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 June 30, 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 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
July 31, 2003, there were 15,000,000 shares of $1 par value common stock
authorized, and 5,560,897 shares issued and outstanding.
Page 1 of 20
PART I
FINANCIAL INFORMATION
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<Table>
<Caption>
June 30, December 31, and June 30, 2003 2002 2002
- ---------------------------------- ------------ ------------ ------------
ASSETS
Cash and due from banks $ 42,351,377 $ 39,654,247 $ 34,279,455
Available for sale securities 206,735,490 151,483,997 145,853,839
Held to maturity securities, market value of
$10,955,000 - June 30, 2003;
$18,026,000 - December 31, 2002;
$22,860,000 - June 30, 2002 10,635,491 17,587,690 22,284,964
Federal Home Loan Bank Stock, at cost 1,952,200 1,927,000 1,898,500
Federal funds sold 32,950,000
Loans 294,927,203 312,296,263 321,315,212
Less: Allowance for loan losses 6,446,375 6,696,911 6,139,267
------------ ------------ ------------
Loans, net 288,480,828 305,599,352 315,175,945
Bank premises and equipment, net of
accumulated depreciation of $15,602,000 -
June 30, 2003; $14,960,000 - December 31,
2002; and $14,079,000 - June 30, 2002 18,121,353 17,059,400 17,492,344
Other real estate 1,569,772 1,195,720 1,307,861
Accrued interest receivable 3,149,089 2,858,190 2,896,104
Other assets 12,414,622 12,773,580 6,194,993
------------ ------------ ------------
TOTAL ASSETS $585,410,222 $550,139,176 $580,334,005
============ ============ ============
</Table>
Page 2 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
<Table>
<Caption>
June 30, December 31, and June 30, 2003 2002 2002
- ---------------------------------- -------------- -------------- --------------
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand, non-interest bearing $ 83,347,873 $ 75,698,316 $ 76,328,355
Savings and demand, interest bearing 163,409,436 164,954,932 156,103,639
Time, $100,000 or more 73,145,277 74,064,356 103,607,691
Other time deposits 70,326,992 73,456,208 76,173,464
-------------- -------------- --------------
Total deposits 390,229,578 388,173,812 412,213,149
Accrued interest payable 263,713 300,042 578,011
Federal funds purchased and securities
sold under agreements to repurchase 87,676,188 67,245,703 74,975,144
Borrowings from the Federal Home Loan Bank 16,719,145 6,313,077 5,754,701
Notes payable 287,271 334,371 372,612
Other liabilities 6,583,700 6,040,565 5,905,713
-------------- -------------- --------------
TOTAL LIABILITIES 501,759,595 468,407,570 499,799,330
SHAREHOLDERS' EQUITY:
Common Stock, $1 par value, 15,000,000
shares authorized, 5,561,211, 5,583,472
and 5,600,666 shares issued and
outstanding at June 30, 2003,
December 31, 2002 and June 30, 2002,
respectively 5,561,211 5,583,472 5,600,666
Surplus 65,780,254 65,780,254 65,780,254
Undivided profits 9,572,871 8,510,341 7,519,298
Unearned compensation (119,043) (143,043) (159,043)
Accumulated other comprehensive income 2,855,334 2,000,582 1,793,500
-------------- -------------- --------------
TOTAL SHAREHOLDERS' EQUITY 83,650,627 81,731,606 80,534,675
-------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 585,410,222 $ 550,139,176 $ 580,334,005
============== ============== ==============
</Table>
See Selected Notes to Condensed Consolidated Financial Statements.
