FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File No. 0-28838
PEOPLES FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Ohio 34-182
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
211 Lincoln Way East, Massillon, Ohio 44646
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(Address of principal executive offices)
(330) 832-7441
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(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changed since last
report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: May 12, 2000 - 1,234,085 common
shares
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Page 1 of 18 pages
INDEX
PEOPLES FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION 17
SIGNATURES 18
Page 2 of 18 pages
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PEOPLES FINANCIAL CORPORATION
(In thousands, except share data)
March 31, September 30,
ASSETS 2000 1999
Cash and due from banks $ 353 $ 157
Interest-bearing deposits in other financial institutions 2,303 2,463
------ ------
Cash and cash equivalents 2,656 2,620
Investment securities designated as available for sale -
at market 608 1,150
Investment securities held to maturity - at cost, approximate
market value of $989 and $2,000 as of March 31, 2000
and September 30, 1999 945 1,956
Mortgage-backed and related securities designated
as available for sale - at market 7,421 7,394
Mortgage-backed and related securities held to maturity - at
amortized cost, approximate market value of $2,995 and
$3,152 as of March 31, 2000 and September 30, 1999 2,951 3,218
Loans receivable - net 78,498 73,084
Office premises and equipment - at depreciated cost 1,341 1,389
Stock in Federal Home Loan Bank - at cost 956 924
Accrued interest receivable 305 311
Prepaid federal income taxes 110 230
Prepaid expenses and other assets 161 161
------ ------
Total assets $95,952 $92,437
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $69,868 $66,276
Advances from the Federal Home Loan Bank 15,000 11,000
Other liabilities 250 285
Deferred federal income taxes 477 675
------ ------
Total liabilities 85,595 78,236
Shareholders' equity
Preferred stock - authorized 1,000,000 shares without par
value; no shares issued - -
Common stock - authorized 6,000,000 shares without par
or stated value; 1,491,012 shares issued - -
Additional paid-in capital 7,360 7,360
Retained earnings - restricted 6,038 9,874
Accumulated comprehensive income, unrealized gains
on securities designated as available
for sale, net of related tax effects 337 729
Shares acquired by stock benefit plans - (625)
Less 256,927 and 225,904 treasury shares, at cost (3,378) (3,137)
------ ------
Total shareholders' equity 10,357 14,201
------ ------
Total liabilities and shareholders' equity $95,952 $92,437
====== ======
Page 3 of 18 pages
CONSOLIDATED STATEMENTS OF EARNINGS
PEOPLES FINANCIAL CORPORATION
(In thousands, except share data)
Six months ended Three months ended
March 31, March 31,
2000 1999 2000 1999
Interest income
Loans $2,860 $2,563 $1,465 $1,298
Mortgage-backed and related securities 345 390 179 187
Investment securities 76 86 34 38
Interest-bearing deposits and other 73 46 23 17
----- ----- ----- -----
Total interest income 3,354 3,085 1,701 1,540
Interest expense
Deposits 1,606 1,598 815 791
Borrowings 395 120 209 64
----- ----- ----- -----
Total interest expense 2,001 1,718 1,024 855
----- ----- ----- -----
Net interest income 1,353 1,367 677 685
Provision for losses on loans 6 6 3 3
----- ----- ----- -----
Net interest income after provision for
losses on loans 1,347 1,361 674 682
Other income
Gain on sale of investment securities
designated as available for sale 387 351 319 123
Other operating 27 25 13 13
----- ----- ----- -----
Total other income 414 376 332 136
General, administrative and other expense
Employee compensation and benefits 811 581 548 288
Occupancy and equipment 128 131 59 63
Franchise taxes 92 106 44 50
Federal deposit insurance premiums 14 20 4 10
Data processing 57 58 29 29
Advertising 26 18 19 8
Other operating 181 179 98 99
----- ----- ----- -----
Total general, administrative and other expense 1,309 1,093 801 547
----- ----- ----- -----
Earnings before income taxes 452 644 205 271
Federal income taxes
Current 139 236 65 96
Deferred 6 (11) - -
----- ----- ----- -----
Total federal income taxes 145 225 65 96
----- ----- ----- -----
NET EARNINGS $ 307 $ 419 $ 140 $ 175
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.24 $.33 $.11 $.14
=== === === ===
Diluted $.24 $.33 $.11 $.14
=== === === ===
Page 4 of 18 Pages
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PEOPLES FINANCIAL CORPORATION
(In thousands)
For the six months For the three months
ended March 31, ended March 31,
2000 1999 2000 1999
Net earnings $307 $419 $ 140 $175
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period (137) 95 (45) (132)
Reclassification adjustment for realized gains
included in earnings (255) (232) (210) (82)
--- --- ---- ---
Comprehensive income (loss) $(85) $282 $(115) $(39)
=== === ==== ===
Page 5 of 18 Pages
CONSOLIDATED STATEMENTS OF CASH FLOWS
