10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the fiscal year ended December 31, 2008

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 number)

Lameuse and Howard Avenues, Biloxi, Mississippi 39533 (Address of principal executive offices) (Zip code)

228-435-5511 (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

	Name of Each Exchange on
Title of Each Class	Which Registered
None	None

Securities registered pursuant to Section 12 (g) of the Act:

Common, $1.00 Par Value (Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. þ

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
(Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

At June 30, 2008, the aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $87,582,000.

On February 27, 2009, the registrant had outstanding 5,227,251 shares of common stock, par value of $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2008 are incorporated by reference into Parts I, II and III of this report. Except for those portions of the Registrant’s Annual Report to Shareholders expressly incorporated herein by reference, the Annual Report is not deemed filed with the Securities and Exchange Commission. Portions of the Registrant’s Definitive Proxy Statement issued in connection with the Annual Meeting of Shareholders to be held April 15, 2009, are incorporated by reference into Part III of this report.

CONTENTS

PART I
Item 1.	Description of Business	1
Item 1a.	Risk Factors	27
Item 1b.	Unresolved Staff Comments	31
Item 2.	Properties	32
Item 3.	Legal Proceedings	32
Item 4.	Submission of Matters to a Vote of Security Holders	32
PART II
Item 5.	Market for the Registrant’s Common Stock And Related Stockholder Matters	32
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	33
Item 7a.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	34
Item 9a.	Controls and Procedures	34
Item 9b.	Other Information	35
PART III
Item 10.	Directors and Executive Officers of the Registrant	35
Item 11.	Executive Compensation	36
Item 12.	Security Ownership of Certain Beneficial Owners and Management	36
Item 13.	Certain Relationships and Related Transactions	36
Item 14.	Principal Accountant Fees and Services	36
PART IV
Item 15.	Exhibits and Financial Statement Schedules	37
EX-13.1
EX-13.2
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

ITEM 1 — DESCRIPTION OF BUSINESS

BACKGROUND AND CURRENT OPERATIONS

General

Peoples Financial Corporation (the “Company”) was organized as a one bank holding company in 1984. The Company is headquartered in Biloxi, Mississippi. At December 31, 2008, the Company operates in the state of Mississippi through its wholly-owned subsidiary, The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Company is engaged, through this subsidiary, in the banking business. The Bank is the Company’s principal asset and primary source of revenue.

The Main Office, operations center and asset management and trust services of the Bank are located in downtown Biloxi, MS. At December 31, 2008, the Bank also had 15 branches located throughout Harrison, Hancock, Jackson and Stone Counties. The Bank has automated teller machines (“ATM”) at its Main Office, all branch locations and at numerous non-proprietary locations.

The Bank Subsidiary

The Company’s wholly-owned bank subsidiary is The Peoples Bank, which was originally chartered in 1896 in Biloxi, Mississippi. The Bank is a state chartered bank whose deposits are insured under the Federal Deposit Insurance Act. The Bank is not a member of the Federal Reserve System. The legal name of the Bank was changed to The Peoples Bank, Biloxi, Mississippi, during 1991.

Most of the Bank’s business originates from the trade area of Harrison, Hancock, Stone and Jackson Counties in Mississippi; however, some business is obtained from other counties in southern Mississippi.

Nonbank Subsidiary

In 1985, PFC Service Corp. (“PFC”) was chartered and began operations as the second wholly-owned subsidiary of Peoples Financial Corporation. The purpose of PFC was principally the leasing of automobiles and equipment. PFC is inactive at this time.

Products And Services

The Bank currently offers a variety of services to individuals and small to middle market businesses within its trade area.

The Bank’s primary lending focus is to offer business, commercial, real estate, construction, personal and installment loans, with an emphasis on commercial lending. Out of area loans and

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concentrations in the hotel/motel and gaming industries are monitored by the Company. Each loan officer has board approved lending limits on the principal amount of secured and unsecured loans that can be approved for a single borrower without prior approval of the loan committee. All loans, however, must meet the credit underwriting standards and loan policies of the Bank.

Deposit services include interest bearing and non-interest bearing checking accounts, savings accounts, certificates of deposit, and IRA accounts. The Bank also offers a non-deposit funds management account, which is not insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank generally provides depository accounts to individuals and small and middle market businesses in its trade area at interest rates consistent with market conditions.

The Bank’s Asset Management and Trust Services Department offers personal trust, agencies and estate services, including living and testamentary trusts, executorships, guardianships, and conservatorships. Benefit accounts maintained by the Department primarily include self-directed individual retirement accounts. Escrow management, stock transfer and bond paying agency accounts are available to corporate customers.

The Bank also offers a variety of other services including safe deposit box rental, wire transfer services, night drop facilities, collection services, cash management and Internet banking. The Bank has more than forty-five ATMs at its branch locations and other off-site, non-proprietary locations, providing bank customers access to their depository accounts. The Bank is a member of the PULSE network.

There has been no significant change in the kind of services offered by the Bank during the last three fiscal years.

Customers

The Bank has a large number of customers acquired over a period of many years and is not dependent upon a single customer or upon a few customers. The Bank also provides services to customers representing a wide variety of industries including seafood, retail, hospitality, hotel/motel, gaming and construction. While the Company has pursued external growth strategies on a limited basis, its primary focus has been on internal growth by the Bank through the establishment of new branch locations and an emphasis on strong customer relationships.

Employees

At December 31, 2008, the Bank employed 208 full-time employees and 14 part-time employees. The Company has no employees who are not employees of the bank subsidiary. Through the bank, employees receive salaries and benefits, which include 401(k), ESOP, cafeteria plan, life, health and disability insurance. The Company considers its relationship with its employees to be good.

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Competition

The Bank is in direct competition with numerous local and regional commercial banks as well as other non-bank institutions. Interest rates paid and charged on deposits and loans are the primary competitive factors within the Bank’s trade area. The Bank also competes for deposits and loans with insurance companies, finance companies, brokerage houses and credit unions. The principal competitive factors in the markets for deposits and loans are interest rates paid and charged. The Company also competes through efficiency, quality of customer service, the range of services and products it provides, the convenience of its branch and ATM locations and the accessibility of its staff. The Bank intends to continue its strategy of being a local, community bank offering traditional bank services and providing quality service in its local trade area.

Miscellaneous

The Bank holds no patents, licenses (other than licenses required to be obtained from appropriate bank regulatory agencies), franchises or concessions.

The Bank has not engaged in any research activities relating to the development of new services or the improvement of existing services except in the normal course of its business activities. The Bank presently has no plans for any new line of business requiring the investment of a material amount of total assets.

Available Information

The Company maintains an internet website at www.thepeoples.com. The Company’s Annual Report to Shareholders is available on the Company’s website. Also available through the website is a link to the Company’s filings with the Securities and Exchange Commission. Information on the Company’s website is not incorporated into this Form 10-K or the Company’s other securities filings and is not part of them.

REGULATION AND SUPERVISION

Bank Holding Company

The Company is required to file certain reports with, and otherwise comply with the rules and regulations of, the Securities and Exchange Commission under federal securities laws. The common stock of the Company is listed on the NASDAQ capital market exchange, such listing subjecting the Company to compliance with the exchange’s requirements with respect to reporting and other rules and regulations.

The Company is a registered one bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to extensive regulation by the Board of Governors of the Federal Reserve System. As such, the Company is required to file periodic reports and additional information required by the Federal Reserve. The Federal Reserve Board may also make examinations of the Company and its subsidiaries.

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The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board 1) before it may acquire substantially all the assets of any bank or ownership or control of any voting shares of any bank if, after the acquisition, it would own or control, directly or indirectly, more than 5 percent of the voting shares of the bank, 2) before it or any of its subsidiaries other than a bank may acquire all of the assets of a bank, 3) before it may merge with any other bank holding company or 4) before it may engage in permissible non-banking activities.

A bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of, voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve to be so closely related to banking or the managing or controlling of banks as to be a proper incident thereto. Some of the activities the Federal Reserve Board has determined by regulation to be closely related to banking are the making and servicing of loans; performing certain bookkeeping or data processing services; acting as fiduciary or investment or financial advisor; making equity or debt investments in corporations or projects designed primarily to promote community welfare; and leasing transactions if the functional equivalent of an extension of credit and mortgage banking or brokerage. The Bank Holding Company Act does not place territorial limitations on permissible bank-related activities of bank holding companies. Despite prior approval, however, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or its control of any subsidiary when it has reasonable cause to believe that continuation of such activity or control of such subsidiary constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

A bank holding company and its subsidiaries are also prohibited from acquiring any voting shares of or interest in, any banks located outside the state in which the operations of the bank holding company’s subsidiaries are located, unless the acquisition is specially authorized by the statute of the state in which the target is located. Mississippi has enacted legislation which authorizes interstate acquisitions of banking organizations by bank holding companies outside of Mississippi, and also interstate branching transactions, subject to certain conditions and restrictions.

The Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) allows bank holding companies to engage in a wider range of financial activities. In order to engage in such activities, which, among others, include underwriting and selling insurance; providing financial, investment or economic advisory services; and underwriting, dealing in or making a market in securities, a bank holding company must elect to become a financial holding company. The Financial Services Modernization Act also authorized the establishment of financial subsidiaries in order to engage in such financial activities, with certain limitations.

The Financial Services Modernization Act also contains a number of other provisions affecting the Company’s operations. One of the most important provisions relates to the issue of privacy as federal banking regulators were authorized to adopt rules designed to protect the financial privacy of consumers. These rules implemented notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about consumers to non-affiliated third parties.

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As of the date of this Form 10-K, the Company has not taken any action to adopt either the financial holding company or the financial subsidiary structures that were authorized by the Financial Services Modernization Act.

The Federal Reserve has adopted capital adequacy guidelines for use in its examination and regulation of bank holding companies. The regulatory capital of a bank holding company under applicable federal capital adequacy guidelines is particularly important in the Federal Reserve’s evaluation of a holding company and any applications by the bank holding company to the Federal Reserve. A financial institution’s failure to meet minimum regulatory capital standards can lead to other penalties, including termination of deposit insurance or appointment of a conservator or receiver for the financial institution. Risk-based capital ratios are the primary measure of regulatory capital presently applicable to bank holding companies. Risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets.

