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PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2004 June (Form 10-Q)

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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, 2004

or
o 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 incorporation or organization)   (I.R.S. Employer 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 o

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 30, 2004, there were 15,000,000 shares of $1 par value common stock authorized, and 5,555,419 shares issued and outstanding.

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TABLE OF CONTENTS

PART I
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4: Controls and Procedures
PART II
Item 4 — Submission of Matters to a Vote of Security Holders
Item 5 — Other Information
Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
Consent of Certified Public Accountants
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to 18 U.S.C. ss. 1350
Certification Pursuant to 18 U.S.C. ss. 1350


Table of Contents

PART I

FINANCIAL INFORMATION
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
                         
June 30, December 31, and June 30,
  2004
  2003
  2003
Assets
                       
Cash and due from banks
  $ 37,883,278     $ 33,861,029     $ 42,351,377  
Held to maturity securities, market value of
$3,041,000 - June 30, 2004;
$4,527,000 - December 31, 2003;
$10,955,000 - June 30, 2003
    2,945,427       4,352,854       10,635,491  
Available for sale securities, at market value
    191,660,051       207,486,172       206,735,490  
Federal Home Loan Bank stock, at cost
    1,389,700       1,974,200       1,952,200  
Loans
    317,279,963       297,922,945       294,927,203  
Less: Allowance for loan losses
    6,644,725       6,398,694       6,446,375  
 
   
 
     
 
     
 
 
Loans, net
    310,635,238       291,524,251       288,480,828  
Bank premises and equipment, net of accumulated depreciation of $16,525,000 - June 30, 2004; $16,275,000 - December 31, 2003; and $15,602,000 - June 30, 2003
    16,241,484       17,952,504       18,121,353  
Other real estate
    484,701       1,383,451       1,569,772  
Accrued interest receivable
    2,657,775       3,096,002       3,149,089  
Other assets
    18,371,429       13,804,039       12,414,622  
 
   
 
     
 
     
 
 
Total assets
  $ 582,269,083     $ 575,434,502     $ 585,410,222  
 
   
 
     
 
     
 
 

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
                         
June 30, December 31, and June 30,
  2004
  2003
  2003
Liabilities & Shareholders’ Equity
                       
Liabilities:
                       
Deposits:
                       
Demand, non-interest bearing
  $ 92,250,934     $ 76,423,904     $ 83,347,873  
Savings and demand, interest bearing
    173,603,679       173,913,054       163,409,436  
Time, $100,000 or more
    67,003,724       58,182,870       73,145,277  
Other time deposits
    63,719,899       64,036,836       70,326,992  
 
   
 
     
 
     
 
 
Total deposits
    396,578,236       372,556,664       390,229,578  
Federal funds purchased and securities sold under agreements to repurchase
    88,406,754       95,039,261       87,676,188  
Borrowings from Federal Home Loan Bank
    7,081,466       17,069,848       16,719,145  
Notes payable
    7,901       110,235       287,271  
Other liabilities
    7,673,418       7,154,545       6,847,413  
 
   
 
     
 
     
 
 
Total liabilities
    499,747,775       491,930,553       501,759,595  
Shareholders’ Equity:
                       
Common Stock, $1 par value, 15,000,000 shares authorized, 5,556,419, 5,557,379 and 5,561,211 shares issued and outstanding at June 30, 2004, December 31, 2003 and June 30, 2003, respectively
    5,556,419       5,557,379       5,561,211  
Surplus
    65,780,254       65,780,254       65,780,254  
Undivided profits
    13,670,745       11,574,074       9,572,871  
Unearned compensation
            (94,899 )     (119,043 )
Accumulated other comprehensive income
    (2,486,110 )     687,141       2,855,334  
 
   
 
     
 
     
 
 
Total shareholders’ equity
    82,521,308       83,503,949       83,650,627  
 
   
 
     
 
     
 
 
Total liabilities and shareholders’ equity
  $ 582,269,083     $ 575,434,502     $ 585,410,222  
 
   
 
     
 
