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

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

Commission File Number    001-12103

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

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 October 30, 2009, there were 15,000,000 shares of $1 par value common stock authorized, with 5,151,697 shares issued and outstanding.

 

 

Part 1 — Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Condition

		September 30, 2009				December 31, 2008
		(Unaudited)				(Audited)
Assets
Cash and due from banks		$	25,792,612			$	34,015,590
Federal funds sold							4,000
Available for sale securities			336,308,381				340,462,072
Held to maturity securities, fair value of $3,348,512 at September 30, 2009; $3,438,108 at December 31, 2008			3,201,224				3,394,212
Other investments			3,999,662				3,889,324
Federal Home Loan Bank Stock, at cost			3,523,800				2,070,700
Loans			466,022,263				467,377,039
Less: Allowance for loan losses			8,106,588				11,113,575
Loans, net			457,915,675				456,263,464
Bank premises and equipment, net of accumulated depreciation			31,890,315				33,600,170
Accrued interest receivable			4,983,018				5,444,767
Cash surrender value of life insurance			15,154,066				14,688,160
Other real estate			2,745,468				397,182
Other assets			2,967,593				2,177,860
Total assets		$	888,481,814			$	896,407,501

Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Condition (continued)

		September 30, 2009				December 31, 2008
		(Unaudited)				(Audited)
Liabilities & Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing		$	103,784,343			$	109,033,184
Savings and demand, interest bearing			223,838,840				239,990,238
Time, $100,000 or more			160,687,218				104,540,112
Other time deposits			53,256,808				56,912,002
Total deposits			541,567,209				510,475,536
Federal funds purchased and securities sold under agreements to repurchase			188,483,055				226,609,231
Borrowings from Federal Home Loan Bank			36,872,633				36,937,686
Other liabilities			15,904,593				15,384,934
Total liabilities			782,827,490				789,407,387
Shareholders’ Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 5,151,697 and 5,279,268 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively			5,151,697				5,279,268
Surplus			65,780,254				65,780,254
Undivided profits			33,025,827				33,412,596
Accumulated other comprehensive income, net of tax			1,696,546				2,527,996
Total shareholders’ equity			105,654,324				107,000,114
Total liabilities & shareholders’ equity		$	888,481,814			$	896,407,501

See selected notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Interest income:
Interest and fees on loans		$	5,028,179			$	6,603,096			$	15,232,634			$	20,711,343
Interest and dividends on securities:
U.S. Treasury			243,566				748,056				1,019,885				2,338,282
U.S. Government agencies			2,704,828				2,568,752				7,474,592				8,283,083
Mortgage-backed securities			388,091				421,063				1,179,745				1,317,989
States and political subdivisions			291,065				273,419				903,488				782,665
Other investments			9,673				42,475				16,567				143,455
Interest on federal funds sold			5,194				49,549				6,631				111,620
Total interest income			8,670,596				10,706,410				25,833,542				33,688,437
Interest expense:
Deposits			1,072,368				2,273,965				4,026,055				8,111,706
Long-term borrowings			141,723				103,726				413,500				343,491
Federal funds purchased and securities sold under agreements to repurchase			437,897				1,111,474				1,531,569				3,731,166
Total interest expense			1,651,988				3,489,165				5,971,124				12,186,363
Net interest income			7,018,608				7,217,245				19,862,418				21,502,074
Provision for allowance for losses on loans			1,875,000				2,001,000				3,725,000				2,095,000
Net interest income after provision for allowance for losses on loans		$	5,143,608			$	5,216,245			$	16,137,418			$	19,407,074

Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Income (continued)
(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Non-interest income:
Trust department income and fees		$	355,982			$	407,643			$	1,017,998			$	1,236,758
Service charges on deposit accounts			1,692,387				1,717,985				5,057,784				5,139,820
Gain on sales, liquidation, or calls of securities			265,247				249,000				402,046				364,277
Other income			281,810				436,610				906,395				1,238,890
Total non-interest income			2,595,426				2,811,238				7,384,223				7,979,745
Non-interest expense:
Salaries and employee benefits			3,557,067				3,564,471				10,631,766				10,641,717
Net occupancy			564,631				538,799				1,757,734				1,545,957
Rentals, depreciation and maintenance			939,523				950,180				2,844,079				2,744,481
Other expense			1,608,703				4,572,677				5,075,278				7,722,910
Total non-interest expense			6,669,924				9,626,127				20,308,857				22,655,065
Income before income taxes			1,069,110				(1,598,644	)			3,212,784				4,731,754
Income taxes			95,000				(545,000	)			335,000				1,518,000
Net Income		$	974,110			$	(1,053,644	)		$	2,877,784			$	3,213,754
Basic and diluted earnings per share		$	.19			$	(.20	)		$	.56			$	.60

