Peoples Financial Corp.
Annual Report 2004

Plain-text annual report

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 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 2004 T O O U R S H A R E H O L D E R S : As you travel along the beach, you will see that things are looking up along the T H E C O A S T L O O K S U P — L I T E R A L L Y A N D E C O N O M I C A L L Y T H E C O A S T L O O K S U P — L I T E R A L L Y A N D E C O N O M I C A L L Y Mississippi Gulf Coast. For the first time in more than six years, a new casino is rising on the beach in Biloxi, and for the first time in history, new high-rise condominiums are going up as well. This is good for the Coast. IIf 2004 saw the beginning of a new phase of construction activity, the year advanced stages of planning, and the expansion of the Coast Coliseum is ahead promises even more. At least two more casino resorts are in expected to begin later this year. All this construction activity—what I like to refer to as the “Crane Index”— Shrimp boats at the dock behind the rising Hard Rock Casino under construction symbolize the past and the future of the Mississippi Gulf Coast and The Peoples Bank. We spent a good deal of our efforts in 2004 positioning our bank to benefit even more from the growth of tourism. During the fourth quarter, we sold a number of investment securities in order to provide liquidity to maintain the pace of our loan growth. In addition, we increased our deposit base, offering an innovative product named the “Turbo CD” that gives the bank long-term deposits and the customer an opportunity to increase the yield points to more jobs today and ultimately more tourists tomorrow, all of one time during the life of the CD. These steps give us capacity for more which ripple through our local economy to create even more jobs, more loans, which generate significantly greater return to the bank. spending and more business. We find ourselves here along the Coast in a revitalized cycle of economic development. In closing out a very successful 2004, I want to recognize and thank our great team of dedicated employees, managers and directors for making it As our local economy continues its transition to a tourism foundation, The so. They collectively deserve the credit for developing our strategic plan Peoples Bank is reaping the benefit of the change. Our loan volume in 2004 and implementing it every day with every customer to benefit our com- rose a solid 11%, significantly greater than the growth of the overall healthy munity and our shareholders. On their behalf, I want to express our shared economy on the Coast. In addition, we are seeing consistent improvement commitment to enhancing the value of your investment. in the quality of our loans, with a corresponding reduction in our allowance for loan loss from 2.12% in 2003 down to 1.97% in 2004. Sincerely, Chevis C. Swetman Chairman of the Board, Chief Executive Officer & President 1 $5,794 $5,018 $0.26 $0.24 $3,191 $0.32 $332,703 $312,296 $297,923 4.35% 8.33% 23.08% 2002 2003 2004 2002 2003 2004 2002 2003 2004 Net Income (in thousands) Dividends (per share) % increase from previous year Loans (in thousands) T H E Y E A R I N R E V I E W E A R N I N G S I N C R E A S E 1 5 % , L O A N S G R O W 1 1 % E A R N I N G S I N C R E A S E 1 5 % , L O A N S G R O W 1 1 % Net income in 2004 reached $5.8 million, a 15% increase over 2003 and the highest since 1999. In addition, loan volume grew 11% during 2004, indicating a significant increase in business activity along the Mississippi Gulf Coast. W We began to see our loan volume begin to pick up in early 2004, and it continued its pace throughout the year. At the same time, the quality of loans on our books continues to improve, which has allowed the bank to reduce its provision for loan loss to less than $500,000 each of the last two years. We are confident that we have successfully worked through a series of credit problems that impacted our earnings a few years ago. The improvement in our credit quality can be attributed to two distinct but related factors. The first is the establishment of a separate credit administration function as part of our new management structure 2 initiated in late 2003 and implemented throughout 2004. Our new credit administration function works together with our lenders to significantly strengthen the underwriting, communications and monitoring of our growing loan portfolio. The second factor in helping us increase both the quantity and the quality of our loans is, ironically, the Sarbanes-Oxley Act, which was originally passed by Congress to combat accounting fraud. Beyond tactical compliance with a number of new regulations, the underlying intent of Sarbanes- Oxley is to strongly encourage—if not force—publicly owned companies to establish a policy of “best practices” in their corporate governance. Led by our board of directors, we have set high goals for embracing the spirit of Sarbanes-Oxley, and we have established a number of new procedures to make certain the federally mandated guidelines are not only met but exceeded. We have improved communications between management and the board; we have reorganized and empowered committees of independent board members, especially audit and nominating committees; we have implemented more effective disclosure procedures for financial reporting and we are in the process of examining our internal controls over financial reports. All of these steps make us a better company under the law. However, com- bined with our new management structure, they have made us a better bank. Today, we are more capable of managing the higher loan volumes we are experiencing and more prepared than ever before to accommodate additional growth in the future. D I V I D E N D I N C R E A S E S T W I C E As a result of the higher earnings in 2004 and the prospect of continued strength indicated by the growth of loan volume, the Board of Directors raised the semi-annual common stock dividend twice during the year. The January dividend was increased to $.15 a common share, and the July dividend was raised to $.17 a share. The annual dividend of $.32 a share paid in 2004 was 23% higher than what was paid in 2003. In December 2004, the Board approved another increase in the semi-annual dividend to $.18 a share, the fourth rise in two years. N E W B R A N C H E S B U I L T During the year, we expanded our retail footprint with the construction of two new branches. The first is located in Waveland to serve the rapidly growing population of Hancock county. The Waveland branch opened October 12 and was formally dedicated October 28, 2004. The second new branch is located in the Cedar Lake area of Biloxi and replaces an older facility, which was sold at a profit to another local Gulf Coast business, providing much of the funding for construction of the new, larger location. The new Cedar Lake branch opened January 18, 2005, offering customers three drive-up teller lanes, a 24-hour drive-up ATM, an after-hours depository and about 120 safe deposit boxes. Bank president Chevis C. Swetman wields the golden scissors to cut the ceremonial ribbon festooned with real $1,000 bills at the grand opening of The Peoples Bank branch in Waveland held in October. Gertrude Newman, right, of The Peoples Bank presents a donation of $9,520 to Angie Sharp, representing LIFE of South Mississippi. In addition, employees of The Peoples Bank donated the same amount of funds to Morning Star Pregnancy Center during the year. 3 Bank president Chevis C. Swetman presents a check for $12,000 to a representative of the Make-A-Wish Foundation, on behalf of Cruisin’ the Coast presented by The Peoples Bank. Cruisin’ the Coast presented by The Peoples Bank has grown from 374 registered entries in its first year to some 5,000 in 2004, seen here gathered in Gulfport’s Rice Pavilion. One of the annual highlights of Cruisin’ the Coast presented by The Peoples Bank is the Biloxi Block Party, which is held right in front of the bank’s main branch on Lameuse Street. C R U I S I N ’ T H E C O A S T P R E S E N T E D B Y T H E P E O P L E S B A N K Perhaps the most widely visible action taken during the year was to sign on as the presenting sponsor of Cruisin’ the Coast, the single largest consumer tourism event of the year in our community. Cruisin’ has grown from 374 cars in its inaugural year 1996 to more than 5,000 registered entrants in 2004. A An economic impact study conducted during the 2004 event by Decision Scientific, a noted consulting and research firm, estimates the direct economic impact of the event to the Mississippi Gulf Coast totals some $15 million. The 2004 edition of Cruisin’ the Coast was impacted by the sudden appearance of a late-season tropical storm, which significantly reduced attendance and spending late in the week. Therefore, more normal weather conditions would have produced greater attendance, higher spending and even more economic impact. However, the research study was able to generate some significant findings that were independent of weather, including: ◆∑ 93.8% of respondents stated their experience was excellent or good. ∑◆ 30.1% said their experience was much better or better than expected. ∑◆ 98.5% said they were either very satisfied or satisfied with the Cruisin’ experience. 4 ∑◆ 75.4% said they were very likely to return. ◆ ∑ 78.4% said they were very likely to recommend Cruisin’ to friends. ∑ ◆ 59% reported household income in excess of $60,000 and 33.9% in excess of $80,000, with a mean expenditure of $82.82 per day and a mean stay of 4.63 nights on the Coast (probably shortened by the tropical storm). The Peoples Bank immediately enjoyed an excellent return on our investment through increased exposure, promotional opportunities that generated traffic to our branches and direct marketing programs to registered participants. Our experience in the first year of sponsorship gives a high level of confidence that our investment in Cruisin’ the Coast will prove even more directly profitable to The Peoples Bank in the years ahead. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S 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 D S U B S I D I A R I E S The following presents Management's discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries (the Company) for the years ended December 31, 2004, 2003 and 2002. These comments highlight the significant events for these years and premises during the current year of $838,000, net of taxes. After several should be considered in combination with the Consolidated Financial years of decline, the local economy has stabilized during the past eight- Statements and Notes to Consolidated Financial Statements included in een months. Economic activity has translated into increased loan volume this annual report. (cid:1) F O R W A R D - L O O K I N G I N F O R M A T I O N Congress passed the Private Securities Litigation Act of 1995 in an effort to for the Company, which has increased 11% during 2004. This growth has been funded through deposits and maturities and sales of investments. Managing the net interest margin in its trade area's extremely competitive environment continues to be a priority for the Company. The majority of encourage corporations to provide information about a company's antic- the Company’s loans are at a floating rate, which generally reprice faster ipated future financial performance. This act provides a safe harbor for than deposits and other funding sources. These factors benefit the such disclosure which protects the companies from unwarranted litigation Company in the current rising rate environment. The Company's net if actual results are different from management expectations. This report interest margin has increased from 3.39% at December 31, 2003 to 3.55% contains forward-looking statements and reflects industry conditions, at December 31, 2004. company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties (cid:1) F I N A N C I A L C O N D I T I O N which could cause the Company's actual results and experience to Available for Sale Securities differ from the anticipated results and expectations expressed in such Available for sale securities decreased $34,455,000 at December 31, 2004 as forward-looking statements. (cid:1) C R I T I C A L A C C O U N T I N G P O L I C I E S Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial compared with December 31, 2003 primarily as a result of the management of the bank subsidiary's liquidity position and its interest margin. The Company invested funds from maturities and sales of available for sale securities in loans. statements. The Company's single most critical accounting policy relates Gross unrealized gains were $347,000, $2,113,000 and $3,032,000 and gross to its allowance for loan losses, which reflects the estimated losses result- unrealized losses were $1,754,000, $1,094,000 and $12,000 for available for ing from the inability of its borrowers to make loan payments. If there was sale securities at December 31, 2004, 2003 and 2002, respectively. Gains a deterioration of any of the factors considered by Management in evalu- (losses) of $(259,000), $57,000 and $210,000 were realized on the liquidation ating the allowance for loan losses, as discussed in Note A, the estimates or sale of available for sale securities in 2004, 2003 and 2002, respectively. of loss would be updated, and additional provisions for loan losses may be required. Held to Maturity Securities (cid:1) O V E R V I E W Net income for 2004 was $5,794,000 as compared with $5,018,000 for 2003. Held to maturity securities increased $2,235,000 at December 31, 2004, compared with December 31, 2003. The increase in these securities is directly attributable to the management by the Company of its liquidity This increase is largely attributable to the gain on the sale of bank position, as discussed above. 5 Gross unrealized gains were $113,000, $176,000 and $438,000, at December Federal Funds Purchased and Securities Sold Under 31, 2004, 2003 and 2002, respectively, while gross unrealized losses were Agreements to Repurchase $2,000 at December 31, 2004 and 2003. There were no significant realized Federal funds purchased and securities sold under agreements to gains or losses from calls of these investments for the years ended repurchase decreased $7,762,000 at December 31, 2004, as compared December 31, 2004, 2003 and 2002. with December 31, 2003. This fluctuation is directly related to customers' Federal Home Loan Bank Stock management of the Company's liquidity position. The Company's investment in Federal Home Loan Bank ("FHLB") stock decreased $572,000 at December 31, 2004 as compared with December 31, 2003, Borrowings from Federal Home Loan Bank due to the redemption of the stock by the FHLB. The Company acquires funds from the Federal Home Loan Bank in periodic reallocation of their funds in a non-deposit product and the Loans the management of the liquidity position. At December 31, 2003, the Company acquired $10,000,000 in advances which matured on The Company's loan portfolio increased $32,038,000 at December 31, 2004, January 9, 2004. as compared with December 31, 2003. Beginning with the fourth quarter of 2003 and continuing in 2004, the loan portfolio increased as the local Other Liabilities economy became stabilized. This stabilization resulted in increased loan Other liabilities increased $812,000 at December 31, 2004, as compared demand. The Company anticipates that this positive loan growth will with December 31, 2003, primarily due to the impact of increasing health continue in 2005. Fluctuations in the various categories of loans are care costs on the liability for post retirement health benefits and an illustrated in Note C. Other Real Estate increase in liabilities related to deferred compensation benefits for officers of the bank subsidiary. The Other Real Estate (ORE) portfolio decreased $1,215,000 at December 31, Shareholders' Equity 2004 as compared with December 31, 2003 due to the sale of several large During 2004, 2003 and 2002, there were significant events that impacted parcels of real estate. Gains (losses) realized on sales of ORE were $100,750, the components of shareholders' equity. These events are detailed in $248,170 and ($43,666) for the years ended December 31, 2004, 2003 Note I to the Consolidated Financial Statements included in this report. and 2002, 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 its founding in Other assets increased $1,337,000 at December 31, 2004, as compared with 1896. A strong capital foundation is fundamental to the continuing pros- December 31, 2003, due to deferred taxes on unrealized losses on available perity of the Company and the security of its customers and shareholders. for sale securities. Deposits There are numerous indicators of capital adequacy including primary capital ratios and capital formation rates. The Five-Year Comparative Summary of Selected Financial Information presents these ratios for those Total deposits increased $12,403,000 at December 31, 2004, as compared periods. This summary is included in the annual report to shareholders. with December 31, 2003. Significant increases or decreases in total deposits The Company's total risk-based capital ratio at December 31, 2004, 2003 and/or significant fluctuations among the different types of deposits are and 2002 was 24.29%, 24.81% and 24.16% as compared with the required anticipated by Management as customers in the casino industry and standard of 8.00%. The Five-Year Comparative Summary of Selected county and municipal areas reallocate their resources periodically. The Financial Information presents these figures. Company has managed its funds, including planning the timing of invest- ment maturities and the classification of investments and using other Bank regulations limit the amount of dividends that may be paid by the funding sources and their maturity, so as to achieve appropriate liquidity. bank subsidiary without prior approval of the Commissioner of Banking In prior years, the Company had acquired brokered deposits which have and Consumer Finance of the State of Mississippi. At December 31, 2004, all matured. 6 approximately $11,389,000 of undistributed earnings of the bank sub- sidiary included in consolidated surplus and retained earnings was avail- able for future distribution to the Company as dividends, subject to approval by the Board of Directors. The Company cannot predict what div- idends, if any, will be paid in the future, however the Board of Directors has established a goal of achieving a 35% dividend payout ratio (before extraordinary items). (cid:1) R E S U L T S O F O P E R A T I O N S Net Interest Income any improvements to specific credits previously identified in prior years as having a potential loss. Any such improvements and their potential Net interest income, the amount by which interest income on loans, invest- impact on the provision for loan losses are considered on a periodic basis. ments and other interest earning assets exceeds interest expense on deposits Although some uncertainty exists, the Company is monitoring positive and other borrowed funds, is the single largest component of the Company's events with respect to specific credits that may be resolved during 2005. income. Management's objective is to provide the largest possible amount of Absent any unforeseen unusual events, the Company expects to provide income while balancing interest rate, credit, liquidity and capital risk. only for potential losses on new loans during 2005. Total interest income decreased $499,000 for the year ended December 31, Service Charges on Deposit Accounts 2004, as compared with the year ended December 31, 2003, and had Service charges on deposit accounts decreased $951,000 for the year ended decreased $2,359,000 for the year ended December 31, 2003, as compared December 31, 2004 as compared with the year ended December 31, 2003 due with the year ended December 31, 2002. During 2004, the Company real- to a decrease in fee income from off-site ATMs no longer under contract with ized an increase in loan volume of 11%. Coinciding with the Federal the Company. Reserve's increases in the discount rates during 2004, the Company's yield on loans has improved, given that the loan portfolio includes a 65%-35% Gain (Loss) on Liquidation, Sale and Calls of Securities mix of variable and fixed rate term. The funding of this loan growth came The Company realized a loss of $259,000 during 2004 as a direct result of the from the maturity and sale of available for sale securities, primarily U. S. sale of investment securities. The sales were executed in order to provide Government Agencies. The Company had experienced a decline in interest funding for increased loan demand. income, particularly from loans, as a result of the decrease in the volume of loans and the decrease in interest rates earned on loans in prior years. Other Income Total interest expense decreased $748,000 for the year ended December 31, as compared with the year ended December 31, 2003, primarily as result of 2004, as compared with the year ended December 31, 2003, and had the sale of bank premises during 2004. See Note J for further information. Other income increased $1,160,000 for the year ended December 31, 2004, decreased $3,777,000 for the year ended December 31, 2003, as compared with the year ended December 31, 2002. As previously discussed, the Other Expense Company has used brokered time deposits and borrowings from the Other expense decreased $696,000 for the year ended December 31, 2004, Federal Home Loan Bank to address its liquidity position in prior years. The as compared with the year ended December 31, 2003, as a result of a cost of these funding sources was higher than other more traditional decrease in expense for off-site ATMs no longer under contract with the deposit funds, and had a negative impact on the Company's net margin. Company. See Note J for further information. As these funds have been repriced more favorably, the Company has real- ized a positive improvement in its interest margin. Provision for Loan Losses (cid:1) R E L A T E D P A R T I E S The Company extends loans to certain officers and directors and their per- sonal business interests, at terms and rates comparable to other loans of sim- The Company continuously monitors its relationships with its loan cus- ilar credit risks. Further disclosure of these transactions are presented in Note C. tomers, especially those in concentrated industries such as seafood, gam- The Company has not currently engaged, nor does it have any plans to engage, ing and hotel/motel, and their direct and indirect impact on its opera- in any other transactions with any related persons or entities. tions. 