ITEM 1 - DESCRIPTION OF BUSINESS
Peoples Financial Corp, Inc., 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 Bank merged with and into Peoples Bank of PA and changed its name to PFC Bank.
The bank is a Pennsylvania-chartered banking institution and, as successor to Peoples Bank of PA and New Bethlehem Bank, 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 each in Clarion, Butler and Indiana. As of December 31, 2000, the bank had total assets of $301.3 million and stockholders' equity of $35.7 million. All of PFC Bank's outstanding common stock is owned by PFC.
PFC Service Corporation is a Delaware corporation and a wholly owned subsidiary of the bank. The service corporation was incorporated in Delaware, on May 16, 1997. The primary purpose of the service corporation is to hold equity securities for the bank, which are primarily Pennsylvania bank securities. As of December 31, 2000, the service corporation had total assets of $29.0 million and shareholder's equity of $22.5 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; and similar items.
Employees
As of December 31, 2000, PFC, PFC Bank and PFC Service Corporation had 87 full-time employees and 18 part-time employees.
Competition
The financial services industry in the corporation's service area is extremely competitive. The corporation's competitors within its service area include multi-bank holding companies, with resources substantially greater than those of the corporation. Many competing 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 impacted by one or a few major competitors.
Recently enacted federal legislation is expected to have a significant effect in restructuring the banking industry in the United States. As a result, the corporation 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" 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 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 corporation 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.
In addition, the Bank Holding Company Act prohibits the corporation 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.
As a bank holding company, the corporation is prohibited from engaging in or acquiring direct or indirect control of more than 5% 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 by the Federal Reserve Bank.
The activities that the Federal Reserve has determined by regulation to be permissible are:
o making, acquiring, or servicing loans or other extensions of credit for its own account or for the account of others;
o 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;
o 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;
o 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;
o subject to limitations, leasing real or personal property or acting as agent, broker, or adviser in leasing such property in accordance with prescribed conditions;
o investing in corporations or projects designed primarily to promote community welfare;
o providing to others data processing services and data transmission services, data bases, and facilities, within certain limitations;
o 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;
o 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;
o providing courier services for certain financial documents;
o subject to limitations, providing management consulting advice to nonaffiliated bank and nonbank depository institutions;
o 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;
o performing appraisals of real estate and personal property;
o 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;
o providing certain securities brokerage services;
o subject to limitations, underwriting and dealing in government obligations and certain other instruments;
o subject to limitations, providing foreign exchange and transactional services;
o subject to limitations, acting as a futures commission merchant for nonaffiliated persons;
o subject to limitations, providing investment advice on financial futures and options to futures;
o subject to limitations, providing consumer financial counseling;
o subject to limitations, tax planning and preparation;
o providing check guaranty services;
o subject to limitations, operating a collection agency; and,
o operating a credit bureau.
Federal Reserve Board approval may be required before the corporation or its nonbank subsidiaries may begin to engage in any such activity and before any such business may be acquired.
The corporation is a legal entity separate and distinct from the bank. The corporation revenues (on a parent corporation only basis) result almost entirely from dividends paid to the corporation by its subsidiary. The right of the corporation, and consequently the right of creditors and shareholders of the corporation, 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 corporation in its capacity as a creditor may be recognized.
Federal and state laws regulate the payment of dividends by the corporation'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.
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" and other indicators 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, 2000, 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 and the Federal Deposit Insurance Corporation. 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.
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 corporation'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 for the current year plus its retained net profits 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 exceed statutory bad debts. 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 PFC 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.
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 depositor relationship. 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.
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 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.
Gramm-Leach-Bliley Act
On November 12, 1999 the Gramm-Leach-Bliley Financial Modernization Act was signed into law. The Act has a profound impact on the financial services industry.
o The Act repeals prior legislation to permit commercial banks to affiliate with securities firms and insurance companies. More importantly, the Act significantly expands the authority of each of these financial industries to engage in a full array of financial services. Thus, each industry may now engage in activities previously reserved to one or the other.
o The Act authorizes bank holding companies meeting defined standards to engage in a substantially broader range of non-banking activities than was permissible before the legislation passed.
o A new hierarchy of existing state and federal regulators will monitor banks and bank holding companies. The Act coordinates the efforts of these regulators. The goal is to lessen regulatory burden and prevent duplication of examination efforts.
