EXHIBIT 13

                          Peoples Financial Corporation

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General

PFC was incorporated for the purpose of owning all of the outstanding  shares of
Peoples Federal after the Conversion.  As a result,  the discussion that follows
focuses on Peoples Federal's financial condition and results of operations.  The
following  discussion  and analysis of the  financial  condition  and results of
operations of PFC and Peoples  Federal  should be read in  conjunction  with and
with reference to the consolidated  financial  statements and the notes thereto,
included in the Annual Report.

In  addition to the  historical  information  contained  herein,  the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  Economic  circumstances,  the operations of Peoples Federal, and
PFC's actual  results  could differ  significantly  from those  discussed in the
forward-looking  statements.  Some of the factors that could cause or contribute
to such  differences  are  discussed  herein,  but also  include  changes in the
economy  and changes in interest  rates in the nation and PFC's  primary  market
area.

Without limiting the generality of the foregoing,  some of the statements in the
referenced sections of this discussion and analysis are forward looking and are,
therefore, subject to such risks and uncertainties:

     1.   Management's determination of the amount and adequacy of the allowance
          for loan losses set forth under "Financial Condition,"  "Comparison of
          Results of Operations for the Years Ended September 30, 1998 and 1997"
          and "Comparison of Results of Operations for the Years Ended September
          30, 1997 and 1996;"

     2.   Management's analysis of interest rate risk set forth under "Asset and
          Liability Management;"

     3.   Management's  discussion of the liquidity of Peoples  Federal's assets
          and  the  regulatory  capital  of  Peoples  Federal  set  forth  under
          "Liquidity and Capital Resources;" and

     4.   The discussion of the anticipated  effect of legislation  which may be
          enacted set forth under "Charter Unification Legislation."

     5.   Management's   determination  of  the  effect  of  recent   accounting
          pronouncements.

     6.   Management's  determination  of the  effects of the year 2000 on PFC's
          information technology systems.

Discussion of Changes in Financial Condition from September 30, 1997 to 
September 30, 1998

PFC's  consolidated  assets  totaled  $86.3  million at September  30, 1998,  an
increase of $1.1 million, or 1.3%, over the $85.2 million total at September 30,
1997. The principal  changes in the  composition of assets during the year ended
September  30,  1998,  consisted of an increase in loans  receivable,  offset by
decreases  in  interest-bearing  deposits in other  financial  institutions  and
investment and  mortgage-backed  securities.  This increase in assets was funded
primarily  through net increases of $1.0 million in  borrowings  and $137,000 in
deposits,  which were partially  offset by a $293,000  decrease in shareholders'
equity.






                                       1
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Discussions  of  Changes in  Financial  Condition  from  September  30,  1997 to
September 30, 1998 (continued)

Interest-earning  deposits in other financial  institutions totaled $2.2 million
at September  30, 1998,  a decrease of $2.3  million  from  September  30, 1997.
Investment  securities and  mortgage-backed  securities totaled $16.8 million at
September  30,  1998,  as compared to $20.8  million at  September  30,  1997, a
decrease of $4.0 million, or 19.2%.  Investment securities decreased due to sale
of U.S. Government agency obligations and FHLMC common stock, maturities of FHLB
certificates of deposit and municipal bonds, and principal  repayments  totaling
$3.4  million,  which  were  partially  offset  by  purchases  of $1.0  million.
Mortgage-backed  securities  decreased  due to sales  and  principal  repayments
totaling  $6.3  million,  partially  offset by purchases of $4.1  million.  Such
proceeds,  coupled  with excess  liquidity,  were  principally  used to fund the
growth in the loan portfolio.

Loans  receivable  totaled  $64.3  million at September 30, 1998, an increase of
$7.7 million,  or 13.6%, over the $56.6 million total at September 30, 1997. The
increase was comprised of a $6.6 million  increase in one- to four-family,  home
equity and construction loans,  including a net decrease in undisbursed loans in
process of $1.2  million.  Multi-family  and  nonresidential  real estate  loans
increased by $1.2 million while  consumer and other loans  decreased by $41,000.
Loan   disbursements  of  $30.6  million  were  partially  offset  by  principal
repayments of $22.8  million  during the year ended  September 30, 1998.  Fiscal
1997 loan disbursements  totaled $28.7 million and principal repayments amounted
to $16.3 million.

Peoples  Federal's  allowance for loan losses totaled  $196,000 at September 30,
1998,  compared to the fiscal 1997  allowance of $145,000.  Nonperforming  loans
were $115,000 at September 30, 1998,  compared to nonperforming  loans of $2,000
and automobile loan pass-through  certificates of $33,000 at September 30, 1997.
The  allowance  for loan  losses  represented  .29%  and .23% of total  loans at
September   30,  1998  and  1997,   respectively   and  170.4%  and  7250.0%  of
nonperforming loans on the same dates.

Management believes that the allowance for loan loss level at September 30, 1998
is appropriate based on the available facts and  circumstances.  There can be no
assurance,  however,  that the allowance  will be adequate to absorb actual loan
losses during future periods.  The amount of loan loss  experienced may increase
due to growth in the loan  portfolio  generally;  increases in the amount of the
portfolio  consisting  of higher risk loan types,  such as  nonresidential  real
estate loans,  construction loans and consumer and other loans; economic changes
locally or nationally, including changes in interest rates, employment rates and
property  values;  and unexpected  problems with specific loans. If additions to
the allowance are necessary in future periods, such additions would reduce PFC's
net earnings.

Deposits  totaled  $65.8  million at September  30,  1998,  as compared to $65.7
million at September 30, 1997, an increase of $137,000,  or .2%. Certificates of
deposit increased by $1.7 million as a result of management's continuing efforts
to increase deposits while  maintaining the cost of funds at acceptable  levels.
Passbook  and money  market  deposits  decreased  by $934,000  and NOW  accounts
decreased by $673,000 for the year.










                                       2
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Discussions  of  Changes in  Financial  Condition  from  September  30,  1997 to
September 30, 1998 (continued)

At September  30, 1998,  borrowings  consisted of advances from the Federal Home
Loan Bank of $4.0 million.  No advances were  outstanding at September 30, 1997.
These funds were used primarily to fund the increase in loans.  At September 30,
1997, borrowings consisted of a note payable to another financial institution of
$3.0  million.  The  funds  obtained  from the  borrowing  in 1997  were used to
partially fund the return of capital  distribution and were repaid to the lender
in October 1997.

Shareholders'  equity totaled $15.0 million at September 30, 1998, a decrease of
$293,000,  or 1.9%,  from  September  30, 1997  levels.  The  decrease  resulted
primarily from purchases of treasury stock totaling  $995,000 and dividends paid
of  $770,000,  which were  partially  offset by net  earnings  of  $918,000  and
proceeds from the exercise of stock options of $76,000.

Comparison of Results of Operations for the Years Ended September 30, 1998 and 
1997

General

The operating  results of PFC are affected by general economic  conditions,  the
monetary and fiscal  policies of U. S.  Government  agencies and the  regulatory
policies of agencies which regulate financial institutions.  The net earnings of
PFC and Peoples Federal are primarily dependent on net interest income, which is
the  difference  between  interest  earned on loans  and other  interest-earning
assets and interest expense incurred on deposits and borrowed funds.

Net earnings totaled $918,000 for the year ended September 30, 1998, an increase
of $112,000 over net earnings of $806,000 recorded for fiscal 1997. The increase
resulted from net gains on the sale of investment and mortgage-backed securities
of  $683,000 in 1998  compared  to $15,000 in 1997,  offset by a decrease in net
interest income of $416,000,  an increase of $30,000 in the provision for losses
on loans,  a  decrease  in other  income of  $8,000,  an  increase  in  general,
administrative  and other  expense of $85,000  and an increase of $17,000 in the
provision for federal income taxes.

Net Interest Income

Total interest  income for the year ended  September 30, 1998,  amounted to $6.1
million,  a decrease of $148,000,  or 2.4%,  from the $6.3  million  recorded in
fiscal  1997.  Interest  income from loans  increased  $814,000,  or 20.4%.  The
increase   resulted   primarily   from  an  $11.2   million   increase   in  the
weighted-average outstanding balance of loans receivable,  partially offset by a
14  basis   point  (100  basis   points   equals  one   percent)   decrease   in
weighted-average  yield to 7.91% in 1998, from 8.05% in 1997. Interest income on
mortgage-backed securities,  investment securities and interest-earning deposits
decreased by $962,000,  or 42.7%. The decrease  resulted  primarily from a $15.0
million  decrease  in the  average  balance of such assets and an 84 basis point
decrease in weighted-average yield on investment securities, partially offset by
a 23 basis point increase in weighted-average yield on interest-earning deposits
and a 17 basis  point  increase  in  weighted-average  yield on  mortgage-backed
securities.








                                       3
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison of Results of Operations for the Years Ended September 30, 1998 and
1997 (continued)

Net Interest Income (continued)

Interest expense on deposits for the year ended September 30, 1998, totaled $3.2
million,  an increase of $176,000,  or 5.8%,  over the $3.0 million  recorded in
fiscal 1997.  This increase was due primarily to a $1.9 million  increase in the
weighted-average  outstanding  balance of deposits,  coupled with an increase in
the  weighted-average  interest rate paid of 13 basis points,  to 4.94% in 1998,
from 4.81% in 1997.  Interest  expense  on  borrowings  increased  to $96,000 in
fiscal 1998 from $4,000 in fiscal 1997. Advances from the Federal Home Loan Bank
were outstanding for  approximately 5 months in fiscal 1998, with no advances in
fiscal 1997, while the note payable was outstanding for less than a month during
both years.

As a result of the foregoing  changes in interest  income and interest  expense,
net interest  income  decreased by $416,000,  or 13.0%,  to $2.8 million for the
year ended  September 30, 1998.  The interest rate spread  increased to 2.53% in
fiscal 1998, from 2.52% in fiscal 1997,  while the net interest margin decreased
to 3.42% in fiscal 1998, from 3.75% in fiscal 1997.

Provision for Losses on Loans

The provision for losses on loans totaled  $42,000 for the year ended  September
30, 1998, an increase of $30,000,  or 250%, over the $12,000 provision  recorded
in fiscal 1997.  The increase  was recorded  primarily  because of growth in the
loan  portfolio in fiscal 1998.  Management  believes that the  continuation  of
periodic increases in the allowance for loan losses based upon the inherent risk
of loss related to loans,  the increase in the  outstanding  portfolio  balance,
current and  anticipated  economic  conditions  as measured by leading  economic
indicators and local employment data, the level of nonperforming  loans and past
loss  experience  is  prudent.  There  can be no  assurance  that the loan  loss
allowance  will be  adequate  to cover  losses  on  nonperforming  assets in the
future.

Other Income

Other income totaled $712,000 for the year ended September 30, 1998, compared to
$52,000  for  fiscal  1997.  The  increase  resulted  from net  gains on sale of
securities  during 1998 of  $683,000,  compared  to net gains of $15,000  during
1997.  Mortgage-backed  and  investment  securities  with a book  value  of $4.2
million and $10.0 million were sold during  fiscal 1998 and 1997,  respectively.
Gains of $696,000  and losses of $13,000 were  realized in 1998,  while gains of
$41,000 and losses of $26,000 were realized in 1997.  Other operating income was
greater in fiscal 1997 by $8,000,  primarily  due to mortgage  loan late charges
from a December 1996 collection. The remainder of other operating income is made
up of service fees,  safe deposit box rentals and service  charges on negotiable
order of withdrawal ("NOW") accounts.

General, Administrative and Other Expense

General,  administrative  and other  expense  totaled  $2.1 million for the year
ended September 30, 1998,  compared to $2.0 million for fiscal 1997, an increase
of $85,000, or 4.2%.






                                       4
<PAGE>



                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison of Results of Operations for the Years Ended September 30, 1998 and
1997 (continued)

General, Administrative and Other Expense (continued)

Employee  compensation  and benefits  increased  by $104,000,  or 9.8% in fiscal
1998,  compared  to fiscal  1997.  Recording  the first full  year's cost of the
Peoples  Financial  Corporation  Recognition  and Retention Plan ("RRP") and the
change in  average  market  value of PFC stock  increased  the  expense of stock
benefit plans by $79,000.  Salaries and wages and  directors'  fees increased by
$41,000  due to normal  merit  increases,  hiring of  additional  personnel  and
deferral of a lesser amount of loan costs.  The cost of the 401(k)  benefit plan
decreased  by $32,000 as the  Corporation's  contributions  were  frozen  during
fiscal  1998 and the first  half of  fiscal  1997 and an  excess  provision  was
reversed during 1998. Other employment  benefits increased $16,000 primarily due
to increases in health  insurance  premium  rates and payroll taxes on the first
RRP distribution made in fiscal 1998.

The other significant change in general, administrative and other expense during
fiscal  1998 was a decrease of $21,000,  or 34.4% in federal  deposit  insurance
premiums mostly due to decreased rates effective January 1, 1997.

Federal Income Taxes

The  provision  for federal  income  taxes  totaled  $453,000 for the year ended
September 30, 1998, an increase of $17,000, or 3.9%, over the $436,000 provision
recorded in fiscal 1997.  The increase was  primarily due to the increase in net
earnings  before taxes of $129,000,  or 10.4%.  PFC's  effective  tax rates were
33.0% for fiscal 1998 and 35.1% for fiscal 1997.

Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996

General

Net earnings totaled $806,000 for the year ended September 30, 1997, an increase
of $729,000, over net earnings of $77,000 recorded for fiscal 1996. The increase
resulted  primarily  from an  increase in net  interest  income of  $965,000,  a
decrease of $93,000 in the provision  for losses on loans,  an increase in other
income of $28,000 and a decrease in general, administrative and other expense of
$58,000,  including the effects of the $428,000  charge  recorded in fiscal 1996
related to the Savings  Association  Insurance  Fund  ("SAIF")  recapitalization
assessment,  which were  partially  offset by an  increase  of  $415,000  in the
provision for federal income taxes.