     
 
 

See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    For the Quarters Ended June 30,
  For the Six Months Ended June 30,
    2004
  2003
  2004
  2003
Interest income:
                               
Interest and fees on loans
  $ 4,109,323     $ 4,395,365     $ 8,163,696     $ 8,938,692  
Interest and dividends on investments:
                               
U. S. Treasury
    326,392       326,854       621,649       648,292  
U. S. Government agencies and corporations
    1,206,280       1,499,454       2,581,235       2,790,730  
States and political subdivisions
    110,311       90,738       215,950       177,472  
Other investments
    51,592       13,466       123,615       133,663  
Interest on federal funds sold
    6,764       6,302       20,927       53,789  
 
   
 
     
 
     
 
     
 
 
Total interest income
    5,810,662       6,332,179       11,727,072       12,742,638  
 
   
 
     
 
     
 
     
 
 
Interest expense:
                               
Time deposits of $100,000 or more
    195,349       370,051       362,959       772,942  
Other deposits
    643,154       889,233       1,303,289       1,829,795  
Mortgage indebtedness
            1,903               3,863  
Borrowings from Federal Home Loan Bank
    110,704       108,877       226,387       207,148  
Federal funds purchased and securities sold under agreements to repurchase
    246,464       253,691       481,645       495,039  
 
   
 
     
 
     
 
     
 
 
Total interest expense
    1,195,671       1,623,755       2,374,280       3,308,787  
 
   
 
     
 
     
 
     
 
 
Net interest income
    4,614,991       4,708,424       9,352,792       9,433,851  
Provision for losses on loans
    183,000       139,105       363,000       317,745  
 
   
 
     
 
     
 
     
 
 
Net interest income after provision for losses on loans
  $ 4,431,991     $ 4,569,319     $ 8,989,792     $ 9,116,106  
 
   
 
     
 
     
 
     
 
 

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
                                 
    For the Quarters Ended June 30,
  For the Six Months Ended June 30,
    2004
  2003
  2004
  2003
Other operating income:
                               
Trust department income and fees
  $ 394,078     $ 397,801     $ 750,180     $ 761,012  
Service charges on deposit accounts
    1,406,063       1,751,556       3,004,543       3,438,622  
Other service charges, commissions and fees
    78,323       68,401       145,277       133,918  
Gain on sale of bank premises
    1,270,697               1,270,697          
Other income
    232,077       268,930       558,574       598,164  
 
   
 
     
 
     
 
     
 
 
Total other operating income
    3,381,238       2,486,688       5,729,271       4,931,716  
 
   
 
     
 
     
 
     
 
 
Other operating expense:
                               
Salaries and employee benefits
    2,836,006       2,717,698       5,605,909       5,606,434  
Net occupancy
    363,811       326,875       682,184       643,815  
Equipment rentals, depreciation and maintenance
    581,781       723,199       1,253,095       1,498,916  
Other expense
    1,207,572       1,689,298       2,824,692       3,315,969  
 
   
 
     
 
     
 
     
 
 
Total other operating expense
    4,989,170       5,457,070       10,365,880       11,065,134  
 
   
 
     
 
     
 
     
 
 
Income before income taxes
    2,824,059       1,598,937       4,353,183       2,982,688  
Income taxes
    837,508       510,500       1,295,000       857,080  
 
   
 
     
 
     
 
     
 
 
Net income
  $ 1,986,551     $ 1,088,437     $ 3,058,183     $ 2,125,608  
 
   
 
     
 
     
 
     
 
 

See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
                                                                 
                                            Accumu-        
                                            lated Other        
    # of                           Unearned   Compre-        
    Common   Common           Undivided   Compen-   hensive   Comprehen-    
    Shares
  Stock
  Surplus
  Profits
  sation
  Income
  sive 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  
Reclassification adjustment for available for sale securities called or sold in the 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 ($ .14 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  
 
   
 
     
 
     
 
     
 
     
 
     
 
             
 
 

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)
                                                                 
