Peoples Financial (PFBX) 10-Q 2005 Q3 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 September 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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 November 1, 2005, there were 15,000,000 shares of $1 par value common stock authorized, and 5,549,128 shares issued and outstanding.

TABLE OF CONTENTS

PART I
	Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4: Controls and Procedures
PART II
	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)

September 30, December 31, and September 30,	2005		2004		2004
Assets
Cash and due from banks	$	58,454,381	$	32,724,625	$	47,911,793
Federal funds sold		97,000,000
Held to maturity securities, market value of
$41,920,000 - September 30, 2005;
$6,698,000 - December 31, 2004;
$3,078,000 - September 30, 2004		41,804,453		6,587,375		2,944,232
Available for sale securities, at market value		191,961,031		173,030,808		210,686,836
Federal Home Loan Bank Stock, at cost		1,432,800		1,401,900		1,395,200
Loans		347,081,539		334,193,124		324,438,772
Less: Allowance for loan losses		11,015,042		6,569,614		6,593,339
Loans, net		336,066,497		327,623,510		317,845,433
Bank premises and equipment, net of accumulated depreciation of $18,304,000 - September 30, 2005; $17,174,000 - December 31, 2004; and $16,780,000 - September 30, 2004		17,749,847		18,018,504		16,621,465
Other real estate		120,956		168,091		335,968
Accrued interest receivable		3,982,223		2,745,235		2,750,455
Other assets		18,736,639		15,141,101		17,044,290
Total assets	$	767,308,827	$	577,441,149	$	617,535,672

Page 2

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

September 30, December 31, and September 30,	2005			2004			2004
Liabilities & Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing	$	147,796,135		$	89,529,270		$	96,794,637
Savings and demand, interest bearing		248,024,104			180,464,256			197,338,514
Time, $100,000 or more		49,598,212			51,948,077			60,448,594
Other time deposits		60,753,503			67,249,927			64,140,656
Total deposits		506,171,954			389,191,530			418,722,401
Federal funds purchased and securities sold under agreements to repurchase		159,090,166			87,277,125			98,221,499
Borrowings from Federal Home Loan Bank		7,359,080			7,202,970			7,201,167
Notes payable					1,239			4,183
Other liabilities		7,465,071			7,966,852			7,067,223
Total liabilities		680,086,271			491,639,716			531,216,473
Shareholders’ Equity:
Common Stock, $1 par value, 15,000,000 shares authorized, 5,549,128 shares issued and outstanding at September 30, 2005, 5,555,419 shares issued and outstanding at December 31, 2004 and 5,555,419 shares issued and outstanding at September 30, 2004		5,549,128			5,555,419			5,555,419
Surplus		65,780,254			65,780,254			65,780,254
Undivided profits		17,522,402			15,391,524			15,081,064
Accumulated other comprehensive income		(1,629,228	)		(925,764	)		(97,538	)
Total shareholders’ equity		87,222,556			85,801,433			86,319,199
Total liabilities and shareholders’ equity	$	767,308,827		$	577,441,149		$	617,535,672

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 September 30,				For The Nine Months Ended September 30,
	2005		2004		2005			2004
Interest income:
Interest and fees on loans	$	5,661,300	$	4,403,970	$	16,742,141		$	12,567,666
Interest and dividends on securities:
U. S. Treasury		702,176		351,134		1,755,843			972,783
U. S. Government agencies and corporations		1,170,691		1,196,517		3,266,360			3,777,752
States and political subdivisions		214,543		149,105		624,012			365,055
Other investments		16,061		54,160		151,344			177,775
Interest on federal funds sold		220,318		35,161		393,254			56,088
Total interest income		7,985,089		6,190,047		22,932,954			17,917,119
Interest expense:
Time deposits of $100,000 or more		370,665		229,412		879,204			592,371
Other deposits		1,084,360		717,852		2,831,473			2,021,141
Borrowing from Federal Home Loan Bank		109,336		108,276		330,276			334,663
Federal funds purchased and securities sold under agreements to repurchase		519,107		264,112		1,268,989			745,757
Total interest expense		2,083,468		1,319,652		5,309,942			3,693,932
Net interest income		5,901,621		4,870,395		17,623,012			14,223,187
Provision for losses on loans		5,103,000		61,000		3,590,000			424,000
Net interest income after provision for losses on loans		798,621		4,809,395		14,033,012			13,799,187
Other operating income:
Trust department income and fees		343,613		328,945		1,057,904			1,079,125
Service charges on deposit accounts		1,136,682		1,406,102		3,862,791			4,410,645
Other service charges, commissions and fees		55,263		71,145		219,630			216,422
Gain on sale of banking premises									1,270,697
Loss on sale of securities						(442,539	)		(129,950	)
Other income		205,619		214,059		680,188			902,583
Total other operating income	$	1,741,177	$	2,020,251	$	5,377,974		$	7,749,522