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 (cid:1) L I Q U I D I T Y Liquidity represents the Company's ability to adequately provide funds to the adequacy of the allowance for loan losses. A provision is charged to satisfy demands from depositors, borrowers and other commitments by income on a periodic basis to absorb potential losses based on these either converting assets to cash or accessing new or existing sources of analyses. Further information related to the computation of the provision funds. Management monitors these funds requirements in such a manner is presented in Note A. as to satisfy these demands and provide the maximum earnings on its earning assets. Note K discloses information relating to financial instru- During 2002, the Company identified negative events with respect to an ments with off-balance-sheet risk, including letters of credit and out- overall softening of the economy and negative events with respect to spe- standing unused loan commitments. The Company closely monitors the cific credits which required a large increase to the Company's provision for potential effects of funding these commitments on its liquidity position. loan losses. The Company believes that this action provided sufficient The Company monitors its liquidity position closely through a number of funds to absorb significant potential losses. Provisions for loan losses methods, including through the computation of liquidity and dependen- amounted to $448,000, $447,000 and $2,428,000 for the years ended cy ratios on a monthly basis. The formula for these ratios is that used for December 31, 2004, 2003 and 2002, respectively. Management continues the Uniform Bank Performance Report, such that the Company may moni- to closely evaluate the entire loan portfolio, in accordance with its policies tor and evaluate its own risk, but also compare itself to its peers. and procedures and will provide for any future potential losses as deemed necessary. As a part of this evaluation, the Company also closely monitors 7 Deposits, payment of principal and interest on loans, proceeds from sales the commitments and irrevocable letters of credit may expire without and maturities of investment securities, earnings on investment securities, being drawn upon, these amounts do not necessarily represent future and purchases of federal funds and securities sold under agreements to cash requirements. As discussed previously, the Company carefully mon- repurchase are the principal sources of funds for the Company. During 2000, itors its liquidity needs and considers the cash requirements, especially for the Company began using other, non-traditional sources of funds, includ- loan commitments, in making decisions on investments and obtaining ing borrowings from the Federal Home Loan Bank. The Company generally funds from its other sources. Further information relating to off-balance- anticipates relying on traditional sources of funds, especially deposits, the sheet instruments can be found in Note K. sale, maturity or call of securities and purchases of federal funds, for its liquid- ity needs in 2005. At December 31, 2004, the Company was able to purchase federal funds up to $68,000,000. (cid:1) 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 D I S C L O S U R E S A B O U T M A R K E T R I S K Market risk is the risk of loss arising from adverse changes in market prices (cid:1) T H E S A R B A N E S - O X L E Y A C T O F 2 0 0 2 The Sarbanes - Oxley Act of 2002 (the "Act") requires the implementation and rates. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange of provisions designed to enhance public company governance, respon- rate risk and commodity price risk, do not arise in the normal course of the sibility and disclosure. The issues addressed by the Act include the com- Company's business activities. Also, the Company does not currently, and position and responsibilities of a public company's board of directors and its has no plans to, engage in trading activities or use derivative or off-bal- committees, especially the Audit and Nominating Committees, the certifica- ance sheet instruments to manage interest rate risk. tion of financial statements by the chief executive officer and chief financial officer, timely reporting of trading by insiders and independence of external The Company has risk management policies in place to monitor and limit auditors. The Company believes that the spirit of the Act represents a best exposure to market risk. The Asset/Liability Committee (ALCO), whose practices approach to corporate governance. We have worked to improve members include the chief executive officer and senior and middle man- communication between management and the board, empowered the com- agement from the financial, lending, investing, and deposit areas, is mittees of the board, especially the audit and nominating committees, and responsible for the day-to-day operating guidelines, approval of strate- implemented an effective disclosure process for financial reporting. During gies affecting net interest income and coordination of activities within 2005, the Company will be working on compliance on the documentation, policy limits established by the Board of Directors based on the Company's evaluation of and reporting on internal controls over financial reporting as tolerance for risk. Specifically, the key objectives of the Company's required by Section 404. The Company's first report under Section 404 will be asset/liability management program are to manage the exposure of required for the 2005 annual report. The Company will continue to take the planned net interest margins to unexpected changes due to interest rate necessary actions to ensure compliance with the Act, as well as the listing fluctuations. These efforts will also affect loan pricing policies, deposit requirements of NASDAQ, on which the Company is registered. interest rate policies, asset mix and volume guidelines and liquidity. The (cid:1) N E W A C C O U N T I N G P R O N O U N C E M E N T S The Financial Accounting Standards Board (FASB) issued Statement 151, During 2004, the ALCO committee enhanced its risk management analysis through the implementation of software to assist in interest rate risk "Inventory Costs, an Amendment of ARB No. 43, Chapter 4", during the analysis. Other tools for balance sheet management and portfolio model- ALCO committee reports to the Board of Directors on a quarterly basis. current year, which is effective for fiscal years beginning after June 15, ing will be implemented in 2005. 2005. FASB issued Statement 152, "Accounting for Real Estate Time-Sharing Transactions - an Amendment of FASB Statements Nos. 66 and 67", during The Company has implemented a conservative approach to its asset/liabil- the current year, which is effective for fiscal years beginning after June 15, ity management. The net interest margin is managed on a daily basis 2005. FASB issued Statement 153, "Exchange of Nonmonetary Assets - an largely as a result of the management of the liquidity needs of the bank Amendment of APB Opinion No. 29", during the current year, and which is subsidiary. The Company generally follows a policy of investing in short effective for fiscal periods beginning after June 15, 2005. The Company term U. S. Agency securities with maturities of two years or less. Due to the evaluated the implementation of adopting these new pronouncements low interest rate environment, the duration of investments has been and determined that their adoption would not have a material effect on its extended to seven years or less with call provisions. The loan portfolio financial statements. (cid:1) O F F - B A L A N C E S H E E T A R R A N G E M E N T S The Company is a party to off-balance-sheet arrangements in the normal consists of a 35% - 65% blend of fixed and floating rate loans. It is the gen- eral loan policy to offer loans with maturities of five years or less; howev- er the market is now dictating floating rate terms to be extended to fifteen years. On the liability side, more than 66% of the deposits are demand and course of business to meet the financing needs of its customers. These savings transaction accounts. Additionally, more than 75% of the certifi- arrangements include unused commitments to extend credit, which cates of deposit mature within eighteen months. Since the Company's amounted to $113,500,000 at December 31, 2004, and irrevocable letters of deposits are generally not rate-sensitive, they are considered to be core credit, which amounted to $3,113,000 at December 31, 2004. The Company deposits. The short term nature of the financial assets and liabilities allows uses the same credit policies in making commitments and conditional the Company to meet the dual requirements of liquidity and interest rate obligations as it does for on-balance-sheet arrangements. Since some of risk management. 