##### Table of Contents

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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  o
 Commission File Number 0-30050 PEOPLES FINANCIAL CORPORATION 
  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 
  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 x
    
    No o
 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. Page 1




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TABLE OF CONTENTS  PART ICONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF INCOMECONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSELECTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSItem 2  Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4: Controls and ProceduresPART IIItem 4  Submission of Matters to a Vote of Security HoldersItem 5  Other InformationItem 6  Exhibits and Reports on Form 8-KSIGNATURESConsent of Certified Public AccountantsCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to 18 U.S.C. ss. 1350Certification Pursuant to 18 U.S.C. ss. 1350    Table of Contents  
 PART I   
   June 30, December 31, and June 30,
    
    2004
    
    2003
    
    2003AssetsCash and due from banks
    
    $
    37,883,278
    
    
    $
    33,861,029
    
    
    $
    42,351,377Held to maturity securities, market value of
$3,041,000 - June 30, 2004;
$4,527,000 - December 31, 2003;
$10,955,000 - June 30, 2003
    
    
    2,945,427
    
    
    
    4,352,854
    
    
    
    10,635,491Available for sale securities, at market value
    
    
    191,660,051
    
    
    
    207,486,172
    
    
    
    206,735,490Federal Home Loan Bank stock, at cost
    
    
    1,389,700
    
    
    
    1,974,200
    
    
    
    1,952,200Loans
    
    
    317,279,963
    
    
    
    297,922,945
    
    
    
    294,927,203Less: Allowance for loan losses
    
    
    6,644,725
    
    
    
    6,398,694
    
    
    
    6,446,375Loans, net
    
    
    310,635,238
    
    
    
    291,524,251
    
    
    
    288,480,828Bank premises and equipment, net of
accumulated depreciation of
$16,525,000 - June 30, 2004;
$16,275,000 - December 31,
2003; and $15,602,000 - June 30, 2003
    
    
    16,241,484
    
    
    
    17,952,504
    
    
    
    18,121,353Other real estate
    
    
    484,701
    
    
    
    1,383,451
    
    
    
    1,569,772Accrued interest receivable
    
    
    2,657,775
    
    
    
    3,096,002
    
    
    
    3,149,089Other assets
    
    
    18,371,429
    
    
    
    13,804,039
    
    
    
    12,414,622Total assets
    
    $
    582,269,083
    
    
    $
    575,434,502
    
    
    $
    585,410,222
 Page 2




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##### Table of Contents



PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES 
 June 30, December 31, and June 30,
    
    2004
    
    2003
    
    2003Liabilities & Shareholders EquityLiabilities:Deposits:Demand, non-interest bearing
    
    $
    92,250,934
    
    
    $
    76,423,904
    
    
    $
    83,347,873Savings and demand, interest bearing
    
    
    173,603,679
    
    
    
    173,913,054
    
    
    
    163,409,436Time, $100,000 or more
    
    
    67,003,724
    
    
    
    58,182,870
    
    
    
    73,145,277Other time deposits
    
    
    63,719,899
    
    
    
    64,036,836
    
    
    
    70,326,992Total deposits
    
    
    396,578,236
    
    
    
    372,556,664
    
    
    
    390,229,578Federal funds purchased and securities
sold under agreements to
repurchase
    
    
    88,406,754
    
    
    
    95,039,261
    
    
    
    87,676,188Borrowings from Federal Home Loan Bank
    
    
    7,081,466
    
    
    
    17,069,848
    
    
    
    16,719,145Notes payable
    
    
    7,901
    
    
    
    110,235
    
    
    
    287,271Other liabilities
    
    
    7,673,418
    
    
    
    7,154,545
    
    
    
    6,847,413Total liabilities
    
    
    499,747,775
    
    
    
    491,930,553
    
    
    
    501,759,595Shareholders Equity:Common Stock, $1 par value, 15,000,000
shares authorized, 5,556,419,
5,557,379 and 5,561,211 shares
issued and outstanding at June 30,
2004, December 31, 2003 and
June 30, 2003, respectively
    