Also, all financial institutions are required to take reasonable precautions to protect the security and confidentiality of personal customer information. A bank or bank holding company may only share customer information with its affiliates under certain circumstances.
ITEM 2
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 12,707 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 corporation and are used by the corporation in its operations. In management's opinion, the above properties are in good condition and are adequate for the bank's purposes.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
A civil action was filed in the Court of Common Pleas of Armstrong County, Pennsylvania on November 29, 2000 that lists Peoples Financial Corp., Inc. as a co-defendant along with C. Edward Dunmire and National City Bank of Pennsylvania, as co-trustees of the Paul L. Dunmire and S. Esther Dunmire trusts. The plaintiffs, Elmer Snyder, as agent for Thomas A. Snyder, David E. Snyder, Mark A. Snyder, C.H. Snyder, Jr., Dennis C. Snyder, Richard G. Snyder and Sally A. Snyder Smith allege that there was a contract for the sale of 107,640 shares of stock in Peoples Financial Corp., Inc. by the Dunmire Trusts to the plaintiffs. The stock was purchased by Peoples Financial Corp., Inc. from the Dunmire Trusts. Count I of the Complaint is against the Dunmire Trusts for breach of contract. Count II of the Complaint is against Peoples Financial Corp., Inc. for intentional interference with contractual relations. The plaintiffs are seeking lost stock appreciation of $387,504, reimbursable expenses, interest, costs and punitive damages from Peoples Financial Corp., Inc..
There are no other proceedings pending other than routine litigation incidental to the business of the corporation and the bank.
ITEM 4
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 2000.
Part II
ITEM 5
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PFC's common stock is held by 385 stockholders of record as of February 15, 2001, and is rarely traded. Management of PFC believes that a small number of securities dealers continue attempts to form a market for the PFC common stock even though there are very few trades recorded. As of February 15, 2001, there were 1,665,412 shares outstanding. A dividend of $0.13 per share was paid in each of the first two quarters of 1999 followed by a $0.14 per share dividend in the third and fourth quarters. PFC paid dividends of $0.15 per share each quarter of 2000 with the addition of a special $0.16 per share dividend paid prior to year-end. 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 12, Regulatory Matters, in the footnotes to PFC's financial statement attached at Exhibit 13. PFC repurchased 107,640 shares of its common stock on July 12, 2000 at the current market price of $36.10 per share to be held as treasury stock.
The following table sets forth quarterly highs and lows of PFC common stock for the years 1998 through 2000. 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 ------------------------------------ ------------------------------------ 4 36.50 35.00 3 36.50 35.00 2 36.69 36.69 1 32.63 32.63 ------------------------------------ ------------------------------------ 4 33.50 32.50 3 33.50 32.50 2 36.00 32.00 1 32.00 30.00 ------------------------------------ ------------------------------------ 4 * 30.00 * 30.00 3 * 25.00 * 25.00 2 * 21.00 * 21.00 1 * 21.50 * 21.00 ------------------------------------
* Adjusted stock price to reflect retroactive treatment of 100% stock dividend in the form of a stock split.
ITEM 6
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. Per share data reflects the retroactive effect of the 100% stock dividend in the form of a 2 for 1 stock split in February 1999. The average balances shown consist of daily average balances.(except SFAS No. 115 which is based on quarterly averages)
(1) Excludes the effect of SFAS No. 115 (Statement of Financial Accounting Standards No. 115 - Accounting for Certain Debt and Equity Securities). (2) Includes the effect of SFAS No. 115.
ITEM 7
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 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, 2000 were $301.5 million, a decrease of $0.2 million, or 0.07% over total assets at December 31, 1999 of $301.7 million. Total assets at December 31, 1999 increased by $35.7 million or 13.42% over December 31, 1998. The decrease in total assets as of December 31, 2000 as compared to December 1, 1999 was comprised primarily of decreases of $18.6 million in cash and due from banks, $3.3 million in federal funds sold and $2.4 million in available-for-sale securities partially offset by increases in the loan portfolio of over $16.9 million, $5.4 million in held-to-maturity securities and $1.8 million in other assets.