                                       5
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996 (continued)

Net Interest Income

Total  interest  income for the year ended  September  30,  1997,  totaled  $6.3
million,  an increase of $621,000,  or 11.0%,  over the $5.6 million recorded in
fiscal 1996.  Interest  income on loans  increased by  $691,000,  or 20.9%.  The
increase resulted primarily from a $9.9 million increase in the weighted-average
outstanding  balance of loans  receivable,  partially offset by a 26 basis point
(100 basis points  equals one  percent)  decrease in  weighted-average  yield to
8.05%  in  1997,  from  8.31%  in  1996.   Interest  income  on  mortgage-backed
securities,  investment  securities and  interest-earning  deposits decreased by
$70,000,  or 3.0%. The decrease resulted  primarily from a $2.4 million decrease
in the  average  balance  of  such  assets  and a 54  basis  point  decrease  in
weighted-average yield on investment securities, partially offset by a 108 basis
point increase in weighted-average  yield on interest-earning  deposits and a 21
basis point increase in weighted average yield on mortgage-backed securities.

Interest expense on deposits for the year ended September 30, 1997, totaled $3.0
million,  a decrease of $348,000 from the $3.4 million  recorded in fiscal 1996.
This  decrease  was  due  primarily  to  a  decrease  in  the   weighted-average
outstanding  balance of deposits  totaling $4.8  million,  and a decrease in the
weighted-average  interest rate paid of 17 basis points,  to 4.81% in 1997, from
4.98% in 1996.

As a result of the foregoing  changes in interest  income and interest  expense,
net interest  income  increased by $965,000,  or 43.1%,  to $3.2 million for the
year ended  September 30, 1997.  The interest rate spread  increased to 2.52% in
fiscal 1997, from 2.25% in fiscal 1996,  while the net interest margin increased
to 3.75% in fiscal 1997, from 2.88% in fiscal 1996.

Provision for Losses on Loans

The provision for losses on loans totaled  $12,000 for the year ended  September
30, 1997, a decrease of $93,000,  or 88.6%, from the $105,000 provision recorded
in fiscal 1996.  The decrease was primarily  due to an  additional  provision of
$100,000  recorded in the year ended September 30, 1996,  because of an increase
in  delinquent  loans  during that year.  These loans were  partially  repaid in
fiscal  1996 and paid in full in December  1996.  Management  believes  that the
continuation  of periodic  increases in the allowance for loan losses based upon
the  inherent  risk of loss related to loans,  the  increase in the  outstanding
portfolio balance,  current and anticipated  economic  conditions as measured by
leading   economic   indicators  and  local   employment   data,  the  level  of
nonperforming loans and past loss experience is prudent.













                                       6
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Comparison of Results of Operations for the Years Ended September 30, 1997 and
1996 (continued)

Other Income

Other income totaled $52,000 for the year ended September 30, 1997,  compared to
$24,000 for fiscal 1996. The increase resulted primarily from a net gain on sale
of securities during 1997. Mortgage-backed and investment securities with a book
value of $10.0 million were sold during fiscal 1997. Gains of $41,000 and losses
of  $26,000  were  realized.  No  securities  were  sold in fiscal  1996.  Other
operating  income  increased  by $13,000,  consisting  primarily of increases in
service fees, safe deposit box rentals,  service charges on negotiable  order of
withdrawal ("NOW") accounts and mortgage loan late charges.

General, Administrative and Other Expense

General,  administrative  and other  expense  totaled  $2.0 million for the year
ended  September 30, 1997,  compared to $2.1 million for fiscal 1996, a decrease
of $58,000, or 2.8%. Federal deposit insurance premiums decreased by $520,000. A
one-time  assessment to recapitalize the SAIF totaling  $428,000 was recorded in
September  1996,  while the $92,000  remainder  of the decrease was due to lower
quarterly premium rates in fiscal 1997.

Employee  compensation  and benefits  increased by $267,000,  or 33.8% in fiscal
1997,  compared to fiscal  1996.  Recording  the first full year's cost of stock
benefit plans  increased  expense by $248,000.  Salaries and wages  increased by
$48,000 due to normal merit increases and additional  hours worked.  Cost of the
401(k) benefit plan decreased by $37,000 as the Corporation's contributions were
frozen during the first half of fiscal 1997.

Other expense  increases  during  fiscal 1997 were $105,000 in franchise  taxes,
based on increased  capital from the Conversion  and $84,000 in other  operating
expenses,  primarily  from  costs  of  compliance  reporting  requirements  of a
publicly  traded  corporation,  modification  of an  employee  benefit  plan and
operation of PFC.

Federal Income Taxes

The  provision  for federal  income  taxes  totaled  $436,000 for the year ended
September 30, 1997, an increase of $415,000 over the $21,000 provision  recorded
in fiscal 1996.  The increase was  primarily due to the increase in net earnings
before taxes of $1.1  million.  PFC's  effective tax rates were 35.1% for fiscal
1997 and 21.4% for fiscal 1996.














                                       7
<PAGE>



                  AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA

The following  table presents  certain  information  relating to PFC and Peoples
Federal's  average  balance sheet  information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods  indicated.  Such  yields and costs are  derived by dividing  annual
income or expense by the average monthly balance of  interest-earning  assets or
interest-bearing  liabilities,  respectively,  for the years presented.  Average
balances are derived from month-end balances, which include nonaccruing loans in
the loan portfolio, net of the allowance for loan losses.
<TABLE>
<CAPTION>

                                                                                                  Year ended September 30,
                                                                       1998                                 1997                
                                                           Average   Interest                    Average   Interest             
                                                       outstanding    earned/     Yield/     outstanding    earned/    Yield/   
                                                           balance       paid     rate           balance       paid    rate     
                                                                                                   (Dollars in thousands)
<S>                                                        <C>            <C>       <C>             <C>        <C>         <C>   
Interest-earning assets:
  Interest-bearing deposits                                $ 3,443     $  199         5.78%      $ 5,806     $  322        5.55%
  Investment securities                                      4,850        222         4.58         8,255        448        5.42 
  Mortgage-backed and related securities                    12,413        870         7.01        21,674      1,483        6.84 
  Loans receivable (1)                                      60,876      4,814         7.91        49,717      4,000        8.05 
                                                            ------      -----       ------        ------      -----      ------ 
            Total interest-earning assets                   81,582      6,105         7.48        85,452      6,253        7.32 

Non-interest-earning assets
  Cash and amounts due from depository institutions            273                                   269                        
  Premises and equipment, net                                1,403                                 1,463                        
  Other non-earning assets                                     401                                   640                        
                                                            ------                                ------                        

         Total assets                                      $83,659                               $87,824                        
                                                            ======                                ======                        

Interest-bearing liabilities:
  NOW accounts                                             $ 1,698         22         1.30       $ 1,536         18        1.17 
  Money market accounts                                      2,590         62         2.39         2,708         57        2.10 
  Passbook savings accounts                                 10,799        217         2.01        12,026        241        2.00 
  Certificates of deposit                                   50,013      2,918         5.83        46,941      2,727        5.81 
  Borrowings                                                 1,814         96         5.29           250          4        1.60 
                                                            ------      -----       ------        ------      -----      ------    
          
         Total interest-bearing liabilities                 66,914      3,315         4.95        63,461      3,047        4.80    
                                                                        -----       ------                    -----      ------    
    
Non-interest-bearing liabilities                             1,432                                 1,435                           
                                                            ------                                ------                           
         Total liabilities                                  68,346                                64,896                           

Shareholders' equity                                        15,313                                22,928                           
                                                            ------                                ------                           

         Total liabilities and shareholders' equity        $83,659                               $87,824                           
                                                            ======                                ======                           

Net interest income; interest rate spread                              $2,790         2.53%                  $3,206        2.52%   
                                                                        =====       ======                    =====      ======    
    

Net interest margin (net interest income as a percent
  of average interest-earning assets)                                                 3.42%                                3.75%   
                                                                                    ======                               ====== 


Average interest-earning assets to average 
 interest-bearing liabilities                                                       121.92%                              134.65%
                                                                                    ======                               ====== 



                                                           Year ended September 30,
                                                                     1996
                                                         Average   Interest
                                                     outstanding    earned/      Yield/
                                                         balance       paid      rate
                                                    
<S>                                                         <C>         <C>       <C>                               
Interest-earning assets:
  Interest-bearing deposits                              $ 7,130     $  319       4.47%
  Investment securities                                    7,292        435       5.96
  Mortgage-backed and related securities                  23,671      1,569       6.63
  Loans receivable (1)                                    39,844      3,309       8.31
                                                          ------      -----      -----
            Total interest-earning assets                 77,937      5,632       7.23

Non-interest-earning assets
  Cash and amounts due from depository institutions          250
  Premises and equipment, net                              1,517
  Other non-earning assets                                   565
                                                          ------

         Total assets                                    $80,269
                                                          ======

Interest-bearing liabilities:
  NOW accounts                                           $ 1,431         18       1.26
  Money market accounts                                    3,402         87       2.56
  Passbook savings accounts                               13,958        326       2.34
  Certificates of deposit                                 49,249      2,960       6.01
  Borrowings                                                  -          -           -
                                                          ------      -----      -----
          
         Total interest-bearing liabilities               68,040      3,391       4.98
                                                                      -----      -----
    
Non-interest-bearing liabilities                           1,032
                                                          ------
         Total liabilities                                69,072

Shareholders' equity                                      11,197
                                                          ------

         Total liabilities and shareholders' equity      $80,269
                                                          ======

Net interest income; interest rate spread                            $2,241       2.25%
                                                                      =====     ======
    

Net interest margin (net interest income as a percen
  of average interest-earning assets)                                             2.88%   
                                                                                ======
Average interest-earning assets to average 
 interest-bearing liabilities                                                   114.55%
                                                                                ====== 
</TABLE>

(1)  Calculated net of deferred loan fees, loan discounts,  loans in process and
     the allowance for loan losses.


                                       8
<PAGE>
                                                 

                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Rate/Volume Table

The following  table describes the extent to which changes in interest rates and
changes in volume of interest-earning  assets and  interest-bearing  liabilities
have affected PFC and Peoples  Federal's  interest income and expense during the
years   indicated.   For  each   category   of   interest-earning   assets   and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume  (change in volume  multiplied  by prior year rate),  (ii)
changes in rate  (change in rate  multiplied  by prior year  volume),  and (iii)
total changes in rate and volume. The combined effects of changes in both volume
and  rate,   which  cannot  be  separately   identified,   have  been  allocated
proportionately to the change due to volume and the change due to rate:
<TABLE>
<CAPTION>

                                                                         Year ended September 30,
                                                            1998 vs. 1997                        1997 vs. 1996
                                                          Increase                             Increase
                                                         (decrease)                           (decrease)
                                                           due to                               due to
                                                     Volume       Rate      Total          Volume       Rate      Total
                                                                               (In thousands)
<S>                                                     <C>        <C>       <C>              <C>        <C>       <C>
Interest income attributable to:
  Interest-earnings deposits                          $(136)     $  13      $(123)          $ (73)     $  76     $    3
  Investment securities                                (156)       (70)      (226)             52        (39)        13
  Mortgage-backed and related securities               (648)        35       (613)           (136)        50        (86)
  Loans receivable                                      882        (68)       814             794       (103)       691
                                                      -----      -----      -----             ---        ---        ---
     Total interest income                              (58)       (90)      (148)            637        (16)       621
                                                      -----      -----      -----             ---        ---        ---

Interest expense attributable to:
  NOW accounts                                            2          3          5               1         (2)        (1)
  Money market accounts                                  (3)         7          4             (14)       (15)       (29)
  Passbook savings accounts                             (25)         1        (24)            (39)       (46)       (85)
  Certificates of deposit                               179         12        191            (134)       (99)      (233)
  Borrowings                                             83          9         92               4         -           4
                                                      -----      -----      -----             ---        ---        ---
     Total interest expense                             236         32        268            (182)      (162)      (344)
                                                      -----      -----      -----             ---        ---        ---

Increase (decrease) in net interest income            $(294)     $(122)     $(416)           $819       $146       $965
                                                      =====      =====      =====             ===        ===        ===
</TABLE>














                                       9
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Asset and Liability Management

Peoples Federal, like other financial institutions,  is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing  liabilities.  As part of its  effort  to  monitor  and  manage
interest  rate  risk,  Peoples  Federal  uses the Net  Portfolio  Value  ("NPV")
methodology  adopted  by the OTS as part of its  capital  regulations.  Although
Peoples  Federal is not  currently  subject to the NPV  regulation  because such
regulation does not apply to institutions  with less than $300 million in assets
and risk-based  capital in excess of 12%, the application of the NPV methodology
can illustrate Peoples Federal's degree of interest rate risk.

Generally,  NPV is the  discounted  present  value  of  the  difference  between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on  interest-bearing  and other liabilities.  The application of the methodology
attempts  to  quantify  interest  rate risk as the change in the NPV which would
result from a theoretical  200 basis point (1 basis point equals .01%) change in
market interest rates.  Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are  considered.  If the
NPV would decrease more than 2% of the present value of the institution's assets
with  either an increase or a decrease in market  rates,  the  institution  must
deduct 50% of the amount of the decrease in excess of such 2% in the calculation
of the institution's risk-based capital. See "Liquidity and Capital Resources."

At September 30, 1998, 2% of the present value of Peoples  Federal's  assets was
approximately $1.8 million.  Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point  decrease) was $3.4 million at September 30, 1998,  Peoples
Federal  would have been required to deduct  approximately  $865,000 (50% of the
approximate  $1.7 million  difference)  from its capital in determining  whether
Peoples  Federal met its  risk-based  capital  requirement.  Regardless  of such
reduction,  however, Peoples Federal's risk-based capital at September 30, 1998,
would still have exceeded the regulatory requirement by $6.8 million.

Presented  below, as of September 30, 1998, is an analysis of Peoples  Federal's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel  shifts of 100 basis points in market  interest  rates.  The table also
contains the policy  limits set by the Board of Directors of Peoples  Federal as
the maximum  change in NPV that the Board of  Directors  deems  advisable in the
event of various  changes in interest rates.  Such limits have been  established
with  consideration  of the dollar  impact of various  rate  changes and Peoples
Federal's strong capital position.