    
    5,556,419
    
    
    
    5,557,379
    
    
    
    5,561,211Surplus
    
    
    65,780,254
    
    
    
    65,780,254
    
    
    
    65,780,254Undivided profits
    
    
    13,670,745
    
    
    
    11,574,074
    
    
    
    9,572,871Unearned compensation
    
    
    
    
    
    
    (94,899
    )
    
    
    (119,043
    )Accumulated other comprehensive income
    
    
    (2,486,110
    )
    
    
    687,141
    
    
    
    2,855,334Total shareholders equity
    
    
    82,521,308
    
    
    
    83,503,949
    
    
    
    83,650,627Total liabilities and shareholders equity
    
    $
    582,269,083
    
    
    $
    575,434,502
    
    
    $
    585,410,222
 See Report of Independent Registered Public Accounting Firm and Selected Notes
to Condensed Consolidated Financial Statements. Page 3




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##### Table of Contents



PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES 
   For the Quarters Ended June 30,
    
    For the Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Interest income:Interest and fees on loans
    
    $
    4,109,323
    
    
    $
    4,395,365
    
    
    $
    8,163,696
    
    
    $
    8,938,692Interest and dividends on investments:U. S. Treasury
    
    
    326,392
    
    
    
    326,854
    
    
    
    621,649
    
    
    
    648,292U. S. Government agencies and corporations
    
    
    1,206,280
    
    
    
    1,499,454
    
    
    
    2,581,235
    
    
    
    2,790,730States and political subdivisions
    
    
    110,311
    
    
    
    90,738
    
    
    
    215,950
    
    
    
    177,472Other investments
    
    
    51,592
    
    
    
    13,466
    
    
    
    123,615
    
    
    
    133,663Interest on federal funds sold
    
    
    6,764
    
    
    
    6,302
    
    
    
    20,927
    
    
    
    53,789Total interest income
    
    
    5,810,662
    
    
    
    6,332,179
    
    
    
    11,727,072
    
    
    
    12,742,638Interest expense:Time deposits of $100,000 or more
    
    
    195,349
    
    
    
    370,051
    
    
    
    362,959
    
    
    
    772,942Other deposits
    
    
    643,154
    
    
    
    889,233
    
    
    
    1,303,289
    
    
    
    1,829,795Mortgage indebtedness
    
    
    
    
    
    
    1,903
    
    
    
    
    
    
    
    3,863Borrowings from Federal Home Loan Bank
    
    
    110,704
    
    
    
    108,877
    
    
    
    226,387
    
    
    
    207,148Federal funds purchased and securities sold
under agreements to repurchase
    
    
    246,464
    
    
    
    253,691
    
    
    
    481,645
    
    
    
    495,039Total interest expense
    
    
    1,195,671
    
    
    
    1,623,755
    
    
    
    2,374,280
    
    
    
    3,308,787Net interest income
    
    
    4,614,991
    
    
    
    4,708,424
    
    
    
    9,352,792
    
    
    
    9,433,851Provision for losses on loans
    
    
    183,000
    
    
    
    139,105
    
    
    
    363,000
    
    
    
    317,745Net interest income after provision for losses
on loans
    
    $
    4,431,991
    
    
    $
    4,569,319
    
    
    $
    8,989,792
    
    
    $
    9,116,106
 Page 4




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##### Table of Contents



PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES   For the Quarters Ended June 30,
    
    For the Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Other operating income:Trust department income and fees
    
    $
    394,078
    
    
    $
    397,801
    
    
    $
    750,180
    
    
    $
    761,012Service charges on deposit accounts
    
    
    1,406,063
    
    
    
    1,751,556
    
    
    
    3,004,543
    
    
    
    3,438,622Other service charges, commissions and fees
    
    
    78,323
    
    
    
    68,401
    
    
    
    145,277
    
    
    