The increase in total assets from December 31, 1998 to December 31, 1999 was comprised primarily of an increase in the loan portfolio of over $21.8 million, an increase in cash and interest-bearing balances with depository institutions of over $20.1 million and an increase in federal funds sold of $3.7 million offsetting a decrease in available-for-sale securities of $9.6 million and other assets of $0.1 million.
The total liabilities of PFC at December 31, 2000 were $265.3, an increase of $2.3 million or 0.87% over total liabilities at December 31, 1999 of $263.0 million. The increase in liabilities resulted primarily from increases in interest bearing deposits of $4.6 million and non-interest bearing deposits of $1.3 million offset by decreases in short-term borrowed funds of $3.0 million and deferred taxes of $0.6 million.
Total liabilities of PFC increased by $37.6 million from $225.4 million at December 31, 1998 to $263.0 million at December 31, 1999. This increase was due to increases in interest-bearing deposits of $30.5 million, non-interest bearing deposits of $2.2 million and an increase in borrowed funds of $8.0 million slightly offset by a decrease in deferred taxes of $3.2 million.
Net Income
PFC reported net income, before deducting income taxes for the 12 month period ended December 31, 2000 of $5,241,000 as compared to $6,556,000 for the 12 month period ended December 31, 1999, a decrease of $1,315,000 or 20.06%. The decrease was due to decreases of $1,951,000 in capital gains taken from the sale of available-for-sale securities and $40,000 in net other operating expenses offset by an increase in net interest income of $586,000 and a decrease of $90,000 in provision for loan losses. PFC's net income for the year ended December 31, 2000, after deducting taxes, was $3,787,000 as compared to $4,700,000 for the year ended December 31, 1999. PFC reported net income, before income taxes, for the year ended December 31, 1999 of $6,556,000 which was an increase of $261,000 or 4.15% as compared to $6,295,000 reported for the year ended December 31, 1998.
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, 2000, 1999 and 1998 was $2.20, $2.66 and $2.53, respectively.
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 $21,262,000 in 2000 from $19,148,000 in 1999, an increase of $2,114,000 or 11.04%. This increase is primarily attributable to an increase in interest earned on loans of $1,552,000 or 10.13% along with increases in interest on investment securities, federal funds sold and interest bearing deposits of $562,000. The average yield on interest-earning assets increased from 7.01% for the 12 month period ended December 31, 1999 to 7.34% for the 12 month period ended December 31, 2000. The average yield on interest-earning assets decreased from 7.07% for the 12 month period ended December 31, 1998 to 7.01% for the 12 month period ended December 31, 1999. The increase in total interest income from 1999 to 2000 results from both an increase in average yield on interest-earning assets and an increase in average earning assets of $16.5 million. Total average loans increased by $19.7 million while average interest-bearing deposits increased by $15.0 million and average investment securities decreased by $1.9 million.
Total interest income increased to $19,148,000 in 1999 from $17,355,000 for the year ended December 31, 1998, an increase of $1,793,000 or 10.33%. The increase in total interest income from 1998 to 1999 results from an increase in earning assets of $16.5 million. Average loans increased by $24.4 million while total average securities decreased by $5.0 million.
Total interest expense increased to $11,293,000 in 2000 from $9,765,000 in 1999, an increase of $1,528,000, or 15.65%. This increase is the result of both an increase in average rate on interest-bearing liabilities, an increase in interest bearing deposits of $4.6 million and a $22,000 increase in interest on FHLB borrowings. Total interest expense increased to $9,765,000 in 1999 from $8,450,000 in 1998, an increase of $1,315,000 or 15.56%. The increase is primarily the result of an increase in interest bearing deposits of $30.5 million for the year ended December 31, 1999. The average rate on interest-bearing liabilities was 5.08% for the 12 months ended December 31, 2000 and 4.71% and 4.74% for the 12 month periods ended December 31, 1999 and 1998, 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, 2000 was $9,969,000 as compared to $9,383,000 for the 12 month period ended December 31, 1999, an increase of $586,000 or 6.25%. Net interest income increased $478,000 or 5.37% in 1999 as compared to $8,905,000 for the year ended December 31, 1998.
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, 2000, 1999 and 1998 comprise approximately 45.52%, 47.61% and 50.20% of total deposits, respectively.