The Federal Reserve rates bank holding companies by a component and composite 1 — 5 rating system. This system is designed to help identify institutions which require special attention. Financial institutions are assigned ratings in the areas of capital adequacy, asset quality, management capability, the quality and level of earnings, the adequacy of liquidity and sensitivity to interest rate fluctuations based on the evaluation of the financial condition and operations.

The Company is a legal entity separate and distinct from the Bank. There are various restrictions that limit the ability of the Bank to finance, pay dividends or otherwise supply funds to the Company. In addition, the Bank is subject to certain restrictions on any extension of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with extensions of credit, leases or sale of property, or furnishing of services.

Bank Subsidiary

The Bank is subject to the regulation of and examination by the Mississippi Department of Banking and Consumer Finance (“Department of Banking”) and the FDIC. Areas subject to regulation include required reserves, investments, loans, mergers, branching, issuance of securities, payment of dividends, capital adequacy, management practices and other areas of banking operations. These regulatory authorities examine such areas as loan and investment quality, management practices, procedures and practices and other aspects of operations. In addition to these regular examinations, the Bank must furnish periodic reports to its regulatory authorities containing a full and accurate statement of affairs. The Bank is subject to deposit insurance assessments by the FDIC and assessments by the Department of Banking to provide operating funds for that agency.

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The Bank is a member of the FDIC, and its deposits are insured by law by the Bank Insurance Fund (“BIF”). On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) was enacted. The Federal Deposit Insurance Act, as amended by Section 302 of FDICIA, calls for risk-related deposit insurance assessment rates. This risk classification of an institution will determine its deposit insurance premium. Assignment to one of the three capital groups, coupled with assignment to one of three supervisory sub-groups, determines which of the nine risk classifications is appropriate for an institution.

In general, FDICIA subjects bank and bank holding companies to significantly increased regulation and supervision. FDICIA increased the borrowing authority of the FDIC in order to recapitalize the BIF, and the future borrowings are to be repaid by increased assessments on FDIC member banks. Other significant provisions of FDICIA require a new regulatory emphasis linking supervision to bank capital levels. Also, federal banking regulators are required to take prompt regulatory action with respect to depository institutions that fall below specified capital levels and to draft non-capital regulatory measures to assure bank safety.

FDICIA further requires regulators to perform annual on-site bank examinations, places limits on real estate lending and tightens audit requirements. The new legislation eliminated the “too big to fail” doctrine, which protects uninsured deposits of large banks, and restricts the ability of undercapitalized banks to obtain extended loans from the Federal Reserve Board discount window. FDICIA also imposed new disclosure requirements relating to fees charged and interest paid on checking and deposit accounts. Most of the significant changes brought about by FDICIA required new regulations.

In addition to regulating capital, the FDIC has broad authority to prevent the development or continuance of unsafe or unsound banking practices. Pursuant to this authority, the FDIC has adopted regulations that restrict preferential loans and loan amounts to “affiliates” and “insiders” of banks, require banks to keep information on loans to major stockholders and executive officers and bar certain director and officer interlocks between financial institutions. The FDIC is also authorized to approve mergers, consolidations and assumption of deposit liability transactions between insured banks and between insured banks and uninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continuing or assumed bank is an insured nonmember state bank.

Although the Bank is not a member of the Federal Reserve System, it is subject to Federal Reserve regulations that require the Bank to maintain reserves against transaction accounts, primarily checking accounts. Because reserves generally must be maintained in cash or in non-interest bearing accounts, the effect of the reserve requirement is to increase the cost of funds for the Bank.

The earnings of commercial banks and bank holding companies are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities, including the Federal Reserve Board. In particular, the Federal Reserve Board regulates money and credit conditions, and interest rates, primarily through open market operations in U.S. Government securities, varying the discount rate of member and nonmember bank borrowing,

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setting reserve requirements against bank deposits and regulating interest rates payable by banks on certain deposits. These policies influence to a varying extent the overall growth and distribution of bank loans, investments, deposits and the interest rates charged on loans. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

The most recent legislation to potentially impact the Bank is the Emergency Economic Stabilization Act which was passed in October of 2008. The information concerning this legislation on page 5 of the 2008 Annual Report to Shareholders is incorporated herein by reference.

Summary

The foregoing is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. It is not intended to be an exhaustive discussion of all the statutes and regulations having an impact on the operations of the Company or the Bank. Additional legislation may be enacted at the federal or state level which may alter the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether and in what form any of these proposals will be adopted or the extent to which the business of the Company or the Bank may be affected thereby.

SUPPLEMENTAL STATISTICAL INFORMATION

Schedules I-A through VII present certain statistical information regarding the Company. This information is not audited and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements found at pages 8 - 27 of the 2008 Annual Report to Shareholders.

Distribution of Assets, Liabilities and Shareholders’ Equity and Interest Rates and Differentials

Net Interest Income, the difference between Interest Income and Interest Expense, is the most significant component of the Company’s earnings. For interest analytical purposes, Management adjusts Net Interest Income to a “taxable equivalent” basis using a Federal Income Tax rate of 34% in 2008 and 35% in 2007 and 2006 on tax-exempt items (primarily interest on municipal securities).

Another significant statistic in the analysis of Net Interest Income is the effective interest differential, also called the net yield on earning assets. The net yield is the difference between the rate of interest earned on earning assets and the effective rate paid for all funds, non-interest bearing as well as interest bearing. Since a portion of the Bank’s deposits do not bear interest, such as demand deposits, the rate paid for all funds is lower than the rate on interest bearing liabilities alone.

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Recognizing the importance of interest differential to total earnings, Management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional and area economic conditions, including the level of credit demand and interest rates, there are significant opportunities to influence interest differential through appropriate loan and investment policies which are designed to maximize the differential while maintaining sufficient liquidity and availability of incremental funds for purposes of meeting existing commitments and investment in lending and investment opportunities that may arise.

The information included in Schedule I-F presents the change in interest income and interest expense along with the reason(s) for these changes. The change attributable to volume is computed as the change in volume times the old rate. The change attributable to rate is computed as the change in rate times the old volume. The change in rate/volume is computed as the change in rate times the change in volume.

Credit Risk Management and Loan Loss Experience

In the normal course of business, the Bank assumes risks in extending credit. The Bank manages these risks through its lending policies, credit underwriting analysis, loan review procedures and the diversification of its loan portfolio. Although it is not possible to predict loan losses with complete accuracy, Management constantly reviews the characteristics of the loan portfolio to determine its overall risk profile and quality.

Constant attention to the quality of the loan portfolio is achieved by the loan review process. Throughout this ongoing process, Management is advised of the condition of individual loans and of the quality profile of the entire loan portfolio. Any loan or portion thereof which is classified “loss” by regulatory examiners or which is determined by Management to be uncollectible because of such factors as the borrower’s failure to pay interest or principal, the borrower’s financial condition, economic conditions in the borrower’s industry or the inadequacy of underlying collateral, is charged-off.

Provisions are charged to operating expense based upon historical loss experience, and additional amounts are provided when, in the opinion of Management, such provisions are not adequate based upon the current factors affecting loan collectibility.

The allocation of the allowance for loan losses by loan category is based on the factors mentioned in the preceding paragraphs. Accordingly, since all of these factors are subject to change, the allocation is not necessarily indicative of the breakdown of future losses.

Further information concerning the provision for loan losses and the allowance for loan losses is presented in “Management’s Discussion and Analysis” at pages 1 - 7 of the 2008 Annual Report to Shareholders and “Note A — Business and Summary of Significant Accounting Policies” at pages 13 - 15 of the 2008 Annual Report to Shareholders and are incorporated herein by reference.

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Return on Equity and Assets

The information under the captions “Five-Year Comparative Summary of Selected Financial Information” on page 30 and “Management’s Discussion and Analysis” on pages 1 - 7 of the 2008 Annual Report are incorporated herein by reference.

Dividend Payout

	Years Ended December 31,
	2008			2007			2006
Dividend payout ratio		59.57	%		25.87	%		19.13	%

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SCHEDULE I-A

Distribution of Average Assets, Liabilities and Shareholders’ Equity for the Periods Indicated (2)

Years Ended December 31, (In thousands)	2008		2007		2006
ASSETS:
Cash and due from financial institutions	$	42,396	$	49,491	$	65,931
Available for sale securities:
Taxable securities		304,536		388,577		262,940
Non-taxable securities		24,394		18,864		15,213
Other securities		3,022		5,264		4,840
Held to maturity securities:
Taxable securities				21,443		137,707
Non-taxable securities		3,691		4,780		5,791
Other investments		3,889		467		100
Net loans (1)		453,723		417,995		366,201
Federal funds sold		5,694		5,763		6,933
Other assets		58,240		50,878		43,703
TOTAL ASSETS	$	899,585	$	963,522	$	909,359
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Non-interest bearing deposits	$	114,380	$	132,719	$	162,636
Interest bearing deposits		443,696		481,877		458,195
Total deposits		558,076		614,596		620,831
Federal funds purchased and securities sold under agreements to repurchase		210,049		225,246		178,663
Other liabilities		25,851		22,775		18,856
Total liabilities		793,976		862,617		818,350
Shareholders’ equity		105,609		100,905		91,009
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	899,585	$	963,522	$	909,359

(1)	Gross loans and discounts, net of unearned income and allowance for loan losses.
(2)	All averages are computed on a daily basis.

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SCHEDULE I-B
Average (2) Amount Outstanding for Major Categories of Interest Earning Assets
and Interest Bearing Liabilities for the Periods Indicated

Years Ended December 31, (In thousands)	2008		2007		2006
INTEREST EARNING ASSETS:
Loans (1)	$	463,505	$	428,447	$	377,172
Federal funds sold		5,694		5,763		15,440
Available for sale securities:
Taxable securities		304,536		388,577		262,940
Non-taxable securities		24,394		18,864		15,213
Other securities		3,022		5,264		4,840
Held to maturity securities:
Taxable securities				21,443		137,707
Non-taxable securities		3,691		4,780		5,791
TOTAL INTEREST EARNING ASSETS	$	804,842	$	873,138	$	819,103
INTEREST BEARING LIABILITIES:
Savings and negotiable interest bearing deposits	$	251,792	$	268,710	$	303,239
Time deposits		191,904		213,167		154,956
Federal funds purchased and securities sold under agreements to repurchase		210,049		225,246		178,663
Other borrowed funds		10,993		8,794		8,213
TOTAL INTEREST BEARING LIABILITIES	$	664,738	$	715,917	$	645,071

(1)	Net of unearned income. Includes nonaccrual loans.
(2)	All averages are computed on a daily basis.

