PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2006 March (Form 10-Q)

 

 

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

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

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.

Yes þ                      No o

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 filer o      Accelerated filer þ      Non-accelerated filer o

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.

 

 

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

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.

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

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.

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

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.

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	)

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.

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

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.

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.

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

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	%

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	%

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.

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	%

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.

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

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.

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

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

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.

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)