                                            Accumu-        
                                            lated Other        
    # of                           Unearned   Compre-        
    Common   Common           Undivided   Compen-   hensive   Comprehen-    
    Shares
  Stock
  Surplus
  Profits
  sation
  Income
  sive Income
  Total
Balance, January 1, 2004
    5,557,379     $ 5,557,379     $ 65,780,254     $ 11,574,074     $ (94,899 )   $ 687,141             $ 83,503,949  
Comprehensive Loss:
                                                               
Net income
                            3,058,183                     $ 3,058,183       3,058,183  
Net unrealized loss on available for sale securities, net of tax
                                            (3,272,335 )     (3,272,335 )     (3,272,335 )
Reclassification adjustment for available for sale securities called or sold in current year, net of tax
                                            99,084       99,084       99,084  
                                                     
         
Total comprehensive loss
                                                  $ (115,068 )        
                                                     
         
Allocation of ESOP shares
                                    94,899                       94,899  
Retirement of common stock
    (960 )     (960 )             (16,921 )                             (17,881 )
Dividend declared ($ .17 per share)
                            (944,591 )                             (944,591 )
 
   
 
     
 
     
 
     
 
     
 
     
 
             
 
 
Balance, June 30, 2004
    5,556,419     $ 5,556,419     $ 65,780,254     $ 13,670,745     $       $ (2,486,110 )           $ 82,521,308  
 
   
 
     
 
     
 
     
 
     
 
     
 
             
 
 

     See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
For the Six Months Ended June 30,
  2004
  2003
Cash flows from operating activities:
               
Net income
  $ 3,058,183     $ 2,125,608  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Gain on sale of bank premises
    (1,270,697 )        
Gain on sales of other real estate
    (99,000 )     (3,500 )
Depreciation
    761,000       931,000  
Provision for losses on loans
    363,000       317,745  
Provision for losses on other real estate
    175,000       128,448  
Changes in assets and liabilities:
               
Accrued interest receivable
    438,227       (290,899 )
Other assets
    (2,911,468 )     297,256  
Other liabilities
    616,871       240,737  
 
   
 
     
 
 
Net cash provided by operating activities
    1,131,116       3,746,395  
 
   
 
     
 
 
Cash flows from investing activities:
               
Proceeds from maturities and calls of held to maturity securities
    1,407,427       6,952,199  
Proceeds from maturities, sales and calls of available for sale securities
    84,040,393       80,713,275  
Investment in available for sale securities
    (73,005,823 )     (134,672,416 )
Investment in Federal Home Loan Bank
    (16,500 )     (25,200 )
Redemption of Federal Home Loan Bank stock
    601,000          
Proceeds from sales of other real estate
    935,000       251,000  
Loans, net (increase) decrease
    (19,586,237 )     16,050,779  
Acquisition of premises and equipment
    (616,783 )     (1,992,953 )
Proceeds from sale of bank premises
    2,837,500          
Other assets
    (246,604 )     (218,382 )
 
   
 
     
 
 
Net cash used in investing activities
  $ (3,650,627 )   $ (32,941,698 )
 
   
 
     
 
 

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
                 
For the Six Months Ended June 30
  2004
  2003
Cash flows from financing activities:
               
Demand and savings deposits, net increase
  $ 15,517,655     $ 6,104,061  
Time deposits, net increase (decrease)
    8,503,917       (4,048,295 )
Principal payments on notes
    (7,435 )     (23,100 )
Borrowings from Federal Home Loan Bank
    20,101,113       30,447,207  
Repayments to Federal Home Loan Bank
    (30,089,495 )     (20,041,139 )
Retirement of common stock
    (17,881 )     (306,769 )
Cash dividends
    (833,607 )     (670,017 )
Federal funds purchased and securities sold under agreements to repurchase, net decrease
    (6,632,507 )     20,430,485  
 
   
 
     
 
 
Net cash provided by financing activities
    6,541,760       31,892,433  
 
   
 
     
 
 
Net increase in cash and cash equivalents
    4,022,249       2,697,130  
Cash and cash equivalents, beginning of period
    33,861,029       39,654,247  
 
   
 
     
 
 
Cash and cash equivalents, end of period
  $ 37,883,278     $ 42,351,377  
 
   
 
     
 
 

See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2004 and 2003

1. The accompanying unaudited condensed consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 2003 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 six months ended June 30, 2004, 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 5,556,954 and 5,566,880 for the six months ended June 30, 2004 and 2003, respectively.