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SCHEDULE I-C
Interest Earned or Paid on the Major Categories of Interest Earning Assets
and Interest Bearing Liabilities for the Periods Indicated

Years Ended December 31, (In thousands)	2008		2007		2006
INTEREST EARNED ON:
Loans (2)	$	26,874	$	33,642	$	28,735
Federal funds sold		122		295		778
Available for sale securities:
Taxable securities		15,331		19,822		11,886
Non-taxable securities		1,433		1,109		897
Other securities		148		199		189
Held to maturity securities:
Taxable securities				1,082		6,449
Non-taxable securities		230		302		401
TOTAL INTEREST EARNED (1)	$	44,138	$	56,451	$	49,335
INTEREST PAID ON:
Savings and negotiable interest bearing deposits	$	3,856	$	5,358	$	5,408
Time deposits		6,094		9,356		5,977
Federal funds purchased and securities sold under agreements to repurchase		4,521		10,212		6,916
Other borrowed funds		492		526		484
TOTAL INTEREST PAID	$	14,963	$	25,452	$	18,785

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2008 and 35% in 2007 and 2006.
(2)	Loan fees of $786, $854 and $592 for 2008, 2007 and 2006, respectively, are included in these figures.

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SCHEDULE I-D
Average Interest Rate Earned or Paid for Major Categories of
Interest Earning Assets and Interest Bearing Liabilities for the Periods Indicated

Years Ended December 31, (In thousands)	2008			2007			2006
AVERAGE RATE EARNED ON:
Loans		5.80	%		7.85	%		7.62	%
Federal funds sold		2.14			5.12			5.04
Available for sale securities:
Taxable securities		5.03			5.10			4.52
Non-taxable securities		5.87			5.88			5.90
Other securities		4.90			3.78			3.9
Held to maturity securities:
Taxable securities					5.05			4.68
Non-taxable securities		6.23			6.32			6.92
TOTAL (weighted average rate) (1)		5.48	%		6.46	%		6.02	%
AVERAGE RATE PAID ON:
Savings and negotiable interest bearing deposits		1.53	%		1.99	%		1.78	%
Time deposits		3.18			4.39			3.86
Federal funds purchased and securities sold under agreements to repurchase		2.15			4.53			3.87
Other borrowed funds		4.48			5.98			5.89
TOTAL (weighted average rate)		2.25	%		3.56	%		2.91	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2008 and 35% in 2007 and 2006.

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SCHEDULE I-E
Net Interest Earnings and Net Yield on Interest Earning Assets

Years Ended December 31,
(In thousands except percentages)	2008			2007			2006
Total interest income (1)	$	44,138		$	56,451		$	49,335
Total interest expense		14,963			25,452			18,785
Net interest earnings	$	29,175		$	30,999		$	30,550
Net yield on interest earning assets		3.62	%		3.55	%		3.73	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2008 and 35% in 2007 and 2006.

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SCHEDULE I-F
Analysis of Changes In Interest Income and Interest Expense
(In thousands)

								Attributable to:
	2008		2007		Increase (Decrease)			Volume			Rate			Rate / Volume
INTEREST INCOME:(1)
Loans (2)(3)	$	26,874	$	33,642	$	(6,768	)	$	2,753		$	(8,801	)	$	(720	)
Federal funds sold		122		295		(173	)		(4	)		(172	)		3
Available for sale securities:
Taxable securities		15,331		19,822		(4,491	)		(4,287	)		(260	)		56
Non-taxable securities		1,433		1,109		324			326			(1	)		(1	)
Other securities		148		199		(51	)		(85	)		59			(25	)
Held to maturity securities:
Taxable securities				1,082		(1,082	)		(1,082	)
Non-taxable securities		230		302		(72	)		(69	)		(4	)		1
Total	$	44,138	$	56,451	$	(12,313	)	$	(2,448	)	$	(9,179	)	$	(686	)
INTEREST EXPENSE:
Savings and negotiable interest bearing deposits	$	3,856	$	5,358	$	(1,502	)	$	(337	)	$	(1,243	)	$	78
Time deposits		6,094		9,356		(3,262	)		(933	)		(2,587	)		258
Federal funds purchased and securities sold under agreements to repurchase		4,521		10,212		(5,691	)		(689	)		(5,364	)		362
Other borrowed funds		492		526		(34	)		132			(132	)		(34	)
Total	$	14,963	$	25,452	$	(10,489	)	$	(1,827	)	$	(9,326	)	$	664

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2008 and 35% in 2007.
(2)	Loan fees are included in these figures.
(3)	Includes interest on nonaccrual loans.

15

SCHEDULE I-F (continued)
Analysis of Changes in Interest Income and Interest Expense
(In thousands)

								Attributable to:
					Increase									Rate /
	2007		2006		(Decrease)			Volume			Rate			Volume
INTEREST INCOME:(1)
Loans (2) (3)	$	33,642	$	28,735	$	4,907		$	3,906		$	881		$	120
Federal funds sold		295		778		(483	)		(488	)		12			(7	)
Available for sale securities:
Taxable securities		19,822		11,886		7,936			5,679			1,527			730
Non-taxable securities		1,109		897		212			215			(2	)		(1	)
Other securities		199		189		10			30			(17	)		(3	)
Held to maturity securities:
Taxable securities		1,082		6,449		(5,367	)		(5,445	)		500			(422	)
Non-taxable securities		302		401		(99	)		(70	)		(35	)		6
Total	$	56,451	$	49,335	$	7,116		$	3,827		$	2,866		$	423
INTEREST EXPENSE:
Savings and negotiable interest bearing deposits	$	5,358	$	5,408	$	(50	)	$	(616	)	$	639		$	(73	)
Time deposits		9,356		5,977		3,379			2,245			824			310
Federal funds purchased and securities sold under agreements to repurchase		10,212		6,916		3,296			1,803			1,184			309
Other borrowed funds		526		484		42			34			7			1
Total	$	25,452	$	18,785	$	6,667		$	3,466		$	2,654		$	547

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 35% in 2007 and 2006.
(2)	Loan fees are included in these figures.
(3)	Includes interest on nonaccrual loans.

16

SCHEDULE II-A
Securities Portfolio
Book Value of Securities Portfolio at the Dates Indicated

December 31, (In thousands):	2008		2007		2006
Available for sale securities:
U. S. Treasury, U.S. Government agency and Mortgage-backed securities	$	308,886	$	360,489	$	376,164
States and political subdivisions		30,926		22,483		17,085
Other securities		650		3,057		3,658
Total	$	340,462	$	386,029	$	396,907
Held to maturity securities:
U. S. Treasury, U.S. Government agency and Mortgage-backed securities	$		$		$	80,487
States and political subdivisions		3,394		4,630		5,087
Total	$	3,394	$	4,630	$	85,574

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SCHEDULE II-B
Maturity of Securities Portfolio at December 31, 2008
And Weighted Average Yields of Such Securities

	Maturity
	(In thousands except percentage data)
						After one but					After five but
	Within one year					within five years					within ten years					After ten years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale securities:
U. S. Treasury, U.S.Government agency and Mortgage-backed securities	$	44,390		3.34	%	$	127,177		3.52	%	$	27,546		4.79	%	$	109,773		5.78	%
States and political subdivisions		1,132		5.18	%		6,195		5.30	%		14,086		5.65	%		9,513		5.83	%
Other																	650		3.90	%
Totals	$	45,522		3.41	%	$	133,372		3.64	%	$	41,632		5.11	%	$	119,936		5.78	%
Held to maturity securities:
States and political subdivisions	$	195		4.13	%	$	1,844		3.97	%	$	1,355		4.58	%	$
Totals	$	195		4.13	%	$	1,844		3.97	%	$	1,355		4.58	%	$

Note: The weighted average yields are calculated on the basis of cost. Average yields on investments in states and political subdivisions are based on their contractual yield. Available for sale securities are stated at fair value and held to maturity securities are stated at amortized cost.

18

SCHEDULE III-A
Loan Portfolio
Loans by Type Outstanding (1)

December 31, (In thousands):	2008		2007		2006		2005		2004
Real estate, construction	$	118,455	$	93,739	$	24,317	$	20,663	$	20,926
Real estate, mortgage		290,458		265,465		300,807		258,573		250,676
Loans to finance agricultural production		3,178		2,545		2,502		2,795		4,251
Commercial and industrial loans		43,312		76,267		57,796		53,473		44,983
Loans to individuals for household, family and other consumer expenditures		10,202		11,173		13,415		11,812		11,387
Obligations of states and political subdivisions		1,733		1,747		2,094		1,423		1,654
All other loans		39		56		263		607		316
Totals	$	467,377	$	450,992	$	401,194	$	349,346	$	334,193

(1) No foreign debt outstanding.

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SCHEDULE III-B
Maturities and Sensitivity to Changes in
Interest Rates of the Loan Portfolio as of December 31, 2008

	Maturity (In thousands)
			Over one year
	One year or		through 5
	Less		years		Over 5 years		Total
Loans:
Real estate, construction	$	54,936	$	34,782	$	28,737	$	118,455
Real estate, mortgage		44,584		154,277		91,597		290,458
Loans to finance agricultural production		3,178						3,178
Commercial and industrial loans		31,232		10,080		2,000		43,312
Loans to individuals for household, family and other consumer expenditures		3,290		6,694		218		10,202
Obligations of states and political subdivisions		522		873		338		1,733
All other loans		39						39
Totals	$	137,781	$	206,706	$	122,890	$	467,377
Loans with pre-determined interest rates	$	35,176	$	149,414	$	17,237	$	201,827
Loans with floating interest rates		102,605		57,292		105,653		265,550
Totals	$	137,781	$	206,706	$	122,890	$	467,377

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SCHEDULE III-C
Non-Performing Loans

December 31, (In thousands):	2008		2007		2006		2005		2004
Loans accounted for on a non-accrual basis (1)	$	15,553	$	45	$	349	$	267	$	6,164
Loans which are contractually past due 90 or more days as to interest or principal payment, but are not included above		2,340		1,234		3,295		762		1,190

(1) The Bank places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. See Note C to the 2008 Annual Report to Shareholders for discussion of impaired loans.

