PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2005 June (Form 10-Q)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

     For the quarterly period ended   June 30, 2005

or

      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 þ                                                             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 29, 2005, there were 15,000,000 shares of $1 par value common stock authorized, and 5,549,308 shares issued and outstanding.

 

 

PART I

FINANCIAL INFORMATION

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30, December 31, and June 30,		2005				2004				2004
Assets
Cash and due from banks		$	49,054,842			$	32,724,625			$	37,883,278
Held to maturity securities, market value of $16,168,000 - June 30, 2005; $6,698,000 - December 31, 2004; $3,041,000 - June 30, 2004			16,040,105				6,587,375				2,945,427
Available for sale securities, at market value			219,299,017				173,030,808				191,660,051
Federal Home Loan Bank stock, at cost			1,420,700				1,401,900				1,389,700
Loans			347,500,920				334,193,124				318,216,752
Less: Allowance for loan losses			5,935,578				6,569,614				6,644,725
Loans, net			341,565,342				327,623,510				311,572,027
Bank premises and equipment, net of accumulated depreciation of $17,958,000 - June 30, 2005; $17,174,000 - December 31, 2004; and $16,525,000 - June 30, 2004			17,815,976				18,018,504				16,241,484
Other real estate			32,957				168,091				484,701
Accrued interest receivable			3,282,548				2,745,235				2,657,775
Other assets			16,444,086				15,141,101				18,371,429
Total assets		$	664,955,573			$	577,441,149			$	583,205,872

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)

June 30, December 31, and June 30,		2005				2004				2004
Liabilities & Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing		$	109,450,024			$	89,529,270			$	93,123,823
Savings and demand, interest bearing			198,019,041				180,464,256				173,667,579
Time, $100,000 or more			58,050,425				51,948,077				67,003,724
Other time deposits			63,470,625				67,249,927				63,719,899
Total deposits			428,990,115				389,191,530				397,515,025
Federal funds purchased and securities sold under agreements to repurchase			130,999,465				87,277,125				88,406,754
Borrowings from Federal Home Loan Bank			7,305,600				7,202,970				7,081,466
Notes payable							1,239				7,901
Other liabilities			8,281,500				7,966,852				7,673,418
Total liabilities			575,576,680				491,639,716				500,684,564
Shareholders’ Equity:
Common Stock, $1 par value, 15,000,000 shares authorized, 5,549,688, 5,555,419 and 5,556,419 shares issued and outstanding at June 30, 2005, December 31, 2004 and June 30, 2004, respectively			5,549,688				5,555,419				5,556,419
Surplus			65,780,254				65,780,254				65,780,254
Undivided profits			19,299,490				15,391,524				13,670,745
Accumulated other comprehensive income			(1,250,539	)			(925,764	)			(2,486,110	)
Total shareholders’ equity			89,378,893				85,801,433				82,521,308
Total liabilities and shareholders’ equity		$	664,955,573			$	577,441,149			$	583,205,872

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

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		For the Quarters Ended June 30,								For the Six Months Ended June 30,
		2005				2004				2005				2004
Interest income:
Interest and fees on loans		$	6,069,161			$	4,109,323			$	11,080,841			$	8,163,696
Interest and dividends on investments:
U. S. Treasury			638,668				326,392				1,053,667				621,649
U. S. Government agencies and corporations			1,149,619				1,206,280				2,095,669				2,581,235
States and political subdivisions			211,229				110,311				409,469				215,950
Other investments			64,441				51,592				135,283				123,615
Interest on federal funds sold			86,448				6,764				172,936				20,927
Total interest income			8,219,566				5,810,662				14,947,865				11,727,072
Interest expense:
Time deposits of $100,000 or more			270,872				195,349				508,539				362,959
Other deposits			929,243				643,154				1,747,113				1,303,289
Borrowings from Federal Home Loan Bank			117,546				110,704				220,940				226,387
Federal funds purchased and securities sold under agreements to repurchase			433,747				246,464				749,882				481,645
Total interest expense			1,751,408				1,195,671				3,226,474				2,374,280
Net interest income			6,468,158				4,614,991				11,721,391				9,352,792
Provision for losses on loans			(834,025	)			183,000				(1,513,000	)			363,000
Net interest income after provision for losses on loans		$	7,302,183			$	4,431,991			$	13,234,391			$	8,989,792