3. At June 30, 2004 and 2003, the total recorded investment in impaired loans amounted to $8,595,000 and $6,705,000, respectively. The average recorded investment in impaired loans amounted to approximately $6,275,000 and $6,695,000 at June 30, 2004 and 2003, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $8,595,000 at June 30, 2004. The allowance for losses related to these loans amounted to approximately $1,311,000 at June 30, 2004. The amount of interest not accrued on these loans amounted to approximately $19,000 and $133,000 for the six months ended June 30, 2004 and 2003, respectively. In compliance with a bankruptcy court order, interest in the amount of $100,000 has been received and recorded as interest income relating to one impaired loan, with an average balance of $5,722,000, for the six months ended June 30, 2004.

4. Transactions in the allowance for loan losses were as follows:

                         
    For the Six   For the Year   For the Six
    Months Ended   Ended December   Months Ended
    June 30, 2004
  31, 2003
  June 30, 2003
Balance, beginning of period
  $ 6,398,694     $ 6,696,911     $ 6,696,911  
Provision for loan losses
    363,000       447,000       317,745  
Recoveries
    368,489       599,783       346,195  
Loans charged off
    (485,458 )     (1,345,000 )     (914,476 )
 
   
 
     
 
     
 
 
Balance, end of period
  $ 6,644,725     $ 6,398,694     $ 6,446,375  
 
   
 
     
 
     
 
 

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5. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $2,377,000 and $3,345,000 for the six months ended June 30, 2004 and 2003, respectively, and $5,938,000 for the twelve months ended December 31, 2003, for interest on deposits and borrowings. Income tax payments of $1,065,000 and $1,117,000 were made during the six months ended June 30, 2004 and 2003, respectively, and $2,537,000 for the twelve months ended December 31, 2003. Loans transferred to other real estate amounted to $112,000 and $750,000 for the six months ended June 30, 2004 and 2003, respectively, and $978,000 for the twelve months ended December 31, 2003. The income tax effect on the accumulated other comprehensive income was $(1,635,000) and $440,000 at June 30, 2004 and 2003, 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.

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Report of Independent Registered Public Accounting Firm

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, 2004, June 30, 2003 and December 31, 2003, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the six months ended June 30, 2004 and June 30, 2003. These interim financial statements are the responsibility of the company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 United States generally accepted accounting principles for interim financial statements.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Peoples Financial Corporation as of December 31, 2003, 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 21, 2004, 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, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Piltz, Williams, LaRosa & Company

Biloxi, Mississippi

July 26, 2004

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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, 2004 and 2003. 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 six months of 2004, net income was $3,058,000, as compared with $2,126,000 for the first six months of 2003. The results for 2004 include a gain of $838,000, net of taxes, from the sale of two parcels of bank premises. Managing the interest margin in its trade area’s extremely competitive environment continues to be a priority for the Company. A strong increase in the loan volume of 7.5% at June 30, 2004, as compared with June 30, 2003, is the result of the improvement of the local economy.

