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, 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 October 31, 2003, there were 15,000,000 shares of $1 par value common stock authorized, and 5,558,699 shares issued and outstanding. Page 1 of 20 PART I FINANCIAL INFORMATION PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, and September 30, 2003 2002 2002 -------------------------------------------- ------------- ------------- ------------- ASSETS Cash and due from banks $ 29,452,234 $ 39,654,247 $ 40,104,878 Held to maturity securities, market value of $7,558,000 - September 30, 2003; $18,026,000 - December 31, 2002; $19,148,000 - September 30, 2002 7,354,334 17,587,690 18,589,305 Available for sale securities, at market value 223,843,642 151,483,997 147,882,866 Federal Home Loan Bank Stock, at cost 1,964,300 1,927,000 1,912,600 Federal funds sold 3,450,000 Loans 286,269,051 312,296,263 324,830,140 Less: Allowance for loan losses 6,402,722 6,696,911 5,105,876 ------------- ------------- ------------- Loans, net 279,866,329 305,599,352 319,724,264 Bank premises and equipment, net of accumulated depreciation of $15,914,000 - September 30, 2003; $14,960,000 - December 31, 2002; and $14,534,000 - September 30, 2002 18,130,419 17,059,400 17,198,524 Other real estate 1,417,646 1,195,720 1,620,509 Accrued interest receivable 3,070,728 2,858,190 2,923,366 Other assets 13,922,481 12,773,580 11,387,284 ------------- ------------- ------------- TOTAL ASSETS $ 579,022,113 $ 550,139,176 $ 564,793,596 ============= ============= ============= Page 2 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited) September 30, December 31, and September 30, 2003 2002 2002 -------------------------------------------- ------------- ------------- ------------- LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand, non-interest bearing $ 89,320,951 $ 75,698,316 $ 77,035,214 Savings and demand, interest bearing 169,862,914 164,954,932 169,153,779 Time, $100,000 or more 60,321,462 74,064,356 79,302,974 Other time deposits 67,341,920 73,456,208 73,935,836 ------------- ------------- ------------- Total deposits 386,847,247 388,173,812 399,427,803 Accrued interest payable 265,135 300,042 518,307 Federal funds purchased and securities sold under agreements to repurchase 95,663,210 67,245,703 71,169,774 Borrowings from Federal Home Loan Bank 6,791,786 6,313,077 5,982,614 Notes payable 264,920 334,371 357,582 Other liabilities 6,123,710 6,040,565 5,416,258 ------------- ------------- ------------- TOTAL LIABILITIES 495,956,008 468,407,570 482,872,338 SHAREHOLDERS' EQUITY: Common Stock, $1 par value, 15,000,000 shares authorized, 5,558,699 shares issued and outstanding at September 30, 2003, 5,583,472 shares issued and outstanding at December 31, 2002 and 5,600,666 shares issued and outstanding at September 30, 2002 5,558,699 5,583,472 5,600,666 Surplus 65,780,254 65,780,254 65,780,254 Undivided profits 11,047,120 8,510,341 8,664,342 Unearned compensation (107,043) (143,043) (155,043) Accumulated other comprehensive income 787,075 2,000,582 2,031,039 ------------- ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 83,066,105 81,731,606 81,921,258 ------------- ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 579,022,113 $ 550,139,176 $ 564,793,596 ============= ============= ============= See Selected Notes to Condensed Consolidated Financial Statements. Page 3 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For The Quarters Ended September 30, For The Nine Months Ended September 30, ------------------------------------ --------------------------------------- 2003 2002 2003 2002 --------------- -------------- -------------- ------------- INTEREST INCOME: Interest and fees on loans $ 4,180,508 $ 5,072,790 $ 13,119,200 $ 15,203,016 Interest and dividends on securities: U. S. Treasury 338,278 364,879 986,570 1,058,075 U. S. Government agencies and corporations 1,496,709 1,097,900 4,287,439 3,957,753 States and political subdivisions 92,773 78,762 270,245 263,696 Other investments 60,682 107,512 194,345 242,657 Interest on federal funds sold 5,207 65,234 58,996 172,314 --------------- -------------- -------------- ------------- TOTAL INTEREST INCOME 6,174,157 6,787,077 18,916,795 20,897,511 --------------- -------------- -------------- ------------- INTEREST EXPENSE: Time deposits of $100,000 or more 249,717 660,740 1,022,659 2,584,708 Other deposits 691,255 1,214,692 2,521,050 3,916,433 Borrowing from Federal Home Loan Bank 113,933 93,757 321,081 275,696 Mortgage indebtedness 1,848 2,067 5,711 6,356 Federal funds purchased and securities sold under agreements to repurchase 234,213 308,619 729,252 929,823 --------------- -------------- -------------- ------------- TOTAL INTEREST EXPENSE 1,290,966 2,279,875 4,599,753 7,713,016 --------------- -------------- -------------- ------------- NET INTEREST INCOME 4,883,191 4,507,202 14,317,042 13,184,495 Provision for losses on loans 65,299 135,841 383,044 748,776 --------------- -------------- -------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS 4,817,892 4,371,361 13,933,998 12,435,719 --------------- -------------- -------------- ------------- OTHER OPERATING INCOME: Trust department income and fees 345,707 205,537 1,106,719 688,546 Service charges on deposit accounts 1,696,696 1,775,274 5,135,318 5,054,607 Other service charges, commissions and fees 87,446 67,932 221,364 205,981 Other income 314,467 321,876 912,631 1,437,044 --------------- -------------- -------------- ------------- TOTAL OTHER OPERATING INCOME $ 2,444,316 $ 2,370,619 $ 7,376,032 $ 7,386,178 --------------- -------------- -------------- ------------- Page 4 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited) For The Quarters Ended September 30, For The Nine Months Ended September 30, ------------------------------------ --------------------------------------- 2003 2002 2003 2002 --------------- -------------- -------------- ------------- OTHER OPERATING EXPENSE: Salaries and employee benefits $ 2,729,284 $ 2,575,306 $ 8,335,718 $ 8,473,216 Net occupancy 335,896 356,743 979,711 1,026,906 Equipment rentals, depreciation and maintenance 593,606 673,557 2,092,522 2,135,500 Other expense 1,487,713 1,585,629 4,803,682 4,954,889 --------------- -------------- -------------- ------------- TOTAL OTHER OPERATING EXPENSE 5,146,499 5,191,235 16,211,633 16,590,511 --------------- -------------- -------------- ------------- INCOME BEFORE INCOME TAXES 2,115,709 1,550,745 5,098,397 3,231,386 Income taxes 605,000 405,701 1,462,080 761,382 --------------- -------------- -------------- ------------- NET INCOME $ 1,510,709 $ 1,145,044 $ 3,636,317 $ 2,470,004 =============== ============== ============== ============= See Selected Notes to Condensed Consolidated Financial Statements. Page 5 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Accumu- Unearned lated Other Compre- # of Common Undivided Compensa- Comprehen- hensive Shares Stock Surplus Profits tion sive 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 2,470,004 $ 2,470,004 2,470,004 Net unrealized gain on available for sale securities, net of tax 464,758 464,758 464,758 Reclassifica- tion adjust- ment for available for sale securities sold in current year, net of tax (223,736) (223,736) (223,736) ----------- Total comprehensive income $ 2,711,026 =========== Allocation of ESOP shares 19,000 19,000 Retirement of stock (26,715) (26,715) (278,987) (305,702) Issuance of stock 7,142 7,142 92,846 99,988 Cash dividends, ($ .12 per share) (672,080) (672,080) ---------- ---------- ------------ ------------ ------------ ------------ ----------- Balance, September 30, 2002 5,600,666 $5,600,666 $ 65,780,254 $ 8,664,342 $ (155,043) $ 2,031,039 $81,921,258 ========== ========== ============ ============ ============ ============ =========== Page 6 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) (Unaudited) Accumu- Unearned lated Other Compre- # of Common Undivided Compensa- Comprehen- hensive Shares Stock Surplus Profits tion sive 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 3,636,317 $ 3,636,317 3,636,317 Net unrealized loss on available for sale securities, net of tax (1,082,738) (1,082,738) (1,082,738) Reclassification adjustment for available for sale securities sold or liquidated in current year, net of tax (130,769) (130,769) (130,769) ----------- Total comprehensive income $ 2,422,810 =========== Allocation of ESOP shares 36,000 36,000 Retirement of stock (24,773) (24,773) (320,968) (345,741) Cash dividends, ($ .14 per share) (778,570) (778,570) ---------- ---------- ------------ ------------ ------------ ------------ ----------- Balance, September 30, 2003 5,558,699 $5,558,699 $ 65,780,254 $ 11,047,120 $ (107,043) $ 787,075 $83,066,105 ========== ========== ============ ============ ============ ============ =========== See Selected Notes to Condensed Consolidated Financial Statements. Page 7 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For The Nine Months Ended September 30, 2003 2002 - -------------------------------------------------- -------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,636,317 $ 2,470,004 Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on sales of other real estate (218,170) 71,466 Gain on liquidation or sale of available for sale securities (199,951) Stock issued under incentive plan 