10-Q 1 d08176e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 ---------------------------------------- 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 (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 [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 July 31, 2003, there were 15,000,000 shares of $1 par value common stock authorized, and 5,560,897 shares issued and outstanding. Page 1 of 20 PART I FINANCIAL INFORMATION PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, and June 30, 2003 2002 2002 ---------------------------------- ------------ ------------ ------------ ASSETS Cash and due from banks $ 42,351,377 $ 39,654,247 $ 34,279,455 Available for sale securities 206,735,490 151,483,997 145,853,839 Held to maturity securities, market value of $10,955,000 - June 30, 2003; $18,026,000 - December 31, 2002; $22,860,000 - June 30, 2002 10,635,491 17,587,690 22,284,964 Federal Home Loan Bank Stock, at cost 1,952,200 1,927,000 1,898,500 Federal funds sold 32,950,000 Loans 294,927,203 312,296,263 321,315,212 Less: Allowance for loan losses 6,446,375 6,696,911 6,139,267 ------------ ------------ ------------ Loans, net 288,480,828 305,599,352 315,175,945 Bank premises and equipment, net of accumulated depreciation of $15,602,000 - June 30, 2003; $14,960,000 - December 31, 2002; and $14,079,000 - June 30, 2002 18,121,353 17,059,400 17,492,344 Other real estate 1,569,772 1,195,720 1,307,861 Accrued interest receivable 3,149,089 2,858,190 2,896,104 Other assets 12,414,622 12,773,580 6,194,993 ------------ ------------ ------------ TOTAL ASSETS $585,410,222 $550,139,176 $580,334,005 ============ ============ ============
Page 2 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited)
June 30, December 31, and June 30, 2003 2002 2002 ---------------------------------- -------------- -------------- -------------- LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES: Deposits: Demand, non-interest bearing $ 83,347,873 $ 75,698,316 $ 76,328,355 Savings and demand, interest bearing 163,409,436 164,954,932 156,103,639 Time, $100,000 or more 73,145,277 74,064,356 103,607,691 Other time deposits 70,326,992 73,456,208 76,173,464 -------------- -------------- -------------- Total deposits 390,229,578 388,173,812 412,213,149 Accrued interest payable 263,713 300,042 578,011 Federal funds purchased and securities sold under agreements to repurchase 87,676,188 67,245,703 74,975,144 Borrowings from the Federal Home Loan Bank 16,719,145 6,313,077 5,754,701 Notes payable 287,271 334,371 372,612 Other liabilities 6,583,700 6,040,565 5,905,713 -------------- -------------- -------------- TOTAL LIABILITIES 501,759,595 468,407,570 499,799,330 SHAREHOLDERS' EQUITY: Common Stock, $1 par value, 15,000,000 shares authorized, 5,561,211, 5,583,472 and 5,600,666 shares issued and outstanding at June 30, 2003, December 31, 2002 and June 30, 2002, respectively 5,561,211 5,583,472 5,600,666 Surplus 65,780,254 65,780,254 65,780,254 Undivided profits 9,572,871 8,510,341 7,519,298 Unearned compensation (119,043) (143,043) (159,043) Accumulated other comprehensive income 2,855,334 2,000,582 1,793,500 -------------- -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 83,650,627 81,731,606 80,534,675 -------------- -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 585,410,222 $ 550,139,176 $ 580,334,005 ============== ============== ==============
See Selected Notes to Condensed Consolidated Financial Statements. Page 3 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For The Quarters Ended June 30, For The Six Months Ended June 30, ------------------------------- --------------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ INTEREST INCOME: Interest and fees on loans $ 4,395,365 $ 5,101,836 $ 8,938,692 $ 10,130,226 Interest and dividends on investments: U. S. Treasury 326,854 359,933 648,292 693,196 U. S. Government agencies and corporations 1,499,454 1,380,876 2,790,730 2,859,853 States and political subdivisions 90,738 90,867 177,472 184,934 Other investments 13,466 14,146 133,663 135,145 Interest on federal funds sold 6,302 44,868 53,789 107,080 ------------ ------------ ------------ ------------ TOTAL INTEREST INCOME 6,332,179 6,992,526 12,742,638 14,110,434 INTEREST EXPENSE: Time deposits of $100,000 or more 370,051 877,127 772,942 1,923,968 Other deposits 889,233 1,323,220 1,829,795 2,701,741 Mortgage indebtedness 1,903 2,122 3,863 4,289 Borrowings from Federal Home Loan Bank 108,877 90,991 207,148 181,939 Federal funds purchased and securities sold under agreements to repurchase 253,691 303,335 495,039 621,204 ------------ ------------ ------------ ------------ TOTAL INTEREST EXPENSE 1,623,755 2,596,795 3,308,787 5,433,141 ------------ ------------ ------------ ------------ NET INTEREST INCOME 4,708,424 4,395,731 9,433,851 8,677,293 Provision for losses on loans 139,105 167,709 317,745 612,935 ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS 4,569,319 4,228,022 9,116,106 8,064,358 ------------ ------------ ------------ ------------ OTHER OPERATING INCOME: Trust department income and fees 397,801 235,367 761,012 483,009 Service charges on deposit accounts 1,751,556 1,661,928 3,438,622 3,279,333 Other service charges, commissions and fees 68,401 70,071 133,918 138,049 Other income 268,930 153,759 598,164 1,115,168 ------------ ------------ ------------ ------------ TOTAL OTHER OPERATING INCOME $ 2,486,688 $ 2,121,125 $ 4,931,716 $ 5,015,559 ------------ ------------ ------------ ------------