Page 3 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
For The Quarters Ended June 30, For The Six Months Ended June 30,
------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 4,395,365 $ 5,101,836 $ 8,938,692 $ 10,130,226
Interest and dividends on investments:
U. S. Treasury 326,854 359,933 648,292 693,196
U. S. Government agencies and
corporations 1,499,454 1,380,876 2,790,730 2,859,853
States and political subdivisions 90,738 90,867 177,472 184,934
Other investments 13,466 14,146 133,663 135,145
Interest on federal funds sold 6,302 44,868 53,789 107,080
------------ ------------ ------------ ------------
TOTAL INTEREST INCOME 6,332,179 6,992,526 12,742,638 14,110,434
INTEREST EXPENSE:
Time deposits of $100,000 or more 370,051 877,127 772,942 1,923,968
Other deposits 889,233 1,323,220 1,829,795 2,701,741
Mortgage indebtedness 1,903 2,122 3,863 4,289
Borrowings from Federal Home Loan
Bank 108,877 90,991 207,148 181,939
Federal funds purchased and securities
sold under agreements to repurchase 253,691 303,335 495,039 621,204
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 1,623,755 2,596,795 3,308,787 5,433,141
------------ ------------ ------------ ------------
NET INTEREST INCOME 4,708,424 4,395,731 9,433,851 8,677,293
Provision for losses on loans 139,105 167,709 317,745 612,935
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS 4,569,319 4,228,022 9,116,106 8,064,358
------------ ------------ ------------ ------------
OTHER OPERATING INCOME:
Trust department income and fees 397,801 235,367 761,012 483,009
Service charges on deposit accounts 1,751,556 1,661,928 3,438,622 3,279,333
Other service charges, commissions
and fees 68,401 70,071 133,918 138,049
Other income 268,930 153,759 598,164 1,115,168
------------ ------------ ------------ ------------
TOTAL OTHER OPERATING INCOME $ 2,486,688 $ 2,121,125 $ 4,931,716 $ 5,015,559
------------ ------------ ------------ ------------
</Table>
Page 4 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
<Table>
<Caption>
For The Quarters Ended June 30, For The Six Months Ended June 30,
------------------------------- ---------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
OTHER OPERATING EXPENSE:
Salaries and employee benefits $ 2,717,698 $ 2,673,181 $ 5,606,434 $ 5,897,910
Net occupancy 326,875 330,122 643,815 670,163
Equipment rentals, depreciation and
maintenance 723,199 767,349 1,498,916 1,461,943
Other expense 1,689,298 1,791,894 3,315,969 3,369,260
------------ ------------ ------------ ------------
TOTAL OTHER OPERATING EXPENSE 5,457,070 5,562,546 11,065,134 11,399,276
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,598,937 786,601 2,982,688 1,680,641
INCOME TAXES 510,500 128,201 857,080 355,681
------------ ------------ ------------ ------------
NET INCOME $ 1,088,437 $ 658,400 $ 2,125,608 $ 1,324,960
============ ============ ============ ============
</Table>
See Selected Notes to Condensed Consolidated Financial Statements.
Page 5 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<Table>
<Caption>
Accumulated
# of Unearned Other Compre-
Common Common Undivided Compen- Comprehensive hensive
Shares Stock Surplus Profits sation 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 1,324,960 $ 1,324,960 1,324,960
Net
unrealized
gain
on
available
for sale
securities,
net of tax 195,780 195,780 195,780
Reclassifi-
cation
adjustment
for
available
for sale
securities
called or
sold in
current
year, net
of tax (192,297) (192,297) (192,297)
------------
Total
comprehensive
income $ 1,328,443
============
Allocation
of ESOP
shares 15,000 15,000
Issuance
of stock 7,142 7,142 92,846 99,988
Retirement
of common
stock (26,715) (26,715) (278,987) (305,702)
Dividend
declared,
($.12 per
share) (672,080) (672,080)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
June 30,
2002 5,600,666 $ 5,600,666 $ 65,780,254 $ 7,519,298 $ (159,043) $ 1,793,500 $ 80,534,675
============ ============ ============ ============ ============ ============ ============
</Table>
Page 6 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
(Unaudited)
<Table>
<Caption>
Accumulated
# of Unearned Other Compre-
Common Common Undivided Compen- Comprehensive hensive
Shares Stock Surplus Profits sation 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 2,125,608 $ 2,125,608 2,125,608
Net
unrealized
gain on
available
for sale
securities,
net of tax 919,878 919,878 919,878
Reclassifi-
cation
adjustment
for
available
for sale
securities
called or
sold in
current
year, net
of tax (65,126) (65,126) (65,126)
------------
Total
comprehensive
income $ 2,980,360
============
Allocation
of ESOP
shares 24,000 24,000
Retirement
of common
stock (22,261) (22,261) (284,508) (306,769)
Dividend
declared
($.12
per share) (778,570) (778,570)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
June 30,
2003 5,561,211 $ 5,561,211 $ 65,780,254 $ 9,572,871 $ (119,043) $ 2,855,334 $ 83,650,627
============ ============ ============ ============ ============ ============ ============
</Table>
See Selected Notes to Condensed Consolidated Financial Statements.
