Peoples Financial Corp.
Annual Report 2003

Plain-text annual report

593 - Cover 3/16/04 10:01 AM Page 1 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N N U A L R E P O R T 2 0 0 3 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N N U A L R E P O R T 2 0 0 3 593 - Cover 3/16/04 10:01 AM Page 2 C O N T E N T S 1 P R E S I D E N T ’ S L E T T E R 2 Y E A R I N R E V I E W 2 1 5 3 F I N A N C I A L S C O R P O R A T E I N F O R M A T I O N 594 - 8pg color inside text 3/16/04 9:46 AM Page 1 L E T T E R F R O M T H E P R E S I D E N T At the same time, during 2003 we began charting new directions to position The Peoples Bank for more growth in the future. Specifically, we engaged the services of a respected management consulting firm to analyze our entire organizational structure and suggest changes to take us seamlessly to another level of asset size. During the second half of 2003, we began to implement the report’s recommendations. Most notably, we have clearly defined the responsibilities of the members of our senior management team, and they in turn have begun to build their respective employee groups to implement their own strategic plans. The result, we are confident, will be a more efficient operation that CHARTING THE COURSE FOR THE FUTURE D E A R S H A R E H O L D E R S : In some important ways, 2003 was a year of seeming contradiction: provides more responsive service to our customers. Peoples Financial Corporation stayed the course of our strategic plan, yet at the same time we charted new directions for the future. Throughout this year of change, we have been blessed with a group of employees whose dedication has been unwavering. Their In practice, these actions were not incompatible. And they were contribution to the success of The Peoples Bank is incalculable. quite successful: the company enjoyed its most profitable year Whether they are on the front line directly serving customers or since 1999, with net income increasing 57% over 2002 to $5,018,000. in the back office keeping our systems running smoothly, our team Moreover, we were able to raise the dividend not once but twice members represent the engine that drives The Peoples Bank. I want during 2003, a total increase of 25%, from $.12 a share at the to acknowledge and salute their splendid performance through beginning of 2003 to $.15 a share at the start of 2004. turbulent times. So how did we stay the course and chart new directions at the same I also want to pay special tribute to our board of directors, who time? First, we stayed the course of our strategic plan to continue have demonstrated their leadership in charting this new direction pursuing expansion in the face of difficult economic conditions. for Peoples Financial Corporation while supporting our management We started the year with the opening of our new branch in Gautier team to stay the course of our strategic plan. Our directors’ in January, 2003, then dedicated a new, larger facility in Long combination of vision and determination represents a great source Beach near the end of the year. In December, we began work on the of strength on which I am personally grateful to depend. renovation of our Bay St. Louis branch to accommodate the growth of our business in Hancock County. Finally, I offer my gratitude to our stockholders who have entrusted our team with the management and operation of this institution. On the financial side of our business, we aggressively tackled the We never forget that our stockholders are our owners; we strive challenge of shrinking interest margins by repricing deposits, to earn your trust and generate a fair return on your investment while simultaneously addressing loan portfolio issues. As we start every day. 2004, I’m comfortable that all our problem loans have been dealt with, and we can look forward to pursuing business on the loan Sincerely, side once again. 1 P R E S I D E N T ’ S L E T T E R Chevis C. Swetman Chairman of the Board, Chief Executive Officer 594 - 8pg color inside text 3/16/04 9:47 AM Page 2 T H E Y E A R I N R E V I E W $5,018 P R O F I T S R I S E , D I V I D E N D R A I S E D T W I C E $3,999 $3,191 Financial performance in 2003 reversed the course of the last three years of economic difficulty, with net income rising 57% over the year before, totaling $5,018,000, compared to $3,191,000 for 2002. The 2002 performance was impacted by a $1,500,000 addition to loan loss reserves caused N E T I N C O M E 2 0 0 1 - 2 0 0 3 I N T H O U S A N D S by a single credit. However, exclusive of the loss provision, 2003 results exceeded 2002 by nearly 9%, largely on the strength of an 8% increase in net interest income to more than $19,000,000. The increase in net interest income was the result of stabilizing interest rates and our ability to reprice loans and deposits to bring interest rates margins back to acceptable levels. $18,780 $16,428 $15,380 As a result of the steady rise in earnings, the Board of Directors voted to increase the dividend paid on the common stock of Peoples Financial Corporation twice during 2003. In June, the Board voted to increase the dividend by 16.7%, from $.12 to $.14 a share. At the end of the year, the Board voted to raise the dividend another 7.1% to $.15 a common share. N E T I N T E R E S T I N C O M E 2 0 0 1 - 2 0 0 3 I N T H O U S A N D S $0.29 $0.24 $0.24 Combined, the two dividend raises increased the dividend 25% above the level it stood at the end of 2002. The current dividend represents a distribution of about 32% of earnings, very near the target of 35% set by the board a year earlier. The latest dividend increase was the fifth in the last six years, making the current $.30 annualized dividend 76% higher than the 1998 payout of $.17 per share. Meanwhile, The Peoples Bank capital ratios continued to improve during the year. Primary capital to average assets finished 2003 at 15.84%, D I V I D E N D S 2 0 0 1 - 2 0 0 3 P E R S H A R E compared to 15.39% at the end of 2002. Our strong capital base gives us the ability to continue our expansion program, even during difficult economic conditions. 15.84% 15.39% 14.47% C A P I TA L R AT I O 2 0 0 1 - 2 0 0 3 2 W E I V E R N I R A E Y E H T 594 - 8pg color inside text 3/16/04 9:47 AM Page 3 T W O N E W B R A N C H E S O P E N , R E N O V A T I O N O F A N O T H E R B R A N C H A N N O U N C E D In a continuation of our program of physical and geographic expansion, 2003 saw the grand opening of two new branches of the Peoples Bank. We opened our new branch in Gautier in January to serve our growing customer base in Jackson County. Later in the fall, we dedicated a new facility in Long Beach that replaced an older branch two blocks away. The new, full-service Long Beach branch provides a total of 2,000 square feet of banking space to (cid:2) customers, including a night drop, safe deposit boxes, two drive-up lanes and an ATM. At the end of the year, The Peoples Bank also announced plans to renovate the Bay St. Louis branch to offer enhanced service to customers in the Bay-Waveland area. Bay St. Louis branch manager Jeannie Deen and prominent business executive William Lady were featured in a television (cid:2) commercial that was part of a new advertising campaign launched in 2003. The campaign features employees from all departments and branches in a series of print ads that accompany the television and radio commercials. 3 T H E Y E A R I N R E V I E W 594 - 8pg color inside text 3/16/04 9:47 AM Page 4 THE PEOPLES BANK AND ITS PEOPLE GIVE BACK TO THE COMMUNITY During 2003, The Peoples Bank continued its long-standing tradition of giving back to the community, with corporate and individual donations to non-profit groups serving the Mississippi Gulf Coast. Two local charitable organizations—St. Vincent DePaul Pharmacy and the Junior Auxiliary of Biloxi—each received checks for $8,266.50, raised through the efforts of Peoples Bank employees (cid:2) through charity golf and bowling tournaments during the year. The donation to the Junior Auxiliary is believed to be the largest single donation ever received by the organization, according to officials of the group. In addition, bank employees selected Life of South Mississippi and Morning Star to receive corporate donations of $5,000 each. Bank president Chevis Swetman presented the checks to representatives of the two organizations. 4 W E I V E R N I R A E Y E H T Once again, The Peoples Bank took an active role in the week-long Cruisin’ the Coast event that has grown to nearly 6,000 registered participants. The annual Biloxi block party of the event was once again staged in front of the Main Branch of the bank. All staffers (cid:2) at the Main Branch, including president and CEO Chevis Swetman, supported the event by dressing in 50s outfits of blue jeans and poodle skirts. 594 - 8pg color inside text 3/16/04 9:47 AM Page 5 Board of Directors Peoples Financial Corporation A. Wes Fulmer, Senior Vice-President and Chief Lending Officer Chevis C. Swetman, Chairman of the Board Brian J. Kozlowski, Assistant Vice-President Dan Magruder, Vice Chairman; President, Rex Distributing Co., Inc. Andrew M. Welter, Assistant Vice-President Lending Drew Allen, President, Allen Beverages, Inc. Rex E. Kelly, Director of Corporate Communications, Mississippi Power Company Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott Officers Peoples Financial Corporation Chevis C. Swetman, President and CEO Thomas J. Sliman, First Vice-President Jeannette E. Romero, Second Vice-President Robert M. Tucei, Vice-President A. Wes Fulmer, Vice-President and Secretary M. O. Lawrence, III, Vice-President Lauri A. Wood, Chief Financial Officer and Controller Board of Directors The Peoples Bank, Biloxi, Mississippi Chevis C. Swetman, Chairman Tyrone J. Gollott, Vice-Chairman; Secretary-Treasurer, Gollott & Sons Transfer & Storage, Inc. Drew Allen, President, Allen Beverages, Inc. Liz Corso Joachim, President, Frank P. Corso, Inc. Rex E. Kelly, Director of Corporate Communications, Mississippi Power Company Dan Magruder, President, Rex Distributing Co., Inc. Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc. Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott Officers The Peoples Bank, Biloxi, Mississippi Senior Management Chevis C. Swetman, President and CEO Thomas J. Sliman, Senior Vice-President Jeannette E. Romero, Senior Vice-President Robert M. Tucei, Senior Vice-President Lauri A. Wood, Senior Vice-President and Cashier A. Wes Fulmer, Senior Vice-President M. O. Lawrence, III, Senior Vice-President Stephanie D. Broussard, Loan Officer Melanie L. Battise, Branch Manager Diana T. Winland, Loan Officer Pinky T. Walker, Administrative Officer West Region Jeannie M. Deen, Vice-President Eric M . Chambless, Assistant Vice-President William A. Aborn, Branch Manager Debora T. Batchelor, Loan Officer Shannon D. Garrett, Loan Officer Central Region John W. McKellar, Vice-President Mark A. Chatham, Vice-President Read H. Breeland, Assistant Vice-President James P. Estrada, Assistant Vice-President Brent G. Johnson, Assistant Vice-President William S. Maddox, Assistant Vice-President J. Denise Holmes, Branch Manager East Region Jerome D. Dodge,II, Vice-President David A. Thompson, Assistant Vice-President Henry N. Knue, Branch Manager Patrick J. Lyons, Branch Manager John L.Welter, IV, Branch Manager Julie B. Carpenter, Loan Officer Human Resources Jackie L. Henson, Vice-President Patricia L. Levine, Vice-President Janice L. Smitherman, Assistant Vice-President - Employee Benefits Business Development Dennis J. Burke, Vice-President Robert M. Tucei, Senior Vice-President and Chief Credit Officer Credit Administration J. Patrick Wild, Vice-President Donna F. Bessetti, Vice-President Jesse J. Migues, Assistant Vice-President Ronnie F. Harrison, Assistant Vice-President Kathleen M. Worrell, Insurance Officer 33 F I N A N C I A L S 594 - 8pg color inside text 3/16/04 9:47 AM Page 6 Thomas J. Sliman, Senior