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

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2004

Commission File Number 0-30050

PEOPLES FINANCIAL CORPORATION

(228) 435-5511

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 April 30, 2004, there were 15,000,000 shares of $1 par value common stock authorized, and 5,557,019 shares issued and outstanding.

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PART I
FINANCIAL INFORMATION
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)

See Independent Accountants’ Review Report and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)

See Independent Accountants’ Review Report and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)

See Independent Accountants’ Review Report and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

See Independent Accountants’ Review Report and Selected Notes to Condensed Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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 quarter ended March 31, 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 5,557,284 and 5,569,913 for the quarters ended March 31, 2004 and 2003, respectively.

3. At March 31, 2004 and 2003, the total recorded investment in impaired loans amounted to $7,241,000 and $8,200,000, respectively. The average recorded investment in impaired loans amounted to approximately $7,166,000 and $8,189,000 at March 31, 2004 and 2003, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $7,241,000 at March 31, 2004. The allowance for losses related to these loans amounted to approximately $1,110,000 at March 31, 2004. The amount of interest not accrued on these loans amounted to approximately $32,000 and $72,000 for the quarter ended March 31, 2004 and 2003, respectively. In compliance with a bankruptcy court order, interest in the amount of $50,000 has been received and recorded as interest income relating to one impaired loan, with an average balance of $5,696,000 for the quarter ended March 31, 2004.

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

5. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $1,179,000 and $1,604,000 for the quarters ended March 31, 2004 and 2003, respectively, for interest on deposits and borrowings. Income tax payments of $277,000 were made during the quarter ended March 31, 2003.

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Loans transferred to other real estate amounted to $60,000 and $750,000 for the quarters ended March 31, 2004 and 2003, respectively. The income tax effect on the accumulated other comprehensive income was $436,000 and ($106,000) at March 31, 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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Independent Accountants’ Review Report

Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi

We have reviewed the accompanying condensed consolidated balance sheets of Peoples Financial Corporation as of March 31, 2004, March 31, 2003 and December 31, 2003, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the three months ended March 31, 2004 and March 31, 2003. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with United States generally accepted accounting principles for interim financial statements.

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, 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.

/s/ Piltz, Williams, LaRosa & Co.

PILTZ, WILLIAMS, LAROSA & Co.

May 5, 2004
Biloxi, Mississippi

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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 quarters ended March 31, 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 quarter of 2004, net income was $1,072,000, as compared with $1,037,000 for the first quarter of 2003. The Company continues to focus on managing its interest margin in its trade area’s extremely competitive interest rate environment. With the stabilization of the local economy, which began in the fourth quarter of 2003, the Company has experienced a 2.50% growth in loan volume. As can been seen in the schedule on page 17, however, the yield earned on loans has decreased in the first quarter of 2004 due to this competition.

The following schedule compares financial highlights for the quarters ended March 31, 2004 and 2003:

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Financial Condition

Held to Maturity Securities
Held to maturity securities decreased $8,535,000 at March 31, 2004, compared with March 31, 2003, as a result of the management of the Company’s liquidity position. As funds were available from the maturity of these securities, they were generally invested in short term U. S. Government Agency securities, which have been classified as available for sale. Gross unrealized gains for held to maturity securities were $180,000 and $346,000 at March 31, 2004 and 2003, respectively. There were no gross unrealized losses for held to maturity securities at March 31, 2004 and 2003, respectively. The following schedule reflects the mix of the held to maturity investment portfolio at March 31, 2004 and 2003:

Available for Sale Securities
Available for sale securities increased $21,586,000 at March 31, 2004, compared with March 31, 2003, in the management of the Company’s liquidity position, as discussed above. Gross unrealized gains were $2,693,000 and $2,764,000 and gross unrealized losses were $392,000 and $57,000 at March 31, 2004 and 2003, respectively. The following schedule reflects the mix of available for sale securities at March 31, 2004 and 2003:

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Federal Funds Sold
Federal funds sold were $4,000,000 at March 31, 2004, as a direct result of the management of the bank subsidiary’s liquidity position.

Loans
Loans increased $7,326,000 at March 31, 2004, as compared with March 31, 2003. During the fourth quarter of 2003 and continuing into the first quarter 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 $506,000 at March 31, 2004, as compared with March 31, 2003, primarily due to sale of approximately $400,000 in ORE inventory during the second, third and fourth quarters of 2003.

Deposits
Total deposits decreased $12,736,000 at March 31, 2004, as compared with March 31, 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.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Federal funds purchased and securities sold under agreements to repurchase increased $8,584,000 at March 31, 2004, as compared with March 31, 2003, as the result of the management of the Company’s liquidity position and the reallocation of funds by certain customers between deposit products and non-deposit products.

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

Notes Payable
Notes payable decreased at March 31, 2004, as compared with March 31, 2003, as a result of the maturity and/or early payoff of Company debt.

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 March 31, 2004, as compared with 15.31% at March 31, 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.

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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

(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 quarters ended March 31, 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)

(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 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 $180,000 for loan losses during the first quarter 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.

Equipment Rentals, Depreciation and Maintenance
Equipment rentals, depreciation and maintenance decreased $104,000 for the first quarter of 2004 as compared with the first quarter of 2003. This decrease was primarily the result of a decrease in depreciation of $73,000 on computer software and hardware acquired in 1998 as a part of the Company’s conversion to the Jack Henry system.

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.

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.

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PART II
OTHER INFORMATION

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

(a) The Annual Meeting of Shareholders of the Company was held on April 14, 2004.

(b) The following five directors were elected at the meeting to hold office for a term of one year:

Of the 5,557,379 shares outstanding and eligible to vote on April 14, shares not voted amounted to 624,325.731 and shares voted to abstain amounted to 39,244.264.

Item 5 - Other Information

None.

Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

A Form 8-K was filed on January 12, 2004 and April 15, 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: May 13, 2004

Date: May 13, 2004

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