Peoples Financial (PFBX) 10-Q 2006 Q1 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 March 31, 2006

or

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

Commission File Number0-30050

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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero      Accelerated filerþ      Non-accelerated filero

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 April 28, 2006, there were 15,000,000 shares of $1 par value common stock authorized, and 5,548,199 shares issued and outstanding.

Page 1

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 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)

March 31, December 31, and March 31,	2006		2005		2005
Assets
Cash and due from banks	$	73,311,721	$	52,277,524	$	40,077,832
Held to maturity securities, market value of $209,672,000 - March 31, 2006; $134,008,000 - December 31, 2005; $6,467,000 - March 31, 2005		209,973,869		134,046,959		6,360,990
Available for sale securities, at market value		204,959,326		178,393,652		219,288,050
Federal Home Loan Bank stock, at cost		1,089,800		1,076,600		1,410,500
Federal funds sold		23,870,000		100,340,000		23,370,000
Loans		354,706,547		349,346,340		323,074,684
Less: Allowance for loan losses		10,975,126		10,966,022		5,863,024
Loans, net		343,731,421		338,380,318		317,211,660
Bank premises and equipment, net of accumulated depreciation of $18,420,000 - March 31, 2006; $18,025,000 - December 31, 2005; and $17,604,000 - March 31, 2005		19,453,383		17,887,907		17,997,662
Other real estate		100,046		106,046		168,025
Accrued interest receivable		4,358,496		4,315,358		2,789,580
Other assets		18,973,389		18,500,668		16,961,460
Total assets	$	899,821,451	$	845,325,032	$	645,635,759

Page 2

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

March 31, December 31, and March 31,	2006			2005			2005
Liabilities & Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing	$	181,777,595		$	176,627,048		$	100,941,569
Savings and demand, interest bearing		328,235,756			301,052,887			210,313,052
Time, $100,000 or more		62,405,284			51,292,708			49,620,444
Other time deposits		65,540,357			63,244,699			65,902,392
Total deposits		637,958,992			592,217,342			426,777,457
Federal funds purchased and securities sold under agreements to repurchase		155,434,163			149,267,750			117,042,843
Borrowings from Federal Home Loan Bank		7,310,139			7,352,005			7,293,846
Other liabilities		9,314,809			8,984,804			7,830,752
Total liabilities		810,018,103			757,821,901			558,944,898
Shareholders’ Equity:
Common Stock, $1 par value, 15,000,000 shares authorized, 5,548,399, 5,549,128 and 5,552,379 shares issued and outstanding at March 31, 2006, December 31, 2005 and March 31, 2005, respectively		5,548,399			5,549,128			5,552,379
Surplus		65,780,254			65,780,254			65,780,254
Undivided profits		21,464,032			18,942,855			17,730,464
Accumulated other comprehensive income		(2,989,337	)		(2,769,106	)		(2,372,236	)
Total shareholders’ equity		89,803,348			87,503,131			86,690,861
Total liabilities and shareholders’ equity	$	899,821,451		$	845,325,032		$	645,635,759

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 March 31,	2006		2005
Interest income:
Interest and fees on loans	$	6,183,077	$	5,011,680
Interest and dividends on investments:
U. S. Treasury		1,828,082		414,999
U. S. Government agencies and corporations		1,758,533		946,050
States and political subdivisions		208,601		198,240
Other investments		85,974		70,842
Interest on federal funds sold		440,490		86,488
Total interest income		10,504,757		6,728,299
Interest expense:
Time deposits of $100,000 or more		483,825		237,667
Other deposits		1,734,445		817,870
Borrowings from Federal Home Loan Bank		115,866		103,394
Federal funds purchased and securities sold under agreements to repurchase		663,245		316,135
Total interest expense		2,997,381		1,475,066
Net interest income		7,507,376		5,253,233
Provision for losses on loans		35,000		(678,975	)
Net interest income after provision for losses on loans	$	7,472,376	$	5,932,208