Vice-President and Chief Information Officer Technology and Facilities Sandra L. York, Vice-President - Information Systems George S. Tranum, Vice-President - Technical Support James M. Gruich, Assistant Vice-President - Technology Security Gloria A. Cothern, Assistant Vice-President - Electronic Banking Ronald L. Baldwin, Systems Support Technician Officer Frederick J. Breal, Property Officer Cheryl A. Dewey, Data Processing Officer Thomas A. Esposito, Jr., Business Solutions Officer John M. Zorich, Internet Banking Technology Officer Lauri A. Wood, Senior Vice President and Chief Financial Officer Security Robin Vignes, Vice-President Minh-Tuyet Nguyen, Security Officer Margaret H. Chandler, Assistant Security Officer Audit, Compliance and Loan Review Gregory M. Batia, Vice-President and Auditor Evelyn R. Herrington, Vice-President - Compliance Robert E. Smith, Jr., Vice-President - Loan Review F. Kay Rice, Loan Review Officer Rebecca A. Williams, Assistant Auditor Darnell Y. Schreck, Assistant Cashier - Compliance Branch Locations The Peoples Bank, Biloxi, Mississippi Biloxi Branches Financial Connie F. Lepoma, Assistant Vice-President Cassandra F. Reid, Assistant Cashier Investments Peggy M. Byrd, Vice-President Janet H. Wood, Assistant Vice-President M. O. Lawrence, III, Senior Vice-President and Senior Trust Officer Asset Management & Trust Services Ann F. Guice, Vice-President Louise C. Wilson, Trust Officer Thomas H. Wicks, Trust Officer Daniel A. Bass, Trust Officer C. J. Dunaway, Trust Officer Main Office, 152 Lameuse Street, Biloxi, Mississippi 39530, (228) 435-5511 Cedar Lake Office, 11355 Cedar Lake Road, Biloxi, Mississippi 39532 (228) 435-8688 West Biloxi Office, 2430 Pass Road, Biloxi, Mississippi 39531, (228) 435-8203 Gulfport Branches Downtown Gulfport Office, 1105 30th Avenue, Gulfport, Mississippi 39501, (228) 897-8715 Handsboro Office, 0412 E. Pass Road, Gulfport, Mississippi 39507, (228) 897-8717 Orange Grove Office, 12020 Highway 49 North, Gulfport, Mississippi 39503, (228) 897-8718 Other Branches Jeannette E. Romero, Senior Vice President and Retail Banking Officer Bay St. Louis Office, 408 Highway 90 East, Bay St. Louis, Account Services Kathy S. Comstock, Savings Officer Toni A. Ganucheau, Assistant Cashier ATM/Bankcard Cheryl A. Dubaz, Assistant Vice-President - ATM Charlotte R. Balius, Bankcard Officer Operations Susan B. Page, Assistant Vice-President - Operations Ardell M. Roberts, Assistant Cashier Hugh J. Kavanagh, Assistant Cashier Diana W. Williams - Branch Manager Laura E. Elliott, Assistant Branch Manager Mississippi 39520, (228) 897-8710 Diamondhead Office, 4408 West Aloha Drive, Diamondhead, Mississippi 39525, (228) 897-8714 D’Iberville-St. Martin Office, 10491 Lemoyne Boulevard, D’Iberville, Mississippi 39532, (228) 435-8202 Gautier Office, 2601 Highway 90, Gautier, Mississippi 39553, (228) 497-1766 Long Beach Office, 298 Jeff Davis Avenue, Long Beach, Mississippi 39560 (228) 897-8712 Ocean Springs Office, 2015 Bienville Boulevard, Ocean Springs, Mississippi 39564, (228) 435-8204 Pass Christian Office, 125 Henderson Avenue, Pass Christian, Mississippi 39571, (228) 897-8719 Saucier Office, 17689 Second Street, Saucier, Mississippi 39574, (228) 897-8716 Wiggins Office, 1312 S. Magnolia Drive, Wiggins, Mississippi 39577 (228) 897-8722 34 F I N A N C I A L S 594 - 8pg color inside text 3/16/04 9:47 AM Page 7 CORPORATE INFORMATION PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES Corporate Office Mailing Address P. O. Box 529 Biloxi, MS 39533-0529 (228) 435-8205 Physical Address 152 Lameuse Street Biloxi, MS 39530 Website www.thepeoples.com Corporate Stock Shareholder Information For complete information concerning the common stock of Peoples Financial Corporation, including dividend reinvestment, or general information about the Company, direct inquiries to transfer agent/investor relations: Asset Management & Trust Services Department The Peoples Bank, Biloxi, Mississippi Attention: M. O. Lawrence, III, Senior Vice-President P. O. Box 1416, Biloxi, Mississippi 39533-1416 (228) 435-8208, e-mail: investorrelations@thepeoples.com Independent Auditors Piltz, Williams, LaRosa & Company, Biloxi, Mississippi The common stock of Peoples Financial Corporation is traded on S.E.C. Form 10-K Requests the NASDAQ Small Cap Market under the symbol: PFBX. The cur- A copy of the Annual Report on Form 10-K, as filed with the rent market makers are: Securities and Exchange Commission, may be obtained without Johnston Lemon & Company Morgan Keegan & Company, Inc. Sterne, Agee & Leach, Inc. charge by directing a written request to: Lauri A. Wood, Chief Financial Officer and Controller Peoples Financial Corporation P. O. Drawer 529, Biloxi, Mississippi 39533-0529 (228) 435-8412, e-mail: lwood@thepeoples.com 35 F I N A N C I A L S 594 - 8pg color inside text 3/16/04 9:47 AM Page 8 BOARD OF DIRECTORS 36 W E I V E R N I R A E Y E H T P E O P L E S F I N A N C I A L C O R P O R A T I O N T H E P E O P L E S B A N K , B I L O X I , M I S S I S S I P P I BACK ROW FROM LEFT: Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc.; Tyrone J. Gollott, Vice-Chairman of The Peoples Bank; Secretary-Treasurer, Gollott & Sons Transfer & Storage, Inc.; Lyle M. Page*, Partner, Page, Mannino, Peresich & McDermott. FRONT ROW FROM LEFT: Rex E. Kelly*, Director of Corporate Communications, Mississippi Power Company; Drew Allen*, President, Allen Beverages, Inc.; Chevis C. Swetman*, Chairman of the Board; Dan Magruder*, Vice-Chairman of Peoples Financial Corporation; President, Rex Distributing Co., Inc.; Liz Corso Joachim, President, Frank P. Corso, Inc. *Member of both boards. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES The following presents Management's discussion and analysis of Net interest income improved from $17,808,000 for 2002 to the consolidated financial condition and results of operations of $19,227,000 for 2003 as the Company continues its interest rate Peoples Financial Corporation and Subsidiaries (the Company) for management policies begun in 2002. These policies particularly the years ended December 31, 2003, 2002 and 2001. These include the aggressive pricing of loans and the favorable repricing comments highlight the significant events for these years and of deposits, specifically large and brokered certificates of deposit. should be considered in combination with the Consolidated Also, the provision for loan losses was $2,428,000 for 2002, as Financial Statements and Notes to Consolidated Financial compared with a provision of $447,000 for 2003, as the Company Statements included in this annual report. had previously identified and provided for potential significant FORWARD-LOOKING INFORMATION Congress passed the Private Securities Litigation Act of 1995 in an FINANCIAL CONDITION effort to encourage corporations to provide information about a Available for Sale Securities loan losses in the prior year. company's anticipated future financial performance. This act Available for sale securities increased $56,002,000 at December 31, provides a safe harbor for such disclosure which protects the 2003 as compared with December 31, 2002 primarily as a result of companies from unwarranted litigation if actual results are the management of the bank subsidiary's liquidity position and its different from management expectations. This report contains interest margin. The Company reinvested funds from maturities in forward-looking statements and reflects industry conditions, held to maturity securities in available for sale securities. company performance and financial results. These forward- looking statements are subject to a number of factors and Gross unrealized gains were $2,113,000, $3,032,000 and $2,787,000 uncertainties which could cause the Company's actual results and and gross unrealized losses were $1,094,000, $12,000 and $84,000 experience to differ from the anticipated results and expectations for available for sale securities at December 31, 2003, 2002 and 2001, expressed in such forward-looking statements. respectively. Gains of $57,000, $210,000 and $243,000 were realized on the liquidation or sale of available for sale securities in 2003, CRITICAL ACCOUNTING POLICIES Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. The Company's single most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. If there was a deterioration of any of the factors considered by Management in evaluating the allowance for loan losses, as discussed in Note A, the estimates of loss would be updated, and additional provisions for loan losses may be required. OVERVIEW Net income was $5,018,000 for the year ended December 31, 2003, 2002 and 2001, respectively. Held to Maturity Securities Held to maturity securities decreased $13,235,000 at December 31, 2003, compared with December 31, 2002. The decrease in these securities is directly attributable to the management by the Company of its liquidity position, as discussed above. Funds available from the maturity of these securities were generally invested in available for sale securities. Gross unrealized gains were $176,000, $438,000 and $725,000, at December 31, 2003, 2002 and 2001, respectively, while gross unrealized losses were $2,000 and $18,000, at December 31, 2003 and 2001, respectively. There were no significant realized gains or losses from calls of these investments for the years ended December as compared with $3,191,000 for the year ended December 31, 2002. 31, 2003, 2002 and 2001. 5 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 2 Federal Home Loan Bank Stock Federal Funds Purchased and Securities Sold Under Agreements The Company acquired common stock issued by the Federal Home to Repurchase Loan Bank as a prerequisite for participating in their loan Federal funds purchased and securities sold under agreements to programs. Loans repurchase increased $27,794,000 at December 31, 2003, as compared with December 31, 2002. This fluctuation is directly related to customers' periodic reallocation of their funds in a The Company's loan portfolio decreased $14,373,000 at December non-deposit product and the management of the Company's 31, 2003, as compared with December 31, 2002. This decrease was a liquidity position. result of decreased loan demand in the Company's trade area caused by the softening of the local economy. Another Borrowings from Federal Home Loan Bank contributing factor was the refinancing of loans in our trade area's The Company acquires funds from the Federal Home Loan Bank in highly competitive interest rate environment. During the fourth the management of the liquidity position. As discussed in Note E, quarter of 2003, the loan portfolio increased as the local economy the Company acquired $10,000,000 in advances which matures on became stabilized. The Company anticipates that this positive loan January 9, 2004. growth will continue in 2004. Funds that are available to fund loan demand in the future are presently invested primarily in available Other Liabilities for sale securities. Fluctuations in the various categories of loans Other liabilities increased $814,000 at December 31, 2003, as are illustrated in Note C. Other Real Estate compared with December 31, 2002, as a result of an increase in liabilities related to deferred compensation benefits for a retired officer and current officers and directors of the bank subsidiary. The Other Real Estate (ORE) portfolio increased $188,000 at December 31, 2003 as compared with December 31, 2002 due to the Shareholders' Equity foreclosure of several large parcels of real estate. The Company is During 2003, 2002 and 2001, there were significant events that actively marketing these properties and anticipates a significant impacted the components of shareholders' equity. These events are reduction in ORE for 2004. Gains (losses) realized on sales of ORE detailed in Note H to the Consolidated Financial Statements were $248,170, ($43,666) and $118,716 for the years ended December included in this report. 