As illustrated in the table,  Peoples  Federal's NPV is more sensitive to rising
rates than declining rates.  Such difference in sensitivity  occurs  principally
because,  as rates rise,  borrowers do not prepay fixed-rate loans as quickly as
they do when interest  rates are  declining.  At September 30, 1998,  fixed-rate
loans  constituted  84.5% of Peoples  Federal's  loan  portfolio.  In  addition,
because Peoples Federal has only recently begun to originate loans in










                                       10
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Asset and Liability Management (continued)

accordance with traditional secondary market guidelines,  the sale of fixed rate
loans may be difficult. As a result, in a rising interest rate environment,  the
amount of interest  Peoples  Federal would  receive on its loans would  increase
relatively  slowly as loans are slowly prepaid and new loans at higher rates are
made.  Moreover,  the interest  Peoples  Federal would pay on its deposits would
increase  rapidly  because  Peoples  Federal's  deposits  generally have shorter
periods of repricing.  Assumptions in calculating  the amounts in this table are
OTS assumptions.
<TABLE>
<CAPTION>

                                                                    September 30, 1998
Change in interest rate        Board limit                    $ Change              % Change
   (Basis Points)               % change                       in NPV                in NPV
                                                           (In thousands)
<S>                                <C>                          <C>                  <C>
        +300                       (75)%                     $(5,668)                (40)%
        +200                       (45)                       (3,494)                (25)
        +100                       (25)                       (1,578)                (11)
          -                         -                             -                   - 
        -100                        25                         1,177                   8
        -200                        45                         2,500                  18
        -300                        75                         4,138                  29

</TABLE>
As with any method of measuring  interest rate risk,  certain  shortcomings  are
inherent  in  the  NPV  approach.  For  example,  although  certain  assets  and
liabilities may have similar maturities or periods of repricing,  they may react
in different  degrees to changes in market  interest  rates.  Also, the interest
rates on certain  types of assets and  liabilities  may  fluctuate in advance of
changes in market  interest  rates,  while interest rates on other types may lag
behind  changes in market rates.  Further,  in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed  securities and
early  withdrawal  levels from  certificates  of deposit  would  likely  deviate
significantly from those assumed in making the risk calculations.

If interest rates rise, Peoples Federal's net interest income will be negatively
affected.   Moreover,  rising  interest  rates  may  negatively  affect  Peoples
Federal's earnings due to diminished loan demand.

Liquidity and Capital Resources

Peoples   Federal's   principal   sources  of  funds  are  deposits,   loan  and
mortgage-backed securities repayments,  maturities of securities and other funds
provided by operations.  Peoples Federal also has the ability to borrow from the
FHLB of Cincinnati. While scheduled loan repayments and maturing investments are
relatively  predictable,  deposit flows and loan and mortgage-backed  securities
prepayments are more influenced by interest rates,  general economic  conditions
and competition.  Peoples Federal  maintains  investments in liquid assets based
upon  management's  assessment of (1) the need for funds,  (2) expected  deposit
flows,  (3)  the  yield  available  on  short-term  liquid  assets  and  (4) the
objectives of the asset/liability management program.






                                       11
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Liquidity and Capital Resources (continued)

OTS regulations at September 30, 1998,  required  Peoples Federal to maintain an
average daily balance of cash,  investments in United States Treasury and agency
securities and other  investments  having maturities of five years or less in an
amount equal to 4% of the sum of Peoples  Federal's average daily balance of net
withdrawable deposit accounts. The liquidity  requirement,  which may be changed
from  time to  time  by the OTS to  reflect  changing  economic  conditions,  is
intended  to provide a source of  relatively  liquid  funds  upon which  Peoples
Federal may rely if necessary to fund deposit  withdrawals  or other  short-term
funding needs. At September 30, 1998,  Peoples  Federal's  regulatory  liquidity
ratio was 23.8%.  At such date,  Peoples  Federal had  commitments  to originate
loans totaling $3.2 million and, in addition,  had undisbursed  loans in process
of $4.1 million.  At September 30, 1998,  Peoples  Federal had no commitments to
purchase or sell loans.  Peoples  Federal  considers  its  liquidity and capital
sufficient to meet its outstanding  short- and long-term needs. At September 30,
1998, Peoples Federal had no material commitments for capital expenditures.

PFC's liquidity, primarily represented by cash and cash equivalents, is a result
of the funds used in or provided by PFC's  operating,  investing  and  financing
activities.  These activities are summarized below for the years ended September
30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>

                                                                 Year ended September 30,
                                                     1998              1997             1996
                                                                 (In thousands)
<S>                                                   <C>               <C>              <C>
Net earnings                                       $  918           $   806          $    77

Adjustments to reconcile net earnings to
  net cash from operating activities                  511              (289)             466
                                                    -----            ------           ------

Net cash from operating activities                  1,429               517              543

Net cash from investing activities                 (3,239)           (2,803)          (1,272)

Net cash from financing activities                   (552)           (5,464)          11,398
                                                    -----            ------           ------

Net change in cash and cash equivalents            (2,362)           (7,750)          10,669

Cash and cash equivalents at
  beginning of year                                 4,783            12,533            1,864
                                                    -----            ------           ------

Cash and cash equivalents at end
  of year                                          $2,421           $ 4,783          $12,533
                                                    =====            ======           ======

</TABLE>






                                       12
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Liquidity and Capital Resources (continued)

Peoples  Federal is required by  applicable  law and  regulation to meet certain
minimum capital  standards.  Such capital  standards  include a tangible capital
requirement,  a core  capital  requirement  or leverage  ratio and a  risk-based
capital requirement.

The tangible  capital  requirement  requires  savings  associations  to maintain
"tangible  capital" of not less than 1.5% of the  association's  adjusted  total
assets.  Tangible  capital is defined in OTS  regulations  as core capital minus
intangible assets.

"Core capital" is comprised of common  shareholders'  equity (including retained
earnings), noncumulative preferred stock and related surplus, minority interests
in  consolidated  subsidiaries,  certain  nonwithdrawable  accounts  and pledged
deposits of mutual associations. OTS regulations require savings associations to
maintain core capital of at least 3% of the association's  total assets. The OTS
has  proposed  to  increase  such  requirement  to 4% or 5%,  except  for  those
associations with the highest examination rating and acceptable levels of risk.

OTS regulations require that savings associations  maintain "risk-based capital"
in an amount not less than 8% of "risk-weighted  assets."  Risk-based capital is
defined as core capital plus certain  additional items of capital,  which in the
case of Peoples  Federal  includes a general loan loss  allowance of $196,000 at
September 30, 1998.

Peoples Federal exceeded all of its regulatory capital requirements at September
30, 1998. The following table summarizes  Peoples Federal's  regulatory  capital
requirements and regulatory capital at September 30, 1998:
<TABLE>
<CAPTION>

                                                                               Excess of
                                                                           regulatory capital
                                                                              over current           Applicable
                        Regulatory capital        Current requirement          requirement                asset
                        Amount      Percent       Amount      Percent       Amount       Percent          total
                                                        (Dollars in thousands)
<S>                      <C>          <C>           <C>          <C>          <C>          <C>             <C>       
Tangible capital       $10,947        13.0%       $1,267         1.5%       $9,680        11.5%         $84,469

Core capital            10,947        13.0         2,534         3.0         8,413        10.0           84,469

Risk-based capital      11,143        26.0         3,433         8.0         7,710        18.0           42,915


</TABLE>











                                       13
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Effect of Recent Accounting Pronouncements

In June 1996,  the  Financial  Accounting  Standards  Board (the "FASB")  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
that provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities.  SFAS No. 125 introduces an
approach to accounting  for transfers of financial  assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial  interest in the assets,  retains  rights or  obligations,  makes use of
special  purpose  entities  in the  transaction,  or  otherwise  has  continuing
involvement with the transferred assets. The new accounting method,  referred to
as the financial components  approach,  provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values.  SFAS No. 125 provides  criteria for  determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer  does not qualify as a sale,  it is  accounted  for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements,  securitizations of financial
assets,  loan   participations,   factoring   arrangements,   and  transfers  of
receivables with recourse.

An entity that undertakes an obligation to service  financial assets  recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets,  and all the securitized  assets are retained and
classified  as  held-to-maturity).  A  servicing  asset  or  liability  that  is
purchased or assumed is initially recognized at its fair value. Servicing assets
and  liabilities are amortized in proportion to and over the period of estimated
net  servicing  income  or net  servicing  loss and are  subject  to  subsequent
assessments for impairment based on fair value.

SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor  either pays the creditor and is relieved of its  obligation  for the
liability or is legally released from being the primary obligor.

SFAS No. 125 is effective for  transfers  and servicing of financial  assets and
extinguishment  of liabilities  occurring  after December 31, 1997, and is to be
applied  prospectively.  Earlier or  retroactive  application  is not permitted.
Management  adopted SFAS No. 125 during fiscal 1998 without  material  effect on
PFC's consolidated financial position or results of operations.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
SFAS No. 130  establishes  standards for reporting and display of  comprehensive
income and its components (revenues,  expenses,  gains and losses) in a full set
of general-purpose  financial  statements.  SFAS No. 130 requires that all items
that are required to be recognized under  accounting  standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as other  financial  statements.  It does  not  require  a
specific  format for that  financial  statement  but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.










                                       14
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Effect of Recent Accounting Pronouncements (continued)

SFAS  No.  130  requires  that  an  enterprise   (a)  classify  items  of  other
comprehensive  income by their nature in a financial  statement  and (b) display
the accumulated balance of other  comprehensive  income separately from retained
earnings and additional  paid-in capital in the equity section of a statement of
financial  position.  SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997.  Reclassification of financial statements for earlier periods
provided for comparative  purposes is required.  SFAS No. 130 is not expected to
have a material impact on PFC's financial statements.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information." SFAS No. 131 significantly changes the way
that public business  enterprises report information about operating segments in
annual financial  statements and requires that those enterprises report selected
information  about reportable  segments in interim  financial  reports issued to
shareholders.  It also  establishes  standards  for  related  disclosures  about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management  approach" to disclose  financial and descriptive  information about
the way that management  organizes the segments within the enterprise for making
operating  decisions  and  assessing  performance.  For  many  enterprises,  the
management  approach  will likely  result in more segments  being  reported.  In
addition,  SFAS No. 131 requires  significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements  and also requires that selected  information  be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December  15, 1997.  SFAS No. 131 is not  expected to have a material  impact on
PFC's financial statements.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging  Activities,"  which requires  entities to recognize all
derivatives  in their  financial  statements  as either  assets  or  liabilities
measured at fair value.  SFAS No. 133 also  specifies  new methods of accounting
for hedging  transactions,  prescribes  the items and  transactions  that may be
hedged,  and  specifies  detailed  criteria  to be  met  to  qualify  for  hedge
accounting.

The definition of a derivative  financial instrument is complex, but in general,
it is an instrument  with one or more  underlyings,  such as an interest rate or
foreign exchange rate, that is applied to a notional  amount,  such as an amount
of currency,  to determine the settlement  amount(s).  It generally  requires no
significant initial investment and can be settled net or by delivery of an asset
that is  readily  convertible  to cash.  SFAS No.  133  applies  to  derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.

SFAS No. 133 is effective  for fiscal years  beginning  after June 15, 1999.  On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the  available-for-sale  or trading category without calling into question their
intent to hold other debt securities to maturity in the future.  SFAS No. 133 is
not expected to have a material impact on PFC's financial statements.









                                       15
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Charter Unification Legislation

The deposit  accounts  of Peoples  Federal and other  savings  associations  are
insured  up to  applicable  limits  by the  FDIC  in the  SAIF.  Legislation  to
recapitalize  the SAIF was  enacted on  September  30,  1996.  Such  legislation
provided that the SAIF will be merged into the Bank  Insurance Fund if there are
no remaining  federal savings  associations.  Such legislation also requires the
Department  of Treasury to submit a report to Congress on the  development  of a
common charter for all financial institutions.

Pursuant  to such  legislation,  Congress  may  eliminate  the OTS,  and Peoples
Federal  may be  regulated  under  federal  law as a bank or may be  required to
change its charter. Such change in regulation or charter would likely change the
range of  activities  in which  Peoples  Federal  may engage and would  probably
subject  Peoples  Federal to more  regulation by the FDIC. In addition,  Peoples
Federal might become subject to a different form of holding company  regulation,
which may limit the activities in which PFC may engage, and subject PFC to other
additional regulatory requirements,  including separate capital requirements. At
this time,  PFC  cannot  predict  when or whether  Congress  may  actually  pass
legislation  regarding PFC's and Peoples  Federal's  regulatory  requirements or
charter. Although such legislation may change the activities in which either PFC
and  Peoples  Federal  may  engage,  it is  not  anticipated  that  the  current
activities of both PFC and Peoples Federal will be materially  affected by those
activity limits.

Impact of Inflation and Changing Prices

The  consolidated  financial  statements and notes thereto  included herein have
been prepared in accordance with generally accepted accounting principles, which
require PFC to measure financial  position and results of operations in terms of
historical  dollars  with  the  exception  of  investment  and   mortgage-backed
securities  available-for-sale,  which are carried at fair value. Changes in the
relative  value of  money  due to  inflation  or  recession  are  generally  not
considered.

In  management's  opinion,  changes  in  interest  rates  affect  the  financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation,  they do not change at the same rate or in the same magnitude
as the rate of inflation.  Rather,  interest rate volatility is based on changes
in the  expected  rate of  inflation,  as well as changes in monetary and fiscal
policies.


                                       16
<PAGE>


                          Peoples Financial Corporation

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS (CONTINUED)



Year 2000 Compliance Matters

As with most providers of financial services,  Peoples Federal's  operations are
heavily  dependent  on  information  technology  systems.   Peoples  Federal  is
addressing  the potential  problems  associated  with the  possibility  that the
computers  that  control or operate  Peoples  Federal's  information  technology
system and  infrastructure  may not be programmed to read  four-digit date codes
and, upon arrival of the year 2000, may recognize the two-digit code "00" as the
year 1900,  causing  systems to fail to function or to generate  erroneous data.
Peoples  Federal is  working  with the  companies  that  supply or  service  its
information  technology  systems to  identify  and remedy any year 2000  related
problems.

