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
(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 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):

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 July 30, 2010, 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

		June 30, 2010				December 31, 2009
		(Unaudited)				(Audited)
Assets		$	43,112,297			$	29,155,294
Cash and due from banks
Available for sale securities			341,083,476				311,434,437
Held to maturity securities, fair value of $2,956,033 at June 30, 2010; $3,340,974 at December 31, 2009			2,813,459				3,201,966
Other investments			4,020,754				4,036,304
Federal Home Loan Bank Stock, at cost			3,370,800				5,015,900
Loans			445,735,665				464,976,291
Less: Allowance for loan losses			9,167,927				7,827,806
Loans, net			436,567,738				457,148,485
Bank premises and equipment, net of accumulated depreciation			30,373,816				31,418,884
Other real estate			1,396,913				1,521,313
Accrued interest receivable			4,020,798				4,646,752
Cash surrender value of life insurance			15,653,219				15,329,394
Prepaid FDIC assessments			4,326,024				4,958,309
Other assets			1,759,991				1,139,861
Total assets		$	888,499,285			$	869,006,899

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

		June 30, 2010				December 31, 2009
		(Unaudited)				(Audited)
Liabilities & Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing		$	116,673,172			$	96,541,387
Savings and demand, interest bearing			206,496,989				206,167,484
Time, $100,000 or more			145,870,422				117,347,663
Other time deposits			50,514,505				50,644,895
Total deposits			519,555,088				470,701,429
Federal funds purchased and securities sold under agreements to repurchase			170,872,263				174,430,877
Borrowings from Federal Home Loan Bank			53,816,167				104,270,452
Other liabilities			37,433,697				16,016,204
Total liabilities			781,677,215				765,418,962
Shareholders’ Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 5,151,697 shares issued and outstanding at June 30, 2010 and December 31, 2009			5,151,697				5,151,697
Surplus			65,780,254				65,780,254
Undivided profits			34,604,196				32,853,346
Accumulated other comprehensive income (loss), net of tax			1,285,923				(197,360	)
Total shareholders’ equity			106,822,070				103,587,937
Total liabilities & shareholders’ equity		$	888,499,285			$	869,006,899

See selected notes to consolidated financial statements.

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Interest income:
Interest and fees on loans		$	4,893,342			$	5,086,063			$	9,880,468			$	10,204,455
Interest and dividends on securities:
U.S. Treasury			131,216				322,981				325,478				776,319
U.S. Government agencies			2,312,723				2,494,405				4,612,426				4,769,764
Mortgage-backed securities			132,048				387,501				518,924				791,654
States and political subdivisions			316,668				301,314				673,597				612,423
Other investments			3,203				1,953				7,654				6,894
Interest on federal funds sold			1,557				544				5,336				1,437
Total interest income			7,790,757				8,594,761				16,023,883				17,162,946
Interest expense:
Deposits			849,297				1,396,989				1,666,786				2,953,687
Long-term borrowings			109,559				110,985				246,204				271,777
Federal funds purchased and securities sold under agreements to repurchase			276,351				517,320				562,741				1,093,672
Total interest expense			1,235,207				2,025,294				2,475,731				4,319,136
Net interest income			6,555,550				6,569,467				13,548,152				12,843,810
Provision for allowance for losses on loans			1,585,000				1,502,000				2,735,000				1,850,000
Net interest income after provision for allowance for losses on loans		$	4,970,550			$	5,067,467			$	10,813,152			$	10,993,810

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Non-interest income:
Trust department income and fees		$	282,941			$	325,750			$	590,237			$	662,016
Service charges on deposit accounts			1,579,485				1,702,090				3,151,988				3,365,397
Gain on sales or calls of securities			1,563,441				2				1,567,486				136,799
Other income			258,660				138,534				507,949				624,585
Total non-interest income			3,684,527				2,166,376				5,817,660				4,788,797
Non-interest expense:
Salaries and employee benefits			3,398,188				3,694,321				6,810,463				7,074,699
Net occupancy			544,121				641,242				1,068,898				1,193,103
Equipment rentals, depreciation and maintenance			951,312				954,189				1,886,765				1,904,556
FDIC assessments			390,517				544,516				740,904				624,439
Other expense			1,402,857				1,248,868				3,109,245				2,842,136
Total non-interest expense			6,686,995				7,083,136				13,616,275				13,638,933
Income before income taxes			1,968,082				150,707				3,014,537				2,143,674
Income taxes			522,000				(50,000	)			697,000				240,000
Net income		$	1,446,082			$	200,707			$	2,317,537			$	1,903,674
Basic and diluted earnings per share		$	.28			$	.04			$	.45			$	.37