31, 2003, 2002 and 2001, respectively. Other Assets Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since 6 F I N A N C I A L S Other assets increased $1,031,000 at December 31, 2003, as its founding in 1896. A strong capital foundation is fundamental to compared with December 31, 2002, due to deferred taxes on the continuing prosperity of the Company and the security of its unrealized losses on available for sale securities. customers and shareholders. There are numerous indicators of Deposits capital adequacy including primary capital ratios and capital formation rates. The Five-Year Comparative Summary of Selected Total deposits decreased $15,617,000 at December 31, 2003, as Financial Information presents these ratios for those periods. This compared with December 31, 2002. Significant increases or summary is included in the annual report to shareholders. The decreases in total deposits and/or significant fluctuations among Company's total risk-based capital ratio at December 31, 2003, the different types of deposits are anticipated by Management as 2002 and 2001 was 24.81 %, 24.16% and 21.90% as compared with the customers in the casino industry and county and municipal areas required standard of 8.00%. The Five-Year Comparative Summary reallocate their resources periodically. The Company has managed of Selected Financial Information presents these figures. its funds including planning the timing of investment maturities and the classification of investments and using other funding Bank regulations limit the amount of dividends that may be paid sources and their maturity so as to achieve appropriate liquidity. by the bank subsidiary without prior approval of the Commissioner Specifically, the Company obtained $30,000,000 in brokered of Banking and Consumer Finance of the State of Mississippi. At deposits during 2000, the last of which matured in 2003. The December 31, 2003, approximately $7,142,000 of undistributed Company does not currently plan to obtain further brokered earnings of the bank subsidiary included in consolidated surplus deposits. and retained earnings was available for future distribution to the Company as dividends, subject to approval by the Board of Directors. The Company cannot predict what dividends, if any, will be paid in the future, however the Board of Directors has established a goal of achieving a 35% dividend payout ratio. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 3 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. Total interest income decreased $2,359,000 for the year ended December 31, 2003, as compared with the year ended December 31, 2002, and had decreased $9,861,000 for the year ended December losses of $447,000 was charged to expense for the year ended December 31, 2003. Management continues to closely evaluate the entire loan portfolio, in accordance with its policies and procedures and will provide for any future potential losses as deemed necessary. As a part of this evaluation, the Company also closely monitors any improvements to specific credits previously identified in prior years as having a potential loss. Any such improvements and their potential impact on the provision for loan losses are considered on a periodic basis. Although some uncertainty exists, the Company is monitoring positive events with respect to specific credits that may be resolved during 2004. 31, 2002, as compared with the year ended December 31, 2001. The Other Income Company experienced a decline in interest income, particularly from loans, as a result of the decrease in the volume of loans and the decrease in interest rates earned on loans. Other income decreased $408,000 for the year ended December 31, 2003, as compared with the year ended December 31, 2002, primarily as a result of the income realized in 2002 from proceeds from whole life insurance owned by the bank subsidiary. Total interest expense decreased $3,777,000 for the year ended December 31, 2003, as compared with the year ended December 31, RELATED PARTIES 2002, and had decreased $8,738,000 for the year ended December 31, 2002, as compared with the year ended December 31, 2001. As previously discussed, the Company used brokered time deposits and borrowings from the Federal Home Loan Bank to address its liquidity position. The cost of these funding sources was higher than other more traditional deposit funds, and has had a slightly negative impact on the Company's net margin. As these funds have been repriced more favorably, the Company has realized a positive The Company extends loans to certain officers and directors and their personal business interests, at terms and rates comparable to other loans of similar credit risks. Further disclosure of these transactions are presented in Note C. The Company has not currently engaged, nor does it have any plans to engage, in any other transactions with any related persons or entities. improvement in its interest margin. LIQUIDITY Provision for Loan Losses The Company continuously monitors its 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 is conducted on a quarterly basis using the latest available information. These analyses are utilized in the computation of the adequacy of the allowance for loan losses. A provision is charged to income on a periodic basis to absorb potential losses based on these analyses. Further information related to the computation of the provision is presented in Note A. During 2001 and 2002, the Company identified negative events with respect to an overall softening of the economy and negative events with respect to specific credits which required a large increase to the Company's provision for loan losses during those years. The Company believes that this action provided sufficient funds to absorb significant potential losses. Provisions for loan losses amounted to $2,428,000 and $2,503,000 for the years ended December 31, 2002 and 2001, respectively. A provision for loan 7 F I N A N C I A L S 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. Note J discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Deposits, payment of principal and interest on loans, proceeds from maturities of investment securities, earnings on investment securities, and purchases of federal funds and securities sold under agreements to repurchase are the principal sources of funds for the Company. During 2000, the Company began using other, non-traditional sources of funds, including borrowings from the Federal Home Loan Bank. The Company generally anticipates relying on traditional sources of funds, especially deposits and purchases of federal funds, for its liquidity needs in 2004. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 4 THE SARBANES - OXLEY ACT OF 2002 Q U A N T I T A T I V E A N D Q U A L I T A T I V E DISCLOSURE ABOUT MARKET RISK The Sarbanes - Oxley Act of 2002 (the "Act") was signed into law on Market risk is the risk of loss arising from adverse changes in July 30, 2002. The Act requires the implementation of provisions market prices and rates. Interest rate risk is the most significant designed to enhance public company governance, responsibility market risk affecting the Company. Other types of market risk, such and disclosure. The issues addressed by the Act include the as foreign currency exchange rate risk and commodity price risk, composition and responsibilities of a public company's board of do not arise in the normal course of the Company's business directors and its committees, especially the Audit and Nominating activities. Also, the Company does not currently, and has no plans Committees, the certification of financial statements by the chief to, engage in trading activities or use derivative or off-balance executive officer and chief financial officer, timely reporting of sheet instruments to manage interest rate risk. trading by insiders and independence of external auditors. The Company has implemented all effective provisions of the Act and is The Company has risk management policies in place to monitor closely monitoring those provisions which have not yet become and limit exposure to market risk. The Asset/Liability Committee effective. The Company will take the necessary actions to ensure (ALCO), whose members include the chief executive officer and compliance with the Act, as well as the listing requirements of senior and middle management from the financial, lending, NASDAQ, on which the Company is registered. investing, and deposit areas, is responsible for the day-to-day NEW ACCOUNTING PRONOUNCEMENTS operating guidelines, approval of strategies affecting net interest income and coordination of activities within policy limits established by the Board of Directors based on the Company's The Financial Accounting Standards Board (FASB) has issued tolerance for risk. Specifically, the key objectives of the Company's several statements during the current year. Statement 148, asset/liability management program are to manage the exposure "Accounting for Stock-Based Compensation - Transition and of planned net interest margins to unexpected changes due to Disclosure", Statement 149, "Amendment of Statement 133 on interest rate fluctuations. These efforts will also affect loan pricing Derivative Instruments and Hedging Activities" and Statement 150, policies, deposit interest rate policies, asset mix and volume "Accounting for Certain Financial Instruments with Characteristics guidelines and liquidity. The ALCO committee reports to the Board of Both Liabilities and Equity" are effective for the current year. The of Directors on a quarterly basis. During 2004, the ALCO committee Company evaluated the implementation of adopting these new will enhance its risk management analysis through the pronouncements and determined that their adoption did not have implementation of software to assist in balance sheet a material effect on its financial statements. management, interest rate risk analysis and portfolio modeling. OFF-BALANCE SHEET ARRANGEMENTS The Company has implemented a conservative approach to its asset/liability management. The net interest margin is managed on The Company is a party to off-balance-sheet arrangements in the a daily basis largely as a result of the management of the liquidity normal course of business to meet the financing needs of its needs of the bank subsidiary. The Company generally follows a customers. These arrangements include unused commitments to policy of investing in short term U. S. Agency securities with extend credit, which amounted to $95,165,000 at December 31, maturities of two years or less. Due to the low interest rate 2003, and irrevocable letters of credit, which amounted to environment, the duration of investments has been extended to $3,388,997 at December 31, 2003. The Company uses the same seven years or less with call provisions. The loan portfolio consists credit policies in making commitments and conditional obligations of a 40% - 60% blend of fixed and floating rate loans. It is the as it does for on-balance-sheet arrangements. Since some of the general loan policy to offer loans with maturities of five years or commitments and irrevocable letters of credit may expire without less; however the market is now dictating floating rate terms to be being drawn upon, the total amounts do not neces sarily extended to fifteen years. On the liability side, more than 66% of represent future cash requirements. As discussed previously, the the deposits are demand and savings transaction accounts. Company carefully monitors its liquidity needs and considers the Additionally, more than 75% of the certificates of deposit mature cash requirements, especially for loan commitments, in making within eighteen months. Since the Company's deposits are decisions on investments and obtaining funds from its other generally not rate-sensitive, they are considered to be core sources. Further information relating to off-balance sheet deposits. The short term nature of the financial assets and instruments can be found in Note J. liabilities allows the Company to meet the dual requirements of liquidity and interest rate risk management. 