Peoples Financial Corporation Annual Report 2003

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FY2003 Annual Report · Peoples Financial Corporation

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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

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C O N T E N T S

P R E S I D E N T ’ S L E T T E R

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

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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.

’

Chevis C. Swetman

Chairman of the Board, Chief Executive Officer

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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

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

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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.

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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.

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.

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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

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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

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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

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BOARD OF DIRECTORS

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.

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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.

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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

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.

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RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the amount by which interest income on loans,

investments and other interest earning assets exceeds interest

expense on deposits and other borrowed funds, is the single largest

component of the Company's income. Management's objective is

to provide the largest possible amount of income while balancing

interest rate, credit, liquidity and capital risk.

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

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.

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

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

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

5.25

1,150

4.12

31,577

5.04

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

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

3,190,722

.57

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

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

65,780,254

6,886

(181,854 )

5,620,239

65,780,254

7,142

(43,909 )

7,142

(43,909 )

5,583,472

65,780,254

(26,093 )

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

)

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

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

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

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.

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

159

176

(38)

(801)

(48)

(887)

(207)

(1,094)

(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

2,266

766

3,032

120

143

175

438

(1)

(11)

(12)

47,656

95,095

4,139

146,890

4,594

151,484

6,118

7,143

4,765

18,026

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

1,768

1,019

2,787

283

306

136

725

(10)

(74)

(84)

(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

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

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

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

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

347

2,876

(1,402)

(20)

(1,422)

2003

2,322

(287)

2,035

2003

(88)

101

(183)

(679)

(151)

(966)

2002

2,215

1,145

685

(4,045)

820

1,750

1,026

3,609

(436)

200

(236)

2002

1,886

(1,198)

688

2002

(127)

(628)

(281)

213

(225)

(985)

2001

1,542

938

431

(2,911

)

947

1,687

813

3,460

549

624

2001

2,202

(1,120

)

1,082

2001

(124

)

(580

)

(220

)

620

(196

)

(500

)

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)

(54)

(133)

2,035

34.0

(2.6)

0.1

(0.8)

(1.8)

28.9

2002 Amount

1,319

(187)

(201)

(63)

(195)

688

34.0

(4.8)

0.4

(5.2)

(1.6)

(5.1)

17.7

2001 Amount

1,526

(259)

(113)

(62)

(96)

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

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

83,768

79,437

83,201

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%

8.00%

4.00%

8.00%

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

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

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

546

1,462

84,966

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

5,103

5,017

(1)

5,018

81,558

1,462

83,105

143

1,230

1,373

81,732

83,105

2002

1,400

1,752

230

3,389

185

3,204

3,191

79,483

263

1,821

81,568

174

1,325

1,499

80,069

81,568

2001

700

3,375

4,130

183

3,947

(52

)

3,999

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)

2,280

2,337

(368)

(1,449)

(1,817)

462

546

(210)

(3,152)

100

(56)

352

1,400

1,752

(528)

(1,347)

(1,875)

(179)

263

(4,075

)

100

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

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

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

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

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,

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

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

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

.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

.20

13.17

5,905,344

1.21

8.26

5.74

15.86

22.45

23.69

9,616

17,808

2,428

15,380

10,372

(21,874)

3,878

687

3,191

.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

.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

2,116

1,511

.27

6,149

4,911

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.

Year

2003

2002

Quarter

High

Low

1st

2nd

3rd

4th

1st

2nd

3rd

4th

Dividend
per share

.12

.14

.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