Interest Income and Expenses (continued)
The following tables present the average major asset and liability categories for the 12 month periods ended December 31, 2000, 1999 and 1998 along with interest income and yields. The average balances shown consist of daily average balances(except SFAS No. 115 which is based on quarterly averages). Non-performing loans are included in the average balance and yield calculations.
Average Balance Sheets & Net Interest Analysis for 2000 (in thousands)
Average Balance Sheets & Net Interest Analysis for 1999 (in thousands)
Interest Income and Expenses (continued)
Average Balance Sheets & Net Interest Analysis for 1998 (in thousands)
Non-interest income
Non-interest income for the twelve month period ended December 31, 2000 totaled $1,584,000 as compared to $3,549,000 for the same period ended 1999, a decrease of $1,965,000 or 55.37%. Non-interest income for the year ended December 31, 1999 decreased from the total in 1998 of $3,627,000 by $78,000. Changes in the level of non-interest income during 2000 are attributable to decreases in net investment gains of $1,951,000 and service fees and commissions of $14,000. Changes in the level of non-interest income during 1999 are primarily attributable to decreases in investment gains of $51,000 and service fees of $89,000 partially offset by an increase of $62,000 in miscellaneous income.
Non-interest Expenses
Non-interest expenses for the twelve month period ended December 31, 2000 totaled $6,252,000 as compared to $6,227,000 for the same period in 1999, an increase of $25,000 or 0.4%. The increase is primarily related to the net of increases in occupancy expense of $63,000, salaries and employee benefits of $89,000 and legal and professional fees of $14,000 partially offset by decreases of $64,000 in data processing fees and miscellaneous expenses of $77.000. Non-interest expense for the twelve month period ended December 31, 1999 registered an increase of $190,000 or 3.15% as compared to the same period in 1998. The increase is primarily the result of increases in data processing fees of $55,000, occupancy expenses of $14,000, salaries and employee benefits of $6,000 and miscellaneous operating expenses of $137,000 slightly offset by a decrease in legal and professional fees of $22,000.
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 Statement of Financial Accounting Standards 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, 2000, PFC's net unrealized gain on available-for-sale securities was $16.2 million. As of December 31, 1999 the net unrealized gain was $17.8 million.
PFC's investment securities balance for the period ended December 31, 2000 was $64.3 million, a $3.0 million or 5.07% increase compared to the period ended December 31, 1999. This increase is primarily the result of an increase of $5.4 million in held-to-maturity securities offset by a decrease of $2.4 million in available-for-sale securities. The December 31, 1999 securities balance of $61.3 million was a decrease of $9.5 million over the same time period in 1998.
Average federal funds sold and securities sold under agreement to repurchase were $7.5 million and $8.4 million for the years ended December 31, 2000 and 1999, respectively.
Investment Securities (continued)
The following table summarizes the maturity distribution and itemized breakdown of the investment portfolio as of December 31, 2000.
Maturity Distribution of Investment Securities for 2000 (in thousands and excluding SFAS No. 115)
Short-term Borrowings (in thousands)
For each period: 2000 1999 1998 ---- ---- ----
Balance at period end $ 5,000 $ 8,000 $ 0 Weighted average interest rate 6.30% 5.85% 0 Maximum amount outstanding 8,000 8,000 0 Average amount outstanding 2,508 2,323 0
Loans
As of December 31, 2000, the net loan portfolio of PFC Bank comprised 70.80% of total consolidated assets as compared with 65.14% for the year ending December 31, 1999.
The corporation's total consolidated loans (net of unearned income and the allowance for loan losses) at December 31, 2000, were $213.4 million, an increase of $16.9 million or 8.60% as compared to $196.5 million at December 31, 1999. The December 31, 1999 balance increased $21.8 million or 12.48% over the year ended December 31, 1998. The increase in 2000 was due primarily to a $14.9 million increase in residential property loans. The increase in 1999 was due primarily to an increase in residential loans of $18.3 million.
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.
The bank offers a variety of loans to individual and corporate customers in Armstrong, Butler, Clarion and Indiana Counties of Pennsylvania, but concentrates lending activities in residential mortgages in these local market areas. These loans comprised approximately 67.58% of PFC Bank's gross loan portfolio as of December 31, 2000. As of that date, the remainder of the portfolio was made up of real estate construction loans comprising loans of 1.02%, commercial mortgage of 15.57%, commercial and agricultural loans of 5.48%, consumer loans of 8.67% and other loans comprising 1.68% 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, 2000.