8 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 5 The interest rate sensitivity tables below provide additional contractual maturity dates. Loan maturities have been adjusted for information about the Company's financial instruments that are reserve for loan losses. There have been no adjustments for such sensitive to changes in interest rates. The negative gap in 2004 is factors as prepayment risk, early calls of investments, the effect of mitigated by the nature of the Company's deposits, whose the maturity of balloon notes or the early withdrawal of deposits. characteristics have been previously described. The tabular The Company does not believe that the aforementioned factors disclosure reflects contractual interest rate repricing dates and have a significant impact on expected maturity. Interest rate sensitivity at December 31, 2003 was as follows (in thousands): 2004 2005 2006 2007 2008 Beyond Total 12/31/03 Fair Value Loans, net Average rate Securities Average rate Total Financial Assets Average rate Deposits Average rate Long-term funds Average rate Total Financial Liabilities Average rate $ 195,878 $ 27,523 $ 6,233 $ 10,399 $ 33,757 $ 17,734 $ 291,524 $ 294,685 5.58 % 31,568 3.45 227,446 5.75 273,265 1.38 10,273 1.30 283,538 1.37 7.60 % 7.51 % 6.22 % 5.92 % 6.05 % 5.82 % 14,560 5.11 42,083 7.12 15,088 3.69 184 4.91 15,272 3.71 9,320 3.34 15,553 5.86 4,387 3.11 236 4.91 4,623 3.24 31,852 3.55 42,251 4.52 2,035 3.39 168 4.91 2,203 3.55 50,176 3.63 76,337 4.31 213,813 3.87 213,987 83,933 94,071 505,337 508,672 4.83 1,356 3.39 160 4.91 1,516 3.59 4.74 2 3.67 6,159 6.26 6,161 6.26 5.31 296,133 297,008 1.96 17,180 4.96 313,313 2.34 18,076 315,084 9 F I N A N C I A L S Interest rate sensitivity at December 31, 2002 was as follows (in thousands): 2003 2004 2005 2006 2007 Beyond Total 12/31/02 Fair Value Loans, net Average rate Securities Average rate Total Financial Assets Average rate Deposits Average rate Long-term funds Average rate Total Financial Liabilities Average rate $ 235,880 $ 21,654 $ 28,094 $ 7,485 $ 7,965 $ 4,521 $ 305,599 $ 307,501 5.98 % 8.05 % 7.91 % 8.04 % 6.56 % 6.66 % 6.47 % 54,478 4.22 290,358 5.73 290,104 2.59 153 5.29 290,257 2.59 35,122 3.48 56,776 6.17 9,199 3.43 382 5.32 9,581 3.51 7,799 4.31 35,893 7.44 10,536 4.12 193 5.25 10,729 4.14 20,605 4.00 25,939 4.13 27,056 4.65 170,999 3.93 171,437 28,090 33,904 5.70 1,579 4.02 105 5.25 1,684 4.09 4.93 1,053 4.02 97 5.25 1,150 4.12 31,577 5.04 4 3.89 5,717 6.37 5,721 6.37 476,598 478,938 5.59 312,475 3.47 6,647 6.24 319,122 3.53 314,495 7,398 321,893 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 6 CONSOLIDATED STATEMENTS OF CONDITION PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES DECEMBER 31, Assets Cash and due from banks Available for sale securities Held to maturity securities, fair value of $4,527,000-2003; $18,026,000-2002; $38,986,000-2001 Federal Home Loan Bank Stock, at cost Loans Less: Allowance for loan losses Loans, net Bank premises and equipment, net Other real estate Accrued interest receivable Other assets Total assets Liabilities & Shareholders’ Equity Liabilities: Deposits: Demand, non-interest bearing Savings and demand, interest bearing Time, $100,000 or more Other time deposits Total deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank Notes payable Other liabilities Total liabilities Shareholders’ Equity: Common Stock, $1 par value, 15,000,000 shares authorized, 5,557,379, 5,583,472, and 5,620,239 shares issued and outstanding at December 31, 2003, 2002 and 2001, respectively Surplus Undivided profits Unearned compensation Accumulated other comprehensive income, net of tax Total shareholders’ equity 10 F I N A N C I A L S 2003 2002 2001 $ 33,861,029 $ 39,654,247 $ 32,034,976 207,486,172 151,483,997 142,902,274 4,352,854 1,974,200 17,587,690 1,927,000 297,922,945 312,296,263 6,398,694 291,524,251 17,952,504 1,383,451 3,096,002 13,804,039 6,696,911 305,599,352 17,059,400 1,195,720 2,858,190 12,773,580 38,278,962 1,870,500 347,168,766 5,658,210 341,510,556 18,117,908 1,799,527 3,728,850 6,768,669 $ 575,434,502 $ 550,139,176 $ 587,012,222 $ 76,423,904 $ 75,698,316 $ 76,215,302 173,913,054 58,182,870 64,036,836 372,556,664 95,039,261 17,069,848 110,235 7,154,545 164,954,932 74,064,356 73,456,208 388,173,812 67,245,703 6,313,077 334,371 6,340,607 145,248,560 105,446,070 85,632,730 412,542,662 82,488,859 5,548,988 336,251 6,026,436 491,930,553 468,407,570 506,943,196 5,557,379 65,780,254 11,574,074 (94,899 ) 687,141 83,503,949 5,583,472 65,780,254 8,510,341 (143,043 ) 2,000,582 81,731,606 5,620,239 65,780,254 7,052,559 (174,043 ) 1,790,017 80,069,026 Total liabilities and shareholders’ equity $ 575,434,502 $ 550,139,176 $ 587,012,222 See Notes to Consolidated Financial Statements. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 7 CONSOLIDATED STATEMENTS OF INCOME PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 2003 2002 2001 Interest income: Interest and fees on loans Interest and dividends on securities: U. S. Treasury U. S. Government agencies and corporations States and political subdivisions Other investments Interest on federal funds sold Total interest income Interest expense: Deposits Long-term borrowings Federal funds purchased and securities sold under agreements to repurchase Total interest expense Net interest income Provision for allowance for losses on loans Net interest income after provision for allowance for losses on loans Other operating income: Trust department income and fees Service charges on deposit accounts Gain on liquidation, sale and calls of securities Other income Total other operating income Other operating expense: Salaries and employee benefits Net occupancy Equipment rentals, depreciation and maintenance Other expense Total other operating expense Income before income taxes and extraordinary gain Income taxes Income before extraordinary gain Extraordinary gain, net of income tax Net income Basic and diluted earnings per share Basic and diluted earnings per share before extraordinary gain See Notes to Consolidated Financial Statements. $ 17,181,975 $ 20,061,342 $ 28,174,153 1,320,545 5,882,469 368,934 249,185 62,109 1,397,148 5,161,358 350,498 257,339 196,207 2,064,729 5,881,969 514,351 445,784 203,566 25,065,217 27,423,892 37,284,552 4,383,806 456,694 998,139 5,838,639 19,226,578 447,000 8,052,732 382,912 1,179,993 9,615,637 17,808,255 2,428,000 15,696,840 437,144 2,219,601 18,353,585 18,930,967 2,503,000 18,779,578 15,380,255 16,427,967 1,458,037 6,709,852 57,356 1,512,169 9,737,414 1,419,463 6,822,638 209,659 1,920,452 10,372,212 10,989,269 10,923,858 1,466,797 2,760,125 6,247,956 21,464,147 7,052,845 2,035,000 5,017,845 1,506,113 2,802,343 6,641,849 21,874,163 3,878,304 687,582 3,190,722 $ $ $ 5,017,845 .90 .90 $ $ $ 3,190,722 .57 .57 $ $ $ 11 F I N A N C I A L S 1,418,847 6,388,406 243,126 1,205,750 9,256,129 11,447,070 1,178,261 2,776,745 5,795,068 21,197,144 4,486,952 1,082,000 3,404,952 594,000 3,998,952 .71 .60 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 8 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES Balance, January 1, 2001 Comprehensive Income: Net income Net unrealized gain on available for sale securities, net of tax Reclassification adjustment for available for sale securities called or sold in current year, net of tax Total comprehensive income Purchase of common shares by ESOP Allocation of ESOP shares Cash dividends ($ .12 per share) Dividend declared ($ .12 per share) Issuance of stock for stock incentive plan Effect of stock retirement on accrued dividends Retirement of stock Balance, December 31, 2001 Comprehensive Income: Net income Net unrealized gain on available for sale securities, net of tax Reclassification adjustment for available for sale securities called or sold in current year, net of tax 12 F I N A N C I A L S Total comprehensive income Allocation of ESOP shares Cash dividends ($ .12 per share) Dividend declared ($ .12 per share) Issuance of stock for stock incentive plan Retirement of stock Balance, December 31, 2002 Comprehensive Income: Net income Net unrealized loss on available for sale securities, net of tax Reclassification adjustment for available for sale securities called or sold in current year, net of tax Total comprehensive income Allocation of ESOP shares Cash dividends ($ .14 per share) Dividend declared ($ .15 per share) Retirement of stock Balance, December 31, 2003 See Notes to Consolidated Financial Statements. Number of Common Shares Common Stock Surplus 5,795,207 $ 5,795,207 $ 65,780,254 6,886 6,886 (181,854 ) (181,854 ) 5,620,239 5,620,239 65,780,254 7,142 (43,909 ) 7,142 (43,909 ) 5,583,472 5,583,472 65,780,254 (26,093 ) (26,093 ) 5,557,379 $ 5,557,379 $ 65,780,254 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 9 Undivided Profits Unearned Compensation Accumulated Other Comprehensive Income Comprehensive Income $ 7,093,830 $ (535,840 ) $ 583,406 $ 1,359,541 (152,930 ) (80,043 ) 441,840 3,998,952 (675,388 ) (674,428 ) 93,097 15,545 (2,799,049 ) 7,052,559 (174,043 ) 1,790,017 3,190,722 (672,080 ) (670,017 ) 92,846 (483,689 ) 8,510,341 5,017,845 (778,570 ) (833,607 ) (341,935 ) 471,295 (260,730 ) 31,000 (143,043 ) 2,000,582 (1,195,267 ) (118,174 ) 48,144 $ $ $ $ $ $ 3,998,952 1,359,541 (152,930 ) 5,205,563 3,190,722 471,295 (260,730 ) 3,401,287 5,017,845 (1,195,267 ) (118,174 ) 3,704,404 Total 78,716,857 3,998,952 1,359,541 (152,930 ) (80,043 ) 441,840 (675,388 ) (674,428 ) 99,983 15,545 (2,980,903 ) 80,069,026 3,190,722 471,295 (260,730 ) 31,000 (672,080 ) (670,017 ) 99,988 (527,598 ) 81,731,606 5,017,845 (1,195,267 ) (118,174 ) 48,144 (778,570 ) (833,607 ) (368,028 ) 13 F I N A N C I A L S $ 11,574,074 $ (94,899 ) $ 687,141 $ 83,503,949 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 10 CONSOLIDATED STATEMENTS OF CASH FLOWS PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES YEARS ENDED DECEMBER 31, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on sales of other real estate Gain on sales, calls and liquidation of securities Gain on sale of bank premises Stock incentive plan Depreciation Provision for allowance for loan losses Provision for losses on other real estate Changes in assets and liabilities: Accrued interest receivable Other assets Other liabilities 14 F I N A N C I A L S Net cash provided by operating activities Cash flows from investing activities: Proceeds from maturities, sales and calls of available for sale securities Investment in available for sale securities Proceeds from maturities and calls of held to maturity securities Investment in held to maturity securities Investment in Federal Home Loan Bank stock Proceeds from sales of other real estate Loans, net decrease Proceeds from sale of bank premises Acquisition of premises and equipment Other assets Net cash provided by (used in) investing activities Cash flows from financing activities: Demand and savings deposits, net increase Time deposits made, net decrease Notes payable Principal payments on notes Cash dividends Retirement of common stock Borrowings from Federal Home Loan Bank Repayments to Federal Home Loan Bank Federal funds purchased and securities sold under agreements to repurchase, net increase (decrease) Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See Notes to Consolidated Financial Statements. 