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 (Loss)				Income				Total
Balance, January 1, 2010			5,151,697			$	5,151,697			$	65,780,254			$	32,853,346			$	(197,360	)						$	103,587,937
Comprehensive Income:
Net income															2,317,537							$	2,317,537				2,317,537
Net unrealized gain on available for sale securities, net of tax																			2,517,824				2,517,824				2,517,824
Reclassification adjustment for available for sale securities called or sold in current year, net of tax																			(1,034,541	)			(1,034,541	)			(1,034,541	)
Total comprehensive gain																						$	3,800,820
Dividend declared, ($.11 per share)															(566,687	)											(566,687	)
Balance, June 30, 2010			5,151,697			$	5,151,697			$	65,780,254			$	34,604,196			$	1,285,923							$	106,822,070

Note: Balances as of January 1, 2010 were audited.

See selected notes to consolidated financial statements.

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

		Six Months Ended June 30,
		2010				2009
Cash flows from operating activities:
Net income		$	2,317,537			$	1,903,674
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation			1,218,000				1,212,000
Provision for allowance for loan losses			2,735,000				1,850,000
Loss on writedown of other real estate			77,350
Loss on sales of other real estate			39,350
(Gain) loss on other investments			15,550				(110,338	)
Gain on sales and calls of securities			(1,567,486	)			(136,799	)
Loss on impairment of equity securities							149,517
Change in accrued interest receivable			625,954				450,450
Change in other assets			15,556				100,299
Change in other liabilities			20,596,976				1,504,614
Net cash provided by operating activities			26,073,787				6,923,417
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities			147,206,124				145,473,727
Investment in available for sale securities			(173,037,295	)			(190,412,284	)
Proceeds from maturities of held to maturity securities			389,920				195,000
Investment in held to maturity securities			(1,413	)			(1,352	)
(Investment in) redemption of Federal Home Loan Bank Stock			1,645,100				(1,452,200	)
Proceeds from sales of other real estate			807,500				326,076
Loans, net change			17,045,947				(5,337,134	)
Acquisition of premises and equipment			(172,932	)			(261,131	)
Other assets			(325,325	)			(339,903	)
Net cash used in investing activities		$	(6,442,374	)		$	(51,809,201	)

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

		Six Months Ended June 30,
		2010				2009
Cash flows from financing activities:
Demand and savings deposits, net change		$	20,461,290			$	(40,653,986	)
Time deposits, net change			28,392,369				48,472,013
Cash dividends			(515,170	)			(1,583,780	)
Retirement of common stock							(2,366,559	)
Borrowings from Federal Home Loan Bank			390,669,662				136,000,000
Repayments to Federal Home Loan Bank			(441,123,947	)			(100,080,551	)
Federal funds purchased and securities sold under agreements to repurchase, net change			(3,558,614	)			10,361,740
Net cash provided by (used in) financing activities			(5,674,410	)			50,148,877
Net increase in cash and cash equivalents			13,957,003				5,263,093
Cash and cash equivalents, beginning of year			29,155,294				34,019,590
Cash and cash equivalents, end of year		$	43,112,297			$	39,282,683

See selected notes to consolidated financial statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2010 and 2009

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 June 30, 2010 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 2009 Annual Report and Form 10-K.

The results of operations for the six months ended June 30, 2010, 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, 2009.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 5,151,697 and 5,189,474 for the six months ended June 30, 2010 and 2009, respectively, and 5,151,697 and 5,157,356 for the quarters ended June 30, 2010 and 2009, 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 $2,475,536 and $4,442,281 for the six months ended June 30, 2010 and 2009, respectively, for interest on deposits and borrowings. Income tax payments of $625,000 and $520,000 were made during the six months ended June 30, 2010 and 2009, respectively. Loans in the amount of $799,800 and $2,383,363 were transferred to other real estate during the six months ended June 30, 2010 and 2009, respectively.