Page 4

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

	For The Quarters Ended September 30,					For The Nine Months Ended September 30,
	2005			2004		2005		2004
Other operating expense:
Salaries and employee benefits	$	2,910,696		$	2,848,598	$	8,566,547	$	8,454,507
Net occupancy		377,987			381,399		1,073,967		1,063,583
Equipment rentals, depreciation and maintenance		598,857			509,658		1,940,465		1,762,753
Other expense		1,327,683			1,146,871		3,836,086		3,971,563
Total other operating expense		5,215,223			4,886,526		15,417,065		15,252,406
Income (loss) before income taxes and extraordinary gain		(2,675,425	)		1,943,120		3,993,921		6,296,303
Income taxes		(908,020	)		517,700		1,179,980		1,812,700
Income (loss)before extraordinary gain		(1,767,405	)		1,425,420		2,813,941		4,483,603
Extraordinary gain, net of taxes							538,000
Net Income (Loss)	$	(1,767,405	)	$	1,425,420	$	3,351,941	$	4,483,603

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-
												Unearned			lated Other			Compre-
	# of			Common								Compensa-			Comprehen-			hensive
	Shares			Stock			Surplus		Undivided Profits			tion			sive Income			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 Income:
Net income										4,483,603								$	4,483,603			4,483,603
Net unrealized loss on available for sale securities, net of tax																(251,701	)		(251,701	)		(251,701	)
Reclassification adjustment for available for sale securities sold in current year, net of tax																(532,978	)		(532,978	)		(532,978	)
Total comprehensive income																		$	3,698,924
Allocation of ESOP shares													94,899									94,899
Retirement of stock		(1,960	)		(1,960	)				(32,022	)											(33,982	)
Cash dividends, ($ .17 per share)										(944,591	)											(944,591	)
Balance, September 30, 2004		5,555,419		$	5,555,419		$	65,780,254	$	15,081,064		$			$	(97,538	)				$	86,319,199

Page 6

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

													Accumu-
												Unearned	lated Other			Compre-
	# of			Common					Undivided			Compensa-	Comprehen-			hensive
	Shares			Stock			Surplus		Profits			tion	sive Income			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										3,351,941						$	3,351,941			3,351,941
Net unrealized loss on available for sale securities, net of tax														(937,779	)		(937,779	)		(937,779	)
Reclassification adjustment for available for sale securities sold or liquidated in current year, net of tax														234,315			234,315			234,315
Total comprehensive income																$	2,648,477
Retirement of stock		(6,291	)		(6,291	)				(111,636	)									(117,927	)
Effect of retirement of stock on accrued dividends										399										399
Cash dividends, ($ .20 per share)										(1,109,826	)									(1,109,826	)
Balance, September 30, 2005		5,549,128		$	5,549,128		$	65,780,254	$	17,522,402		$	$	(1,629,228	)				$	87,222,556