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,
		2005				2004				2005				2004
Other operating income:
Trust department income and fees		$	370,766			$	394,078			$	714,291			$	750,180
Service charges on deposit accounts			1,449,698				1,406,063				2,726,109				3,004,543
Other service charges, commissions and fees			90,983				78,323				164,367				145,277
Gain on sale of bank premises							1,270,697								1,270,697
Loss on sale of securities			(442,539	)							(442,539	)
Other income			231,341				232,077				474,569				558,574
Total other operating income			1,700,249				3,381,238				3,636,797				5,729,271
Other operating expense:
Salaries and employee benefits			2,817,894				2,836,006				5,655,851				5,605,909
Net occupancy			349,461				363,811				695,980				682,184
Equipment rentals, depreciation and maintenance			677,114				581,781				1,341,608				1,253,095
Other expense			1,193,539				1,207,572				2,508,403				2,824,692
Total other operating expense			5,038,008				4,989,170				10,201,842				10,365,880
Income before income taxes and extraordinary gain			3,964,424				2,824,059				6,669,346				4,353,183
Income taxes			1,316,520				837,508				2,088,000				1,295,000
Income before extraordinary gain			2,647,904				1,986,551				4,581,346				3,058,183
Extraordinary gain, net of income taxes			79,000								538,000
Net income		$	2,726,904			$	1,986,551			$	5,119,346			$	3,058,183

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

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, 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 the 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

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, 2005			5,555,419			$	5,555,419			$	65,780,254			$	15,391,524			$				$	(925,764	)						$	85,801,433
Comprehensive Income:
Net income															5,119,346											$	5,119,346				5,119,346
Net unrealized loss on available for sale securities, net of tax																							(559,090	)			(559,090	)			(559,090	)
Reclassification adjustment for available for sale securities called or sold in current year, net of tax																							234,315				234,315				234,315
Total comprehensive income																										$	4,794,571
Retirement of common stock			(5,731	)			(5,731	)							(101,841	)															(107,572	)
Effect of stock retirement on accrued dividends															399																399
Dividend declared ($ .20 per share)															(1,109,938	)															(1,109,938	)
Balance, June 30, 2005			5,549,688			$	5,549,688			$	65,780,254			$	19,299,490			$				$	(1,250,539	)						$	89,378,893

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

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the Six Months Ended June 30,		2005				2004
Cash flows from operating activities:
Net income		$	5,119,346			$	3,058,183
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of bank premises							(1,270,697	)
Loss on sales of securities			442,539
Gain on sales of other real estate			(246,866	)			(99,000	)
Depreciation			828,760				761,000
Provision for losses on loans			(1,513,000	)			363,000
Provision for losses on other real estate			7,000				175,000
Changes in assets and liabilities:
Accrued interest receivable			(537,313	)			438,227
Other assets			(424,431	)			(2,911,468	)
Other liabilities			(229,337	)			616,871
Net cash provided by operating activities			3,446,698				1,131,116
Cash flows from investing activities:
Proceeds from maturities and calls of held to maturity securities			435,000				1,407,427
Proceeds from maturities, sales and calls of available for sale securities			88,641,255				84,040,393
Investment in held to maturity securities			(9,887,530	)
Investment in available for sale securities			(135,845,156	)			(73,005,823	)
Investment in Federal Home Loan Bank			(18,800	)			(16,500	)
Redemption of Federal Home Loan Bank stock							601,000
Proceeds from sales of other real estate			375,000				935,000
Loans, net increase			(12,428,832	)			(16,290,696	)
Acquisition of premises and equipment			(626,232	)			(616,783	)
Proceeds from sale of bank premises							2,837,500
Other assets			(276,354	)			(246,604	)
Net cash used in investing activities			(69,631,649	)			(355,086	)