4. Investments:

The amortized cost and estimated fair value of securities at June 30, 2010 and December 31, 2009, respectively, were as follows:

						Gross				Gross
						unrealized				unrealized				Estimated
June 30, 2010		Amortized cost				gains				losses				fair value
Available for sale securities:
Debt securities:
U.S. Treasury		$	62,980,917			$	110,221			$	(58	)		$	63,091,080
U.S. Government agencies			235,197,987				2,197,267								237,395,254
States and political subdivisions			39,006,292				1,208,332				(267,465	)			39,947,159
Total debt securities			337,185,196				3,515,820				(267,523	)			340,433,493
Equity securities			649,983												649,983
Total available for sale securities		$	337,835,179			$	3,515,820			$	(267,523	)		$	341,083,476
Held to maturity securities:
States and political subdivisions		$	2,813,459			$	142,574			$				$	2,956,033
Total held to maturity securities		$	2,813,459			$	142,574			$				$	2,956,033

						Gross				Gross
						unrealized				unrealized				Estimated
December 31, 2009		Amortized cost				gains				losses				fair value
Available for sale securities:
Debt securities:
U.S. Treasury		$	23,987,222			$	752,918			$				$	24,740,140
U.S. Government agencies			216,473,270				695,213				(2,590,287	)			214,578,196
Mortgage-backed securities			30,035,546				1,278,310				(51,186	)			31,262,670
States and political subdivisions			39,290,502				1,179,412				(266,466	)			40,203,448
Total debt securities			309,786,540				3,905,853				(2,907,939	)			310,784,454
Equity securities			649,983												649,983
Total available for sale securities		$	310,436,523			$	3,905,853			$	(2,907,939	)		$	311,434,437
Held to maturity securities:
States and political subdivisions		$	3,201,966			$	139,008			$				$	3,340,974
Total held to maturity securities		$	3,201,966			$	139,008			$				$	3,340,974

The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. The other source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

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 June 30, 2010 and December 31, 2009 were as follows:

						Fair Value Measurement Using
		Total				Level 1				Level 2				Level 3
June 30, 2010		$	341,083,476							$	341,083,476
December 31, 2009			311,434,437								311,434,437

At June 30, 2010, available for sale securities with an amortized cost of $337,835,179 were reported at a fair value, net of unrealized gains and losses, of $341,083,476. The net change in unrealized

gains and losses of $1,483,283 was included in comprehensive income during the first six months of 2010. At December 31, 2009, available for sale securities with an amortized cost of $310,436,523 were reported at a fair value, net of unrealized gains and losses, of $311,434,437. The net change in unrealized gains and losses of $(2,867,464) was included in comprehensive income during the year ended December 31, 2009.

The amortized cost and estimated fair value of debt securities at June 30, 2010, 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		$	63,698,272			$	63,754,739
Due after one year through five years			64,964,724				65,940,252
Due after five years through ten years			81,332,261				82,713,623
Due after ten years			127,189,939				128,024,879
Totals		$	337,185,196			$	340,433,493
Held to maturity securities:
Due in one year or less		$	210,000			$	214,396
Due after one year through five years			1,606,493				1,705,043
Due after five years through ten years			996,966				1,036,594
Totals		$	2,813,459			$	2,956,033

Securities with gross unrealized losses at June 30, 2010 and December 31, 2009, 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
June 30, 2010		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
U.S. Treasury		$	9,999,450			$	58			$				$				$	9,999,450			$	58
States and political subdivisions			5,574,761				175,343				1,851,672				92,122				7,426,433				267,465
TOTAL		$	15,574,211			$	175,401			$	1,851,672			$	92,122			$	17,425,883			$	267,523

		Less Than Twelve Months								Over Twelve Months								Total
						Gross								Gross								Gross
						Unrealized								Unrealized								Unrealized
December 31, 2009:		Fair Value				Loss				Fair Value				Loss				Fair Value				Loss
U.S. Government Agencies		$	138,913,530			$	2,590,287			$				$				$	138,913,530			$	2,590,287
Mortgage-backed Securities			4,856,429				51,186												4,856,429				51,186
States and political subdivisions			9,501,227				148,396				2,520,564				118,070				12,021,791				266,466
TOTAL		$	153,271,186			$	2,789,869			$	2,520,564			$	118,070			$	155,791,750			$	2,907,939

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, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell and it is not more than likely than not that we will be required to sell these securities before 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 tables 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 were $7,595,175 and $6,733,659 at June 30, 2010 and December 31, 2009, respectively.

