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 March 31, 2003
------------------------------------
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
incorporation or organization) Identification No.)
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 May 1, 2003, there were 15,000,000
shares of $1 par value common stock authorized, and 5,567,415 shares issued and
outstanding.
Page 1 of 22
PART I
FINANCIAL INFORMATION
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<Table>
<Caption>
March 31, December 31, and March 31, 2003 2002 2002
- ------------------------------------ ------------ ------------ ------------
ASSETS
Cash and due from banks $ 60,539,875 $ 39,654,247 $ 28,817,023
Held to maturity securities, market value of
$13,132,000 - March 31, 2003;
$18,026,000 - December 31, 2002;
$27,553,000 - March 31, 2002 12,786,448 17,587,690 27,036,649
Available for sale securities, at market value 191,386,475 151,483,997 152,667,409
Federal Home Loan Bank stock, at cost 1,940,300 1,927,000 1,884,600
Federal funds sold 1,600,000 17,650,000
Loans 298,156,093 312,296,263 328,057,936
Less: Allowance for loan losses 6,343,099 6,696,911 6,005,479
------------ ------------ ------------
Loans, net 291,812,994 305,599,352 322,052,457
Bank premises and equipment, net of
accumulated depreciation of $15,446,000 -
March 31, 2003; $14,960,000 - December 31,
2002; and $13,612,000 - March 31, 2002 17,863,459 17,059,400 17,864,255
Other real estate 1,721,780 1,195,720 1,663,226
Accrued interest receivable 3,039,082 2,858,190 3,301,387
Other assets 12,894,073 12,773,580 5,966,749
------------ ------------ ------------
TOTAL ASSETS $595,584,486 $550,139,176 $578,903,755
============ ============ ============
</Table>
Page 2 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
<Table>
<Caption>
March 31, December 31, and March 31, 2003 2002 2002
- ------------------------------------ -------------- -------------- --------------
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand, non-interest bearing $ 87,126,693 $ 75,698,316 $ 74,319,213
Savings and demand, interest bearing 184,214,635 164,954,932 163,052,165
Time, $100,000 or more 71,960,009 74,064,356 103,211,827
Other time deposits 72,316,265 73,456,208 77,395,168
-------------- -------------- --------------
Total deposits 415,617,602 388,173,812 417,978,373
Accrued interest payable 381,556 300,042 716,072
Federal funds purchased and securities sold under
agreements to repurchase 84,709,032 67,245,703 69,498,290
Borrowings from Federal Home Loan Bank 6,332,874 6,313,077 5,567,196
Notes payable 310,850 334,371 398,586
Other liabilities 5,875,627 6,040,565 5,043,493
-------------- -------------- --------------
TOTAL LIABILITIES 513,227,541 468,407,570 499,202,010
SHAREHOLDERS' EQUITY:
Common Stock, $1 par value, 15,000,000 shares
authorized, 5,567,415, 5,583,472 and 5,604,439
shares issued and outstanding at March 31,
2003, December 31, 2002 and March 31, 2002,
respectively 5,567,415 5,583,472 5,604,439
Surplus 65,780,254 65,780,254 65,780,254
Undivided profits 9,346,122 8,510,341 7,532,978
Unearned compensation (131,043) (143,043) (174,043)
Accumulated other comprehensive income 1,794,197 2,000,582 958,117
-------------- -------------- --------------
TOTAL SHAREHOLDERS' EQUITY 82,356,945 81,731,606 79,701,745
-------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 595,584,486 $ 550,139,176 $ 578,903,755
============== ============== ==============
</Table>
See Independent Accountants' Review Report and Selected Notes to Condensed
Consolidated Financial Statements.