Page 4

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

For the Quarters Ended March 31,	2006		2005
Other operating income:
Trust department income and fees	$	356,017	$	343,525
Service charges on deposit accounts		1,060,487		1,276,411
Other service charges, commissions and fees		74,507		73,384
Other income		179,529		243,228
Total other operating income		1,670,540		1,936,548
Other operating expense:
Salaries and employee benefits		3,033,019		2,837,957
Net occupancy		343,002		346,519
Equipment rentals, depreciation and maintenance		661,205		664,494
Other expense		1,282,248		1,314,864
Total other operating expense		5,319,474		5,163,834
Income before income taxes and extraordinary gain		3,823,442		2,704,922
Income taxes		1,289,992		771,480
Income before extraordinary gain		2,533,450		1,933,442
Extraordinary gain, net of income taxes				459,000
Net income	$	2,533,450	$	2,392,442

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-
	# of											lated Other
	Common			Common					Undivided			Comprehensive			Comprehensive
	Shares			Stock			Surplus		Profits			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										2,392,442					$	2,392,442			2,392,442
Net unrealized loss on available for sale securities, net of tax													(1,446,472	)		(1,446,472	)		(1,446,472	)
Total comprehensive income															$	945,970
Retirement of common stock		(3,040	)		(3,040	)				(53,502	)								(56,542	)
Balance, March 31, 2005		5,552,379		$	5,552,379		$	65,780,254	$	17,730,464		$	(2,372,236	)				$	86,690,861

Page 6

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

												Accumu-
	# of											lated Other
	Common			Common					Undivided			Comprehensive			Comprehensive
	Shares			Stock			Surplus		Profits			Income			Income			Total
Balance, January 1, 2006		5,549,128		$	5,549,128		$	65,780,254	$	18,942,855		$	(2,769,106	)				$	87,503,131
Comprehensive Income:
Net income										2,533,450					$	2,533,450			2,533,450
Net unrealized loss on available for sale securities, net of tax													(220,231	)		(220,231	)		(220,231	)
Total comprehensive income															$	2,313,219
Retirement of common stock		(729	)		(729	)				(12,273	)								(13,002	)
Balance, March 31, 2006		5,548,399		$	5,548,399		$	65,780,254	$	21,464,032		$	(2,989,337	)				$	89,803,348

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 Quarters Ended March 31,	2006			2005
Cash flows from operating activities:
Net income	$	2,533,450		$	2,392,442
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		369,000			429,429
Provision for losses on loans		35,000			(678,975	)
Changes in assets and liabilities:
Accrued interest receivable		(43,138	)		(44,345	)
Other assets		(241,443	)		(384,129	)
Other liabilities		1,439,831			310,875
Net cash provided by operating activities		4,092,700			2,025,297
Cash flows from investing activities:
Proceeds from maturities and calls of held to maturity securities		62,000,000			226,385
Proceeds from maturities, sales and calls of available for sale securities		3,100,292			39,000,000
Investment in held to maturity securities		(137,926,910	)
Investment in available for sale securities		(29,999,197	)		(87,449,714	)
Investment in Federal Home Loan Bank		(13,200	)		(8,600	)
Proceeds from sales of other real estate		6,000
Loans, net (increase) decrease		(5,386,103	)		11,090,825
Acquisition of premises and equipment		(1,934,476	)		(408,587	)
Federal funds sold		76,470,000			(23,370,000	)
Other assets		(118,278	)		(137,164	)
Net cash used in investing activities	$	(33,801,872	)	$	(61,056,855	)

