Peoples Financial (PFBX) 10-Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended   June 30, 2005

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

      Commission File Number      0-30050

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(228) 435-5511

(Registrant’s telephone number, including area code)

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

Yesþ                                                             Noo

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At July 29, 2005, there were 15,000,000 shares of $1 par value common stock authorized, and 5,549,308 shares issued and outstanding.

Page 1

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
	Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4: Controls and Procedures
PART II OTHER INFORMATION
	Item 4 — Submission of Matters to a Vote of Security Holders
	Item 5 — Other Information
	Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
Consent of Independent Registered Public Accounting Firm
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to 18 U.S.C. Section 1350
Certification of CFO Pursuant to 18 U.S.C. Section 1350

PART I

FINANCIAL INFORMATION

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30, December 31, and June 30,	2005		2004		2004
Assets
Cash and due from banks	$	49,054,842	$	32,724,625	$	37,883,278
Held to maturity securities, market value of $16,168,000 - June 30, 2005; $6,698,000 - December 31, 2004; $3,041,000 - June 30, 2004		16,040,105		6,587,375		2,945,427
Available for sale securities, at market value		219,299,017		173,030,808		191,660,051
Federal Home Loan Bank stock, at cost		1,420,700		1,401,900		1,389,700
Loans		347,500,920		334,193,124		318,216,752
Less: Allowance for loan losses		5,935,578		6,569,614		6,644,725
Loans, net		341,565,342		327,623,510		311,572,027
Bank premises and equipment, net of accumulated depreciation of $17,958,000 - June 30, 2005; $17,174,000 - December 31, 2004; and $16,525,000 - June 30, 2004		17,815,976		18,018,504		16,241,484
Other real estate		32,957		168,091		484,701
Accrued interest receivable		3,282,548		2,745,235		2,657,775
Other assets		16,444,086		15,141,101		18,371,429
Total assets	$	664,955,573	$	577,441,149	$	583,205,872

Page 2

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)

June 30, December 31, and June 30,	2005			2004			2004
Liabilities & Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing	$	109,450,024		$	89,529,270		$	93,123,823
Savings and demand, interest bearing		198,019,041			180,464,256			173,667,579
Time, $100,000 or more		58,050,425			51,948,077			67,003,724
Other time deposits		63,470,625			67,249,927			63,719,899
Total deposits		428,990,115			389,191,530			397,515,025
Federal funds purchased and securities sold under agreements to repurchase		130,999,465			87,277,125			88,406,754
Borrowings from Federal Home Loan Bank		7,305,600			7,202,970			7,081,466
Notes payable					1,239			7,901
Other liabilities		8,281,500			7,966,852			7,673,418
Total liabilities		575,576,680			491,639,716			500,684,564
Shareholders’ Equity:
Common Stock, $1 par value, 15,000,000 shares authorized, 5,549,688, 5,555,419 and 5,556,419 shares issued and outstanding at June 30, 2005, December 31, 2004 and June 30, 2004, respectively		5,549,688			5,555,419			5,556,419
Surplus		65,780,254			65,780,254			65,780,254
Undivided profits		19,299,490			15,391,524			13,670,745
Accumulated other comprehensive income		(1,250,539	)		(925,764	)		(2,486,110	)
Total shareholders’ equity		89,378,893			85,801,433			82,521,308
Total liabilities and shareholders’ equity	$	664,955,573		$	577,441,149		$	583,205,872

See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

Page 3

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	For the Quarters Ended June 30,					For the Six Months Ended June 30,
	2005			2004		2005			2004
Interest income:
Interest and fees on loans	$	6,069,161		$	4,109,323	$	11,080,841		$	8,163,696
Interest and dividends on investments:
U. S. Treasury		638,668			326,392		1,053,667			621,649
U. S. Government agencies and corporations		1,149,619			1,206,280		2,095,669			2,581,235
States and political subdivisions		211,229			110,311		409,469			215,950
Other investments		64,441			51,592		135,283			123,615
Interest on federal funds sold		86,448			6,764		172,936			20,927
Total interest income		8,219,566			5,810,662		14,947,865			11,727,072
Interest expense:
Time deposits of $100,000 or more		270,872			195,349		508,539			362,959
Other deposits		929,243			643,154		1,747,113			1,303,289
Borrowings from Federal Home Loan Bank		117,546			110,704		220,940			226,387
Federal funds purchased and securities sold under agreements to repurchase		433,747			246,464		749,882			481,645
Total interest expense		1,751,408			1,195,671		3,226,474			2,374,280
Net interest income		6,468,158			4,614,991		11,721,391			9,352,792
Provision for losses on loans		(834,025	)		183,000		(1,513,000	)		363,000
Net interest income after provision for losses on loans	$	7,302,183		$	4,431,991	$	13,234,391		$	8,989,792

