PEOPLES FINANCIAL CORP /MS/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002
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or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 0 - 30050
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PEOPLES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Mississippi 64-0709834
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

Lameuse and Howard Avenues, Biloxi, Mississippi 39533
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(Address of principal executive offices) (Zip Code)

(228) 435-5511
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(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.

Peoples Financial Corporation has only one class of common stock authorized. At
October 31, 2002, there were 15,000,000 shares of $1 par value common stock
authorized, and 5,600,666 shares issued and outstanding.

Page 1 of 23

PART I
FINANCIAL INFORMATION
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

Page 2 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)

See Selected Notes to Condensed Consolidated Financial Statements.

Page 3 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Page 4 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)

See Selected Notes to Condensed Consolidated Financial Statements.

Page 5 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)

Page 6 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
(Unaudited)

See Selected Notes to Condensed Consolidated Financial Statements.

Page 7 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Page 8 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

See Selected Notes to Condensed Consolidated Financial Statements.

Page 9 of 23

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2002 and 2001

1. The accompanying unaudited condensed consolidated financial statements have
been prepared with the accounting policies in effect as of December 31, 2001 as
set forth in the Notes to the Consolidated Financial Statements of Peoples
Financial Corporation and Subsidiaries (the Company). In the opinion of
Management, all adjustments necessary for a fair presentation of the condensed
consolidated financial statements have been included and are of a normal
recurring nature. The accompanying unaudited condensed consolidated financial
statements have been prepared also in accordance with the instructions to Form
10-Q and Rule 10-01 of Regulations S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The statements include information
required for interim financial statements.

2. The results of operations for the nine months ended September 30, 2002 and
2001, are not necessarily indicative of the results to be expected for the full
year.

3. Per share data is based on the weighted average shares of common stock
outstanding of 5,607,913 and 5,632,169 for the nine months ended September 30,
2002 and 2001, respectively.

4. At September 30, 2002 and 2001, the total recorded investment in impaired
loans amounted to $6,557,000 and $1,237,000. The average recorded investment in
impaired loans amounted to approximately $6,273,000 and $1,087,000 at September
30, 2002 and 2001, respectively. The amount of that recorded investment in
impaired loans for which there is a related allowance for loan losses was
$6,557,000 at September 30, 2002. The allowance for losses related to these
loans amounted to approximately $1,150,000 at September 30, 2002. Interest not
accrued on these loans did not have a significant effect on earnings for the
nine months ended September 30, 2002 and 2001.

5. Transactions in the allowance for loan losses were as follows:

Page 10 of 23

6. The Company has defined cash and cash equivalents to include cash and due
from banks. The Company paid $7,808,471 and $14,945,254 for the nine months
ended September 30, 2002 and 2001, respectively, and $18,768,000 for the twelve
months ended December 31, 2001, for interest on deposits and borrowings. Income
tax payments totaled $1,410,000 and $1,117,000 for the nine months ended
September 30, 2002 and 2001, respectively, and $1,847,000 for the twelve months
ended December 31, 2001. Loans transferred to other real estate amounted to
$960,000 and $2,253,000 for the nine months ended September 30, 2002 and 2001,
respectively, and $2,073,000 for the twelve months ended December 31, 2001.

7. The income tax effect on the accumulated other comprehensive income was
$124,000 and $735,000 at September 30, 2002 and 2001, respectively.

Page 11 of 23

Independent Accountants' Review Report

Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi

We have reviewed the accompanying condensed consolidated balance sheets of
Peoples Financial Corporation as of September 30, 2002, September 30, 2001 and
December 31, 2001, and the related condensed consolidated statements of income,
shareholders' equity, and cash flows for the nine months ended September 30,
2002 and September 30, 2001. These financial statements are the responsibility
of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles for interim financial
statements.

/s/ Piltz, Williams, LaRosa & Co.

PILTZ, WILLIAMS, LAROSA & CO.

November 4, 2002
Biloxi, Mississippi

Page 12 of 23

Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following presents Management's discussion and analysis of the consolidated
financial condition and results of operations of Peoples Financial Corporation
and Subsidiaries (the Company) for the nine months ended September 30, 2002 and
2001. These comments highlight the significant events and should be considered
in combination with the Condensed Consolidated Financial Statements included in
this report on Form 10-Q.

FORWARD-LOOKING INFORMATION

Congress passed the Private Securities Litigation Act of 1995 in an effort to
encourage corporations to provide information about a company's anticipated
future financial performance. This act provides a safe harbor for such
disclosure which protects the companies from unwarranted litigation if actual
results are different from management expectations. This report contains
forward-looking statements and reflects industry conditions, company performance
and financial results. These forward-looking statements are subject to a number
of factors and uncertainties which could cause the Company's actual results and
experience to differ from the anticipated results and expectations expressed in
such forward-looking statements.