See selected notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries
Consolidated Statement of Shareholders’ Equity

																		Accumulated
		Number of																Other
		Common				Common								Undivided				Comprehensive				Comprehensive
		Shares				Stock				Surplus				Profits				Income				Income				Total
Balance, January 1, 2009			5,279,268			$	5,279,268			$	65,780,254			$	33,412,596			$	2,527,996							$	107,000,114
Comprehensive Income:
Net income															2,877,784							$	2,877,784				2,877,784
Net unrealized loss on available for sale securities, net of tax																			(1,096,800	)			(1,096,800	)			(1,096,800	)
Reclassification adjustment for available for sale securities called or sold in current year, net of tax																			265,350				265,350				265,350
Total comprehensive income																						$	2,046,334
Effect of stock retirement on accrued dividends															4,774												4,774
Dividend declared, ($ .20 per share)															(1,030,339	)											(1,030,339	)
Retirement of stock			(127,571	)			(127,571	)							(2,238,988	)											(2,366,559	)
Balance, September 30, 2009			5,151,697			$	5,151,697			$	65,780,254			$	33,025,827			$	1,696,546							$	105,654,324

Note: Balances as of January 1, 2009 were audited.

See selected notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

		Nine Months Ended September 30,
		2009				2008
Cash flows from operating activities:
Net income		$	2,877,784			$	3,213,754
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation			1,798,500				1,777,500
Provision for allowance for loan losses			3,725,000				2,095,000
Loss on impairment of equity securities			149,517				2,964,000
Gain on other investments			(110,338	)
Gain on sale of bank premises							(142,607	)
Gain on sale of other real estate			3,000
Gain on sales and calls of securities			(402,046	)			(364,277	)
Change in accrued interest receivable			461,749				2,280,314
Change in other assets			(801,830	)			725,810
Change in other liabilities			2,540,113				(1,009,809	)
Net cash provided by operating activities			10,241,449				11,539,685
Cash flows from investing activities:
Proceeds from maturities, sales, liquidation and calls of available for sale securities			218,568,260				200,027,056
Investment in available for sale securities			(215,425,390	)			(110,080,676	)
Proceeds from maturities of held to maturity securities			195,000				1,240,000
Investment in held to maturity securities			(2,012	)			(3,514	)
Purchases of other investments							(3,160,000	)
(Purchase) redemption of Federal Home Loan Bank Stock			(1,453,100	)			200
Proceeds from sales of other real estate			326,076				19,500
Loans, net change			(8,054,574	)			(12,424,936	)
Proceeds from sale of bank premises							266,812
Acquisition of premises and equipment			(88,645	)			(1,727,877	)
Other assets			(453,808	)			(990,201	)
Net cash provided by (used in) investing activities		$	(6,388,193	)		$	73,166,364

Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)

		Nine Months Ended September 30,
		2009				2008
Cash flows from financing activities:
Demand and savings deposits, net change		$	(21,400,239	)		$	36,197,357
Time deposits, net change			52,491,912				(67,790,579	)
Cash dividends			(2,614,119	)			(3,003,342	)
Retirement of common stock			(2,366,559	)			(2,311,173	)
Borrowings from Federal Home Loan Bank			219,906,300				16,500,000
Repayments to Federal Home Loan Bank			(219,971,353	)			(16,622,103	)
Federal funds purchased and securities sold under agreements to repurchase, net change			(38,126,176	)			(18,916,423	)
Net cash used in financing activities			(12,080,234	)			(55,946,263	)
Net increase (decrease) in cash and cash equivalents			(8,226,978	)			28,759,786
Cash and cash equivalents, beginning of period			34,019,590				34,935,370
Cash and cash equivalents, end of period		$	25,792,612			$	63,695,156

See selected notes to consolidated financial statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2009 and 2008

1. Basis of Presentation:

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of Peoples Financial Corporation and its subsidiaries (the “Company”) as of September 30, 2009 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2008 Annual Report and Form 10-K.