8 The interest rate sensitivity tables below provide additional information about risk, early calls of investments, the effect of the maturity of balloon notes or the the Company's financial instruments that are sensitive to changes in interest early withdrawal of deposits. The Company does not believe that the afore- rates. The tabular disclosure reflects contractual interest rate repricing dates mentioned factors have a significant impact on expected maturity. and contractual maturity dates. Loan maturities have been adjusted for reserve for loan losses. There have been no adjustments for such factors as prepayment Interest rate sensitivity at December 31, 2004 was as follows (in thousands): Loans, net Average rate Securities Average rate 2 0 0 5 228,658 $ 2 0 0 6 7,337 $ 2 0 0 7 7,248 $ 2 0 0 8 $ 20,443 $ 2 0 0 9 58,895 B E Y O N D 5,043 $ $ 1 2 / 3 1 / 0 4 F A I R V A L U E 331,044 $ T O T A L 327,624 6.11 50,329 2.02 7.50 15,317 2.64 6.69 6.69 6.12 5.60 6.49 10,076 29,617 15,274 60,408 181,020 181,132 3.20 3.50 3.89 4.39 3.55 Total Financial Assets 278,987 22,654 17,324 50,060 74,169 65,451 508,644 512,176 5.30 5.31 5.80 4.51 5.81 3,787 6,093 4,062 3 299,662 300,188 Average rate Deposits Average rate Long-term funds Average rate 6.10 275,935 1.61 222 4.89 5.44 9,782 2.46 235 4.89 3.02 165 4.89 3.58 3.58 156 147 4.89 4.89 Total Financial Liabilities 276,157 10,017 3,952 6,249 4,209 Average rate 1.61 2.57 3.14 3.62 3.64 Interest rate sensitivity at December 31, 2003 was as follows (in thousands): 3.59 6,278 6.24 6,281 6.24 1.82 7,203 5.36 7,906 306,865 308,094 2.05 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 B E Y O N D 1 2 / 3 1 / 0 3 F A I R V A L U E T O T A L Loans, net Average rate Securities Average rate $ 200,110 $ 27,523 $ 6,233 $ 10,399 $ 33,757 $ 17,734 $ 295,756 $ 298,918 5.58 7.60 7.51 6.22 5.92 6.05 5.82 31,568 14,560 9,320 31,852 50,176 76,337 213,813 213,987 3.45 5.11 3.34 3.55 3.63 4.31 3.87 Total Financial Assets 231,678 42,083 15,553 42,251 83,933 94,071 509,569 512,905 5.75 7.12 5.86 4.52 4.83 4.74 5.31 273,322 15,088 4,387 2,035 1,356 2 296,190 297,065 Average rate Deposits Average rate Long-term funds Average rate 1.38 10,273 1.30 3.69 184 4.91 3.11 236 4.91 168 4.91 3.39 3.39 160 4.91 1,516 3.59 Total Financial Liabilities 283,595 15,272 4,623 2,203 Average rate 1.37 3.71 3.24 3.55 3.67 6,159 6.26 6,161 6.26 1.96 17,180 4.96 18,076 313,370 315,141 2.34 9 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C O N D I T I O N D E C E M B E R 3 1 , Assets Cash and due from banks Available for sale securities Held to maturity securities, fair value of $6,698,000 - 2004; $4,527,000 - 2003; $18,026,000 - 2002 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, 5,555,419, 5,557,379, and 5,583,472 shares issued and outstanding at December 31, 2004, 2003 and 2002, respectively Surplus Undivided profits Unearned compensation Accumulated other comprehensive income, net of tax Total shareholders' equity Total liabilities and shareholders' equity See Notes to Consolidated Financial Statements. 10 2 0 0 4 2 0 0 3 2 0 0 2 $ 32,724,625 $ 33,861,029 $ 39,654,247 173,030,808 207,486,172 151,483,997 6,587,375 1,401,900 334,193,124 6,569,614 327,623,510 18,018,504 168,091 2,745,235 15,141,101 4,352,854 1,974,200 302,155,275 6,398,694 295,756,581 17,952,504 1,383,451 3,096,002 13,804,039 17,587,690 1,927,000 315,827,590 6,696,911 309,130,679 17,059,400 1,195,720 2,858,190 12,773,580 $ 577,441,149 $ 579,666,832 $ 553,670,503 $ 89,529,270 $ 80,598,685 $ 79,171,739 180,464,256 51,948,077 67,249,927 389,191,530 87,277,125 7,202,970 1,239 7,966,852 491,639,716 5,555,419 65,780,254 15,391,524 (925,764) 85,801,433 173,970,603 58,182,870 64,036,836 376,788,994 95,039,261 17,069,848 110,235 7,154,545 496,162,883 5,557,379 65,780,254 11,574,074 (94,899) 687,141 83,503,949 165,012,836 74,064,356 73,456,208 391,705,139 67,245,703 6,313,077 334,371 6,340,607 471,938,897 5,583,472 65,780,254 8,510,341 (143,043) 2,000,582 81,731,606 $ 577,441,149 $ 579,666,832 $ 553,670,503 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 0 4 2 0 0 3 2 0 0 2 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 (loss) 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 Income taxes Net income Basic and diluted earnings per share See Notes to Consolidated Financial Statements. $ 17,526,210 $ 17,181,975 $ 20,061,342 1,366,831 4,833,893 532,688 229,550 76,780 24,565,952 3,600,386 447,401 1,043,112 5,090,899 19,475,053 448,000 19,027,053 1,391,314 5,758,727 (258,888) 2,671,704 9,562,857 11,334,384 1,461,492 2,416,749 5,551,947 20,764,572 7,825,338 2,031,300 5,794,038 1.04 $ $ 1,320,545 5,882,469 368,934 249,185 62,109 25,065,217 4,383,806 456,694 998,139 5,838,639 19,226,578 447,000 18,779,578 1,458,037 6,709,852 57,356 1,512,169 9,737,414 10,989,269 1,466,797 2,760,125 6,247,956 21,464,147 7,052,845 2,035,000 1,397,148 5,161,358 350,498 257,339 196,207 27,423,892 8,052,732 382,912 1,179,993 9,615,637 17,808,255 2,428,000 15,380,255 1,419,463 6,822,638 209,659 1,920,452 10,372,212 10,923,858 1,506,113 2,802,343 6,641,849 21,874,163 3,878,304 687,582 $ 5,017,845 $ .90 $ 3,190,722 $ .57 11 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y N u m b e r o f C o m m o n S h a r e s 5,620,239 C o m m o n S t o c k 5,620,239 $ S u r p l u s 65,780,254 $ Balance, January 1, 2002 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 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 ($ .17 per share) Dividend declared ($ .18 per share) Retirement of stock Balance, December 31, 2004 See Notes to Consolidated Financial Statements. 12 7,142 (43,909) 7,142 (43,909) 5,583,472 5,583,472 65,780,254 (26,093) 5,557,379 (26,093) 5,557,379 65,780,254 (1,960) 5,555,419 (1,960) $ 5,555,419 $ 65,780,254 U n d i v i d e d P r o f i t s 7,052,559 $ 3,190,722 U n e a r n e d C o m p e n s a t i o n (174,043) $ 31,000 A c c u m u l a t e d O t h e r C o m p r e h e n s i v e I n c o m e 1,790,017 $ C o m p r e h e n s i v e I n c o m e T o t a l 80,069,026 $ 471,295 (260,730) $ 3,190,722 471,295 (260,730) $ 3,401,287 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) (143,043) 2,000,582 (1,195,267) $ 5,017,845 (1,195,267) (118,174) (118,174) (118,174) $ 3,704,404 48,144 (94,899) 687,141 (1,720,706) 107,801 $ 5,794,038 (1,720,706) 107,801 $ 4,181,133 94,899 48,144 (778,570) (833,607) (368,028) 83,503,949 5,794,038 (1,720,706) 107,801 94,899 (944,591) (999,975) (33,982) (672,080) (670,017) 92,846 (483,689) 8,510,341 5,017,845 (778,570) (833,607) (341,935) 11,574,074 5,794,038 (944,591) (999,975) (32,022) $ 15,391,524 $ (174,043) $ (925,764) $ 85,801,433 13 P E O P L E S F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Y E A R S E N D E D D E C E M B E R 3 1 , 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) loss 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 Redemption of Federal Home Loan Bank stock Proceeds from sales of other real estate Loans, net (increase) 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. 14 2 0 0 4 2 0 0 3 2 0 0 2 $ 5,794,038 $ 5,017,845 $ 3,190,722 (100,750) 258,888 (1,270,697) 1,447,000 448,000 354,360 350,767 (238,021) 778,939 7,822,524 174,457,599 (142,688,628) 1,405,000 (3,639,521) (28,700) 601,000 1,074,000 (32,427,179) 2,837,500 (3,079,803) (417,441) (1,906,173) 15,424,238 (3,021,702) (14,097) (1,778,198) (33,982) 30,292,102 (40,158,980) (7,762,136) (7,052,755) (1,136,404) 33,861,029 (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 11,949,514 445,068 (2,883,669) 325,425 (34,093,371) 10,384,713 (25,300,858) (175,992) (1,448,587) (368,028) 95,855,031 (85,098,260) 27,793,558 21,641,577 (5,793,218) 39,654,247 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 28,967,447 355,620 (956,251) (6,282,010) 35,675,102 22,720,713 (43,558,236) 72,799 (43,679) (1,346,508) (527,598) 806,801 (42,712) (15,243,156) (37,161,576) 7,619,271 32,034,976 $ 32,724,625 $ 33,861,029 $ 39,654,247 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 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 D S U B S I D I A R I E S 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 D S U B S I D I A R I E S (cid:1) N O T E A - B U S I N E S S A N D S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S : Business of The Company Securities The classification of securities is determined by Management at the time of purchase. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the security until Peoples Financial Corporation is a one-bank holding company headquar- maturity. Securities held to maturity are stated at amortized cost. tered in Biloxi, Mississippi. Its two operating subsidiaries are The Peoples Bank, Biloxi, Mississippi, and PFC Service Corp. Its principal subsidiary is Securities not classified as held to maturity are classified as available for The Peoples Bank, Biloxi, Mississippi, which provides a full range of bank- sale and are stated at fair value. Unrealized gains and losses, net of tax, ing, financial and trust services to individuals and small and commercial on these securities are recorded in shareholders’ equity as accumulated businesses operating in Harrison, Hancock, Stone and Jackson counties. other comprehensive income. Principles of Consolidation The amortized cost of available for sale securities and held to maturity The consolidated financial statements include the accounts of Peoples securities is adjusted for amortization of premiums and accretion of dis- Financial Corporation and its wholly-owned subsidiaries, The Peoples counts to maturity, determined using the interest method. Such amortiza- Bank, Biloxi, Mississippi, and PFC Service Corp. All significant intercompany tion and accretion is included in interest income on securities. Declines in transactions and balances have been eliminated in consolidation. the fair value of securities below their cost that are deemed to be other Basis of Accounting than temporary would be reflected in earnings as realized losses. In esti- mating other-than-temporary losses, management considers the length Peoples Financial Corporation and Subsidiaries recognize assets and lia- of time and the extent to which the fair value has been less than cost, the bilities, and income and expense, on the accrual basis of accounting. The financial condition and nature of the issuer and the intent and ability of preparation of financial statements in conformity with generally accepted the Company to retain the investment in the issuer for a period of time suf- accounting principles requires Management to make estimates and ficient to allow for any anticipated recovery in fair value. The specific assumptions that affect the reported amounts of assets and liabilities and identification method is used to determine realized gains and losses on disclosure of contingent assets and liabilities at the date of the financial sales of securities, which are reported as gain or loss on sale and calls of statements and the reported amounts of revenues and expenses during securities in other operating income. the reporting period. Actual results could differ from these estimates. Loans Cash and Due from Banks The loan portfolio consists of commercial and industrial and real estate loans The Company is required to maintain average reserve balances in its vault or within the Company’s trade area in South Mississippi. The loan policy estab- on deposit with the Federal Reserve Bank. The average amount of these reserve lishes guidelines relating to pricing, repayment terms, collateral standards requirements was approximately $11,623,000, $10,220,000 and $9,013,000 for including loan to value (LTV) limits, appraisal and environmental standards, the years ending December 31, 2004, 2003 and 2002, respectively. lending authority, lending limits and documentation requirements. The Company’s bank subsidiary maintained account balances in excess of Loans are stated at the amount of unpaid principal, reduced by unearned amounts insured by the Federal Deposit Insurance Corporation. At income and the allowance for loan losses. Interest on loans is recognized December 31, 2004, the bank subsidiary had excess deposits of $5,348,000. over the terms of each loan based on the unpaid principal balance. These amounts were uninsured and uncollateralized. Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements. 