Page 4 of 20 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, ------------------------------- --------------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ OTHER OPERATING EXPENSE: Salaries and employee benefits $ 2,717,698 $ 2,673,181 $ 5,606,434 $ 5,897,910 Net occupancy 326,875 330,122 643,815 670,163 Equipment rentals, depreciation and maintenance 723,199 767,349 1,498,916 1,461,943 Other expense 1,689,298 1,791,894 3,315,969 3,369,260 ------------ ------------ ------------ ------------ TOTAL OTHER OPERATING EXPENSE 5,457,070 5,562,546 11,065,134 11,399,276 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 1,598,937 786,601 2,982,688 1,680,641 INCOME TAXES 510,500 128,201 857,080 355,681 ------------ ------------ ------------ ------------ NET INCOME $ 1,088,437 $ 658,400 $ 2,125,608 $ 1,324,960 ============ ============ ============ ============
See Selected Notes to Condensed Consolidated Financial Statements. Page 5 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Accumulated # of Unearned Other Compre- Common Common Undivided Compen- Comprehensive hensive Shares Stock Surplus Profits sation Income Income Total ------------ ------------ ------------ ------------ ------------ ------------- ------------ ------------ Balance, January 1, 2002 5,620,239 $ 5,620,239 $ 65,780,254 $ 7,052,559 $ (174,043) $ 1,790,017 $ 80,069,026 Comprehensive Income: Net income 1,324,960 $ 1,324,960 1,324,960 Net unrealized gain on available for sale securities, net of tax 195,780 195,780 195,780 Reclassifi- cation adjustment for available for sale securities called or sold in current year, net of tax (192,297) (192,297) (192,297) ------------ Total comprehensive income $ 1,328,443 ============ Allocation of ESOP shares 15,000 15,000 Issuance of stock 7,142 7,142 92,846 99,988 Retirement of common stock (26,715) (26,715) (278,987) (305,702) Dividend declared, ($.12 per share) (672,080) (672,080) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, June 30, 2002 5,600,666 $ 5,600,666 $ 65,780,254 $ 7,519,298 $ (159,043) $ 1,793,500 $ 80,534,675 ============ ============ ============ ============ ============ ============ ============
Page 6 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued) (Unaudited)
Accumulated # of Unearned Other Compre- Common Common Undivided Compen- Comprehensive hensive Shares Stock Surplus Profits sation 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 2,125,608 $ 2,125,608 2,125,608 Net unrealized gain on available for sale securities, net of tax 919,878 919,878 919,878 Reclassifi- cation adjustment for available for sale securities called or sold in current year, net of tax (65,126) (65,126) (65,126) ------------ Total comprehensive income $ 2,980,360 ============ Allocation of ESOP shares 24,000 24,000 Retirement of common stock (22,261) (22,261) (284,508) (306,769) Dividend declared ($.12 per share) (778,570) (778,570) ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, June 30, 2003 5,561,211 $ 5,561,211 $ 65,780,254 $ 9,572,871 $ (119,043) $ 2,855,334 $ 83,650,627 ============ ============ ============ ============ ============ ============ ============
See Selected Notes to Condensed Consolidated Financial Statements. Page 7 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six Months Ended June 30, 2003 2002 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,125,608 $ 1,324,960 Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on sales of other real estate (3,500) 93,939 Gain on sale or liquidation of available for sale securities (180,868) Depreciation and amortization 931,000 920,000 Provision for losses on loans 317,745 612,935 Provision for losses on other real estate 128,448 300,259 Stock issued under incentive plan 99,988 Changes in assets and liabilities: Accrued interest receivable (290,899) 832,746 Other assets 297,256 1,074,689 Accrued interest payable (36,329) (35,751) Other liabilities 277,066 207,417 -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,746,395 5,250,314 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales, maturities and calls of held to maturity securities 6,952,199 16,050,000 Investment in held to maturity securities (56,002) Proceeds from sales, maturities and calls of available for sale securities 80,713,275 66,110,014 Investment in available for sale securities (134,672,416) (68,876,428) Investment in Federal Home Loan Bank (25,200) (28,000) Loans, net decrease 16,050,779 25,263,894 Proceeds from sales of other real estate 251,000 555,250 Acquisition of premises and equipment (1,992,953) (294,436) Federal funds sold (32,950,000) Other assets (218,382) (213,843) -------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ (32,941,698) $ 5,560,449 -------------- --------------