Page 4

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)
(Unaudited)

	For the Quarters Ended June 30,					For the Six Months Ended June 30,
	2005			2004		2005			2004
Other operating income:
Trust department income and fees	$	370,766		$	394,078	$	714,291		$	750,180
Service charges on deposit accounts		1,449,698			1,406,063		2,726,109			3,004,543
Other service charges, commissions and fees		90,983			78,323		164,367			145,277
Gain on sale of bank premises					1,270,697					1,270,697
Loss on sale of securities		(442,539	)				(442,539	)
Other income		231,341			232,077		474,569			558,574
Total other operating income		1,700,249			3,381,238		3,636,797			5,729,271
Other operating expense:
Salaries and employee benefits		2,817,894			2,836,006		5,655,851			5,605,909
Net occupancy		349,461			363,811		695,980			682,184
Equipment rentals, depreciation and maintenance		677,114			581,781		1,341,608			1,253,095
Other expense		1,193,539			1,207,572		2,508,403			2,824,692
Total other operating expense		5,038,008			4,989,170		10,201,842			10,365,880
Income before income taxes and extraordinary gain		3,964,424			2,824,059		6,669,346			4,353,183
Income taxes		1,316,520			837,508		2,088,000			1,295,000
Income before extraordinary gain		2,647,904			1,986,551		4,581,346			3,058,183
Extraordinary gain, net of income taxes		79,000					538,000
Net income	$	2,726,904		$	1,986,551	$	5,119,346		$	3,058,183

See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

Page 5

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

															Accumu-
															lated Other
	# of											Unearned			Compre-
	Common			Common					Undivided			Compen-			hensive			Comprehen-
	Shares			Stock			Surplus		Profits			sation			Income			sive Income			Total
Balance, January 1, 2004		5,557,379		$	5,557,379		$	65,780,254	$	11,574,074		$	(94,899	)	$	687,141					$	83,503,949
Comprehensive Loss:
Net income										3,058,183								$	3,058,183			3,058,183
Net unrealized loss on available for sale securities, net of tax																(3,272,335	)		(3,272,335	)		(3,272,335	)
Reclassification adjustment for available for sale securities called or sold in the current year, net of tax																99,084			99,084			99,084
Total comprehensive loss																		$	(115,068	)
Allocation of ESOP shares													94,899									94,899
Retirement of common stock		(960	)		(960	)				(16,921	)											(17,881	)
Dividend declared ($ .17 per share)										(944,591	)											(944,591	)
Balance, June 30, 2004		5,556,419		$	5,556,419		$	65,780,254	$	13,670,745		$			$	(2,486,110	)				$	82,521,308

Page 6

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
(Unaudited)

													Accumu-
													lated Other
	# of											Unearned	Compre-
	Common			Common					Undivided			Compen-	hensive			Comprehen-
	Shares			Stock			Surplus		Profits			sation	Income			sive Income			Total
Balance, January 1, 2005		5,555,419		$	5,555,419		$	65,780,254	$	15,391,524		$	$	(925,764	)				$	85,801,433
Comprehensive Income:
Net income										5,119,346						$	5,119,346			5,119,346
Net unrealized loss on available for sale securities, net of tax														(559,090	)		(559,090	)		(559,090	)
Reclassification adjustment for available for sale securities called or sold in current year, net of tax														234,315			234,315			234,315
Total comprehensive income																$	4,794,571
Retirement of common stock		(5,731	)		(5,731	)				(101,841	)									(107,572	)
Effect of stock retirement on accrued dividends										399										399
Dividend declared ($ .20 per share)										(1,109,938	)									(1,109,938	)
Balance, June 30, 2005		5,549,688		$	5,549,688		$	65,780,254	$	19,299,490		$	$	(1,250,539	)				$	89,378,893