One loan in the Company’s portfolio, which had been on nonaccrual status since 2008, had a Chapter 11 bankruptcy plan of reorganization confirmed on April 15, 2010. The Company modified the terms of the loan in accordance with the bankruptcy plan, which requires the payment of interest only for a period of 12 months and payment of principal and interest for 60 months, with a balloon payment due on April 15, 2016. The Company’s policy is to remove loans from nonaccrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. At June 30, 2010, the loan, the balance of which was $2,853,896, was classified as a troubled debt restructuring. Management has restored this loan to accrual status because this customer continues to perform under its re-negotiated terms and the bankruptcy plan requires that the payments due in the first year be applied as interest. Management has reviewed the loan and believes the borrower’s financial performance provides sufficient evidence to classify this loan as impaired.

Impaired loans include the restructured loan of $2,853,896 at June 30, 2010 and nonaccrual loans

which amounted to $23,460,870 and $22,005,748 at June 30, 2010 and December 31, 2009, respectively. The average recorded investment in impaired loans amounted to approximately $16,548,477 and $25,551,787 at June 30, 2010 and December 31, 2009, respectively. The Company had $3,014,914 and $1,895,414 of specific allowance related to impaired loans at June 30, 2010 and December 31, 2009, respectively. No material interest income was recognized on impaired loans for the six months ended June 30, 2010 and the year ended December 31, 2009.

At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. Most of the Company’s impaired loans are collateral-dependent. The fair value of the collateral for these loans is based on appraisals performed by third-party valuation specialists, comparable sales and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. Factors including the assumptions and techniques utilized by the appraiser, changes in market conditions from the time of valuation and estimated sales value based on Management’s plans for disposition which could result in adjustment to the collateral value estimates indicated in the appraisal are considered by the Company. The criteria for determining whether an existing appraisal remains valid will vary depending upon the condition of the property, time, volatility of the local market and loan to value issues. Appraisals relating to collateral for impaired loans may be discounted by 20% - 35% based on whether the collateral is vacant land, property under construction, completed building, etc. 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.

The balances of impaired loans, which are measured at fair value on a non-recurring basis, by level within the hierarchy as of June 30, 2010 and December 31, 2009 were as follows:

		Total				Level 1				Level 2				Level 3
June 30, 2010		$	23,299,852			$				$	12,945,969			$	10,353,883
December 31, 2009			20,110,334								20,110,334

The following table sets forth a summary of changes in the fair value of impaired loans, the Company’s only Level 3 assets:

		For the six
		months ended
		June 30, 2010
Fair value, beginning of period		$
Net gains			10,353,883
Fair value, end of period		$	10,353,883

At June 30, 2010, impaired loans with a carrying amount of $13,078,588 were written down to their fair value of $12,945,969 through a $132,619 charge to the provision for loan losses in prior periods.

At December 31, 2009, impaired loans with a carrying amount of $22,005,748 were written down to their fair value of $20,110,334 through a $1,895,414 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. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the bank subsidiary’s in-house property evaluator and management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. 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 June 30, 2010 and December 31, 2009 were as follows:

		Total				Level 1				Level 2				Level 3
June 30, 2010		$	1,396,913			$				$	1,396,913			$
December 31, 2009			1,521,313								1,521,313

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses were as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Balance, beginning of period		$	8,278,805			$	11,372,866			$	7,827,806			$	11,113,575
Recoveries			18,584				224,212				74,201				329,634
Loans charged off			(714,462	)			(3,301,197	)			(1,469,080	)			(3,495,328	)
Provision for allowance for loan losses			1,585,000				1,502,000				2,735,000				1,850,000
Balance, end of period		$	9,167,927			$	9,797,881			$	9,167,927			$	9,797,881

7. Deposits:

At June 30, 2010, time deposits of $100,000 or more include brokered deposits of $34,966,000 which have maturity dates from July 24, 2010 - March 18, 2011.