PEOPLES FINANCIAL CORPORATION
For the six months ended March 31,
(In thousands)
2000 1999
Cash flows from operating activities:
Net earnings for the period $ 307 $ 419
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation of premises and equipment 53 59
Amortization of premiums and discounts on investment securities
and mortgage-backed securities, net 7 20
Gain on sale of investment and mortgage-backed
securities designated as available for sale (387) (351)
Amortization expense of stock benefit plans 384 -
Amortization of deferred loan fees - net (27) (10)
Provision for losses on loans 6 6
Recovery of loss on investments 10 4
Federal Home Loan Bank stock dividends (33) (15)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 6 (21)
Prepaid expenses and other assets - (316)
Other liabilities (36) 118
Federal income taxes:
Current 120 (329)
Deferred 6 (11)
------ ------
Net cash provided by (used in) operating activities 416 (427)
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed and related securities 1,197 2,856
Purchase of mortgage-backed and related securities designated
as available for sale (1,026) (2,258)
Proceeds from sale of investment securities 395 357
Principal repayments and maturities of investment securities 1,012 1,012
Loan principal repayments 6,843 11,316
Loan disbursements (12,246) (15,473)
Purchase of office premises and equipment (4) (36)
------ ------
Net cash used in investing activities (3,829) (2,226)
------ ------
Net cash used in operating and investing activities
(balance carried forward) (3,413) (2,653)
------ ------
Page 6 of 18 Pages
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the six months ended March 31,
(In thousands)
2000 1999
Net cash used in operating and investing activities
(balance brought forward) $(3,413) $(2,653)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 3,592 1,175
Proceeds from Federal Home Loan Bank advances 32,000 5,500
Repayment of Federal Home Loan Bank advances (28,000) (4,000)
Purchase of treasury shares - (769)
Cash dividends paid on common stock (4,143) (395)
------ ------
Net cash provided by financing activities 3,449 1,511
------ ------
Net increase (decrease) in cash and cash equivalents 36 (1,142)
Cash and cash equivalents at beginning of period 2,620 2,421
------ ------
Cash and cash equivalents at end of period $ 2,656 $ 1,279
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 25 $ 825
====== ======
Interest on deposits and borrowings $ 1,969 $ 1,717
====== ======
Supplemental disclosure of noncash investing activities:
Unrealized net losses on securities designated as
available for sale, net of related tax effects $ (392) $ (137)
====== ======
Page 7 of 18 Pages
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORPORATION
For the six and three month periods ended March 31, 2000 and 1999
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Accordingly, these financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto of Peoples Financial Corporation included in the Annual Report on Form
10-KSB for the year ended September 30, 1999. However, in the opinion of
management, all adjustments (consisting of only normal recurring accruals) which
are necessary for a fair presentation of the consolidated financial statements
have been included. The results of operations for the six-and three month
periods ended March 31, 2000, are not necessarily indicative of the results
which may be expected for an entire fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Peoples Financial Corporation ("PFC" or the "Corporation") and Peoples Federal
Savings and Loan Association of Massillon ("Peoples Federal" or the
"Association"). All significant intercompany items have been eliminated.
3. Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires entities to
recognize all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods of
accounting for hedging transactions, prescribes the items and transactions that
may be hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on the Corporation's financial position or results of operations.
Page 8 of 18 pages
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
For the six and three month periods ended March 31, 2000 and 1999
4. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period less shares in the ESOP that are unallocated and
not committed to be released. Weighted-average common shares outstanding totaled
1,263,074 and 1,261,017 for the six and three-month periods ended March 31,
2000. The weighted-average common shares outstanding includes no unallocated
shares due to the transfer of remaining unallocated ESOP shares to treasury
stock prior to January 1, 2000. Weighted-average common shares outstanding,
which gives effect to 32,516 unallocated ESOP shares, totaled 1,278,213 and
1,251,585 for the six and three-month periods ended March 31, 1999.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under PFC's stock
option plan. Weighted-average common shares deemed outstanding for purposes of
computing diluted earnings per share were the same as those for basic earnings
per share for all periods presented.