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

For the Six Months Ended June 30,		2005				2004
Cash flows from financing activities:
Demand and savings deposits, net increase		$	37,475,539			$	12,222,114
Time deposits, net increase			2,323,046				8,503,917
Principal payments on notes			(1,239	)			(7,435	)
Borrowings from Federal Home Loan Bank			177,769				20,101,113
Repayments to Federal Home Loan Bank			(75,139	)			(30,089,495	)
Retirement of common stock			(107,572	)			(17,881	)
Cash dividends			(999,576	)			(833,607	)
Federal funds purchased and securities sold under agreements to repurchase, net increase (decrease)			43,722,340				(6,632,507	)
Net cash provided by financing activities			82,515,168				3,246,219
Net increase in cash and cash equivalents			16,330,217				4,022,249
Cash and cash equivalents, beginning of period			32,724,625				33,861,029
Cash and cash equivalents, end of period		$	49,054,842			$	37,883,278

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

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2005 and 2004

1. The accompanying unaudited condensed consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 2004 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, 2005, 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 5,551,781 and 5,556,954 for the six months ended June 30, 2005 and 2004, respectively.

3. At June 30, 2005 and 2004, the total recorded investment in impaired loans amounted to $443,000 and $8,595,000, respectively. The average recorded investment in impaired loans amounted to approximately $445,000 and $6,275,000 at June 30, 2005 and 2004, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $443,000 at June 30, 2005. The allowance for losses related to these loans amounted to approximately $35,000 at June 30, 2005. The amount of interest not accrued on these loans amounted to approximately $11,000 and $19,000 for the six months ended June 30, 2005 and 2004, respectively. In compliance with a bankruptcy court order, interest in the amount of $100,000 was 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, 2005				31, 2004				June 30, 2004
Balance, beginning of period		$	6,569,614			$	6,398,694			$	6,398,694
Provision for loan losses			(1,513,000	)			448,000				363,000
Recoveries			1,117,406				493,920				368,489
Loans charged off			(238,442	)			(771,000	)			(485,458	)
Balance, end of period		$	5,935,578			$	6,569,614			$	6,644,725

5. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $3,226,000 and $2,377,000 for the six months ended June 30, 2005 and 2004, respectively, and $5,044,000 for the twelve months ended December 31, 2004, for interest on deposits and borrowings. Income tax payments of $2,943,000 and $1,065,000 were made during the six months ended June 30, 2005 and 2004, respectively, and $2,062,000 for the twelve months ended December 31, 2004. Loans transferred to other real estate amounted to $112,000 for the six months ended June 30, 2004 and for the twelve months ended December 31, 2004. The income tax effect on the accumulated other comprehensive income was $(167,000) and $(1,635,000) at June 30, 2005 and 2004, respectively.

6. Securities with gross unrealized losses at June 30, 2005, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

		Less Than Twelve Months								Over Twelve Months								Total
						Gross								Gross								Gross
						Unreal-								Unreal-								Unreal-
		Fair Value				ized Loss				Fair Value				ized Loss				Fair Value				ized loss
U. S. Treasury		$	76,348			$	(249	)		$	7,941			$	(57	)		$	84,289			$	(306	)
U. S. Govt. Agencies			74,940				(514	)			17,599				(394	)			92,539				(908	)
States and political subdivisions			2,981				(27	)			3,301				(86	)			6,282				(113	)
FHLMC preferred stock											2,141				(934	)			2,141				(934	)
Total		$	154,269			$	(790	)		$	30,982			$	(1,471	)		$	185,251			$	(2,261	)

Management evaluates securities for other-than-temporary impairment on a monthly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U. S. Treasury and U. S. Government Agencies, the cause of the decline in value, the intent and ability of the Company to hold these securities until maturity and that the Company has traditionally held virtually all of its securities, including those classified as available for sale, until maturity. Any sales of available for sale securities, which have been infrequent and immaterial, have been for liquidity purposes. The Company has also carefully considered the specific issues related to the valuation of the FHLMC preferred stock. As a result of these evaluations, the Company has determined that the declines summarized in the table above are not deemed to be other-than-temporary.