See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

Page 7

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the Six Months Ended June 30,	2005			2004
Cash flows from operating activities:
Net income	$	5,119,346		$	3,058,183
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of bank premises					(1,270,697	)
Loss on sales of securities		442,539
Gain on sales of other real estate		(246,866	)		(99,000	)
Depreciation		828,760			761,000
Provision for losses on loans		(1,513,000	)		363,000
Provision for losses on other real estate		7,000			175,000
Changes in assets and liabilities:
Accrued interest receivable		(537,313	)		438,227
Other assets		(424,431	)		(2,911,468	)
Other liabilities		(229,337	)		616,871
Net cash provided by operating activities		3,446,698			1,131,116
Cash flows from investing activities:
Proceeds from maturities and calls of held to maturity securities		435,000			1,407,427
Proceeds from maturities, sales and calls of available for sale securities		88,641,255			84,040,393
Investment in held to maturity securities		(9,887,530	)
Investment in available for sale securities		(135,845,156	)		(73,005,823	)
Investment in Federal Home Loan Bank		(18,800	)		(16,500	)
Redemption of Federal Home Loan Bank stock					601,000
Proceeds from sales of other real estate		375,000			935,000
Loans, net increase		(12,428,832	)		(16,290,696	)
Acquisition of premises and equipment		(626,232	)		(616,783	)
Proceeds from sale of bank premises					2,837,500
Other assets		(276,354	)		(246,604	)
Net cash used in investing activities		(69,631,649	)		(355,086	)

Page 8

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

For the Six Months Ended June 30,	2005			2004
Cash flows from financing activities:
Demand and savings deposits, net increase	$	37,475,539		$	12,222,114
Time deposits, net increase		2,323,046			8,503,917
Principal payments on notes		(1,239	)		(7,435	)
Borrowings from Federal Home Loan Bank		177,769			20,101,113
Repayments to Federal Home Loan Bank		(75,139	)		(30,089,495	)
Retirement of common stock		(107,572	)		(17,881	)
Cash dividends		(999,576	)		(833,607	)
Federal funds purchased and securities sold under agreements to repurchase, net increase (decrease)		43,722,340			(6,632,507	)
Net cash provided by financing activities		82,515,168			3,246,219
Net increase in cash and cash equivalents		16,330,217			4,022,249
Cash and cash equivalents, beginning of period		32,724,625			33,861,029
Cash and cash equivalents, end of period	$	49,054,842		$	37,883,278

See Report of Independent Registered Public Accounting Firm and Selected Notes to Condensed Consolidated Financial Statements.

Page 9

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

SELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2005 and 2004

1. The accompanying unaudited condensed consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 2004 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 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.

2. The results of operations for the six months ended June 30, 2005, are not necessarily indicative of the results to be expected for the full year. Per share data is based on the weighted average shares of common stock outstanding of 5,551,781 and 5,556,954 for the six months ended June 30, 2005 and 2004, respectively.

3. At June 30, 2005 and 2004, the total recorded investment in impaired loans amounted to $443,000 and $8,595,000, respectively. The average recorded investment in impaired loans amounted to approximately $445,000 and $6,275,000 at June 30, 2005 and 2004, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $443,000 at June 30, 2005. The allowance for losses related to these loans amounted to approximately $35,000 at June 30, 2005. The amount of interest not accrued on these loans amounted to approximately $11,000 and $19,000 for the six months ended June 30, 2005 and 2004, respectively. In compliance with a bankruptcy court order, interest in the amount of $100,000 was received and recorded as interest income relating to one impaired loan, with an average balance of $5,722,000, for the six months ended June 30, 2004.

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

	For the Six			For the Year			For the Six
	Months Ended			Ended December			Months Ended
	June 30, 2005			31, 2004			June 30, 2004
Balance, beginning of period	$	6,569,614		$	6,398,694		$	6,398,694
Provision for loan losses		(1,513,000	)		448,000			363,000
Recoveries		1,117,406			493,920			368,489
Loans charged off		(238,442	)		(771,000	)		(485,458	)
Balance, end of period	$	5,935,578		$	6,569,614		$	6,644,725

Page 10

5. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $3,226,000 and $2,377,000 for the six months ended June 30, 2005 and 2004, respectively, and $5,044,000 for the twelve months ended December 31, 2004, for interest on deposits and borrowings. Income tax payments of $2,943,000 and $1,065,000 were made during the six months ended June 30, 2005 and 2004, respectively, and $2,062,000 for the twelve months ended December 31, 2004. Loans transferred to other real estate amounted to $112,000 for the six months ended June 30, 2004 and for the twelve months ended December 31, 2004. The income tax effect on the accumulated other comprehensive income was $(167,000) and $(1,635,000) at June 30, 2005 and 2004, respectively.