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 evolve 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 outlying but moderately prosperous sections 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 an increase in non-performing assets from 1999 to 2000 of $99,000 or 24.75% following a decrease of $489,000 or 55.01% from 1998 to 1999. Restructured loans decreased by $13,000 or 11.02% while non-accrual loans and loans 90 days or more past-due increased by $89,000 and $47,000, respectively. The tightening of lending policies has not decreased loan demand. In fact, total loans as of December 31, 2000 have increased over the balances at December 31, 1999, by $16.9 million following an increase from 1998 to 1999 of $21.8 million. The bank intends to continue its policy of performing formal credit analysis in support of loan requests.
Loans(continued)
(in thousands and net of unearned income, but not the allowance for loan losses)
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, 2000.
The provision for loan losses was $60,000 for the twelve month period ended December 31, 2000 and $150,000 for the same period ended December 31, 1999. The allowance for loan losses was $1,412,000 at December 31, 2000, which was an increase of $34,000 or 2.47% over the amount at December 31, 1999.
The provision for loan losses of $150,000 for the twelve month period ended December 31, 1999 was a $50,000 decrease compared with the provision of $200,000 for the same period ended December 31, 1998. The allowance for loan losses increased $140,000 from $1,238,000 at December 31, 1998 to $1,378,000 at December 1999.
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 $27,000 for the twelve month period ended December 31, 2000 as compared to 1999 and 1998 net charge-offs of $10,000 and $211,000, respectively. The unusual 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 $499,000 were 35.34% of the allowance for loan losses at December 31, 2000. Non-performing assets compared to the allowance for loan losses at December 31, 1999 and 1998 were 29.03% and 71.81%, 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, 2000.
Allowance/Provision for Loan Losses (continued)
Non-Performing Assets
The table below presents non-performing assets in each of the five years ended December 31, 2000. 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 foreclosures 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
Non-Performing Assets (in thousands)
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 of time deposits of $100,000 or more for the years ended December 31, 2000, 1999 and 1998.
Deposits (in thousands)
PFC's consolidated deposit balance as of December 31, 2000 was $252.0 million, which is a $5.9 million increase over the December 31, 1999 balance of $246.1 million. The December 31, 1999 balance was a $32.7 million increase over the December 31, 1998 balance of $213.4 million. The majority of the deposit growth experienced in 2000 and 1999 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 and sales of investment securities, short term borrowed funds 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 2000, PFC Bank maintained an average balance of federal funds sold of $7.5 million for the 12 months ended December 31, 2000, as compared to $8.4 million at December 31,
1999. At December 31, 2000, PFC held $8.5 million of investment securities and $8.5 million of loans maturing in less than one year. PFC Bank has the option to borrow funds from the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank. At December 31, 2000, the bank had borrowed short terms funds of $5.0 million from FHLB, compared with $8.0 million borrowed at December 31, 1999. 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.
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 manage 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.
Interest Sensitivity Cumulative Gap Analysis (in thousands)
Peoples Financial Corp., Inc.
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, 2000.
PFC Bank
Leverage Capital Ratio 8.69%
Tier I Capital to Risk Weighted Assets 13.11%
Total Capital to Risk Weighted Assets 17.72%
Return on Equity and Assets (not including SFAS No. 115)
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS
The financial statements required by this Item are set forth at Exhibit 13, and incorporated herein by reference.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
Part III
ITEM 10
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 8 of the Registrant's Proxy Statement to be used in connection with the 2001 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, 2000 through December 31, 2000, its officers and directors were in compliance with all filing requirements applicable to them.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item, relating to executive compensation, is set forth in pages 7 and 8 of the Registrant's Proxy Statement to be used in connection with the 2001 Annual Meeting of Shareholders, which pages are incorporated herein by reference.
ITEM 12
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 through 12 of the Registrant's Proxy Statement to be used in connection with the 2001 Annual Meeting of Shareholders, which pages are incorporated herein by reference.
ITEM 13
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, 2000.
(1) Comprised primarily of Standby Letters of Credit fully secured by cash on deposit or residential property. (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) Letter of Credit
Part IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(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
3.1 Registrant's Articles of Incorporation. (Incorporated by Reference to Registrant's January 27, 1995, filing of Form S-4.