7. On April 29, 2005, a loan in amount of $5,533,000, which had been classified as an impaired loan, paid off. During 2005, the Company recognized interest income of approximately $900,000, which included accrued interest previously charged-off and interest not accrued while this credit was on nonaccrual. A recovery of charged-off principal of $962,000 and the reversal of a specific reserve of $650,000 also relate to this event.

8. 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.

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, 2005, June 30, 2004 and December 31, 2004, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the six months ended June 30, 2005 and June 30, 2004. 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, 2004, 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 24, 2005, 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, 2004, 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
August 1, 2005

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, 2005 and 2004. 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 2005, net income was $5,119,000, as compared with $3,058,000 for the first six months of 2004. The Company realized extraordinary income of $538,000, net of taxes, as a result of the PULSE EFT Association Exchange during the current year. While this unusual, non-recurring gain is very positive, the Company continues to concentrate on its operating results. The economy of the Mississippi Gulf Coast, our trade area, continues to be robust, and this translates into opportunities for the Company, especially in terms of loan growth. The quality of the loan portfolio is also strong and non-performing loans have decreased significantly, as discussed in Note 7, contributing to the reduction of the allowance for loan losses through a negative loan loss provision of $1,513,000 in the current year. The Company continues to closely monitor its interest rate risk activities, as it continues to manage pricing challenges in its competitive market.

The following schedule compares financial highlights for the six months ended June 30, 2005 and 2004:

For the six months ended June 30,		2005				2004
Net income per share		$	0.92			$	0.55
Book value per share		$	16.11			$	14.85
Return on average total assets			1.63	%			1.04	%
Return on average shareholders’ equity			11.69	%			7.37	%
Allowance for loan losses as a % of loans, net of unearned discount			1.71	%			2.09	%

Financial Condition

Held to Maturity Securities

Held to maturity securities increased $13,095,000 at June 30, 2005, compared with June 30, 2004, as a result of the management of the Company’s liquidity position. Sustained temporary increases in deposits are being invested in short term Treasury securities. Gross unrealized gains for held to maturity securities were $145,000 and $98,000 at June 30, 2005 and 2004, respectively. Gross unrealized losses were $17,000 and $2,000 at June 30, 2005 and 2004, respectively. The following schedule reflects the mix of the held to maturity investment portfolio at June 30, 2005 and 2004:

June 30,		2005								2004
		Amount				%				Amount				%
U. S. Treasury		$	9,889,402				62	%		$
States and political subdivisions			6,150,703				38	%			2,945,427				100	%
Totals		$	16,040,105				100	%		$	2,945,427				100	%

Available for Sale Securities

Available for sale securities increased $27,639,000 at June 30, 2005, compared with June 30, 2004, in the management of the Company’s liquidity position, as discussed above. Gross unrealized gains were $341,000 and $931,000 and gross unrealized losses were $2,243,000 and $4,702,000 at June 30, 2005 and 2004, respectively. The following schedule reflects the mix of available for sale securities at June 30, 2005 and 2004:

June 30,		2005								2004
		Amount				%				Amount				%
U. S. Treasury		$	82,372,974				38	%		$	61,754,516				32	%
U. S. Government agencies			119,583,966				54	%			117,584,871				62	%
States and political subdivisions			14,384,780				7	%			8,372,305				4	%
Other securities			2,957,297				1	%			3,948,359				2	%
Totals		$	219,299,017				100	%		$	191,660,051				100	%

Loans

Loans increased $29,284,000 at June 30, 2005, as compared with June 30, 2004. During 2004 and continuing into 2005, 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 2005.