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 Nine Months Ended September 30,	2005			2004
Cash flows from operating activities:
Net income	$	3,351,941		$	4,483,603
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of available for sale securities		442,539			129,950
Gain on sales of other real estate		(366,865	)		(100,750	)
Gain on sale of bank premises					(1,270,697	)
Depreciation and amortization		1,173,148			1,052,000
Provision for losses on loans		3,590,000			424,000
Provision for losses on other real estate		7,000			178,130
Changes in assets and liabilities:
Accrued interest receivable		(1,236,988	)		345,547
Other assets		(1,340,944	)		(2,819,466	)
Other liabilities		(1,033,093	)		1,067,285
Net cash provided by operating activities		4,586,738			3,489,602
Cash flows from investing activities:
Proceeds from maturities and calls of held to maturity securities		4,435,000			1,408,622
Investment in held to maturity securities		(39,652,078	)
Proceeds from maturities, sales and calls of available for sale securities		129,641,255			112,252,864
Investment in available for sale securities		(150,083,264	)		(116,758,457	)
(Investment in) redemption of Federal Home Loan Bank stock		(30,900	)		579,000
Loans, net		(12,120,987	)		(26,140,868	)
Proceeds from sale of bank premises					2,837,500
Acquisition of premises and equipment		(904,491	)		(1,287,764	)
Proceeds from sales of other real estate		495,000			1,074,000
Federal funds sold		(97,000,000	)
Other assets		(357,524	)		(343,132	)
Net cash used in investing activities	$	(165,577,989	)	$	(26,378,235	)

Page 8

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

For The Nine Months Ended September 30,	2005			2004
Cash flows from financing activities:
Demand and savings deposits, net increase	$	125,826,713		$	43,079,629
Time deposits, net increase (decrease)		(8,846,289	)		2,369,544
Principal payments on notes		(1,239	)		(11,153	)
Cash dividends		(2,109,402	)		(1,778,198	)
Retirement of stock		(117,927	)		(33,982	)
Federal funds purchased and securities sold under agreements to repurchase		71,813,041			3,182,238
Repayments to Federal Home Loan Bank		(133,048	)		(30,123,630	)
Borrowings from Federal Home Loan Bank		289,158			20,254,949
Net cash provided by financing activities		186,721,007			36,939,397
Net increase in cash and cash equivalents		25,729,756			14,050,764
Cash and cash equivalents, beginning of period		32,724,625			33,861,029
Cash and cash equivalents, end of period	$	58,454,381		$	47,911,793

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 Nine Months Ended September 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 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, 2005 and 2004, 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 5,550,932 and 5,556,530 for the nine months ended September 30, 2005 and 2004, respectively.

4. At September 30, 2005 and 2004, the total recorded investment in impaired loans amounted to $351,000 and $8,173,000. The average recorded investment in impaired loans amounted to approximately $260,000 and $6,605,000 at September 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 $350,000 at September 30, 2005. The allowance for losses related to these loans amounted to approximately $30,000 at September 30, 2005. Interest not accrued on these loans amounted to $5,000 and $42,000 for the nine months ended September 30, 2005 and 2004, respectively. In compliance with a bankruptcy court order, interest in the amount of $136,000 was received and recorded as interest income relating to one impaired loan, with an average balance of $5,736,000 for the nine months ended September 30, 2004.

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

	For the Nine			For the Year			For the Nine
	Months Ended			Ended			Months Ended
	September 30,			December 31,			September 30,
	2005			2004			2004
Balance, beginning of period	$	6,569,614		$	6,398,694		$	6,398,694
Recoveries		1,220,363			493,920			447,255
Loans charged off		(364,935	)		(771,000	)		(676,610	)
Provision for loan losses		3,590,000			448,000			424,000
Balance, end of period	$	11,015,042		$	6,569,614		$	6,593,339

Page 10

6. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $5,287000 and $3,600,000 for the nine months ended September 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 totaled $3,956,000 and $1,564,000 for the nine months ended September 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 $88,000 and $112,000 for the nine months ended September 30, 2005 and 2004, respectively, and $112,000 for the twelve months ended December 31, 2004.

7. Securities with gross unrealized losses at September 30, 2005, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows (in 000’s):

	Less Than Twelve
	Months					Over Twelve Months					Total
			Gross					Gross					Gross
	Fair		Unreal-			Fair		Unreal-			Fair		Unreal-
	Value		ized Loss			Value		ized Loss			Value		ized Loss
U. S. Treasury	$	69,368	$	(308	)	$	3,955	$	(44	)	$	73,323	$	(352	)
U. S. Govt. Agencies		104,542		(904	)		17,516		(478	)		122,058		(1,382	)
States and political subdivisions		3,079		(28	)		3,301		(84	)		6,380		(112	)
FHLMC preferred stock							2,141		(934	)		2,141		(934	)
Total	$	176,989	$	(1,240	)	$	26,913	$	(1,540	)	$	203,902	$	(2,780	)

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, 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

8. The income tax effect on the accumulated other comprehensive income was ($362,000)and ($404,000) at September 30, 2005 and 2004, respectively.