Options to purchase 116,617 shares of common stock at a weighted-average
exercise price of $12.38 per share were outstanding at March 31, 2000, but were
excluded from the computation of common share equivalents because their exercise
prices were greater than the average market price of the common shares.
5. Deferred Compensation Plan
In March, 2000 a Deferred Compensation Plan was established to replace the
Recognition and Retention Plan (RRP) which was terminated as of the same date.
Certain assets of the RRP Trust were returned to PFC and an expense provision of
$274,000 was recorded upon termination to recognize total vested benefits to
participants of $363,000. The estimated annual expense of the Deferred
Compensation Plan is approximately $15,000.
6. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2000
consolidated financial statement presentation.
Page 9 of 18 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PEOPLES FINANCIAL CORPORATION
Note Regarding Forward-Looking Statements
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, PFC's operations and PFC's actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and PFC's market area generally. See Exhibit 99 hereto, which is incorporated
herein by reference.
Some of the forward-looking statements included herein are the statements
regarding management's determination of the amount and adequacy of allowance for
losses on loans and the effect of certain recent accounting pronouncements.
Discussion of Financial Condition Changes from September 30, 1999 to March 31,
2000
PFC's assets totaled $96.0 million as of March 31, 2000, an increase of $3.5
million, or 3.8%, over the September 30, 1999 total. The increase in assets was
funded primarily by an increase in deposits of $3.6 million and an increase in
advances from the Federal Home Loan Bank ("FHLB") of $4.0 million. These
increases were offset by a decrease in shareholders' equity of $3.8 million, or
27.1%, caused mostly by payment of a special dividend in November 1999 and
regular dividends in November 1999 and February 2000 for a total of $4.1
million. The increase in assets was comprised primarily of increases in loans
receivable of $5.4 million, offset by net decreases in investment securities and
mortgage-backed securities of $1.8 million.
Cash and cash equivalents totaled $2.7 million at March 31, 2000, an increase of
$36,000, or 1.4%, over the total at September 30, 1999.
Investment securities totaled $1.6 million at March 31, 2000, a decrease of $1.6
million, or 50.0%, from the total at September 30, 1999. This decrease resulted
primarily from a net decrease of $534,000 in unrealized gains and maturities of
$1.0 million. Proceeds from maturities were primarily used to fund loan
originations.
Mortgage-backed securities totaled $10.4 million at March 31, 2000, a decrease
of $240,000, or 2.3%, from the total at September 30, 1999. This decrease
resulted primarily from principal repayments of $1.2 million and an increase in
net unrealized losses of $61,000, offset by purchases totaling $1.0 million.
Proceeds from principal repayments were primarily used to purchase
mortgage-backed securities and fund loan originations.
Page 10 of 18 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Discussion of Financial Condition Changes from September 30, 1999 to March 31,
2000 (continued)
Net loans receivable totaled $78.5 million at March 31, 2000, an increase of
$5.4 million, or 7.4%, over the September 30, 1999 total. The increase is
attributable to Peoples Federal's continued focus on its marketing program to
originate new fixed and adjustable-rate mortgage loans and home equity loans at
the main office and the branch lending office, and disbursements on construction
loans. The allowance for loan losses totaled $229,000 at March 31, 2000, an
increase of $16,000, including $10,000 from loss recoveries, over the balance at
September 30, 1999. The allowance represented .27% of total loans at both March
31, 2000 and September 30, 1999. Nonperforming loans totaled $36,000 at March
31, 2000 and $114,000 at September 30, 1999.
Deposits totaled $69.9 million at March 31, 2000, an increase of $3.6 million,
or 5.4%, over the September 30, 1999 amount. During the six months ended March
31, 2000, certificates of deposit increased by $3.0 million, as Peoples Federal
offered rates designed to maintain certificates and control interest cost.
Passbook deposits and NOW accounts increased by $344,000 and $371,000
respectively, during the period. Money market demand accounts decreased by
$74,000 during the period.
