1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0 - 30050 PEOPLES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Mississippi 64-0709834 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Lameuse and Howard Avenues, Biloxi, Mississippi 39533 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (228)435-5511 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At October 28, 1999, there were 15,000,000 shares of $1 par value common stock authorized, and 2,952,672 shares issued and outstanding. Page 1 of 19 2 PART I FINANCIAL INFORMATION PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, and September 30, 1999 1998 1998 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 35,394,245 $ 30,359,600 $ 21,752,574 Held to maturity securities, market value of $121,682,000 - September 30, 1999; $135,924,000 - December 31, 1998; $127,139,000 - September 30, 1998 122,612,546 134,723,695 125,534,041 Available for sale securities, at market value 27,475,855 12,836,885 24,770,793 Federal funds sold 1,900,000 3,250,000 Loans 314,941,484 291,514,748 275,553,018 Less: Unearned income 8,525 1,850 2,715 Allowance for loan losses 4,130,145 4,382,157 4,294,844 ------------ ------------ ------------ Loans, net 310,802,814 287,130,741 271,255,459 Bank premises and equipment, net of accumulated depreciation of $9,624,000 - September 30 1999; $8,930,000 - December 31,1998; and $8,511,000 - September 30, 1998 17,000,090 15,923,450 14,329,555 Other real estate 138,454 274,280 593,941 Accrued interest receivable 3,621,326 3,128,279 3,153,969 Other assets 3,436,748 3,794,213 3,639,989 ------------ ------------ ------------ TOTAL ASSETS $522,382,078 $488,171,143 $468,280,321 ============ ============ ============ Page 2 of 19 3 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited) September 30, December 31, and September 30, 1999 1998 1998 - --------------------------------------------------------------------------------------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand, non-interest bearing $ 99,246,828 $ 76,268,636 $ 65,237,244 Savings and demand, interest bearing 168,540,539 167,120,669 161,537,468 Time, $100,000 or more 69,657,004 68,080,406 72,988,277 Other time deposits 67,924,303 70,132,525 68,174,053 ------------- ------------- ------------ Total deposits 405,368,674 381,602,236 367,937,042 Accrued interest payable 678,609 924,172 910,943 Federal funds purchased and securities sold under agreements to repurchase 35,815,037 28,050,780 22,933,242 Notes payable 235,443 202,946 206,044 Other liabilities 4,150,411 3,845,616 4,072,834 ------------- ------------- ------------ TOTAL LIABILITIES 446,248,174 414,625,750 396,060,105 SHAREHOLDERS' EQUITY: Common Stock, $1 par value, 15,000,000 shares authorized, 2,952,672 shares issued and outstanding at September 30, 1999, December 31, 1998 and September 30, 1998 2,952,672 2,952,672 2,952,672 Surplus 63,711,758 63,711,758 56,711,758 Undivided profits 9,948,720 6,739,151 12,173,721 Unearned compensation (612,886) (160,900) Accumulated other comprehensive income 133,640 302,712 382,065 ------------- ------------- ------------ TOTAL SHAREHOLDERS' EQUITY 76,133,904 73,545,393 72,220,216 ------------- ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 522,382,078 $ 488,171,143 $468,280,321 ============= ============= ============ See Selected Notes to Consolidated Financial Statements. Page 3 of 19 4 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For The Quarters Ended September 30, For The Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------------------------------ 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $6,838,282 $6,311,621 $19,304,197 $18,291,832 Interest and dividends on securities: U. S. Treasury 1,144,929 1,235,402 3,601,132 3,783,102 U. S. Government agencies and corporations 1,000,406 744,395 2,462,643 2,362,287 States and political subdivisions 105,496 107,969 346,194 267,259 Other investments 220 88,688 14,469 Interest on federal funds sold 15,278 130,191 439,188 338,143 ---------- ---------- ----------- ----------- TOTAL INTEREST INCOME 9,104,611 8,529,578 26,242,042 25,057,092 ---------- ---------- ----------- ----------- INTEREST EXPENSE: Time deposits of $100,000 or more 886,486 1,022,082 2,749,960 3,129,930 Other deposits 2,331,073 2,415,870 6,932,672 6,994,747 Mortgage indebtedness 2,630 2,799 8,019 8,518 Federal funds purchased and securities sold under agreements to repurchases 455,897 152,350 1,104,128 258,152 ---------- ---------- ----------- ----------- TOTAL INTEREST EXPENSE 3,676,086 3,593,101 10,794,779 10,391,347 ---------- ---------- ----------- ----------- NET INTEREST INCOME 5,428,525 4,936,477 15,447,263 14,665,745 Provision for losses on loans 30,000 90,000 ---------- ---------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS 5,398,525 4,936,477 15,357,263 14,665,745 ---------- ---------- ----------- ----------- OTHER OPERATING INCOME: Trust department income and fees 201,966 145,571 677,929 574,264 Service charges on deposit accounts 1,182,688 1,045,344 3,568,089 2,912,215 Other service charges, commissions an fees 79,439 67,553 198,416 208,154 Gain on securities 31,849 57,129 Other income 85,615 286,529 270,169 5,508,989 ---------- ---------- ----------- ----------- TOTAL OTHER OPERATING INCOME $1,549,708 $1,576,846 $ 4,714,603 $ 9,260,751 ---------- ---------- ----------- ----------- Page 4 of 19 5 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited) For The Quarters Ended September 30, For The Nine Months Ended September 30, - ----------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- OTHER OPERATING EXPENSE: Salaries and employee benefits $2,539,742 $2,227,026 $ 7,387,584 $ 6,557,939 Net occupancy 316,781 246,710 732,593 724,820 Equipment rentals, depreciation and maintenance 599,988 513,013 1,779,535 1,499,733 Other expense 1,299,220 1,233,502 3,597,833 4,261,518 ---------- ---------- ----------- ----------- TOTAL OTHER OPERATING EXPENSE 4,755,731 4,220,251 13,497,545 13,044,010 ---------- ---------- ----------- ----------- INCOME BEFORE INCOME TAXES 2,192,502 2,293,072 6,574,321 10,882,486 Income taxes 703,724 713,650 2,213,210 3,658,410 ---------- ---------- ----------- ----------- NET INCOME $1,488,778 $1,579,422 $ 4,361,111 $ 7,224,076 ========== ========== =========== =========== See Selected Notes to Consolidated Financial Statements. Page 5 of 19 6 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Accumu- Unearned lated Other Compre- Common Undivided Compensa- Comprehen- hensive # of Shares Stock Surplus Profits tion sive Income Income Total ----------------------------------------------------------------------------------------------------------------- Balance, January 1, 1998, as previously reported 1,476,336 $1,476,336 $ 58,188,094 $ 5,924,027 $ 0 $ 183,305 $ 65,771,762 Two-for-one stock split in 1998 1,476,336 1,476,336 (1,476,336) --------- ---------- ------------ ----------- -------------- ------------ ------------ Balance, January 1, 1998, as restated 2,952,672 2,952,672 56,711,758 5,924,027 183,305 65,771,762 Comprehen- sive Income: Net income 7,224,076 $ 7,224,076 7,224,076 Net unrealized gain on available for sale securities, net of tax 225,775 225,775 225,775 Reclassifica- tion adjustment for available for sale securities called or sold in current year, net of tax (27,015) (27,015) (27,015) ----------- Total comprehen- sive income $ 7,422,836 =========== Cash dividends, ($ .33 per share) (974,382) (974,382) --------- ---------- ------------ ----------- -------------- ------------ ------------ Balance, September 30, 1998 2,952,672 $2,952,672 $ 56,711,758 $12,173,721 $ 0 $ 382,065 $ 72,220,216 ========= ========== ============ =========== ============== ============ ============ Page 6 of 19 7 ================================================================================ PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ( Continued) (Unaudited) Accumu- Unearned lated Other Compre- Common Undivided Compensa- Comprehen- hensive # of Shares Stock Surplus Profits tion sive Income Income Total --------- ---------- ----------- ----------- --------- ----------- ----------- ------------ Balance, January 1, 1999 2,952,672 $2,952,672 $63,711,758 $ 6,739,151 $(160,900) $ 302,712 $ 73,545,393 Comprehen- sive Income: Net income 4,361,111 $ 4,361,111 4,361,111 Net unrealized loss on available for sale securities, net of tax (169,072) (169,072) (169,072) ----------- Total comprehen- sive income $ 4,192,039 =========== Purchase of common shares (642,886) (642,886) Allocation of ESOP shares 190,900 190,900 Cash dividends, ($ .39 per share) (1,151,542) (1,151,542) --------- ---------- ----------- ----------- --------- ----------- ------------ Balance, September 30, 1999 2,952,672 $2,952,672 $63,711,758 $ 9,948,720 $(612,886) $ 133,640 $ 76,133,904 ========= ========== =========== =========== ========== =========== ============ See Selected Notes to Consolidated Financial