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PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2006 September (Form 10-Q)

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Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
Lameuse and Howard Avenues, Biloxi, Mississippi   39533
 
(Address of principal executive offices)   (Zip Code)
(228) 435-5511
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer o      Accelerated filer þ      Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
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 November 1, 2006, there were 15,000,000 shares of $1 par value common stock authorized, and 5,548,199 shares issued and outstanding.
 
 

 


TABLE OF CONTENTS

PART I
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4: Controls and Procedures
PART II
Item 5 — Other Information
Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to 18 U.S.C Section 1350
Certification of CFO Pursuant to 18 U.S.C. Section 1350


Table of Contents

PART I
FINANCIAL INFORMATION
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                         
    (Unaudited)     (Audited)     (Unaudited)  
September 30, December 31, and September 30,   2006     2005     2005  
 
Assets
                       
 
                       
Cash and due from banks
  $ 64,824,795     $ 52,277,524     $ 58,454,381  
 
                       
Federal funds sold
    6,442,000       100,340,000       97,000,000  
 
                       
Held to maturity securities, market value of $107,754,000 - September 30, 2006; $134,008,000 - December 31, 2005; $41,920,000 - September 30, 2005
    107,845,418       134,046,959       41,804,453  
 
                       
Available for sale securities, at market value
    373,505,852       178,393,652       191,961,031  
 
                       
Federal Home Loan Bank Stock, at cost
    1,115,100       1,076,600       1,432,800  
 
                       
Loans
    403,182,940       349,346,340       347,081,539  
 
                       
Less: Allowance for loan losses
    10,928,307       10,966,022       11,015,042  
     
 
                       
Loans, net
    392,254,633       338,380,318       336,066,497  
 
                       
Bank premises and equipment, net of accumulated depreciation of $19,203,000 - September 30, 2006; $18,025,000 - December 31, 2005; and $18,304,000 - September 30, 2005
    18,148,828       17,887,907       17,749,847  
 
                       
Other real estate
    56,317       106,046       120,956  
 
                       
Accrued interest receivable
    7,449,079       4,315,358       3,982,223  
 
                       
Other assets
    19,072,847       18,500,668       18,736,639  
     
 
                       
Total assets
  $ 990,714,869     $ 845,325,032     $ 767,308,827  
     

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
                         
    (Unaudited)     (Audited)     (Unaudited)  
September 30, December 31, and September 30,   2006     2005     2005  
 
Liabilities & Shareholders’ Equity
                       
 
                       
Liabilities:
                       
 
                       
Deposits:
                       
 
                       
Demand, non-interest bearing
  $ 173,023,256     $ 176,627,048     $ 147,796,135  
 
                       
Savings and demand, interest bearing
    298,054,632       301,052,887       248,024,104  
 
                       
Time, $100,000 or more
    131,172,939       51,292,708       49,598,212  
 
                       
Other time deposits
    61,279,315       63,244,699       60,753,503  
     
 
                       
Total deposits
    663,530,142       592,217,342       506,171,954  
 
                       
Federal funds purchased and securities sold under agreements to repurchase
    212,157,926       149,267,750       159,090,166  
 
                       
Borrowings from Federal Home Loan Bank
    10,609,371       7,352,005       7,359,080  
 
                       
Other liabilities
    9,489,636       8,984,804       7,465,071  
     
 
                       
Total liabilities
    895,787,075       757,821,901       680,086,271  
 
                       
Shareholders’ Equity:
                       
 
                       
Common Stock, $1 par value, 15,000,000 shares authorized, 5,548,199 shares issued and outstanding at September 30, 2006, 5,549,128 shares issued and outstanding at December 31, 2005 and 5,549,128 shares issued and outstanding at September 30, 2005
    5,548,199       5,549,128       5,549,128  
 