The results of operations for the nine months ended September 30, 2009, are not necessarily indicative of the results to be expected for the full year.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Summary of Significant Accounting Policies — The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2008.

Subsequent events — The Company has performed an evaluation of subsequent events through November 6, 2009, which is the date the financial statements were issued.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 5,176,744 and 5,359,690 for the nine months ended September 30, 2009 and 2008, respectively, and 5,151,697 and 5,322,595 for the quarters ended September 30, 2009 and 2008, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents to include cash and due from banks and federal funds sold. The Company paid $6,094,012 and $13,051,262 for the nine months ended September 30, 2009 and 2008, respectively, for interest on deposits and borrowings. Income tax payments of $520,000 and $1,725,000 were made during the nine months ended September 30, 2009 and 2008, respectively. Loans in the amount of $2,677,363 and $371,626 were transferred to other real estate during the nine months ended September 30, 2009 and 2008, respectively.

4. Investments:

The amortized cost and estimated fair value of securities at September 30, 2009 and December 31, 2008, respectively, were as follows:

						Gross				Gross
						unrealized				unrealized				Estimated
September 30, 2009		Amortized cost				gains				losses				fair value
Available for sale securities:
Debt securities:
U.S. Treasury		$	23,984,082			$	886,218			$				$	24,870,300
U.S. Government agencies			245,396,069				1,958,436				(1,113,840	)			246,240,665
Mortgage-backed securities			26,869,670				1,180,543								28,050,213
States and political subdivisions			35,327,093				1,375,902				(205,775	)			36,497,220
Total debt securities			331,576,914				5,401,099				(1,319,615	)			335,658,398
Equity securities			649,983												649,983
Total available for sale securities		$	332,226,897			$	5,401,099			$	(1,319,615	)		$	336,308,381
Held to maturity securities:
States and political subdivisions		$	3,201,224			$	147,288			$				$	3,348,512
Total held to maturity securities		$	3,201,224			$	147,288			$				$	3,348,512

						Gross				Gross
						unrealized				unrealized				Estimated
December 31, 2008		Amortized cost				gains				losses				fair value
Available for sale securities:
Debt securities:
U.S. Treasury		$	64,963,243			$	1,746,597			$				$	66,709,840
U.S. Government agencies			208,917,636				3,552,215				(74,020	)			212,395,831
Mortgage-backed securities			28,992,858				788,218								29,781,076
States and political subdivisions			31,594,000				316,874				(985,049	)			30,925,825
Total debt securities			334,467,737				6,403,904				(1,059,069	)			339,812,572
Equity securities			649,500												649,500
Total available for sale securities		$	335,117,237			$	6,403,904			$	(1,059,069	)		$	340,462,072
Held to maturity securities:
States and political subdivisions		$	3,394,212			$	52,382			$	(8,486	)		$	3,438,108
Total held to maturity securities		$	3,394,212			$	52,382			$	(8,486	)		$	3,438,108

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the hierarchy as of September 30, 2009 and December 31, 2008 were as follows:

						Fair Value Measurement Using
		Total				Level 1				Level 2				Level 3
September 30, 2009		$	336,308,381							$	336,308,381
December 31, 2008			340,462,072								340,462,072

At September 30, 2009, available for sale securities with an amortized cost of $332,226,897 were reported at a fair value, net of unrealized gains and losses, of $336,308,381. The net change in unrealized gains and losses of $1,362,150 was included in comprehensive income during the first nine months of 2009. At December 31, 2008, available for sale securities with an amortized cost of $335,117,237 were reported at a fair value, net of unrealized gains and losses, of $340,462,072. The net change in unrealized gains and losses of $2,439,567 was included in comprehensive income during the year ended December 31, 2008.