Other Real Estate

Other real estate decreased $452,000 at June 30, 2005, as compared with June 30, 2004, primarily due to sales of ORE inventory and a reduction in property taken into ORE in recent quarters.

Bank Premises and Equipment

Bank premises and equipment increased $1,574,000 at June 30, 2005, as compared with June 30, 2004, primarily as a result of the construction of two new branch facilities during 2004 and 2005.

Accrued Interest Receivable

Accrued interest receivable increased $625,000 at June 30, 2005, as compared with June 30, 2004, due to an increase in interest earning assets and the rate earned on these assets.

Other Assets

Other assets decreased $1,927,000 at June 30, 2005, as compared with June 30, 2004, due to a decrease in deferred taxes on unrealized losses on available for sale securities.

Deposits

Total deposits increased $31,457,000 at June 30, 2005, as compared with June 30, 2004. 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 $42,593,000 at June 30, 2005, as compared with June 30, 2004, as a result of the reallocation of funds by certain commercial customers between deposit and non-deposit products.

Notes Payable

Notes payable decreased at June 30, 2005, as compared with June 30, 2004, as a result of the maturity and/or early payoff of Company debt.

Other Liabilities

Other liabilities increased $608,000 at June 30, 2005, as compared with June 30, 2004. This increase is primarily due to the impact of increasing health care costs on the liability for post-retirement health benefits during 2004 and an increase in the liabilities related to deferred compensation benefits for officers of the bank subsidiary.

Shareholders’ Equity and Capital Adequacy

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. One measure of capital adequacy is the primary capital ratio which was 15.22% at June 30, 2005, as compared with 15.23% at June 30, 2004. 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)		2005				2004
Total interest income (1)		$	15,158			$	11,839
Total interest expense			3,226				2,374
Net interest earnings		$	11,932			$	9,465
Net yield on interest earning assets (2)			4.28	%			3.68	%

(1)		All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2005 and 2004.
(2)		Interest income in 2005 includes $900,000 received in 2005 for prior years. See Note 7. Net yield would have been 3.96 % without this interest.

The schedule on page 18 provides an analysis of the change in total interest income and total interest expense for the six months ended June 30, 2005 and 2004. Changes in interest income are generally attributable to changes in interest rates related to interest-earning assets, particularly loans. It should be noted that loan interest income in 2005 includes the recovery of previously charged off interest and the receipt of interest that would have been earned had the credit not been on nonaccrual. This interest amounted to approximately $900,000. Changes in interest expense, while impacted by changes in volume related to interest-bearing liabilities, were impacted by the increase in the cost of funds during these time periods.

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/
		2005				2004				(Decrease)				Volume				Rate				Volume
INTEREST INCOME: (1)
Loans (2) (3)		$	11,081			$	8,164			$	2,917			$	723			$	2,016			$	178
Federal funds sold			173				21				152				284				(10	)			(122	)
Held to maturity:
Taxable			14				19				(5	)			6				(9	)			(2	)
Non-taxable			228				122				106				126				(10	)			(10	)
Available for sale:
Taxable			3,135				3,184				(49	)			(73	)			25				(1	)
Non-taxable			392				205				187				151				21				15
Other			135				124				11				(30	)			54				(13	)
Total		$	15,158			$	11,839			$	3,319			$	1,187			$	2,087			$	45
INTEREST EXPENSE:
Savings and demand, interest bearing		$	982			$	663			$	319			$	(51	)		$	400			$	(30	)
Time deposits			1,273				1,003				270				(90	)			395				(35	)
Federal funds purchased and securities sold under agreements to repurchase			750				482				268				107				132				29
Borrowings from FHLB			221				226				(5	)			(42	)			45				(8	)
Total		$	3,226			$	2,374			$	852			$	(76	)		$	972			$	(44	)