Page 8

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

For the Quarters Ended March 31,	2006			2005
Cash flows from financing activities:
Demand and savings deposits, net increase	$	32,333,416		$	41,261,095
Time deposits, net increase (decrease)		13,408,234			(3,675,168	)
Principal payments on notes					(1,239	)
Borrowings from Federal Home Loan Bank		4,600,000			127,160
Repayments to Federal Home Loan Bank		(4,641,866	)		(36,284	)
Retirement of common stock		(13,002	)		(56,941	)
Cash dividends		(1,109,826	)		(999,576	)
Federal funds purchased and securities sold under agreements to repurchase, net increase		6,166,413			29,765,718
Net cash provided by financing activities		50,743,369			66,384,765
Net increase in cash and cash equivalents		21,034,197			7,353,207
Cash and cash equivalents, beginning of period		52,277,524			32,724,625
Cash and cash equivalents, end of period	$	73,311,721		$	40,077,832

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 Quarters Ended March 31, 2006 and 2005

1. The accompanying unaudited condensed consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 2005 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 quarter ended March 31, 2006, 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 5,548,609 and 5,552,801 for the quarters ended March 31, 2006 and 2005, respectively.

3. At March 31, 2006 and 2005, the total recorded investment in impaired loans amounted to $410,000 and $5,817,000, respectively. The average recorded investment in impaired loans amounted to approximately $410,000 and $5,817,000 at March 31, 2006 and 2005, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $410,000 at March 31, 2006. The allowance for losses related to these loans amounted to approximately $115,000 at March 31, 2006. The amount of interest not accrued on these loans amounted to approximately $5,000 and $3,000 for the quarters ended March 31, 2006 and 2005, respectively. In compliance with a bankruptcy court order, interest in the amount of $56,000 was received and recorded as interest income relating to one impaired loan, with an average balance of $5,532,796 for the quarter ended March 31, 2005.

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

	For the Quarter			For the Year			For the Quarter
	Ended March 31,			Ended December			Ended March 31,
	2006			31, 2005			2005
Balance, beginning of period	$	10,966,022		$	6,569,614		$	6,569,614
Provision for loan losses		35,000			3,614,000			(678,975	)
Recoveries		122,250			1,344,000			74,526
Loans charged off		(148,146	)		(561,592	)		(102,141	)
Balance, end of period	$	10,975,126		$	10,966,022		$	5,863,024

Page 10

5. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $2,747,000 and $1,430,000 for the quarters ended March 31, 2006 and 2005, respectively, for interest on deposits and borrowings. Income tax payments of $793,000 were made during the quarter ended March 31, 2005. There were no loans transferred to other real estate during the quarters ended March 31, 2006 and 2005. The income tax effect on the accumulated other comprehensive income was ($113,000) and ($745,000) at March 31, 2006 and 2005, respectively.

6. Securities with gross unrealized losses at March 31, 2006, aggregated by investment category and length of time that individual securities have been in a continuous loss position as follows (in 000’s):

	Less Than Twelve
	Months				Over Twelve Months				Total
			Gross				Gross				Gross
			Unrealized				Unrealized		Fair		Unrealized
	Fair Value		Loss		Fair Value		Loss		Value		Loss
U. S. Treasury	$	157,410	$	382	$	22,564	$	413	$	179,974	$	795
U. S. Govt. Agencies		127,089		887		75,191		2,286		202,280		3,173
States and political subdivisions		6,297		64		5,717		219		12,014		283
FHLMC preferred stock						2,276		799		2,276		799
Total	$	290,796	$	1,333	$	105,748	$	3,717	$	396,544	$	5,050

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. As a result of this evaluation, the Company has determined that the declines summarized in the table above are not deemed to be other-than-temporary.

7. On April 29, 2005, a loan in the amount of $5,533,000, which had been classified as an impaired loan, paid off. As a result of this transaction, the related allowance for loan losses of $650,000 was reversed in the quarter ended March 31, 2005. During the quarter ended June 30, 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.

Page 11

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

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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 March 31, 2006, March 31, 2005 and December 31, 2005, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the three months ended March 31, 2006 and March 31, 2005. These 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, 2005, 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 25, 2006, 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, 2005, 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.