Statements. Page 7 of 19 8 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Nine Months Ended September 30, 1999 1998 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,361,111 $ 7,224,076 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sales and calls of securities (59,129) Gain on sales of other real estate (449,529) (11,478) Gain on sale of bank premises (5,083,867) Depreciation and amortization 1,170,000 1,139,397 Provision for losses on other real estate 16,355 44,736 Changes in assets and liabilities: Accrued interest receivable (493,047) 465,948 Other assets 796,531 179,065 Accrued interest payable (245,563) 184,180 Other liabilities 304,795 1,484,626 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,460,653 5,567,554 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and calls of held to maturity securities 106,390,000 79,795,000 Investment in held to maturity securities (95,916,051) (102,488,660) Proceeds from maturities, sales and calls of available securities for sale 1,222,174 23,725,000 Investment in available for sale securities (14,488,796) (466,991) Loans made (24,082,013) (24,297,883) Proceeds from sale of bank premises 5,996,754 Acquisition of premises and equipment (2,246,640) (6,768,362) Proceeds from sales of other real estate 569,000 289,077 Federal funds sold (1,900,000) 2,900,000 Other assets (343,286) (442,433) ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES $ (30,795,612) $ (21,758,498) ------------- ------------- Page 8 of 19 9 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) For The Nine Months Ended September 30, 1999 1998 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Demand and savings deposits, net increase (decrease) $ 24,407,839 $ (1,305,384) Time deposits, net decrease (641,401) (3,312,403) Principal payments on notes (9,549) (9,050) Cash dividends (1,151,542) (974,382) Federal funds purchased and securities sold under agreements to repurchase 7,764,257 22,933,242 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 30,369,604 17,332,023 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 5,034,645 1,141,079 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,359,600 20,611,495 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,394,245 $ 21,752,574 ============ ============ See Selected Notes to Consolidated Financial Statements. Page 9 of 19 10 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Nine Months Ended September 30, 1999 and 1998 1. The accompanying unaudited consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 1998 as set forth in the Notes to the Consolidated Financial Statements of Peoples Financial Corporation and Subsidiaries (the Company). In the opinion of Management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included and are of a normal recurring nature. The accompanying unaudited consolidated financial statements have been prepared also in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 2. The results of operations for the nine months ended September 30, 1999, are not necessarily indicative of the results to be expected for the full year. 3. Per share data is based on the weighted average shares of common stock outstanding of 2,952,672 for the nine months ended September 30, 1999 and 1998. 4. At September 30, 1999 and 1998, the total recorded investment in impaired loans amounted to $2,000 and $638,000. The amount of that recorded investment in impaired loans for which there was no related allowance for loan losses was $2,000 and $638,000 at September 30, 1999 and 1998, respectively. 5. Transactions in the allowance for loan losses were as follows: Balance, January 1, 1999 $ 4,382,157 Provision for loan losses 90,000 Recoveries 61,781 Loans charged off (403,793) ------------- Balance, September 30, 1999 $ 4,130,145 ============= Page 10 of 19 11 6. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $11,040,342 and $10,207,000 for the nine months ended September 30, 1999 and 1998, respectively, for interest on deposits and borrowings. Income tax payments totaled $2,315,000 and $1,920,000 for the nine months ended September 30, 1999 and 1998, respectively. Loans transferred to other real estate amounted to $404,000 for the nine months ended September 30, 1998. 7. The income tax effect on the accumulated other comprehensive income was ($87,000) and $103,000 at September 30, 1999 and 1998, respectively. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following presents Management's discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries (the Company) for the nine months ended September 30, 1999 and 1998. These comments highlight the significant events and should be considered in combination with the Consolidated Financial Statements included in this report on Form 10-Q. OVERVIEW Net income for the nine months ended September 30, 1999, was $4,361,000, which was a decrease of $2,863,000, as compared with the nine months ended September 30, 1999. This decrease was primarily attributable to the gain recognized for book purposes of $3,300,000, net of taxes, during the first quarter of 1998 as the result of the sale of a branch location. During the first quarter of 1999, the Company recognized a gain, net of taxes, of $293,000 from the sale of other real estate. The following schedule compares financial highlights for the nine months ended September 30, 1999 and 1998: For the nine months ended September 30, 1999 1998 - ------------------------------------------------------------------------ Net income per share $ 1.48 $ 2.45 Book value per share $ 25.78 $ 24.46 Return on average total assets 1.14% 2.10% Return on average shareholders' equity 7.83% 13.96% Allowance for loan losses as a % of 1.31% 1.56% loans, net of unearned discount Page 11 of 19 12 FINANCIAL CONDITION HELD TO MATURITY SECURITIES There was no significant change in the held to maturity securities portfolio at September 30, 1999, as compared with September 30, 1998. The Company continues to closely manage its liquidity position by matching the maturity of investment securities with anticipated fluctuations in deposits. Gross unrealized gains for held to maturity securities were $428,000 and $1,624,000 and gross unrealized losses for held to maturity securities were $1,359,000 and $19,000 at September 30, 1999 and 1998, respectively. The following schedule reflects the mix of the held to maturity investment portfolio at September 30, 1999 and 1998: September 30, 1999 1998 - ------------------------------------------------------------------------------------------------ Amount % Amount % -------------------------------------------------------------- U. S. Treasury securities $ 63,625,282 51.90% $ 86,247,040 68.70% U. S. Government agencies 52,330,396 42.70% 32,912,848 26.20% States and political subdivisions 6,656,868 5.40% 6,374,153 5.10% ------------ ------ ------------ ------ Totals $122,612,546 100.00% $125,534,041 100.00% ============ ====== ============ ====== AVAILABLE FOR SALE SECURITIES There was no significant change in the available for sale securities portfolio at September 30, 1999, as compared with September 30, 1998. The Company continues to closely monitor its liquidity position as described above. Gross unrealized gains were $919,000 and $526,000 at September 30, 1999 and 1998, respectively, and gross unrealized losses were $722,000 at September 30, 1999. The following schedule reflects the mix of available for sale securities at September 30, 1999 and 1998: September 30, 1999 1998 - ---------------------------------------------------------------------------------------------- Amount % Amount % ------------------------------------------------------------ U. S. Treasury securities $ 5,858,130 21.30% $ 4,036,250 16.30% U. S. Government agencies 16,198,234 58.90% 19,013,090 76.80% States and political subdivisions 2,163,328 7.90% 1,080,120 4.40% Other securities 3,256,163 11.90% 641,333 2.50% ----------- ------ ----------- ------ Totals $27,475,855 100.00% $24,770,793 100.00% =========== ====== =========== ====== Page 12 of 19 13 FEDERAL FUNDS SOLD Federal funds sold were $1,900,000 at September 30, 1999, as compared with $3,250,000 at September 30, 1998. This fluctuation is directly related to the liquidity needs of the bank subsidiary. LOANS Loans increased $39,388,000 at September 30, 1999, as compared with September 30, 1998, as a result of the increased loan demand in the Company's trade area. The Company anticipates that this increased demand will continue throughout the remainder of 1999. The allowance for loan losses, as a % of loans, net of unearned discount, has decreased from 1.56% at September 30, 1998 to 1.31% at September 30, 1999. Management continues to monitor the volume and quality of its loan portfolio and has determined that the allowance is adequate. BANK PREMISES AND EQUIPMENT Bank premises and equipment increased $2,671,000 at September 30, 1999, as compared with September 30, 1998, as a result of the construction of two branch facilities during this time. DEPOSITS Significant increases or decreases in total deposits or significant fluctuations among the different types of deposits are anticipated by Management as customers in the casino industry and county and municipal areas reallocate their resources periodically. As discussed above, the Company has managed its funds including planning the timing of investment maturities so as to achieve appropriate liquidity. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Federal funds purchased and securities sold under agreements to repurchase increased $12,882,000 at September 30, 1999, as compared with September 30, 1998. This fluctuation is entirely due to the introduction of a new non-deposit product during 1998. SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. One measure of capital adequacy is the primary capital ratio which was 15.75% at September 30, 1999, as compared with 16.65% at September 30, 1998. These ratios are well above the regulatory minimum of 6.00%. Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company. Page 13 of 19 14 RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income, the amount by which interest income on loans, investments and other interest earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company's income. Management's objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. The following schedule summarizes net interest earnings and net yield on interest earning assets: Net Interest Earnings and Net Yield on Interest Earning Assets Nine Months Ended September 30, (In thousands, except percentages) 1999 1998 - -------------------------------------------------------------------- Total interest income (1) $26,420 $25,194 Total interest expense 10,795 10,391 ------- ------- Net interest earnings $15,625 $14,803 ======= ======= Net yield on interest earning assets 4.43% 4.72% ======= ======= (1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 1999 and 1998. The schedule on page 15 provides an analysis of the change in total interest income and total interest expense for the nine months ended September 30, 1999 and 1998. Page 14 of 19 15 Analysis of Changes in Interest Income and Interest Expense (In Thousands) Attributable To: ----------------------------------------- For the Nine For the Nine Months Months Ended Ended September September Increase Rate/ 30, 1999 30, 1998 (Decrease) Volume Rate Volume --------------- --------------- -------------- ------------ ------------ -------------- INTEREST INCOME: (1) Loans (2) $ 19,304 $ 18,292 $ 1,012 $ 2,265 $ (1,115) $ (138) Federal funds sold 439 338 101 225 (74) (50) Held to maturity: Taxable securities 5,392 4,754 638 1,260 (492) (130) Non-taxable securities 405 174 231 16 196 19 Available for sale: Taxable securities 672 1,391 (719) (722) 5 (2) Non-taxable securities 119 231 (112) 604 (198) (518) Other securities 89 14 75 27 16 32 --------------- --------------- -------------- ------------ ------------ -------------- Total $ 26,420 $ 25,194 $ 1,226 $ 3,675 $ (1,662) $ (787) =============== =============== ============== ============ ============ ============== INTEREST EXPENSE: Savings and negotiable interest bearing deposits $ 4,144 $ 4,137 $ 7 $ 104 $ (95) $ (2) Time deposits 5,539 5,987 (448) 571 (931) (88) Federal funds purchased and securities sold under agreements to repurchase 1,104 258 846 1,165 (58) (261) Mortgage indebtedness 8 9 (1) (4) 7 (4) --------------- --------------- -------------- ------------ ------------ -------------- Total $ 10,795 $ 10,391 $ 404 $ 1,836 $ (1,077) $ (355) =============== =============== ============== ============ ============ ============== (1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 1999 and 1998. (2) Loan fees are included in these figures. Includes nonaccrual loans. Page 15 of 19 16 PROVISION FOR LOAN LOSSES Management continuously monitors the Company's relationships with its loan customers, especially those in concentrated industries such as seafood, gaming, and hotel/motel, and their direct and indirect impact on its operations. A thorough analysis of current economic conditions and the quality of the loan portfolio are conducted on a quarterly basis. These analyses are utilized in the computation of the adequacy of the allowance for loan losses. During the period from 1993 until 1998, the Company had not recorded a provision for loan losses. Beginning in January 1999, the Company began