SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended June 30, 2004

Commission File Number 0-30050

PEOPLES FINANCIAL CORPORATION

(228) 435-5511

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.

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 30, 2004, there were 15,000,000 shares of $1 par value common stock authorized, and 5,555,419 shares issued and outstanding.

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Table of Contents

PART I

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

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

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

1. The accompanying unaudited condensed consolidated financial statements have been prepared with the accounting policies in effect as of December 31, 2003 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, 2004, 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 5,556,954 and 5,566,880 for the six months ended June 30, 2004 and 2003, respectively.

3. At June 30, 2004 and 2003, the total recorded investment in impaired loans amounted to $8,595,000 and $6,705,000, respectively. The average recorded investment in impaired loans amounted to approximately $6,275,000 and $6,695,000 at June 30, 2004 and 2003, respectively. The amount of that recorded investment in impaired loans for which there is a related allowance for loan losses was $8,595,000 at June 30, 2004. The allowance for losses related to these loans amounted to approximately $1,311,000 at June 30, 2004. The amount of interest not accrued on these loans amounted to approximately $19,000 and $133,000 for the six months ended June 30, 2004 and 2003, respectively. In compliance with a bankruptcy court order, interest in the amount of $100,000 has been 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:

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5. The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $2,377,000 and $3,345,000 for the six months ended June 30, 2004 and 2003, respectively, and $5,938,000 for the twelve months ended December 31, 2003, for interest on deposits and borrowings. Income tax payments of $1,065,000 and $1,117,000 were made during the six months ended June 30, 2004 and 2003, respectively, and $2,537,000 for the twelve months ended December 31, 2003. Loans transferred to other real estate amounted to $112,000 and $750,000 for the six months ended June 30, 2004 and 2003, respectively, and $978,000 for the twelve months ended December 31, 2003. The income tax effect on the accumulated other comprehensive income was $(1,635,000) and $440,000 at June 30, 2004 and 2003, respectively.

6. 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.

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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 June 30, 2004, June 30, 2003 and December 31, 2003, and the related condensed consolidated statements of income, shareholders’ equity, and cash flows for the six months ended June 30, 2004 and June 30, 2003. 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, 2003, 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 21, 2004, 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, 2003, 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

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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 six months ended June 30, 2004 and 2003. 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 2004, net income was $3,058,000, as compared with $2,126,000 for the first six months of 2003. The results for 2004 include a gain of $838,000, net of taxes, from the sale of two parcels of bank premises. Managing the interest margin in its trade area’s extremely competitive environment continues to be a priority for the Company. A strong increase in the loan volume of 7.5% at June 30, 2004, as compared with June 30, 2003, is the result of the improvement of the local economy.

The following schedule compares financial highlights for the six months ended June 30, 2004 and 2003:

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Financial Condition

Held to Maturity Securities

Held to maturity securities decreased $7,690,000 at June 30, 2004, compared with June 30, 2003, as a result of the management of the Company’s liquidity position. Funds available from the maturity of these securities were generally used to fund the increase in the loan portfolio . Gross unrealized gains for held to maturity securities were $98,000 and $320,000 at June 30, 2004 and 2003, respectively. Gross unrealized losses were $2,000 at June 30, 2004, and there were no gross unrealized losses for held to maturity securities at June 30, 2003. The following schedule reflects the mix of the held to maturity investment portfolio at June 30, 2004 and 2003:

Available for Sale Securities

     Available for sale securities decreased $15,075,000 at June 30, 2004, compared with June 30, 2003, in the management of the Company’s liquidity position, as discussed above. Gross unrealized gains were $931,000 and $4,392,000 and gross unrealized losses were $4,702,000 and $80,000 at June 30, 2004 and 2003, respectively. The following schedule reflects the mix of available for sale securities at June 30, 2004 and 2003:

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Loans

Loans increased $22,353,000 at June 30, 2004, as compared with June 30, 2003. During the fourth quarter of 2003 and continuing into the first half of 2004, 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 2004.

Other Real Estate

Other real estate decreased $1,085,000 at June 30, 2004, as compared with June 30, 2003, primarily due to sales of ORE inventory during the twelve months ended June 30, 2004.

Other Assets

Other assets increased $5,957,000 at June 30, 2004, as compared with June 30, 2003, due to an increase in deferred taxes of $2,700,000 from the unrealized loss on available for sale securities and a receivable of $2,800,000 relating to the sale of bank premises.

Deposits

Total deposits increased $6,349,000 at June 30, 2004, as compared with June 30, 2003. 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. Specifically, the Company obtained brokered deposits of $30,000,000 in 2000. At June 30, 2003, brokered deposits amounted to $5,000,000. These deposits matured on July 18, 2003. Since that time, the Company has not obtained any further brokered deposits, and does not have any current plans to do so.

Other Liabilities

Other liabilities increased $826,000 at June 30, 2004, as compared with June 30, 2003. This increase is primarily due to the impact of increasing health care costs on the liability for post-retirement health benefits.

Borrowings from Federal Home Loan Bank

The Company acquired funds from the Federal Home Loan Bank in the management of its liquidity position.

Notes Payable

Notes payable decreased at June 30, 2004, as compared with June 30, 2003, as a result of the maturity and/or early payoff of Company debt.

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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 15.23% at June 30, 2004, as compared with 15.69% at June 30, 2003. 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

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2004 and 2003.

The schedule on page 17 provides an analysis of the change in total interest income and total interest expense for the six months ended June 30, 2004 and 2003. Changes in interest income are generally attributable to changes in interest rates related to interest-earning assets, particularly loans. Changes in interest expense, while impacted by changes in volume related to interest-bearing liabilities, particularly brokered time deposits, were heavily impacted by the decrease in the cost of funds during these time periods.

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

(1)		All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2004 and 2003.
(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, the Company provided $363,000 for loan losses during the first six months of 2004, primarily due to the increase in loans during the same period. The Company expects to provide for its loan loss provision on a monthly basis throughout the remaining quarters of 2004 at a similar level, as deemed necessary, based on the analysis.

Service Charges on Deposit Accounts

Service charges on deposit accounts decreased $434,000 for the six months ended June 30, 2004, as compared with the six months ended June 30, 2003, 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.

Equipment Rentals, Depreciation and Maintenance

Equipment rentals, depreciation and maintenance decreased $246,000 for the first six months of 2004 as compared with the first six months of 2003. This decrease was primarily the result of a decrease in depreciation on computer software and hardware acquired in 1998 as a part of the Company’s conversion to the Jack Henry system and the decrease in depreciation due to the sale of bank premises in 2004.

Other Expense

Other expense decreased $491,000 for the first six months of 2004 as compared with the first six months of 2003 as a result of a decrease in expense for off-site ATMs no longer under contract by the Company.

LIQUIDITY

Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. As discussed previously, the Company has utilized non-traditional sources of funds including brokered certificates and borrowings from the Federal Home Loan Bank. These additional sources have allowed the Company to satisfy its liquidity needs. The Company will continue to utilize these sources of funds throughout 2004, as necessary.

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Item 4: Controls and Procedures

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

PART II

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

None.

Item 5 — Other Information

None.

Item 6 — Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

A Form 8-K was filed on April 15, 2004 and July 7, 2004.

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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)

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