3.2 Registrant's By-Laws. (Incorporated by Reference to Registrant's January 27, 1995, filing of Form S-4.)
10.1 Agreement between R.B. Robertson and Bank. (Incorporated by Reference to the Registrant's September 30, 1997 filing of Form 10-QSB.)
10.2 Settlement Agreement. (Incorporated by Reference to the Registrant's December 31, 1996 filing of Form 10-KSB.)
10.3 General Release. (Incorporated by Reference to the Registrant's December 31, 1996 filing of Form 10-KSB.)
10.4 Amendment to Executive Employment Agreement dated October 20, 1999, between R.B. Robertson and Bank. (Incorporated by Reference to Registrant's September 30, 1999 filing of Form 10-Q).
10.5 Amendment to Executive Employment Agreement dated November 17, 1999 between R.B. Robertson and Bank. (Incorporated by Reference to Registrant's December 31, 1999 filing of Form 10-K).
11 Statement re: Computation of Earnings Per Share. (Refer to Exhibit 13, page 3, Consolidated Statement of Income.)
13 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
99 Proxy Statement and Proxy Card.
(b) Reports on Form 8-K. None.
(c) The exhibits required herein are included at Item 14(a), above.
(d) Not Applicable.
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 16, 2001 By /S/ 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.
Signature Title Date - --------- ----- ----
/S/ R.B. Robertson President/CEO March 16, 2001 and Director
/S/ Frank Baker Chairman/Director March 16, 2001
/S/ Darl Hetrick Vice President and Director March 16, 2001
/S/ Timothy Reddinger Secretary and Director March 16, 2001
/S/ William H. Toy Director March 16, 2001
/S/ R.B. Robertson, Jr. Director March 16, 2001
/S/ Howard H. Shreckengost Director March 16, 2001
/S/ J. Jack Sherman Director March 16, 2001
/S/ Francis E. Kane Director March 16, 2001
/S/ James L. Kifer Executive Vice President March 16, 2001 Principal Financial Officer Principal Accounting Officer
EXHIBIT INDEX
PAGE NO. IN MANUALLY SIGNED EXHIBIT NO. ORIGINAL
(a) 1. Financial Statements.
The following financial statements are included by reference in Part II, 35 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
3.1 Registrant's Articles of Incorporation. (Incorporated by Reference to Registrant's January 27, 1995, filing of Form S-4.
3.2 Registrant's By-Laws. (Incorporated by Reference to Registrant's January 27, 1995, filing of Form S-4.)
10.1 Agreement between R.B. Robertson and Bank. (Incorporated by Reference to the Registrant's September 30, 1997 filing of Form 10-QSB.)
10.2 Settlement Agreement. (Incorporated by Reference to the Registrant's December 31, 1996 filing of Form 10-KSB.)
10.3 General Release. (Incorporated by Reference to the Registrant's December 31, 1996 filing of Form 10-KSB.)
10.4 Amendment to Executive Employment Agreement dated October 20, 1999, between R.B. Robertson and Bank. (Incorporated by Reference to Registrant's September 30, 1999 filing of Form 10-Q).
10.5 Amendment to Executive Employment Agreement dated November 17, 1999, between R.B. Robertson and Bank. (Incorporated by Reference to Registrant's December 31, 1999 filing of Form 10-K).
11 Statement re: Computation of Earnings Per Share. (Refer to Exhibit 13, page 3, Consolidated Statement of Income.)
13 Annual Report to Shareholders.
21 Subsidiaries of the Registrant. 61
23 Consent of Independent Auditors. 62
99 Proxy Statement and Proxy Card. 63
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
December 31, 2000, 1999 and 1998
CONTENTS PAGE
Independent Auditors' Report...................................................1
Consolidated Balance Sheets....................................................2
Consolidated Statements of Income..............................................3
Consolidated Statements of Changes in Stockholders' Equity...................4-5
Consolidated Statements of Cash Flows..........................................6
Notes to Consolidated Financial Statements..................................8-24
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, 2000 and 1999 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
Pittsburgh, Pennsylvania January 26, 2001
CONSOLIDATED BALANCE SHEETS
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
(RESTUBBED TABLE)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PEOPLES FINANCIAL CORP., INC. AND SUBSIDIARY
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
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 installment, commercial and single-family and multi-family mortgage 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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable and Allowance for Loan Losses: Loans are stated at unpaid principal balances, less the allowance for loan losses, deferred loan fees and costs, 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.