OVERVIEW

Net income for the nine months ended September 30, 2002, was $2,470,000 compared
with $2,590,000 for the same period in 2001. The negative trend in the net
interest margin the Company had experienced during 2001 and the first quarter of
2002 has now stabilized. This is the result of aggressive pricing of loans and
the favorable repricing of deposits, specifically large and brokered
certificates of deposit. The Company anticipates that this positive trend will
continue during the fourth quarter of 2002.

The following schedule compares financial highlights for the nine months ended
September 30, 2002 and 2001:

Page 13 of 23

FINANCIAL CONDITION

HELD TO MATURITY SECURITIES

Held to maturity securities decreased $38,652,000 at September 30, 2002, as
compared with September 30, 2001, as a result of the management of the Company's
liquidity position. Funds available from the maturity of these securities were
generally invested in available for sale securities. Gross unrealized gains for
held to maturity securities were $559,000 and $933,000 at September 30, 2002 and
2001, respectively, and gross unrealized losses for held to maturity securities
were $31,000 at September 30, 2001. The following schedule reflects the mix of
the held to maturity investment portfolio at September 30, 2002 and 2001:

AVAILABLE FOR SALE SECURITIES

Available for sale securities increased $26,328,000 at September 30, 2002, as
compared with September 30, 2001, as the result of the management of the
Company's liquidity position, as discussed above. Gross unrealized gains were
$3,073,000 and $3,035,000 at September 30, 2002 and 2001, respectively, and
gross unrealized losses were $7,000 at September 30, 2002. The following
schedule reflects the mix of available for sale securities at September 30, 2002
and 2001:

Page 14 of 23

FEDERAL FUNDS SOLD

Federal funds sold were $3,450,000 at September 30, 2002 as direct result of the
management of the bank subsidiary's liquidity position.

LOANS

Loans decreased $22,779,000 at September 30, 2002, as compared with September
30, 2001, as a result of the decreased loan demand in the Company's trade area
which in turn was due to the softening of the local economy. In addition, as
interest rates declined a number of customers paid off several large credits
during the third quarter of 2001. The Company anticipates that loan demand will
be flat throughout the remainder of 2002.

During the third quarter of 2002, the Company had charge-offs of $1,340,000. The
Company had previously provided for these losses during 2001 and the first
quarter of 2002.

OTHER REAL ESTATE

Other real estate decreased $962,000 at September 30,2002 as compared with
September 30, 2001, due to the sale of several parcels of commercial real estate
during the second half of 2001 and the first two quarters of 2002.

ACCRUED INTEREST RECEIVABLE

Accrued interest receivable decreased $1,029,000 at September 30, 2002, as
compared with September 30, 2001, as a result of the decline in interest rates
earned on loans and investments and a decline in the volume of these assets.

OTHER ASSETS

Other assets increased $5,969,000 at September 30, 2002, as compared with
September 30, 2001, due to the investment of $5,000,000 in bank owned life
insurance in 2002.

DEPOSITS

Total deposits decreased $37,706,000 at September 30, 2002, as compared with
September 30, 2001. Significant increases or decreases in total deposits or
significant fluctuations among the different types of deposits are anticipated
by Management as customers in the casino industry and county and municipal areas
reallocate their resources periodically. Additionally, the Company obtained
brokered deposits during 2000, most of which has now matured. As discussed
above, the Company has managed its funds including planning the timing and
classification of investment maturities and using other funding sources and
their maturity so as to achieve appropriate liquidity.

ACCRUED INTEREST PAYABLE

Accrued interest payable decreased $495,000 at September 30, 2002, as compared
with September 30, 2001, as a result of the decline in interest rates paid on
deposits.

SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY

Strength, security and stability have been the hallmark of the Company since its
founding in 1985 and of its bank subsidiary since its founding in 1896. A strong
capital foundation is fundamental to the continuing prosperity of the Company
and the security of its customers and shareholders.

Page 15 of 23

One measure of capital adequacy is the primary capital ratio which was 14.97 %
at September 30, 2002, as compared with 14.14% at September 30, 2001. These
ratios are well above the regulatory minimum of 6.00%. Management continues to
emphasize the importance of maintaining the appropriate capital levels of the
Company.

On May 23, 2001, the Company's Board of Directors approved a stock incentive
program for two executive officers. Under this plan, whole shares valued as of
the distribution date at $50,000 are to be distributed to each of these officers
who continue to meet the eligibility requirements on June 15, 2001, and on
January 15 of the four succeeding years. On June 15, 2001 and January 15, 2002,
a total of 6,886 and 7,142 shares of Peoples Financial Corporation common stock
was issued.