                       
Surplus
    65,780,254       65,780,254       65,780,254  
 
                       
Undivided profits
    25,536,642       18,942,855       17,522,402  
 
                       
Accumulated other comprehensive income
    (1,937,301 )     (2,769,106 )     (1,629,228 )
     
 
                       
Total shareholders’ equity
    94,927,794       87,503,131       87,222,556  
     
 
                       
Total liabilities and shareholders’ equity
  $ 990,714,869     $ 845,325,032     $ 767,308,827  
     
See Selected Notes to Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                                 
    For The Quarter Ended September 30,     For The Nine Months Ended September 30,  
    2006     2005     2006     2005  
 
Interest income:
                               
 
                               
Interest and fees on loans
  $ 7,847,283     $ 5,661,300     $ 20,901,766     $ 16,742,141  
 
                               
Interest and dividends on securities:
                               
 
                               
U. S. Treasury
    1,127,800       702,176       4,451,151       1,755,843  
 
                               
U. S. Government agencies and corporations
    3,717,040       1,170,691       8,250,066       3,266,360  
 
                               
States and political subdivisions
    216,430       214,543       633,821       624,012  
 
                               
Other investments
    21,730       16,061       147,549       151,344  
 
                               
Interest on federal funds sold
    220,691       220,318       760,047       393,254  
     
 
                               
Total interest income
    13,150,974       7,985,089       35,144,400       22,932,954  
     
 
                               
Interest expense:
                               
 
                               
Time deposits of $100,000 or more
    1,204,460       370,665       2,430,204       879,204  
 
                               
Other deposits
    1,934,321       1,084,360       5,546,505       2,831,473  
 
                               
Borrowing from Federal Home Loan Bank
    120,014       109,336       362,405       330,276  
 
                               
Federal funds purchased and securities sold under agreements to repurchase
    2,285,413       519,107       4,186,418       1,268,989  
     
 
                               
Total interest expense
    5,544,208       2,083,468       12,525,532       5,309,942  
     
 
                               
Net interest income
    7,606,766       5,901,621       22,618,868       17,623,012  
 
                               
Provision for losses on loans
    48,000       5,103,000       125,000       3,590,000  
     
 
                               
Net interest income after provision for losses on loans
    7,558,766       798,621       22,493,868       14,033,012  
     
 
                               
Other operating income:
                               
 
                               
Trust department income and fees
    498,627       343,613       1,228,865       1,057,904  
 
                               
Service charges on deposit accounts
    1,391,013       1,136,682       3,696,281       3,862,791  
 
                               
Other service charges, commissions and fees
    64,015       55,263       214,889       219,630  
 
                               
Loss on sale of securities
                            (442,539 )
 
                               
Other income
    354,212       205,619       986,323       680,188  
     
 
                               
Total other operating income
  $ 2,307,867     $ 1,741,177     $ 6,126,358     $ 5,377,974  
     

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)
                                 
    For The Quarter Ended September 30,     For The Nine Months Ended September 30,  
    2006     2005     2006     2005  
 
Other operating expense:
                               
 
                               
Salaries and employee benefits
  $ 3,295,811     $ 2,910,696     $ 9,434,025     $ 8,566,547  
 
                               
Net occupancy
    370,838       377,987       1,476,070       1,073,967  
 
                               
Equipment rentals, depreciation and maintenance
    726,905       598,857       2,077,174       1,940,465  
 
                               
Other expense
    1,358,319       1,327,683       3,718,326       3,836,066  
     
 
                               
Total other operating expense
    5,751,873       5,215,223       16,705,595       15,417,045  
     
 
                               
Income (loss) before income taxes and extraordinary gain
    4,114,760       (2,675,425 )     11,914,631       3,993,941  
 
                               
Income taxes (benefit)
    1,430,000       (908,020 )     4,140,000       1,180,000  
     
 
                               
Income (loss) before extraordinary gain
    2,684,760       (1,767,405 )     7,774,631       2,813,941  
 
                               
Extraordinary gain, net of taxes
                            538,000  
     
 
                               