6. Securities with gross unrealized losses at June 30, 2005, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

	Less Than Twelve Months					Over Twelve Months					Total
			Gross					Gross					Gross
			Unreal-					Unreal-					Unreal-
	Fair Value		ized Loss			Fair Value		ized Loss			Fair Value		ized loss
U. S. Treasury	$	76,348	$	(249	)	$	7,941	$	(57	)	$	84,289	$	(306	)
U. S. Govt. Agencies		74,940		(514	)		17,599		(394	)		92,539		(908	)
States and political subdivisions		2,981		(27	)		3,301		(86	)		6,282		(113	)
FHLMC preferred stock							2,141		(934	)		2,141		(934	)
Total	$	154,269	$	(790	)	$	30,982	$	(1,471	)	$	185,251	$	(2,261	)

Management evaluates securities for other-than-temporary impairment on a monthly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U. S. Treasury and U. S. Government Agencies, the cause of the decline in value, the intent and ability of the Company to hold these securities until maturity and that the Company has traditionally held virtually all of its securities, including those classified as available for sale, until maturity. Any sales of available for sale securities, which have been infrequent and immaterial, have been for liquidity purposes. The Company has also carefully considered the specific issues related to the valuation of the FHLMC preferred stock. As a result of these evaluations, the Company has determined that the declines summarized in the table above are not deemed to be other-than-temporary.

Page 11

7. On April 29, 2005, a loan in amount of $5,533,000, which had been classified as an impaired loan, paid off. During 2005, the Company recognized interest income of approximately $900,000, which included accrued interest previously charged-off and interest not accrued while this credit was on nonaccrual. A recovery of charged-off principal of $962,000 and the reversal of a specific reserve of $650,000 also relate to this event.

8. Certain reclassifications, which had no effect on prior year net income, have been made to the prior period statements to conform to current year presentation.

Page 12

Report of Independent Registered Public Accounting Firm

Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi

We have reviewed the accompanying condensed consolidated balance sheets of Peoples Financial Corporation as of June 30, 2005, June 30, 2004 and December 31, 2004, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the six months ended June 30, 2005 and June 30, 2004. These interim financial statements are the responsibility of the company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 United States generally accepted accounting principles for interim financial statements.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Peoples Financial Corporation as of December 31, 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Piltz, Williams, LaRosa & Company

Biloxi, Mississippi
August 1, 2005

Page 13

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries (the Company) for the six months ended June 30, 2005 and 2004. 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

During the first six months of 2005, net income was $5,119,000, as compared with $3,058,000 for the first six months of 2004. The Company realized extraordinary income of $538,000, net of taxes, as a result of the PULSE EFT Association Exchange during the current year. While this unusual, non-recurring gain is very positive, the Company continues to concentrate on its operating results. The economy of the Mississippi Gulf Coast, our trade area, continues to be robust, and this translates into opportunities for the Company, especially in terms of loan growth. The quality of the loan portfolio is also strong and non-performing loans have decreased significantly, as discussed in Note 7, contributing to the reduction of the allowance for loan losses through a negative loan loss provision of $1,513,000 in the current year. The Company continues to closely monitor its interest rate risk activities, as it continues to manage pricing challenges in its competitive market.

The following schedule compares financial highlights for the six months ended June 30, 2005 and 2004:

For the six months ended June 30,	2005			2004
Net income per share	$	0.92		$	0.55
Book value per share	$	16.11		$	14.85
Return on average total assets		1.63	%		1.04	%
Return on average shareholders’ equity		11.69	%		7.37	%
Allowance for loan losses as a % of loans, net of unearned discount		1.71	%		2.09	%

Page 14

Financial Condition

Held to Maturity Securities

Held to maturity securities increased $13,095,000 at June 30, 2005, compared with June 30, 2004, as a result of the management of the Company’s liquidity position. Sustained temporary increases in deposits are being invested in short term Treasury securities. Gross unrealized gains for held to maturity securities were $145,000 and $98,000 at June 30, 2005 and 2004, respectively. Gross unrealized losses were $17,000 and $2,000 at June 30, 2005 and 2004, respectively. The following schedule reflects the mix of the held to maturity investment portfolio at June 30, 2005 and 2004:

June 30,	2005					2004
	Amount		%			Amount		%
U. S. Treasury	$	9,889,402		62	%	$
States and political subdivisions		6,150,703		38	%		2,945,427		100	%
Totals	$	16,040,105		100	%	$	2,945,427		100	%

Available for Sale Securities

Available for sale securities increased $27,639,000 at June 30, 2005, compared with June 30, 2004, in the management of the Company’s liquidity position, as discussed above. Gross unrealized gains were $341,000 and $931,000 and gross unrealized losses were $2,243,000 and $4,702,000 at June 30, 2005 and 2004, respectively. The following schedule reflects the mix of available for sale securities at June 30, 2005 and 2004:

June 30,	2005					2004
	Amount		%			Amount		%
U. S. Treasury	$	82,372,974		38	%	$	61,754,516		32	%
U. S. Government agencies		119,583,966		54	%		117,584,871		62	%
States and political subdivisions		14,384,780		7	%		8,372,305		4	%
Other securities		2,957,297		1	%		3,948,359		2	%
Totals	$	219,299,017		100	%	$	191,660,051		100	%

Page 15

Loans

Loans increased $29,284,000 at June 30, 2005, as compared with June 30, 2004. During 2004 and continuing into 2005, the local economy has stabilized which has resulted in increased loan demand. The Company expects that this demand will continue in the remaining quarters of 2005.

Other Real Estate

Other real estate decreased $452,000 at June 30, 2005, as compared with June 30, 2004, primarily due to sales of ORE inventory and a reduction in property taken into ORE in recent quarters.

Bank Premises and Equipment

Bank premises and equipment increased $1,574,000 at June 30, 2005, as compared with June 30, 2004, primarily as a result of the construction of two new branch facilities during 2004 and 2005.

Accrued Interest Receivable

Accrued interest receivable increased $625,000 at June 30, 2005, as compared with June 30, 2004, due to an increase in interest earning assets and the rate earned on these assets.

Other Assets

Other assets decreased $1,927,000 at June 30, 2005, as compared with June 30, 2004, due to a decrease in deferred taxes on unrealized losses on available for sale securities.

Deposits

Total deposits increased $31,457,000 at June 30, 2005, as compared with June 30, 2004. Significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal areas reallocate their resources periodically. As discussed above, the Company has managed its funds including planning the timing and classification of investment maturities and using other funding sources and their maturity so as to achieve appropriate liquidity.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase increased $42,593,000 at June 30, 2005, as compared with June 30, 2004, as a result of the reallocation of funds by certain commercial customers between deposit and non-deposit products.

Notes Payable

Notes payable decreased at June 30, 2005, as compared with June 30, 2004, as a result of the maturity and/or early payoff of Company debt.

Other Liabilities

Other liabilities increased $608,000 at June 30, 2005, as compared with June 30, 2004. This increase is primarily due to the impact of increasing health care costs on the liability for post-retirement health benefits during 2004 and an increase in the liabilities related to deferred compensation benefits for officers of the bank subsidiary.

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Shareholders’ Equity and Capital Adequacy

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. One measure of capital adequacy is the primary capital ratio which was 15.22% at June 30, 2005, as compared with 15.23% at June 30, 2004. 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.

RESULTS OF OPERATIONS

Net Interest Income

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

Net Interest Earnings and Net Yield on Interest Earning Assets

Six Months Ended June 30, (In
thousands, except percentages)	2005			2004
Total interest income (1)	$	15,158		$	11,839
Total interest expense		3,226			2,374
Net interest earnings	$	11,932		$	9,465
Net yield on interest earning assets (2)		4.28	%		3.68	%

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2005 and 2004.
(2)	Interest income in 2005 includes $900,000 received in 2005 for prior years. See Note 7. Net yield would have been 3.96 % without this interest.

The schedule on page 18 provides an analysis of the change in total interest income and total interest expense for the six months ended June 30, 2005 and 2004. Changes in interest income are generally attributable to changes in interest rates related to interest-earning assets, particularly loans. It should be noted that loan interest income in 2005 includes the recovery of previously charged off interest and the receipt of interest that would have been earned had the credit not been on nonaccrual. This interest amounted to approximately $900,000. Changes in interest expense, while impacted by changes in volume related to interest-bearing liabilities, were impacted by the increase in the cost of funds during these time periods.