PFC's primary data processing  applications are handled by a third-party service
bureau  which  has  advised  PFC  that  is  has  transferred  to  a  fully  year
2000-compliant  processing  system that will be fully tested by January 1, 1999.
Management has also reviewed PFC's ancillary  equipment and is in the process of
providing the appropriate remedial measures without material cost.

As a result of the  foregoing,  PFC has not  identified  any  material  specific
expenses  that are  reasonably  likely to be  incurred  by  Peoples  Federal  in
connection with this issue and does not expect to incur  significant  expense to
implement the necessary corrective measures. No assurance can be given, however,
that  significant  expense will not be incurred in future periods.  In the event
that Peoples  Federal is ultimately  required to purchase  replacement  computer
systems,  programs and equipment,  or incur substantial  expense to make Peoples
Federal's current systems, programs and equipment year 2000 compliant, PFC's net
earnings and financial condition could be adversely affected.

While  Peoples  Federal is  endeavoring  to ensure  that its  computer-dependent
operations  are year 2000  compliant,  no assurance  can be given that some year
2000  problems  will not  occur.  Peoples  Federal  has  developed  a Year  2000
contingency/business   resumption   plan  which  calls  for  manual  posting  of
customers'  accounts and passbooks.  Under the plan, general ledger accounts and
other company records will also be posted manually.  Management  believes manual
posting is possible due to the size of Peoples Federal,  the relative simplicity
of products and records, the number of personnel available to participate in the
additional  record  keeping  and the fact  that all loan and  deposit  accounts,
except NOW accounts and Home Equity Line of Credit loans are passbook accounts.

In addition  to possible  expense  related to its own  systems,  PFC could incur
losses if year 2000 issues  adversely  affect  Peoples  Federal's  depositors or
borrowers.  Such problems  could include  delayed loan payments due to year 2000
problems affecting any significant borrowers or impairing the payroll systems of
large  employers  in Peoples  Federal's  primary  market area.  Because  Peoples
Federal's  loan  portfolio  is highly  diversified  with  regard  to  individual
borrowers and types of businesses and Peoples  Federal's  primary market area is
not significantly dependent upon one employer or industry,  Peoples Federal does
not  expect any  significant  or  prolonged  difficulties  that will  affect net
earnings or cash flow.

                                       17
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
Peoples Financial Corporation

We have audited the accompanying  consolidated statements of financial condition
of Peoples  Financial  Corporation  as of September  30, 1998 and 1997,  and the
related consolidated statements of earnings, shareholders' equity and cash flows
for  each  of  the  years  ended  September  30,  1998,  1997  and  1996.  These
consolidated  financial  statements are the  responsibility of the Corporation's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the 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 financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Peoples Financial
Corporation as of September 30, 1998 and 1997, and the  consolidated  results of
its  operations  and its cash flows for each of the years  ended  September  30,
1998,  1997  and  1996,  in  conformity  with  generally   accepted   accounting
principles.



GRANT THORNTON LLP


Cincinnati, Ohio
November 19, 1998









                                       18
<PAGE>


                          Peoples Financial Corporation
<TABLE>
<CAPTION>

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                  September 30,
                        (In thousands, except share data)


         ASSETS                                                               1998                1997
<S>                                                                        <C>                     <C>
Cash and due from banks                                                    $   269             $   343
Interest-earning deposits in other financial institutions                    2,152               4,440
                                                                            ------              ------
         Cash and cash equivalents                                           2,421               4,783

Investment securities designated as available
  for sale - at market                                                       2,591               3,291
Investment securities - at cost, approximate market value
  of $1,045 and $2,025 as of September 30, 1998 and 1997                       967               1,973
Mortgage-backed securities designated as available for
  sale - at market                                                           8,859               8,657
Mortgage-backed securities - at amortized cost,
  approximate market value of $4,521 and $7,044
  as of September 30, 1998 and 1997                                          4,400               6,841
Loans receivable - net                                                      64,341              56,642
Office premises and equipment - at depreciated cost                          1,471               1,422
Stock in Federal Home Loan Bank - at cost                                      861                 802
Accrued interest receivable                                                    298                 316
Prepaid expenses and other assets                                               87                 479
                                                                            ------              ------

         Total assets                                                      $86,296             $85,206
                                                                            ======              ======

         LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits                                                                   $65,797             $65,660
Advances from the Federal Home Loan Bank                                     4,000                  - 
Note payable                                                                    -                3,000
Other liabilities                                                              251                 326
Accrued federal income taxes                                                   329                  10
Deferred federal income taxes                                                  886                 884
                                                                            ------              ------
         Total liabilities                                                  71,263              69,880

Commitments                                                                     -                   - 

Shareholders' equity
  Preferred stock - authorized 1,000,000 shares without par
    value; no shares issued                                                     -                   - 
  Common stock - authorized 6,000,000 shares without par or
    stated value; 1,491,012 shares issued                                       -                   - 
  Additional paid-in capital                                                 7,287               7,165
  Retained earnings - restricted                                             9,927               9,779
  Unrealized gains on securities designated as available
    for sale, net of related tax effects                                     1,095               1,083
  Shares acquired by stock benefit plans                                    (1,097)             (1,416)
  Less 139,327 and 74,400 treasury shares, at cost                          (2,179)             (1,285)
                                                                            ------              ------
         Total shareholders' equity                                         15,033              15,326
                                                                            ------              ------

         Total liabilities and shareholders' equity                        $86,296             $85,206
                                                                            ======              ======

</TABLE>


The accompanying notes are an integral part of these statements.

                                       19
<PAGE>



                          Peoples Financial Corporation
<TABLE>
<CAPTION>

                       CONSOLIDATED STATEMENTS OF EARNINGS

                            Year ended September 30,
                        (In thousands, except share data)


                                                            1998            1997         1996
<S>                                                         <C>            <C>           <C>
Interest income
  Loans                                                   $4,814          $4,000       $3,309
  Mortgage-backed securities                                 870           1,483        1,569
  Investment securities                                      222             448          435
  Interest-bearing deposits and other                        199             322          319
                                                           -----           -----        -----

         Total interest income                             6,105           6,253        5,632

Interest expense
  Deposits                                                 3,219           3,043        3,391
  Borrowings                                                  96               4           - 
                                                           -----           -----        -----
         Total interest expense                            3,315           3,047        3,391
                                                           -----           -----        -----


         Net interest income                               2,790           3,206        2,241

Provision for losses on loans                                 42              12          105
                                                           -----           -----        -----

         Net interest income after
           provision for losses on loans                   2,748           3,194        2,136

Other income
  Gain on sale of investment and mortgage-backed
    securities designated as available for sale              683              15           - 
  Other operating                                             29              37           24
                                                           -----           -----        -----
         Total other income                                  712              52           24

General, administrative and other expense
  Employee compensation and benefits                       1,161           1,057          790
  Occupancy and equipment                                    222             228          228
  Franchise taxes                                            230             227          122
  Federal deposit insurance premiums                          40              61          581
  Data processing                                             81              75           75
  Advertising                                                 33              37           31
  Other operating                                            322             319          235
                                                           -----           -----        -----
         Total general, administrative
           and other expense                               2,089           2,004        2,062
                                                           -----           -----        -----

         Earnings before income taxes                      1,371           1,242           98

Federal income taxes
  Current                                                    455             275          108
  Deferred                                                    (2)            161          (87)
                                                           -----           -----        -----
         Total federal income taxes                          453             436           21
                                                           -----           -----        -----

         NET EARNINGS                                     $  918          $  806       $   77
                                                           =====           =====        =====

         EARNINGS PER SHARE
           Basic                                            $.68            $.57          N/A
                                                             ===             ===          ===

           Diluted                                          $.67            $.57          N/A
                                                             ===             ===          ===
</TABLE>

The accompanying notes are an integral part of these statements.

                                       20
<PAGE>



                          Peoples Financial Corporation
<TABLE>
<CAPTION>

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

              For the years ended September 30, 1998, 1997 and 1996
                       (In thousands, except share data)
                                                                                                   Unrealized
                                                                               Shares                gains on
                                                                             acquired              securities
                                                                Additional   by stock  Treasury    designated
                                                       Common      paid-in    benefit   shares,  as available   Retained
                                                        stock      capital      plans   at cost      for sale   earnings    Total
<S>                                                       <C>        <C>         <C>      <C>          <C>       <C>        <C>
Balance at October 1, 1995                                $-       $    -     $    -     $   -      $  504       $9,378    $ 9,882

Reorganization to common stock form and issuance
  of shares in connection therewith - net                  -        14,203       (597)       -          -            -      13,606
Net earnings for the year ended September 30, 1996         -            -          -         -          -            77         77
Unrealized gains on securities designated as available
  for sale, net of related tax effects                     -            -          -         -         141           -         141
                                                           --       ------     ------    ------      -----        -----     ------

Balance at September 30, 1996                              -        14,203       (597)       -         645        9,455     23,706

Return of capital distribution to shareholders             -        (7,083)        -         -          -            -      (7,083)
Purchase of shares for stock benefit plan                  -            -        (919)       -          -            -        (919)
Purchase of treasury shares                                -            -          -     (1,285)        -            -      (1,285)
Amortization expense of stock benefit plan                 -            45        100        -          -            -         145
Dividends of $.325 per share                               -            -          -         -          -          (482)      (482)
Net earnings for the year ended September 30, 1997         -            -          -         -          -           806        806
Unrealized gains on securities designated as available
  for sale, net of related tax effects                     -            -          -         -         438           -         438
                                                           --       ------     ------    ------     ------        -----     ------

Balance at September 30, 1997                              -         7,165     (1,416)   (1,285)     1,083        9,779     15,326

Issuance of shares under stock option plan                 -           (25)        -        101         -            -          76
Purchase of treasury shares                                -            -          -       (995)        -            -        (995)
Amortization expense of stock benefit plans                -           147        319        -          -            -         466
Dividends of $.55 per share                                -            -          -         -          -          (770)      (770)
Net earnings for the year ended September 30, 1998         -            -          -         -          -           918        918
Unrealized gains on securities designated as available
  for sale, net of related tax effects                     -            -          -         -          12           -          12
                                                           --        -----     ------    ------      -----        -----     ------

Balance at September 30, 1998                             $-       $ 7,287    $(1,097)  $(2,179)    $1,095       $9,927    $15,033
                                                           ==        =====     ======    ======      =====        =====     ======

</TABLE>


The accompanying notes are an integral part of these statements.

                                       21
<PAGE>

                          Peoples Financial Corporation
<TABLE>
<CAPTION>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Year ended September 30,
                                 (In thousands)

                                                                           1998            1997           1996
<S>                                                                         <C>            <C>             <C>
Cash flows from operating activities:
  Net earnings for the year                                             $   918         $   806        $    77
  Adjustments to reconcile net earnings to net cash
  provided by (used in) operating activities:
    Amortization of premiums and discounts on
      investments and mortgage-backed securities - net                       20              36             64
    Gain on sale of investment and mortgage-backed
      securities designated as available for sale                          (683)            (15)            - 
    Amortization of deferred loan origination (fees) costs                  (32)             (9)            29
    Depreciation and amortization                                            98             102             95
    Provision for losses on loans                                            42              12            105
    Amortization expense of stock benefit plans                             466             145             - 
    Recovery of loss on investments                                           9              -              - 
    Federal Home Loan Bank stock dividends                                  (60)            (54)           (62)
    Increase (decrease) in cash due to changes in:
      Accrued interest receivable                                            18              81            (22)
      Prepaid expenses and other assets                                     392            (384)            (3)
      Other liabilities                                                     (91)           (347)           345
      Accrued interest payable                                               15               5              3
      Federal income taxes
        Current                                                             319             (22)            (1)
        Deferred                                                             (2)            161            (87)
                                                                         ------          ------         ------
         Net cash provided by operating activities                        1,429             517            543

Cash flows provided by (used in) investing activities:
  Purchase of mortgage-backed securities designated
    as available for sale                                                (4,085)         (3,498)        (2,243)
  Proceeds from sale of mortgage-backed securities
    designated as available for sale                                      1,998           6,501             - 
  Principal repayments on mortgage-backed securities                      4,348           4,616          5,090
  Purchase of investment securities designated as available
    for sale                                                               (999)         (1,500)        (3,502)
  Proceeds from sale of investment securities designated
    as available for sale                                                 2,211           3,499             - 
  Purchase of investment securities designated as
    held to maturity                                                         -           (2,000)        (1,000)
  Principal repayments and maturities of investment securities            1,153           1,967          6,770
  Loan principal repayments                                              22,834          16,323          8,805
  Loan disbursements                                                    (30,552)        (28,702)       (15,125)
  Purchase of office premises and equipment                                (147)             (9)           (67)
                                                                         ------          ------         ------
         Net cash used in investing activities                           (3,239)         (2,803)        (1,272)
                                                                         ------          ------         ------

         Net cash used in operating and investing
           activities (balance carried forward)                          (1,810)         (2,286)          (729)
                                                                         ------          ------         ------

</TABLE>



                                       22
<PAGE>


                          Peoples Financial Corporation
<TABLE>
<CAPTION>

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                            Year ended September 30,
                                 (In thousands)


                                                                      1998            1997           1996
<S>                                                                   <C>            <C>             <C>
         Net cash used in operating and investing
           activities (balance brought forward)                    $(1,810)        $(2,286)       $  (729)


Cash flows provided by (used in) financing activities:
  Net increase (decrease) in deposit accounts                          137           1,305         (2,208)
  Proceeds from note payable                                            -            3,000             - 
  Repayment of note payable                                         (3,000)             -              - 
  Proceeds from Federal Home Loan Bank advances                      4,000              -              - 
  Return of capital distribution on common stock                        -           (7,083)            - 
  Purchase of treasury shares                                         (995)         (1,285)            - 
  Purchase of shares for stock benefit plans                            -             (919)            - 
  Dividends paid on common stock                                      (770)           (482)            - 
  Proceeds from exercise of stock options                               76              -              - 
  Net proceeds from the issuance of common stock                        -               -          13,606
                                                                    ------          ------         ------
         Net cash provided by (used in) financing activities          (552)         (5,464)        11,398
                                                                    ------          ------         ------

Net increase (decrease) in cash and cash equivalents                (2,362)         (7,750)        10,669

Cash and cash equivalents at beginning of year                       4,783          12,533          1,864
                                                                    ------          ------         ------

Cash and cash equivalents at end of year                           $ 2,421         $ 4,783        $12,533
                                                                    ======          ======         ======

Supplemental disclosure of cash flow information: 
  Cash paid during the year for:
    Federal income taxes                                           $   135        $    298        $   108
                                                                    =======        =======         ======

    Interest on deposits and borrowings                            $ 3,304        $  3,039        $ 3,387
                                                                    ======         =======         ======


Supplemental disclosure of noncash investing activities:
  Securities transferred to an available for sale classification
    in accordance with SFAS No. 115                                $    -         $     -         $14,855
                                                                    ======         =======         ======

  Unrealized gains on securities designated as
    available for sale, net of related tax effects                 $    12        $    438        $   141
                                                                    ======         =======         ======

</TABLE>




The accompanying notes are an integral part of these statements.