15 The Company places loans on a nonaccrual status when, in the opinion of subsequent adjustments are charged to expense. Costs of operating and Management, they possess sufficient uncertainty as to timely collection of maintaining the properties, net of related income and gains (losses) on interest or principal so as to preclude the recognition in reported earnings their disposition, are charged to expense as incurred. of some or all of the contractual interest. Accrued interest on loans classi- fied as nonaccrual is reversed at the time the loans are placed on nonac- Trust Department Income and Fees crual. Interest received on nonaccrual loans is applied against principal. Corporate trust fees are accounted for on an accrual basis and personal Loans are restored to accrual status when the obligation is brought current trust fees are recorded when received for 2004 and 2003. All trust fees were or has performed in accordance with the contractual terms for a reason- recorded for 2002 when received. able period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Loans classified as nonaccru- Income Taxes al are generally identified as impaired loans. The policy for recognizing The Company files a consolidated tax return with its wholly-owned income on impaired loans is consistent with the nonaccrual policy. subsidiaries. The tax liability of each entity is allocated based on the Allowance for Loan Losses entity’s contribution to consolidated taxable income. The provision for applicable income taxes is based upon reported income and expenses The allowance for loan losses is established through provisions for loan as adjusted for differences between reported income and taxable income. losses charged against earnings. Loans deemed to be uncollectible are The primary differences are exempt income on state, county and charged against the allowance for loan losses, and subsequent recoveries, municipal securities; differences in provisions for losses on loans as com- if any, are credited to the allowance. pared to the amount allowable for income tax purposes; directors' and officers' insurance; depreciation for income tax purposes over (under) The allowance for loan losses is based on Management's evaluation of the that reported for financial statements; gains reported under the install- loan portfolio under current economic conditions and is an amount that ment sales method for tax purposes and gains on the sale of bank prem- Management believes will be adequate to absorb probable losses on loans ises which were structured under the provisions of Section 1031 of the existing at the reporting date. The evaluation includes Management’s Internal Revenue Code. assessment of several factors: review and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current and antic- Advertising ipated economic conditions and the related impact on specific borrowers Advertising costs are expensed as incurred. and industry groups, a study of loss experience, a review of classified, nonperforming and delinquent loans, the estimated value of any under- Leases lying collateral, an estimate of the possibility of loss based on the risk All leases are accounted for as operating leases in accordance with the characteristics of the portfolio, adverse situations that may affect the terms of the leases. borrower’s ability to repay and the results of regulatory examinations. This evaluation is inherently subjective as it requires material estimates Earnings Per Share that may be susceptible to significant change. Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding, 5,556,251, The allowance consists of specific and general components. The specific 5,563,015 and 5,603,834 in 2004, 2003 and 2002, respectively. component relates to loans that are classified as either doubtful or sub- standard. For such loans, a specific allowance is established when the col- Statements of Cash Flows lateral value or observable market price of the loan is lower than the car- The Company has defined cash and cash equivalents to include cash and rying value of the loan. The general component of the allowance relates to due from banks. The Company paid $5,044,207, $5,937,967 and $9,929,357 loans that are not classified and is based on historical loss experience. in 2004, 2003 and 2002, respectively, for interest on deposits and borrow- Bank Premises and Equipment ings. Income tax payments totaled $2,062,000, $2,537,223 and $1,639,612 in 2004, 2003 and 2002, respectively. Loans transferred to other real estate Bank premises and equipment are stated at cost, less accumulated amounted to $112,250, $977,584 and $984,430 in 2004, 2003 and 2002, depreciation. Depreciation is computed primarily by the straight-line respectively. The income tax effect on the accumulated other comprehen- method based on the estimated useful lives of the related assets. sive income was $(830,890), $(676,621) and $108,473, at December 31, Other Real Estate Other real estate acquired through foreclosure is carried at the lower Reclassifications 2004, 2003 and 2002, respectively. of cost (primarily outstanding loan balance) or estimated market value, Certain reclassifications have been made to the prior year statements to less estimated costs to sell. If, at foreclosure, the carrying value of the loan conform to current year presentation. The reclassifications had no effect is greater than the estimated market value of the property acquired, on prior year net income. the excess is charged against the allowance for loan losses and any 16 (cid:1) N O T E B - S E C U R I T I E S : The amortized cost and estimated fair value of securities at December 31, 2004, 2003, and 2002, respectively, are as follows (in thousands): December 31, 2004 Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Available for sale securities: Debt securities: U. S. Treasury U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities $ 64,817 92,538 13,254 170,609 3,829 Total available for sale securities $ 174,438 Held to maturity securities: States and political subdivisions Total held to maturity securities $ $ 6,587 6,587 $ $ $ $ 000 41 244 285 62 347 113 113 $ (165) (766) (115) (1,046) (708) $ 64,652 91,813 13,383 169,848 3,183 $ (1,754) $ 173,031 $ $ (2) (2) $ $ 6,698 6,698 December 31, 2003 Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Available for sale securities: Debt securities: U. S. Treasury $ 49,977 $ U. S. Government agencies and corp. States and political subdivisions Total debt securities Equity securities 145,507 7,154 202,638 3,829 Total available for sale securities $ 206,467 Held to maturity securities: U. S. Treasury States and political subdivisions Total held to maturity securities $ $ 1,000 3,353 4,353 $ $ $ 465 778 161 1,404 709 2,113 17 159 176 $ (38) (801) (48) (887) (207) $ 50,404 145,484 7,267 203,155 4,331 $ (1,094) $ 207,486 $ $ 0 (2) (2) $ $ 1,017 3,510 4,527 17 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 $ $ $ $ 46,948 93,627 4,061 144,636 3,828 148,464 5,998 7,000 4,590 17,588 $ $ $ $ 709 1,468 89 2,266 766 3,032 120 143 175 438 $ (1) (11) (12) (12) (12) (12) $ $ $ $ $ $ $ 47,656 95,095 4,139 146,890 4,594 151,484 6,118 7,143 4,765 18,026 The amortized cost and estimated fair value of debt securities at December 31, 2004, (in thousands) by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized cost Estimated fair value 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 $ $ $ $ 49,961 68,674 46,376 5,598 170,609 436 1,836 3,144 1,171 6,587 $ $ $ $ 49,893 68,448 46,004 5,503 169,848 438 1,844 3,186 1,230 6,698 Information pertaining to securities with gross unrealized losses at December 31, 2004, aggregated by investment category and length of time that indi- vidual securities have been in a continuous loss position is as follows (in thousands): Less Than Twelve Months Over Twelve Months Total U. S. Treasury U. S. Government Agencies States and political subdivisions FHLMC Preferred stock Total Fair Value 57,716 $ 54,550 5,318 $ 117,584 Gross Unrealized Loss 165 417 115 $ $ 697 Fair Value 10,832 $ 10,735 97 2,367 13,199 $ $ Gross Unrealized Loss 352 349 2 708 1,059 $ $ Fair Value Gross Unrealized Loss 165 $ 766 117 708 1,756 57,716 65,285 5,415 2,367 $ 130,783 $ As a result of the evaluation of the impairment of these securities, the Company has determined that the declines summarized in the table above are not deemed to be other-than-temporary. Proceeds from maturities and calls of held to maturity debt securities during 2004, 2003 and 2002 were $1,405,000, $13,234,836 and $20,745,000, respectively. There were no sales of held to maturity debt securities during 2004, 2003 and 2002. Proceeds from maturities, sales and calls of available for sale debt secu- rities were $174,457,599, $130,443,200 and $145,297,421 during 2004, 2003 and 2002, respectively. Available for sale debt securities were sold in 2004 for a real- ized loss of $258,888. There were no sales of available for sale debt securities during 2003 and 2002. The Company realized gains of $57,356 and $209,659 18 from the liquidation of equity securities in 2003 and 2002, respectively. Securities with an amortized cost of approximately $166,311,000, $154,105,000 and $139,625,000 at December 31, 2004, 2003 and 2002, respectively, were pledged to secure public deposits, federal funds pur- chased and other balances required by law. Federal Home Loan Bank (FHLB) common stock was purchased during 1999 in order for the Company to participate in certain FHLB programs. The amount to be invested in FHLB stock was calculated according to FHLB guidelines as a percentage of certain mortgage loans. The investment is carried at cost. Dividends received are reinvested in FHLB stock. (cid:1) N O T E C - L O A N S : 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 2004 $ 20,926 $ 250,676 4,251 44,983 11,387 1,654 316 2003 14,896 223,246 3,980 41,832 15,252 2,560 389 $ 2002 21,534 197,478 7,375 65,946 19,522 3,637 336 $ 334,193 $ 302,155 $ 315,828 2004 6,399 494 (771) 448 6,570 $ $ 2003 6,697 600 (1,345) 447 6,399 $ $ 2002 5,658 676 (2,065) 2,428 6,697 $ $ In the ordinary course of business, the Company extends loans to certain officers and directors and their personal business interests at, in the opin- ion of Management, terms and rates comparable to other loans of similar credit risks. These loans do not involve more than normal risk of collectibility and do not include other unfavorable 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 2004 7,637 14,412 (13,190) 8,859 $ $ 2003 9,183 13,517 (15,063) 7,637 $ $ 2002 11,920 18,817 (21,554) 9,183 $ $ Industrial revenue bonds with a carrying value of $502,187 and $700,356 which there is a related allowance for loan losses was $6,164,000, at December 31, 2003 and 2002, respectively, were pledged to secure $7,415,000 and $6,550,000 at December 31, 2004, 2003 and 2002, respec- public deposits. tively. At December 31, 2004, 2003 and 2002, the average recorded invest- ment in impaired loans was $6,355,000, $7,400,000 and $6,602,000, Nonaccrual loans amounted to approximately $6,164,000, $7,415,000 and respectively. The amount of interest not accrued on these loans was $6,550,000 at December 31, 2004, 2003 and 2002, respectively. approximately $15,000, $261,000 and $212,000 in 2004, 2003 and 2002, respectively. In compliance with a bankruptcy court order, interest in the The total recorded investment in impaired loans amounted to $6,164,000, amount of $255,000 was received and recorded as interest income relating $7,415,000 and $6,550,000 at December 31, 2004, 2003 and 2002, respec- to one impaired loan, with an average balance of $5,725,000 for the year tively. The amount of that recorded investment in impaired loans for ended December 31, 2004. 