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

								Attributable To:
	For the Six		For the Six
	Months		Months
	Ended		Ended
	June 30,		June 30,		Increase									Rate/
	2005		2004		(Decrease)			Volume			Rate			Volume
INTEREST INCOME: (1)
Loans (2) (3)	$	11,081	$	8,164	$	2,917		$	723		$	2,016		$	178
Federal funds sold		173		21		152			284			(10	)		(122	)
Held to maturity:
Taxable		14		19		(5	)		6			(9	)		(2	)
Non-taxable		228		122		106			126			(10	)		(10	)
Available for sale:
Taxable		3,135		3,184		(49	)		(73	)		25			(1	)
Non-taxable		392		205		187			151			21			15
Other		135		124		11			(30	)		54			(13	)
Total	$	15,158	$	11,839	$	3,319		$	1,187		$	2,087		$	45
INTEREST EXPENSE:
Savings and demand, interest bearing	$	982	$	663	$	319		$	(51	)	$	400		$	(30	)
Time deposits		1,273		1,003		270			(90	)		395			(35	)
Federal funds purchased and securities sold under agreements to repurchase		750		482		268			107			132			29
Borrowings from FHLB		221		226		(5	)		(42	)		45			(8	)
Total	$	3,226	$	2,374	$	852		$	(76	)	$	972		$	(44	)

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2005 and 2004.
(2)	Loan fees are included in these figures.
(3)	Includes nonaccrual loans.

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Provision for Loan Losses

Management continuously monitors the Company’s relationships with its loan customers, especially those in concentrated industries such as gaming and hotel/motel, as well as exposure for out of area loans, and their direct and indirect impact on its operations. A thorough analysis of current economic conditions and the quality of the loan portfolio are conducted on a quarterly basis. These analyses are utilized in the computation of the adequacy of the allowance for loan losses. Based on these analyses, the Company recorded a negative provision during the first six months of 2005. The Company expects to record provisions throughout the remaining quarters of 2005, as deemed necessary, based on its analyses.

Service Charges on Deposit Accounts

Service charges on deposit accounts decreased $278,000 for the six months ended June 30, 2005, as compared with the six months ended June 30, 2004, primarily due to the decrease in fee income from off-site ATMs no longer under contract by the Company.

Gain on Sale of Bank Premises

The Company realized a gain of $1,271,000 for the six months of 2004 from the sale of bank premises.

Loss on Sale of Securities

The Company realized a loss from the sale of available for sale securities during the second quarter of 2005 of $443,000. The proceeds of these sales will be used to fund loan demand.

Other Expense

Other expense decreased $316,000 for the first six months of 2005 as compared with the first six months of 2004 as a result of a decrease in expense for off-site ATMs no longer under contract by the Company.

Extraordinary Gain

An extraordinary gain of $538,000, net of taxes, was recorded as a result of the PULSE EFT Association Exchange.

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 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 2005, as necessary.

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During the second quarter of 2005, the Company became qualified for the State of Mississippi Collateral Pool, which reduced the requirement for pledging securities for public funds from 105% to 75%. This will provide the Company with more flexibility in meeting its liquidity needs, as public funds represent a significant part of the Company’s deposit base.

Item 4: Controls and Procedures

As of June 30, 2005, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II
OTHER INFORMATION

Item 4 — Submission of Matters to a Vote of Security Holders

None.

Item 5 — Other Information

The Sarbanes Oxley Act of 2002 provides for, among other things, the acceleration of filing deadlines for quarterly and annual reports for companies that meet certain criteria. Based on its June 30, 2005 market capitalization, the Company has determined that it will become an accelerated filer at December 31, 2005. The Company anticipates that it will be compliant with these requirements.

Page 20

Item 6 — Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 23:	Consent of Independent Registered Public Accounting Firm
Exhibit 31.1:	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002
Exhibit 31.2:	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002
Exhibit 32.1:	Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2:	Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350

(b) Reports on Form 8-K

A Form 8-K was filed on April 11, 2005, May 12, 2005, June 22, 2005 and July 11, 2005.

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SIGNATURES

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

PEOPLES FINANCIAL CORPORATION
(Registrant)

Date: August 10, 2005
By:	/s/ Chevis C. Swetman
	Chevis C. Swetman
Chairman, President and Chief Executive Officer
Date: August 10, 2005
By:	/s/ Lauri A. Wood
	Lauri A. Wood
Chief Financial Officer and Controller
(principal financial and accounting officer)

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