At December 31, 1999, the Bank held approximately $654,000 in guaranteed student loans held for sale. Such loans were recorded at the lower of cost or estimated market value. As of December 31, 2000, the Bank holds $18,000 in student loans. These student loans are not for sale.
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.
Foreclosed Assets: Real estate properties and other assets acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of the Bank's carrying amount or fair value less estimated selling costs at the date of foreclosure. Any write-downs on an asset's fair value at the date of foreclosure are charged against the allowance for loan losses. Costs of significant asset improvements are capitalized, whereas costs relating to holding foreclosed assets are expensed in the period incurred. Management periodically obtains valuations on the assets. Any subsequent write-downs to reduce the carrying value of an asset to the lower of its cost or fair value less estimated selling costs are recorded as a charge against current operations.
Employee Retirement Plans: The Bank's qualified defined benefit pension plan (see Note 9) 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. Funding for the Bank's non-qualified defined benefit pension plan consists of certificates of deposit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Earnings per Share: Earnings per share are calculated using the weighted-average number of shares outstanding, which also equals basic and diluted per share calculations. The weighted average shares outstanding, giving retroactive effect to the stock dividend discussed in Note 17, were 1,722,467, 1,770,151 and 1,765,792 for the years ended December 31, 2000, 1999 and 1998, 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. 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
Held to maturity securities consist of the following:
Gross realized gains on sales of available for sale securities were $1,327,902, $3,199,903 and $3,216,142 in 2000, 1999 and 1998, respectively. The gains are reduced by previously recognized appreciation which occurred as a result of a merger of $329,232, $281,732 and $246,837 in 2000, 1999 and 1998, respectively. Additional net gains of $332, $32,318 and $31,811 in 2000, 1999 and 1998, respectively, were recognized for previous write-downs of held to maturity securities resulting from the merger.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of held to maturity securities at December 31, 2000, 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.
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 both December 31, 2000 and 1999, the Bank held $1,408,400 of FHLB stock.
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The primary classifications of loans as of December 31 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
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:
At December 31, 2000 and 1999, the total recorded investment in impaired loans amounted to approximately $27,200 and $7,200 respectively. All impaired loans were on non-accrual status as of December 31, 2000 and 1999. The allowance for loan losses related to impaired loans amounted to approximately $16,700 and $7,200 at December 31, 2000 and 1999, respectively.
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment, which are stated at cost, as of December 31 are as follows:
Depreciation expense was $546,680, $590,385 and $580,950 for the years ended December 31, 2000, 1999 and 1998, respectively.
NOTE 5 - PLEDGED ASSETS
The carrying values of assets pledged to qualify for fiduciary powers, to secure public monies as required by law and for other purposes at December 31 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 6 - DEPOSITS
The maturities of time deposits over the next five years and thereafter as of December 31, 2000 are as follows:
Amount Percent ------------------- ------------
Within one year $ 102,061,020 73.5% One to two years 14,294,214 10.3 Two to three years 8,673,734 6.2 Three to four years 5,390,348 3.9 Four to five years 7,273,061 5.2 Over five years 1,168,313 0.9 ------------------- ------------
$ 138,860,690 100.0% =================== ============
NOTE 7 - INCOME TAXES
The provision for income taxes for the years ended December 31 consists of:
The significant components of temporary differences as of December 31 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
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:
The significant components of the Bank's deferred tax assets and liabilities recorded on the balance sheet as of December 31 are as follows:
NOTE 8 - FEDERAL HOME LOAN BANK BORROWINGS
At December 31, 2000, the Bank had an advance from the FHLB in the amount of $5,000,000 at 6.67% with interest only payments through the maturity date of November 5, 2001. The Bank has access to additional FHLB borrowings in the amount of $114 million. However, such borrowings would require additional holdings of FHLB stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 9 - EMPLOYEE RETIREMENT PLANS
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. In 1999, the Bank adopted a non-qualified deferred compensation plan for certain executive employees. The Board of Directors designates participants of the plan. Benefits provided under the non-qualified plan are based on the discretion of the Board of Directors.