Advances from the FHLB totaled $15.0 million at March 31, 2000, an increase of
$4.0 million, or 36.4%, over the September 30, 1999 amount, as PFC used advances
primarily to fund payment of dividends. At March 31, 2000, variable rate
advances were comprised of $5.5 million maturing in December 2000 and $3.0
million maturing in March 2001. At March 31, 2000, fixed rate advances were
comprised of $3.5 million maturing in April 2000 and $1.0 million maturing in
each of May, June and July 2000.
Peoples Federal is required to meet minimum capital standards promulgated by the
Office of Thrift Supervision (the "OTS"). At March 31, 2000, the Association's
regulatory capital was well in excess of such minimum capital requirements.
Comparison of Operating Results for the Six-Month Periods Ended March 31, 2000
and 1999
General
Net earnings for the six months ended March 31, 2000, totaled $307,000, compared
to $419,000 for the same period in 1999, a decrease of $112,000, or 26.7%. The
decline in earnings resulted primarily from a decrease in net interest income of
$14,000, or 1.0%, and an increase in general, administrative and other expense
of $216,000, or 19.8%, which were partially offset by an increase in gain on
sale of investment securities of $36,000, or 10.3%, and a decrease in federal
income taxes of $80,000, or 35.6%.
Page 11 of 18 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Six-Month Periods Ended March 31, 2000
and 1999 (continued)
Net Interest Income
Interest income on loans for the six months ended March 31, 2000, increased by
$297,000, or 11.6%, over the 1999 period. This increase resulted primarily from
a $9.0 million, or 13.5%, increase in the average net loan portfolio balance
outstanding, partially offset by a decrease in weighted-average yield from 7.64%
for the six months ended March 31, 1999 to 7.51% in the 2000 period. Interest
income on mortgage-backed and related securities, investment securities and
interest-bearing deposits decreased by $28,000, or 5.4%, from the 1999 period.
This decrease resulted from a $2.3 million decrease in average portfolio
balances outstanding, partly offset by an increase in weighted average yield
from 5.80% in the 1999 period to 6.29% in the 2000 period.
Interest expense on deposits increased by $8,000, or .5%, for the six months
ended March 31, 2000, as compared to 1999. This increase resulted primarily from
a $2.4 million increase in average deposit balances outstanding, partially
offset by a decrease in weighted-average interest rate from 4.81% for the six
months ended March 31, 1999 to 4.67% in the comparable 2000 period. Interest
expense on FHLB advances increased by $275,000, or 229.2% for the six months
ended March 31, 2000, as compared to 1999. The fiscal 2000 average advances
outstanding from the FHLB increased to $13.7 million from $5.0 million in fiscal
1999, and the weighted-average interest rate increased to 5.78% in fiscal 2000
from 4.79% in fiscal 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $14,000, or 1.0%, for the six months ended
March 31, 2000, compared to 1999. The interest rate spread increased to 2.45%
for the six months ended March 31, 2000, as compared to 2.44% for the
corresponding 1999 six-month period. The net interest margin decreased to 2.95%
for the six months ended March 31, 2000, as compared to 3.21% for the comparable
1999 period.
Provision for Losses on Loans
It is the Association's policy to provide valuation allowances for estimated
losses on loans based on past loan loss experience, changes in the composition
of the loan portfolio, trends in the level of delinquent and problem loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area. The allowance for loan losses
is increased by charges to earnings and decreased by charge-offs (net of
recoveries). After considering the above guidelines, management decided to
increase the allowance for losses on loans by $6,000 during both the six months
ended March 31, 2000 and 1999. There can be no assurance that the allowance for
losses on loans of Peoples Federal will be adequate to cover losses on
nonperforming loans in the future.
Page 12 of 18 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Six-Month Periods Ended March 31, 2000
and 1999 (continued)
Other Income
Other income totaled $414,000 for the six months ended March 31, 2000, an
increase of $38,000, or 10.1%, over the comparable period in 1999. The increase
was the result of selling a greater number of shares of FHLMC common stock
during the six months ended March 31, 2000 than in the comparable 1999 period,
and an increase of $2,000 in other operating income for fiscal 2000 over 1999.
FHLMC common stock with a book value of $8,000 was sold during the six months
ended March 31, 2000 for a total of $395,000 resulting in a realized gains of
$387,000, while FHLMC common stock with a book value of $6,000 was sold during
the six months ended March 31, 1999 for a total of $357,000 resulting in a
realized gain of $351,000. Other operating income increased by $2,000, primarily
due to increased ATM fee income. Also included in other operating income are
safe deposit box rentals and late charges on loans.