Page 8 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
For The Six Months Ended June 30, 2003 2002 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Demand and savings deposits, net increase $ 6,104,061 $ 10,968,132 Time deposits, net decrease (4,048,295) (11,297,645) Principal payments on notes (23,100) (21,438) Retirement of common stock (306,769) (305,702) Cash dividends (670,017) (674,428) Federal funds purchased and securities sold under agreements to repurchase 20,430,485 (7,513,715) Notes payable 72,799 Borrowings from Federal Home Loan Bank 10,406,068 205,713 ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 31,892,433 (8,566,284) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 2,697,130 2,244,479 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 39,654,247 32,034,976 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,351,377 $ 34,279,455 ============ ============
See Selected Notes to Condensed Consolidated Financial Statements. Page 9 of 20 PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Six Months Ended June 30, 2003 and 2002 1. The accompanying unaudited condensed consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 2002 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 Regulations S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The statements include information required for interim financial statements. 2. The results of operations for the six months ended June 30, 2003 and 2002, 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 5,566,880 and 5,611,596 for the six months ended June 30, 2003 and 2002, respectively. 4. At June 30, 2003 and 2002, the total recorded investment in impaired loans amounted to $6,705,000 and $7,008,000. The average recorded investment in impaired loans amounted to approximately $6,695,000 and $7,195,000 at June 30, 2003 and 2002, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $6,702,000 at June 30, 2003. The allowance for losses related to these loans amounted to approximately $936,000 at June 30, 2003. The amount of interest not accrued on these loans amounted to approximately $133,000 and $169,000 for the six months ended June 30, 2003 and 2002, respectively. 5. Transactions in the allowance for loan losses were as follows:
For the six months For the year ended For the six months ended June 30, December 31, ended June 30, 2003 2002 2002 ------------------ ------------------ ------------------ Balance, beginning of period $ 6,696,911 $ 5,658,210 $ 5,658,210 Recoveries 346,195 675,491 352,424 Loans charged off (914,476) (2,064,790) (484,302) Provision for loan losses 317,745 2,428,000 612,935 ------------------ ------------------ ------------------ Balance, end of period $ 6,446,375 $ 6,696,911 $ 6,139,267 ================== ================== ==================
Page 10 of 20 6. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $3,345,000 and $5,469,000 for the six months ended June 30, 2003 and 2002, respectively, and $9,929,000 for the twelve months ended December 31, 2002, for interest on deposits and borrowings. Income tax payments totaled $1,117,000 and $815,000 for the six months ended June 30, 2003 and 2002, respectively, and $1,640,000 for the twelve months ended December 31, 2002. Loans transferred to other real estate amounted to $750,000 and $458,000 for the six months ended June 30, 2003 and 2002, respectively, and $984,000 for the twelve months ended December 31, 2002. 7. The income tax effect on the accumulated other comprehensive income was $440,000 and $2,000 at June 30, 2003 and 2002, respectively. Page 11 of 20 Independent Accountants' Report 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, 2003, June 30, 2002 and December 31, 2002, and the related condensed consolidated statements of income, shareholders' equity, and cash flows for the six months ended June 30, 2003 and June 30, 2002. 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 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 reviews, we are not aware of any material modifications that should be made to the accompanying condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America 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, 2002, 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 17, 2003, except for Note P as to which the date was February 18, 2003, 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, 2002, 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. August 4, 2003 Biloxi, Mississippi Page 12 of 20 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, 2003 and 2002. These comments highlight the significant events and should be considered in combination with the 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 Net income for the six months ended June 30, 2003, was $2,126,000 compared with $1,325,000 for the same period in 2002. Net interest income improved from $8,677,000 for the six months ended June 30, 2002 to $9,434,000 for the six months ended June 30, 2003 as the Company continues its interest rate management policies begun in 2002, particularly with respect to rates paid on deposits. Also, the provision for loans was $613,000 for the six months ended June 30, 2002, as compared to $318,000 for the six months ended June 30, 2003, as the Company has previously identified and provided for potential significant loan losses before January 1, 2003. The following schedule compares financial highlights for the six months ended June 30, 2003 and 2002:
For the six months ended June 30, 2003 2002 ----------------- ---------------- Net income per share $ 0.38 $ 0.24 Book value per share $ 15.04 $ 14.38 Return on average total assets .74% .45% Return on average shareholders' equity 5.14% 3.30% Allowance for loan losses as a % of loans, net of unearned discount 2.19% 1.91%
Page 13 of 20 FINANCIAL CONDITION HELD TO MATURITY SECURITIES Held to maturity securities decreased $11,649,000 at June 30, 2003, as compared with June 30, 2002, as a result of the management of the Company's liquidity position. As funds were available from the maturity of these securities, they were invested in available for sale securities. Gross unrealized gains were $320,000 and $576,000 at June 30, 2003 and 2002, respectively, and gross unrealized losses were $1,000 at June 30, 2002. The following schedule reflects the mix of the held to maturity securities portfolio at June 30, 2003 and 2002:
June 30, 2003 2002 --------------------------- --------------------------- Amount % Amount % ----------- ----------- ----------- ----------- U. S. Treasury securities $ 3,999,265 37.60% $ 8,995,016 40.40% U. S. Government agencies 3,000,000 28.20% 8,002,206 35.90% States and political subdivisions 3,636,226 34.20% 5,287,742 23.70% ----------- ------ ----------- ------ Totals $10,635,491 100.00% $22,284,964 100.00% =========== ====== =========== ======
AVAILABLE FOR SALE SECURITIES Available for sale securities increased $60,882,000 at June 30, 2003, as compared with June 30, 2002, as the result of the management of the Company's liquidity position, as discussed above, and as a result of decreased loan demand. Gross unrealized gains were $4,392,000 and $2,715,000 and gross unrealized losses were $80,000 and $7,000 at June 30, 2003 and 2002, respectively. The following schedule reflects the mix of available for sale securities at June 30, 2003 and 2002:
June 30, 2003 2002 ----------------------------- ----------------------------- Amount % Amount % ------------ ------------ ------------ ------------ U. S. Treasury securities $ 47,979,548 23.20% $ 46,303,855 31.80% U. S. Government agencies 148,685,216 71.90% 93,319,916 63.90% States and political subdivisions 5,612,038 2.70% 1,596,106 1.10% Other securities 4,458,688 2.20% 4,633,962 3.20% ------------ ------ ------------ ------ Totals $206,735,490 100.00% $145,853,839 100.00% ============ ====== ============ ======
Page 14 of 20 FEDERAL FUNDS SOLD The Company invests in Federal funds sold, as it deems necessary, in the management of the bank subsidiary's liquidity position. LOANS Loans decreased $26,388,000 at June 30, 2003, as compared with June 30, 2002. This decrease is a result of decreased loan demand in the Company's trade area caused by the softening of the local economy. Another contributing factor is the refinancing of loans in our trade area's highly competitive interest rate environment. The Company anticipates that loan demand will continue to be flat or slightly decrease throughout the remainder of 2003. Funds that are available to fund loan demand are currently invested primarily in available for sale securities. OTHER REAL ESTATE Other real estate increased $262,000 at June 30, 2003, as compared with June 30, 2002, due to an increase in loans transferred to other real estate in 2003 compared with 2002. The Company is actively marketing these properties. OTHER ASSETS Other assets increased $6,220,000 at June 30, 2003, as compared with June 30, 2002, primarily due to the investment of $5,000,000 in bank owned life insurance during the third quarter of 2002. DEPOSITS Total deposits decreased $21,984,000 at June 30, 2003, as compared with June 30, 2002. Significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal areas reallocate their resources periodically. As discussed above, the Company has managed its funds including planning the timing and classification of investment maturities and using other funding sources and their maturity so as to achieve appropriate liquidity. Specifically, the Company obtained brokered deposits of $30,000,000 during the third quarter of 2000. At June 30, 2003, brokered deposits amounted to $5,000,000. These deposits matured on July 18, 2003. The Company currently does not plan to obtain further brokered deposits. ACCRUED INTEREST PAYABLE Accrued interest payable decreased $314,000 at June 30, 2003, as compared with June 30, 2002, due to the decline in interest rates paid on deposits. FEDERAL FUNDS PURCHASED Federal funds purchased increased $12,701,000 as June 30, 2003, as compared with June 30, 2002, in the management of the Company's liquidity position and the reallocation of funds by certain customers between deposit and non-deposit products. BORROWING FROM THE FEDERAL HOME LOAN BANK Borrowings from the Federal Home Loan Bank increased $10,964,000 at June 30, 2003, as compared with June 30, 2002, and the Company periodically acquires these funds in the management of its liquidity position. Page 15 of 20 OTHER LIABILITIES Other liabilities increased $678,000 at June 30, 2003, as compared with June 30, 2002, primarily as a result of an increase in liabilities related to deferred compensation benefits for a deceased officer and a retired officer 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 15.69% at June 30, 2003, as compared with 14.70% at June 30, 2002. 