21

SCHEDULE IV-A
Summary of Loan Loss Expenses
(In thousands except percentage data)

	2008			2007			2006			2005			2004
Average amount of loans outstanding (1)	$	463,505		$	428,447		$	377,172		$	338,761		$	323,190
Balance of allowance for loan losses at the beginning of period	$	9,378		$	10,841		$	10,966		$	6,570		$	6,399
Loans charged-off:
Commercial, financial and agricultural		334			139			254			37			105
Consumer and other		950			545			475			525			666
Total loans charged-off		1,284			684			729			562			771
Recoveries of loans previously charged-off:
Commercial, financial and agricultural		19			23			147			6			49
Consumer and other		654			243			316			1,338			445
Total recoveries		673			266			463			1,344			494
Net loans charged-off (recovered)		611			418			266			(782	)		277
Provision for loan losses charged to operating expense		2,347			(1,045	)		141			3,614			448
Balance of allowance for loan losses at end of period	$	11,114		$	9,378		$	10,841		$	10,966		$	6,570
Ratio of net charge-offs during period to average loans outstanding		.13	%		.10	%		.07	%		(.23	)%		.09	%

(1) Net of unearned income.

22

SCHEDULE IV-B
Allocation of the Allowance for Loan Losses

	2008				2007				2006				2005				2004
											% of
			% of				% of				Loans				% of				% of
			Loans				Loans				to				Loans				Loans
Balance at December 31,			to Total				to Total				Total				to Total				to Total
(In thousands)	Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans
Real estate, construction	$	5,277		25	$	2,793		21	$	1,474		6	$	941		5	$	860		6
Real estate, mortgage		3,922		61		3,980		59		6,058		74		7,605		74		3,496		75
Loans to finance agricultural production		28		1		19		1		42		1		28		1		38		1
Commercial and industrial loans		1,581		9		2,462		16		3,038		14		2,184		15		2,072		13
Loans to individuals for household, family and other consumer expenditures		306		2		122		1		225		3		206		3		103		3
Obligations of states and political subdivisions				1				1				1				1				1
All other loans				1		2		1		4		1		2		1		1		1
Unallocated				N/A				N/A				N/A				N/A				N/A
Totals	$	11,114		100	$	9,378		100	$	10,841		100	$	10,966		100	$	6,570		100

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SCHEDULE V
Summary of Average Deposits and Their Yields

	2008					2007					2006
Years Ended December 31,
(In thousands except
for percentage data)	Amount		Rate			Amount		Rate			Amount		Rate
Demand deposits in domestic offices	$	114,380		N/A		$	132,719		N/A		$	162,636		N/A
Negotiable interest bearing deposits in domestic offices		205,420		1.71	%		217,352		2.24	%		237,391		2.04	%
Savings deposits in domestic offices		46,372		.76	%		51,358		.94	%		65,848		.87	%
Time deposits in domestic offices		191,904		3.18	%		213,167		4.39	%		154,956		3.86	%
Total deposits	$	558,076		1.78	%	$	614,596		2.39	%	$	620,831		1.83	%

Certificates of deposit outstanding in amounts $100,000 or more (in thousands) by the amount of time remaining until maturity as of December 31, 2008, are as follows:

Remaining maturity:
3 months or less	$	75,169
Over 3 through 6 months		8,087
Over 6 months through 12 months		15,418
Over 12 months		5,866
Total	$	104,540

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SCHEDULE VI
Short Term Borrowings
(In thousands except percentage data)

	2008			2007			2006
Amount outstanding at December 31,	$	286,609		$	231,225		$	226,032
Weighted average interest rate at December 31,		1.52	%		3.96	%		4.50	%
Maximum outstanding at any month-end during year	$	286,609		$	238,464		$	231,450
Average amount outstanding during year	$	213,422		$	225,246		$	178,663
Weighted average interest rate		2.14	%		4.53	%		3.87	%

Note: Short term borrowings include federal funds purchased from other banks and securities sold under agreements to repurchase and short term borrowings from the Federal Home Loan Bank.

25

SCHEDULE VII
Interest Sensitivity/Gap Analysis

December 31, 2008
(In thousands)	0 — 3 Months			4 — 12 Months			1 — 5 Years			Over 5 Years			Total
ASSETS:
Loans (1)	$	281,277		$	13,973		$	142,220		$	14,354		$	451,824
Available for sale securities		34,271			11,251			133,372			161,568			340,462
Held to maturity securities					195			1,844			1,355			3,394
Total assets	$	315,548		$	25,419		$	277,436		$	177,277		$	795,680
FUNDING SOURCES:
Interest bearing deposits	$	333,229		$	42,069		$	26,137		$	7		$	401,442
Federal funds purchased and securities sold under agreements to repurchase		226,609												226,609
Borrowings from FHLB		30,049			129			5,708			1,052			36,938
Total funding sources	$	589,887		$	42,198		$	31,845		$	1,059		$	664,989
REPRICING/MATURITY GAP:
Period	$	(274,339	)	$	(16,779	)	$	245,591		$	176,218
Cumulative		(274,339	)		(291,118	)		(45,527	)		130,691
Cumulative Gap/Total Assets		(30.60	%)		(32.48	)%		(5.08	)%		14.58	%

(1) Amounts stated include fixed and variable rate investments of the balance sheet that are still accruing interest. Variable rate instruments are included in the next period in which they are subject to a change in rate. The principal portions of scheduled payments on fixed rate instruments are included in periods in which they become due or mature.

26

Liquidity

The information included in Management’s Discussion and Analysis at page 5 in the 2008 Annual Report to Shareholders is incorporated herein by reference.

Capital Resources

The information included in Note J-Shareholders’ Equity in the 2008 Annual Report to Shareholders is incorporated herein by reference.

ITEM 1a-RISK FACTORS

An investment in the Company’s stock involves a number of risks. Investors should carefully consider the following risks as well as the other information in this Annual Report on Form 10-K and the documents incorporated by reference before making an investment decision. The realization of any of the risks described below could have a material adverse affect on the Company and the price of its common stock.

RISKS RELATING TO THE COMPANY’S BUSINESS

Greater than expected loan losses may adversely affect the Company’s earnings.

The Company’s investment and loan portfolio subject the Company to credit risk. Credit losses are always inherent in the banking business but the current economic downturn presents even more exposure to loss. The Company makes various assumptions and judgments about the collectibility of its loan portfolio and provides an allowance for estimated loan losses based on a number of factors. The Company believes that its current allowance for loan losses is adequate. However, if the Company’s assumptions or judgments prove to be incorrect, the allowance for loan losses may not be sufficient to cover actual loan losses. In the event that our loan customers do not repay their loans according to the terms of the loans, and the collateral securing the repayment of these loans is insufficient to cover any remaining loan balances, the Company could experience significant loan losses or increase the provision for loan losses or both, which could have a material adverse effect on its operating results. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.

The Company has a high concentration of loans secured by real estate, and a greater downturn in the real estate market could materially and adversely affect earnings.

A significant portion of the Company’s loan portfolio is dependent on real estate. At December 31, 2008, approximately 88% of the Company’s loans had real estate as a primary or secondary component of collateral. The collateral in each case provides an alternate source of repayment if the borrower defaults and may deteriorate in value during the time the credit is extended. A continued deterioration in the economy affecting the value of real estate generally or in the Company’s trade

27

area specifically could significantly impair the value of the collateral and the ability to sell the collateral upon foreclosure. Furthermore, it is likely that the Company would be required to increase the provision for loan losses. If the Company were required to liquidate the collateral securing a loan to satisfy the debt during this period of reduced real estate value or to increase the allowance for loan losses, the Company’s profitability and financial condition could be adversely impacted.

The Company has a high concentration of exposure to a number of industries.

The Company has concentrations of loan exposure to the hotel/motel and gaming industries. At December 31, 2008 these exposures were approximately $35,962,000 and $79,510,000 or 8% and 17%, respectively, of the total loan portfolio. The recent downturn in the economy has negatively impacted tourism, which is one of the major factors for success in these industries. Given the size of these relationships, a significant loss in either of these portfolios could materially and adversely affect the Company’s earnings.

The current economic downturn or a natural disaster, especially one affecting the Company’s trade area, could adversely affect the Company.

The Company’s primary trade area includes four of the six counties in south Mississippi. With the exception of a number of credits that are considered out of area, the Company’s credit exposure is generally limited to the Mississippi Gulf Coast. As a result, the Company is at risk from continuing adverse business developments in its trade area, including declining real estate value, increasing loan delinquencies, personal and business bankruptcies and unemployment rates. The Company is also at risk to weather-related disasters including hurricanes, floods and tornadoes. If the Mississippi Gulf Coast economy experiences a natural disaster or worsening economic conditions, our operating results could be negatively impact.

Current economic factors could negatively impact the Company’s liquidity.

In addition to funds provided by its banking activities such as deposits, loan payments and proceeds from the maturity of investment securities, the Company’s liquidity needs have traditionally been met through the purchase of federal funds, often on an unsecured basis, and advances from the Federal Home Loan Bank (“FHLB”). The recent disruption in the financial markets has negatively impacted the availability of these unsecured funds. As a result, the Company has increased its borrowing lines with the FHLB and has applied to participate through the Federal Reserve’s Discount Window to meet all of its liquidity needs.

The Company is subject to industry competition which may have an impact on its success.

The profitability of the Company depends on its ability to compete successfully. The Company operates in a highly competitive financial services environment. Certain competitors are larger and may have more resources than the Company. The Company faces competition in its trade area from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, insurance companies, brokerage and investment banking firms and other financial intermediaries. Some of these nonbank competitors are not subject to the same extensive regulations that govern the Company or the Bank and may have greater flexibility in competing for business.