    133,918Gain on sale of bank premises
    
    
    1,270,697
    
    
    
    
    
    
    
    1,270,697Other income
    
    
    232,077
    
    
    
    268,930
    
    
    
    558,574
    
    
    
    598,164Total other operating income
    
    
    3,381,238
    
    
    
    2,486,688
    
    
    
    5,729,271
    
    
    
    4,931,716Other operating expense:Salaries and employee benefits
    
    
    2,836,006
    
    
    
    2,717,698
    
    
    
    5,605,909
    
    
    
    5,606,434Net occupancy
    
    
    363,811
    
    
    
    326,875
    
    
    
    682,184
    
    
    
    643,815Equipment rentals, depreciation and maintenance
    
    
    581,781
    
    
    
    723,199
    
    
    
    1,253,095
    
    
    
    1,498,916Other expense
    
    
    1,207,572
    
    
    
    1,689,298
    
    
    
    2,824,692
    
    
    
    3,315,969Total other operating expense
    
    
    4,989,170
    
    
    
    5,457,070
    
    
    
    10,365,880
    
    
    
    11,065,134Income before income taxes
    
    
    2,824,059
    
    
    
    1,598,937
    
    
    
    4,353,183
    
    
    
    2,982,688Income taxes
    
    
    837,508
    
    
    
    510,500
    
    
    
    1,295,000
    
    
    
    857,080Net income
    
    $
    1,986,551
    
    
    $
    1,088,437
    
    
    $
    3,058,183
    
    
    $
    2,125,608
 See Report of Independent Registered Public Accounting Firm and Selected Notes
to Condensed Consolidated Financial Statements. Page 5




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##### Table of Contents



PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES 
   Accumu-lated Other# of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    Compre-Common
    
    Common
    
    
    
    
    
    Undivided
    
    Compen-
    
    hensive
    
    Comprehen-Shares
    
    Stock
    
    Surplus
    
    Profits
    
    sation
    
    Income
    
    sive Income
    
    TotalBalance, January 1,
2003
    
    
    5,583,472
    
    
    $
    5,583,472
    
    
    $
    65,780,254
    
    
    $
    8,510,341
    
    
    $
    (143,043
    )
    
    $
    2,000,582
    
    
    
    
    
    
    $
    81,731,606Comprehensive Income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,125,608
    
    
    
    
    
    
    
    
    
    
    $
    2,125,608
    
    
    
    2,125,608Net unrealized
gain on available
for sale
securities, net of
tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    919,878
    
    
    
    919,878
    
    
    
    919,878Reclassification
adjustment for
available for sale
securities called
or sold in the
current year, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,126
    )
    
    
    (65,126
    )
    
    
    (65,126
    )Total
comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,980,360Allocation of ESOP
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    24,000Retirement of
common stock
    
    
    (22,261
    )
    
    
    (22,261
    )
    
    
    
    
    
    
    (284,508
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (306,769
    )Dividend declared
($ .14 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (778,570
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (778,570
    )Balance, June 30,
2003
    
    
    5,561,211
    
    
    $
    5,561,211
    
    
    $
    65,780,254
    
    
    $
    9,572,871
    
    
    $
    (119,043
    )
    
    $
    2,855,334
    
    
    
    
    
    
    $
    83,650,627
 Page 6




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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES   Accumu-lated Other# of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    Compre-Common
    
    Common
    
    
    
    
    
    Undivided
    
    Compen-
    
    hensive
    
    Comprehen-Shares
    
    Stock
    
    Surplus
    
    Profits
    
    sation
    
    Income
    
    sive Income
    
    TotalBalance, January 1,
2004
    
    
    5,557,379
    
    
    $
    5,557,379
    
    
    $
    65,780,254
    
    
    $
    11,574,074
    
    
    $
    (94,899
    )
    
    $
    687,141
    
    
    
    
    
    
    $
    83,503,949Comprehensive
Loss:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,058,183
    
    
    
    
    
    
    
    
    