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. On June 25, 2003, the Company's Board of Directors approved a semi-annual dividend of $ .14 per share. The dividend had a record date of July 7, 2003 and a distribution date of July 11, 2003. 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) 2003 2002 ---------------- ---------------- Total interest income (1) $ 12,833 $ 14,206 Total interest expense 3,309 5,433 ---------------- ---------------- Net interest earnings $ 9,524 $ 8,773 ================ ================ Net yield on interest earning assets 3.78% 3.36% ================ ================
(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2003 and 2002. The schedule on page 17 provides an analysis of the change in total interest income and total interest expense for the six months ended June 30, 2003 and 2002. Page 16 of 20 Analysis of Changes in Interest Income and Interest Expense (In Thousands)
Attributable To: ------------------------------------------------ For the Six For the Six Months Months Ended June Ended June Increase 30, 2003 30, 2002 (Decrease) Volume Rate Rate/ Volume ------------ ------------ ------------ ------------ ------------ ------------ INTEREST INCOME: (1) Loans (2) $ 8,939 $ 10,130 $ (1,191) $ (858) $ (364) $ 31 Federal funds sold 54 107 (53) (86) 165 (132) Held to maturity: Taxable securities 222 584 (362) (341) (51) 30 Non-taxable securities 156 239 (83) (71) (17) 5 Available for sale: Taxable securities 3,216 2,969 247 720 (381) (92) Non-taxable securities 112 42 70 80 (3) (7) Other securities 134 135 (1) 1 (1) (1) ------------ ------------ ------------ ------------ ------------ ------------ Total $ 12,833 $ 14,206 $ (1,373) $ (555) $ (652) $ (166) ============ ============ ============ ============ ============ ============ INTEREST EXPENSE: Savings and negotiable interest bearing deposits $ 864 $ 1,308 $ (444) $ (154) $ (329) $ 39 Time deposits 1,739 3,318 (1,579) (726) (1,092) 239 Borrowings from FHLB 207 182 25 72 (34) (13) Federal funds purchased and securities sold under agreements to repurchase 495 621 (126) 68 (175) (19) Mortgage indebtedness 4 4 (1) 1 ------------ ------------ ------------ ------------ ------------ ------------ TOTAL $ 3,309 $ 5,433 $ (2,124) $ (741) $ (1,629) $ 246 ============ ============ ============ ============ ============ ============
(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2003 and 2002. (2) Loan fees are included in these figures. Includes nonaccrual loans. Page 17 of 20 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 $318,000 and $613,000 for loan losses during the six months ended June 30, 2003 and 2002, respectively. Although it does not anticipate that further loan loss provisions will be required in 2003, the Company will continue to closely monitor the allowance and will provide for such losses as deemed necessary. TRUST DEPARTMENT INCOME AND FEES Trust department income and fees increased $278,000 for the six months ended June 30, 2003, as compared with the six months ended June 30, 2002. This increase was due to the change in accounting for corporate bond fee income from a cash basis to accrual basis in 2003. OTHER INCOME Other income decreased $517,000 for the six months ended June 30, 2003, as compared with the six months ended June 30, 2002, primarily as a result of the income realized on proceeds from whole life insurance owned by the bank subsidiary in 2002. 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 of deposit 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 2003, as necessary. ITEM 4: CONTROLS AND PROCEDURES Based on their evaluation, as of June 30, 2003, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(c) and 15d-15(c) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) are effective. During the period ending June 30, 2003, there were no changes in internal controls over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 18 of 20 PART II OTHER INFORMATION 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 None. Page 19 of 20 SIGNATURES Pursuant to the requirement of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLES FINANCIAL CORPORATION (Registrant) Date: August 8, 2003 By: /s/ Chevis C. Swetman ----------------------------------- Chevis C. Swetman Chairman, President and Chief Executive Officer Date: August 8, 2003 By: /s/ Lauri A. Wood --------------------------------- Lauri A. Wood Chief Financial Officer and Controller (principal financial and accounting officer) Page 20 of 20