providing $10,000 for loan losses on a monthly basis and expects to continue to do so throughout 1999. This action was implemented primarily in response to the large increase in the volume of the loan portfolio and does not indicate a deterioration of its quality. SERVICE CHARGES ON DEPOSIT ACCOUNTS Service charges on deposit accounts increased $656,000 for the nine months ended September 30, 1999, as compared with the nine months ended September 30, 1998, as the result of an increase in off-site ATM's and ATM fees at branch locations during 1999. OTHER INCOME During the nine months ended September 30, 1998, the Company realized a gain of $5,083,000 for book purposes as the result of the sale of one of its branch locations, as mentioned previously in the Overview. SALARIES AND EMPLOYEE BENEFITS Salaries and employee benefits increased $830,000 for the nine months ended September 30, 1999, as compared with the nine months ended September 30, 1998, as the result of an increase in the number of full-time employees during this time frame due to the opening of two new branches and significant cost of living adjustment raises placed in January 1999. OTHER EXPENSE Other expense decreased $664,000 for the nine months ended September 30, 1999, as compared with the nine months ended September 30, 1998, largely as the result of expenses relating to the computer conversion during 1998. LIQUIDITY Liquidity represents the Company's ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. At September 30, 1999, cash and due from banks, investment securities and federal funds sold were 46% of total deposits, as compared with 47% at September 30, 1998. Page 16 of 19 17 YEAR 2000 In response to the Year 2000 issue, the Company has established a committee, headed by a senior officer of the Company, to review all computer-based systems which includes all operations departments and applications as well as other operational activities. The committee has developed and is in the process of implementing a plan of action, which has been approved by the Board of Directors, to ensure that its computer and information systems will function properly in the Year 2000. This plan incorporates the awareness, assessment, renovation, validation and implementation phases as directed by the Federal Deposit Insurance Corporation (FDIC). Renovation of systems for Year 2000 compliance was completed by December 31, 1998. Testing of all mission critical systems was completed by June 30, 1999. The Company has budgeted for projected Year 2000 expenses, and the Company does not expect the costs of achieving Year 2000 compliance to have a material effect on the Company's financial statements. In the event of unforeseen Year 2000 problems, the Company has established a Year 2000 contingency plan, which includes all information technology and non-information technology systems. The Plan, which has been approved by the Board of Directors, also addresses potential Year 2000 issues relating to core application software, trust services software, ATM services, liquidity and other operational activities. While the Company has taken steps to ensure that its material vendors and customers are Year 2000 compliant, there is no guarantee that the systems of these other companies will be Year 2000 compliant on time. As a result, the Company could be adversely affected by the failure of other companies to become Year 2000 compliant. The potential impact of such a failure cannot be quantified at this time. FORWARD LOOKING INFORMATION - Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company's anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the company's actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Page 17 of 19 18 PART II OTHER INFORMATION Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None. Page 18 of 19 19 SIGNATURES Pursuant to the requirement of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLES FINANCIAL CORPORATION (Registrant) Date: October 28, 1999 -------------------------------------- By: /s/ CHEVIS C. SWETMAN -------------------------------------- Chevis C. Swetman Chairman, President and Chief Executive Officer Date: October 28, 1999 -------------------------------------- By: /s/ LAURI A. WOOD -------------------------------------- Lauri A. Wood Chief Financial Officer and Controller (principal financial and accounting officer) Page 19 of 19 20 INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 27 Financial Data Schedule