9. The Company’s bank subsidiary (the “Bank”) filed suit against USF&G in 1998 to recover damages for USF&G’s bad faith failure to defend and indemnify the Bank in connection with a lawsuit filed against the Bank in 1996. The Bank obtained legal representation from a local plaintiff’s attorney and customer (“Attorney”) on a contingent basis.

In December 2000, the case was transferred from the judge to whom it was originally assigned to a second judge (the “Judge”). The Judge had previously handled some discovery matters in the case.

The Bank had made a routine loan to the Judge in November 1998, which was guaranteed by the Attorney. The loan was repaid in February 2000 by someone other than the Judge, apparently at the request of the Attorney. Neither the Attorney nor the Judge disclosed the loan or the repayment to USF&G or its counsel.

During the course of the case, the Bank and USF&G filed competing motions for summary judgment. The Judge granted summary judgment in the Bank’s favor on the issue of liability and subsequently presided over a settlement conference in which he expressed his opinion about the value of the case in monetary terms. The case was settled on December 24, 2001, for $1.5 million.

In 2003, the Attorney, the Judge and other parties were indicted for alleged fraud, bribery, etc. involving various events, including allegations concerning the Bank v. USF&G lawsuit. Neither the Bank nor any Bank employee was indicted. Following the indictments, USF&G filed a civil action against the Attorney, the Judge and the Bank alleging fraud in connection with the outcome of the Bank v. USF&G lawsuit. The complaint demands $2.5 million in compensatory damages and $10 million in punitive damages, prejudgment interest and attorneys’ fees, etc. The USF&G v. Bank suit was stayed until 30 days following the completion of the criminal case. There has been no discovery.

The criminal case against the Attorney, the Judge and other parties concluded on August 12, 2005. No guilty verdicts were returned. The defendants received not guilty verdicts on several counts and there was no verdict (mistrial) on a number of other counts, including the Bank v. USF&G matter. On September 16, 2005, the U. S. Attorney’s office announced that it will retry the Attorney, the Judge and other parties on fraud and bribery charges related to the Bank v. USF&G matter. A tentative date of March 6, 2006 has been set for the new trial. The USF&G v. Bank suit will remain subject to the stay order until the criminal matters are concluded.

The Company understands that this litigation, as with any litigation, is inherently uncertain and it is reasonably possible that the Company may incur a loss in this matter. The Company has no reason to conclude, however, that the loss is probable and cannot reasonably estimate the amount of any possible loss. No liability for the USF&G lawsuit has been accrued. This conclusion is based on relevant legal advice, the fact that this lawsuit is in its very earliest stages with no discovery having been undertaken and the Company’s resolve to vigorously contest the case.

Page 12

10. On April 29, 2005, a loan in the 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.

11. The Company’s trade area of Harrison, Hancock, Jackson and Stone Counties were especially affected by Hurricane Katrina. Six of the bank subsidiaries’ sixteen branches were disabled. Since August 29, four of these locations have been reopened. The negative financial impact to the Company was approximately $5,750,000 before taxes. This loss is primarily attributable to the provision of loan losses of $5,055,000, a loss on flood and wind insurance deductibles of $365,000 and loss of fee income of $190,000.

Past due loans have increased at September 30, 2005 to $27,300,000 from $4,300,000 at June 30, 2005, as a direct result of Hurricane Katrina. The Company has worked with its lending customers on specific issues and has granted a modification of terms as appropriate. Management anticipates that those loans categorized as past due will continue to be high for a period of time. While it is likely that there may be a loss of interest income in future quarters due to non-performing loans, based on information currently available the Company does not anticipate that this will result in a material impact on interest income.

12. 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 13

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 September 30, 2005, September 30, 2004 and December 31, 2004, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the nine months ended September 30, 2005 and September 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 condensed 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 auditing 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.

/s/ Piltz, Williams, LaRosa & Co.