                                       23
<PAGE>


                          Peoples Financial Corporation

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    On October 16, 1995, the Board of Directors of Peoples  Federal  Savings and
    Loan  Association  of  Massillon  (the  "Association")  adopted  a  Plan  of
    Conversion (the "Plan")  whereby the Association  would convert to the stock
    form of  ownership,  followed by the  issuance  of all of the  Association's
    outstanding  stock to a newly  formed  holding  company,  Peoples  Financial
    Corporation  (the  "Corporation").  Pursuant  to the Plan,  the  Corporation
    offered common shares for sale to certain  depositors of the Association and
    members of the  community.  The  conversion  was  completed on September 12,
    1996,  and  resulted  in the  issuance  of  1,491,012  common  shares of the
    Corporation  which,  after   consideration  of  offering  expenses  totaling
    approximately  $707,000, and share purchases by the Employee Stock Ownership
    Plan ("ESOP")  totaling  $597,000,  resulted in net equity proceeds of $13.6
    million.  Condensed financial statements of the Corporation are presented in
    Note  M.  Future  references  are  made  either  to the  Corporation  or the
    Association as applicable.

    The Corporation is a savings and loan holding  company whose  activities are
    primarily  limited to holding the stock of the Association.  The Association
    conducts a general  banking  business in  northeast  Ohio which  consists of
    attracting  deposits from the general public and applying those funds to the
    origination of loans for residential,  consumer and nonresidential purposes.
    The  Association's  profitability  is  significantly  dependent  on its  net
    interest income,  which is the difference  between interest income generated
    from  interest-earning  assets (i.e. loans and investments) and the interest
    expense paid on  interest-bearing  liabilities  (i.e.  customer deposits and
    borrowed  funds).  Net interest income is affected by the relative amount of
    interest-earning  assets and  interest-bearing  liabilities and the interest
    received  or paid on these  balances.  The level of  interest  rates paid or
    received by the Association can be  significantly  influenced by a number of
    environmental  factors,  such as  governmental  monetary  policy,  that  are
    outside of management's control.

    The consolidated financial information presented herein has been prepared in
    accordance  with  generally  accepted  accounting  principles  ("GAAP")  and
    general  accounting  practices within the financial  services  industry.  In
    preparing   consolidated  financial  statements  in  accordance  with  GAAP,
    management  is required to make  estimates and  assumptions  that affect the
    reported  amounts of assets and liabilities and the disclosure of contingent
    assets and liabilities at the date of the financial  statements and revenues
    and expenses during the reporting  period.  Actual results could differ from
    such estimates.

    A summary of significant  accounting  policies which have been  consistently
    applied  in the  preparation  of  the  accompanying  consolidated  financial
    statements follows:

    1.  Principles of Consolidation

    The  consolidated   financial   statements   include  the  accounts  of  the
    Corporation and the Association, and its wholly-owned subsidiary,  Massillon
    Community  Service  Corporation  ("Massillon")  . At September  30, 1998 and
    1997,  Massillon had no assets and was inactive.  All intercompany  balances
    and  transactions  have been  eliminated  in the  accompanying  consolidated
    financial statements.



                                       24
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    2.  Investment Securities and Mortgage-Backed Securities

    The Corporation  accounts for investments and mortgage-backed  securities in
    accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
    "Accounting for Certain Investments in Debt and Equity Securities". SFAS No.
    115 requires that investments be categorized as  held-to-maturity,  trading,
    or available for sale. Securities classified as held-to-maturity are carried
    at cost only if the  Corporation has the positive intent and ability to hold
    these securities to maturity.  Trading securities and securities  designated
    as available  for sale are carried at fair value with  resulting  unrealized
    gains  or  losses   recorded  to   operations   or   shareholders'   equity,
    respectively.

    In November  1995,  the Financial  Accounting  Standards  Board (the "FASB")
    issued a Special  Report on  Implementation  of SFAS No.  115 (the  "Special
    Report"),  which provided for the reclassification of securities between the
    held-to-maturity, available for sale and trading portfolios, without calling
    into  question  management's  prior intent with respect to such  securities.
    Management  elected to restructure the  Association's  securities  portfolio
    pursuant  to  the   Special   Report,   and   transferred   investment   and
    mortgage-backed  securities totaling $14.9 million from the held-to-maturity
    portfolio  to  an  available  for  sale  classification.  The  Corporation's
    shareholders'   equity   reflected  a  net  unrealized  gain  on  securities
    designated as available for sale totaling approximately $1.1 million at both
    September 30, 1998 and 1997.

    Realized gains and losses on sales of securities  are  recognized  using the
specific identification method.

    3.  Loans Receivable

    Loans receivable are stated at the principal balance  outstanding,  adjusted
    for deferred  loan  origination  fees and costs and the  allowance  for loan
    losses.  Interest is accrued as earned unless the collectibility of the loan
    is in doubt.  Interest on loans that are  contractually  past due is charged
    off,  or  an  allowance  is  established  based  on  management's   periodic
    evaluation.  The  allowance is  established  by a charge to interest  income
    equal  to all  interest  previously  accrued,  and  income  is  subsequently
    recognized  only to the extent that cash  payments  are received  until,  in
    management's  judgment, the borrower's ability to make periodic interest and
    principal  payments  has  returned  to  normal,  in  which  case the loan is
    returned to accrual status. If the ultimate collectibility of the loan is in
    doubt,  in whole or in part, all payments  received on nonaccrual  loans are
    applied to reduce principal until such doubt is eliminated.








                                       25
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    4.  Loan Origination Fees

    The Association  accounts for loan  origination fees and costs in accordance
    with SFAS No. 91 "Accounting  for  Nonrefundable  Fees and Costs  Associated
    with  Originating  or Acquiring  Loans and Initial  Direct Costs of Leases".
    Pursuant to the  provisions of SFAS No. 91,  origination  fees received from
    loans, net of certain direct  origination  costs, are deferred and amortized
    to interest  income using the  level-yield  method,  giving effect to actual
    loan prepayments.  Additionally, SFAS No. 91 generally limits the definition
    of loan origination costs to the direct costs  attributable to originating a
    loan,  i.e.,  principally  actual  personnel  costs.  Fees received for loan
    commitments that are expected to be drawn upon,  based on the  Association's
    experience  with similar  commitments,  are deferred and amortized  over the
    life  of the  loan  using  the  level-yield  method.  Fees  for  other  loan
    commitments are deferred and amortized over the loan commitment  period on a
    straight-line basis.

    5.  Allowance for Loan Losses

    It is the Association's policy to provide valuation allowances for estimated
    losses  on  loans  based  on  past  loan  loss  experience,  changes  in the
    composition  of the loan  portfolio,  trends in the level of delinquent  and
    problem loans,  adverse situations that may affect the borrower's ability to
    repay,  the estimated  value of any  underlying  collateral  and current and
    anticipated  economic  conditions  in the  primary  lending  area.  When the
    collection  of  a  loan  becomes  doubtful,   or  otherwise  troubled,   the
    Association  records a charge-off  equal to the difference  between the fair
    value of the property securing the loan and the loan's carrying value. Major
    loans and  major  lending  areas  are  reviewed  periodically  to  determine
    potential  problems  at an early  date.  The  allowance  for loan  losses is
    increased  by charges to  earnings  and  decreased  by  charge-offs  (net of
    recoveries).

    The Association accounts for impaired loans in accordance with SFAS No. 114,
    "Accounting  by Creditors for  Impairment of a Loan".  SFAS No. 114 requires
    that  impaired  loans be measured  based upon the present  value of expected
    future cash flows discounted at the loan's effective interest rate or, as an
    alternative,  at the  loan's  observable  market  price or fair value of the
    collateral if the loan is collateral dependent.

    A loan is  defined  under SFAS No. 114 as  impaired  when,  based on current
    information  and events,  it is probable  that a creditor  will be unable to
    collect all  amounts  due  according  to the  contractual  terms of the loan
    agreement.  In applying  the  provisions  of SFAS No. 114,  the  Association
    considers  its  investment  in one- to  four-family  residential  loans  and
    consumer  installment  loans to be homogeneous  and therefore  excluded from
    separate  identification  for evaluation of impairment.  With respect to the
    Association's investment in nonresidential and multi-family residential real
    estate  loans,  and its  evaluation of  impairment  thereof,  such loans are
    generally  collateral dependent and, as a result, are carried as a practical
    expedient at the lower of cost or fair value.



                                       26
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    5.  Allowance for Loan Losses (continued)

    Collateral  dependent  loans which are more than ninety days  delinquent are
    considered  to  constitute  more than a minimum  delay in repayment  and are
    evaluated for impairment under SFAS No. 114 at that time.

    At September 30, 1998 and 1997, the  Association  had no loans that would be
defined as impaired under SFAS No. 114.

    6.  Real Estate Acquired through Foreclosure

    Real  estate  acquired  through  foreclosure  is carried at the lower of the
    loan's unpaid principal  balance (cost) or fair value less estimated selling
    expenses  at the  date of  acquisition.  Real  estate  loss  provisions  are
    recorded if the properties' fair value subsequently declines below the value
    determined at the recording  date. In determining  the lower of cost or fair
    value at  acquisition,  costs  relating to  development  and  improvement of
    property are  capitalized.  Costs  relating to holding real estate  acquired
    through  foreclosure,  net of rental income, are charged against earnings as
    incurred.

    7.  Office Premises and Equipment

    Office  premises and equipment are carried at cost and include  expenditures
    which extend the useful lives of existing assets.  Maintenance,  repairs and
    minor   renewals  are  expensed  as  incurred.   For  financial   reporting,
    depreciation and amortization are provided on the straight-line  method over
    the  useful  lives  of the  assets,  estimated  to be  fifty  years  for the
    building,  ten to thirty  years for  building  improvements  and five to ten
    years for furniture and  equipment.  An  accelerated  method is used for tax
    reporting purposes.

    8.  Income Taxes

    The Corporation  accounts for federal income taxes pursuant to SFAS No. 109,
    "Accounting  for Income Taxes".  In accordance with SFAS No. 109, a deferred
    tax  liability  or deferred  tax asset is  computed by applying  the current
    statutory  tax rates to net  taxable  or  deductible  temporary  differences
    between the tax basis of an asset or liability  and its  reported  amount in
    the  consolidated  financial  statements  that will result in net taxable or
    deductible amounts in future periods.  Deferred tax assets are recorded only
    to the extent that the amount of net  deductible  temporary  differences  or
    carryforward  attributes may be utilized  against  current period  earnings,
    carried back against prior years' earnings, offset against taxable temporary
    differences  reversing  in future  periods,  or  utilized  to the  extent of
    management's  estimate of future taxable  income.  A valuation  allowance is
    provided  for  deferred  tax  assets  to the  extent  that the  value of net
    deductible  temporary   differences  and  carryforward   attributes  exceeds
    management's  estimates of taxes payable on future taxable income.  Deferred
    tax   liabilities  are  provided  on  the  total  amount  of  net  temporary
    differences taxable in the future.



                                       27
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    8.  Income Taxes (continued)

    Deferral of income taxes results  primarily  from the  different  methods of
    accounting for deferred loan origination  fees and costs,  Federal Home Loan
    Bank  stock  dividends,  stock  benefit  plan  expense,  general  loan  loss
    allowances  and  percentage  of  earnings  bad debt  deductions.  Additional
    temporary  differences  result from depreciation  computed using accelerated
    methods for tax purposes.

    9.  Benefit Plans

    In  conjunction  with its  reorganization  to stock  form,  the  Corporation
    implemented  an Employee Stock  Ownership  Plan ("ESOP").  The ESOP provides
    retirement  benefits for  substantially all employees who have completed one
    year of service and have  attained the age of 21. The  Corporation  accounts
    for the  ESOP  in  accordance  with  Statement  of  Position  ("SOP")  93-6,
    "Employers'  Accounting  for  Employee  Stock  Ownership  Plans".  SOP  93-6
    requires the measure of compensation  expense recorded by employers to equal
    the fair value of ESOP  shares  allocated  to  participants  during a fiscal
    year. Expense recognized related to the ESOP totaled approximately $215,000,
    $203,000 and $35,000 for the fiscal years ended September 30, 1998, 1997 and
    1996, respectively.

    The Association also provides retirement benefits through contributions to a
    discretionary  401(k) plan.  Expense recorded under the plan totaled $21,000
    and  $58,000 for fiscal 1997 and 1996,  respectively.  Due to  contributions
    made to the ESOP,  the Company did not make  matching  contributions  to the
    401(k) plan during fiscal 1998 and 1997.

    The  Corporation   also  has  a  Recognition  and  Retention  Plan  ("RRP").
    Subsequent to the common stock  offering the RRP purchased  59,640 shares of
    the  Corporation's  common stock in the open market.  During  fiscal 1997, a
    total of 47,712 shares  available under the RRP were awarded to officers and
    directors of the Corporation effective upon shareholder approval of the RRP,
    leaving 11,928 shares  available for allocation.  Common stock granted under
    the RRP is earned by plan  participants and distributed  ratably over a five
    year period,  commencing with the date of award. A provision of $147,000 and
    $80,000 related to the RRP was charged to expense for the fiscal years ended
    September 30, 1998 and 1997, respectively.