Net Income (Loss)
  $ 2,684,760     $ (1,767,405 )   $ 7,774,631     $ 3,351,941  
     
 
                               
Basic and diluted earnings per share
  $ .48     $ (.32 )   $ 1.40     $ .60  
     
 
                               
Basic and diluted earnings per share before extraordinary gain
  $ .48     $ (.32 )   $ 1.40     $ .51  
     
See Selected Notes to Consolidated Financial Statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
                                                         
                                    Accumulated              
                                    Other     Compre-        
            Common             Undivided     Comprehen-     hensive        
    # of Shares     Stock     Surplus     Profits     sive Income     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
                            3,351,941             $ 3,351,941       3,351,941  
 
                                                       
Net unrealized loss on available for sale securities, net of tax
                                    (937,779 )     (937,779 )     (937,779 )
 
                                                       
Reclassification adjustment for available for sale securities sold in current year, net of tax
                                    234,315       234,315       234,315  
 
                                                     
 
                                                       
Total comprehensive income
                                          $ 2,648,477          
 
                                                     
 
                                                       
Retirement of stock
    (6,291 )     (6,291 )             (111,636 )                     (117,927 )
 
                                                       
Effect of stock retirement on accrued dividends
                            399                       399  
 
                                                       
Cash dividends, ($ .17 per share)
                            (1,109,826 )                     (1,109,826 )
                   
 
                                                       
Balance, September 30, 2005
    5,549,128     $ 5,549,128     $ 65,780,254     $ 17,522,402     $ (1,629,228 )           $ 87,222,556  
                   
Note: Balances as of January 1, 2005 were audited.
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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
                                                         
                                    Accumulated              
                                    Other     Compre-        
            Common             Undivided     Comprehen-     Hensive        
    # of Shares     Stock     Surplus     Profits     sive Income     Income     Total  
     
Balance, January 1, 2006
    5,549,128     $ 5,549,128     $ 65,780,254     $ 18,942,855     $ (2,769,106 )           $ 87,503,131  
 
                                                       
Comprehensive Income:
                                                       
 
                                                       
Net income
                            7,774,631             $ 7,774,631       7,774,631  
 
                                                       
Net unrealized gain on available for sale securities, net of tax
                                    831,805       831,805       831,805  
 
                                                     
 
                                                       
Total comprehensive income
                                          $ 8,606,436          
 
                                                     
 
                                                       
Retirement of stock
    (929 )     (929 )             (15,722 )                     (16,651 )
 
                                                       
Cash dividends, ($ .21 per share)
                            (1,165,122 )                     (1,165,122 )
                   
 
                                                       
Balance, September 30, 2006
    5,548,199     $ 5,548,199     $ 65,780,254     $ 25,536,642     $ (1,937,301 )           $ 94,927,794  
                   
Note: Balances as of January 1, 2006 were audited.
See Selected Notes to Consolidated Financial Statements.
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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
For The Nine Months Ended September 30,   2006     2005  
 
Cash flows from operating activities:
               
Net income
  $ 7,774,631     $ 3,351,941  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,177,000       1,173,148  
Provision for losses on loans
    125,000       3,590,000  
Provision for losses on other real estate
    3,129       7,000  
Loss on sale of available for sale securities
            442,539  
Gain on sales of other real estate
    (150,000 )     (366,865 )
Gain on sale of bank premises
    (159,669 )        
Changes in assets and liabilities:
               
Accrued interest receivable
    (3,133,721 )     (1,236,988 )
Other assets
    (370,722 )     (1,340,944 )
Other liabilities
    1,393,290       (1,033,093 )
     
Net cash provided by operating activities
    6,658,938       4,586,738  
     
Cash flows from investing activities:
               