8. Other Comprehensive Income:

The income tax effect from the unrealized loss on available for sale securities on accumulated other

comprehensive income was $764,115 at June 30, 2010.

9. Shareholders’ Equity:

On June 23, 2010, the Board approved a semi-annual dividend of $.11 per share with a record date of July 9, 2010 and distribution date of July 16, 2010.

10. Fair Value of Financial Instruments:

The carrying amounts and estimated fair value for financial assets and financial liabilities at June 30, 2010 and December 31, 2009, respectively, were as follows:

		June 30, 2010								December 31, 2009
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial Assets:
Cash and due from banks		$	43,112,297			$	43,112,297			$	29,155,294			$	29,155,294
Available for sale securities			341,083,476				341,083,476				311,434,437				311,434,437
Held to maturity securities			2,813,459				2,956,033				3,201,966				3,340,974
Other investments			4,020,754				4,020,754				4,036,304				4,036,304
Federal Home Loan Bank stock			3,370,800				3,370,800				5,015,900				5,015,900
Loans, net			436,567,738				439,954,148				457,148,485				460,587,836
Cash surrender value			15,653,219				15,653,219				15,329,394				15,329,394
Financial Liabilities:
Deposits:
Non-interest bearing			116,673,172				116,673,172				96,541,387				96,541,387
Interest bearing			402,881,916				403,150,698				374,160,042				375,051,835
Total deposits			519,555,088				519,823,870				470,701,429				471,593,222
Federal funds purchased and securities sold under agreements to repurchase			170,872,263				170,872,263				174,430,877				174,430,877
Borrowings from Federal Home Loan Bank			53,816,167				55,805,381				104,270,452				105,815,000

11. New Accounting Pronouncements:

In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements (“ASU No. 2010-09”). ASU No. 2010-09 removes some contradictions between the requirements of U.S. GAAP and the filing rules of the Securities and Exchange Commission (“SEC”). SEC filers are required to evaluate subsequent events through the date the financial statements are issued, and they are no longer required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance except for the use of the issued date for conduit debt obligors, and it is not expected to have a material impact on Company’s results of operations, financial position or disclosures.

In February 2010, the FASB issued Accounting Standards Update No. 2010-10, Consolidation: Amendments for Certain Investment Funds (“ASU No. 2010-10”). ASU No. 2010-10 indefinitely defers the effective date for certain investment funds, the amendments made to FASB ASC 810-10 related to variable interest entities by Statement of Financial Accounting Standard (“SFAS”) No. 167,

however this deferral does not apply to the disclosure requirements of SFAS No. 167. ASU No. 2010-10 also clarifies that (1) interests of related parties must be considered in determining whether fees paid to decision makers or service providers constitute a variable interest, and (2) a quantitative calculation should not be the only basis on which such determination is made. This guidance is effective as of the beginning of the first annual period beginning after November 15, 2009, and for interim periods within that first annual reporting period. It is not expected to have a material impact on Company’s results of operations, financial position or disclosures.

In March 2010, the FASB issued Accounting Standards Update No. 2010-11, Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives (“ASU No. 2010-11”). ASU No. 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements, by resolving a potential ambiguity about the breadth of the embedded credit derivative scope exception with regard to some types of contracts, such as collateralized debt obligations (“CDO’s”) and synthetic CDO’s. The scope exception will no longer apply to some contracts that contain an embedded credit derivative feature that transfers credit risk. The ASU is effective for fiscal quarters beginning after June 15, 2010, and is not expected to have a material impact on Company’s results of operations, financial position or disclosures.

In April 2010, the FASB issued Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool That Is Accounted for as a Single Asset (“ASU No. 2010-18”). ASU No. 2010-18 allows for the one-time election to terminate accounting for loans as a pool under ASU Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. ASU No. 2010-18 is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. It is not expected to have a material impact on Company’s results of operations, financial position or disclosures.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”). ASU 2010-20 requires enhanced disclosures, including a greater level of disaggregated information, about the credit quality of financial receivables and the allowance for credit losses. Additionally, this standards update also requires an entity to disclose credit quality indicators, past due information, modifications to financing receivables and significant purchases and sales of financing receivables. The disclosures as of the end of a reporting period under ASU 2010-20 are effective for the Company for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company for interim and annual reporting periods beginning on or after December 15, 2010. It is not expected to have a material impact on Company’s results of operations or financial position, but will require additional disclosures.