    10.  Earnings Per Share and Capital Distributions

    Basic earnings per share is computed based upon the weighted-average  shares
    outstanding  during the period less shares in the ESOP that are  unallocated
    and not  committed to be released.  Weighted-average  common  shares  deemed
    outstanding,  which  gives  effect to a  reduction  for  45,676  and  59,132
    weighted-average  unallocated shares held by the ESOP, totaled 1,354,032 and
    1,420,414  for  the  fiscal  years  ended   September  30,  1998  and  1997,
    respectively.



                                       28
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    10.  Earnings Per Share and Capital Distributions (continued)

    Diluted  earnings  per share is computed  taking into  consideration  common
    shares  outstanding and dilutive  potential common shares to be issued under
    the Corporation's stock option plan.  Weighted-average  common shares deemed
    outstanding  for purposes of computing  diluted  earnings per share  totaled
    1,372,595 and  1,420,414  for the fiscal years ended  September 30, 1998 and
    1997,  respectively.  Options to purchase 3,000 and 104,371 shares of common
    stock  with a weighted  average  exercise  price of $16.44  and $16.00  were
    outstanding at September 30, 1998 and 1997, respectively,  but were excluded
    from the  computation  of diluted  earnings per share because their exercise
    prices were greater than the average market price of the common shares.

    Effective  during the fiscal year ended  September 30, 1998, the Corporation
    began  presenting  earnings per share pursuant to the provisions of SFAS No.
    128, "Earnings per Share."  Accordingly,  the fiscal 1997 earnings per share
    presentation  has been revised to conform to SFAS No. 128. The provisions of
    SFAS No. 128 are not applicable for fiscal 1996 as the Corporation completed
    its conversion to stock form in September 1996.

    During fiscal 1997, the Corporation declared capital  distributions of $5.32
    per common share.  Of this amount $5.00 per share was paid in September 1997
    from funds  retained by the  Corporation in the conversion to stock form and
    was  deemed  by  management  to  constitute  a  return  of  excess  capital.
    Accordingly,  the Corporation charged the return of capital  distribution to
    additional   paid-in-capital.   Additionally,   management   estimated  that
    approximately  $5.00 of the  distribution  constituted a tax-free  return of
    capital.

    11.  Cash and Cash Equivalents

    For purposes of reporting cash flows, cash and cash equivalents include cash
    and  due  from  banks  and  interest-bearing  deposits  in  other  financial
    institutions with original terms to maturity of less than ninety days.

    12.  Fair Value of Financial Instruments

    SFAS No.  107,  "Disclosures  about  Fair Value of  Financial  Instruments",
    requires disclosure of fair value of financial instruments,  both assets and
    liabilities,  whether or not  recognized  in the  consolidated  statement of
    financial condition, for which it is practicable to estimate that value. For
    financial  instruments  where quoted market prices are not  available,  fair
    values  are based on  estimates  using  present  value  and other  valuation
    methods.

    The methods used are greatly affected by the assumptions applied,  including
    the discount  rate and estimates of future cash flows.  Therefore,  the fair
    values  presented  may not  represent  amounts  that could be realized in an
    exchange for certain financial instruments.





                                       29
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    12.  Fair Value of Financial Instruments (continued)

    The  following  methods  and  assumptions  were used by the  Corporation  in
    estimating its fair value disclosures for financial instruments at September
    30, 1998 and 1997:

          Cash and cash  equivalents:  The  carrying  amounts  presented  in the
          consolidated  statements  of  financial  condition  for  cash and cash
          equivalents are deemed to approximate fair value.

          Investment  and   mortgage-backed   securities:   For  investment  and
          mortgage-backed  securities,  fair value is deemed to equal the quoted
          market price.

          Loans  receivable:   The  loan  portfolio  has  been  segregated  into
          categories with similar  characteristics,  such as one- to four-family
          residential,  multi-family residential and nonresidential real estate.
          These loan  categories  were further  delineated  into  fixed-rate and
          adjustable-rate   loans.  The  fair  values  for  the  resultant  loan
          categories  were computed via  discounted  cash flow  analysis,  using
          current  interest  rates  offered  for  loans  with  similar  terms to
          borrowers of similar credit quality. For loans on deposit accounts and
          consumer  and  other  loans,  fair  values  were  deemed  to equal the
          historic  carrying values.  The historical  carrying amount of accrued
          interest on loans is deemed to approximate fair value.

          Federal  Home Loan Bank stock:  The carrying  amount  presented in the
          consolidated   statements   of   financial   condition  is  deemed  to
          approximate fair value.

          Deposits: The fair value of NOW accounts, passbook accounts, and money
          market demand  deposits is deemed to approximate the amount payable on
          demand.  Fair values for fixed-rate  certificates of deposit have been
          estimated using a discounted cash flow calculation  using the interest
          rates currently offered for deposits of similar remaining maturities.

          Advances  from the  Federal  Home Loan  Bank:  The fair value of these
          advances is estimated using the interest rates  currently  offered for
          advances of similar  remaining  maturities or, when available,  quoted
          market prices.

          Note Payable:  The fair value of the 90 day unsecured  note payable is
          deemed to approximate the carrying value. 

          Commitments to extend credit: For fixed-rate and adjustable-rate  loan
          commitments,  the fair value estimate considers the difference between
          current levels of interest rates and committed  rates.  The difference
          between  the fair  value  and  notional  amount  of  outstanding  loan
          commitments at September 30, 1998 and 1997, was not material.





                                       30
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

    12.  Fair Value of Financial Instruments (continued)

    Based on the foregoing methods and assumptions,  the carrying value and fair
    value of the  Corporation's  financial  instruments  at  September 30 are as
    follows:

<TABLE>
<CAPTION>
                                                              1998                            1997
                                                   Carrying         Fair            Carrying         Fair
                                                      value        value               value        value
                                                                        (In thousands)
<S>                                                  <C>          <C>                <C>             <C>
    Financial assets
      Cash and cash equivalents                    $  2,421      $ 2,421             $ 4,783      $ 4,783
      Investment securities                           3,558        3,636               5,264        5,316
      Mortgage-backed securities                     13,259       13,380              15,498       15,701
      Loans receivable                               64,341       67,752              56,642       58,315
      Federal Home Loan Bank stock                      861          861                 802          802
                                                     ------       ------              ------       ------

                                                    $84,440      $88,050             $82,989      $84,917
                                                     ======       ======              ======       ======

    Financial liabilities
      Deposits                                      $65,797      $66,094             $65,660      $65,905
      Advances from the Federal Home Loan Bank        4,000        4,001                  -            - 
      Note payable                                       -            -                3,000        3,000
                                                     ------       ------              ------       ------

                                                    $69,797      $70,095             $68,660      $68,905
                                                     ======       ======              ======       ======
</TABLE>

    13.  Reclassifications

    Certain  prior year  amounts have been  reclassified  to conform to the 1998
consolidated financial statement presentation.


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES

    The amortized cost, gross unrealized  gains,  gross unrealized  losses,  and
    estimated  fair value of  investment  securities  at September  30, 1998 and
    1997, are as follows:
<TABLE>
<CAPTION>
                                                                                        1998
                                                                               Gross               Gross      Estimated
                                                            Amortized     unrealized          unrealized           fair
                                                                 cost          gains              losses          value
                                                                                     (In thousands)
<S>                                                             <C>             <C>                 <C>            <C>
    Held to maturity:
      Municipal obligations                                   $   967       $     82              $    4         $1,045

    Available for sale:
      U.S. Government obligations                                 999              4                  -           1,003
      FHLMC stock                                                  31          1,557                  -           1,588
                                                                -----          -----               -----          -----
         Total investments available for sale                   1,030          1,561                  -           2,591
                                                                -----          -----               -----          -----

         Total investment securities                           $1,997         $1,643              $    4         $3,636
                                                                =====          =====               =====          =====
</TABLE>

                                       31
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>

                                                                                         1997
                                                                               Gross               Gross      Estimated
                                                            Amortized     unrealized          unrealized           fair
                                                                 cost          gains              losses          value
                                                                                     (In thousands)
<S>                                                              <C>            <C>                 <C>             <C>
    Held to maturity:
      Municipal obligations                                   $   973       $     57              $    5         $1,025
      Federal Home Loan Bank obligations                        1,000             -                   -           1,000
                                                                -----          -----               -----          -----
         Total investments held to maturity                     1,973             57                   5          2,025

    Available for sale:
      U.S. Government obligations                               1,500             -                    4          1,496
      FHLMC stock                                                  46          1,603                  -           1,649
      Automobile loan pass-through certificates                   146             -                   -             146
                                                                -----          -----               -----          -----
         Total investments available for sale                   1,692          1,603                   4          3,291
                                                                -----          -----               -----          -----

         Total investment securities                           $3,665         $1,660              $    9         $5,316
                                                                =====          =====               =====          =====
</TABLE>

    The  amortized  cost and estimated  fair value of  investment  securities at
    September 30, 1998,  including  those  designated as available for sale, are
    shown below by term to maturity.
<TABLE>
<CAPTION>

                                                                  Estimated
                                                Amortized              fair
                                                     cost             value
                                                          (In thousands)
<S>                                                 <C>               <C>
    Due in one year or less                      $     12          $     12
    Due after one year through five years           1,122             1,125
    Due in five to ten years                          202               212
    Due after ten years                               630               699
                                                   ------            ------
                                                    1,966             2,048
    FHLMC stock                                        31             1,588
                                                  -------             -----

                                                   $1,997            $3,636
                                                    =====             =====
</TABLE>











                                       32
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)

    The amortized cost, gross  unrealized  gains,  gross  unrealized  losses and
    estimated fair value of mortgage-backed securities at September 30, 1998 and
    1997, are shown below:
<TABLE>
<CAPTION>

                                                                                          1998
                                                                                 Gross             Gross      Estimated
                                                            Amortized       unrealized        unrealized           fair
                                                                 cost            gains            losses          value
                                                                                      (In thousands)
<S>                                                              <C>             <C>                <C>            <C>
    Held to maturity:
      Government National Mortgage
        Association participation certificates                $ 2,308             $ 38              $ -         $ 2,346
      Federal Home Loan Mortgage
        Corporation participation certificates                  1,197               37                -           1,234
      Federal National Mortgage Association
        participation certificates                                895               46                -             941
                                                               ------              ---              ---          ------
         Total mortgage-backed securities
           held to maturity                                     4,400              121                -           4,521

    Available for sale:
      Government National Mortgage
        Association participation certificates                  2,549               68                -           2,617
      Federal Home Loan Mortgage
        Corporation participation certificates                  5,200               53                15          5,238
      Collateralized mortgage obligation -
        FHLMC REMIC                                               207                6                -             213
      Guardian Savings and Loan participation
        certificates                                              714               -                 14            700
      Discovery Resort Limited, partnership
        notes                                                      91               -                 -              91
                                                               ------              ---               ---         ------
         Total mortgage-backed securities
           available for sale                                   8,761              127                29          8,859
                                                               ------              ---               ---         ------

         Total mortgage-backed securities                     $13,161             $248              $ 29        $13,380
                                                               ======              ===               ===         ======
</TABLE>












                                       33
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>

                                                                                          1997
                                                                                 Gross             Gross      Estimated
                                                            Amortized       unrealized        unrealized           fair
                                                                 cost            gains            losses          value
                                                                                      (In thousands)
<S>                                                              <C>             <C>                <C>             <C>
    Held to maturity:
      Government National Mortgage
        Association participation certificates                $ 3,168             $ 89              $ -         $ 3,257
      Federal Home Loan Mortgage
        Corporation participation certificates                  2,294               47                -           2,341
      Federal National Mortgage Association
        participation certificates                              1,379               67                -           1,446
                                                               ------              ---               ---         ------
         Total mortgage-backed securities
           held to maturity                                     6,841              203                -           7,044

    Available for sale:
      Government National Mortgage
        Association participation certificates                  3,253               49                -           3,302
      Federal Home Loan Mortgage
        Corporation participation certificates                  1,951               18                 3          1,966
      Collateralized mortgage obligations -
        FNMA and FHLMC REMICs                                   2,314                8                 9          2,313
      Guardian Savings and Loan participation
        certificates                                              916               -                 19            897
      Discovery Resort Limited, partnership
        notes                                                     179               -                 -             179
                                                               ------              ---               ---         ------
         Total mortgage-backed securities
           available for sale                                   8,613               75                31          8,657
                                                               ------              ---               ---         ------

         Total mortgage-backed securities                     $15,454             $278              $ 31        $15,701
                                                               ======              ===               ===         ======
</TABLE>

    The amortized cost and estimated fair values of  mortgage-backed  securities
    at September 30, 1998, including those designated as available for sale, are
    shown below by contractual term to maturity. Expected maturities will differ
    from  contractual   maturities   because   borrowers  may  generally  prepay
    obligations without prepayment penalties.
<TABLE>
<CAPTION>
                                                                     Estimated
                                              Amortized                   fair
                                                   cost                  value
                                                         (In thousands)
<S>                                                <C>                   <C>
    Due after one through five years            $    91                $    91
    Due in five to ten years                        868                    906
    Due after ten years                          12,202                 12,383
                                                 ------                 ------

                                                $13,161                $13,380
                                                 ======                 ======
</TABLE>




                                       34
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE C - LOANS RECEIVABLE

    The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>

                                                            1998           1997
                                                               (In thousands)
<S>                                                        <C>            <C>
    Residential real estate
      One- to four-family                                $54,237        $49,574
      Multi-family                                           320            345
    Nonresidential real estate                             3,897          2,653
    Construction                                           9,831          9,140
    Consumer and other loans                                 360            401
    Deferred loan origination costs, net                      26             48
                                                          ------         ------
                                                          68,671         62,161
    Less:
      Undisbursed portion of loans in process              4,134          5,374
      Allowance for losses on loans                          196            145
                                                          ------         ------

                                                         $64,341        $56,642
                                                          ======         ======

</TABLE>

    The  Association's  lending  efforts  have  historically  focused on one- to
    four-family  residential  real estate loans,  which  comprise  approximately
    $59.9 million, or 93% of the total loan portfolio at September 30, 1998, and
    approximately $53.3 million, or 94% of the total loan portfolio at September
    30, 1997.  Generally,  such loans have been  underwritten on the basis of no
    more than an 80% loan-to-value  ratio,  which has historically  provided the
    Association  with  adequate  collateral  coverage  in the event of  default.
    Nevertheless,  the Association,  as with any lending institution, is subject
    to the risk that real estate values could deteriorate in its primary lending
    area of  northeast  Ohio,  thereby  impairing  collateral  values.  However,
    management  is of the belief  that real estate  values in the  Association's
    primary lending area are presently stable.