Page 7 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
For The Six Months Ended June 30, 2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,125,608 $ 1,324,960
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on sales of other real estate (3,500) 93,939
Gain on sale or liquidation of available for
sale securities (180,868)
Depreciation and amortization 931,000 920,000
Provision for losses on loans 317,745 612,935
Provision for losses on other real estate 128,448 300,259
Stock issued under incentive plan 99,988
Changes in assets and liabilities:
Accrued interest receivable (290,899) 832,746
Other assets 297,256 1,074,689
Accrued interest payable (36,329) (35,751)
Other liabilities 277,066 207,417
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,746,395 5,250,314
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales, maturities and calls of held
to maturity securities 6,952,199 16,050,000
Investment in held to maturity securities (56,002)
Proceeds from sales, maturities and calls of
available for sale securities 80,713,275 66,110,014
Investment in available for sale securities (134,672,416) (68,876,428)
Investment in Federal Home Loan Bank (25,200) (28,000)
Loans, net decrease 16,050,779 25,263,894
Proceeds from sales of other real estate 251,000 555,250
Acquisition of premises and equipment (1,992,953) (294,436)
Federal funds sold (32,950,000)
Other assets (218,382) (213,843)
-------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (32,941,698) $ 5,560,449
-------------- --------------
</Table>
Page 8 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<Table>
<Caption>
For The Six Months Ended June 30, 2003 2002
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Demand and savings deposits, net increase $ 6,104,061 $ 10,968,132
Time deposits, net decrease (4,048,295) (11,297,645)
Principal payments on notes (23,100) (21,438)
Retirement of common stock (306,769) (305,702)
Cash dividends (670,017) (674,428)
Federal funds purchased and securities sold under
agreements to repurchase 20,430,485 (7,513,715)
Notes payable 72,799
Borrowings from Federal Home Loan Bank 10,406,068 205,713
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 31,892,433 (8,566,284)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,697,130 2,244,479
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,654,247 32,034,976
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,351,377 $ 34,279,455
============ ============
</Table>
See Selected Notes to Condensed Consolidated Financial Statements.
Page 9 of 20
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 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 condensed 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 accounting principles generally
accepted in the United States of America for complete financial statements. The
statements include information required for interim financial statements.
2. The results of operations for the six months ended June 30, 2003 and 2002,
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 5,566,880 and 5,611,596 for the six months ended June 30, 2003
and 2002, respectively.
4. At June 30, 2003 and 2002, the total recorded investment in impaired loans
amounted to $6,705,000 and $7,008,000. The average recorded investment in
impaired loans amounted to approximately $6,695,000 and $7,195,000 at June 30,
2003 and 2002, respectively. The amount of that recorded investment in impaired
loans for which there is a related allowance for loan losses was $6,702,000 at
June 30, 2003. The allowance for losses related to these loans amounted to
approximately $936,000 at June 30, 2003. The amount of interest not accrued on
these loans amounted to approximately $133,000 and $169,000 for the six months
ended June 30, 2003 and 2002, respectively.