19 (cid:1) N O T E D - B A N K P R E M I S E S A N D E Q U I P M E N T : 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 2004 5,033 17,463 12,697 35,193 17,174 18,019 $ $ $ 2003 4,522 17,533 12,173 34,228 16,275 2002 $ 4,839 15,584 11,596 32,019 14,960 $ 17,953 $ 17,059 (cid:1) N O T E E - D E P O S I T S At December 31, 2004, the scheduled maturities of time deposits (in thousands) are as follows: 2005 2006 2007 2008 2009 Thereafter Total $ 95,471 9,782 3,787 6,093 4,062 3 $ 119,198 (cid:1) N O T E F - B O R R O W I N G S F R O M F E D E R A L H O M E L O A N B A N K : At December 31, 2004, the Company had $5,000,000 outstanding in in 2010. The advances are collateralized by a blanket floating lien on the advances under a $76,000,000 line of credit with the Federal Home Loan Company’s residential first mortgage loans. Bank of Dallas (“FHLB”). This advance bore interest at 6.50% and matures 2004 2003 2002 $ 1,239 $ 1,2 9 $ 147,029 1,239 15,336 44,299 $ 1,239 94,899 $ 110,235 143,043 $ 334,371 (cid:1) N O T E G - N O T E S P A Y A B L E : December 31, Small Business Administration, outstanding mortgage on property acquired. The note bears interest at 5 3/8% & is payable at $1,952 monthly through January 2004. Notes payable on automobiles. The notes are non interest-bearing and payable in monthly installments through January 2005. RiverHills Bank, $750,000 line of credit for Peoples Financial Corporation Employee Stock Ownership Plan, secured by the guarantee of the Company; Interest at New York Prime (4.00% at December 31, 2003) due quarterly, principal due at maturity in June 2004. Totals 20 (cid:1) N O T E H - I N C O M E T A X E S : Federal income taxes payable (or refundable) and deferred taxes (or deferred charges) as of December 31, 2004, 2003 and 2002, 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 Unrealized loss on available for sale securities, charged from equity 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 $ 2004 2,282 1,489 479 915 (5,165) 524 1,784 2,308 (2,857) 603 $ 2003 2,114 1,328 836 (4,278) 732 1,784 13 347 2,876 (1,402) (20) $ 2002 2,215 1,145 685 (4,045) 820 1,750 13 1,026 3,609 (436) 200 $ (2,254) $ (1,422) $ (236) $ $ $ $ $ $ 2004 2,660 (629) 2,031 2004 (46) (57) (161) (826) (365) $ 2003 2,322 (287) $ 2,035 $ 2003 (88) 101 (183) 34 (679) (151) $ (1,455) $ (966) $ 2002 1,886 (1,198) 688 2002 (127) (628) (281) 63 213 (225) (985) 21 Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2004, 2003 and 2002, to earnings before income taxes. The reason for these differences is shown below (in thousands): Years Ended December 31, Taxes computed at statutory rate Increase (decrease) resulting from: Tax-exempt interest income Non-deductible interest Non-taxable life insurance proceeds Dividend exclusion Other, net Total income taxes 2004 Amount $ 2,660 (230) 6 (43) (50) (312) $ 2,031 % 34.0 (2.9) 0.1 (0.5) (0.6) (4.2) 25.9 2003 Amount % 2002 Amount $ 2,398 34.0 $ 1,319 (184) 8 (54) (133) $ 2,035 (2.6) 0.1 (0.8) (1.8) 28.9 (187) 15 (201) (63) (195) $ 688 % 34.0 (4.8) 0.4 (5.2) (1.6) (5.1) 17.7 (cid:1) N O T E I - S H A R E H O L D E R S ' E Q U I T Y : Banking regulations limit the amount of dividends that may be paid by On December 6, 2002, the Company’s Board of Directors approved the ter- mination of the stock incentive program, which was replaced by the acqui- the bank subsidiary without prior approval of the Commissioner of sition of endorsement split dollar policies for the two executive officers. Banking and Consumer Finance of the State of Mississippi. At December 31, 2004, approximately $11,389,000 of undistributed earnings of the bank On December 10, 2004, the Company’s Board of Directors approved a semi- subsidiary included in consolidated surplus and retained earnings was annual dividend of $ .18 per share. This dividend has a record date of available for future distribution to the Company as dividends, subject to January 10, 2005 and a distribution date of January 17, 2005. the approval by Board of Directors. The bank subsidiary is subject to various regulatory capital requirements On May 24, 2000, the Company’s Board of Directors approved the repur- administered by the federal banking agencies. Failure to meet minimum chase of up to 2.50% of the outstanding shares of the Company’s common capital requirements can initiate certain mandatory, and possibly addi- stock. As of December 31, 2003, 147,633 shares available under this plan tional discretionary, actions by the regulators that, if undertaken, could had been repurchased and retired. On November 26, 2002, the Company’s have a direct material effect on the bank subsidiary’s financial statements. Board of Directors approved the repurchase of up to 2.50% of the out- Under capital adequacy guidelines and the regulatory framework for standing shares of the Company’s common stock. As of December 31, 2004, prompt corrective action, the bank subsidiary must meet specific capital 23,573 shares had been repurchased and retired under the plan approved guidelines that involve quantitative measures of the bank subsidiary’s November 26, 2002. assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The bank subsidiary’s capital amounts On May 23, 2001, the Company’s Board of Directors approved a stock incen- and classification are also subject to qualitative judgments by the regula- tive program for two executive officers. Under this plan, whole shares tors about components, risk weightings and other factors. valued as of the distribution date at $50,000 were distributed to each of these officers who continue to meet the eligibility requirements on June 15, Quantitative measures established by regulation to ensure capital ade- 2001, and on January 15 of the four succeeding years. On June 15, 2001 and quacy require the bank subsidiary to maintain minimum amounts and January 15, 2002, a total of 6,886 and 7,142 shares, respectively, of Peoples ratios of Total and Tier 1 capital to risk-weighted assets, and Tier 1 capital Financial Corporation common stock was issued. This incentive program was to average assets. established subsequent to the surrender of collateral assignment split dollar policies that had been obtained on behalf of these executives. 22 As of December 31, 2004, the most recent notification from the Federal Total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based cap- Deposit Insurance Corporation categorized the bank subsidiary as well ital ratio of 6.00% or greater and a Leverage capital ratio of 5.00% or capitalized under the regulatory framework for prompt corrective action. greater. There are no conditions or events since that notification that To be categorized as well capitalized, the bank subsidiary must have a Management believes have changed the bank subsidiary’s category. The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2004, 2003 and 2002, are as follows (in thousands): December 31, 2004: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) 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) Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount $88,983 84,405 84,405 $85,583 81,270 81,270 $83,768 79,437 79,437 24.29% 23.04% 14.66% 24.81% 23.56% 14.44% 24.16% 22.91% 13.98% $29,302 14,651 23,028 $27,600 13,800 22,511 $27,720 13,860 22,798 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% (cid:1) N O T E J - O T H E R I N C O M E A N D E X P E N S E S : Other income consisted of the following: Years Ended December 31, 2004 Other service charges, commissions and fees $ 220,443 $ Gain on sale of bank premises Rentals Income from proceeds of insurance policies Other income Totals 1,270,698 480,267 128,117 572,179 $ 2,671,704 $ 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 23 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 and other bank service charges Conferences and classes Taxes and licenses Consulting fees Trust expense Other Totals $ 2004 553,104 232,473 55,923 443,152 189,082 263,241 359,344 1,256,013 145,991 164,546 259,361 119,182 397,610 1,112,925 $ 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 $ 5,551,947 $ 6,247,956 $ 6,641,849 (cid:1) N O T E K - F I N A N C I A L I N S T R U M E N T S W I T H O F F - B A L A N C E - S H E E T R I S K : The Company is a party to financial instruments with off-balance-sheet fixed expiration dates or other termination clauses and may require pay- ment of a fee. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amounts do not risk in the normal course of business to meet the financing needs of its necessarily represent future cash requirements. The Company evaluated customers. These financial instruments include commitments to extend each customer's creditworthiness on a case-by-case basis. The amount of credit and irrevocable letters of credit. These instruments involve, to vary- collateral obtained upon extension of credit is based on Management's ing degrees, elements of credit and interest rate risk in excess of the credit evaluation of the customer. Collateral obtained varies but may amount recognized in the balance sheet. The contract amounts of those include equipment, real property and inventory. instruments reflect the extent of involvement the bank subsidiary has in particular classes of financial instruments. The Company's exposure to The Company generally grants loans to customers in its primary trade area credit loss in the event of nonperformance by the other party to the finan- of Harrison, Hancock, Jackson and Stone counties. cial instrument for commitments to extend credit and irrevocable letters of credit is represented by the contractual amount of those instruments. At December 31, 2004, 2003 and 2002, the Company had outstanding The Company uses the same credit policies in making commitments and irrevocable letters of credit aggregating $3,113,033, $3,388,997 and conditional obligations as it does for on-balance-sheet instruments. $2,849,400, respectively. At December 31, 2004, 2003 and 2002, the Commitments to extend credit are agreements to lend to a customer as $113,500,000, $95,165,000 and $87,382,000, respectively. Approximately long as there is no violation of any conditions established in the agree- $24,637,000, $46,688,000 and $43,543,000 of outstanding commitments ment. Irrevocable letters of credit written are conditional commitments were at fixed rates and the remainder