12. 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, 2009.

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.

New Accounting Pronouncements

The FASB has issued a number of Accounting Standards Updates, which have been disclosed in Note 11. The Company does not expect that any of these updates will have a material impact on its results of operations, financial position for disclosures.

Critical Accounting Policies

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 financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis

using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Allowance for loan losses:

The Company’s most critical accounting policy relates to its allowance for loan losses (“ALL”), which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of determination. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine when the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. 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. The analysis divides the portfolio into two segments: a pool analysis of loans based upon loss history by loan type and a specific reserve analysis for those loans considered impaired under generally accepted accounting principles. All credit relationships with an outstanding balance of $100,000 or greater are individually reviewed for impairment. All losses are charged to the ALL when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the ALL at the time of receipt.

Employee Benefit Plans:

Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.

OVERVIEW

The Company is a community bank serving the financial and trust needs of its customers in Harrison, Hancock, Jackson and Stone Counties in Mississippi. Maintaining a strong core deposit base and commercial and real estate lending in that trade area is the traditional focus of the Company. Growth has largely been achieved through de novo activity, and it is expected that this strategy will continue to be utilized in the future.

With the focus of our core business being on the Mississippi Gulf Coast, any significant local events have the potential to impact the Company’s business. Although the recent oil spill in the Gulf of

Mexico has not yet had a significant direct impact on the Company, its effects on the seafood and tourism industries in our trade area and the local economy in general may not be known for years to come. Additionally, the current interest rate environment, the decline in the value of real estate and the general economic downturn on a local and national level has affected the Company’s results. Managing the net interest margin in the Company’s highly competitive market and in the context of larger national economic conditions has been very challenging and will continue to be so for the foreseeable future.

Net income for the second quarter of 2010 was $1,446,082 compared with $200,707 for the second quarter of 2009 and for the first half of 2010 was $2,317,537 compared with $1,903,674 for the first half of 2009. These increases were almost entirely attributable to the gain on the sale of securities of $1,563,441 during the second quarter of 2010. Also affecting net income were the increase in net interest income of $704,342 and the increase in the provision for loan losses of $885,000 for the six months ended June 30, 2010 as compared with the six months ended June 30, 2009, respectively.

Monitoring asset quality and addressing potential losses in our loan portfolio continues to be emphasized during these difficult economic times, During the third quarter of 2009, non-performing loans, particularly non-accrual loans, increased significantly and remained at those levels at June 30, 2010. Approximately 33% of our total nonaccrual loans as of June 30, 2010 relate to one performing credit relationship which has been classified as nonaccrual by the banking regulators in their shared national credit review.

Total assets at June 30, 2010 increased $19,492,386 as compared with December 31, 2009. Available for sale securities increased $29,649,039 while loans decreased $19,240,626 as principal payments and maturities outpaced new loan volume. Deposits increased by $48,853,659 at June 30, 2010, providing the liquidity for borrowings from the Federal Home Loan Bank to decrease $50,454,285 as compared with December 31,2009.

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.

Quarter Ended June 30, 2010 as Compared with Quarter Ended June 30, 2009

The Company’s average interest earning assets decreased approximately $77,964,000, or 9%, from approximately $841,780,000 for the second quarter of 2009 to approximately $763,816,000 for the second quarter of 2010. The Company’s average balance sheet has shrunk as principal payments and maturities of loans have outpaced new loans, deposits have decreased as the Company has not

matched its competitors’ rates and investments have been called and sold.

The average yield on earning assets increased slightly from 4.16% for the second quarter of 2009 to 4.17% for the second quarter of 2010, with the biggest impact being to the yield on loans as the Company began including floors on its variable rate loans.

Average interest bearing liabilities decreased approximately $75,874,000, or 11%, from approximately $702,988,000 for the second quarter of 2009 to approximately $627,114,000 for the second quarter of 2010. The average rate paid on interest bearing liabilities decreased 36 basis points, from 1.15% for the second quarter of 2009 to .79% for the second quarter of 2010. This dramatic decrease is the result of utilizing lower cost funding sources including brokered deposits and Federal Home Loan Bank advances in 2010 as compared with 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 3.52% at June 30, 2010, up 32 basis points from 3.20% at June 30, 2009.