Proceeds from maturities and calls of held to maturity securities
    212,720,000       4,435,000  
Investment in held to maturity securities
    (186,518,459 )     (39,652,078 )
Proceeds from maturities, sales and calls of available for sale securities
    18,250,292       129,641,255  
Investment in available for sale securities
    (212,094,319 )     (150,083,264 )
Investment in Federal Home Loan Bank stock
    (38,500 )     (30,900 )
Loans, net
    (54,040,715 )     (12,120,987 )
Proceeds from sale of bank premises
    317,120          
Acquisition of premises and equipment
    (1,595,372 )     (904,491 )
Proceeds from sales of other real estate
    238,000       495,000  
Other assets
    (416,457 )     (357,524 )
     
Net cash used in investing activities
  $ (223,178,410 )   $ (68,577,989 )
     
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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
                 
For The Nine Months Ended September 30,   2006     2005  
 
Cash flows from financing activities:
               
Demand and savings deposits, net (decrease) increase
  $ (6,602,047 )   $ 125,826,713  
Time deposits, net increase (decrease)
    77,914,847       (8,846,289 )
Principal payments on notes
            (1,239 )
Cash dividends
    (2,274,948 )     (2,109,402 )
Retirement of stock
    (16,651 )     (117,927 )
Federal funds purchased and securities sold under agreements to repurchase
    62,890,176       71,813,041  
Repayments to Federal Home Loan Bank
    (13,983,361 )     (133,048 )
Borrowings from Federal Home Loan Bank
    17,240,727       289,158  
     
Net cash provided by financing activities
    135,168,743       186,721,007  
     
Net (decrease) increase in cash and cash equivalents
    (81,350,729 )     122,729,756  
Cash and cash equivalents, beginning of period
    152,617,524       32,724,625  
     
Cash and cash equivalents, end of period
  $ 71,266,795     $ 155,454,381  
     
See Selected Notes to Consolidated Financial Statements.
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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2006 and 2005
1. The accompanying unaudited condensed consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 2005 as set forth in the Notes to the Consolidated Financial Statements of Peoples Financial Corporation and Subsidiaries (the Company). In the opinion of Management, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included and are of a normal recurring nature. The accompanying unaudited condensed consolidated financial statements have been prepared also in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The statements include information required for interim financial statements.
2. The results of operations for the nine months ended September 30, 2006 and 2005, are not necessarily indicative of the results to be expected for the full year.
3. Per share data is based on the weighted average shares of common stock outstanding of 5,548,334 and 5,550,932 for the nine months ended September 30, 2006 and 2005, respectively.
4. The Company has defined cash and cash equivalents to include cash and due from banks and federal funds sold. The Company paid $12,285,000 and $5,287,000 for the nine months ended September 30, 2006 and 2005, respectively, and $7,390,000 for the twelve months ended December 31, 2005, for interest on deposits and borrowings. Income tax payments totaled $4,001,000 and $3,956,000 for the nine months ended September 30, 2006 and 2005, respectively, and $4,856,000 for the twelve months ended December 31, 2005. Loans transferred to other real estate amounted to $41,000 and $88,000 for the nine months ended September 30, 2006 and 2005, respectively, and $88,000 for the twelve months ended December 31, 2005.
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5. Securities with gross unrealized losses at September 30, 2006, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows (in 000’s):
                                                 
    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
  $ 51,510     $ 123     $ 20,653     $ 328     $ 72,163     $ 451  
U. S. Govt. Agencies
    129,858       201       112,285       2,188       242,143       2,389  
States and political subdivisions
    5,717       44       6,075       181       11,792       225  
FHLMC preferred stock
                    2,421       654       2,421       654  
     
Total
  $ 187,085     $ 368     $ 141,434     $ 3,351     $ 328,519     $ 3,719  
     
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.
6. At September 30, 2006 and 2005, the total recorded investment in impaired loans amounted to $402,000 and $351,000. The average recorded investment in impaired loans amounted to approximately $430,000 and $260,000 at September 30, 2006 and 2005, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $402,000 at September 30, 2006. The allowance for losses related to these loans amounted to approximately $152,000 at September 30, 2006. Interest not accrued on these loans amounted to $4,000 and $5,000 for the nine months ended September 30, 2006 and 2005, respectively.
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7. Transactions in the allowance for loan losses were as follows:
                         