99,988 Gain on sale of bank premises (123,733) (42,539) Depreciation and amortization 1,294,000 1,394,000 Provision for losses on loans 383,044 748,776 Provision for losses on other real estate 198,579 470,259 Changes in assets and liabilities: Accrued interest receivable (212,538) 805,484 Other assets (473,115) 978,926 Accrued interest payable (34,907) (95,455) Other liabilities 535,645 226,542 -------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,985,122 6,927,500 -------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities and calls of held to maturity securities 10,233,356 19,745,000 Investment in held to maturity securities (55,343) Proceeds from maturities, sales and calls of available for sale securities 108,203,468 110,217,242 Investment in available for sale securities (182,411,069) (114,634,061) Investment in Federal Home Loan Bank stock (37,300) (42,100) Loans, net 24,599,979 20,077,086 Proceeds from sale of bank premises 479,673 153,120 Acquisition of premises and equipment (2,720,959) (585,197) Proceeds from sales of other real estate 547,665 597,723 Federal funds sold (3,450,000) Other assets 176,180 (5,268,871) -------------- --------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (40,929,007) $ 26,754,599 -------------- --------------- Page 8 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) For The Nine Months Ended September 30, 2003 2002 - ----------------------------------------------------- -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Demand and savings deposits, net increase $ 18,530,617 $ 24,725,131 Time deposits, net decrease (19,857,182) (37,839,990) Principal payments on notes (33,451) (32,468) Notes payable 72,799 Cash dividends (1,448,587) (1,346,508) Retirement of stock (345,741) (305,702) Federal funds purchased and securities sold under agreements to repurchase 28,417,507 (11,319,085) Borrowings from Federal Home Loan Bank 478,709 433,626 -------------- --------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 25,741,872 (25,612,197) -------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,202,013) 8,069,902 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,654,247 32,034,976 -------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,452,234 $ 40,104,878 ============== =============== 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 Nine Months Ended September 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 generally accepted accounting principles for complete financial statements. The statements include information required for interim financial statements. 2. The results of operations for the nine months ended September 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 5,564,641 and 5,607,913 for the nine months ended September 30, 2003 and 2002, respectively. 4. At September 30, 2003 and 2002, the total recorded investment in impaired loans amounted to $6,962,000 and $6,557,000. The average recorded investment in impaired loans amounted to approximately $6,947,000 and $6,273,000 at September 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 $6,962,000 at September 30, 2003. The allowance for losses related to these loans amounted to approximately $1,120,000 at September 30, 2003. Interest not accrued on these loans amounted to $219,000 and $168,000 for the nine months ended September 30, 2003 and 2002, respectively. 5. Transactions in the allowance for loan losses were as follows: For the Nine For the Year For the Nine Months Ended Ended Months Ended September 30, December 31, September 30, 2003 2002 2002 --------------------- ---------------------- ---------------------- Balance, beginning of period $ 6,696,911 $ 5,658,210 $ 5,658,210 Recoveries 507,596 675,491 523,055 Loans charged off (1,184,829) (2,064,790) (1,824,165) Provision for loan losses 383,044 2,428,000 748,776 --------------------- ---------------------- ---------------------- Balance, end of period $ 6,402,722 $ 6,696,911 $ 5,105,876 ===================== ====================== ====================== Page 10 of 20 6. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $4,636,000 and $7,808,000 for the nine months ended September 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 $1,832,000 and $1,410,000 for the nine months ended September 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 $960,000 for the nine months ended September 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 ($625,000) and $124,000 at September 30, 2003 and 2002, respectively. Page 11 of 20 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 September 30, 2003, September 30, 2002 and December 31, 2002, and the related condensed consolidated statements of income, shareholders' equity, and cash flows for the nine months ended September 30, 2003 and September 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. November 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 nine months ended September 30, 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 Net income for the nine months ended September 30, 2003 was $3,636,000 compared with $2,470,000 for the same period in 2002. Net interest income improved from $13,184,000 for the nine months ended September 30, 2002 to $14,317,000 for the nine months ended September 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 loan losses was $ 749,000 for the nine months ended September 30, 2002, as compared to $383,000 for the nine months ended September 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 nine months ended September 30, 2003 and 2002: For the nine months ended September 30, 2003 2002 --------------------------------------- -------- -------- Net income per share $ 0.65 $ 0.44 Book value per share $ 14.94 $ 14.63 Return on average total assets .85% .57% Return on average shareholders' equity 5.88% 4.07% Allowance for loan losses as a % of loans, net of unearned discount 2.24% 1.57% Page 13 of 20 FINANCIAL CONDITION HELD TO MATURITY SECURITIES Held to maturity securities decreased $11,235,000 at September 30, 2003, as compared with September 30, 2002, as a result of the management of the Company's liquidity position. Funds available from the maturity of these securities were generally invested in available for sale securities. Gross unrealized gains for held to maturity securities were $204,000 and $559,000 at September 30, 2003 and 2002, respectively. The following schedule reflects the mix of the held to maturity investment portfolio at September 30, 2003 and 2002: September 30, 2003 2002 - ------------------------- ------------------------ ------------------------- Amount % Amount % ----------- ---- ------------ ------- U. S. Treasury securities $ 999,645 14% $ 5,996,769 32% U. S. Government agencies 3,000,000 40% 8,001,423 43% States and political subdivisions 3,354,688 46% 4,591,113 25% ----------- ---- ------------ ------- Totals $ 7,354,333 100% $ 18,589,305 100% =========== ==== ============ ======= AVAILABLE FOR SALE SECURITIES Available for sale securities increased $75,961,000 at September 30, 2003, as compared with September 30, 2002, as the result of the management of the Company's liquidity position, as discussed above. Gross unrealized gains were $2,361,000 and $3,073,000 at September 30, 2003 and 2002, respectively, and gross unrealized losses were $1,189,000 and $7,000 at September 30, 2003 and 2002, respectively. The following schedule reflects the mix of available for sale securities at September 30, 2003 and 2002: September 30, 2003 2002 - --------------------------------- -------------------------- ------------------------- Amount % Amount % ------------- ---- ------------ ------- U. S. Treasury securities $ 55,514,592 25% $ 49,544,202 34% U. S. Government agencies 157,581,451 70% 91,264,968 62% States and political subdivisions 6,385,248 3% 2,451,317 1% Other securities 4,362,351 2% 4,622,379 3% ------------- ---- ------------ ------- Totals $ 223,843,642 100% $147,882,866 100% ============= ==== ============ ======= 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 $38,561,000 at September 30, 2003, as compared with September 30, 2002. This decrease is the result of the 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 presently invested primarily in available for sale securities. OTHER REAL ESTATE Other real estate decreased $203,000 at September 30, 2003 as compared with September 30, 2002, due to the sale of several parcels of commercial real estate during the last quarter of 2002 and the first three quarters of 2003. OTHER ASSETS Other assets increased $2,535,000 at September 30, 2003, as compared with September 30, 2002, primarily due to an increase in deferred income taxes of $1,100,000, which was the result of unrealized losses on available for sale securities. This increase in other assets is also due to the investment of $800,000 in bank owned life insurance to fund deferred compensation plans to executive officers and directors. DEPOSITS Total deposits decreased $12,581,000 at September 30, 2003, as compared with September 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. The last of these deposits matured during the third quarter of 2003. The Company currently does not plan to obtain further brokered deposits. ACCRUED INTEREST PAYABLE Accrued interest payable decreased $253,000 at September 30, 2003, as compared with September 30, 2002 as a result of the decline in interest rates paid on deposits. FEDERAL FUNDS PURCHASED Federal funds purchased increased $24,493,000 at September 30, 2003, as compared with September 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. OTHER LIABILITIES Other liabilities increased $707,000 at September 30, 2003, as compared with September 30, 2002, primarily as a result of an increase in liabilities related to deferred compensation benefits for a retired officer and current officers and directors of the bank subsidiary. Page 15 of 20 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 15.67% at September 30, 2003, as compared with 14.97% at September 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. 