May 1, 2006
Biloxi, Mississippi

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 quarters ended March 31, 2006 and 2005. 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 quarter of 2006, net income was $2,533,000, as compared with $2,392,000 for the first quarter of 2005. Total assets reached $900,000,000 at March 31, 2006, with investments increasing 83% and total deposits increasing 50% at March 31, 2006 as compared with March 31, 2005. Earnings for the first quarter of 2006 included primarily income from operations, with net interest income increasing from $5,253,000 for the first quarter of 2005 to $7,507,000 for the first quarter of 2006. Earnings for the first quarter of 2005 included extraordinary income of $459,000, net of taxes, as a result of the PULSE EFT Association Exchange and a negative provision for losses on loans of $448,000, net of taxes.

During the first quarter of 2006, the Company continued its post-Katrina recovery efforts. Management has maintained its efforts in evaluating its loan portfolio, especially with respect to potential losses on loans as a result of the impact of Hurricane Katrina. See Provision for Loan Losses for further discussion of potential losses from Hurricane Katrina. Construction at our damaged D’Iberville facility was completed and branch operations were restored in the permanent branch facility in February. Renovation of the upper floors at our Downtown Gulfport facility continues to make progress.

Below are the financial highlights for the quarters ended March 31, 2006 and 2005:

For the quarters ended March 31,	2006			2005
Net income per share	$	.46		$	.43
Book value per share	$	16.19		$	15.61
Return on average total assets		1.15	%		1.55	%
Return on average shareholders’ equity		8.85	%		11.12	%
Allowance for loan losses as a % of loans, net of unearned discount		3.09	%		1.81	%

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Financial Condition

Held to Maturity Securities

Held to maturity securities increased $203,613,000 at March 31, 2006, compared with March 31, 2005, 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 largely invested in U. S. Treasury and U. S. Government Agency securities and classified as Held to Maturity. The Company continues to monitor its investment in bonds issued by municipalities which have been affected by Hurricane Katrina. At March 31, 2006, Management has determined that no provision for loss on these investments is required. Gross unrealized gains for held to maturity securities were $78,000 and $132,000 at March 31, 2006 and 2005, respectively. Gross unrealized losses for held to maturity securities were $380,000 and $26,000 at March 31, 2006 and 2005, respectively. The following schedule reflects the mix of the held to maturity investment portfolio at March 31, 2006 and 2005:

March 31,	2006					2005
		Amount		%			Amount		%
U. S. Treasury		$	134,819,398	64	%		$
U. S. Government agencies			69,000,000	33	%
State and political subdivisions			6,154,471	3	%			6,360,990	100	%
Totals		$	209,973,869	100	%		$	6,360,990	100	%

Available for Sale Securities

Available for sale securities decreased $14,329,000 at March 31, 2006, compared with March 31, 2005, in the management of the Company’s liquidity position as discussed above. The Company continues to monitor its investment in bonds issued by municipalities which have been affected by Hurricane Katrina. At March 31, 2006, Management has determined that no provision for loss on these investments is required. Gross unrealized gains were $140,000 and $222,000 and gross unrealized losses were $4,670,000 and $3,822,000 at March 31, 2006 and 2005, respectively. The following schedule reflects the mix of available for sale securities at March 31, 2006 and 2005:

March 31,	2006					2005
		Amount		%			Amount		%
U. S. Treasury		$	47,320,217	23	%		$	88,118,024	40	%
U. S. Government agencies			140,451,521	69	%			114,165,651	52	%
State and political subdivisions			14,095,381	7	%			13,909,480	6	%
Other securities			3,092,207	1	%			3,094,895	2	%
Totals		$	204,959,326	100	%		$	219,288,050	100	%

Page 15

Federal Funds Sold

Federal funds sold were $23,870,000 at March 31, 2006, as a direct result of the management of the bank subsidiary’s liquidity position. 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.