Page 3 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
For the Quarters Ended March 31, 2003 2002
- -------------------------------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans $4,543,327 $5,028,390
Interest and dividends on investments:
U. S. Treasury 321,438 333,263
U. S. Government agencies and corporations 1,291,276 1,478,977
States and political subdivisions 86,734 94,067
Other investments 120,197 120,999
Interest on federal funds sold 47,487 62,212
---------- ----------
TOTAL INTEREST INCOME 6,410,459 7,117,908
---------- ----------
INTEREST EXPENSE:
Time deposits of $100,000 or more 402,891 1,046,841
Other deposits 940,562 1,378,521
Borrowings from Federal Home Loan Bank 98,271 90,948
Mortgage indebtedness 1,960 2,167
Federal funds purchased and securities sold under
agreements to repurchase 241,348 317,869
---------- ----------
TOTAL INTEREST EXPENSE 1,685,032 2,836,346
---------- ----------
NET INTEREST INCOME 4,725,427 4,281,562
Provision for losses on loans 178,640 445,226
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS $4,546,787 $3,836,336
---------- ----------
</Table>
Page 4 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
<Table>
<Caption>
For the Quarters Ended March 31, 2003 2002
- -------------------------------- ---------- ----------
OTHER OPERATING INCOME:
Trust department income and fees $ 363,211 $ 247,642
Service charges on deposit accounts 1,687,066 1,617,405
Other service charges, commissions and fees 65,517 67,978
Other income 329,234 961,409
---------- ----------
TOTAL OTHER OPERATING INCOME 2,445,028 2,894,434
---------- ----------
OTHER OPERATING EXPENSE:
Salaries and employee benefits 2,888,736 3,224,729
Net occupancy 316,940 340,041
Equipment rentals, depreciation and maintenance 775,717 694,594
Other expense 1,626,671 1,577,366
---------- ----------
TOTAL OTHER OPERATING EXPENSE 5,608,064 5,836,730
---------- ----------
INCOME BEFORE INCOME TAXES 1,383,751 894,040
Income taxes 346,580 227,480
---------- ----------
NET INCOME $1,037,171 $ 666,560
========== ==========
</Table>
See Independent Accountants' Review Report and Selected Notes to Condensed
Consolidated Financial Statements.
Page 5 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<Table>
<Caption>
Accumulated
# of Other
Common Common Undivided Unearned Comprehensive Comprehensive
Shares Stock Surplus Profits Compensation Income Income Total
---------- ---------- ----------- ----------- ------------ ------------- ------------- -----------
BALANCE,
JANUARY 1, 2002 5,620,239 $5,620,239 $65,780,254 $ 7,052,559 $ (174,043) $ 1,790,017 $80,069,026
Comprehensive Income:
Net income 666,560 $ 666,560 666,560
Net unrealized
loss on
available for
sale securities,
net of tax (724,495) (724,495) (724,495)
Reconciliation
adjustment for
available for
sale securities
called or sold
in the current (107,405) (107,405) (107,405)
year, net of tax
-------------
Total comprehensive
income $ (165,340)
=============
Issuance of
stock for stock
incentive plan 7,142 7,142 92,846 99,988
Retirement of
common stock (22,942) (22,942) (278,987) (301,929)
---------- ---------- ----------- ----------- ------------ ------------- -----------
BALANCE,
MARCH 31, 2002 5,604,439 $5,604,439 $65,780,254 $ 7,532,978 $ (174,043) $ 958,117 $79,701,745
========== ========== =========== =========== ============ ============= ===========
</Table>
Page 6 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(Unaudited)
<Table>
<Caption>
Accumulated
# of Other
Common Common Undivided Unearned Comprehensive Comprehensive
Shares Stock Surplus Profits Compensation Income Income Total
---------- ---------- ----------- ----------- ------------ ------------- ------------- -----------
BALANCE,
JANUARY 1, 2003 5,583,472 $5,583,472 $65,780,254 $ 8,510,341 $ (143,043) $ 2,000,582 $81,731,606
Comprehensive
Income:
Net income 1,037,171 $ 1,037,171 1,037,171
Net unrealized
loss on
available for
sale securities,
net of tax (174,835) (174,835) (174,835)
Reclassification
adjustment for
available for
sale securities
called or sold
in current
year, net of tax (31,550) (31,550) (31,550)
-------------
Total comprehensive
loss $ 830,786
=============
Allocation of
ESOP shares 12,000 12,000
Retirement of
common stock (16,057) (16,057) (201,390) (217,447)
---------- ---------- ----------- ----------- ------------ ------------- -----------
BALANCE,
MARCH 31, 2003 5,567,415 $5,567,415 $65,780,254 $ 9,346,122 $ (131,043) $ 1,794,197 $82,356,945
========== ========== =========== =========== ============ ============= ===========
</Table>
See Independent Accountants' Review Report and Selected Notes to Condensed
Consolidated Financial Statements.