The amortized cost and estimated fair value of debt securities at September 30, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

						Estimated
		Amortized cost				fair value
Available for sale securities:
Due in one year or less		$	20,538,102			$	20,934,035
Due after one year through five years			88,857,795				90,896,980
Due after five years through ten years			69,951,725				70,484,280
Due after ten years			125,359,622				125,292,890
Mortgage-backed securities			26,869,670				28,050,213
Totals		$	331,576,914			$	335,658,398
Held to maturity securities:
Due in one year or less		$	304,966			$	308,938
Due after one year through five years			1,779,362				1,879,774
Due after five years through ten years			1,116,896				1,159,800
Totals		$	3,201,224			$	3,348,512

Securities with gross unrealized losses at September 30, 2009 and December 31, 2008, respectively, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

		Less Than Twelve Months								Over Twelve Months								Total
						Gross								Gross								Gross
						Unrealized								Unrealized								Unrealized
September 30, 2009		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
U.S. Government
Agencies		$	82,893,991			$	1,113,840			$				$				$	82,893,991			$	1,113,840
States and political subdivisions			6,112,320				101,484				2,533,876				104,291				8,646,196				205,775
TOTAL		$	89,006,311			$	1,215,324			$	2,533,876			$	104,291			$	91,540,187			$	1,319,615

		Less Than Twelve Months								Over Twelve Months								Total
						Gross								Gross								Gross
						Unrealized								Unrealized								Unrealized
December 31, 2008:		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
U.S. Government
Agencies		$	10,780,995			$	74,020			$				$				$	10,780,995			$	74,020
States and political subdivisions			16,545,087				739,918				2,825,811				253,617				19,370,898				993,535
TOTAL		$	27,326,082			$	813,938			$	2,825,811			$	253,617			$	30,151,893			$	1,067,555

Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost and the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies are considered. In addition, the Company assesses the cause of the decline in value and the intent and ability of the Company to hold these securities until maturity. While some available for sale securities have been sold for liquidity purposes, the Company has traditionally held its securities, including those classified as available for sale, until maturity. 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.

5. Past Due and Impaired Loans:

Loans past due ninety days or more and still accruing interest were $1,304,734 and $2,340,190 at September 30, 2009 and December 31, 2008, respectively.

Impaired loans include performing and non-performing loans for which full payment of principal or interest is not expected. At September 30, 2009 and December 31, 2008, performing loans which were classified as impaired loans totaled $11,125,507 and $11,864,285, respectively. At September 30, 2009 and December 31, 2008, non-performing loans which were classified as impaired loans included nonaccrual loans which amounted to $25,256,847 and $15,553,447, respectively.

The total average recorded investment in impaired loans amounted to approximately $29,730,349 and $28,189,747 at September 30, 2009 and December 31, 2008, respectively. The Company had $5,328,547 and $7,345,022 of specific allowance related to impaired loans at September 30, 2009 and December 31, 2008, respectively. Interest income recognized on impaired loans was $394,160 and $833,055 during the nine months ended September 30, 2009 and the year ended December 31, 2008 , respectively. Interest income recognized on impaired loans if the Company had used the cash-basis method of accounting would have been $384,791 and $686,129 during the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively.

An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by

third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis.

The balances of impaired loans, which are measured at fair value on a non-recurring basis, by level within the hierarchy as of September 30, 2009 and December 31, 2008 were as follows:

						Fair Value Measurement Using
		Total				Level 1				Level 2				Level 3
September 30, 2009		$	31,053,807							$	31,053,807
December 31, 2008			20,072,210								20,072,210

At September 30, 2009, impaired loans with a carrying amount of $36,382,354 were written down to their fair value of $31,053,807 through a $5,328,547 charge to the provision for loan losses in prior periods. At December 31, 2008, impaired loans with a carrying amount of $27,417,732 were written down to their fair value of $20,072,210 through a $7,345,022 charge to the provision for loan losses in prior periods.

When Management determines that it has sustained a loss on a loan, it may be necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. Accordingly, the Company’s other real estate is reported at its estimated fair value on a non-recurring basis.

The balances of other real estate, which are measured at fair value on a non-recurring basis, by level within the hierarchy as of September 30, 2009 and December 31, 2008 were as follows:

						Fair Value Measurement Using
		Total				Level 1				Level 2				Level 3
September 30, 2009		$	2,745,468							$	2,745,468
December 31, 2008			397,182								397,182

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
Balance, beginning of period		$	9,797,881			$	9,327,780			$	11,113,575			$	9,378,137
Recoveries			5,140				52,754				334,774				331,884
Loans charged off			(3,571,433	)			(398,954	)			(7,066,761	)			(822,441	)
Provision for allowance for loan losses			1,875,000				2,001,000				3,725,000				2,095,000
Balance, end of period		$	8,106,588			$	10,982,580			$	8,106,588			$	10,982,580

7. Other Comprehensive Income:

The income tax effect from the unrealized loss on available for sale securities on accumulated other comprehensive income was $428,323 at September 30, 2009.

