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

e10vq
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

         
[x]
  QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE SECURITIES
  EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

         
 
 
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 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 [  ]

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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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 of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer
Certification of Chief Financial Officer


Table of Contents

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

                         
March 31, December 31, and March 31,
  2004
  2003
  2003
Assets
                       
Cash and due from banks
  $ 38,078,406     $ 33,861,029     $ 60,539,875  
Held to maturity securities, market value of
$4,432,000 - March 31, 2004;
$4,527,000 - December 31, 2003;
$13,132,000 - March 31, 2003
    4,251,461       4,352,854       12,786,448  
Available for sale securities, at market value
    212,972,197       207,486,172       191,386,475  
Federal Home Loan Bank stock, at cost
    1,680,000       1,974,200       1,940,300  
Federal funds sold
    4,000,000               1,600,000  
Loans
    305,481,911       297,922,945       298,156,093  
Less: Allowance for loan losses
    6,434,980       6,398,694       6,343,099  
 
   
 
     
 
     
 
 
Loans, net
    299,046,931       291,524,251       291,812,994  
Bank premises and equipment, net of accumulated depreciation of $16,690,000 - March 31, 2004; $16,275,000 - December 31, 2003; and $15,446,000 - March 31, 2003
    17,779,350       17,952,504       17,863,459  
Other real estate
    1,215,451       1,383,451       1,721,780  
Accrued interest receivable
    2,914,868       3,096,002       3,039,082  
Other assets
    13,651,377       13,804,039       12,894,073  
 
   
 
     
 
     
 
 
Total assets
  $ 595,590,041     $ 575,434,502     $ 595,584,486  
 
   
 
     
 
     
 
 

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

                         
March 31, December 31, and March 31,
  2004
  2003
  2003
Liabilities & Shareholders’ Equity
                       
Liabilities:
                       
Deposits:
                       
Demand, non-interest bearing
  $ 85,639,210     $ 76,423,904     $ 87,126,693  
Savings and demand, interest bearing
    189,843,958       173,913,054       184,214,635  
Time, $100,000 or more
    62,884,594       58,182,870       71,960,009  
Other time deposits
    64,513,669       64,036,836       72,316,265  
 
   
 
     
 
     
 
 
Total deposits
    402,881,431       372,556,664       415,617,602  
Federal funds purchased and securities sold under agreements to repurchase
    93,293,362       95,039,261       84,709,032  
Borrowings from Federal Home Loan Bank
    7,084,162       17,069,848       6,332,874  
Notes payable
    11,618       110,235       310,850  
Other liabilities
    6,809,128       7,154,545       6,257,183  
 
   
 
     
 
     
 
 
Total liabilities
    510,079,701       491,930,553       513,227,541  
Shareholders’ Equity:
                       
Common Stock, $1 par value, 15,000,000 shares authorized, 5,557,019, 5,557,379 and 5,567,415 shares issued and outstanding at March 31, 2004, December 31, 2003 and March 31, 2003, respectively
    5,557,019       5,557,379       5,567,415  
Surplus
    65,780,254       65,780,254       65,780,254  
Undivided profits
    12,639,347       11,574,074       9,346,122  
Unearned compensation
            (94,899 )     (131,043 )
Accumulated other comprehensive income
    1,533,720       687,141       1,794,197  
 
   
 
     
 
     
 
 
Total shareholders’ equity
    85,510,340       83,503,949       82,356,945  
 
   
 
     
 
     
 
 
Total liabilities and shareholders’ equity
  $ 595,590,041     $ 575,434,502     $ 595,584,486  
 
   
 
     
 
     
 
 

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)

                 
For the Quarters Ended March 31,
  2004
  2003
Interest income:
               
Interest and fees on loans
  $ 4,054,373     $ 4,543,327  
Interest and dividends on investments:
               
U. S. Treasury
    295,257       321,438  
U. S. Government agencies and corporations
    1,374,955       1,291,276  
States and political subdivisions
    105,639       86,734  
Other investments
    72,023       120,197  
Interest on federal funds sold
    14,163       47,487  
 