2003 2002 2001 $ 5,017,845 $ 3,190,722 $ 3,998,952 (248,170) (57,356) (130,503) 1,676,000 447,000 210,358 (237,812) (323,618) 304,832 6,658,576 130,443,200 (188,388,210) 13,234,836 (47,200) 827,665 12,650,517 445,068 (2,883,669) 325,425 (33,392,368) 9,683,710 (25,300,858) (175,992) (1,448,587) (368,028) 10,756,771 43,666 (209,659) (182,861) 99,988 1,842,000 2,428,000 533,848 870,660 448,969 40,412 9,105,745 145,297,421 (153,352,620) 20,745,000 (53,728) (56,500) 1,010,723 32,498,774 355,620 (956,251) (6,282,010) 39,206,429 19,189,386 (43,558,236) 72,799 (43,679) (1,346,508) (527,598) 764,089 (118,716) (243,126) 99,983 1,864,827 2,503,000 409,264 768,863 140,233 (638,777) 8,784,503 46,359,462 (139,028,899) 143,715,000 (83,942,007) (223,200) 1,044,119 27,242,762 (1,649,463) 521,482 (5,960,744) 15,851,110 (17,032,525) (14,273) (1,297,316) (2,980,903) (17,610,519) 27,793,558 20,940,574 (5,793,218) 39,654,247 33,861,029 (15,243,156) (40,692,903) 7,619,271 32,034,976 39,654,247 $ 17,149,775 (5,934,651) (3,110,892) 35,145,868 $ 32,034,976 $ 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Business of The Company Securities Peoples Financial Corporation is a one-bank holding company The classification of securities is determined by Management at the headquartered in Biloxi, Mississippi. Its two operating subsidiaries time of purchase. Securities are classified as held to maturity when are The Peoples Bank, Biloxi, Mississippi, and PFC Service Corp. Its the Company has the positive intent and ability to hold the principal subsidiary is The Peoples Bank, Biloxi, Mississippi, which security until maturity. Securities held to maturity are stated at provides a full range of banking, financial and trust services to amortized cost. individuals and small and commercial businesses operating in Harrison, Hancock, Stone and Jackson counties. Securities not classified as held to maturity are classified as Principles of Consolidation available for sale and are stated at fair value. Unrealized gains and losses, net of tax, on these securities are recorded in shareholders’ The consolidated financial statements include the accounts of equity as accumulated other comprehensive income. Peoples Financial Corporation and its wholly-owned subsidiaries, The Peoples Bank, Biloxi, Mississippi, and PFC Service Corp. All The amortized cost of available for sale securities and held to significant intercompany transactions and balances have been maturity securities is adjusted for amortization of premiums and eliminated in consolidation. Basis of Accounting accretion of discounts to maturity, determined using the interest method. Such amortization and accretion is included in interest income on securities. The specific identification method is used to Peoples Financial Corporation and Subsidiaries recognize assets determine realized gains and losses on sales of securities, which and liabilities, and income and expense, on the accrual basis of are reported as gain on sale and calls of securities in other accounting. The preparation of financial statements in operating income. conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the Loans reported amounts of assets and liabilities and disclosure of The loan portfolio consists of commercial and industrial and real contingent assets and liabilities at the date of the financial estate loans within the Company’s trade area in South Mississippi. statements and the reported amounts of revenues and expenses The loan policy establishes guidelines relating to pricing, during the reporting period. Actual results could differ from repayment terms, collateral standards including loan to value these estimates. Cash and Due from Banks (LTV) limits, appraisal and environmental standards, lending authority, lending limits and documentation requirements. The Company is required to maintain average reserve balances in Loans are stated at the amount of unpaid principal, reduced by its vault or on deposit with the Federal Reserve Bank. The average unearned income and the allowance for loan losses. Interest on amount of these reserve requirements was approximately loans is recognized over the terms of each loan based on the $10,220,000, $9,013,000 and $8,420,000 for the years ending unpaid principal balance. December 31, 2003, 2002 and 2001, respectively. Loan origination fees are recognized as income when received. The Company’s bank subsidiary maintained account balances in Revenue from these fees is not material to the financial statements. excess of amounts insured by the Federal Deposit Insurance Corporation. At December 31, 2003, the bank subsidiary had The Company places loans on a nonaccrual status when, in the excess deposits of $8,001,000. These amounts were uninsured opinion of Management, they possess sufficient uncertainty as to and uncollateralized. timely collection of interest or principal so as to preclude the 15 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 12 recognition in reported earnings of some or all of the contractual Trust Department Income and Fees interest. Accrued interest on loans classified as nonaccrual is Corporate trust fees are accounted for on an accrual basis and reversed at the time the loans are placed on nonaccrual. Interest personal trust fees are recorded when received for 2003. All trust received on nonaccrual loans is applied against principal. Loans fees were recorded for 2002 and 2001 when received. are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms Income Taxes for a reasonable period of time and the ultimate collectibility of the The Company files a consolidated tax return with its wholly-owned total contractual principal and interest is no longer in doubt. Loans subsidiaries. The tax liability of each entity is allocated based classified as nonaccrual are generally identified as impaired loans. on the entity’s contribution to consolidated taxable income. The The policy for recognizing income on impaired loans is provision for applicable income taxes is based upon reported consistent with the nonaccrual policy. Allowance for Loan Losses income and expenses as adjusted for differences between reported income and taxable income. The primary differences are exempt income on state, county and municipal securities; differences in The allowance for loan losses is established through provisions provisions for losses on loans as compared to the amount allowable for loan losses charged against earnings. Loans deemed to be for income tax purposes; directors’ and officers’ insurance; uncollectible are charged against the allowance for loan losses, depreciation for income tax purposes over (under) that reported and subsequent recoveries, if any, are credited to the allowance. for financial statements; gains reported under the installment sales The allowance for loan losses is based on Management’s evaluation which were structured under the provisions of Section 1031 of the method for tax purposes and gains on the sale of bank premises of the loan portfolio under current economic conditions and is Internal Revenue Code. an amount that Management believes will be adequate to absorb probable losses on loans existing at the reporting date. The Advertising evaluation includes Management’s assessment of several factors: Advertising costs are expensed as incurred. review and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic Leases conditions and the related impact on specific borrowers and All leases are accounted for as operating leases in accordance with industry groups, a study of loss experience, a review of classified, the terms of the leases. nonperforming and delinquent loans, the estimated value of any underlying collateral, an estimate of the possibility of loss based Earnings Per Share on the risk characteristics of the portfolio, adverse situations that Basic and diluted earnings per share are computed on the basis of may affect the borrower’s ability to repay and the results of the weighted average number of common shares outstanding, regulatory examinations. This evaluation is inherently subjective 5,563,015, 5,603,834 and 5,629,872 in 2003, 2002 and 2001, as it requires material estimates that may be susceptible to respectively. significant change. Statements of Cash Flows Bank Premises and Equipment The Company has defined cash and cash equivalents to include Bank premises and equipment are stated at cost, less accumulated cash and due from banks. The Company paid $5,937,967, depreciation. Depreciation is computed primarily by the straight- $9,929,357 and $18,768,387 in 2003, 2002 and 2001, respectively, line method based on the estimated useful lives of the related assets. for interest on deposits and borrowings. Income tax payments Other Real Estate totaled $2,537,223, $1,639,612 and $1,847,250 in 2003, 2002 and 2001, respectively. Loans transferred to other real estate Other real estate acquired through foreclosure is carried at the amounted to $977,584, $984,430 and $2,073,113 in 2003, 2002 and lower of cost (primarily outstanding loan balance) or estimated 2001, respectively. The income tax effect on the accumulated other market value, less estimated costs to sell. If, at foreclosure, the comprehensive income was ($676,621), $108,473 and $621,587, at carrying value of the loan is greater than the estimated market December 31, 2003, 2002 and 2001, respectively. value of the property acquired, the excess is charged against the allowance for loan losses and any subsequent adjustments are Reclassifications charged to expense. Costs of operating and maintaining the Certain reclassifications have been made to the prior year properties, net of related income and gains (losses) on their statements to conform to current year presentation. The disposition, are charged to expense as incurred. reclassifications had no effect on prior year net income. 16 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 13 NOTE B - SECURITIES: The amortized cost and estimated fair value of securities at December 31, 2003, 2002, and 2001, respectively, are as follows (in thousands): December 31, 2003 Available for sale securities: Debt securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: U. S. Treasury States and political subdivisions Total held to maturity securities December 31, 2002 Available for sale securities: Debt securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total held to maturity securities $ $ $ $ $ $ $ $ Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value 49,977 145,507 7,154 202,638 3,829 206,467 1,000 3,353 4,353 $ $ $ $ 465 778 161 1,404 709 2,113 17 159 176 $ $ (38) (801) (48) (887) (207) (1,094) $ (2) (2) $ $ $ $ $ 50,404 145,484 7,267 203,155 4,331 207,486 1,017 3,510 4,527 Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value $ $ 46,948 93,627 4,061 144,636 3,828 148,464 5,998 7,000 4,590 17,588 $ $ $ $ 709 1,468 89 2,266 766 3,032 120 143 175 438 $ $ (1) $ (11) (12) (12) $ $ $ 47,656 95,095 4,139 146,890 4,594 151,484 6,118 7,143 4,765 18,026 17 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 14 December 31, 2001 Available for sale securities: Debt securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total held to maturity securities Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value $ $ $ $ 20,975 113,494 1,759 136,228 3,971 140,199 18,948 13,687 5,644 38,279 $ $ $ $ 207 1,557 4 1,768 1,019 2,787 283 306 136 725 $ $ (10) (74) (84) (84) $ (18) (18) $ $ $ $ $ 21,172 114,977 1,763 137,912 4,990 142,902 19,231 13,993 5,762 38,986 The amortized cost and estimated fair value of debt securities at maturities because borrowers may have the right to call or prepay December 31, 2003, (in thousands) by contractual maturity, are obligations with or without call or prepayment penalties. shown below. Expected maturities will differ from contractual Available for sale securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Totals 18 F I N A N C I A L S Held to maturity securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Totals Amortized cost 30,168 104,057 63,596 4,817 202,638 1,130 1,213 283 1,727 4,353 $ $ $ $ Estimated fair value 30,438 104,696 63,256 4,765 203,155 1,149 1,241 299 1,838 4,527 $ $ $ $ Proceeds from maturities and calls of held to maturity debt Securities with an amortized cost of approximately $154,105,000, securities during 2003, 2002 and 2001 were $13,234,836, $139,625,000 and $149,013,000 at December 31, 2003, 2002 and 2001, $20,745,000 and $143,715,000, respectively. There were no sales of respectively, were pledged to secure public deposits, federal funds held to maturity debt securities during 2003, 2002 and 2001. purchased and other balances required by law. Proceeds from maturities and calls of available for sale debt securities were $130,443,200, $145,297,421 and $46,359,462 during Federal Home Loan Bank (FHLB) common stock was purchased 2003, 2002 and 2001, respectively. Available for sale debt securities during 1999 in order for the Company to participate in certain FHLB were sold in 2001 for a gain of $243,126. There were no sales of programs. The amount to be invested in FHLB stock was calculated available for sale debt securities during 2003 and 2002. The according to FHLB guidelines as a percentage of certain mortgage Company realized gains of $57,356 and $209,659 from the loans. The investment is carried at cost. Dividends received are liquidation of equity securities in 2003 and 2002, respectively. reinvested in FHLB stock. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 15 NOTE C - LOANS: The composition of the loan portfolio was as follows (in thousands): December 31, Real estate, construction Real estate, mortgage Loans to finance agricultural production and other loans to farmers Commercial and industrial loans Loans to individuals for household, family and other consumer expenditures Obligations of states and political subdivisions (primarily industrial revenue bonds and local government tax anticipation notes) All other loans Totals Transactions in the allowance for loan losses are as follows (in thousands): Balance, January 1 Recoveries Loans charged off Provision for allowance for loan losses Balance, December 31 2003 14,896 223,246 3,980 41,832 11,020 2,560 389 297,923 2003 6,697 600 (1,345) 447 6,399 $ $ $ $ 2002 21,534 197,478 7,375 65,946 15,990 3,637 336 312,296 2002 5,658 676 (2,065) 2,428 6,697 $ $ $ $ $ 2001 25,636 224,524 7,241 71,271 15,068 3,233 196 $ 347,169 2001 4,568 561 (1,974 ) 2,503 5,658 $ $ In the ordinary course of business, the Company extends loans to other loans of similar credit risks. These loans do not involve more certain officers and directors and their personal business interests than normal risk of collectability and do not include other unfa- at, in the opinion of Management, terms and rates comparable to vorable features. An analysis of the activity with respect to such loans to related parties is as follows (in thousands): Balance, January 1 New loans and advances Repayments Balance, December 31 2003 10,080 14,453 (15,587) 8,946 $ $ 2002 12,340 19,529 (21,789) 10,080 $ $ 2001 14,118 20,511 (22,289 ) 12,340 $ $ 19 F I N A N C I A L S Industrial revenue bonds with a carrying value of $502,187, impaired loans for which there is a related allowance for loan $700,356 and $898,687 at December 31, 2003, 2002 and 2001, losses was $7,415,073, $6,550,169 and $650,215 at December 31, 2003, respectively, were pledged to secure public deposits. 2002 and 2001, respectively. At December 31, 2003, 2002 and 2001, Nonaccrual loans amounted to $7,415,073, $6,550,169 and $650,215 $7,400,000, $6,602,000 and $661,000, respectively. The amount of the average recorded investment in impaired loans was at December 31, 2003, 2002 and 2001, respectively. The total recorded investment in impaired loans amounted to $7,415,073, $6,550,169 and $650,215 at December 31, 2003, 2002 and 2001, respectively. The amount of that recorded investment in interest not accrued on these loans was approximately $261,000 and $212,000 in 2003 and 2002, respectively. The amount of interest not accrued on these loans did not have a significant effect on earnings in 2001. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 16 NOTE D - BANK PREMISES AND EQUIPMENT: Bank premises and equipment are shown as follows (in thousands): December 31, Land Buildings Furniture, fixtures and equipment Totals, at cost Less: Accumulated depreciation Totals Estimated useful lives 5-40 years 3-10 years 2003 4,522 17,533 12,173 34,228 16,275 17,953 $ $ $ $ 2002 4,839 15,584 11,596 32,019 14,960 17,059 $ $ 2001 4,988 15,315 11,107 31,410 13,292 18,118 NOTE E - BORROWINGS FROM FEDERAL HOME LOAN BANK: At December 31, 2003, the Company had $5,000,000 outstanding in outstanding under the line which bears interest at 1.06% and advances under a $76,000,000 line of credit with the Federal Home matures January 9, 2004. The advances are collateralized by a Loan Bank of Dallas (“FHLB”). This advance bore interest at 6.50% blanket floating lien on the Company’s residential first mortgage and matures in 2010. The Company also had $10,000,000 loans. NOTE F - NOTES PAYABLE: December 31, Small Business Administration, outstanding mortgage on property acquired. The note bears interest at 5 3/8% & is payable at $1,952 monthly through January 2004. Notes payable on automobiles. The notes are non interest-bearing and payable in monthly installments through January 2005. RiverHills Bank, $750,000 line of credit for Peoples Financial Corporation Employee Stock Ownership Plan, secured by the guarantee of the Company; Interest at New York Prime (4.00% at December 31, 2003) due quarterly, principal due at maturity in June 2004. Totals 20 F I N A N C I A L S The maturities of notes payable are as follows: 2003 2002 2001 $ 147,029 $ 162,208 15,336 44,299 94,899 110,235 $ 143,043 334,371 $ 174,043 336,251 $ $ 2004 $ 109,769 2005 466 Total $ 110,235 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 17 NOTE G - INCOME TAXES: Federal income taxes payable (or refundable) and deferred taxes (or deferred charges) as of December 31, 2003, 2002 and 2001, included in other assets or other liabilities, were as follows (in thousands): December 31, Deferred tax assets: Allowance for loan losses Employee benefit plans’ liabilities Other Deferred tax assets Deferred tax liabilities: Accumulated depreciation Deferred gain on sale of bank premises Installment sales Unrealized gains on available for sale securities, charged to equity Deferred tax liabilities Net deferred taxes Current payable (refundable) Totals Income taxes consist of the following components (in thousands): Years Ended December 31, Current Deferred Totals $ $ $ $ Deferred income taxes (benefits) resulted from the following (in thousands): Years Ended December 31, Depreciation Provision for loan losses Officers’ and directors’ life insurance Deferred gain on sale of bank premises Unrealized gain on available for sale securities, charged to equity Other Totals $ $ 2003 2,114 1,328 836 (4,278) 732 1,784 13 347 2,876 (1,402) (20) (1,422) 2003 2,322 (287) 2,035 2003 (88) 101 (183) 34 (679) (151) (966) $ $ $ $ $ $ 2002 2,215 1,145 685 (4,045) 820 1,750 13 1,026 3,609 (436) 200 (236) 2002 1,886 (1,198) 688 2002 (127) (628) (281) 63 213 (225) (985) $ $ $ $ $ $ 2001 1,542 938 431 (2,911 ) 947 1,687 13 813 3,460 549 75 624 2001 2,202 (1,120 ) 1,082 2001 (124 ) (580 ) (220 ) 620 (196 ) (500 ) 21 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 18 Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2003, 2002 and 2001, to earnings before income taxes. The reason for these differences is shown below (in thousands): Years Ended December 31, 2003 Amount Taxes computed at statutory rate $ 2,398 Increase (decrease) resulting from: Tax-exempt interest income Non-deductible interest Credit for certified historic structure Non-taxable life insurance proceeds Dividend exclusion Other, net Total income taxes (184) 8 (54) (133) $ 2,035 % 34.0 (2.6) 0.1 (0.8) (1.8) 28.9 2002 Amount $ 1,319 (187) 15 (201) (63) (195) 688 $ % 34.0 (4.8) 0.4 (5.2) (1.6) (5.1) 17.7 2001 Amount $ 1,526 (259) 30 (113) (62) (96) 56 $ 1,082 % 34.0 (5.8 ) 0.7 (2.5 ) (1.4 ) (2.1 ) 1.2 24.1 NOTE H - SHAREHOLDERS’ EQUITY: Banking regulations limit the amount of dividends that may be split dollar policies that had been obtained on behalf of these paid by the bank subsidiary without prior approval of the executives. On December 6, 2002, the Company’s Board of Directors Commissioner of Banking and Consumer Finance of the State of approved the termination of the stock incentive program, which Mississippi. At December 31, 2003, approximately $7,142,000 of was replaced by the acquisition of endorsement split dollar policies undistributed earnings of the bank subsidiary included in for the two executive officers. consolidated surplus and retained earnings was available for future distribution to the Company as dividends, subject to the On November 25, 2003, the Company’s Board of Directors approved approval by Board of Directors. a semi-annual dividend of $ .15 per share. This dividend has a record date of January 9, 2004 and a distribution date of January On May 24, 2000, the Company’s Board of Directors approved the 16, 2004. repurchase of up to 2.50% of the outstanding shares of the Company’s common stock. As of December 31, 2003, the 147,633 The bank subsidiary is subject to various regulatory capital shares available under this plan had been repurchased and retired. requirements administered by the federal banking agencies. On December 8, 2000, the Company’s Board of Directors approved Failure to meet minimum capital requirements can initiate certain the repurchase of 146,304 shares of the outstanding common stock mandatory, and possibly additional discretionary, actions by the from one unrelated shareholder at a purchase price of $2,432,000. regulators that, if undertaken, could have a direct material effect This repurchase was executed on January 2, 2001, and these shares on the bank subsidiary’s financial statements. Under capital were subsequently retired. On November 26, 2002, the Company’s adequacy guidelines and the regulatory framework for prompt Board of Directors approved the repurchase of up to 2.50% of the corrective action, the bank subsidiary must meet specific capital outstanding shares of the Company’s common stock. As of guidelines that involve quantitative measures of the bank December 31, 2003, 21,613 shares had been repurchased and retired subsidiary’s assets, liabilities and certain off-balance sheet items under the plan approved November 26, 2002. as calculated under regulatory accounting practices. The bank On May 23, 2001, the Company’s Board of Directors approved a qualitative judgments by the regulators about components, risk subsidiary’s capital amounts and classification are also subject to stock incentive program for two executive officers. Under this plan, weightings and other factors. whole shares valued as of the distribution date at $50,000 were distributed to each of these officers who continue to meet the Quantitative measures established by regulation to ensure capital eligibility requirements on June 15, 2001, and on January 15 of the adequacy require the bank subsidiary to maintain minimum four succeeding years. On June 15, 2001 and January 15, 2002, a total amounts and ratios of Total and Tier 1 capital to risk-weighted of 6,886 and 7,142 shares, respectively, of Peoples Financial assets, and Tier 1 capital to average assets. Corporation common stock was issued. This incentive program was established subsequent to the surrender of collateral assignment 22 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 19 As of December 31, 2003, the most recent notification from the 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or Federal Deposit Insurance Corporation categorized the bank greater and a Leverage capital ratio of 5.00% or greater. There are subsidiary as well capitalized under the regulatory framework for no conditions or events since that notification that Management prompt corrective action. To be categorized as well capitalized, the believes have changed the bank subsidiary’s category. bank subsidiary must have a Total risk-based capital ratio of The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2003, 