5. Transactions in the allowance for loan losses were as follows:
<Table>
<Caption>
For the six months For the year ended For the six months
ended June 30, December 31, ended June 30,
2003 2002 2002
------------------ ------------------ ------------------
Balance, beginning of period $ 6,696,911 $ 5,658,210 $ 5,658,210
Recoveries 346,195 675,491 352,424
Loans charged off (914,476) (2,064,790) (484,302)
Provision for loan losses 317,745 2,428,000 612,935
------------------ ------------------ ------------------
Balance, end of period $ 6,446,375 $ 6,696,911 $ 6,139,267
================== ================== ==================
</Table>
Page 10 of 20
6. The Company has defined cash and cash equivalents to include cash and due
from banks. The Company paid $3,345,000 and $5,469,000 for the six months ended
June 30, 2003 and 2002, respectively, and $9,929,000 for the twelve months ended
December 31, 2002, for interest on deposits and borrowings. Income tax payments
totaled $1,117,000 and $815,000 for the six months ended June 30, 2003 and 2002,
respectively, and $1,640,000 for the twelve months ended December 31, 2002.
Loans transferred to other real estate amounted to $750,000 and $458,000 for the
six months ended June 30, 2003 and 2002, respectively, and $984,000 for the
twelve months ended December 31, 2002.
7. The income tax effect on the accumulated other comprehensive income was
$440,000 and $2,000 at June 30, 2003 and 2002, respectively.
Page 11 of 20
Independent Accountants' Report
Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi
We have reviewed the accompanying condensed consolidated balance sheets of
Peoples Financial Corporation as of June 30, 2003, June 30, 2002 and December
31, 2002, and the related condensed consolidated statements of income,
shareholders' equity, and cash flows for the six months ended June 30, 2003 and
June 30, 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 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 reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheets of
Peoples Financial Corporation as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated January 17,
2003, except for Note P as to which the date was February 18, 2003, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2002, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Piltz, Williams, LaRosa & Co.
PILTZ, WILLIAMS, LAROSA & CO.
August 4, 2003
Biloxi, Mississippi
Page 12 of 20
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 six months ended June 30, 2003 and 2002.
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.
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
Net income for the six months ended June 30, 2003, was $2,126,000 compared with
$1,325,000 for the same period in 2002. Net interest income improved from
$8,677,000 for the six months ended June 30, 2002 to $9,434,000 for the six
months ended June 30, 2003 as the Company continues its interest rate management
policies begun in 2002, particularly with respect to rates paid on deposits.
Also, the provision for loans was $613,000 for the six months ended June 30,
2002, as compared to $318,000 for the six months ended June 30, 2003, as the
Company has previously identified and provided for potential significant loan
losses before January 1, 2003.