NOTE 9 - EMPLOYEE RETIREMENT PLANS (CONTINUED)
Assets for the qualified pension 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. Assets for the non-qualified plan consist of certificates of deposit.
The following table summarizes financial data for the plans as of December 31:
Prepaid benefit costs were $90,162 and $0 for December 31, 2000 and 1999, respectively. Accrued pension costs were $154,942 and $157,844 as of December 31, 2000 and 1999, respectively.
The Company recorded an intangible asset related to an additional minimum pension liability as of December 31, 2000 in the amount of $52,351.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 9 - EMPLOYEE RETIREMENT PLANS (CONTINUED)
Net periodic pension cost included the following components for the years ended December 31:
The projected benefit obligation for the qualified plan was determined using an assumed discount rate of 7.5% for 2000 (6.5% for the non-qualified plan), 7.5% for 1999 (6.5% for the non-qualified plan), and 7.0% for 1998 and an expected rate of increase in compensation of 4.0% for each of the same periods (compensation increases are not considered as part of the non-qualified plan). The assumed rate of return on the qualified plan's investment earnings was 8.0% for 2000 (6.5% for the non-qualified plan), 8.0% for 1999 (6.5% for the non-qualified plan), and 7.0% for 1998.
NOTE 10 - 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 approximately $12,268,000 and $13,900,000 as of December 31, 2000 and 1999, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 11 - 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.
FHLB borrowings: The carrying value is a reasonable estimate of fair value.
The Company's estimated fair value of financial instruments as of December 31, 2000 is as follows:
The market values of classifications of investment securities are contained in Note 2.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 12 - REGULATORY MATTERS
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 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 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 and defined in the regulations, of Tier 1 capital to average assets and of Tier 1 and total capital to risk-weighted assets. Management believes, as of December 31, 2000 and 1999, that the Bank meets all capital adequacy requirements to which it is subjected.
As of December 31, 2000 and 1999, 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, 2000 and 1999 is, as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 12 - REGULATORY MATTERS (CONTINUED)
Included in the "Cash and due from banks" and "Interest-bearing deposits in banks" balances are required federal reserves of approximately $1,677,000 and $1,370,000 at December 31, 2000 and 1999, 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.
NOTE 13 - 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 374 accounts greater than $100,000 representing $73.8 million in deposits as of December 31, 2000 (29.3% of deposits as of December 31, 2000) and $63.5 million in 284 accounts as of December 31, 1999 (25.8% of deposits as of December 31, 1999).
A substantial portion of the Bank's investments in municipal securities is obligations of state or political subdivisions located within Pennsylvania.
At December 31, 2000, approximately $8.9 million 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 14 - RELATED PARTIES
At December 31, 2000 and 1999, certain executive officers, directors and principal shareholders of the Company, and companies in which they have beneficial ownership, were indebted (including loans, open letters of credit, and third part consignors) to the Bank for $1,109,290 and $1,012,475, respectively. During 2000, no new loans were made to such related parties. Repayments on existing loans were $27,115. Open letters of credit and third party guarantees had a net increase of $123,930.
Deposits with the Bank by related parties and shareholders' greater than 5% were approximately $4,487,000 and $6,045,000 as of December 31, 2000 and 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 15 - SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION
The condensed financial information for Peoples Financial Corp., Inc., Inc. as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 is as follows:
BALANCE SHEETS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
NOTE 17 - STOCK SPLIT
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 was 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 remained unchanged at $0.30 per share. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PEOPLES FINANCIAL CORP. INC. AND SUBSIDIARY
Years Ended December 31, 2000, 1999 and 1998
NOTE 18 - REPURCHASE OF COMMON STOCK
In July 2000, the Company repurchased 107,640 shares of its stock for $3,948,946. It is being held as treasury stock and reported at cost at December 31, 2000. The Company is named as a co-defendant in a lawsuit related to the repurchase of the common stock. Management does not feel that any loss will result from the lawsuit.
NOTE 19 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (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 entities 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, 2000, as amended by SFAS Nos. 137 and 138. At this time, the Bank does not hold any derivative instruments or engage in any hedging activities.
In November 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it caries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Management does not believe that SFAS No. 140 will have a material impact on the Bank or its operations.