Page 7 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
For the Quarters Ended March 31, 2003 2002
- -------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,037,171 $ 666,560
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sales of other real estate (24,500) (9,500)
Gain on sale of available for sale securities (152,203)
Stock incentive plan 99,988
Depreciation 486,000 453,000
Provision for losses on loans 178,640 445,226
Provision for losses on other real estate 73,440 112,640
Changes in assets and liabilities:
Accrued interest receivable (180,892) 427,463
Other assets 173,222 870,308
Accrued interest payable 81,514 102,310
Other liabilities 345,062 596,928
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,169,657 3,612,720
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and calls of held to maturity
securities 4,801,242 11,300,000
Investment in held to maturity securities (57,687)
Proceeds from maturities, sales and calls of available for sale
securities 35,552,547 31,028,292
Investment in available for sale securities (75,768,509) (41,899,873)
Investment in Federal Home Loan Bank (13,300) (14,100)
Proceeds from sales of other real estate 175,000 170,000
Loans, net decrease 12,857,718 18,876,034
Acquisition of premises and equipment (1,290,059) (199,347)
Federal funds sold (1,600,000) (17,650,000)
Other assets (26,599) 66,680
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $(25,311,960) $ 1,619,999
============ ============
</Table>
Page 8 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<Table>
<Caption>
For the Quarters Ended March 31, 2003 2002
- -------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand and savings deposits, net increase $ 30,688,080 $ 15,907,516
Time deposits, net decrease (3,244,290) (10,471,805)
Principal payments on notes (11,521) (10,464)
Notes payable 72,799
Borrowings from Federal Home Loan Bank 19,797 18,208
Retirement of common stock (217,447) (301,929)
Cash dividends (670,017) (674,428)
Federal funds purchased and securities sold under
agreements to repurchase, net decrease 17,463,329 (12,990,569)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 44,027,931 (8,450,672)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,885,628 (3,217,953)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,654,247 32,034,976
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 60,539,875 $ 28,817,023
============ ============
</Table>
See Independent Accountants' Review Report and Selected Notes to Condensed
Consolidated Financial Statements.
Page 9 of 22
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarters Ended March 31, 2003 and 2002
1. The accompanying unaudited condensed consolidated financial statements have
been prepared with the accounting policies in effect as of December 31, 2002 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 quarter ended March 31, 2003, are not
necessarily indicative of the results to be expected for the full year. Per
share data is based on the weighted average shares of common stock outstanding
of 5,569,913 and 5,621,390 for the quarters ended March 31, 2003 and 2002,
respectively.
3. At March 31, 2003 and 2002, the total recorded investment in impaired loans
amounted to $8,200,000 and $7,544,000, respectively. The average recorded
investment in impaired loans amounted to approximately $8,189,000 and $7,549,000
at March 31, 2003 and 2002, respectively. The amount of that recorded investment
in impaired loans for which there is a related allowance for loan losses was
$8,200,000 at March 31, 2003. The allowance for losses related to these loans
amounted to approximately $840,000 at March 31, 2003. The amount of interest not
accrued on these loans amounted to approximately $72,000 for the quarter ended
March 31, 2003. The amount of interest not accrued on these loans for the
quarter ended March 31, 2002 was not material.
4. Transactions in the allowance for loan losses were as follows:
<Table>
<Caption>
For the For the For the
Quarter Ended Year Ended Quarter Ended
March 31, 2003 December 31, 2002 March 31, 2002
-------------- ----------------- --------------
Balance, beginning of period $ 6,696,911 $ 5,658,210 $ 5,658,210
Provision for loan losses 178,640 2,428,000 445,226
Recoveries 181,786 675,491 189,261
Loans charged off (714,238) (2,064,790) (287,218)
-------------- ----------------- --------------
Balance, end of period $ 6,343,099 $ 6,696,911 $ 6,005,479
============== ================= ==============
</Table>
5. The Company has defined cash and cash equivalents to include cash and due
from banks. The Company paid $1,604,000 and $2,734,000 for the quarters ended
March 31, 2003 and 2002, respectively, for interest on deposits and borrowings.
Income tax payments of $277,000 and $75,000 were made during the quarters ended
March 31, 2003 and 2002, respectively.