Six Months Ended June 30, 2010 as Compared with Six Months Ended June 30, 2009

The Company’s average interest earning assets decreased approximately $58,467,000, or 7%, from approximately $829,584,000 for the first half of 2009 to approximately $771,117,000 for the first half of 2010. The Company’s average balance sheet has shrunk as principal payments and maturities of loans have outpaced new loans, deposits have decreased as the Company has not matched its competitors’ rates and investments have been called and sold.

The average yield on earning assets increased 4 basis points, from 4.21% for the first half of 2009 to 4.25% for the first half of 2010, with the biggest impact being to the yield on loans as the Company began including floors on its variable rate loans.

Average interest bearing liabilities decreased approximately $52,506,000, or 8%, from approximately $689,614,000 for the first half of 2009 to approximately $637,108,000 for the first half of 2010. The average rate paid on interest bearing liabilities decreased 47 basis points, from 1.25% for the first half of 2009 to .78% for the first half of 2010. This decrease is the result of utilizing lower cost funding sources including brokered deposits and Federal Home Loan Bank advances in 2010 as compared with 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 3.60% at June 30, 2010, up 43 basis points from 3.17% at June 30, 2009.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended June 30, 2010 and 2009 and the six months ended June 30, 2010 and 2009.

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

		Three Months Ended June 30, 2010												Three Months Ended June 30, 2009
		Average Balance				Interest Earned/Paid				Rate				Average Balance				Interest Earned/Paid				Rate
Loans (2)(3)		$	445,601			$	4,893				4.39	%		$	473,432			$	5,086				4.30	%
Federal Funds Sold			2,670				2				0.30	%			934				1				0.42	%
HTM:
Non taxable (1)			3,025				36				4.76	%			3,264				43				5.27	%
ATS:
Taxable			267,579				2,576				3.85	%			328,065				3,205				3.91	%
Non taxable (1)			40,340				444				4.40	%			33,692				414				4.92	%
Other			4,601				3				0.26	%			2,393				2				0.33	%
Total		$	763,816			$	7,954				4.17	%		$	841,780			$	8,751				4.16	%
Savings & interest-bearing DDA		$	223,111			$	289				0.52	%		$	238,775			$	541				0.91	%
CD’s			197,044				560				1.14	%			217,051				856				1.58	%
Federal funds purchased			155,629				276				0.71	%			230,600				517				0.90	%
FHLB advances			51,330				110				0.86	%			16,562				111				2.68	%
Total		$	627,114			$	1,235				0.79	%		$	702,988			$	2,025				1.15	%
Net tax-equivalent yield on earning assets											3.52	%											3.20	%

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

		Six Months Ended June 30, 2010												Six Months Ended June 30, 2009
		Average Balance				Interest Earned/Paid				Rate				Average Balance				Interest Earned/Paid				Rate
Loans (2)(3)		$	450,712			$	9,880				4.38	%		$	471,986			$	10,204				4.32	%
Federal Funds Sold			4,222				5				0.24	%			1,136				1				0.18	%
HTM:
Non taxable (1)			3,113				80				5.14	%			3,329				89				5.35	%
AFS:
Taxable			267,586				5,457				4.08	%			317,464				6,338				3.99	%
Non taxable (1)			40,353				941				4.66	%			33,033				839				5.08	%
Other			5,131				8				0.31	%			2,636				7				0.53	%
Total		$	771,117			$	16,371				4.25	%		$	829,584			$	17,478				4.21	%
Savings & interest-bearing DDA		$	223,047			$	578				0.52	%		$	241,524			$	1,236				1.02	%
CD’s			187,331				1,089				1.16	%			196,453				1,717				1.75	%
Federal funds purchased			163,178				563				0.69	%			228,985				1,094				0.96	%
FHLB advances			63,552				246				0.77	%			22,652				272				2.40	%
Total		$	637,108			$	2,476				0.78	%		$	689,614			$	4,319				1.25	%
Net tax-equivalent yield on earning assets											3.60	%											3.17	%