General, Administrative and Other Expense
General, administrative and other expense increased by $216,000, or 19.8%, for
the six months ended March 31, 2000, compared to the same period in 1999.
Employee compensation and benefits increased by $230,000, or 39.6%. Significant
increases in employee compensation and benefits were due to the establishment of
the Deferred Compensation Plan, hiring of new employees, normal wage increases
and resumption of contributions to the 401(k) plan. Establishment of the
Deferred Compensation Plan is the final action needed to close PFC's employees
stock benefit plans and eliminate the related cost. As a result of terminating
the ESOP, employee compensation and benefits decreased by $78,000 from 1999 to
2000. Annual expense related to 401(k) contributions is expected to approximate
$40,000. Advertising increased by $8,000, or 44.4%, primarily due to increased
local media advertising of loan and deposit rates. Ohio franchise taxes for the
six months ended March 31, 2000 decreased by $14,000, or 13.2%, due primarily to
a decrease in tax rates year to year. Federal deposit insurance premiums for the
six month period decreased $6,000, or 30.0%, due to lower assessment rates
beginning January 1, 2000.
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the six month
periods ended March 31, 2000 and 1999. The decrease of $80,000, or 35.6%, in the
provision for income taxes resulted primarily from the $192,000, or 29.8%,
decrease in earnings before income taxes. The effective tax rate was 32.1% for
the six months ended March 31, 2000 and 34.9% for the fiscal 1999 period.
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2000
and 1999
General
Net earnings for the three months ended March 31, 2000, totaled $140,000,
compared to $175,000 for the same period in 1999, a decrease of $35,000, or
20.0%. The decline in earnings resulted primarily from a decrease in net
interest income of $8,000 and an increase in general, administrative and other
expense of $254,000, or 46.4%, which were partially offset by an increase in
gain on sale of investment securities of $196,000, or 159.3% and a decrease in
federal income taxes of $31,000, or 32.3%.
Page 13 of 18 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2000
and 1999 (continued)
Net Interest Income
Interest income on loans for the three months ended March 31, 2000, increased by
$167,000, or 12.9%, over the 1999 period. This increase resulted primarily from
a $9.6 million, or 14.2%, increase in the average net loan portfolio balance
outstanding, partially offset by a decrease in weighted-average yield from 7.64%
in the three months ended March 31, 1999 to 7.55% in the 2000 period. Interest
income on mortgage-backed and related securities, investment securities and
interest-bearing deposits decreased by $6,000, or 2.5%, from the 1999 period.
This decrease resulted from a $2.4 million decrease in average portfolio
balances outstanding, partly offset by an increase in weighted average yield
from 5.54% in the 1999 quarter to 6.24% in the 2000 quarter.
Interest expense on deposits increased by $24,000, or 3.0%, for the three months
ended March 31, 2000, as compared to 1999. This increase resulted from an
increase of $2.6 million, or 3.9%, in average deposit balances outstanding,
partially offset by a decrease in weighted-average cost of funds from 4.74% in
1999 to 4.70% in 2000. Interest expense on FHLB advances increased by $145,000,
or 226.6% for the three months ended March 31, 2000, as compared to 1999. The
2000 average advances outstanding from the FHLB increased to $14.3 million from
$5.3 million in 1999 and the weighted-average interest rate increased to 5.84%
in 2000 from 4.78% in 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $8,000, or 1.2%, for the three months ended
March 31, 2000, compared to 1999. The interest rate spread decreased to 2.44%
for the three months ended March 31, 2000, as compared to 2.47% for the
corresponding 1999 three-month period. The net interest margin decreased to
2.92% for the three months ended March 31, 2000, as compared to 3.21% for the
comparable 1999 period.
Provision for Losses on Loans
It is the Association's policy to provide valuation allowances for estimated
losses on loans based on past loan loss experience, changes in the composition
of the loan portfolio, trends in the level of delinquent and problem loans,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current and anticipated
economic conditions in the primary lending area. The allowance for loan losses
is increased by charges to earnings and decreased by charge-offs (net of
recoveries). After considering the above guidelines, management decided to
increase the allowance for losses on loans by $3,000 during both the three
months ended March 31, 2000 and 1999. There can be no assurance that the
allowance for losses on loans of Peoples Federal will be adequate to cover
losses on nonperforming loans in the future.