    For the Nine     For the Year     For the Nine  
    Months Ended     Ended     Months Ended  
    September 30,     December 31,     September 30,  
    2006     2005     2005  
     
Balance, beginning of period
  $ 10,966,022     $ 6,569,614     $ 6,569,614  
Recoveries
    316,646       1,344,408       1,220,363  
Loans charged off
    (479,361 )     (562,000 )     (364,935 )
Provision for loan losses
    125,000       3,614,000       3,590,000  
     
Balance, end of period
  $ 10,928,307     $ 10,966,022     $ 11,015,042  
     
8. The income tax effect on the accumulated other comprehensive income was $428,000 and ($362,000) at September 30, 2006 and 2005, respectively.
9. 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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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries (the Company) for the nine months ended September 30, 2006 and 2005. 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 nine months of 2006, net income was $7,775,000 as compared with $3,352,000 for the first nine months of 2005. Earnings for the first nine months of 2006 included primarily income from operations, with net interest income increasing from $17,623,000 for the first nine months of 2005 to $22,619,000 for the first nine months of 2006. Earnings in 2005 included a gain of $538,000, net of taxes, from the PULSE EFT Association Exchange and a provision for loan losses of $2,369,000, net of taxes. Total assets reached $991,000,000 at September 30, 2006, as deposits increased 31% as compared with September 30, 2005. These funds have been invested primarily in U. S. Treasury and U. S. Government Agency securities.
As of September 30, 2006, the Company continues its post-Katrina recovery efforts. Construction began during the third quarter of 2006 on a new Money Center vault facility in downtown Biloxi and in a few weeks plans will be announced regarding the construction of a new Pass Christian branch facility in that city’s downtown business district.
Management continues to evaluate the area’s recovery and rebuilding efforts. While much has been accomplished in just over a year, the vast scale of these efforts is sobering. And the pace of that recovery is being impacted by the availability and affordability of insurance, housing for residents and construction workers, availability of workforce and the increasing cost of materials.
Management has also continued its efforts in evaluating its loan portfolio, especially with respect to potential losses on loans as a result of the impact of Hurricane Katrina. See Provision for Loan Losses for further discussion of the issues impacting the allowance for loan losses.
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The following schedule compares financial highlights for the nine months ended September 30, 2006 and 2005:
                 
For the nine months ended September 30,   2006     2005  
 
Net income per share
  $ 1.40     $ .60  
Book value per share
  $ 17.11     $ 15.72  
Return on average total assets
    1.12 %     .66 %
Return on average shareholders’ equity
    11.37 %     5.17 %
Allowance for loan losses as a % of loans, net of unearned discount
    2.71 %     3.16 %
Financial Condition
Held to Maturity Securities
Held to maturity securities increased $66,041,000 at September 30, 2006, as compared with September 30, 2005, as a result of the management of the Company’s liquidity position. Funds available from the increase in deposits and non-deposit products have been invested in U. S. Treasury and U. S. Government Agency securities. The Company continues to monitor its investment in bonds issued by local municipalities which have been affected by Hurricane Katrina. At September 30, 2006, Management has determined that no provision for loss for these investments is required.
Gross unrealized gains for held to maturity securities were $61,000 and $140,000 at September 30, 2006 and 2005, respectively, and gross unrealized losses were $152,000 and $25,000 at September 30, 2006 and 2005, respectively. The following schedule reflects the mix of the held to maturity investment portfolio at September 30, 2006 and 2005:
                                 