8. Notes Payable:

On March 11, 2009, the Company opened a $2,500,000 line of credit with Mississippi National Banker’s Bank. The line, which is secured by the common stock of the Company’s bank subsidiary, bears interest at Wall Street Prime, with a floor of 4.00%. Quarterly interest payments are required under the line with all principal and accrued interest being due at maturity, which is March 11, 2010. There was no outstanding balance at September 30, 2009.

9. Federal Reserve Bank Discount Window Approval:

During the second quarter of 2009, the Company’s bank subsidiary received approval to participate in the Federal Reserve Bank Discount Window Primary Credit Program. The borrowing limit, which was $62,900,000 at September 30, 2009, is based on the amount of collateral pledged, with certain loans from the bank’s portfolio serving as collateral. Borrowings bear interest at 25 basis points over the current federal funds rate. Borrowings may have a maturity date between one and ninety days. There was no outstanding balance at September 30, 2009.

10. Shareholders’ Equity:

During the first quarter of 2009, the Company completed the repurchase and retirement of its common stock under a stock repurchase plan approved by its Board of Directors (“Board”) on September 24, 2008. A total of 132,589 shares were purchased and retired under this plan.

On February 25, 2009, the Board approved the repurchase of up to 3%, or approximately 150,000 shares, of its common stock. As of September 30, 2009, 19,245 shares had been repurchased and retired under this plan.

On June 24, 2009, the Board approved a semi-annual dividend of $ .20 per share with a record date of July 8, 2009 and distribution date of July 15, 2009.

11. Fair Value of Financial Instruments:

The carrying amounts and estimated fair value for financial assets and financial liabilities at September 30, 2009 and December 31, 2008, respectively, were as follows:

		September 30, 2009								December 31, 2008
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial Assets:
Cash and due from banks		$	25,792,612			$	25,792,612			$	34,015,590			$	34,015,590
Federal funds sold											4,000				4,000
Available for sale securities			336,308,381				336,308,381				340,462,072				340,462,072
Held to maturity securities			3,201,224				3,348,512				3,394,212				3,438,108
Other investments			3,999,662				3,999,662				3,889,324				3,889,324
Federal Home Loan Bank stock			3,523,800				3,523,800				2,070,700				2,070,700
Loans, net			457,915,675				463,544,454				456,263,464				461,112,530
Cash surrender value			15,154,066				15,154,066				14,688,160				14,688,160
Financial Liabilities:
Deposits:
Non-interest bearing			103,784,343				103,784,343				109,033,184				109,033,184
Interest bearing			437,782,866				438,448,036				401,442,352				402,361,440
Total deposits			541,567,209				542,232,379				510,475,536				511,394,624
Federal funds purchased and securities sold under agreements to repurchase			188,483,055				188,483,055				226,609,231				226,609,231
Borrowings from Federal Home Loan Bank			36,872,633				37,529,000				36,937,686				37,547,000

12. New Accounting Pronouncements:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which established the Accounting Standards Codification (“Codification” or “ASC”) to become the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the SEC and its staff. All guidance contained in the Codification carries an equal level of authority. The Codification is not intended to change GAAP, but rather is expected to simplify accounting research by reorganizing current GAAP into approximately 90 accounting topics. The switch to the ASC affects the away companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. The Company adopted this accounting standard in preparing the Consolidated Financial Statements for the period ended September 30, 2009. The adoption of this accounting standard, which was subsequently codified into ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on the Company’s financial statements.

New authoritative accounting guidance under ASC Topic 815, “Derivatives and Hedging,” amends prior guidance to amend and enhance the disclosure requirements for derivatives and hedging to

provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, ASC Topic 815 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair values of derivative instruments and their gains and losses and disclosures about credit-risk-related contingent features of the derivative instruments and their potential impact on an entity’s liquidity. ASC Topic 815 was effective on January 1, 2009, and did not have a significant impact on the Company’s financial statements.

New authoritative accounting guidance under ASC Topic 855, “Subsequent Events,” establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. ASC Topic 855 became effective for the Company’s financial statements for periods ending after June 15, 2009, and did not have a significant impact on the Company’s financial statements.