   
 
     
 
 
Total interest income
    5,916,410       6,410,459  
 
   
 
     
 
 
Interest expense:
               
Time deposits of $100,000 or more
    167,610       402,891  
Other deposits
    660,135       940,562  
Borrowings from Federal Home Loan Bank
    115,683       98,271  
Mortgage indebtedness
            1,960  
Federal funds purchased and securities sold under agreements to repurchase
    235,181       241,348  
 
   
 
     
 
 
Total interest expense
    1,178,609       1,685,032  
 
   
 
     
 
 
Net interest income
    4,737,801       4,725,427  
Provision for losses on loans
    180,000       178,640  
 
   
 
     
 
 
Net interest income after provision for losses on loans
  $ 4,557,801     $ 4,546,787  
 
   
 
     
 
 

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

                 
For the Quarters Ended March 31,
  2004
  2003
Other operating income:
               
Trust department income and fees
  $ 356,102     $ 363,211  
Service charges on deposit accounts
    1,598,480       1,687,066  
Other service charges, commissions and fees
    66,954       65,517  
Other income
    326,497       329,234  
 
   
 
     
 
 
Total other operating income
    2,348,033       2,445,028  
 
   
 
     
 
 
Other operating expense:
               
Salaries and employee benefits
    2,769,903       2,888,736  
Net occupancy
    318,373       316,940  
Equipment rentals, depreciation and maintenance
    671,314       775,717  
Other expense
    1,617,120       1,626,671  
 
   
 
     
 
 
Total other operating expense
    5,376,710       5,608,064  
 
   
 
     
 
 
Income before income taxes
    1,529,124       1,383,751  
Income taxes
    457,492       346,580  
 
   
 
     
 
 
Net income
  $ 1,071,632     $ 1,037,171  
 
   
 
     
 
 

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)

                                                                 
    # of                                   Accumulated Other        
    Common                   Undivided   Unearned   Comprehensive   Comprehensive    
    Shares
  Common Stock
  Surplus
  Profits
  Compensation
  Income
  Income
  Total
Balance, January 1, 2003
    5,583,472     $ 5,583,472     $ 65,780,254     $ 8,510,341     $ (143,043 )   $ 2,000,582             $ 81,731,606  
Comprehensive Income:
                                                               
Net income
                            1,037,171                     $ 1,037,171       1,037,171  
Net unrealized loss on available for sale securities, net of tax
                                            (174,835 )     (174,835 )     (174,835 )
Reclassification adjustment for available for sale securities called or sold in the current year, net of tax
                                            (31,550 )     (31,550 )     (31,550 )
 
                                                   
 
         
Total comprehensive income
                                                  $ 830,786          
 
                                                   
 
         
Issuance of stock for stock incentive plan
                                    12,000                       12,000  
Retirement of common stock
    (16,057 )     (16,057 )             (201,390 )                             (217,447 )
 
   
 
     
 
     
 
     
 
     
 
     
 
             
 
 
Balance, March 31, 2003
    5,567,415     $ 5,567,415     $ 65,780,254     $ 9,346,122     $ (131,043 )   $ 1,794,197             $ 82,356,945  
 
   
 
     
 
     
 
     
 
     
 
     
 
             
 
 

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

                                                                 
    # of                                   Accumulated Other        
    Common                   Undivided   Unearned   Comprehensive   Comprehensive    
    Shares
  Common Stock
  Surplus
  Profits
  Compensation
  Income
  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 Income:
                                                               
Net income
                            1,071,632                     $ 1,071,632       1,071,632  
Net unrealized gain on available for sale securities, net of tax
                                            872,075       872,075       872,075  
Reclassification adjustment for available for sale securities called or sold in current year, net of tax
                                            (25,496 )     (25,496 )     (25,496 )
 
                                                   
 
         
Total comprehensive income
                                                  $ 1,918,211          
 
                                                   
 
         
Allocation of ESOP shares
                                    94,899                       94,899  
Retirement of common stock
    (360 )     (360 )             (6,359 )                             (6,719 )
 