PILTZ, WILLIAMS, LAROSA & CO.

November 3, 2005
Biloxi, Mississippi

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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, 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

When Hurricane Katrina hit the Mississippi Gulf Coast on August 29, 2005, it impacted the Company’s entire trade area and operations. Six of the bank subsidiary’s sixteen branch facilities were severely damaged or completely destroyed. Hurricane Katrina severely damaged the local economy. It is estimated that more than twenty thousand homes and businesses were destroyed. Much of the infrastructure, including highways and local bridges, has been disabled. The gaming and tourism industry, which plays a major role in the Gulf Coast economy and employs more than fifteen thousand workers, has been temporarily crippled.

The Company’s success in completely tied to the success of south Mississippi, and therefore Katrina has negatively impacted the earnings for 2005. Net income for the nine months ended September 30, 2005 was $3,352,000 as compared with $4,484,000 for the nine months ended September 30, 2004. The single largest effect of the hurricane is on the Company’s loan portfolio, as Management determined that a provision for loan losses of $5,055,000, or $3,355,000 net of taxes, should be recorded for the third quarter of 2005. Further information relating to the provision is presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management is very optimistic about the recovery of the Mississippi Gulf Coast. Every day brings progress in the recovery as more businesses reopen, infrastructure is restored, and life slowly returns to normal. The Company has reopened four of its disabled branches, with plans for the last two to reopen in the coming weeks. Our disaster recovery plans were extremely effective and allowed the bank subsidiary to return to normal operations within days of the hurricane.

Peoples is doing what it does best, working closely with our customers and in our community. The Company will play a vital role as the Mississippi Gulf Coast first recovers, and then rebuilds in the coming years. With history from other challenging times as a guide, we expect that the short-term difficulties we now face will ultimately result in longer term prosperity.

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

For the nine months ended September 30,	2005			2004
Net income per share	$	0.60		$	0.81
Book value per share	$	15.72		$	15.61
Return on average total assets		.66	%		.99	%
Return on average shareholders’ equity		5.17	%		7.02	%
Allowance for loan losses as a % of loans, net of unearned discount		3.16	%		2.04	%

Financial Condition

Federal Funds Sold

Federal funds sold were $97,000,000 at September 30, 2005. Funds available from the increase in deposits and non-deposit products have been invested in these short-term investments in the management of the Company’s liquidity position.

Held to Maturity Securities

Held to maturity securities increased $38,860,000 at September 30, 2005, as compared with September 30, 2004, as a result of the management of the Company’s liquidity position as funds available from the increase in deposits and non-deposit products have been invested in U. S. Treasury Bills and classified as held to maturity. Included in this portfolio are bonds issued by local municipalities which have been affected by Hurricane Katrina. These investments were approximately $1,800,000 at September 30, 2005. Developments, especially the ability of the issuer to continue to service the bonds, are being closely monitored with respect to these investments. At September 30, 2005, Management has determined that no provision for loss for these investments is required.

Gross unrealized gains for held to maturity securities were $140,000 and $134,000 at September 30, 2005 and 2004, respectively and there was a gross unrealized loss of $25,000 at September 30, 2005. The following schedule reflects the mix of the held to maturity investment portfolio at September 30, 2005 and 2004:

September 30,	2005					2004
	Amount		%			Amount		%
U. S. Treasury securities	$	35,654,125		85	%	$
States and political subdivisions		6,150,328		15	%		2,944,232		100	%
Totals	$	41,804,453		100	%	$	2,944,232		100	%

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Available for Sale Securities

Available for sale securities decreased $18,726,000 at September 30, 2005, as compared with September 30, 2004, as the result of the management of the Company’s liquidity position, as discussed above. Included in this portfolio are bonds issued by local municipalities which have been affected by Hurricane Katrina. These investments were approximately $2,800,000 at September 30, 2005. Developments, especially the ability of the issuer to continue to service the bonds, are being closely monitored with respect to these investments. At September 30, 2005, Management has determined that no provision for loss for these investments is required.