The following schedule compares financial highlights for the six months ended
June 30, 2003 and 2002:
<Table>
<Caption>
For the six months ended June 30, 2003 2002
----------------- ----------------
Net income per share $ 0.38 $ 0.24
Book value per share $ 15.04 $ 14.38
Return on average total assets .74% .45%
Return on average shareholders' equity 5.14% 3.30%
Allowance for loan losses as a % of loans,
net of unearned discount 2.19% 1.91%
</Table>
Page 13 of 20
FINANCIAL CONDITION
HELD TO MATURITY SECURITIES
Held to maturity securities decreased $11,649,000 at June 30, 2003, as compared
with June 30, 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 invested in available for sale securities. Gross unrealized gains were
$320,000 and $576,000 at June 30, 2003 and 2002, respectively, and gross
unrealized losses were $1,000 at June 30, 2002. The following schedule reflects
the mix of the held to maturity securities portfolio at June 30, 2003 and 2002:
<Table>
<Caption>
June 30, 2003 2002
--------------------------- ---------------------------
Amount % Amount %
----------- ----------- ----------- -----------
U. S. Treasury securities $ 3,999,265 37.60% $ 8,995,016 40.40%
U. S. Government agencies 3,000,000 28.20% 8,002,206 35.90%
States and political
subdivisions 3,636,226 34.20% 5,287,742 23.70%
----------- ------ ----------- ------
Totals $10,635,491 100.00% $22,284,964 100.00%
=========== ====== =========== ======
</Table>
AVAILABLE FOR SALE SECURITIES
Available for sale securities increased $60,882,000 at June 30, 2003, as
compared with June 30, 2002, as the result of the management of the Company's
liquidity position, as discussed above, and as a result of decreased loan
demand. Gross unrealized gains were $4,392,000 and $2,715,000 and gross
unrealized losses were $80,000 and $7,000 at June 30, 2003 and 2002,
respectively. The following schedule reflects the mix of available for sale
securities at June 30, 2003 and 2002:
<Table>
<Caption>
June 30, 2003 2002
----------------------------- -----------------------------
Amount % Amount %
------------ ------------ ------------ ------------
U. S. Treasury securities $ 47,979,548 23.20% $ 46,303,855 31.80%
U. S. Government agencies 148,685,216 71.90% 93,319,916 63.90%
States and political
subdivisions 5,612,038 2.70% 1,596,106 1.10%
Other securities 4,458,688 2.20% 4,633,962 3.20%
------------ ------ ------------ ------
Totals $206,735,490 100.00% $145,853,839 100.00%
============ ====== ============ ======
</Table>
Page 14 of 20
FEDERAL FUNDS SOLD
The Company invests in Federal funds sold, as it deems necessary, in the
management of the bank subsidiary's liquidity position.
LOANS
Loans decreased $26,388,000 at June 30, 2003, as compared with June 30, 2002.
This decrease is a result of decreased loan demand in the Company's trade area
caused by the softening of the local economy. Another contributing factor is the
refinancing of loans in our trade area's highly competitive interest rate
environment. The Company anticipates that loan demand will continue to be flat
or slightly decrease throughout the remainder of 2003. Funds that are available
to fund loan demand are currently invested primarily in available for sale
securities.
OTHER REAL ESTATE
Other real estate increased $262,000 at June 30, 2003, as compared with June 30,
2002, due to an increase in loans transferred to other real estate in 2003
compared with 2002. The Company is actively marketing these properties.
OTHER ASSETS
Other assets increased $6,220,000 at June 30, 2003, as compared with June 30,
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 $21,984,000 at June 30, 2003, as compared with June 30,
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 the third quarter of 2000. At June 30, 2003,
brokered deposits amounted to $5,000,000. These deposits matured on July 18,
2003. The Company currently does not plan to obtain further brokered deposits.
ACCRUED INTEREST PAYABLE
Accrued interest payable decreased $314,000 at June 30, 2003, as compared with
June 30, 2002, due to the decline in interest rates paid on deposits.
FEDERAL FUNDS PURCHASED
Federal funds purchased increased $12,701,000 as June 30, 2003, as compared with
June 30, 2002, in the management of the Company's liquidity position and the
reallocation of funds by certain customers between deposit and non-deposit
products.
BORROWING FROM THE FEDERAL HOME LOAN BANK
Borrowings from the Federal Home Loan Bank increased $10,964,000 at June 30,
2003, as compared with June 30, 2002, and the Company periodically acquires
these funds in the management of its liquidity position.
Page 15 of 20
OTHER LIABILITIES
Other liabilities increased $678,000 at June 30, 2003, as compared with June 30,
2002, primarily as a result of an increase in liabilities related to deferred
compensation benefits for a deceased officer and a retired officer of the bank
subsidiary.
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 15.69% at June 30, 2003, as
compared with 14.70% at June 30, 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.