    
    $
    3,058,183
    
    
    
    3,058,183Net unrealized loss
on available for
sale securities,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,272,335
    )
    
    
    (3,272,335
    )
    
    
    (3,272,335
    )Reclassification
adjustment for
available for sale
securities called
or sold in current
year, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,084
    
    
    
    99,084
    
    
    
    99,084Total
comprehensive
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (115,068
    )Allocation of ESOP
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,899
    
    
    
    
    
    
    
    
    
    
    
    94,899Retirement of
common stock
    
    
    (960
    )
    
    
    (960
    )
    
    
    
    
    
    
    (16,921
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,881
    )Dividend declared
($ .17 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (944,591
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (944,591
    )Balance, June 30,
2004
    
    
    5,556,419
    
    
    $
    5,556,419
    
    
    $
    65,780,254
    
    
    $
    13,670,745
    
    
    $
    
    
    
    $
    (2,486,110
    )
    
    
    
    
    
    $
    82,521,308
 See Report of Independent Registered Public Accounting Firm and Selected Notes
to Condensed Consolidated Financial Statements. Page 7




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##### Table of Contents



PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES 
 
 For the Six Months Ended June 30,
    
    2004
    
    2003Cash flows from operating activities:Net income
    
    $
    3,058,183
    
    
    $
    2,125,608Adjustments to reconcile net income to net
cash provided by operating activities:Gain on sale of bank premises
    
    
    (1,270,697
    )Gain on sales of other real estate
    
    
    (99,000
    )
    
    
    (3,500
    )Depreciation
    
    
    761,000
    
    
    
    931,000Provision for losses on loans
    
    
    363,000
    
    
    
    317,745Provision for losses on other real estate
    
    
    175,000
    
    
    
    128,448Changes in assets and liabilities:Accrued interest receivable
    
    
    438,227
    
    
    
    (290,899
    )Other assets
    
    
    (2,911,468
    )
    
    
    297,256Other liabilities
    
    
    616,871
    
    
    
    240,737Net cash provided by operating activities
    
    
    1,131,116
    
    
    
    3,746,395Cash flows from investing activities:Proceeds from maturities and calls of held
to maturity securities
    
    
    1,407,427
    
    
    
    6,952,199Proceeds from maturities, sales and calls of
available for sale securities
    
    
    84,040,393
    
    
    
    80,713,275Investment in available for sale securities
    
    
    (73,005,823
    )
    
    
    (134,672,416
    )Investment in Federal Home Loan Bank
    
    
    (16,500
    )
    
    
    (25,200
    )Redemption of Federal Home Loan Bank stock
    
    
    601,000Proceeds from sales of other real estate
    
    
    935,000
    
    
    
    251,000Loans, net (increase) decrease
    
    
    (19,586,237
    )
    
    
    16,050,779Acquisition of premises and equipment
    
    
    (616,783
    )
    
    
    (1,992,953
    )Proceeds from sale of bank premises
    
    
    2,837,500Other assets
    
    
    (246,604
    )
    
    
    (218,382
    )Net cash used in investing activities
    
    $
    (3,650,627
    )
    
    $
    (32,941,698
    )
 Page 8




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##### Table of Contents



PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES 
 For the Six Months Ended June 30
    
    2004
    
    2003Cash flows from financing activities:Demand and savings deposits, net increase
    
    $
    15,517,655
    
    
    $
    6,104,061Time deposits, net increase (decrease)
    
    
    8,503,917
    
    
    
    (4,048,295
    )Principal payments on notes
    
    
    (7,435
    )
    
    
    (23,100
    )Borrowings from Federal Home Loan Bank
    
    
    20,101,113
    
    
    
    30,447,207Repayments to Federal Home Loan Bank
    
    
    (30,089,495
    )
    
    
    (20,041,139
    )Retirement of common stock
    
    
    (17,881
    )
    
    
    (306,769
    )Cash dividends
    
    
    (833,607
    )
    