The following schedule compares financial highlights for the six months ended June 30, 2004 and 2003:

                 
For the six months ended June 30,
  2004
  2003
Net income per share
  $ 0.55     $ 0.38  
Book value per share
  $ 14.85     $ 15.04  
Return on average total assets
    1.04 %     .74 %
Return on average shareholders’ equity
    7.37 %     5.14 %
Allowance for loan losses as a % of loans, net of unearned discount
    2.09 %     2.19 %

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Financial Condition

Held to Maturity Securities

Held to maturity securities decreased $7,690,000 at June 30, 2004, compared with June 30, 2003, as a result of the management of the Company’s liquidity position. Funds available from the maturity of these securities were generally used to fund the increase in the loan portfolio . Gross unrealized gains for held to maturity securities were $98,000 and $320,000 at June 30, 2004 and 2003, respectively. Gross unrealized losses were $2,000 at June 30, 2004, and there were no gross unrealized losses for held to maturity securities at June 30, 2003. The following schedule reflects the mix of the held to maturity investment portfolio at June 30, 2004 and 2003:

                                 
June 30,
  2004
  2003
    Amount
  %
  Amount
  %
U. S. Treasury
  $               $ 3,999,265       38 %
U. S. Government agencies
                    3,000,000       28 %
States and political subdivisions
    2,945,427       100 %     3,636,226       34 %
 
   
 
     
 
     
 
     
 
 
Totals
  $ 2,945,427       100 %   $ 10,635,491       100 %
 
   
 
     
 
     
 
     
 
 

Available for Sale Securities

     Available for sale securities decreased $15,075,000 at June 30, 2004, compared with June 30, 2003, in the management of the Company’s liquidity position, as discussed above. Gross unrealized gains were $931,000 and $4,392,000 and gross unrealized losses were $4,702,000 and $80,000 at June 30, 2004 and 2003, respectively. The following schedule reflects the mix of available for sale securities at June 30, 2004 and 2003:

                                 
June 30,
  2004
  2003
    Amount
  %
  Amount
  %
U. S. Treasury
  $ 61,754,516       32 %   $ 47,979,548       23 %
U. S. Government agencies
    117,584,871       62 %     148,685,216       72 %
States and political subdivisions
    8,372,305       4 %     5,612,038       3 %
Other securities
    3,948,359       2 %     4,458,688       2 %
 
   
 
     
 
     
 
     
 
 
Totals
  $ 191,660,051       100 %   $ 206,735,490       100 %
 
   
 
     
 
     
 
     
 
 

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Loans

Loans increased $22,353,000 at June 30, 2004, as compared with June 30, 2003. During the fourth quarter of 2003 and continuing into the first half of 2004, the local economy has stabilized which has resulted in increased loan demand. The Company expects that this demand will continue in the remaining quarters of 2004.

Other Real Estate

Other real estate decreased $1,085,000 at June 30, 2004, as compared with June 30, 2003, primarily due to sales of ORE inventory during the twelve months ended June 30, 2004.

Other Assets

Other assets increased $5,957,000 at June 30, 2004, as compared with June 30, 2003, due to an increase in deferred taxes of $2,700,000 from the unrealized loss on available for sale securities and a receivable of $2,800,000 relating to the sale of bank premises.

Deposits

Total deposits increased $6,349,000 at June 30, 2004, as compared with June 30, 2003. 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 in 2000. At June 30, 2003, brokered deposits amounted to $5,000,000. These deposits matured on July 18, 2003. Since that time, the Company has not obtained any further brokered deposits, and does not have any current plans to do so.

Other Liabilities

Other liabilities increased $826,000 at June 30, 2004, as compared with June 30, 2003. This increase is primarily due to the impact of increasing health care costs on the liability for post-retirement health benefits.

Borrowings from Federal Home Loan Bank

The Company acquired funds from the Federal Home Loan Bank in the management of its liquidity position.

Notes Payable

Notes payable decreased at June 30, 2004, as compared with June 30, 2003, as a result of the maturity and/or early payoff of Company debt.

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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 15.23% at June 30, 2004, as compared with 15.69% at June 30, 2003. 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

                 
Six Months Ended June 30, (In        
thousands, except percentages)
  2004
  2003
Total interest income (1)
  $ 11,839     $ 12,833  
Total interest expense
    2,374       3,309  
 
   
 
     
 
 
Net interest earnings
  $ 9,465     $ 9,524  
 
   
 
     
 
 
Net yield on interest earning assets
    3.68 %     3.78 %
 
   
 
     
 
 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2004 and 2003.