On June 25, 2003, the Company's Board of Directors approved a semi-annual
dividend of $ .14 per share. The dividend had a record date of July 7, 2003 and
a distribution date of July 11, 2003.
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>
Six Months Ended June 30, (In
thousands, except percentages) 2003 2002
---------------- ----------------
Total interest income (1) $ 12,833 $ 14,206
Total interest expense 3,309 5,433
---------------- ----------------
Net interest earnings $ 9,524 $ 8,773
================ ================
Net yield on interest earning assets 3.78% 3.36%
================ ================
</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 six months ended June 30, 2003 and
2002.
Page 16 of 20
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
<Table>
<Caption>
Attributable To:
------------------------------------------------
For the Six For the Six
Months Months
Ended June Ended June Increase
30, 2003 30, 2002 (Decrease) Volume Rate Rate/ Volume
------------ ------------ ------------ ------------ ------------ ------------
INTEREST
INCOME: (1)
Loans (2) $ 8,939 $ 10,130 $ (1,191) $ (858) $ (364) $ 31
Federal funds sold 54 107 (53) (86) 165 (132)
Held to maturity:
Taxable securities 222 584 (362) (341) (51) 30
Non-taxable
securities 156 239 (83) (71) (17) 5
Available for sale:
Taxable securities 3,216 2,969 247 720 (381) (92)
Non-taxable securities 112 42 70 80 (3) (7)
Other securities 134 135 (1) 1 (1) (1)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 12,833 $ 14,206 $ (1,373) $ (555) $ (652) $ (166)
============ ============ ============ ============ ============ ============
INTEREST
EXPENSE:
Savings and
negotiable interest
bearing deposits $ 864 $ 1,308 $ (444) $ (154) $ (329) $ 39
Time deposits 1,739 3,318 (1,579) (726) (1,092) 239
Borrowings from FHLB 207 182 25 72 (34) (13)
Federal funds
purchased and
securities sold
under agreements to
repurchase 495 621 (126) 68 (175) (19)
Mortgage
indebtedness 4 4 (1) 1
------------ ------------ ------------ ------------ ------------ ------------
TOTAL $ 3,309 $ 5,433 $ (2,124) $ (741) $ (1,629) $ 246
============ ============ ============ ============ ============ ============
</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. Includes nonaccrual loans.
Page 17 of 20
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 $318,000 and $613,000 for loan losses during the
six months ended June 30, 2003 and 2002, respectively. Although it does not
anticipate that further loan loss provisions will be required in 2003, the
Company will continue to closely monitor the allowance and will provide for such
losses as deemed necessary.
TRUST DEPARTMENT INCOME AND FEES
Trust department income and fees increased $278,000 for the six months ended
June 30, 2003, as compared with the six months ended June 30, 2002. This
increase was due to the change in accounting for corporate bond fee income from
a cash basis to accrual basis in 2003.
OTHER INCOME
Other income decreased $517,000 for the six months ended June 30, 2003, as
compared with the six months ended June 30, 2002, primarily as a result of the
income realized on proceeds from whole life insurance owned by the bank
subsidiary in 2002.
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 of
deposit 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 June 30, 2003, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(c) and 15d-15(c) and
internal control over financial reporting (as defined in Exchange Act Rules 13a
- - 15(f) and 15d - 15(f)) are effective. During the period ending June 30, 2003,
there were no changes in internal controls over financial reporting that
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Page 18 of 20
PART II
OTHER INFORMATION
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 23 Consent of Certified Public Accountants
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. ss. 1350.
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. ss. 1350
(b) Reports on Form 8-K
None.
Page 19 of 20
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: August 8, 2003
By: /s/ Chevis C. Swetman
-----------------------------------
Chevis C. Swetman
Chairman, President and Chief Executive Officer
Date: August 8, 2003
By: /s/ Lauri A. Wood
---------------------------------
Lauri A. Wood
Chief Financial Officer and Controller
(principal financial and accounting officer)
Page 20 of 20