September 30,   2006     2005  
    Amount     %     Amount     %  
     
U. S. Treasury securities
  $ 43,499,182       40 %   $ 35,654,125       85 %
U. S. Government Agencies
    58,904,984       55 %                
States and political subdivisions
    5,441,252       5 %     6,150,328       15 %
     
Totals
  $ 107,845,418       100 %   $ 41,804,453       100 %
     
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Available for Sale Securities
Available for sale securities increased $181,545,000 at September 30, 2006, as compared with September 30, 2005, as the result of the management of the Company’s liquidity position, as discussed above. The Company continues to monitor its investments in bonds issued by local municipalities which have been affected by Hurricane Katrina. At September 30, 2006, Management has determined that no provision for loss for these investments is required.
Gross unrealized gains were $640,000 and $280,000 at September 30, 2006 and 2005, respectively, and gross unrealized losses were $3,568,000 and $2,756,000 at September 30, 2006 and 2005, respectively. The following schedule reflects the mix of available for sale securities at September 30, 2006 and 2005:
                                 
September 30,   2006     2005  
    Amount     %     Amount     %  
     
U. S. Treasury securities
  $ 53,617,300       14 %   $ 50,572,436       26 %
U. S. Government agencies
    299,165,147       80 %     124,059,226       65 %
States and political subdivisions
    16,786,495       5 %     14,372,073       7 %
Other securities
    3,936,910       1 %     2,957,296       2 %
     
Totals
  $ 373,505,852       100 %   $ 191,961,031       100 %
     
Loans
Loans increased $56,101,000 at September 30, 2006, as compared with September 30, 2005, with the majority of this growth occurring since March 31, 2006. The initial phase of rebuilding after Hurricane Katrina is well underway, yet Management believes that more than a decade will be needed to complete the recovery of the Mississippi Gulf Coast. As the pace of money flow has slowed, rebuilding has been negatively impacted. The anticipated loan growth of 25% for 2006 has stalled at 16% due to the uncertainty that exists in the market place. Resources available to fund development, rising construction costs and the availability and affordability of insurance are among the concerns creating that uncertainty. These factors, and others, are impacting rebuilding efforts, and will directly impact loan demand and growth during the coming years.
See Provision for Loan Losses for further discussion of these and other issues relating to the evaluation of the quality of the loan portfolio and the allowance for loan losses.
Accrued Interest Receivable
Accrued interest receivable increased $3,467,000 at September 30, 2006, as compared with September 30, 2005, due to an increase in interest earning assets and the rate earned on these assets.
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Deposits
Total deposits increased $157,358,000 at September 30, 2006, as compared with September 30, 2005. Typically, 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. Since Hurricane Katrina, the Company has realized a significant increase in demand and savings deposits and jumbo CD’s as municipal customers receive federal and state funding and commercial and personal customers receive proceeds from insurance, SBA loans, grants and other forms of assistance. Based on previous post-hurricane experience and expectations with respect to the time frame for reconstruction, the Company anticipates that deposits will continue at or near their present level until December 31, 2006, and may increase during 2007.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Federal funds purchased and securities sold under agreements to repurchase increased $53,068,000 at September 30, 2006, as compared with September 30, 2005, as customers allocate their funds between deposits and non-deposit products.
Shareholders’ Equity and Capital Adequacy
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 11.40% at September 30, 2006 as compared with 14.43% at September 30, 2005. These ratios are well above the regulatory minimum of 6.00%. This decrease has been the result of the significant increase in assets since September 30, 2005, rather than an indication of a weakening of the Company’s capital position. Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established a goal of maintaining its primary capital ratio at 8%, which is the minimum requirement for classification as being “well capitalized” by the banking regulatory authorities.
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:
                 
             
Nine Months Ended September 30, (In thousands, except percentages)   2006     2005  
 
Total interest income (1)
  $ 35,471     $ 23,254  
Total interest expense
    12,526       5,310  
     
Net interest earnings
  $ 22,945     $ 17,944  
     
Net yield on interest earning assets (2)
    3.83 %     4.16 %
     
 
(1)   All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2006 and 2005.
 