Gross unrealized gains were $280,000 and $927,000 at September 30, 2005 and 2004, respectively, and gross unrealized losses were $2,756,000 and $1,083,000 at September 30, 2005 and 2004, respectively. The following schedule reflects the mix of available for sale securities at September 30, 2005 and 2004:

September 30,	2005					2004
	Amount		%			Amount		%
U. S. Treasury securities	$	50,572,436		26	%	$	72,083,380		34	%
U. S. Government agencies		124,059,226		65	%		121,455,359		58	%
States and political subdivisions		14,372,073		7	%		13,571,474		6	%
Other securities		2,957,297		2	%		3,576,624		2	%
Totals	$	191,961,031		100	%	$	210,686,836		100	%

Loans

Loans increased $22,643,000 at September 30, 2005, as compared with September 30, 2004. During 2004 and continuing to August 28, 2005, the local economy had stabilized which had resulted in increased loan demand. While the Company does expect to have some loan losses due to Hurricane Katrina, as the local economy recovers it is anticipated that loan demand will be robust.

Bank Premises and Equipment

Bank premises and equipment increased $1,128,000 at September 2005, as compared with September 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 $1,232,000 at September 30, 2005, as compared with September 30, 2004, due to an increase in interest earning assets and the rate earned on these assets.

Other Real Estate

Other real estate decreased $215,000 at September 30, 2005 as compared with September 30, 2004, due to the sale of several parcels of other real estate during the twelve months ended September 30, 2005.

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Other Assets

Other assets increased $1,692,000 at September 30, 2005, as compared with September 30, 2004, primarily due to an increase in deferred income taxes of $1,900,000, which was the result of unrealized losses on available for sale securities.

Deposits

Total deposits increased $87,450,000 at September 30, 2005, as compared with September 30, 2004. Typically, 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. Since Hurricane Katrina, the Company has realized a significant increase in demand and savings deposits as municipal customers receive federal and state funding and commercial customers begin receiving insurance proceeds. As discussed above, the Company has managed its funds including planning the timing and classification of investment maturities to manage its liquidity position.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase increased $60,869,000 at September 30, 2005, as compared with September 30, 2004, as customers allocate their funds between deposits and non-deposit products.

Shareholders’ Equity and Capital Adequacy

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 14.43% at September 30, 2005 as compared with 15.48% at September 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:

Nine Months Ended September 30, (In thousands, except percentages)	2005			2004
Total interest income (1)	$	23,254		$	18,105
Total interest expense		5,310			3,694
Net interest earnings	$	17,944		$	14,411
Net yield on interest earning assets (2)		4.16	%		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 included $900,000 received in 2005 for prior years. See Note 10. Net yield would have been 3.95% without this interest.

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The schedule below provides an analysis of the change in total interest income and total interest expense for the nine months ended September 30, 2005 and 2004. As presented in the schedule (in 000’s), while the increase in interest earning assets has had a positive impact on earnings, the most significant effect has been from the increase in rates earned on these assets.

								Attributable To:
	For the Nine		For the Nine
	Months		Months
	Ended		Ended
	September		September		Increase
	30, 2005		30, 2004		(Decrease)			Volume			Rate			Rate/ Volume
INTEREST INCOME: (1)
Loans (2)	$	16,742	$	12,568	$	4,174		$	1,031		$	2,905		$	238
Federal funds sold		393		56		337			112			75			150
Held to maturity:
Taxable securities		198		19		179			297			(7	)		(111	)
Non-taxable securities		317		183		134			192			(28	)		(30	)
Available for sale:
Taxable securities		4,824		4,731		93			(39	)		133			(1	)
Non-taxable securities		629		370		259			191			45			23
Other securities		151		178		(27	)		(39	)		16			(4	)
Total	$	23,254	$	18,105	$	5,149		$	1,745		$	3,139		$	265
INTEREST EXPENSE:
Savings and negotiable interest bearing deposits	$	1,646	$	1,065	$	581		$	(30	)	$	629		$	(18	)
Time deposits		2,065		1,549		516			(131	)		707			(60	)
Borrowings from FHLB		330		334		(4	)		(42	)		44			(6	)
Federal funds purchased and securities sold under agreements to repurchase		1,269		746		523			210			244			69
Total	$	5,310	$	3,694	$	1,616		$	7		$	1,624		$	(15	)

(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. Includes nonaccrual loans.