New authoritative accounting guidance under ASC Topic 820, “Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. The Company adopted the new authoritative accounting guidance under ASC Topic 820 during the first quarter of 2009. Adoption of the new guidance did not have a significant impact on the Company’s financial statements.

Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The foregoing new authoritative accounting guidance under ASC Topic 820 will be effective for the Company’s financial statements

beginning October 1, 2009, and is not expected to have a significant impact on the Company’s financial statements.

New authoritative accounting guidance under ASC Topic 825, “Financial Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and amends prior guidance to require those disclosures in summarized financial information at interim reporting periods. The Company adopted this accounting standard in preparing its financial statements for the period ended June 30, 2009. As ASC Topic 825 amended only the disclosure requirements about the fair value of financial instruments in interim periods, the adoption had no impact on the Company’s financial statements.

New authoritative accounting guidance under ASC Topic 320, “Investments — Debt and Equity Securities,” amended other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not that the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. This accounting standard does not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. This accounting standard also extends disclosure requirements related to debt and equity securities to interim reporting periods. ASC Topic 320 became effective for the Company’s financial statements for periods ending after June 15, 2009, and did not have a significant impact on the Company’s financial statements.

13. Reclassifications:

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

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The Company is a one-bank holding company headquartered in Biloxi, Mississippi. It has two operating subsidiaries, PFC Service Corp. and The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses in Harrison, Hancock, Stone and Jackson counties in Mississippi.

The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2008.

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. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.

Critical Accounting Policies

Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. The Company’s single most critical accounting policy relates to its allowance for loan losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. If there was a deterioration of any of the factors considered by Management in evaluating the allowance for loan losses, the estimate of loss would be updated, and additional provisions for loan losses may be required.

OVERVIEW

Net income for the third quarter of 2009 was $974,110 compared with a net loss of $1,053,644 for the third quarter of 2008, an increase in earnings of $2,027,754. Earnings in the third quarter of 2009 included an increase in FDIC assessments of $200,264 over 2008’s results. In the third quarter of 2008, the Company recorded a charge to earnings for the impairment of its investment in Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock of $2,964,000.

Net income for the first nine months 2009 was $2,877,784 compared with $3,213,754 for the first nine months of 2008. Earnings for the nine months ended September 30, 2009 and 2008 were impacted by the provision for loan losses, the impairment loss of $2,964,000 recognized in the third quarter of 2008 and increased FDIC insurance assessments in 2009. The provision for the allowance for losses on loans was $3,725,000 in 2009 as compared with $2,095,000 in 2008. FDIC assessments for the nine months ended September 30, 2009 were $729,968 more than in the nine months ended September 30, 2008.

Monitoring asset quality and addressing potential losses in our loan portfolio continues to be emphasized during these tough economic times. The Company charged-off $7,066,761 in loans during the first nine months of 2009 as compared with only $822,441 for the same period in 2008. Approximately 64% of the charge-offs in 2009 related to three credit relationships in the residential development industry. Nonaccrual loans increased to $25,256,847 at September 30, 2009 as compared with $15,553,447 at December 31, 2008. This large increase is primarily attributable to the placement of one loan in the amount of $11,000,000 on nonaccrual at September 30, 2009. This credit is a performing loan, but was classified as nonaccrual by the banking regulators in their annual shared national credit review in the third quarter of 2009.

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. Changes in the volume and mix of interest earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income.

The Federal Reserve, through the Federal Open Market Committee (the “Committee”), dropped the discount rate by a total of 200 basis points during the first quarter of 2008, and by another 200 basis points during the following three quarters of 2008. The Committee’s actions were their attempt to stabilize financial markets as well as to stimulate the national economy and flow of capital. Typically, changes in the discount rate result in corresponding changes in prime interest rates. The impact of these rate reductions was significant to the Company’s financial condition and results of operations.

The Company’s average interest earning assets increased approximately $18,752,000, or 2%, from approximately $804,323,000 for the third quarter of 2008 to approximately $823,075,000 for the third quarter of 2009.

The average yield on earning assets decreased 110 basis points, from 5.39% for the third quarter of 2008 to 4.29% for the third quarter of 2009. The Company’s loan portfolio generally has a 40%/60% blend of fixed/floating rate term. This results in the Company being more asset sensitive to market interest rates and generally is the cause of the decrease in interest income. The Company also lost interest income of approximately $43,000 due to loans being on nonaccrual during the quarter.