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, 2004 and 2003. Changes in interest income are generally attributable to changes in interest rates related to interest-earning assets, particularly loans. Changes in interest expense, while impacted by changes in volume related to interest-bearing liabilities, particularly brokered time deposits, were heavily impacted by the decrease in the cost of funds during these time periods.

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Analysis of Changes in Interest Income and Interest Expense
(In Thousands)

                                                 
                    Attributable To:
   
    For the Six   For the Six                        
    Months   Months                        
    Ended   Ended                        
    June 30,   June 30,   Increase                   Rate/
    2004
  2003
  (Decrease)
  Volume
  Rate
  Volume
INTEREST INCOME: (1)
                                               
Loans (2) (3)
  $ 8,164     $ 8,939     $ (775 )   $ 152     $ (912 )   $ (15 )
Federal funds sold
    21       54       (33 )     (37 )     14       (10 )
Held to maturity:
                                               
Taxable
    19       222       (203 )     (205 )     27       (25 )
Non-taxable
    122       156       (34 )     (30 )     (5 )     1  
Available for sale:
                                               
Taxable
    3,184       3,216       (32 )     265       (274 )     (23 )
Non-taxable
    205       112       93       82       6       5  
Other
    124       134       (10 )     (11 )     1          
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
  $ 11,839     $ 12,833     $ (994 )   $ 216     $ (1,143 )   $ (67 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
INTEREST EXPENSE:
                                               
Savings and demand, interest bearing
  $ 663     $ 864     $ (201 )   $ 548     $ (458 )   $ (291 )
Time deposits
    1,003       1,739       (736 )     (221 )     (590 )     75  
Federal funds purchased and securities sold under agreements to repurchase
    482       495       (13 )     51       (58 )     (6 )
Borrowings from FHLB
    226       207       19       30       (9 )     (2 )
Other borrowed funds
            4       (4 )     (4 )                
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
  $ 2,374     $ 3,309     $ (935 )   $ 404     $ (1,115 )   $ (224 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 

(1)   All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2004 and 2003.
 
(2)   Loan fees are included in these figures.
 
(3)   Includes nonaccrual loans.

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Provision for Loan Losses

Management continuously monitors the Company’s relationships with its loan customers, especially those in concentrated industries such as 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 $363,000 for loan losses during the first six months of 2004, primarily due to the increase in loans during the same period. The Company expects to provide for its loan loss provision on a monthly basis throughout the remaining quarters of 2004 at a similar level, as deemed necessary, based on the analysis.

Service Charges on Deposit Accounts

Service charges on deposit accounts decreased $434,000 for the six months ended June 30, 2004, as compared with the six months ended June 30, 2003, primarily due to the decrease in fee income from off-site ATMs no longer under contract by the Company.

Gain on Sale of Bank Premises

The Company realized a gain of $1,271,000 for the six months of 2004 from the sale of bank premises.

Equipment Rentals, Depreciation and Maintenance

Equipment rentals, depreciation and maintenance decreased $246,000 for the first six months of 2004 as compared with the first six months of 2003. This decrease was primarily the result of a decrease in depreciation on computer software and hardware acquired in 1998 as a part of the Company’s conversion to the Jack Henry system and the decrease in depreciation due to the sale of bank premises in 2004.

Other Expense

Other expense decreased $491,000 for the first six months of 2004 as compared with the first six months of 2003 as a result of a decrease in expense for off-site ATMs no longer under contract by the Company.

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 2004, as necessary.

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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.

PART II

OTHER INFORMATION

Item 4 — Submission of Matters to a Vote of Security Holders

None.

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

A Form 8-K was filed on April 15, 2004 and July 7, 2004.

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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 9, 2004
 
By:
  /s/ Chevis C. Swetman
 
 
  Chevis C. Swetman
Chairman, President and Chief Executive Officer
 
Date:
  August 9, 2004
 
By:
  /s/ Lauri A. Wood
 
 
  Lauri A. Wood
 
Chief Financial Officer and Controller
(principal financial and accounting officer)

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