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Provision for Loan Losses

The Company continuously monitors its relationships with its loan customers, especially those in concentrated industries such as gaming and hotel/motel, and their direct and indirect impact on its operations. A thorough analysis of current economic conditions and the quality of the loan portfolio is conducted on a quarterly basis using the latest available information. These analyses are utilized in the computation of the adequacy of the allowance for loan losses. A provision is charged to income on a periodic basis to absorb potential losses based on these analyses.

During the first six months of 2005, the Company had recorded a negative provision of $1,513,000 as a result of positive events relating to the quality of the loan portfolio. As a result of Hurricane Katrina, however, Management recorded a provision for loan losses of $5,055,000 during the third quarter of 2005. This provision was determined based on established Company methodology in compliance with generally accepted accounting principles.

During the weeks after August 29, 2005, the loan portfolio was considered based on two specific criteria: commercial loans and residential loans. For commercial loans, Management evaluated potential losses for individual credits based on criteria including post-Katrina value of the collateral, existence and adequacy of insurance, and sources of repayments. Based on this evaluation and information available before the issuance of these financial statements, a provision for loan losses on commercial loans of $3,455,000 was recorded. The Company evaluated the residential portfolio as a pool of loans. This portfolio was analyzed based on the census tract in which the collateral is located. Assumptions based on this information as well as the post-Katrina value of collateral and existence and adequacy of insurance for the loans within each census tract were developed. Based on this evaluation and information available before the issuance of these financial statements, a provision of loan losses of $1,600,000 for the residential portfolio was recorded.

The allowance for loan losses is an estimate, and as such, events may occur in the future which effect its accuracy. The Company anticipates that it is probable that additional information will be gathered in the coming quarters which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio, work with individual customers and take such action as it deems appropriate to accurately report its financial condition and results of operations.

Service Charges on Deposit Accounts

Service charges on deposit accounts decreased $548,000 for the nine months ended September 30, 2005 as compared with the nine months ended September 30, 2004. The decrease is due to reduced fee income from off-site ATMs no longer under contract with the Company as well as a decrease in fees of $190,000 as a result of Hurricane Katrina.

Gain On Sale of Bank Premises

In 2004, the Company realized a gain 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 were used to fund loan demand.

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Other Income

Other income decreased $222,000 for the nine months ended September 30, 2005 as compared with the nine months ended September 30, 2004, due to the fact that the Company received proceeds of $200,000 in 2004 from life insurance policies relating to deferred compensation benefits for deceased employees.

Other Expense

Other expense decreased $135,000 for the nine months ended September 30, 2005 as compared with the nine months ended September 30, 2004. Expenses related to ATMs have decreased in 2005 versus 2004 as a result of a decrease in expenses relating to off-site ATMs no longer under contract with the Company. However, the Company realized expense of $365,000 in the third quarter of 2005 relating to insurance deductibles on disabled branch facilities.

Extraordinary Gain

An extraordinary gain of $538,000, net of taxes, was recorded as 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.

The Company carefully monitors its liquidity needs, especially relating to potentially volatile deposits. It has continued to implement these procedures since August 29, 2005, and the Company continues to encounter no problems with meeting its liquidity needs.

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 September 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 Acts Rules 13a-15(e)).

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.

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There were no changes in Company’s internal control over financial reporting that occurred during the period ended September 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 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. As a result of the impact of Hurricane Katrina on the duties and activities of Company personnel and the independent registered public accounting firm, the Company anticipates that it will likely be unable to be compliant with the reporting requirements relating to internal controls over financial reporting in a timely manner. The Company has requested relief relating to this reporting from the Securities and Exchange Commission. At the time of this filing, the Company has not received a response from the Commission for its request, specifically an extension of the filing deadline.

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 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 by the Company on July 11, 2005, September 29, 2005, October 14, 2005 and October 18, 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: November 8, 2005
By:	/s/ Chevis C. Swetman
	Chevis C. Swetman
	Chairman, President and Chief Executive Officer
Date: November 8, 2005
By:	/s/ Lauri A. Wood
	Lauri A. Wood
	Chief Financial Officer and Controller
	(principal financial and accounting officer)

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