(2)   Interest income in 2005 included $900,000 received in nonaccrual loan income from prior years not previously recognized. Net yield would have been 3.95% without this interest.
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The schedule on page 18 provides an analysis of the change in total interest income and total interest expense for the nine months ended September 30, 2006 and 2005. As presented in the schedule (in 000’s), the positive change in interest income is generally attributable to the change in interest rates earned on the loan portfolio, which at 60% variable, favorably reprices for the Company each time the prime rates increases. Interest income has also been affected by the increase in volume of the investment portfolio. 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 in prior years 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 savings and interest-bearing demand accounts, were impacted by the increase in the cost of funds during this time period.
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    For the     For the                
    Nine     Nine                
    Months     Months                
    Ended     Ended             Attributable To:  
    September     September     Increase                     Rate/  
    30,2006     30,2005     (Decrease)     Volume     Rate     Volume  
INTEREST INCOME: (1)
                                               
Loans (2)
  $ 20,902     $ 16,742     $ 4,160     $ 1,735     $ 2,197     $ 228  
Federal funds sold
    760       393       367       (25 )     419       (27 )
Held to maturity:
                                               
Taxable securities
    5,288       198       5,090       3,460       88       1,542  
Non-taxable securities
    314       317       (3 )     (17 )     15       (1 )
Available for sale:
                                               
Taxable securities
    7,413       4,824       2,589       1,148       1,164       277  
Non-taxable securities
    646       629       17       29       (11 )     (1 )
Other securities
    148       151       (3 )     14       (15 )     (2 )
     
Total
  $ 35,471     $ 23,254     $ 12,217     $ 6,344     $ 3,857     $ 2,016  
     
 
                                               
INTEREST EXPENSE:
                                               
Savings and negotiable interest bearing deposits
  $ 4,040     $ 1,646     $ 2,394     $ 836     $ 1,033     $ 525  
Time deposits
    3,938       2,065       1,873       490       1,118       265  
Borrowings from FHLB
    362       330       32       41       (8 )     (1 )
Federal funds purchased and securities sold under agreements to repurchase
    4,186       1,269       2,917       423       1,871       623  
     
Total
  $ 12,526     $ 5,310     $ 7,216     $ 1,790     $ 4,014     $ 1,412  
     
 
(1)   All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2006 and 2005.
 