28

Increased competition could require the Company to increase the rates paid on deposits or lower the rates offered on loans, which could adversely affect and also limit future growth and earnings prospects.

The Company’s profitability is vulnerable to interest rate fluctuations.

The Company’s profitability is dependent to a large extent on net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company is asset sensitive to market interest rates, as its assets reprice more quickly to changes in interest rates than do its liabilities. Interest rates dropped by the unprecedented amount of 400 basis points during 2008 as the Federal Reserve, through its Federal Open Market Committee, attempted to stabilize the financial markets, reduce the effects of the recession and stimulate the economy. These actions taken by the Federal Reserve greatly impacted the Company’s 2008 earnings, and may continue to do so in the future as rates will remain unchanged for the foreseeable future.

Changes in the policies of monetary authorities and other government action could adversely affect the Company’s profitability.

Many factors affect the demand for loans and the ability to attract deposits, including changes in government economic and monetary policies, particularly the Federal Reserve, modifications to tax, banking and credit laws and regulations, national, state and local economic growth rates, and unemployment rates. The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted in October of 2008 to address the asset quality, capital and liquidity issues facing certain financial institutions and to improve the general availability of credit for consumers and businesses. In addition, the American Recovery and Reinvestment Act (“ARRA”) was passed in February 2009 in an effort to save and create jobs, stimulate our national economy and promote long-term growth and stability. There can be no assurance that EESA or ARRA will achieve their intended purposes. Furthermore, their failure could result in continuing or worsening economic and market conditions, and this could adversely affect our operations.

The Company is subject to regulation by various federal and state entities.

The Company is subject to the regulations of the Securities and Exchange Commission (“SEC”), the Federal Reserve Board, the FDIC and the Department of Banking. New regulations issued by these agencies may adversely affect the Company’s ability to carry on its business activities. The Company is also subject to various other federal and state laws and certain changes in these laws and regulations may adversely affect the Company’s operations. Noncompliance with certain of these regulations may impact the Company’s business plans.

The Company is also subject to the accounting rules and regulations of the SEC and the Financial Accounting Standards Board. Changes in accounting rules could adversely affect the reported financial statements or results of operations of the Company and may also require additional effort or cost to implement.

29

The Company is subject to the requirements under The Sarbanes-Oxley Act of 2002 with respect to the assessment of internal controls over financial reporting.

The Company’s management is required to report on, and the independent auditors to attest to, the effectiveness of internal controls over financial reporting for each fiscal year end. The rules governing the standards that must be met for management to assess internal controls are complex and require significant documentation and testing. In connection with this effort, the Company has and will continue to incur increased expenses and diversion of Management’s time and other internal resources. In connection with the attestation process by the Company’s independent auditors, Management may encounter problems or delays in completing the implementation for any requested improvements and receiving a favorable attestation. If the Company cannot make the required report, or if the Company’s external auditors are unable to provide an unqualified attestation, investor confidence and the Company’s common stock could be adversely affected.

The Company is subject to anti-terrorism and money laundering legislation.

The Company is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (the “USA PATRIOT Act”), the Bank Secrecy Act, and rules and regulations of the Office of Foreign Assets Control (the “OFAC”). These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism financing. Noncompliance with these rules and regulations may adversely affect the Company’s operations and may impact the Company’s business plans.

The Company relies heavily on technology and computer systems, and advances and changes in technology could significantly affect business.

The Company’s ability to compete depends on the ability to continue to adapt technology on a timely and cost-effective basis to meet customers’ demands. In addition, the Company’s operations are susceptible to negative effects from computer system failures, communication and energy disruption and unethical individuals with the technological ability to cause disruptions or failures of data processing systems.

RISKS RELATING TO AN INVESTMENT IN THE COMPANY’S COMMON STOCK

Securities issued by the Company are not FDIC insured.

The Company’s common stock is not a savings or deposit account or other obligation of the Bank and is not insured by the FDIC, the Bank Insurance Fund or any other government agency or instrumentality, or any private insurer and is subject to investment risk, including the possible loss of principal.

30

The directors of the Company and executive management own a significant number of shares of stock, allowing further control over business and corporate affairs.

The Company’s directors and executive officers beneficially own approximately 20% of the outstanding common stock of Peoples Financial Corporation. As a result, in addition to their day-to-day management roles, they will be able to exercise significant influence on the Company’s business as shareholders, including influence over election of the Board and the authorization of other corporate actions requiring shareholder approval.

Provisions of the Company’s articles of incorporation and bylaws, Mississippi law and state and federal banking regulations could delay or prevent a takeover by a third party.

Certain provisions of the Company’s articles of incorporation and bylaws and of state and federal law may make it more difficult for someone to acquire control of the Company. Under federal law, subject to certain exemptions, a person, entity or group must notify the federal banking agencies before acquiring 10% or more of the outstanding voting stock of a bank holding company, including the Company’s shares. Banking agencies review the acquisition to determine if it will result in a change of control. The banking agencies have 60 days to act on the notice, and take in to account several factors, including the resources of the acquirer and the antitrust effects of the acquisition. There are also Mississippi statutory provisions and provisions in the Company’s articles of incorporation and bylaws that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in the Company’s articles and bylaws could result in the Company being less attractive to a potential acquirer.

The Company’s future ability to pay dividends is subject to restrictions.

Since the Company is a holding company with no significant assets other than the Bank, the Company has no material source of funds other than dividends received from the Bank. Therefore, the ability to pay dividends to the shareholders will depend on the Bank’s ability to pay dividends to the Company. Moreover, banks and bank holding companies are both subject to certain federal and state regulatory restrictions on cash dividends.

ITEM 1b — UNRESOLVED STAFF COMMENTS

None.

31

ITEM 2 — PROPERTIES

The principal properties of the Company are its 16 business locations, including the Main Office, which is located at 152 Lameuse Street, Biloxi, MS, 39530. All such properties are owned by the Company. The address of the other branch locations are:

Bay St. Louis Office	408 Highway 90 East, Bay St. Louis, MS 39520
Cedar Lake Office	1740 Popps Ferry Road, Biloxi, MS 39532
Diamondhead Office	5429 West Aloha Drive, Diamondhead, MS 39525
D’Iberville-St. Martin Office	10491 Lemoyne Boulevard, D’Iberville, MS 39540
Downtown Gulfport Office	1105 30th Avenue, Gulfport, MS 39501
Gautier Office	2609 Highway 90, Gautier, MS 39553
Handsboro Office	412 E. Pass Road, Gulfport, MS 39507
Long Beach Office	298 Jeff Davis Avenue, Long Beach, MS 39560
Ocean Springs Office	2015 Bienville Boulevard, Ocean Springs, MS 39564
Orange Grove Office	12020 Highway 49 North, Gulfport, MS 39503
Pass Christian Office	301 East Second Street, Pass Christian, MS 39571
Saucier Office	17689 Second Street, Saucier, MS 39574
Waveland Office	470 Highway 90, Waveland, MS 39576
West Biloxi Office	2560 Pass Road, Biloxi, MS 39531
Wiggins Office	1312 S. Magnolia Drive, Wiggins, MS 39577

ITEM 3 — LEGAL PROCEEDINGS

The information included in Note M to the Consolidated Financial Statements included in the 2008 Annual Report to Shareholders is incorporated herein by reference.

ITEM 4 — SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS

None.

PART II

ITEM 5 — MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The information provided on page 31 of the 2008 Annual Report is incorporated herein by reference.

32

The graph below compares the Company’s annual percentage change in cumulative total shareholder return on common shares over the last five years with the cumulative total return of a broad equity market index of companies, the NASDAQ Market Index, and a peer group consisting of the Hemscott Industry Group 413-Regional Southeast Banks. This presentation assumes that $100 was invested in shares of the relevant issuers on January 1, 2004, and that dividends received were immediately invested in additional shares. The graph plots the value of the initial $100 investment at one year intervals. For purposes of constructing this data, the returns of each component issuer have been weighted according to that issuer’s market capitalization.

ITEM 6 — SELECTED FINANCIAL DATA

The information under the caption “Five Year Comparative Summary of Selected Financial Information” on page 30 of the 2008 Annual Report is incorporated herein by reference.

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 1-7 of the 2008 Annual Report is incorporated herein by reference.

33

The Company’s long-term contractual obligations relate to its borrowings from the Federal Home Loan Bank and the maturities of certificates of deposits. Information relating the maturity of these obligations is found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 7 of the 2008 Annual Report and is incorporated by reference and in Notes E and G on pages 18 and 19 of the 2008 Annual Report and is incorporated by reference.

ITEM 7a — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The information under the caption “Quantitative and Qualitative Disclosures about Market Risk” on pages 6 — 7 of the 2008 Annual Report is incorporated herein by reference.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The following consolidated financial statements of the Company and consolidated subsidiaries and the independent auditors’ report appearing on pages 8-29 of the 2008 Annual Report are incorporated herein by reference:
Consolidated Statements of Condition on page 8
Consolidated Statements of Income on page 9
Consolidated Statements of Shareholders’ Equity on page 10-11
Consolidated Statements of Cash Flows on page 12
Notes to Consolidated Financial Statements on pages 13-27
Report of Independent Registered Public Accounting Firm on page 28-29

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9a — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
As of December 31, 2008, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

34

Management’s Report on Internal Controls Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13(a)-15 (f) of the Securities Exchange Act of 1934. In meeting its responsibility, management relies on its accounting and other related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misappropriation.

Management of the Company, including its Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal control over financial reporting as of December 31, 2008, using the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our assessment included a review of the documentation of controls, evaluations of the design of the internal control system and tests of operating effectiveness of the internal controls. Based on the assessment, management has concluded that the Company had effective internal control over financial reporting as of December 31, 2008.

Chevis C. Swetman	Lauri A. Wood
Chairman, President and Chief Executive Officer	Chief Financial Officer
March 3, 2009	March 3, 2009

ITEM 9b — OTHER INFORMATION

None.

PART III

ITEM 10 — DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information in Sections II, VII, VIII, IX and XI contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 15, 2009, which was filed by the Company in definitive form with the Commission on March 13, 2009, is incorporated herein by reference.