    
    (670,017
    )Federal funds purchased and securities sold
under agreements to
repurchase, net decrease
    
    
    (6,632,507
    )
    
    
    20,430,485Net cash provided by financing activities
    
    
    6,541,760
    
    
    
    31,892,433Net increase in cash and cash equivalents
    
    
    4,022,249
    
    
    
    2,697,130Cash and cash equivalents, beginning of period
    
    
    33,861,029
    
    
    
    39,654,247Cash and cash equivalents, end of period
    
    $
    37,883,278
    
    
    $
    42,351,377
 See Report of Independent Registered Public Accounting Firm and Selected Notes
to Condensed Consolidated Financial Statements. Page 9




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##### Table of Contents



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: For the Six
    
    For the Year
    
    For the SixMonths Ended
    
    Ended December
    
    Months EndedJune 30, 2004
    
    31, 2003
    
    June 30, 2003Balance, beginning of
period
    
    $
    6,398,694
    
    
    $
    6,696,911
    
    
    $
    6,696,911Provision for loan losses
    
    
    363,000
    
    
    
    447,000
    
    
    
    317,745Recoveries
    
    
    368,489
    
    
    
    599,783
    
    
    
    346,195Loans charged off
    
    
    (485,458
    )
    
    
    (1,345,000
    )
    
    
    (914,476
    )Balance, end of period
    
    $
    6,644,725
    
    
    $
    6,398,694
    
    
    $
    6,446,375
 Page 10




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##### Table of Contents



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. Page 11




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##### Table of Contents



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  Page 12




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##### Table of Contents



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: For the six months ended June 30,
    
    2004
    
    2003Net income per share
    
    $
    0.55
    
    
    $
    0.38Book value per share
    
    $
    14.85
    
    
    $
    15.04Return on average total assets
    
    
    1.04
    %
    
    
    .74
    %Return on average shareholders equity
    
    
    7.37
    %
    
    
    5.14
    %Allowance for loan losses as a % of loans,
net of unearned discount
    
    
    2.09
    %
    
    
    2.19
    %
 Page 13




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##### Table of Contents



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: June 30,
    
    2004
    
    2003Amount
    
    %
    
    Amount
    
    %U. S. Treasury
    
    $
    
    
    
    
    
    
    
    $
    3,999,265
    
    
    
    38
    %U. S. Government agencies
    
    
    
    
    
    
    
    
    
    
    3,000,000
    
    
    
    28
    %States and political
subdivisions
    
    
    2,945,427
    
    
    
    100
    %
    
    
    3,636,226
    
    
    
    34
    %Totals
    
    $
    2,945,427
    
    
    
    100
    %
    
    $
    10,635,491
    
    
    
    100
    %
 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: June 30,
    
    2004
    
    2003Amount
    
    %
    
    Amount
    
    %U. S. Treasury
    
    $
    61,754,516
    
    
    
    32
    %
    
    $
    47,979,548
    
    
    
    23
    %U. S. Government agencies
    
    
    117,584,871
    
    
    
    62
    %
    
    
    148,685,216
    
    
    
    72
    %States and political
subdivisions
    
    
    8,372,305
    
    
    
    4
    %
    
    
    5,612,038
    
    
    
    3
    %Other securities
    
    
    3,948,359
    
    
    
    2
    %
    
    
    4,458,688
    
    
    
    2
    %Totals
    
    $
    191,660,051
    
    
    
    100
    %
    
    $
    206,735,490
    
    
    
    100
    %
 Page 14




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##### Table of Contents



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. Page 15




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##### Table of Contents



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 Six Months Ended June 30, (Inthousands, except percentages)
    
    2004
    
    2003Total interest income (1)
    
    $
    11,839
    
    
    $
    12,833Total interest expense
    
    
    2,374
    
    
    
    3,309Net interest earnings
    
    $
    9,465
    
    
    $
    9,524Net yield on interest earning assets
    
    
    3.68
    %
    
    
    3.78
    %
 (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. Page 16




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##### Table of Contents



Analysis of Changes in Interest Income and Interest Expense
(In Thousands) Attributable To:For the Six
    