    In the ordinary  course of business,  the Association has made loans to some
    of its  directors,  officers and their related  business  interests.  In the
    opinion  of  management,  such  loans  are  consistent  with  sound  lending
    practices and are within  applicable  regulatory  lending  limitations.  The
    balance  of such  loans  totaled  approximately  $263,000  and  $277,000  at
    September 30, 1998 and 1997, respectively.

    From time to time, the  Corporation has retained a director to perform legal
    services. Fees paid for such services totaled approximately $16,000, $17,000
    and  $16,000  for the  years  ended  September  30,  1998,  1997  and  1996,
    respectively.








                                       35
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE D - ALLOWANCE FOR LOAN LOSSES

    The activity in the  allowance  for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>

                                                     1998           1997           1996
                                                            (In thousands)
<S>                                                  <C>             <C>            <C>
    Balance at beginning of year                     $145           $193          $  80
    Provision for losses on loans                      42             12            105
    Charge-offs                                        -             (60)            - 
    Recoveries                                          9             -               8
                                                      ---            ---            ---

    Balance at end of year                           $196           $145           $193
                                                      ===            ===            ===
</TABLE>

    As of September 30, 1998,  the  Association's  allowance for loan losses was
    comprised solely of a general loan loss allowance,  which is includible as a
    component of regulatory risk-based capital.

    Nonperforming  and  nonaccrual  loans at September 30, 1998,  1997 and 1996,
    totaled $115,000,  $2,000 and $25,000,  respectively.  There was no material
    loss of interest income on nonperforming loans for the years ended September
    30, 1998, 1997 and 1996.


NOTE E - OFFICE PREMISES AND EQUIPMENT

    Office premises and equipment at September 30 is comprised of the following:
<TABLE>
<CAPTION>

                                                          1998           1997
                                                             (In thousands)
<S>                                                      <C>             <C>
    Land                                               $   355        $   355
    Building and improvements                            1,216          1,216
    Furniture and equipment                                989            846
                                                        ------         ------
                                                         2,560          2,417
      Less accumulated depreciation and
        amortization                                     1,089            995
                                                         -----         ------

                                                        $1,471         $1,422
                                                         =====          =====
</TABLE>








                                       36
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE F - DEPOSITS

    Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>

    Deposit type and weighted-
    average interest rate                                      1998                           1997
                                                     Amount          %                  Amount         %  
                                                                      (Dollars in thousands)
<S>                                                  <C>            <C>                 <C>             <C>
    NOW accounts
      1998 - 1.75%                                  $ 1,824         2.8
      1997 - 1.50%                                                                      $ 2,497        3.8
    Passbook
      1998 - 2.00%                                   10,433        15.8
      1997 - 2.00%                                                                       11,395       17.4
    Money market demand accounts
      1998 - 2.19%                                    2,616         4.0
      1997 - 2.10%                                                                        2,588        3.9
                                                     ------       -----                  ------      -----
    Total demand, transaction and
      passbook deposits                              14,873        22.6                  16,480       25.1

    Certificates of deposit
      Original maturities of:
        Up to 12 months
          1998 - 5.25%                               12,507        19.0
          1997 - 5.29%                                                                   11,019       16.8
        Over 12 months to 94 months
          1998 - 5.98%                               38,291        58.2
          1997 - 5.99%                                                                   38,001       57.9
      Individual retirement accounts
        1998 - 1.50%                                    126          .2
        1997 - 1.50%                                                                        160         .2
                                                     ------       -----                  ------      -----

    Total certificates of deposit                    50,924        77.4                  49,180       74.9
                                                     ------       -----                  ------      -----

    Total deposit accounts                          $65,797       100.0                 $65,660      100.0
                                                     ======       =====                  ======      =====
</TABLE>

     At September 30, 1998 and 1997, the  Association had certificate of deposit
     accounts  with  balances of $100,000 or more totaling $5.9 million and $4.3
     million, respectively.

     Interest  expense on deposits is  summarized as follows for the years ended
     September 30:
<TABLE>
<CAPTION>

                                          1998            1997           1996
                                                    (In thousands)
<S>                                        <C>             <C>            <C>
    NOW accounts                        $   22          $   18         $   18
    Passbook                               217             241            326
    Money market demand accounts            62              57             87
    Certificates of deposit              2,918           2,727          2,960
                                         -----           -----          -----

                                        $3,219          $3,043         $3,391
                                         =====           =====          =====
</TABLE>


                                       37
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE F - DEPOSITS (continued)

    Maturities  of  outstanding  certificates  of  deposit at  September  30 are
summarized as follows:
<TABLE>
<CAPTION>

                                                     1998                1997
                                                          (In thousands)
<S>                                                 <C>                  <C>
    Up to one year                                $29,268             $27,334
    Over one year to two years                     14,383              16,174
    Over two years to three years                   3,310               3,216
    Over three years to four years                  1,413               1,858
    Over four years to five years                   2,218                 221
    Over five years                                   332                 377
                                                   ------              ------

                                                  $50,924             $49,180
                                                   ======              ======
</TABLE>


NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK

    Advances  from the Federal Home Loan Bank,  collateralized  at September 30,
    1998,  by  pledges of  certain  residential  mortgage  loans  totaling  $6.0
    million,  and the Association's  investment in Federal Home Loan Bank stock,
    are summarized as follows:
<TABLE>
<CAPTION>

                                            Maturing fiscal
    Interest rate                            year ending in           1998                 1997
                                                                           (In thousands)
<S>                                                <C>                <C>                    <C>
    5.65% - 5.69%                                 1999              $4,000                  $- 
                                                                     =====                   ==

    Weighted-average interest rate                                    5.68%                 N/A
                                                                      ====                  ===

</TABLE>

NOTE H - NOTE PAYABLE

    In connection  with the September 1997 return of capital  distribution,  the
    Corporation borrowed funds from another financial institution.  At September
    30, 1997,  the related note  payable  consisted of an unsecured  90-day loan
    bearing interest at 8.50%.
    The note was repaid in October 1997.










                                       38
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE I - FEDERAL INCOME TAXES

     Federal  income  taxes  differ from the amounts  computed at the  statutory
     corporate tax rate for the years ended September 30 as follows:
<TABLE>
<CAPTION>
                                                             1998           1997           1996
                                                                      (In thousands)
<S>                                                          <C>             <C>             <C>
    Federal income taxes at statutory rate                   $466           $422           $ 33
    Increase (decrease) in taxes resulting from:
      Interest on municipal obligations                       (12)           (12)           (12)
      Other                                                    (1)            26             - 
                                                              ---            ---            --- 
    Federal income taxes per consolidated
      financial statements                                   $453           $436           $ 21
                                                              ===            ===            ===

    Effective tax rate                                       33.0%          35.1%          21.4%
                                                             ====           ====           ==== 
</TABLE>

    The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>

    Taxes (payable) refundable on temporary                        1998         1997
    differences at statutory rate:                                  (In thousands)

<S>                                                                <C>            <C>
    Deferred tax assets:
      Net deferred loan origination costs                        $   71       $   71
      General loan loss allowance                                    67           49
      Stock benefit plan expense                                     27           27
      Other                                                          12           - 
                                                                  -----        -----
         Deferred tax assets                                        177          147

    Deferred tax liabilities:
      Federal Home Loan Bank stock dividends                       (194)        (174)
      Difference between book and tax depreciation                 (115)        (104)
      Percentage of earnings bad debt deduction                    (190)        (190)
      Unrealized gains on securities designated
        as available for sale                                      (564)        (560)
      Other                                                          -            (3)
                                                                  -----        -----
         Deferred tax liabilities                                (1,063)      (1,031)
                                                                  -----        -----

         Net deferred tax liability                              $ (886)      $ (884)
                                                                  =====        ===== 
</TABLE>

    The Association was allowed a special bad debt deduction  generally  limited
    to 8% of otherwise  taxable income and subject to certain  limitations based
    on aggregate loans and deposit  account  balances at the end of the year. If
    the amounts that previously qualified as deductions for federal income taxes
    are  later  used  for  purposes  other  than  bad  debt  losses,   including
    distributions in liquidation,  such distributions will be subject to federal
    income  taxes  at the then  current  corporate  income  tax  rate.  Retained
    earnings at September 30, 1998, include approximately $2.4 million for which
    federal  income  taxes have not been  provided.  The  approximate  amount of
    unrecognized  deferred tax  liability  relating to the  cumulative  bad debt
    deduction was  approximately  $630,000 at September 30, 1998. See Note L for
    additional  information  regarding  future  percentage  of earnings bad debt
    deductions.


                                       39
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE J - LOAN COMMITMENTS

    The Association is a party to financial  instruments with  off-balance-sheet
    risk in the normal  course of  business to meet the  financing  needs of its
    customers including  commitments to extend credit. Such commitments involve,
    to varying degrees,  elements of credit and interest-rate  risk in excess of
    the amount recognized in the consolidated  statement of financial condition.
    The contract or notional  amounts of the  commitments  reflect the extent of
    the Association's involvement in such financial instruments.

    The Association's  exposure to credit loss in the event of nonperformance by
    the other party to the financial instrument for commitments to extend credit
    is represented by the contractual notional amount of those instruments.  The
    Association  uses  the  same  credit  policies  in  making  commitments  and
    conditional obligations as those utilized for on-balance-sheet instruments.

    At September  30, 1998,  the  Association  had  outstanding  commitments  of
    approximately $3.2 million to originate loans. Additionally, the Association
    had  undisbursed  loans in process of $4.1 million at September 30, 1998. In
    the  opinion  of  management,  all  loan  commitments  equaled  or  exceeded
    prevalent market interest rates as of September 30, 1998, and will be funded
    from normal cash flow from operations.


NOTE K - REGULATORY CAPITAL

    The  Association is subject to the regulatory  capital  requirements  of the
    Office of Thrift  Supervision  (the "OTS").  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  Association's  financial  statements.  Under
    capital  adequacy  guidelines  and  the  regulatory   framework  for  prompt
    corrective  action,  the Association must meet specific  capital  guidelines
    that involve quantitative measures of the Association's assets, liabilities,
    and  certain   off-balance-sheet   items  as  calculated   under  regulatory
    accounting  practices.  The Association's capital amounts and classification
    are  also  subject  to  qualitative   judgments  by  the  regulators   about
    components, risk-weightings, and other factors.

    Such  minimum  capital  standards   generally  require  the  maintenance  of
    regulatory  capital  sufficient  to meet  each of three  tests,  hereinafter
    described as the tangible capital requirement,  the core capital requirement
    and the risk-based  capital  requirement.  The tangible capital  requirement
    provides for minimum tangible capital (defined as shareholders'  equity less
    all  intangible  assets) equal to 1.5% of adjusted  total  assets.  The core
    capital requirement provides for minimum core capital (tangible capital plus
    certain  forms of  supervisory  goodwill  and  other  qualifying  intangible
    assets) equal to 3.0% of adjusted total assets. An OTS proposal,  if adopted
    in present form,  would increase the core capital  requirement to a range of
    4% - 5% of adjusted total assets for substantially all savings institutions.
    Management  anticipates  no  material  change to the  Association's  present
    excess




                                       40
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE K - REGULATORY CAPITAL (continued)

    regulatory  capital  position as a result of this  change in the  regulatory
    capital  requirement.  The risk-based capital  requirement  provides for the
    maintenance  of core capital plus general loss  allowances  equal to 8.0% of
    risk-weighted  assets. In computing  risk-weighted  assets,  the Association
    multiplies  the value of each asset on its statement of financial  condition
    by a defined  risk-weighting  factor,  e.g.,  one-to-four family residential
    loans carry a risk-weighted factor of 50%.

    During the calendar  year, the  Association  was notified from its regulator
    that it was categorized as "well-capitalized" under the regulatory framework
    for prompt corrective  action. To be categorized as  "well-capitalized"  the
    Association  must  maintain  minimum  capital  ratios  as set  forth  in the
    following table.

    As of September 30, 1998 and 1997,  management believes that the Association
    met all capital  adequacy  requirements  to which it is  subject.  The major
    cause of changes in capital and ratios presented below is the declaration of
    dividends of $6.5 million from the  Association  to the  Corporation  during
    fiscal 1998.

<TABLE>
<CAPTION>
                                                   As of September 30, 1998
                                                                                       To be "well-
                                                                                    capitalized" under
                                                           For capital               prompt corrective
                                   Actual                adequacy purposes          action provisions
                               Amount    Ratio           Amount    Ratio             Amount     Ratio
                                                        (Dollars in thousands)
<S>                             <C>       <C>            <C>         <C>              <C>         <C>
    Tangible capital          $10,947    13.0%         =>$1,267    =>1.5%          =>$4,223     => 5.0%

    Core capital              $10,947    13.0%         =>$2,534    =>3.0%          =>$5,068     => 6.0%

    Risk-based capital        $11,143    26.0%         =>$3,433    =>8.0%          =>$4,292     =>10.0%

</TABLE>

<TABLE>
<CAPTION>
                                                     As of September 30, 1997
                                                                                       To be "well-
                                                                                    capitalized" under
                                                           For capital               prompt corrective
                                   Actual                adequacy purposes          action provisions
                               Amount    Ratio           Amount    Ratio             Amount     Ratio
                                                        (Dollars in thousands)
<S>                            <C>        <C>             <C>       <C>               <C>          <C>
    Tangible capital          $16,126    19.3%         =>$1,251    =>1.5%          =>$4,170     => 5.0%

    Core capital              $16,126    19.3%         =>$2,502    =>3.0%          =>$5,004     => 6.0%

    Risk-based capital        $16,271    43.9%         =>$2,966    =>8.0%          =>$3,708     =>10.0%

</TABLE>




                                       41
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE K - REGULATORY CAPITAL (continued)

    The  Corporation's  management  believes that, under the current  regulatory
    capital  regulations,  the  Association  will  continue to meets its minimum
    capital requirements in the foreseeable future.  However,  events beyond the
    control of  management,  such as  increased  interest  rates or an  economic
    downturn in the  Association's  market areas,  could adversely affect future
    earnings and,  consequently,  the ability to meet future minimum  regulatory
    capital requirements.