The Company’s Board of Directors has adopted a Code of Conduct that applies to not only the chief executive officer and the chief financial officer, but also all of the officers, directors and employees of the Company and its subsidiaries. A copy of this Code of Conduct can be found at the Company’s internet website at www.thepeoples.com. The Company intends to disclose any amendments to its Code of Conduct, and any waiver from a provision of the Code of Conduct granted to the Company’s chief executive officer or chief financial officer on the Company’s internet website within five business days following such amendment or waiver. The information contained on or connected to

35

the Company’s internet website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report that the Company may file with or furnish to the SEC.

ITEM 11 — EXECUTIVE COMPENSATION

The information in Section V contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 15, 2009, which was filed by the Company in definitive form with the Commission on March 13, 2009, is incorporated herein by reference.

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information in Sections III and IV contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 15, 2009, which was filed by the Company in definitive form with the Commission on March 13, 2009, is incorporated herein by reference.

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in Sections V, VI, VII and IX contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 15, 2009, which was filed by the Company in definitive form with the Commission on March 13, 2009, is incorporated herein by reference.

ITEM 14 — PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information in Section XII contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 15, 2009, which was filed by the Company in definitive form with the Commission on March 13, 2009, is incorporated herein by reference.

36

PART IV

ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	1. Index of Financial Statements:
	See Item 8.
(a)	2. Index of Financial Statement Schedules:
	All other schedules have been omitted as not applicable or not required or because the information has been included in the financial statements or applicable notes.

37

(a) 3. Index of Exhibits:

		Incorporated by
		Reference to
		Registration or	Form of	Date of	Exhibit Number in
	Description	File Number	Report	Report	Report
(3.1)	Articles of Incorporation	0-30050	10/a	6/21/99		3.1
(3.2)	By-Laws	0-30050	10/a	6/21/99		3.2
(10.1)	Description of Automobile Plan	0-30050	10-K	12/31/03		10.1
(10.2)	Directors’ Deferred Income Plan Agreements	0-30050	10-K	12/31/03		10.2
(10.3)	Executive Supplemental Income Plan Agreement-Chevis C. Swetman	001-12103	10-Q	9/30/07		10.2
(10.4)	Executive Supplemental Income Plan Agreement-A. Wes Fulmer	001-12103	10-Q	9/30/07		10.3
(10.5)	Executive Supplemental Income Plan Agreement-Lauri A. Wood	001-12103	10-Q	9/30/07		10.4
(10.5)	Split Dollar Plan Agreements	0-30050	10-K	12/31/03		10.4
(10.6)	Deferred Compensation Plan	001-12103	10-Q	9/30/07		10.1
(10.7)	Description of Stock Incentive Plan	33-15595	10-K	12/31/01		10.6
(13.1)	Annual Report to Shareholders for year ended December 31, 2008 * (A)
(13.2)	Summary Report to Shareholders for year ended December 31, 2008 (A)
(21)	Subsidiaries of the registrant	33-15595	10-K	12/31/88		22
(23.1)	Consent of Independent Registered Public Accounting Firm-Porter Keadle Moore, LLP *
(31.1)	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

38

		Incorporated by
		Reference to
		Registration or	Form of	Date of	Exhibit Number in
	Description	File Number	Report	Report	Report
(31.2)	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
(32.1)	Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350*
(32.2)	Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350*
(99.1)	Letter Application for Exemption under Authority Given By Section 12(h) of the Exchange Act.	81-00935	34-12H	3/10/06

(A)	Furnished for the information of the Commission only and not deemed “filed” except for those portions which are specifically incorporated herein.
*	Filed herewith.

39

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PEOPLES FINANCIAL CORPORATION
(Registrant)

Date: March 13, 2009
BY:	/s/ Chevis C. Swetman
	Chevis C. Swetman, Chairman of the Board
	(principal executive officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

BY:	/s/ Chevis C. Swetman
Date:	March 13, 2009
	Chevis C. Swetman, Chairman, President and CEO (principal executive officer)

BY:	/s/ Drew Allen	BY:	/s/ Dan Magruder
Date:	March 13, 2009	Date:	March 13, 2009
	Drew Allen, Director		Dan Magruder, Director
BY:	/s/ Rex E. Kelly	BY:	/s/ Lyle M. Page
Date:	March 13, 2009	Date:	March 13, 2009
	Rex E. Kelly, Director		Lyle M. Page, Director
		BY:	/s/ Lauri A. Wood
		Date:	March 13, 2009
			Lauri A. Wood, Chief Financial Officer (principal financial and accounting officer)

40

EX-13.1

PEOPLES FINANCIAL CORPORATION
AND SUBSIDIARIES

2008 ANNUAL REPORT

THIS PAGE LEFT BLANK
INTENTIONALLY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, MS. The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2008, 2007 and 2006. These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report.

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

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 are the traditional focus of the Company. Growth has largely been achieved through de novo activity, and it is expected that these principles will continue to be emphasized.

With the focus of our core business being on the Mississippi Gulf Coast, the local economy impacts the Company’s business. Additionally, the Company is impacted by national economic trends, as the actions taken by the Federal Reserve touch all financial institutions. The interest rate reductions, decline in value of real estate and general economic downturn have affected the Company’s results in 2008. Managing the net interest margin in the Company’s highly competitive market and in context of the larger national economic conditions has been very challenging and will continue to be so for the foreseeable future.

Total assets decreased to $896,407,501 at December 31, 2008 from $927,356,573 at December 31, 2007. This decrease was primarily attributable to the net decrease in available for sale securities of $45,566,853 during 2008. Investment securities with a par value of more than $184,000,000 were called during the year, with proceeds from these calls funding loan demand and liquidity needs. Any excess funds were primarily reinvested in U.S. Agency securities.

During 2008, non-performing loans, particularly non-accrual loans, increased significantly. This increase was primarily the result of the deterioration in the performance of a small number of residential development loans. A provision for loans losses of $1,549,000, net of taxes, was recorded in 2008, largely as a result of these loans. During 2007, the Company recorded a negative provision of $679,000, net of taxes, as it effectively reversed a portion of the reserve established after Hurricane Katrina.

Net income for 2008 was $5,033,690 as compared with $11,026,129 for 2007. In addition to the impact of the provision for loan losses during 2008, the Company realized a loss of $1,956,000, net of taxes, from the other-than-temporary impairment of the Company’s investment in Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock. Earnings for 2007 were impacted by the negative provision for loan losses.

1

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 Open Market Committee (the “Committee”), a component of the Federal Reserve System, is charged under United States law with overseeing the nation’s open market operations by making key decisions about interest rates and the growth of the United States money supply. In managing the current conditions in 2006, the Committee increased the discount rate by a total of 100 basis points by June 30 of that year and did not adjust rates again until September of 2007, when the decision was made to begin decreasing interest rates. During 2008, the Committee dropped the discount rate by a total of 400 basis points. The Committee’s actions were a part of the U.S. Government’s larger plan to stabilize the financial markets and stimulate the national economy and flow of capital. The impact of these rate fluctuations was significant to the Company’s financial condition and results of operations as changes in the discount rate typically result in corresponding changes in the prime rate.

2008 as compared with 2007

The Company’s average interest-earning assets decreased approximately $68,296,000, or 8%, from approximately $873,138,000 for 2007 to approximately $804,842,000 for 2008. As a direct result of the Committee’s rate reductions, available for sale securities with a par value of $184,000,000 were called during 2008.

Also as a result of the Committee’s actions, the average yield on earning assets decreased 98 basis points, from 6.46% for 2007 to 5.48% for 2008. 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. In addition, the proceeds from the called securities that were reinvested in similar securities were at lower interest rates.

Average interest-bearing liabilities decreased approximately $51,179,000, or 7%, from approximately $715,917,000 for 2007 to approximately $664,738,000 for 2008. The average rate paid on interest-bearing liabilities decreased 131 basis points, from 3.56% for 2007 to 2.25% for 2008.

The Company’s trade area generally experiences a very competitive interest rate environment for deposits. During the last two quarters of 2007 and continuing into 2008, this competition ramped up significantly. In some cases, the Company chose to not match higher rates offered to our customers by competitors. This strategy has resulted in a favorable improvement in the yield on interest-bearing liabilities as well as an overall reduction in total deposits.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.62% at December 31, 2008, up 7 basis points from 3.55% at December 31, 2007.

2007 as compared with 2006

The Company’s average interest-earning assets increased approximately $53,935,000, or 7%, from approximately $819,203,000 for 2006 to approximately $873,138,000 for 2007. The large increase in funds from deposit and funds management account growth during 2005 and 2006 funded the overall increase in total assets. More specifically, these funds were invested in loans and U.S. Agency securities.

The average yield on earning assets increased 44 basis points, from 6.02% for 2006 to 6.46% for 2007. The Company’s sensitivity to market interest rates caused the increase in interest income.

Average interest-bearing liabilities increased approximately $70,846,000, or 11%, from approximately $645,071,000 for 2006 to approximately $715,917,000 for 2007. The average rate paid on interest-bearing liabilities increased 65 basis points, from 2.91% for 2006 to 3.56% for 2007.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.55% at December 31, 2007, down 18 basis points from 3.73% at December 31, 2006.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the years ended December 31, 2008 and 2007 and the years ended December 31, 2007 and 2006.