On June 26, 2002, the Company's Board of Directors approved a semi-annual
dividend of $ .12 per share. The dividend had a record date of July 8, 2002 and
a distribution date of July 10, 2002.

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income, the amount by which interest income on loans, investments
and other interest earning assets exceeds interest expense on deposits and other
borrowed funds, is the single largest component of the Company's income.
Management's objective is to provide the largest possible amount of income while
balancing interest rate, credit, liquidity and capital risk. The following
schedule summarizes net interest earnings and net yield on interest earning
assets:

Net Interest Earnings and Net Yield on Interest Earning Assets

(1) All interest earned is reported on a taxable equivalent basis using a tax
rate of 34% in 2002 and 2001.

The schedule on page 17 provides an analysis of the change in total interest
income and total interest expense for the nine months ended September 30, 2002
and 2001.

Page 16 of 23

Analysis of Changes in Interest Income and Interest Expense
(In Thousands)

(1) All interest earned is reported on a taxable equivalent basis using a tax
rate of 34% in 2002 and 2001.

(2) Loan fees are included in these figures. Includes nonaccrual loans.

Page 17 of 23

PROVISION FOR LOAN LOSSES

Management continuously monitors the Company's relationships with its loan
customers, especially those in concentrated industries such as seafood, gaming
and hotel/motel, and their direct and indirect impact on its operations. A
thorough analysis of current economic conditions and the quality of the loan
portfolio are conducted on a quarterly basis using the latest available
information. These analyses are utilized in the computation of the adequacy of
the allowance for loan losses. Based on these analyses, the Company provided
$136,000 during the quarter ended September 30, 2002, and $749,000 during the
nine months ended September 30, 2002, for loan losses, primarily to address
potential losses from one credit. The Company expects to provide for its loan
loss provision on a monthly basis during the fourth quarter of 2002 at a level
consistent with provisions made during the third quarter of 2002.

OTHER INCOME

Other income increased $808,000 for the nine months ended September 30, 2002, as
compared with the nine months ended September 30, 2001, as a result of the gain
realized on proceeds from whole life insurance owned by the bank subsidiary and
the gain realized from the sale of bank premises.

LIQUIDITY

Liquidity represents the Company's ability to adequately provide funds to
satisfy demands from depositors, borrowers and other commitments by either
converting assets to cash or accessing new or existing sources of funds.
Management monitors these funds requirements in such a manner as to satisfy
these demands and provide the maximum earnings on its earning assets. Deposits,
payments of principal and interest on loans, proceeds from maturities of
investment securities and earnings on investment securities are the principal
sources of funds for the Company. As discussed previously, the Company has
utilized non-traditional sources of funds including brokered certificates of
deposit and borrowings from the Federal Home Loan Bank. These additional sources
have allowed the Company to satisfy its liquidity needs. The Company will
continue to utilize these sources of funds throughout 2002, as necessary.

ITEM 4 - CONTROLS AND PROCEDURES

Based on their evaluation, as of a date within 90 days of the filing date of
this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-14( c) and 15d- 14( c) under the Securities Exchange Act of 1934, as
amended) are effective. There have been no significant changes in internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Page 18 of 23

PART II
OTHER INFORMATION

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

Exhibit 23 Consent of Certified Public Accountants

Exhibit 99 Certifications of Chief Executive Officer and Chief
Financial Officer

(B) REPORTS ON FORM 8-K

None.

Page 19 of 23

SIGNATURES

Pursuant to the requirement of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

PEOPLES FINANCIAL CORPORATION
(REGISTRANT)

Date: November 12, 2002
--------------------------------------

By: /S/ Chevis C. Swetman
--------------------------------------
Chevis C. Swetman
Chairman, President and Chief Executive Officer

Date: November 12, 2002
--------------------------------------

By: /s/ Lauri A. Wood
--------------------------------------
Lauri A. Wood
Chief Financial Officer and Controller
(principal financial and accounting officer)

Page 20 of 23

CERTIFICATIONS

I, Chevis C. Swetman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Peoples Financial
Corporation.

2. Based on my knowledge, the report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;

3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in the report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as such term is
defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) presented in the quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

Page 21 of 23

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: November 12, 2002

/s/ Chevis C. Swetman
--------------------------------------
Chevis C. Swetman,
President and Chief Executive Officer

I, Lauri A. Wood, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Peoples Financial
Corporation.

2. Based on my knowledge, the report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;

3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in the report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as such term is
defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
the report (the "Evaluation Date"); and

c) presented in the quarterly report our conclusions about
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the board of directors (or persons performing the equivalent functions):

Page 22 of 23

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Dated: November 12, 2002
/s/ Lauri A. Wood
---------------------------------------
Lauri A. Wood,
Chief Financial Officer

Page 23 of 23

EXHIBIT INDEX