NOTE L - LEGISLATIVE MATTERS

    The deposit  accounts of the Association  and of other savings  associations
    are insured by the Federal  Deposit  Insurance  Corporation  ("FDIC") in the
    Savings Association  Insurance Fund ("SAIF").  The reserves of the SAIF were
    below the  level  required  by law,  because a  significant  portion  of the
    assessments paid into the fund had been used to pay the cost of prior thrift
    failures.  The deposit  accounts of commercial banks are insured by the FDIC
    in the Bank  Insurance  Fund  ("BIF"),  except to the extent such banks have
    acquired SAIF  deposits.  The reserves of the BIF met the level  required by
    law in 1995.  As a result of the  respective  reserve  levels of the  funds,
    deposit insurance  assessments paid by healthy savings associations exceeded
    those paid by healthy  commercial  banks by  approximately  $.19 per $100 in
    deposits in 1995.  In 1996,  no BIF  assessments  were  required for healthy
    commercial banks except for a $2,000 minimum fee.

    On September  30, 1996,  legislation  was enacted to  recapitalize  the SAIF
    which  provided for a special  assessment of $.657 per $100 of deposits held
    at March 31, 1995.  The  Association  had $65.7  million in SAIF deposits at
    March 31, 1995,  resulting in an assessment of  approximately  $428,000,  or
    $282,000  after-tax,  which was recorded as a charge in fiscal 1996, and was
    paid in November 1996.

    The  legislation  also  provided  for a reduction of future  annual  deposit
    insurance premiums from $.235 per $100 of SAIF deposits to $.064 per $100 of
    SAIF deposits. At September 30, 1998, the annual rate was $.0582 per $100 of
    SAIF deposits.

    A component of the recapitalization plan provides for the merger of the SAIF
    and BIF on January 1, 1999,  assuming all savings  associations  have become
    banks.  Pending  legislation  has  proposed  the  elimination  of the thrift
    charter or of the separate federal  regulation of thrifts.  As a result, the
    Association  would be  regulated  as a bank under  federal  laws which would
    subject it to the more  restrictive  activity  limits  imposed  on  national
    banks. Under separate but related  legislation,  the Association is required
    to  recapture  as  taxable  income  approximately  $560,000  of its bad debt
    reserve,  which  represents the post-1987  additions to the reserve,  and is
    unable to utilize the  percentage of earnings  method to compute its reserve
    in the future.  The Association has provided  deferred taxes for this amount
    and will be permitted by such  legislation  to amortize the recapture of its
    bad debt reserve over six years commencing in fiscal 1999.




                                       42
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION

    The  following  condensed  financial   statements  summarize  the  financial
    position of Peoples Financial Corporation as of September 30, 1998 and 1997,
    and the results of its  operations  and its cash flows for the periods ended
    September 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>

                          Peoples Financial Corporation
                        STATEMENTS OF FINANCIAL CONDITION
                                  September 30,
                                 (In thousands)

         ASSETS                                                                   1998              1997
<S>                                                                              <C>                <C>
    Interest-bearing deposits in other financial institutions                  $   205           $   310
    Loan receivable from ESOP                                                      336               497
    Investment in Peoples Federal Savings and Loan Association
      of Massillon                                                              12,042            17,209
    Prepaid expenses and other assets                                               70               400
    Accounts receivable from Peoples Federal Savings and Loan
      Association of Massillon                                                   2,405                - 
                                                                                ------            ------

         Total assets                                                          $15,058           $18,416
                                                                                ======            ======

         LIABILITIES AND SHAREHOLDERS' EQUITY

    Accounts payable to Peoples Federal Savings and Loan
      Association of Massillon                                                 $    -            $    79
    Note payable                                                                    -              3,000
    Other liabilities                                                               25                11
                                                                                ------            ------
         Total liabilities                                                          25             3,090

    Shareholders' equity
      Additional paid-in capital                                                 7,287             7,165
      Retained earnings                                                          9,927             9,779
      Unrealized gains on securities designated as available
        for sale, net of related tax effects                                     1,095             1,083
      Shares acquired by stock benefit plans                                    (1,097)           (1,416)
      Treasury shares                                                           (2,179)           (1,285)
                                                                                ------            ------
         Total shareholders' equity                                             15,033            15,326
                                                                                ------            ------

         Total liabilities and shareholders' equity                            $15,058           $18,416
                                                                                ======            ======
</TABLE>






                                       43
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION 
 (continued)
<TABLE>
<CAPTION>

                          Peoples Financial Corporation
                            STATEMENTS OF OPERATIONS
                           Period ended September 30,
                                 (In thousands)

                                                                  1998               1997             1996
<S>                                                              <C>                 <C>              <C>
    Revenue (expense)
      Interest income                                           $   54             $  437            $  32
      Other income                                                  -                   4               - 
      Equity in earnings (loss) of subsidiary                      997                664             (268)
                                                                 -----              -----             ----
         Total revenue (expense)                                 1,051              1,105             (236)

    Interest expense                                                19                 20               - 

    General and administrative expenses                            154                198                2
                                                                 -----              -----             ----

         Earnings (loss) before income taxes (credits)             878                887             (238)

    Federal income taxes (credits)                                 (40)                81               11
                                                                 -----              -----             ----

         NET EARNINGS (LOSS)                                    $  918             $  806            $(249)
                                                                 =====              =====             ==== 

</TABLE>





















                                       44
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE M - CONDENSED FINANCIAL STATEMENTS OF PEOPLES FINANCIAL CORPORATION 
 (continued)
<TABLE>
<CAPTION>

                          Peoples Financial Corporation
                            STATEMENTS OF CASH FLOWS
                           Period ended September 30,
                                 (In thousands)

                                                                              1998            1997           1996
<S>                                                                            <C>             <C>           <C>
    Cash flows provided by (used in) operating activities:
      Net earnings (loss) for the period                                    $  918          $  806        $  (249)
      Adjustments to reconcile net earnings (loss) to net cash
      provided by (used in) operating activities:
        Undistributed (earnings) loss of consolidated subsidiary              (997)           (664)           268
        Amortization of expense related to stock benefit plans                 147             145             - 
        Gain on sale of securities designated as available for sale             -               (4)            - 
        Increases (decreases) in cash due to changes in:
          Other assets                                                         330            (362)           (38)
          Other liabilities                                                    (65)              1             10
          Other                                                                 -             (675)           609
                                                                             -----           -----         ------
         Net cash provided by (used in) operating activities                   333            (753)           600

    Cash flows provided by (used in) investing activities:
      Purchase of securities available for sale                                 -           (3,020)        (4,771)
      Dividends received from subsidiary                                     4,090              -              - 
      Maturities of investment securities                                       -            3,502             - 
      Proceeds from sale of securities designated as available
        for sale                                                                -            4,293             - 
      Investment in subsidiary                                                  -               -          (6,478)
                                                                             -----           -----         ------
         Net cash provided by (used in) investing activities                 4,090           4,775        (11,249)

    Cash flows provided by (used in) financing activities:
      Proceeds from issuance of common stock                                    -               -          13,606
      Proceeds from (repayment of) note payable                             (3,000)          3,000             - 
      Return of capital distribution                                            -           (7,083)            - 
      Repayments on ESOP loan                                                  161             100             - 
      Dividends on common stock                                               (770)           (482)            - 
      Purchase of shares for stock benefit plan                                 -             (919)            - 
      Purchase of treasury stock                                              (995)         (1,285)            - 
      Proceeds from exercise of stock options                                   76              -              - 
                                                                             -----           -----         ------
         Net cash provided by (used in) financing activities                (4,528)         (6,669)        13,606
                                                                             -----           -----         ------

    Net increase (decrease) in cash and cash equivalents                      (105)         (2,647)         2,957

    Cash and cash equivalents at beginning of period                           310           2,957             - 
                                                                             -----           -----         ------

    Cash and cash equivalents at end of period                              $  205          $  310        $ 2,957
                                                                             =====           =====         ======
</TABLE>


                                       45
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE N - STOCK OPTION PLAN

    During fiscal 1997, the Board of Directors  adopted a Stock Option Plan that
    provided  for the  issuance of 104,371  shares of  authorized,  but unissued
    shares of common stock at the fair market value at the date of grant.

    In 1996, the Corporation  adopted SFAS No. 123,  "Accounting for Stock-Based
    Compensation,"   which  contains  a  fair  value-based  method  for  valuing
    stock-based  compensation that entities may use, which measures compensation
    cost at the grant date  based on the fair  value of the award.  Compensation
    expense is then  recognized  over the service  period,  which is usually the
    vesting period. Alternatively,  SFAS No. 123 permits entities to continue to
    account for stock options and similar equity  instruments  under  Accounting
    Principles  Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to
    Employees."  Entities  that  continue to account for stock options using APB
    Opinion No. 25 are  required to make pro forma  disclosures  of net earnings
    and  earnings per share,  as if the fair  value-based  method of  accounting
    defined in SFAS No. 123 had been applied.

    The  Corporation  applies  Accounting  Principles  Board  Opinion No. 25 and
    related   Interpretations   in   accounting   for  its  stock  option  plan.
    Accordingly,  no  compensation  cost has been  recognized  for the plan. Had
    compensation  cost for the  Corporation's  stock option plan been determined
    based on the  fair  value at the  grant  dates  for  awards  under  the plan
    consistent  with  the  accounting  method  utilized  in SFAS  No.  123,  the
    Corporation's net earnings and earnings per share would have been reduced to
    the pro forma amounts indicated below for the years ended September 30:
<TABLE>
<CAPTION>
                                                                         1998             1997
<S>                                      <C>                              <C>              <C>
    Net earnings (In thousands)        As reported                       $918             $806
                                                                          ===              ===

                                         Pro-forma                       $917             $767
                                                                          ===              ===

    Earnings per share
      Basic                            As reported                      $.68              $.57
                                                                         ===               ===

                                         Pro-forma                      $.68              $.54
                                                                         ===               ===

      Diluted                          As reported                      $.67              $.57
                                                                         ===               ===

                                         Pro-forma                      $.67              $.54
                                                                         ===               ===
</TABLE>

    The fair value of each option  grant is estimated on the date of grant using
    the  modified   Black-Scholes   options-pricing  model  with  the  following
    weighted-average  assumptions  used for  grants  in  fiscal  1998 and  1997;
    dividend  yield of 4.9% and 1.7%;  expected  volatility of 12.0%;  risk-free
    interest rate of 6.0% and 6.5% and expected lives of ten years.



                                       46
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE N - STOCK OPTION PLAN (continued)

    A  summary  of the  status  of the  Corporation's  stock  option  plan as of
    September  30, 1998 and 1997,  and changes  during the years then ended,  is
    presented below:
<TABLE>
<CAPTION>

                                                         1998                                    1997
                                                              Weighted-                              Weighted-
                                                                average                                average
                                                               exercise                               exercise
                                                 Shares           price                Shares            price
<S>                                               <C>            <C>                    <C>                <C>
    Outstanding at beginning of year            104,371         $16.00                    -             $   -    
    Adjustment for return of capital
      distribution                               30,056          (3.59)                   -                 -    
    Granted                                       3,000          16.44                104,371             16.00
    Exercised                                    (6,165)         12.41                    -                 -    
    Forfeited                                        -               -                    -                 -    
                                                -------          -----                -------            -----

    Outstanding at end of year                  131,262         $12.50                104,371           $16.00
                                                =======          =====                =======            =====

    Options exercisable at year-end              20,716         $12.41                     -            $   - 
                                                =======          =====                =======            =====
    Weighted-average fair value of
      options granted during the year                           $ 1.96                                  $ 4.76
                                                                 =====                                   =====
</TABLE>

    The following  information  applies to options  outstanding at September 30,
1998:

    Number outstanding                                                 131,262
    Exercise price                                             $12.41 - $16.44
    Weighted-average exercise price                                     $12.50
    Weighted-average remaining contractual life                      8.5 years


NOTE O - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM

    On October 16, 1995, the Association's  Board of Directors adopted a Plan of
    Conversion  whereby  the  Association  would  convert  to the stock  form of
    ownership,  followed by the issuance of all of the Association's outstanding
    common  stock  to  a  newly  formed  holding  company,   Peoples   Financial
    Corporation.

    On September 12, 1996, the Association completed its conversion to the stock
    form of ownership,  and issued all of the Association's  outstanding  common
    shares to the Corporation.

    In connection with the conversion,  the Corporation sold 1,491,012 shares at
    a price of $10.00 per share which, after  consideration of offering expenses
    totaling  approximately  $707,000, and shares purchased by the ESOP totaling
    $597,000, resulted in net equity proceeds of approximately $13.6 million.



                                       47
<PAGE>


                          Peoples Financial Corporation

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        September 30, 1998, 1997 and 1996


NOTE O - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM (continued)

    At the date of the  conversion,  the  Association  established a liquidation
    account in an amount equal to retained  earnings  reflected in the statement
    of  financial  condition  used  in the  conversion  offering  circular.  The
    liquidation  account will be maintained for the benefit of eligible  savings
    account holders who maintained  deposit  accounts in the  Association  after
    conversion. In the event of a complete liquidation (and only in such event),
    each  eligible  savings  account  holder  will  be  entitled  to  receive  a
    liquidation  distribution from the liquidation  account in the amount of the
    then  current  adjusted  balance  of  deposit  accounts  held,   before  any
    liquidation  distribution  may be made with respect to common stock.  Except
    for the repurchase of stock and payment of dividends by the Association, the
    existence  of  the  liquidation   account  will  not  restrict  the  use  or
    application of such retained earnings.  The Association may not declare, pay
    a cash  dividend on, or repurchase  any of its common  stock,  if the effect
    thereof would cause retained  earnings to be reduced below either the amount
    required for the liquidation account or the regulatory capital  requirements
    for SAIF insured institutions.






























                                       48