2

ANALYSIS OF AVERAGE BALANCES, INTEREST EARNED/PAID AND YIELD (IN THOUSANDS)

	2008						2007
	Average Balance		Interest Earned/Paid		Rate		Average Balance		Interest Earned/Paid		Rate
Loans (2) (3)	$	463,505	$	26,874		5.80	$	428,447	$	33,642		7.85
Federal Funds Sold		5,694		122		2.14		5,763		295		5.12
Held to maturity:
Taxable								21,443		1,082		5.05
Non taxable (1)		3,691		230		6.23		4,780		302		6.32
Available for sale:
Taxable		304,536		15,331		5.03		388,577		19,822		5.10
Non taxable (1)		24,394		1,433		5.87		18,864		1,109		5.88
Other		3,022		148		4.90		5,264		199		3.78
Total	$	804,842	$	44,138		5.48	$	873,138	$	56,451		6.46
Savings and demand, interest bearing	$	251,792	$	3,856		1.53	$	268,710	$	5,358		1.99
Time deposits		191,904		6,094		3.18		213,167		9,356		4.39
Federal funds purchased and securities sold under agreements to repurchase		210,049		4,521		2.15		225,246		10,212		4.53
Borrowings from FHLB		10,993		492		4.48		8,794		526		5.98
Total	$	664,738	$	14,963		2.25	$	715,917	$	25,452		3.56
Net tax-equivalent yield on earning assets						3.62						3.55

	2007						2006
	Average Balance		Interest Earned/Paid		Rate		Average Balance		Interest Earned/Paid		Rate
Loans (2) (3)	$	428,447	$	33,642		7.85	$	377,172	$	28,735		7.62
Federal Funds Sold		5,763		295		5.12		15,440		778		5.04
Held to maturity:
Taxable		21,443		1,082		5.05		137,707		6,449		4.68
Non taxable (1)		4,780		302		6.32		5,791		401		6.92
Available for sale:
Taxable		388,577		19,822		5.10		262,940		11,886		4.52
Non taxable (1)		18,864		1,109		5.88		15,213		897		5.90
Other		5,264		199		3.78		4,940		189		3.83
Total	$	873,138	$	56,451		6.46	$	819,203	$	49,335		6.02
Savings and demand, interest bearing	$	268,710	$	5,358		1.99	$	303,239	$	5,408		1.78
Time deposits		213,167		9,356		4.39		154,956		5,977		3.86
Federal funds purchased and securities sold under agreements to repurchase		225,246		10,212		4.53		178,663		6,916		3.87
Borrowings from FHLB		8,794		526		5.98		8,213		484		5.89
Total	$	715,917	$	25,452		3.56	$	645,071	$	18,785		2.91
Net tax-equivalent yield on earning assets						3.55						3.73

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2008 and 35% in 2007 and 2006.
(2)	Loan fees of $786, $854 and $592 for 2008, 2007 and 2006, respectively, are included in these figures.
(3)	Includes nonaccrual loans.

3

Provision for Loan Losses

In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy (the “policy”), which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. A loan review process further assists with evaluating credit quality and assessing potential performance issues. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. In addition, the Company continuously monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area loans and commercial real estate concentrations, and their direct and indirect impact on its operations. A watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation.

Hurricane Katrina hit the Mississippi Gulf Coast on August 29, 2005, potentially impacting the continued performance of loans within the Company’s trade area. Based on an evaluation using existing methodology conducted after the storm, the Company recorded a provision for loan losses of $5,055,000 during the third quarter of 2005. The Company continued to closely monitor its portfolio during the quarters that followed, considering the impact of federal assistance, insurance availability and affordability, the pace of recovery, increasing construction costs and the length of time which has passed since August of 2005. Based on these factors and its ongoing analysis, the Company recorded a negative provision of $1,250,000 during the third quarter of 2007, effectively reversing approximately 25% of the provision recorded in 2005.

The credit crisis our nation is now facing has affected the Company’s loan portfolio. Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and identify potential losses. During 2008, this on-going, systematic evaluation identified potential losses and resulted in the Company recording a provision of $2,347,000, of which $1,180,000 relates to two residential development loans with a total outstanding balance of $10,542,809.

The allowance for loan losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in future quarters which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations.

Non-interest income

Total non-interest income decreased $2,499,043 in 2008 as compared with 2007. During 2008, the Company recorded a charge to earnings for the other-than-temporary impairment of its investment in FHLMC preferred stock of $2,964,000. During 2008, a gain of $397,852 from sales, calls and liquidation of available for sale securities was recorded as compared with a loss of $605,813 from such activity in 2007. Also during 2008, the Company recorded a loss of $270,676 from its investment in a low income housing partnership.

Total non-interest income decreased $2,541,197 for 2007 as compared with 2006. During 2006, a gain of $3,792,942 was realized as a result of the settlement of the Company’s insurance claims arising from the significant damage to six of the bank subsidiary’s branch locations during Hurricane Katrina in 2005. During 2007, an increase in service charges on deposit accounts was attributable to an increase in the number of ATMs, an increase in the number of ATM transactions, an increase in per transaction ATM surcharge fees and the increase in per transaction NSF fees.

Non-interest expense

Total non-interest expense increased $1,257,896 for 2008 as compared with 2007. Equipment rentals, depreciation and maintenance expense increased by $645,221 in 2008, primarily as a result of depreciation expense on banking premises which were placed into service after March 31, 2007. Other expense increased $601,086 during 2008 primarily as a result of an increase in accounting and legal fees of $537,645. These increases were the result of the outsourcing of the I/T internal audit function, an increase in external audit fees and legal fees associated with litigation and other matters in the ordinary course of the Company’s business.

Total non-interest expense increased $2,212,806 for 2007 as compared with 2006. Expenses associated with salaries and employee benefits increased $1,251,424 as the Company increased salaries and incentives to its employees in order to reward performance and retain personnel. Additionally, a reduction in the discount rate used in computing the liability for deferred compensation plans provided to certain officers and directors resulted in an increase in the accrual for such liabilities in 2007. During 2007, increased expenses of $748,000 related to the costs associated with ATM activity.

FINANCIAL CONDITION

Available for sale securities decreased $45,566,853 at December 31, 2008, compared with December 31, 2007. The Federal Reserve reduced interest rates by 400 basis points during 2008, which resulted in more than $184,000,000 of the Company’s U.S. Agency securities being called during the year. Proceeds from these calls have provided funding for lending and liquidity requirements, and excess funds have been invested in U.S. Agency securities.

The Company’s held to maturity portfolio was invested solely in debt securities issued by state and political subdivisions at December 31, 2008 and December 31, 2007. The decrease in these securities of $1,235,780 since December 31, 2007 is the result of maturities.

During 2008, the Company invested $3,160,000 as the limited partner in an investment in low-income housing in its trade area.

Gross loans increased $16,384,965 at December 31, 2008 as compared with December 31, 2007. The Company’s real estate portfolio increased $50 million during 2008. Approximately 40%, or $20 million of this increase, was in improved property which is commercial owner-occupied and/or income producing real estate. The commercial and industrial loan portfolio decreased $33 million as several large loans paid off during the third quarter of 2008.

Interest-earning assets, particularly available for sale securities, have decreased since January 1, 2008 along with a decrease in interest rates earned on these assets. These trends directly impact accrued interest receivable, which decreased $1,926,449 during 2008.

Total deposits decreased $58,654,943 at December 31, 2008, as compared with December 31, 2007. Fluctuations among the different types of deposits represent recurring activity for the Company. Since December 31, 2007, however, time deposits of $100,000 or more have decreased by $61,538,361. This significant decrease primarily resulted from the Company’s decision to not match higher rates offered to our customers by competitors. The Company anticipates that deposits will continue at or near their present level during 2009.

4

Borrowings from the Federal Home Loan Bank increased $29,837,381 at December 31, 2008 as compared with December 31, 2007. During the fourth quarter of 2008, the Company increased its borrowing lines with the Federal Home Loan Bank in order to expand its liquidity options.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. The primary and risk-based capital ratios are important indicators of the strength of a Company’s capital. These figures are presented in the Five-Year Comparative Summary of Selected Financial Information.

The measure of capital adequacy which is currently used by Management to evaluate the strength of the Company’s capital is the primary capital ratio which was 12.81% at December 31, 2008, which is well above the regulatory minimum of 6.00%. Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of maintaining its primary capital ratio at 8.00%, which is the minimum requirement for classification as being “well-capitalized” by the banking regulatory authorities.

During 2008, significant transactions affecting shareholders’ equity are described in Note J. The Statement of Shareholders’ Equity also presents all activity in the Company’s equity accounts.

LIQUIDITY

Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Note L discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Management monitors these funding requirements in such a manner as to satisfy these demands and to provide the maximum return on its earning assets.

The Company monitors its liquidity position diligently through a number of methods, including through the computation of liquidity and dependency ratios on a monthly basis. The formula for these ratios are those used for the Uniform Bank Performance Report, such that the Company may monitor and evaluate its own risk, but also compare itself to its peers. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits, and the Company has encountered no problems with meeting its liquidity needs.

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. The Company also uses other sources of funds, including borrowings from the Federal Home Loan Bank. The Company generally anticipates relying on deposits, purchases of federal funds and advances from the Federal Home Loan Bank for its liquidity needs in 2009. Proceeds from the large number of calls of investment securities since January 1, 2008 are also currently being used for liquidity needs. The Company has applied for eligibility to participate through the Federal Reserve’s Discount Window.

OFF — BALANCE SHEET ARRANGEMENTS

The Company is a party to off-balance-sheet arrangements in the normal course of business to meet the financing needs of its customers. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet arrangements. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amount does not necessarily represent future cash requirements. As discussed previously, the Company carefully monitors its liquidity needs and considers its cash requirements, especially for loan commitments, in making decisions on investments and obtaining funds from its other sources. Further information relating to off-balance-sheet instruments can be found in Note L.

EMERGENCY ECONOMIC STABILIZATION ACT

The Emergency Economic Stabilization Act of 2008 (the “Act”) was enacted on October 3, 2008. The purpose of this law is to restore liquidity and stability to the financial system, while minimizing any potential long term negative impact on taxpayers. The law authorizes the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation’s banks. The program under which the asset purchase will be administered is referred to as the Troubled Asset Relief Program (“TARP”). The Company did not participate in TARP.

The Act also temporarily raises the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The higher insurance limits took effect immediately and will be in effect through December 31, 2009. Additionally, the Federal Deposit Insurance Corporation (“FDIC”) announced on October 14, 2008, a new program, the Temporary Liquidity Guarantee Program (“TLGP”), which guarantees newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and provides full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. The program provides a three year guarantee of newly issued debt and increased insurance coverage through December 31, 2009. This two-pronged program will be funded through special fees paid by the participating financial institutions. The Company is participating in both programs available under TLGP. The Company did not have outstanding senior unsecured debt at December 31, 2008. Participation in the TLGP requires the payment of additional assessments to the FDIC.

The quarterly assessment rate paid by the Company’s bank subsidiary will increase in 2009 as a result of the FDIC’s normal funding requirements. This increase, along with the additional assessment required by the TLGP, will not be material to the Company’s results of operations.