2002 and 2001, are as follows (in thousands): December 31, 2003: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2002: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2001: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) NOTE I - OTHER INCOME AND EXPENSES: Other income consisted of the following: Years Ended December 31, Other service charges, commissions and fees Gain on sale of bank premises Rentals Income from proceeds of insurance policies Other income Totals $ $ $ $ $ Actual For Capital Adequacy Purposes Amount Ratio Amount 85,583 81,270 81,270 83,768 79,437 79,437 83,201 78,453 78,453 24.81% 23.56% 14.44% 24.16% 22.91% 13.98% 21.90% 20.65% 13.25% $ $ $ 27,600 13,800 22,511 27,720 13,860 22,798 30,930 15,195 23,677 Ratio 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 2003 226,946 130,503 473,292 681,428 1,512,169 2002 189,835 182,861 494,055 592,436 461,265 1,920,452 $ $ 2001 208,332 511,751 485,667 1,205,750 $ $ 23 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 20 Other expenses consisted of the following: Years Ended December 31, Advertising Data processing FDIC and state banking assessments Legal and accounting Postage and freight Stationery, printing and supplies Other real estate ATM expense Federal Reserve service charges Conferences and classes Taxes and licenses Consulting fees Trust expense Other Totals $ 2003 515,538 282,420 117,271 382,161 167,517 250,976 59,887 2,223,479 154,701 120,293 267,319 363,282 381,233 961,879 $ 2002 433,037 268,044 127,234 395,016 227,871 169,583 636,789 2,477,104 153,783 99,325 276,910 45,880 373,483 957,790 $ 2001 463,103 233,390 132,629 272,337 211,792 191,803 328,133 2,282,118 152,815 112,469 252,491 11,250 350,525 800,213 $ 6,247,956 $ 6,641,849 $ 5,795,068 24 F I N A N C I A L S NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a party to financial instruments with off-balance- some of the commitments and irrevocable letters of credit may sheet risk in the normal course of business to meet the financing expire without being drawn upon, the total amounts do not needs of its customers. These financial instruments include necessarily represent future cash requirements. The Company commitments to extend credit and irrevocable letters of credit. evaluated each customer’s creditworthiness on a case-by-case These instruments involve, to varying degrees, elements of credit basis. The amount of collateral obtained upon extension of credit and interest rate risk in excess of the amount recognized in the is based on Management’s credit evaluation of the customer. balance sheet. The contract amounts of those instruments reflect Collateral obtained varies but may include equipment, real the extent of involvement the bank subsidiary has in particular property and inventory. classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the The Company generally grants loans to customers in its primary financial instrument for commitments to extend credit and trade area of Harrison, Hancock, Jackson and Stone counties. irrevocable letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit At December 31, 2003, 2002 and 2002, the Company had policies in making commitments and conditional obligations as it outstanding irrevocable letters of credit aggregating $3,388,997, does for on-balance-sheet instruments. $2,849,400 and $3,344,016, respectively. At December 31, 2003, 2002 and 2001, the Company had outstanding unused loan Commitments to extend credit are agreements to lend to a commitments aggregating $95,165,000, $87,382,000 and customer as long as there is no violation of any conditions $74,254,000, respectively. Approximately $46,688,000, established in the agreement. Irrevocable letters of credit written $43,543,000 and $27,810,000 of outstanding commitments were at are conditional commitments issued by the Company to guarantee fixed rates and the remainder were at variable rates at December the performance of a customer to a third party. Commitments and 31, 2003, 2002 and 2001, respectively. irrevocable letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 21 NOTE K - CONTINGENCIES: During 2003, a lawsuit was filed again the Company’s bank various other legal matters and claims which are being defended subsidiary. This litigation, which specifies damages of $1,500,000 and handled in the ordinary course of business. None of these and punitive damages of $12,500,000, has been filed by an matters is expected, in the opinion of Management, to have a insurance company trying to reverse a settlement it voluntarily material adverse effect upon the financial position or results of agreed to in 2000. The bank subsidiary intends to vigorously operations of the Company. contest the allegations of the complaint. The bank is involved in NOTE L - CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION: Peoples Financial Corporation began its operations September 30, Bank, Biloxi, Mississippi. A condensed summary of its financial 1985, when it acquired all the outstanding stock of The Peoples information is shown below. CONDENSED BALANCE SHEETS (IN THOUSANDS) 2003 2002 2001 December 31, Assets Investments in subsidiaries, at underlying equity: Bank subsidiary Nonbank subsidiary Cash in bank subsidiary Other assets Total assets Liabilities and Shareholders’ Equity Notes payable Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity $ $ $ $ 82,957 1 546 1,462 84,966 95 1,367 1,462 83,504 84,966\ CONDENSED STATEMENTS OF INCOME (IN THOUSANDS) Years Ended December 31, Income Earnings of unconsolidated bank subsidiary: Distributed earnings Undistributed earnings Interest income Other income Total income Expenses Other expense Total expenses Income before income taxes Income tax (benefit) Net income 2003 2,280 2,739 5 79 5,103 86 86 5,017 (1) 5,018 $ $ $ $ $ $ $ $ 81,558 1 84 1,462 83,105 143 1,230 1,373 81,732 83,105 2002 1,400 1,752 7 230 3,389 185 185 3,204 13 3,191 $ $ $ $ $ $ 79,483 1 263 1,821 81,568 174 1,325 1,499 80,069 81,568 2001 700 3,375 14 41 4,130 183 183 3,947 (52 ) 3,999 25 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 22 CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Years Ended December 31, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on liquidation of investment Net income of unconsolidated subsidiaries Stock incentive plan Changes in assets and liabilities: Other assets Net cash provided by (used in) operating activities Cash flows from investing activities: Proceeds from liquidation of investment Dividends from unconsolidated subsidiary Net cash provided by investing activities Cash flows from financing activities: Retirement of stock Dividends paid Net cash used in financing activities Net increase (decrease) in cash Cash, beginning of year Cash, end of year 2003 2002 2001 $ 5,018 $ 3,191 $ 3,999 (57) (5,019) (58) 57 2,280 2,337 (368) (1,449) (1,817) 462 84 546 $ (210) (3,152) 100 15 (56) 352 1,400 1,752 (528) (1,347) (1,875) (179) 263 84 $ (4,075 ) 100 71 95 700 700 (2,981 ) (1,297 ) (4,278 ) (3,483 ) 3,746 263 $ Peoples Financial Corporation paid income taxes of $2,537,223, interest was paid during the three years ended December 31, 2003. $1,639,612 and $1,847,250 in 2003, 2002 and 2001, respectively. No 26 F I N A N C I A L S NOTE M - EMPLOYEE BENEFIT PLAN: The Company sponsors the Peoples Financial Corporation Employee ESOP debt for acquisition of Company shares has been guaranteed Stock Ownership Plan (ESOP). Employees who work more than 1,000 by the Company and is reported as a debt of the Company. Shares hours are eligible to participate in the ESOP. The Plan included pledged as collateral are reported as unearned compensation in 401(k) provisions and the former Gulf National Bank Profit Sharing equity. ESOP debt for acquisition from The Peoples Bank, Biloxi, Plan. Effective January 1, 2001, the ESOP was amended to separate Mississippi, is eliminated in consolidation. As shares are committed the 401(k) funds into the Peoples Financial Corporation 401(k) Plan. to be released, the Company reports compensation expense equal The separation had no impact on the eligibility or benefits to the current market price of the shares, and the shares become provided to participants of either plan. The 401(k) provides for a outstanding for net income per share computations. Dividends on matching contribution of 75% of the amounts contributed by the allocated ESOP shares are recorded as a reduction of retained employee (up to 6% of compensation). Contributions are earnings; dividends on unallocated ESOP shares are recorded as a determined by the Board of Directors and may be paid either in reduction of debt and accrued interest. cash or Peoples Financial Corporation capital stock. Total contributions to the plan charged to operating expense were Compensation expense of $7,021,816, $7,167,143 and $7,681,720 $360,000, $360,000 and $734,000 in 2003, 2002 and 2001, relating to the ESOP was recorded during 2003, 2002 and 2001, respectively. respectively. The ESOP held 467,499, 533,733 and 560,010 allocated shares at December 31, 2003, 2002, and 2001 respectively. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 23 The Company established an Executive Supplemental Income Plan to the participants’ beneficiaries. These contracts are carried at and a Directors’ Deferred Income Plan, which provide for their cash surrender value, which amounted to $989,004, $686,381 pre-retirement and post-retirement benefits to certain key and $420,221 at December 31, 2003, 2002 and 2001, respectively. The executives and directors. The Company has acquired insurance present value of accumulated benefits under these plans using an policies, with the bank subsidiary as owner and beneficiary, that it interest rate of 7.50% in 2003, 2002 and 2001 and the projected unit may use as a source to pay potential benefits to the plan cost method has been accrued. The accrual amounted to $530,372 , participants. These contracts are carried at their cash surrender $485,534 and $341,819 at December 31, 2003, 2002 and 2001, value, which amounted to $10,588,084, $10,276,887 and $4,558,220 respectively. at December 31, 2003, 2002 and 2001, respectively. The present value of accumulated benefits under these plans, using an interest The Company provides post-retirement health insurance to certain rate of 7.50% and 8.00% and the interest ramp-up method for 2003 of its retired employees. Employees are eligible to participate in the and 2002 and using an interest rate of 7.5% and the projected unit retiree health plan if they retire from active service no earlier than cost method for 2001, has been accrued. The accrual amounted to their Social Security normal retirement age, which varies from 65 to $3,375,938, $2,882,009 and $2,418,114 at December 31, 2003, 2002 67 based on the year of birth. In addition, the employee must have and 2001, respectively. at least 25 continuous years of service with the Company immediately preceding retirement. However, any active employee The Company also has additional plans for non-vested post- who was at least age 65 as of January 1, 1995, does not have to meet retirement benefits for certain key executives and directors. The the 25 years of service requirement. The accumulated post- Company has acquired insurance policies, with the bank subsidiary retirement benefit obligation at January 1, 1995, was $517,599, as owner and beneficiary, that it may use as a source to pay which the Company elected to amortize over 20 years. The potential benefits to the plan participants. Additionally, there are Company reserves the right to modify, reduce or eliminate these two endorsement split dollar policies, with the bank subsidiary as health benefits. owner and beneficiary, which provide a guaranteed death benefit The following is a summary of the components of the net periodic post-retirement benefit cost: Years Ended December 31, Service cost Interest cost Amortization of net transition obligation Net periodic post-retirement benefit cost $ $ 2003 157,515 104,409 20,600 282,524 2002 107,533 94,603 20,600 222,736 $ $ 2001 67,981 70,461 20,600 159,042 $ $ The discount rate used in determining the accumulated post- service and interest cost components of the net periodic post- retirement benefit obligation was 6.25% in 2003, 6.50% in 2002, retirement benefit cost for the year then ended would have and 7.25% in 2001. The assumed health care cost trend rate used in increased by 28.72%. If the health care cost trend rate assumptions measuring the accumulated post-retirement benefit obligation were decreased 1.00%, the accumulated post-retirement benefit was 10.00% in 2003. The rate was assumed to decrease gradually to obligation as of December 31, 2003, would be decreased by 18.64%, 5.00% for 2013 and remain at that level thereafter. If the health care and the aggregate of the service and interest cost components of cost trend rate assumptions were increased 1.00%, the the net periodic post-retirement benefit cost for the year then accumulated post-retirement benefit obligation as of December 31, ended would have decreased by 21.37%. 