Page 10 of 22
Loans transferred to other real estate amounted to $750,000 and $137,000 for the
quarters ended March 31, 2003 and 2002, respectively. The income tax effect on
the accumulated other comprehensive income was ($106,000) and ($429,000) at
March 31, 2003 and 2002, respectively.
6. Certain reclassifications, which had no effect on prior year net income, have
been made to the prior period statements to conform to current year
presentation.
Page 11 of 22
Independent Accountants' Review Report
Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi
We have reviewed the accompanying condensed consolidated balance sheets of
Peoples Financial Corporation as of March 31, 2003, March 31, 2002 and December
31, 2002, and the related condensed consolidated statements of income,
shareholders' equity, and cash flows for the three months ended March 31, 2003
and March 31, 2002. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles for interim financial
statements.
/s/ Piltz, Williams, LaRosa & Co.
PILTZ, WILLIAMS, LAROSA & Co.
May 9, 2003
Biloxi, Mississippi
Page 12 of 22
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 quarters ended March 31, 2003 and 2002.
These comments highlight the significant events and should be considered in
combination with the Condensed Consolidated Financial Statements included in
this report on Form 10-Q.
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.
OVERVIEW
During the first quarter of 2003, net income was $1,037,000 compared with
$667,000 for the first quarter of 2002. Net interest income improved from
$4,282,000 for the first quarter of 2002 to $4,725,000 for the first quarter of
2003 as the Company continues its interest rate management policies begun in
2002, particularly with respect to rates paid on deposits. The provision for
loan losses was $179,000 for the first quarter of 2003 compared with a provision
of $445,000 for the first quarter of 2002 as discussed in Management's
Discussion and Analysis.
The following schedule compares financial highlights for the quarters ended
March 31, 2003 and 2002:
<Table>
<Caption>
For the quarters ended March 31, 2003 2002
- -------------------------------- ---------- ----------
Net income per share $ 0.19 $ 0.12
Book value per share $ 14.79 $ 14.22
Return on average total assets .72% .45%
Return on average shareholders' equity 5.06% 3.34%
Allowance for loan losses as a % of
loans, net of unearned discount 2.13% 1.83%
</Table>
Page 13 of 22
FINANCIAL CONDITION
HELD TO MATURITY SECURITIES
Held to maturity securities decreased $14,250,000 at March 31, 2003, compared
with March 31, 2002, as a result of the management of the Company's liquidity
position. As funds were available from the maturity of these securities, they
were generally invested in short term U. S. Government Agency securities, which
have been classified as available for sale. Gross unrealized gains for held to
maturity securities were $346,000 and $508,000 at March 31, 2003 and 2002,
respectively, and gross unrealized losses for held to maturity securities were
$12,000 at March 31, 2002. The following schedule reflects the mix of the held
to maturity investment portfolio at March 31, 2003 and 2002:
<Table>
<Caption>
March 31, 2003 2002
- --------- ------------------------ ------------------------
Amount % Amount %
------------ ------- ------------ -------
U. S. Treasury $ 3,998,600 31.30% $ 9,992,703 36.90%
U. S. Government agencies 5,000,000 39.10% 11,502,925 42.50%
States and political
subdivisions 3,787,848 29.60% 5,541,021 20.60%
------------ ------- ------------ -------
Totals $ 12,786,448 100.00% $ 27,036,649 100.00%
============ ======= ============ =======
</Table>
AVAILABLE FOR SALE SECURITIES
Available for sale securities increased $38,719,000 at March 31, 2003, compared
with March 31, 2002, in the management of the Company's liquidity position, as
discussed above. Gross unrealized gains were $2,764,000 and $1,792,000 and gross
unrealized losses were $57,000 and $347,000 at March 31, 2003 and 2002,
respectively. The following schedule reflects the mix of available for sale
securities at March 31, 2003 and 2002:
<Table>
<Caption>
March 31, 2003 2002
- --------- ------------------------ ------------------------
Amount % Amount %
------------ ------- ------------ -------
U. S. Treasury $ 55,590,905 29.10% $ 42,960,506 28.10%
U. S. Government agencies 126,527,811 66.10% 103,529,540 67.80%
States and political
subdivisions 4,685,087 2.40% 1,548,215 1.00%
Other securities 4,582,672 2.40% 4,629,148 3.10%
------------ ------- ------------ -------
Totals $191,386,475 100.00% $152,667,409 100.00%
============ ======= ============ =======
</Table>
Page 14 of 22
FEDERAL FUNDS SOLD
Federal funds sold were $1,600,000 at March 31, 2003, as a direct result of the
management of the bank subsidiary's liquidity position.