Page 14 of 18 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2000
and 1999 (continued)
Other Income
Other income totaled $332,000 for the three months ended March 31, 2000, an
increase of $196,000, or 144.1%, over the 1999 amount. The increase was the
result of selling a greater number of shares of FHLMC common stock during the
three months ended March 31, 2000 than in the comparable 1999 period. FHLMC
common stock with a book value of $7,000 was sold in March 2000 for $326,000
resulting in a realized gain of $319,000, while FHLMC common stock with a book
value of $2,000 was sold in March 1999 for $125,000 resulting in a realized gain
of $123,000. Other operating income amounted to $13,000 for both three month
periods and includes ATM, NOW, home equity line of credit and other fee income,
safe deposit box rentals and late charges on loans.
General, Administrative and Other Expense
General, administrative and other expense increased by $254,000, or 46.4%, for
the three months ended March 31, 2000, compared to the same period in 1999.
Employee compensation and benefits increased by $260,000, or 90.3%. Significant
increases in employee compensation and benefits were due to the establishment of
the Deferred Compensation Plan, hiring of new employees, normal wage increases
and resumption of contributions to the 401(k) plan. Significant decreases in
employee compensation and benefits were due to termination of the ESOP and RRP.
Advertising increased by $11,000, or 137.5%, primarily due to increased local
media advertising of loan and deposit rates. Ohio franchise taxes for the three
months ended March 31, 2000 decreased by $6,000, or 12.0%, due primarily to a
decrease in tax rates year to year. Federal deposit insurance premiums for the
three month period decreased $6,000, or 60.0%, due to lower assessment rates
beginning January 1, 2000.
Federal Income Taxes
Federal income taxes are based on earnings before taxes for the three months
ended March 31, 2000 and 1999. The decrease of $31,000, or 32.3%, in the
provision for income taxes resulted primarily from the $66,000, or 24.4%,
decrease in earnings before income taxes. The effective tax rate was 31.7% for
the three months ended March 31, 2000 and 35.4% for the 1999 quarter.
Year 2000 Compliance Matters
As with most providers of financial services, Peoples Federal's operations are
heavily dependent on information technology systems. During the three years
leading up to January 1, 2000, Peoples Federal addressed the potential problems
associated with the possibility that the computers that control or operate
Peoples Federal's information technology system and infrastructure may not have
been programmed to read four-digit date codes and, upon arrival of the year
2000, may have recognized the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data.
Page 15 of 18 pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
PEOPLES FINANCIAL CORPORATION
Year 2000 Compliance Matters (continued)
PFC's primary data processing applications are handled by a third-party service
bureau which advised PFC that it transferred to a fully year 2000-compliant
processing system that was fully tested prior to June 30, 1999. Management also
reviewed PFC's ancillary equipment and provided the appropriate remedial
measures. Costs incurred to make Peoples Federal Year 2000 compliant, totaling
approximately $40,000, had been charged to operations during the fiscal years
ended September 30, 1999 and 1998.
Peoples Federal realized no technology-related problems upon arrival of January
1, 2000, and had no interruption of services to its customers.
PFC could incur losses if year 2000 issues adversely affect Peoples Federal's
depositors or borrowers. Such problems could include delayed loan payments due
to year 2000 problems affecting any significant borrowers or impairing the
payroll systems of large employers in Peoples Federal's primary market area.
Because Peoples Federal's loan portfolio is highly diversified with regard to
individual borrowers and types of businesses and Peoples Federal's primary
market area is not significantly dependent upon one employer or industry,
Peoples Federal does not expect, and to date has not realized, any significant
or prolonged difficulties that will affect net earnings or cash flow.
Page 16 of 18 pages
PART II
PEOPLES FINANCIAL CORPORATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10 Peoples Federal Savings and Loan Association of
Massillon Deferred Compensation Plan
27 Financial data schedule for the six months ended
March 31, 2000.
99 Safe Harbor under the Private Securities Litigation
Reform Act of 1995.
(b) Reports on Form 8-K: None.
Page 17 of 18 pages
SIGNATURES
PEOPLES FINANCIAL CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 2000 By: /s/Paul von Gunten
------------------------- ------------------
Paul von Gunten
President and Chief
Executive Officer
Date: May 12, 2000 By: /s/James R. Rinehart
------------------------- --------------------
James R. Rinehart
Treasurer
Page 18 of 18 Pages