    For the SixMonths
    
    MonthsEnded
    
    EndedJune 30,
    
    June 30,
    
    Increase
    
    
    
    
    
    
    
    
    
    Rate/2004
    
    2003
    
    (Decrease)
    
    Volume
    
    Rate
    
    VolumeINTEREST INCOME: (1)Loans (2) (3)
    
    $
    8,164
    
    
    $
    8,939
    
    
    $
    (775
    )
    
    $
    152
    
    
    $
    (912
    )
    
    $
    (15
    )Federal funds sold
    
    
    21
    
    
    
    54
    
    
    
    (33
    )
    
    
    (37
    )
    
    
    14
    
    
    
    (10
    )Held to maturity:Taxable
    
    
    19
    
    
    
    222
    
    
    
    (203
    )
    
    
    (205
    )
    
    
    27
    
    
    
    (25
    )Non-taxable
    
    
    122
    
    
    
    156
    
    
    
    (34
    )
    
    
    (30
    )
    
    
    (5
    )
    
    
    1Available for sale:Taxable
    
    
    3,184
    
    
    
    3,216
    
    
    
    (32
    )
    
    
    265
    
    
    
    (274
    )
    
    
    (23
    )Non-taxable
    
    
    205
    
    
    
    112
    
    
    
    93
    
    
    
    82
    
    
    
    6
    
    
    
    5Other
    
    
    124
    
    
    
    134
    
    
    
    (10
    )
    
    
    (11
    )
    
    
    1Total
    
    $
    11,839
    
    
    $
    12,833
    
    
    $
    (994
    )
    
    $
    216
    
    
    $
    (1,143
    )
    
    $
    (67
    )INTEREST EXPENSE:Savings
and
demand,
interest
bearing
    
    $
    663
    
    
    $
    864
    
    
    $
    (201
    )
    
    $
    548
    
    
    $
    (458
    )
    
    $
    (291
    )Time deposits
    
    
    1,003
    
    
    
    1,739
    
    
    
    (736
    )
    
    
    (221
    )
    
    
    (590
    )
    
    
    75Federal
funds
purchased and
securities sold under
agreements to
repurchase
    
    
    482
    
    
    
    495
    
    
    
    (13
    )
    
    
    51
    
    
    
    (58
    )
    
    
    (6
    )Borrowings from FHLB
    
    
    226
    
    
    
    207
    
    
    
    19
    
    
    
    30
    
    
    
    (9
    )
    
    
    (2
    )Other borrowed funds
    
    
    
    
    
    
    4
    
    
    
    (4
    )
    
    
    (4
    )Total
    
    $
    2,374
    
    
    $
    3,309
    
    
    $
    (935
    )
    
    $
    404
    
    
    $
    (1,115
    )
    
    $
    (224
    )
  (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. Page 17




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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. Page 18




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##### Table of Contents



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 Exhibit 23:
    
    Consent of Certified Public AccountantsExhibit 31.1:
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2:
    
    Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1:
    
    Certification of Chief Executive Officer Pursuant
to 18 U.S.C. ss. 1350Exhibit 32.2:
    
    Certification of Chief Financial Officer Pursuant
to 18 U.S.C. ss. 1350
 (b) Reports on Form 8-K A Form 8-K was filed on April 15, 2004 and July 7, 2004. Page 19




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##### Table of Contents



SIGNATURES Pursuant to the requirement of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized. PEOPLES FINANCIAL CORPORATION
(Registrant) Date:
    
    August 9, 2004By:
    
    /s/ Chevis C. SwetmanChevis C. SwetmanChairman, President and Chief Executive OfficerDate:
    
    August 9, 2004By:
    
    /s/ Lauri A. WoodLauri A. WoodChief Financial Officer and Controller(principal financial and accounting officer)
 Page 20