LOANS
Loans decreased $29,902,000 at March 31, 2003, as compared with March 31, 2002,
as a result of the decreased loan demand in the Company's trade area, which in
turn was due to a softening of the local economy. The Company anticipates that
this demand will continue to be flat into the second quarter of 2003.
OTHER ASSETS
Other assets increased $6,927,000 at March 31, 2003, as compared with March 31,
2002, primarily due to the investment of $5,000,000 in bank owned life insurance
during the third quarter of 2002.
DEPOSITS
Total deposits decreased $2,361,000 at March 31, 2003, as compared with March
31, 2002. Significant increases or decreases in total deposits and/or
significant fluctuations among the different types of deposits from quarter to
quarter 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 and
classification of investment maturities and using other funding sources and
their maturity so as to achieve appropriate liquidity. Specifically, the Company
obtained brokered deposits of $30,000,000 during 2000. At March 31, 2003,
brokered deposits amounted to $5,000,000.
ACCRUED INTEREST PAYABLE
Accrued interest payable decreased $335,000 at March 31, 2003, as compared with
March 31, 2002, due to the decline in interest rates paid on deposits.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Federal funds purchased and securities sold under agreements to repurchase
increased $15,211,000 at March 31, 2003, as compared with March 31, 2002, as the
result of the management of the Company's liquidity position and the
reallocation of funds by certain customers between deposit products and
non-deposit products.
BORROWINGS FROM FEDERAL HOME LOAN BANK
The Company acquired funds from the Federal Home Loan Bank in the management of
its liquidity position.
Page 15 of 22
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 15.31% at March 31, 2003, as
compared with 14.56% at March 31, 2002. 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.
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
<Table>
<Caption>
Quarters Ended March 31,
(In thousands, except percentages) 2003 2002
- ---------------------------------- ---------- ----------
Total interest income (1) $ 6,454 $ 7,166
Total interest expense 1,685 2,836
---------- ----------
Net interest earnings $ 4,769 $ 4,330
========== ==========
Net yield on interest earning assets 3.86% 3.26%
========== ==========
</Table>
(1) All interest earned is reported on a taxable equivalent basis using a tax
rate of 34% in 2003 and 2002.
The schedule on page 17 provides an analysis of the change in total interest
income and total interest expense for the quarters ended March 31, 2003 and
2002. Changes in interest income are generally attributable to changes in volume
related to interest-earning assets. Changes in interest expense, while impacted
by changes in volume related to interest-bearing liabilities, were heavily
impacted by the decrease in the cost of funds during these time periods.
Page 16 of 22
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
<Table>
<Caption>
Attributable To:
------------------------------------------
For the For the
Quarter Ended Quarter Ended Increase Rate/
March 31, 2003 March 31, 2002 (Decrease) Volume Rate Volume
-------------- -------------- ---------- ---------- ---------- ----------
INTEREST INCOME: (1)
Loans (2) (3) $ 4,543 $ 5,028 $ (485) $ (444) $ (45) $ 4
Federal funds sold 47 62 (15) (40) 68 (43)
Held to maturity:
Taxable 234 354 (120) (209) 217 (128)
Non-taxable 79 112 (33) (32) (2) 1
Available for sale:
Taxable 1,379 1,460 (81) 205 (251) (35)
Non-taxable 52 30 22 49 (10) (17)
Other 120 120 (1) 1
-------------- -------------- ---------- ---------- ---------- ----------
Total $ 6,454 $ 7,166 $ (712) $ (472) $ (22) $ (218)
============== ============== ========== ========== ========== ==========
INTEREST EXPENSE:
Savings and
demand, interest
bearing $ 440 $ 655 $ (215) $ (59) $ (172) $ 16
Time deposits 904 1,770 (866) (445) (562) 141
Federal funds
purchased and
securities sold
under agreements to
repurchase 241 318 (77) 13 (87) (3)
Borrowings from FHLB 98 91 7 13 (5) (1)
Mortgage
indebtedness 2 2 (1) 1
-------------- -------------- ---------- ---------- ---------- ----------
Total $ 1,685 $ 2,836 $ (1,151) $ (479) $ (825) $ 153
============== ============== ========== ========== ========== ==========
</Table>
(1) All interest earned is reported on a taxable equivalent basis using a tax
rate of 34% in 2003 and 2002.