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) 2003 2002 - ----------------------------------- --------- ---------- Total interest income (1) $ 19,055 $ 21,033 Total interest expense 4,600 7,713 --------- ---------- Net interest earnings $ 14,455 $ 13,320 ========= ========== Net yield on interest earning assets 3.83% 3.44% ========= ========== (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 nine months ended September 30, 2003 and 2002. Page 16 of 20 Analysis of Changes in Interest Income and Interest Expense (In Thousands) For the Nine For the Nine Months Months Attributable To: Ended Ended ------------------------------------------ September September Increase Rate/ 30, 2003 30, 2002 (Decrease) Volume Rate Volume ------------ ------------ ------------------------------------------ INTEREST INCOME: (1) Loans (2) $ 13,119 $ 15,203 $ (2,084) $ (1,477) $ (672) $ 65 Federal funds sold 59 172 (113) (147) 228 (194) Held to maturity: Taxable securities 287 779 (492) (472) (50) 30 Non-taxable securities 226 293 (67) (85) 25 (7) Available for sale: Taxable securities 4,987 4,236 751 1,255 (389) (115) Non-taxable securities 183 107 76 214 (46) (92) Other securities 194 243 (49) (1) (48) ----------------------------------------------------------------------- Total $ 19,055 $ 21,033 $ (1,978) $ (713) $ (952) $ (313) ======================================================================= INTEREST EXPENSE: Savings and negotiable interest bearing deposits $ 1,180 $ 1,935 $ (755) $ (288) $ (549) $ 82 Time deposits 2,364 4,566 (2,202) (936) (1,592) 326 Borrowings from FHLB 321 276 45 138 (62) (31) Federal funds purchased and securities sold under agreements to repurchase 729 930 (201) 99 (271) (29) Mortgage indebtedness 6 6 ----------------------------------------------------------------------- Total $ 4,600 $ 7,713 $ (3,113) $ (987) $ (2,474) $ 348 ======================================================================= (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 using the latest available information. These analyses are utilized in the computation of the adequacy of the allowance for loan losses. Based on these analyses, the Company provided $383,000 and $749,000 during the nine months ended September 30, 2003 and 2002, respectively, for loan losses. 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 $418,000 for the nine months ended September 30, 2003, as compared with the nine months ended September 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 $524,000 for the nine months ended September 30, 2003, as compared with the nine months ended September 30, 2002, primarily as a result of the income realized in 2002 from proceeds from whole life insurance owned by the bank subsidiary. 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 September 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 September 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 In October 2003, a lawsuit was filed again the Company's bank subsidiary. This litigation, which specifies damages of $1,500,000 and punitive damages of $12,500,000, has been filed by an insurance company trying to reverse a settlement it voluntarily agreed to in 2000. The bank subsidiary intends to vigorously contest the allegations of the complaint. The Company replied to media inquiries about this matter in its statement dated October 16, 2003, which was filed as an exhibit to Form 8-K on October 17, 2003. 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 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 A Form 8-K was filed by the Company on October 17, 2003. 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: November 7, 2003 By: /s/ Chevis C. Swetman -------------------------------- Chevis C. Swetman Chairman, President and Chief Executive Officer Date: November 7, 2003 By: /s/ Lauri A. Wood ------------------------------- Lauri A. Wood Chief Financial Officer and Controller (principal financial and accounting officer) Page 20 of 20