were at variable rates at December Company had outstanding unused loan commitments aggregating issued by the Company to guarantee the performance of a customer to a 31, 2004, 2003 and 2002, respectively. third party. Commitments and irrevocable letters of credit generally have 24 (cid:1)N O T E L - C O N T I N G E N C I E S : vigorously contest the allegations of the complaint. The bank is involved in During 2003, a lawsuit was filed against the Company’s bank subsidiary. This various other legal matters and claims which are being defended and han- litigation, which specifies damages of $1,500,000 and punitive damages of dled in the ordinary course of business. None of these matters is expected, in $12,500,000, was filed by an insurance company trying to reverse a settle- the opinion of Management, to have a material adverse effect upon the ment it voluntarily agreed to in 2000. The bank subsidiary intends to financial position or results of operations of the Company. (cid:1)N O T E M - C O N D E N S E D P A R E N T C O M P A N Y O N L Y F I N A N C I A L I N F O R M A T I O N : Peoples Financial Corporation began its operations September 30, 1985, when it acquired all the outstanding stock of The Peoples Bank, Biloxi, Mississippi. A condensed summary of its financial information is shown below. C O N D E N S E D B A L A N C E S H E E T S ( I N T H O U S A N D S ) December 31, 2004 2003 2002 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 $ $ $ $ 85,991 1 268 823 87,083 87,083 1,282 1,282 85,801 87,083 C O N D E N S E D S T A T E M E N T S O F I N C O M E ( I N T H O U S A N D S ) Years Ended December 31, 2004 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 $ $ 1,575 4,246 3 43 5,867 87 87 5,780 (14) 5,794 $ 82,957 $ 81,558 1 546 1,462 84,966 95 1,367 1,462 83,504 84,966 2003 2,280 2,739 5 79 5,103 86 86 5,017 (1) 5,018 $ $ $ $ $ $ $ $ $ $ 1 84 1,462 83,105 143 1,230 1,373 81,732 83,105 2002 1,400 1,752 7 230 3,389 185 185 3,204 13 3,191 25 C O N D E N S E D S T A T E M E N T S O F C A S H F L O W S ( I N T H O U S A N D S ) 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 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 2004 2003 2002 $ 5,794 $ 5,018 $ 3,191 (22) (5,821) (14) (63) 22 1,575 1,597 (34) (1,778) (1,812) (278) 546 268 $ (57) (5,019) (58) 57 2,280 2,337 (368) (1,449) (1,817) 462 84 546 $ (210) (3,152) 100 15 (56) 352 1,400 1,752 (528) (1,347) (1,875) (179) 263 84 $ Peoples Financial Corporation paid income taxes of $2,062,000, $2,537,223 and $1,639,612 in 2004, 2003 and 2002, respectively. No interest was paid during the three years ended December 31, 2004. (cid:1) N O T E N - E M P L O Y E E B E N E F I T P L A N S : The Company sponsors the Peoples Financial Corporation Employee Stock ESOP debt for acquisition of Company shares has been guaranteed by the Company and is reported as a debt of the Company. Shares pledged as Ownership Plan (ESOP). Employees who work more than 1,000 hours and collateral are reported as unearned compensation in equity. ESOP debt for are at least 21 years of age are eligible to participate in the ESOP. The Plan acquisition from The Peoples Bank, Biloxi, Mississippi, is eliminated in included 401(k) provisions and the former Gulf National Bank Profit consolidation. As shares are committed to be released, the Company Sharing Plan. Effective January 1, 2001, the ESOP was amended to separate reports compensation expense equal to the current market price of the the 401(k) funds into the Peoples Financial Corporation 401(k) Plan. The shares, and the shares become outstanding for net income per share com- separation had no impact on the eligibility or benefits provided to partic- putations. Dividends on allocated ESOP shares are recorded as a reduction ipants of either plan. The 401(k) provides for a matching contribution of of retained earnings; dividends on unallocated ESOP shares are recorded 75% of the amounts contributed by the employee (up to 6% of compensa- as a reduction of debt and accrued interest. tion). Contributions are determined by the Board of Directors and may be paid either in cash or Peoples Financial Corporation capital stock. Total Compensation expense of $7,323,267, $7,021,816 and $7,167,143 relating to contributions to the plan charged to operating expense were $459,000, the ESOP was recorded during 2004, 2003 and 2002, respectively. The ESOP $360,000 and $360,000 in 2004, 2003 and 2002, respectively. held 472,744, 467,499 and 533,733 allocated shares at December 31, 2004, 2003 and 2002, respectively. 26 The Company established an Executive Supplemental Income Plan and a carried at their cash surrender value, which amounted to $1,021,710, Directors' Deferred Income Plan, which provide for pre-retirement and $989,004 and $686,381 at December 31, 2004, 2003 and 2002, respectively. post-retirement benefits to certain key executives and directors. The The present value of accumulated benefits under these plans using an Company has acquired insurance policies, with the bank subsidiary as interest rate of 7.50% in 2004, 2003 and 2002 and the projected unit cost owner and beneficiary, that it may use as a source to pay potential bene- method has been accrued. The accrual amounted to $597,096 , $530,372 fits to the plan participants. These contracts are carried at their cash sur- and $485,534 at December 31, 2004, 2003 and 2002, respectively. render value, which amounted to $10,980,737, $10,588,084 and $10,276,887 at December 31, 2004, 2003 and 2002, respectively. The present value of The Company provides post-retirement health insurance to certain of its accumulated benefits under these plans, using an interest rate of 7.50% retired employees. Employees are eligible to participate in the retiree and the interest ramp-up method for 2004, 2003 and 2002, has been health plan if they retire from active service no earlier than their Social accrued. The accrual amounted to $3,783,850, $3,375,938 and $2,882,009 Security normal retirement age, which varies from 65 to 67 based on the at December 31, 2004, 2003 and 2002, respectively. year of birth. In addition, the employee must have at least 25 continuous years of service with the Company immediately preceding retirement. The Company also has additional plans for non-vested post-retirement However, any active employee who was at least age 65 as of January 1, benefits for certain key executives and directors. The Company has 1995, does not have to meet the 25 years of service requirement. The accu- acquired insurance policies, with the bank subsidiary as owner and ben- mulated post-retirement benefit obligation at January 1, 1995, was $517,599, eficiary, that it may use as a source to pay potential benefits to the plan which the Company elected to amortize over 20 years. The Company reserves participants. Additionally, there are two endorsement split dollar policies, the right to modify, reduce or eliminate these health benefits. with the bank subsidiary as owner and beneficiary, which provide a guar- anteed death benefit to the participants’ beneficiaries. These contracts are 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 2004 $ 212,933 133,262 20,600 2003 $ 157,515 104,409 20,600 2002 $ 107,533 94,603 20,600 Net periodic post-retirement benefit cost $ 366,795 $ 282,524 $ 222,736 The discount rate used in determining the accumulated post-retirement The Medicare Prescription Drug, Improvement and Modernization Act of benefit obligation was 5.75% in 2004, 6.25% in 2003, and 6.50% in 2002. 2003 (the “Act”) introduces a prescription drug benefit under Medicare The assumed health care cost trend rate used in measuring the accumulat- Part D as well as a federal subsidy to sponsors of retiree health care bene- ed post-retirement benefit obligation was 9.50% in 2004. The rate was fit plans that provide a benefit that is at least actuarially equivalent to assumed to decrease gradually to 5.00% for 2013 and remain at that level Medicare Part D. The Act becomes effective in 2006. The Company believes thereafter. If the health care cost trend rate assumptions were increased that the coverage it provides under its retiree health plan is actuarially 1.00%, the accumulated post-retirement benefit obligation as of December equivalent to Medicare Part D and that it will be entitled to the subsidy. 31, 2004, would be increased by 25.49%, and the aggregate of the service The Company has elected to recognize the effect of this subsidy as and interest cost components of the net periodic post-retirement benefit of December 31, 2004, in accordance with FASB Staff Position 106-2. cost for the year then ended would have increased by 29.70%. If the health The recognition of this subsidy had no effect on the 2004 net periodic care cost trend rate assumptions were decreased 1.00%, the accumulated post-retirement benefit cost but did reduce the accumulated benefit post-retirement benefit obligation as of December 31, 2004, would be obligation as of December 31, 2004 by $650,109, as reflected in the follow- decreased by 19.31%, and the aggregate of the service and interest cost ing two tables. components of the net periodic post-retirement benefit cost for the year then ended would have decreased by 22.01%. 27 The following is a reconciliation of the accumulated post-retirement benefit obligation: Accumulated post-retirement benefit obligation as of December 31, 2003 $ 2,152,982 Service cost Interest cost Actuarial loss Change due to Medicare Part D Subsidy Benefits paid 173,757 133,262 485,747 (650,109) (61,070) Accumulated post-retirement benefit obligation as of December 31, 2004 $ 2,234,569 December 31, 2004 2003 2002 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 $ 717,323 $ 659,859 $ 422,403 1,517,246 2,234,569 -0- 2,234,569 (205,997) 1,493,123 2,152,982 -0- 2,152,982 (226,597) 50,218 1,220,501 1,693,122 -0- 1,693,122 (247,197) (684,409) (887,947) (615,462) Accrued post-retirement benefit cost $ 1,344,163 $ 1,038,438 $ 830,463 (cid:1) N O T E O - F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S : SFAS 107, "Disclosures About Fair Value of Financial Instruments," requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of condition, for which it is practical to estimate its fair value. SFAS 107 excluded certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In preparing these dis- closures, Management made highly sensitive estimates and assumptions in developing the methodology to be utilized in the computation of fair value. These estimates and assumptions were formulated based on judgments regarding economic conditions and risk characteristics of the financial instruments that were present at the time the computations were made. Events may occur that alter these conditions and thus perhaps change the assumptions as well. A change in the assumptions might affect the fair value of the financial instruments disclosed in this footnote. In addition, the tax consequences related to the realization of the unrealized gains and losses have not been computed or disclosed herein. These fair value estimates, methods and assumptions are set forth below. Cash and Due from Banks The amount shown as cash and due from banks approximates fair value. Available for Sale Securities The fair value of available for sale securities is based on quoted market prices. Held to Maturity Securities The fair value of held to maturity securities is based on quoted market prices. Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. 28 Deposits Federal Funds Purchased and Securities Sold under The fair value of non-interest bearing demand and interest bearing sav- Agreements to Repurchase ings and demand deposits is the amount reported in the financial state- The amount shown as federal funds purchased and securities sold under ments. The fair value of time deposits is estimated by discounting the cash agreements to repurchase approximates fair value. flows using current rates of time deposits with similar remaining maturi- ties. The cash flows considered in computing the fair value of such Long Term Funds deposits are based on contractual maturities, since approximately 98% of The fair value of long term funds is computed by discounting the cash time deposits provide for automatic renewal at current interest rates. flows using current borrowing rates. The following table presents carrying amounts and estimated fair values for financial assets and financial liabilities at December 31, 2004, 2003 and 2002 (in thousands): 2004 2003 2002 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Financial Assets: Cash and due from banks $ 32,725 $ 32,725 $ 33,861 $ 33,861 $ 39,654 $ 39,654 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 174,438 6,587 327,624 89,529 299,663 389,192 87,277 7,203 173,031 6,698 331,044 89,529 300,188 389,717 87,277 7,906 206,467 4,353 295,757 80,599 296,190 376,789 95,039 17,180 207,486 4,527 298,918 80,599 297,065 377,664 95,039 18,076 151,484 17,588 309,130 79,172 312,533 391,705 67,246 6,647 151,484 18,026 311,032 79,172 314,552 393,724 67,246 7,398 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 D S U B S I D I A R I E S 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 D S U B S I D I A R I E S Board of Directors In our opinion, the consolidated financial statements referred to above Peoples Financial Corporation and Subsidiaries present fairly, in all material respects, the financial position of Peoples Biloxi, Mississippi Financial Corporation and Subsidiaries at December 31, 2004, 2003 and We have audited the accompanying consolidated statements of condition ended, in conformity with U. S. generally accepted accounting principles. 2002, and the results of its operations and its cash flows for the years then of Peoples Financial Corporation and Subsidiaries as of December 31, 2004, 2003 and 2002, and the related consolidated statements of income, share- Certified Public Accountants holders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these financial statements based PILTZ, WILLIAMS, LAROSA & CO. on our audits. We conducted our audits in accordance with the standards of the Public January 24, 2005 Biloxi, Mississippi Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant esti- mates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 30 F I V E - Y E A R C O M P A R A T I V E S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N ( I N T H O U S A N D S E X C E P T P E R S H A R E D A T A ) Peoples Financial Corporation and Subsidiaries Balance Sheet Summary Total assets Available for sale securities Held to maturity securities Loans, net of unearned discount Deposits Borrowings from FHLB Long term notes payable Shareholders' equity Summary of Operations Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before taxes and extraordinary gain Applicable income taxes Extraordinary gain Net income Per Share Data Basic and diluted earnings per share Basic and diluted earnings per share before extraordinary gain Dividends per share Book value 2004 2003 2002 2001 2000 $ 577,441 $ 579,669 $ 553,671 $ 587,012 $ 587,244 173,030 6,588 334,193 389,192 7,203 85,801 207,486 4,353 302,155 376,789 17,070 110 83,504 151,484 17,588 315,827 391,705 6,313 334 81,732 142,902 38,279 347,169 412,543 5,549 336 80,069 48,168 98,052 377,476 413,724 23,160 291 78,717 $ 24,566 $ 25,065 $ 27,424 $ 37,285 $ 42,250 5,091 19,475 448 19,027 9,563 (20,765) 7,825 2,031 5,794 1.04 1.04 .32 15.44 $ $ 5,838 19,227 447 18,780 9,737 (21,464) 7,053 2,035 5,018 .90 .90 .29 15.03 $ $ 9,616 17,808 2,428 15,380 10,372 (21,874) 3,878 687 18,354 18,931 2,503 16,428 9,256 (21,197) 4,487 1,082 594 19,401 22,849 4,192 18,657 7,678 (19,632) 6,703 2,065 $ $ 3,191 $ 3,999 $ 4,638 .57 .57 .24 14.64 $ .71 $ .79 .60 .24 14.25 .79 .21 13.58 Weighted average number of shares 5,556,251 5,563,015 5,603,834 5,629,872 5,857,232 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 1.00% 6.84% 2.75% 15.87% 23.04% 24.29% .88% 6.07% 2.17% 15.79% 23.56% 24.81% .56% 3.94% 2.08% 15.39% 22.91% 24.16% .68% 5.04% 1.72% 14.47% 20.65% 21.90% .82% 5.93% 1.22% 14.68% 19.97% 21.13% 31 S U M M A R Y O F Q U A R T E R L Y R E S U L T S O F O P E R A T I O N S ( I N T H O U S A N D S E X C E P T P E R S H A R E D A T A ) Peoples Financial Corporation and Subsidiaries Quarter Ended, 2004 Interest income Net interest income Provision for loan losses Income before income taxes Net income Basic and diluted earnings per share Quarter Ended, 2003 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 $ 5,916 June 30 $ 5,811 September 30 December 31 $ 6,190 $ 6,649 4,738 180 1,529 1,072 .19 4,615 183 2,824 1,987 .36 4,870 61 1,943 1,425 .25 5,252 24 1,529 1,310 .24 March 31 $ 6,410 June 30 September 30 December 31 $ 6,332 $ 6,174 $ 6,149 4,725 179 1,384 1,037 .19 4,708 139 1,599 1,088 .19 4,883 65 2,116 1,511 .27 4,911 64 1,954 1,382 .25 The Company's stock is traded under the symbol PFBX and is quoted in publications under "PplFnMS". The following table sets forth the high and low sale prices of the Company's common stock as reported on the NASDAQ Stock Market. Year 2004 2003 Quarter High Low Dividend per share 1st 2nd 3rd 4th 1st 2nd 3rd 4th $ $ 20 19 18 20 15 16 17 18 $ $ 16 17 17 17 13 13 14 15 $ .15 .17 $ .12 .14 There were 625 holders of record of common stock of the Company at The Commissioner of Banking and Consumer Finance of the State of January 31, 2005, and 5,553,359 shares issued and outstanding. The prin- Mississippi must approve all dividends paid to the Company by its bank cipal source of funds to the Company for payment of dividends is the subsidiary. Although Management cannot predict what dividends, if any, earnings of the bank subsidiary. will be paid in the future, the Company has paid regular semiannual cash dividends since its founding in 1985. 32 B O A R D O F D I R E C T O R S B O A R D O F D I R E C T O R S Peoples Financial Corporation B O A R D O F D I R E C T O R S The Peoples Bank, Biloxi, Mississippi Chevis C. Swetman, Chairman of the Board Chevis C. Swetman, Chairman of the Board Dan Magruder, Vice-Chairman; President, Rex Distributing Co., Inc. Tyrone J. Gollott, Vice-Chairman; President, G & W Enterprises, Inc. Drew Allen, President, Allen Beverages, Inc. Drew Allen, President, Allen Beverages, Inc. Rex E. Kelly, Director of Corporate Communications, Liz Corso Joachim, President, Frank P. Corso, Inc. Mississippi Power Company Rex E. Kelly, Director of Corporate Communications, Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott, PLLC Mississippi Power Company O F F I C E R S Peoples Financial Corporation Chevis C. Swetman, President and CEO Thomas J. Sliman, First Vice-President Jeannette E. Romero, Second Vice-President 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, PLLC S E N I O R M A N A G E M E N T The Peoples Bank, Biloxi, Mississippi Robert M. Tucei, Vice-President Chevis C. Swetman, President and CEO A. Wes Fulmer, Vice-President and Secretary Thomas J. Sliman, Senior Vice-President Lauri A. Wood, Chief Financial Officer and Controller 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 33 B R A N C H L O C A T I O N S The Peoples Bank, Biloxi, Mississippi Other Branches Biloxi Branches Bay St. Louis Office, 408 Highway 90 East, Bay St. Louis, Mississippi 39520, (228) 897-8710 Main Office, 152 Lameuse Street, Biloxi, Mississippi 39530, (228) 435-5511 Diamondhead Office, 4408 West Aloha Drive, Diamondhead, Cedar Lake Office, 1740 Popps Ferry Road, Biloxi, Mississippi 39532 Mississippi 39525, (228) 897-8714 (228) 435-8688 D’Iberville-St. Martin Office, 10491 Lemoyne Boulevard, West Biloxi Office, 2560 Pass Road, Biloxi, Mississippi 39531, D’Iberville, Mississippi 39540, (228) 435-8202 (228) 435-8203 Gulfport Branches Gautier Office, 2601 Highway 90, Gautier, Mississippi 39553, (228) 435-8694 Long Beach Office, 298 Jeff Davis Avenue, Long Beach, Mississippi 39560 (228) 897-8712 Downtown Gulfport Office, 1105 30th Avenue, Gulfport, Mississippi 39501, Ocean Springs Office, 2015 Bienville Boulevard, Ocean Springs, (228) 897-8715 Mississippi 39564, (228) 435-8204 Handsboro Office, 412 E. Pass Road, Gulfport, Mississippi 39507, Pass Christian Office, 125 Henderson Avenue, Pass Christian, (228) 897-8717 Mississippi 39571, (228) 897-8719 Orange Grove Office, 12020 Highway 49 North, Gulfport, Saucier Office, 17689 Second Street, Saucier, Mississippi 39574, Mississippi 39503, (228) 897-8718 (228) 897-8716 Waveland Office, 470 Highway 90, Waveland, Mississippi 39576, (228) 467-7257 Wiggins Office, 1312 S. Magnolia Drive, Wiggins, Mississippi 39577 (228) 897-8722 34 C O R P O R A T E I N F O R M A T I O N Peoples Financial Corporation and Subsidiaries Independent Auditors Piltz, Williams, LaRosa & Company, Biloxi, Mississippi S.E.C. Form 10-K Requests A copy of the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained without charge by direct- ing 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 Corporate Office Mailing Address P. O. Box 529 Biloxi, MS 39533-0529 Physical Address 152 Lameuse Street Biloxi, MS 39530 (228) 435-8205 Website www.thepeoples.com Corporate Stock The common stock of Peoples Financial Corporation is traded on the NASDAQ Small Cap Market under the symbol: PFBX. The current market makers are: FTN Midwest Research Secs. Knight Equity Markets, L.P. Morgan Keegan & Company, Inc. Sterne, Agee & Leach, Inc. Stifel Nicolaus & Co. 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 P. O. Box 1416, Biloxi, Mississippi 39533-1416 (228) 435-8208, e-mail: investorrelations@thepeoples.com 35 B O A R D O F D I R E C T O R S PEOPLES FINANCIAL CORPORATION THE PEOPLES BANK, BILOXI, MISSISSIPPI BACK ROW FROM LEFT: Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc.; Tyrone J. Gollott, Vice-Chairman; President, G & W Enterprises, Inc.; Lyle M. Page*, Partner, Page, Mannino, Peresich & McDermott, PLLC. 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 36 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 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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