(2) Loan fees are included in these figures.
(3) Includes nonaccrual loans.
Page 17 of 22
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. Based on these
analyses, the Company provided $445,000 for loan losses primarily to address
potential losses from one credit, during the first quarter of 2002 and provided
$179,000 for the first quarter of 2003. The Company expects to provide for its
loan loss provision on a monthly basis throughout the remaining quarters of 2003
at a similar level.
OTHER INCOME
Other income decreased $632,000 for the quarter ended March 31, 2003 as compared
with the quarter ended March 31, 2002, primarily as a result of income from the
proceeds from whole life insurance owned by the bank subsidiary in the prior
year.
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits decreased $336,000 for the quarter ended March
31, 2003, as compared with the quarter ended March 31, 2002. In the first
quarter of 2002, the Company had additional compensation expense as a result of
the stock incentive plan, which has subsequently been terminated, and the
accrual for deferred compensation benefits due to the beneficiary of a deceased
employee.
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. As discussed previously, the Company has
utilized non-traditional sources of funds including brokered certificates and
borrowings from the Federal Home Loan Bank. These additional sources have
allowed the Company to satisfy its liquidity needs. The Company will continue to
utilize these sources of funds throughout 2003, as necessary.
ITEM 4: CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-14( c) and 15d-14 ( c) under the Securities Exchange Act of 1934, as
amended) are effective. There have been no significant changes in internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Page 18 of 22
PART II
OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on April 23,
2003.
(b) The following five directors were elected at the meeting to hold office for
a term of one year:
<Table>
<Caption>
Approve Disapprove
------------ ------------
Drew Allen 4,636,014.128 40,188.306
Rex E. Kelly 4,636,014.128 40,188.306
Dan Magruder 4,636,014.128 40,188.306
Lyle M. Page 4,635,774.128 40,188.306
Chevis C. Swetman 4,636,014.128 40,188.306
</Table>
Of the 5,568,415 shares outstanding and eligible to vote on April 23, shares not
voted amounted to 892,260.566.
Item 5 - Other Information
Effective March 31, 2003, Andy Carpenter resigned from his positions as
Executive Vice President of the Company and as a member of the Company's Board
of Directors. An Executive Severance Agreement, which provides certain early
retirement benefits and non-competition obligations of Mr. Carpenter, was
executed between Mr. Carpenter and the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 23: Consent of Certified Public Accountants
Exhibit 99: Certifications of Chief Executive Officer and Chief Financial
Officer
(b) Reports on Form 8-K
A Form 8-K was filed on February 28, 2003.
Page 19 of 22
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: May 13, 2003
--------------------------
By: /s/ Chevis C. Swetman
--------------------------
Chevis C. Swetman
Chairman, President and Chief Executive Officer
Date: May 13, 2003
--------------------------
By: /s/ Lauri A. Wood
--------------------------
Lauri A. Wood
Chief Financial Officer and Controller
(principal financial and accounting officer)
Page 20 of 22
CERTIFICATIONS
I, Chevis C. Swetman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Financial
Corporation.
2. Based on my knowledge, the report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in the report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as such term is
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in the quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 13, 2003
/s/ Chevis C. Swetman
-----------------------------------------
Chevis C. Swetman,
President and Chief Executive Officer
Page 21 of 22
I, Lauri A. Wood, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Financial
Corporation.
2. Based on my knowledge, the report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in the report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as such term is
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
the report (the "Evaluation Date"); and
c) presented in the quarterly report our conclusions about
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 13, 2003
/s/ Lauri A. Wood
------------------------------------
Lauri A. Wood,
Chief Financial Officer
Page 22 of 22
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 23: Consent of Certified Public Accountants
Exhibit 99: Certifications of Chief Executive Officer and Chief
Financial Officer
</Table>