Loans

Loans increased $31,632,000 at March 31, 2006, as compared with March 31, 2005. During the first seven months of 2005, the local economy had stabilized which had resulted in increased loan demand for the bank subsidiary. While the Company has experienced higher than normal loan payoffs since Hurricane Katrina as customers receive insurance proceeds and funds from other sources, it is anticipated that loan demand will be robust in 2006 as the local economy recovers.

Bank Premises and Equipment

Bank premises and equipment increased $1,456,000 at March 31, 2006, as compared with March 31, 2005, as a result of renovations to damaged bank premises and the replacement of furniture, fixtures and equipment as a result of Hurricane Katrina.

Deposits

Total deposits increased $211,182,000 at March 31, 2006, as compared with March 31, 2005. 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 and personal customers begin receiving insurance proceeds, SBA loans and other forms of assistance. Based on previous post-hurricane experience and expectations with respect to the time frame for reconstruction, the Company anticipates that deposits will continue at or near their present level throughout the remaining quarters of 2006.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase increased $38,391,000 at March 31, 2006, as compared with March 31, 2005, as the result of the reallocation of funds by certain customers between deposit products and non-deposit products.

Other Liabilities

Other liabilities increased $1,484,000 at March 31, 2006, as compared with March 31, 2005, as a result of accrued income taxes at March 31, 2006.

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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 11.41% at March 31, 2006, as compared with 15.01% at March 31, 2005. 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. The decrease at March 31, 2006 is directly related to the increase in total assets in the last two quarters and does not indicate a weakening of the Company’s capital position.

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

Quarters Ended March 31, (In
thousands, except percentages)	2006			2005
Total interest income (1)	$	10,612		$	6,830
Total interest expense		2,997			1,475
Net interest earnings	$	7,615		$	5,355
Net yield on interest earning assets		4.01	%		3.97	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2006 and 2005.

The schedule on page 18 provides an analysis of the change in total interest income and total interest expense for the quarters ended March 31, 2006 and 2005. Changes in interest income are attributable to positive changes in volume and interest rates related to interest-earning assets, particularly held to maturity securities. While impacted by volume, the changes in interest expense were more significantly impacted by the increase in the cost of funds during the last three quarters.

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

							Attributable To:
	For the		For the
	Quarter		Quarter
	Ended		Ended
	March 31,		March 31,		Increase								Rate/
	2006		2005		(Decrease)		Volume			Rate			Volume
INTEREST INCOME: (1)
Loans (2) (3)	$	6,183	$	5,012	$	1,171	$	196		$	939		$	36
Federal funds sold		440		86		354		163			66			125
Held to maturity:
Taxable		1,953				1,953		1,953
Non-taxable		110		98		12		(5	)		18			(1	)
Available for sale:
Taxable		1,634		1,361		273		29			239			5
Non-taxable		206		202		4		10			(5	)		(1	)
Other		86		71		15		(9	)		27			(3	)
Total	$	10,612	$	6,830	$	3,782	$	2,337		$	1,284		$	161
INTEREST EXPENSE:
Savings and demand, interest bearing	$	1,262	$	445	$	817	$	257		$	355		$	205
Time deposits		956		611		345		27			304			14
Federal funds purchased and securities sold under agreements to repurchase		663		316		347		100			187			60
Borrowings from FHLB		116		103		13		12			1
Total	$	2,997	$	1,475	$	1,522	$	396		$	847		$	279

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2006 and 2005.
(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, 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 and with special emphasis on the impact of Hurricane Katrina on the loan portfolio and underlying collateral, the Company recorded a provision of $35,000 during the first quarter of 2006. The Company will continue to closely monitor its portfolio throughout 2006, especially as information concerning the ability of residential customers to service their debt, is gathered in the remaining quarters of 2006. The Company will adjust its reserve for loan losses, as deemed necessary based on its evaluations, in 2006.

Service Charges on Deposit Accounts

Service charges on deposit accounts decreased $216,000 for the quarter ended March 31, 2006, as compared with the quarter ended March 31, 2005, as a result of a decrease in fee income from off-site ATMs no longer under contract with the Company and a decrease in fees as a result of Hurricane Katrina.