   
 
     
 
     
 
     
 
     
 
     
 
             
 
 
Balance, March 31, 2004
    5,557,019     $ 5,557,019     $ 65,780,254     $ 12,639,347     $       $ 1,533,720             $ 85,510,340  
 
   
 
     
 
     
 
     
 
     
 
     
 
             
 
 

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 CASH FLOWS
(Unaudited)
                 
For the Quarters Ended March 31,
  2004
  2003
Cash flows from operating activities:
               
Net income
  $ 1,071,632     $ 1,037,171  
Adjustments to reconcile net income to net cash provided by operating activities:
               
(Gain) loss on sales of other real estate
    10,000       (24,500 )
Depreciation
    413,000       486,000  
Provision for losses on loans
    180,000       178,640  
Provision for losses on other real estate
    168,000       73,440  
Changes in assets and liabilities:
               
Accrued interest receivable
    181,134       (180,892 )
Other assets
    (110,412 )     173,222  
Other liabilities
    488,190       426,576  
 
   
 
     
 
 
Net cash provided by operating activities
    2,401,544       2,169,657  
 
   
 
     
 
 
Cash flows from investing activities:
               
Proceeds from maturities and calls of held to maturity securities
    101,393       4,801,242  
Proceeds from maturities, sales and calls of available for sale securities
    45,867,994       35,552,547  
Investment in available for sale securities
    (50,073,040 )     (75,768,509 )
Investment in Federal Home Loan Bank
            (13,300 )
Redemption of Federal Home Loan Bank stock
    294,200          
Proceeds from sales of other real estate
    50,000       175,000  
Loans, net (increase) decrease
    (7,762,680 )     12,857,718  
Acquisition of premises and equipment
    (239,846 )     (1,290,059 )
Federal funds sold
    (4,000,000 )     (1,600,000 )
Other assets
    (171,326 )     (26,599 )
 
   
 
     
 
 
Net cash used in investing activities
  $ (15,933,305 )   $ (25,311,960 )
 
   
 
     
 
 

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

                 
For the Quarters Ended March 31,
  2004
  2003
Cash flows from financing activities:
               
Demand and savings deposits, net increase
  $ 25,146,210     $ 30,688,080  
Time deposits, net increase (decrease)
    5,178,557       (3,244,290 )
Principal payments on notes
    (3,718 )     (11,521 )
Borrowings from Federal Home Loan Bank
    15,071,113       19,797  
Repayments to Federal Home Loan Bank
    (25,056,799 )        
Retirement of common stock
    (6,719 )     (217,447 )
Cash dividends
    (833,607 )     (670,017 )
Federal funds purchased and securities sold under agreements to repurchase, net decrease
    (1,745,899 )     17,463,329  
 
   
 
     
 
 
Net cash provided by financing activities
    17,749,138       44,027,931  
 
   
 
     
 
 
Net increase in cash and cash equivalents
    4,217,377       20,885,628  
Cash and cash equivalents, beginning of period
    33,861,029       39,654,247  
 
   
 
     
 
 
Cash and cash equivalents, end of period
  $ 38,078,406     $ 60,539,875  
 
   
 
     
 
 

See Independent Accountants’ Review Report 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 Quarters Ended March 31, 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 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:

                         
    For the Quarter           For the Quarter
    Ended March 31,   For the Year Ended   Ended March 31,
    2004
  December 31, 2003
  2003
Balance, beginning of period
  $ 6,398,694     $ 6,696,911     $ 6,696,911  
Provision for loan losses
    180,000       447,000       178,640  
Recoveries
    71,312       599,783       181,786  
Loans charged off
    (215,026 )     (1,345,000 )     (714,238 )
 
   
 
     
 
     
 
 
Balance, end of period
  $ 6,434,980     $ 6,398,694     $ 6,343,099  
 
   
 
     
 
     
 
 

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:

                 
For the quarters ended March 31,
  2004
  2003
Net income per share
  $ 0.19     $ 0.19  
Book value per share
  $ 15.39     $ 14.79  
Return on average total assets
    .73 %     .72 %
Return on average shareholders’ equity
    5.07 %     5.06 %
Allowance for loan losses as a % of loans, net of unearned discount
    2.11 %     2.13 %

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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:

                                 
March 31,
  2004
  2003
    Amount
  %
  Amount
  %
U. S. Treasury
  $ 999,944       24 %   $ 3,998,600       31 %
U. S. Government agencies
                    5,000,000       39 %
States and political subdivisions
    3,251,517       76 %     3,787,848       30 %
 
   
 
     
 
     
 
     
 
 
Totals
  $ 4,251,461       100 %   $ 12,786,448       100 %
 
   
 
     
 
     
 
     
 
 

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:

                                 
March 31,
  2004
  2003
    Amount
  %
  Amount
  %
U. S. Treasury
  $ 67,534,112       32 %   $ 55,590,905       29 %
U. S. Government agencies
    133,181,953       63 %     126,527,811       67 %
States and political subdivisions
    7,888,920       3 %     4,685,087       2 %
Other securities
    4,367,212       2 %     4,582,672       2 %
 
   
 
     
 
     
 
     
 
 
Totals
  $ 212,972,197       100 %   $ 191,386,475       100 %
 
   
 
     
 
     
 
     
 
 

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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

                 
Quarters Ended March 31, (In        
thousands, except percentages)
  2004
  2003
Total interest income (1)
  $ 5,973     $ 6,454  
Total interest expense
    1,179       1,685  
 
   
 
     
 
 
Net interest earnings
  $ 4,794     $ 4,769  
 
   
 
     
 
 
Net yield on interest earning assets
    3.76 %     3.86 %
 
   
 
     
 
 

(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)

                                                 
                            Attributable To:
    For the Quarter   For the Quarter                        
    Ended March 31,   Ended March 31,   Increase                   Rate/
    2004
  2003
  (Decrease)
  Volume
  Rate
  Volume
INTEREST INCOME: (1)
                                               
Loans (2) (3)
  $ 4,054     $ 4,543     $ (489 )   $ (68 )   $ (428 )   $ 7  
Federal funds sold
    14       47       (33 )     (33 )     (1 )     1  
Held to maturity:
                                               
Taxable
    13       234       (221 )     (214 )     (81 )     74  
Non-taxable
    66       79       (13 )     (14 )     1          
Available for sale:
                                               
Taxable
    1,657       1,379       278       294       (13 )     (3 )
Non-taxable
    97       52       45       40       3       2  
Other
    72       120       (48 )     (7 )     (43 )     2  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
  $ 5,973     $ 6,454     $ (481 )   $ (2 )   $ (562 )   $ 83  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
INTEREST EXPENSE:
                                               
Savings and demand, interest bearing
  $ 339     $ 440     $ (101 )   $ (22 )   $ (83 )   $ 4  
Time deposits
    489       904       (415 )     (333 )     (130 )     48  
Federal funds purchased and securities sold under agreements to repurchase
    235       241       (6 )     32       (33 )     (5 )
Borrowings from FHLB
    116       98       18       76       (32 )     (26 )
Mortgage indebtedness
            2       (2 )     (1 )     (1 )        
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total
  $ 1,179     $ 1,685     $ (506 )   $ (248 )   $ (279 )   $ 21  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

(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:

                 
    Approve
  Disapprove
Drew Allen
    4,843,076.074       3,500.931  
Rex E. Kelly
    4,905,476.074       3,500.931  
Dan Magruder
    4,905,476.074       3,500.931  
Lyle M. Page
    4,892,036.074       3,500.931  
Chevis C. Swetman
    4,905,476.074       3,500.931  

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

     
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 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

         
     
  By:   /s/ Chevis C. Swetman    
    Chevis C. Swetman   
    Chairman, President and Chief Executive Officer   
 

Date: May 13, 2004

         
     
  By:   /s/ Lauri A. Wood    
    Lauri A. Wood   
    Chief Financial Officer and Controller
(principal financial and accounting officer) 
 

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