2003, would be increased by 24.39%, and the aggregate of the 27 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 24 The following is a reconciliation of the accumulated post-retirement benefit obligation: Accumulated post-retirement benefit obligation as of December 31, 2002 Service cost Interest cost Actuarial loss Benefits paid Accumulated post-retirement benefit obligation as of December 31, 2003 $1,693,122 135,006 104,409 294,994 (74,549) $2,152,982 December 31, Accumulated post-retirement benefit obligation: Retirees Eligible to retire Not eligible to retire Total Plan assets at fair value Accumulated post-retirement benefit obligation in excess of plan assets Unrecognized transition obligation Unrecognized cumulative net gain from past experience different from that assumed and from changes in assumptions Accrued post-retirement benefit cost 2003 659,859 1,493,123 2,152,982 -0- 2,152,982 (226,597) (887,947) 1,038,438 2002 2001 $ $ 422,403 50,218 1,220,501 1,693,122 -0- 1,693,122 (247,197) (615,462) 830,463 $ $ 395,895 44,172 881,657 1,321,724 -0- 1,321,724 (267,797 ) (394,611 ) 659,316 $ $ 28 F I N A N C I A L S NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS 107, “Disclosures About Fair Value of Financial Instruments,” Cash and Due from Banks requires all entities to disclose the fair value of financial The amount shown as cash and due from banks approximates fair instruments, both assets and liabilities recognized and not value. recognized in the statement of condition, for which it is practical to Available for Sale Securities estimate its fair value. SFAS 107 excluded certain financial The fair value of available for sale securities is based on quoted instruments and all nonfinancial instruments from its disclosure market prices. requirements. Accordingly, the aggregate fair value amounts Held to Maturity Securities presented do not represent the underlying value of the Company. The fair value of held to maturity securities is based on quoted In preparing these disclosures, Management made highly sensitive market prices. estimates and assumptions in developing the methodology to be Loans utilized in the computation of fair value. These estimates and The fair value of loans is estimated by discounting the future cash assumptions were formulated based on judgments regarding flows using the current rates at which similar loans would be made economic conditions and risk characteristics of the financial to borrowers with similar credit ratings for the remaining instruments that were present at the time the computations were maturities. The cash flows considered in computing the fair value made. Events may occur that alter these conditions and thus of such loans are segmented into categories relating to the nature perhaps change the assumptions as well. A change in the of the contract and collateral based on contractual principal assumptions might affect the fair value of the financial instruments maturities. Appropriate adjustments are made to reflect probable disclosed in this footnote. In addition, the tax consequences credit losses. Cash flows have not been adjusted for such factors as related to the realization of the unrealized gains and losses have prepayment risk or the effect of the maturity of balloon notes. not been computed or disclosed herein. These fair value estimates, methods and assumptions are set forth below. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 25 Deposits Federal Funds Purchased and Securities Sold under Agreements The fair value of non-interest bearing demand and interest to Repurchase bearing savings and demand deposits is the amount reported in The amount shown as federal funds purchased and securities sold the financial statements. The fair value of time deposits is under agreements to repurchase approximates fair value. estimated by discounting the cash flows using current rates of time Long Term Funds deposits with similar remaining maturities. The cash flows The fair value of long term funds is computed by discounting the considered in computing the fair value of such deposits are based cash flows using current borrowing rates. on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates. The following table presents carrying amounts and estimated fair December 31, 2003, 2002 and 2001 (in thousands): values for financial assets and financial liabilities at 2003 Carrying Amount Fair Value Financial Assets: Cash and due from banks $ 33,861 $ 33,861 $ Available for sale securities Held to maturity securities Loans, net Financial Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Federal funds purchased and securities sold under agreements to repurchase Long term funds 206,467 4,353 291,524 76,424 296,133 372,557 95,039 17,180 207,486 4,527 294,685 76,424 297,008 373,432 95,039 18,076 2002 $ Fair Value 39,654 151,484 18,026 307,501 75,698 314,495 390,193 67,246 7,398 Carrying Amount 39,654 151,484 17,588 305,599 75,698 312,476 388,174 67,246 6,647 2001 Carrying Amount $ 32,035 $ 142,902 38,279 341,511 76,215 336,328 412,543 82,489 5,885 Fair Value 32,035 142,902 38,986 345,155 76,215 339,640 415,855 82,489 6,356 NOTE O - EXTRAORDINARY GAIN: In 2001, the Company agreed to an out of court settlement of an was realized in the prior year as a result of this settlement. insurance claim. An extraordinary gain of $594,000, net of taxes, 29 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 26 INDEPENDENT AUDITORS’ REPORT PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES Board of Directors presentation. We believe that our audits provide a reasonable basis Peoples Financial Corporation and Subsidiaries for our opinion. Biloxi, Mississippi In our opinion, the consolidated financial statements referred to We have audited the accompanying consolidated statements of above present fairly, in all material respects, the financial position condition of Peoples Financial Corporation and Subsidiaries as of of Peoples Financial Corporation and Subsidiaries at December 31, December 31, 2003, 2002 and 2001, and the related consolidated 2003, 2002 and 2001, and the results of its operations and its cash statements of income, shareholders’ equity and cash flows for the flows for the years then ended, in conformity with accounting years then ended. These financial statements are the responsibility principles generally accepted in the United States of America. of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audits. Certified Public Accountants We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are PILTZ, WILLIAMS, LAROSA & CO. free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Biloxi, Mississippi financial statements. An audit also includes assessing the January 21, 2004 accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement 30 F I N A N C I A L S 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 27 FIVE-YEAR COMPARATIVE SUMMARY OF SELECTED FINANCIAL INFORMATION (IN THOUSANDS EXCEPT PER SHARE DATA) PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES 2003 2002 2001 2000 1999 Balance Sheet Summary Total assets Available for sale securities Held to maturity securities Loans, net of unearned discount Deposits Borrowings from FHLB Long term notes payable Shareholders' equity Summary of Operations Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before taxes and extraordinary gain Applicable income taxes Extraordinary gain Net income Per Share Data Basic and diluted earnings per share Basic and diluted earnings per share before extraordinary gain Dividends per share Book value Weighted average number of shares Selected Ratios Return on average assets Return on average equity Capital formation rate Primary capital to average assets Risk-based capital ratios: Tier 1 Total $ 575,435 $ 550,139 $ 207,486 4,353 297,923 372,557 17,070 110 83,504 151,484 17,588 312,296 388,174 6,313 334 81,732 $ 25,065 $ 27,424 $ 587,012 142,902 38,279 347,169 412,543 5,549 336 80,069 37,285 18,354 18,931 2,503 16,428 9,256 (21,197) 4,487 1,082 594 3,999 .71 .60 .24 14.25 $ 587,244 $ 537,972 48,168 98,052 377,476 413,724 23,160 291 78,717 $ 42,250 $ $ $ $ $ 19,401 22,849 4,192 18,657 7,678 (19,632) 6,703 2,065 4,638 .79 .79 .21 13.58 5,857,232 .82% 5.93% 1.22% 14.68% 19.97% 21.13% 33,076 115,273 332,510 394,681 274 77,767 35,440 14,441 20,999 120 20,879 6,767 (18,438 ) 9,208 2,958 6,250 1.06 1.06 .20 13.17 5,905,344 1.21 % 8.26 % 5.74 % 15.86 % 22.45 % 23.69 % 31 F I N A N C I A L S 9,616 17,808 2,428 15,380 10,372 (21,874) 3,878 687 3,191 .57 .57 .24 14.64 $ $ 5,603,834 5,629,872 .56% 3.94% 2.08% 15.39% 22.91% 24.16% .68% 5.04% 1.72% 14.47% 20.65% 21.90% $ $ $ $ 5,838 19,227 447 18,780 9,737 (21,464) 7,053 2,035 5,018 .90 .90 .29 15.03 5,563,015 .88% 6.07% 2.17% 15.79% 23.56% 24.81% Note: All share and per share data have been given retroactive effect for the two for one stock split effective April 17, 2000. 595 - 28pg 2c inside text 3/16/04 9:54 AM Page 28 Summary of Quarterly Results of Operations (in thousands except per share data) PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES Quarter Ended, 2003 Interest income Net interest income Provision for loan losses Income before income taxes Net income Basic and diluted earnings per share Quarter Ended, 2002 Interest income Net interest income Provision for loan losses Income before income taxes and extraordinary items Net income Basic and diluted earnings per share Market Information March 31 June 30 September 30 December 31 $ $ 6,410 4,725 179 1,384 1,037 .19 March 31 7,118 4,282 445 894 667 .12 $ $ 6,332 4,708 139 1,599 1,088 .19 June 30 6,993 4,396 168 787 658 .12 $ $ 6,174 4,883 65 2,116 1,511 .27 $ 6,149 4,911 64 1,954 1,382 .25 September 30 December 31 6,787 4,507 136 1,551 1,145 .20 $ 6,526 4,623 1,679 646 721 .13 The Company's stock is traded under the symbol PFBX and is forth the high and low sale prices of the Company's common stock quoted in publications under "PplFnMS". The following table sets as reported on the NASDAQ Stock Market. 32 F I N A N C I A L S Year 2003 2002 Quarter High Low $ $ 1st 2nd 3rd 4th 1st 2nd 3rd 4th 15 16 17 18 15 15 15 15 $ $ 13 13 14 15 12 13 12 12 $ $ Dividend per share .12 .14 .12 .12 There were 661 holders of record of common stock of the Company approve all dividends paid to the Company by its bank subsidiary. at January 30, 2004, and 5,557,379 shares issued and outstanding. Although Management cannot predict what dividends, if any, will The principal source of funds to the Company for payment of be paid in the future, the Company has paid regular semiannual dividends is the earnings of the bank subsidiary. The Commissioner cash dividends since its founding in 1985. of Banking and Consumer Finance of the State of Mississippi must 

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