Salaries and Employee Benefits

Salaries and employee benefits increased $195,000 for the quarter ended March 31, 2006, as compared with the quarter ended March 31, 2005, as a result of an increase in health insurance costs and 2005 bonuses paid in 2006.

Extraordinary Gain

An extraordinary gain of $459,000, net of taxes, was recorded in 2005 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. Since Hurricane Katrina, the Company’s deposits and non-deposit accounts have increased significantly as discussed previously. Management carefully monitors its liquidity needs, particularly relating to these potentially volatile deposits. The Company is currently investing in short-term U. S. Treasury and Agency Securities. It is anticipated that loan demand will be funded in future quarters from the maturity of these investments.

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Item 4: Controls and Procedures

As of March 31, 2006, 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-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.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended March 31, 2006 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

(a) The Annual Meeting of Shareholders of the Company was held on April 12, 2006.

(b) The following five directors were elected at the meeting to hold office for a term of one year:

	Approve		Disapprove
Drew Allen		4,256,879.000		226,338.000
Rex E. Kelly		4,251,541.000		226,338.000
Dan Magruder		4,256,879.000		226,338.000
Lyle M. Page		4,256,962.000		226,338.000
Chevis C. Swetman		4,256,962.000		226,338.000

Of the 5,549,128 shares outstanding and eligible to vote on April 12, shares not voted amounted to 1,063,393 and there were 3,552 abstentions.

Item 5 — Other Information

(a) In Section VIII of its Proxy Statement filed as Definitive Form 14a with the Securities and Exchange Commission on March 10, 2006, the Company stated that it believed that during 2005

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its officers, directors and greater than 10 percent beneficial owners had complied with all filing requirements under Section 16 of the Securities Exchange Act of 1934. Subsequent to this filing, the Company was notified by Director Drew Allen that he purchased 600 shares of Company common stock for a total purchase price of $11,538 on May 13, 2005, and that the transaction had not been reported. This transaction was reported on Form 5 with the Commission on April 6, 2006.

(b) As reported in its Form 10-K which was filed with the Commission on March 16, 2006, the Company filed a request for exemptive relief under Section 12(h) of the Securities Exchange Act of 1934. On March 10, 2006, the Commission issued a Notice announcing our request. During the comment period, which expired on March 30, 2006, the Commission received no comments concerning this request. On March 31, 2006, the Commission issued an Order granting relief to the Company for reporting under paragraphs (a) and (b) of Item 308 of Regulation S-K and the requirements under Rule 13a-15(c) of the Exchange Act. The effect of the Order is that the Company will not be required to be compliant with the SOX 404 reporting requirements until December 31, 2006.

(c) The Company was notified by its independent accountants, Piltz, Williams, LaRosa & Co., on April 26, 2006, of their intention to withdraw as the auditors for 2006. The firm is withdrawing as a result of the resignation of the partner assigned to the Company’s engagement in order to pursue other career opportunities and does not reflect any disagreements or other negative issues with the Company. This event was reported in Form 8-K which was filed with the Commission on May 2, 2006.

(d) On January 25, 2006, the Board of Directors appointed the following officers of the Company:

President and CEO	Chevis C. Swetman
Executive Vice President	A. Wes Fulmer
First Vice President	Thomas J. Sliman
Second Vice President	Jeannette E. Romero
Vice President	Robert M. Tucei
Vice President and Secretary	Ann F. Guice
Chief Financial Officer	Lauri A. Wood

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

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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 January 23, 2006, April 12, 2006 and May 2, 2006.

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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:May 5, 2006
By:	/s/ Chevis C. Swetman
Chevis C. Swetman
Chairman, President and Chief Executive Officer
Date:May 5, 2006
By:	/s/ Lauri A. Wood
Lauri A. Wood
Chief Financial Officer and Controller
(principal financial and accounting officer)

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