(2)   Loan fees are included in these figures. 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, as well as the exposure for out of area loans, and their direct and indirect impact on its operations. A thorough analysis of current economic conditions and the quality of the loan portfolio is conducted on a quarterly basis. Management utilized these analyses, with special emphasis on the impact of Hurricane Katrina on the loan portfolio and underlying collateral, in determining the adequacy of its allowance for loan losses at September 30, 2006. In determining potential loan losses as a result of Hurricane Katrina since August 2005, the Company has evaluated its commercial and residential loan portfolios separately. This on-going analysis has been enhanced by the completion of a detailed evaluation of the impact of Katrina on the residential loan portfolio during the second quarter of 2006.
Management continues its evaluation in recognition of the extraordinary impact of Katrina on its entire trade area, attempting to quantify potential losses in accordance with the Company’s established methodology. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible.
Additionally, Management has considered the historical data available from the impact of other natural disasters on the Mississippi Gulf Coast and other coastal communities, including the length of time between the storm’s landfall and identification of all losses. Past bank experience with hurricanes and FDIC research have shown that the actual loss position may not be known until 24 months after the event.
Although more than one year has passed, much uncertainty remains regarding the impact of federal and state assistance, settlement of insurance claims, the availability and affordability of windstorm insurance and the rate and pace of recovery in the Company’s trade area. Commercial and personal customers are still assessing their resources and making decisions about their future plans. Meanwhile, construction costs continue to escalate, further impacting recovery efforts. The ability of customers to service their debt must be carefully considered. The almost nonexistent release of Community Development Block Grants (CDBG), which should have started in July, has added to our uncertainty.
We are just starting to realize the full impact of Hurricane Katrina on insurance coverage going forward. Several carriers have announced their intention to restrict coverage in our trade area. For those carriers continuing to write policies on the Gulf Coast, premiums are increasing significantly. Commercial development has already been negatively impacted by the ability to obtain insurance coverage. Ultimately, the effect of the insurance question may pose a potential risk to a large portion of our loan portfolio.
The Company has identified no additional significant potential losses as a result of Hurricane Katrina since its initial evaluation in September 2005. In fact, some loans which were thought to pose a potential loss during the initial evaluation have shown positive developments. It is also very possible that potential losses, despite the best efforts of the Company, have not yet been identified. Management believes that its is reasonably possible that the actual amount of potential losses as a result of Hurricane Katrina may be less that what was estimated in September 2005, but as a result of the factors discussed above, this amount cannot be reasonably estimated at this time and no provision or negative provision for losses on loans was recorded for the nine months ended September 30, 2006
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The Company recorded a provision of $125,000 during the first nine months of 2006 relating to potential losses on overdrawn deposit accounts.
Service Charges on Deposit Accounts
Service charges on deposit accounts decreased $167,000 for the first nine months of 2006 as compared with the first nine months of 2005, primarily due to lost fee income as a result of Hurricane Katrina.
Loss on Sale of Securities
The Company realized a loss from the sale of available for sale securities during the second quarter of 2005 of $443,000. The proceeds of these sales were used to fund loan demand.
Other Income
Other income increased $306,000 for the nine months ended September 30, 2006 as compared with the nine months ended September 30, 2005, due to gains on the sale of banking premises and ORE during 2006.
Salaries and Employee Benefits
Other expense increased $867,000 for the nine months ended September 30, 2006 as compared with the nine months ended September 30, 2005. The Company increased salaries and incentives to its employees in order to reward performance and retain personnel within the local, post-Katrina competitive employment conditions.
Net Occupancy
Net occupancy increased $402,000 for the first nine months of 2006 as compared with the first nine months of 2005 as a result of the increase in costs associated with insurance coverage.
Extraordinary Gain
An extraordinary gain of $538,000, net of taxes, was recorded as result of the PULSE EFT Association Exchange in 2005.
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.
Since Hurricane Katrina, the Company’s deposits and non-deposit accounts have increased significantly, as discussed previously. Management carefully monitors its liquidity needs, particularly relating to these potentially volatile funds, which are currently invested in U. S. Treasury and U. S. Agency securities. It is anticipated that expanding loan demand in future quarters will be funded from the maturity of these investments. Federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position.
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Item 4: Controls and Procedures
As of September 30, 2006, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Acts Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no changes in Company’s internal control over financial reporting that occurred during the period ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 5 — Other Information
On August 8, 2006, the Company announced that it had appointed the firm of Porter Keadle Moore of Atlanta, GA, as its independent accountants for 2006.
Item 6 — Exhibits and Reports on Form 8-K
(a) Exhibits
     
Exhibit 31.1
  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
Exhibit 31.2
  Certification Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
Exhibit 32.1
  Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss.1350
 
   
Exhibit 32.2
  Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350.
     (b) Reports on Form 8-K
A Form 8-K was filed by the Company on July 12, 2006, August 8, 2006 and October 16, 2006.
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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:   November 9, 2006    
 
           
 
           
 
  By:   /s/ Chevis C. Swetman    
 
           
 
      Chevis C. Swetman    
 
      Chairman, President and Chief Executive Officer    
 
           
 
  Date:   November 9, 2006    
 
           
 
           
 
  By:   /s/ Lauri A. Wood    
 
           
 
      Lauri A. Wood    
 
      Chief Financial Officer and Controller    
 
      (principal financial and accounting officer)    
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