Average interest bearing liabilities increased approximately $31,110,000, or 5%, from approximately $662,140,000 for the third quarter of 2008 to approximately $693,250,000 for the third quarter of 2009. The average rate paid on interest bearing liabilities decreased 116 basis points, from 2.11% for the third quarter of 2008 to .95% for the third quarter of 2009.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.48% at September 30, 2009, down 18 basis points from 3.66% at September 30, 2008.

The Company’s average interest earning assets increased approximately $14,519,000, or 2%, from approximately $812,956,000 for the first nine months of 2008 to approximately $827,475,000 for the first nine months of 2009.

Also as a result of the Committee’s actions, the average yield on earning assets decreased 135 basis points, from 5.59% for the first nine months of 2008 to 4.24% for the first nine months of 2009. The Company’s loan portfolio generally has a 40%/60% blend of fixed/floating rate term. This results in the Company being more asset sensitive to market interest rates and generally is the cause of the decrease in interest income. The Company also lost interest income of approximately $334,000 due to loans being on nonaccrual during the first nine months of 2009.

Average interest bearing liabilities increased approximately $19,976,000, or 3%, from approximately $670,219,000 for the first nine months of 2008 to approximately $690,195,000 for the first nine months of 2009. The average rate paid on interest bearing liabilities decreased 127 basis points, from 2.42% for the first nine months of 2008 to 1.15% for the first nine months of 2009.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.28% at September 30, 2009, down 31 basis points from 3.59% at September 30, 2008.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended September 30, 2009 and 2008 and the nine months ended September 30, 2009 and 2008.

Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)

		Three Months Ended September 30, 2009												Three Months Ended September 30, 2008
		Average				Interest								Average				Interest
		Balance				Earned/Paid				Rate				Balance				Earned/Paid				Rate
Loans (2)(3)		$	466,954			$	5,028				4.30	%		$	472,088			$	6,603				5.59	%
Federal Funds Sold			7,631				5				0.26	%			11,397				50				1.75	%
HTM:
Non taxable (1)			3,201				39				4.87	%			3,393				52				6.13	%
AFS:
Taxable			306,267				3,336				4.36	%			285,869				3,738				5.23	%
Non taxable (1)			34,848				402				4.61	%			24,214				362				5.98	%
Other			4,174				10				0.96	%			7,362				42				2.82	%
Total		$	823,075			$	8,820				4.29	%		$	804,323			$	10,847				5.39	%
Savings & interest- bearing DDA		$	225,233			$	303				0.54	%		$	254,513			$	972				1.53	%
CD’s			203,479				769				1.51	%			184,393				1,303				2.83	%
Federal funds purchased			209,578				437				0.83	%			215,548				1,111				2.06	%
FHLB advances			54,960				142				1.03	%			7,686				103				5.36	%
Total		$	693,250			$	1,651				0.95	%		$	662,140			$	3,489				2.11	%
Net tax-equivalent yield on earning assets											3.48	%											3.66	%

Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)

		Nine Months Ended September 30, 2009												Nine Months Ended September 30, 2008
		Average				Interest								Average				Interest
		Balance				Earned/Paid				Rate				Balance				Earned/Paid				Rate
Loans (2)(3)		$	470,290			$	15,233				4.32	%		$	461,948			$	20,711				5.98	%
Federal Funds Sold			3,409				7				0.27	%			7,024				112				2.12	%
HTM:
Non taxable (1)			3,286				129				5.23	%			3,791				178				6.26	%
AFS:
Taxable			313,690				9,674				4.11	%			309,603				11,939				5.14	%
Non taxable (1)			33,645				1,239				4.91	%			23,166				1,008				5.80	%
Other			3,155				17				0.72	%			7,424				143				2.57	%
Total		$	827,475			$	26,299				4.24	%		$	812,956			$	34,091				5.59	%
Savings & interest- bearing DDA		$	235,388			$	1,540				0.87	%		$	253,197			$	3,032				1.60	%
CD’s			198,821				2,486				1.67	%			201,571				5,080				3.36	%
Federal funds purchased			222,447				1,532				0.92	%			207,612				3,731				2.40	%
FHLB advances			33,539				413				1.64	%			7,839				343				5.83	%
Total		$	690,195			$	5,971				1.15	%		$	670,219			$	12,186				2.42	%
Net tax-equivalent yield on earning assets											3.28	%											3.59	%