5

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices and rates. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities. Also, the Company does not currently, and has no plans to, engage in trading activities or use derivative or off-balance sheet instruments to manage interest rate risk.

The Company has risk management policies in place to monitor and limit exposure to market risk. The Asset/Liability Committee (“ALCO Committee”), whose members include the chief executive officer and senior and middle management from the financial, lending, investing, and deposit areas, is responsible for the day-to-day operating guidelines, approval of strategies affecting net interest income and coordination of activities within policy limits established by the Board of Directors based on the Company’s tolerance for risk. Specifically, the key objectives of the Company’s asset/liability management program are to manage the exposure of planned net interest margins to unexpected changes due to interest rate fluctuations. These efforts will also affect loan pricing policies, deposit interest rate policies, asset mix and volume guidelines and liquidity. The ALCO Committee utilizes a number of tools in its activities, including software to assist with interest rate risk management and balance sheet management. The ALCO Committee reports to the Board of Directors on a quarterly basis.

The Company has implemented a conservative approach to its asset/liability management. The net interest margin is managed on a daily basis largely as a result of the management of the liquidity needs of the bank subsidiary. The Company generally follows a policy of investing in short term U.S. Treasury Bills and U.S. Agency securities with maturities of two years or less. Due to the low interest rate environment, the duration of investments has been extended to seven years or less with call provisions. The loan portfolio consists of a 40%/60% blend of fixed and floating rate loans. It is the general loan policy to offer loans with maturities of five years or less; however the market is now dictating floating rate terms to be extended to fifteen years. On the liability side, more than 68% of the deposits are demand and savings transaction accounts. Additionally, more than 80% of the certificates of deposit mature within eighteen months. Since the Company’s deposits are generally not rate-sensitive, they are considered to be core deposits. The short term nature of the financial assets and liabilities allows the Company to meet the dual requirements of liquidity and interest rate risk management.

The interest rate sensitivity tables on the next page provide additional information about the Company’s financial instruments that are sensitive to changes in interest rates. The negative gap in 2009 is mitigated by the nature of the Company’s deposits, whose characteristics have been previously described. The tabular disclosure reflects contractual interest rate repricing dates and contractual maturity dates. Loan maturities have been adjusted for reserve for loan losses. There have been no adjustments for such factors as prepayment risk, early calls of investments, the effect of the maturity of balloon notes or the early withdrawal of deposits. The Company does not believe that the aforementioned factors have a significant impact on expected maturity.

6

Interest rate sensitivity at December 31, 2008 was as follows (in thousands):

																						12/31/08
																						FAIR
	2009			2010			2011			2012			2013			BEYOND			TOTAL			VALUE
Loans, net	$	293,576		$	33,159		$	46,649		$	37,308		$	28,744		$	16,827		$	456,263		$	461,113
Average rate		4.23	%		6.27	%		6.03	%		6.21	%		6.92	%		5.17	%		5.80	%
Securities		45,717			45,286			35,065			24,812			30,053			168,883			349,816			349,860
Average rate		3.44	%		2.67	%		4.08	%		4.40	%		3.83	%		5.40	%		4.42	%
Total Financial Assets		339,293			78,445			81,714			62,120			58,797			185,710			806,079			810,973
Average rate		4.14	%		4.95	%		5.37	%		5.63	%		5.79	%		5.38	%		5.29	%
Interest Bearing Deposits		375,298			20,276			3,290			1,455			1,116			7			401,442			402,361
Average rate		1.80	%		3.43	%		3.69	%		3.83	%		3.15	%		2.82	%		2.01	%
Federal funds purchased and securities sold under agreements to repurchase		226,609																		226,609			226,609
Average rate		1.25	%																	1.25	%
Long-term funds		30,178			5,177			177			177			177			1,052			36,938			37,547
Average rate		0.80	%		6.46	%		4.86	%		4.86	%		4.86	%		4.86	%		4.18	%
Total Financial Liabilities		632,085			25,453			3,467			1,632			1,293			1,059			664,989			666,517
Average rate		1.62	%		4.41	%		3.77	%		3.97	%		3.50	%		4.85	%		2.11	%

Interest rate sensitivity at December 31, 2007 was as follows (in thousands):

																						12/31/07
																						FAIR
	2008			2009			2010			2011			2012			BEYOND			TOTAL			VALUE
Loans, net	$	288,348		$	62,692		$	20,709		$	30,331		$	32,107		$	7,427		$	441,614		$	439,694
Average rate		7.51	%		6.27	%		6.77	%		7.17	%		7.88	%		7.07	%		7.85	%
Securities		62,995			43,846			61,615			38,267			42,245			143,627			392,595			392,641
Average rate		4.56	%		4.61	%		4.35	%		5.08	%		5.01	%		5.63	%		5.07	%
Total Financial Assets		351,343			106,538			82,324			68,598			74,352			151,054			834,209			832,335
Average rate		7.17	%		5.71	%		5.18	%		6.18	%		6.57	%		5.72	%		6.84	%
Interest Bearing Deposits		434,515			14,133			3,556			1,806			1,204						455,214			456,490
Average rate		3.33	%		3.83	%		4.04	%		4.37	%		4.37	%					3.36	%
Federal funds purchased and securities sold under agreements to repurchase		231,225																		231,225			231,225
Average rate		4.53	%																	4.53	%
Long-term funds		172			178			5,177			177			177			1,219			7,100			7,811
Average rate		4.86	%		4.86	%		6.50	%		4.86	%		4.86	%		4.86	%		5.98	%
Total Financial Liabilities		665,912			14,311			8,733			1,983			1,381			1,219			693,539			695,526
Average rate		3.83	%		3.84	%		5.75	%		4.42	%		4.44	%		4.85	%		3.87	%

7

DECEMBER 31,	2008		2007		2006
Assets
Cash and due from banks	$	34,015,590	$	34,665,370	$	37,793,493
Federal funds sold		4,000		270,000		6,400,000
Available for sale securities		340,462,072		386,028,925		396,907,489
Held to maturity securities, fair value of $3,438,108 — 2008; $4,676,471 — 2007; $85,518,999 — 2006		3,394,212		4,629,992		85,574,260
Other investments		3,889,324		1,000,000		300,000
Federal Home Loan Bank Stock, at cost		2,070,700		936,200		1,128,500
Loans		467,377,039		450,992,074		401,194,010
Less: Allowance for loan losses		11,113,575		9,378,137		10,841,367
Loans, net		456,263,464		441,613,937		390,352,643
Bank premises and equipment, net of accumulated depreciation		33,600,170		34,410,789		19,658,585
Accrued interest receivable		5,444,767		7,371,216		8,142,230
Cash surrender value of life insurance		14,688,160		13,578,536		12,984,602
Other assets		2,575,042		2,851,608		4,781,266
Total assets	$	896,407,501	$	927,356,573	$	964,023,068
Liabilities & Shareholders’ Equity
Liabilities:
Deposits:
Demand, non- interest bearing	$	109,033,184	$	113,916,041	$	148,455,754
Savings and demand, interest bearing		239,990,238		231,435,685		271,331,272
Time, $100,000 or more		104,540,112		166,078,473		132,846,509
Other time deposits		56,912,002		57,700,280		60,536,259
Total deposits		510,475,536		569,130,479		613,169,794
Federal funds purchased and securities sold under agreements to repurchase		226,609,231		231,225,118		226,032,370
Borrowings from Federal Home Loan Bank		36,937,686		7,100,305		7,267,349
Other liabilities		15,384,934		13,359,047		19,320,860
Total liabilities		789,407,387		820,814,949		865,790,373
Shareholders’ Equity:
Common Stock, $1 par value, 15,000,000 shares authorized, 5,279,268, 5,420,204 and 5,548,199 shares issued and outstanding at December 31, 2008, 2007 and 2006, respectively		5,279,268		5,420,204		5,548,199
Surplus		65,780,254		65,780,254		65,780,254
Undivided profits		33,412,596		34,458,291		29,253,825
Accumulated other comprehensive income, net of tax		2,527,996		882,875		(2,349,583	)
Total shareholders’ equity		107,000,114		106,541,624		98,232,695
Total liabilities and shareholders’ equity	$	896,407,501	$	927,356,573	$	964,023,068

See Notes to Consolidated Financial Statements.

8

YEARS ENDED DECEMBER 31,	2008			2007			2006
Interest income:
Interest and fees on loans	$	26,874,057		$	33,642,030		$	28,735,424
Interest and dividends on securities:
U.S. Treasury		2,972,851			4,320,309			5,725,317
U.S. Government agencies		10,625,314			15,519,419			12,610,083
Mortgage-backed securities		1,733,026			1,064,149
States and political subdivisions		1,097,790			931,292			856,450
Other securities		148,328			198,968			188,965
Interest on federal funds sold		122,066			294,812			777,742
Total interest income		43,573,432			55,970,979			48,893,981
Interest expense:
Deposits		9,950,478			14,713,824			11,384,540
Long-term borrowings		492,048			526,369			484,398
Federal funds purchased and securities sold under agreements to repurchase		4,520,821			10,212,201			6,915,690
Total interest expense		14,963,347			25,452,394			18,784,628
Net interest income		28,610,085			30,518,585			30,109,353
Provision for allowance for losses on loans		2,347,000			(1,045,000	)		141,000
Net interest income after provision for allowance for losses on loans		26,263,085			31,563,585			29,968,353
Non-interest income:
Trust department income and fees		1,637,747			1,791,417			1,670,063
Service charges on deposit accounts		6,793,404			6,709,142			5,407,901
Gain (loss) on liquidation, sale and calls of securities		397,852			(605,813	)
Writedown of investments to market value		(2,964,000	)
Loss on other investments		(270,676	)
Gain from sale of bank premises		142,607			635,271			159,669
Gain from settlement of insurance proceeds								3,792,942
Other income		1,531,525			1,237,485			1,278,124
Total non-interest income		7,268,459			9,767,502			12,308,699
Non-interest expense:
Salaries and employee benefits		14,051,655			14,284,532			13,033,108
Net occupancy		2,220,670			1,976,204			1,870,011
Equipment rentals, depreciation and maintenance		3,749,274			3,104,053			2,836,392
Other expense		6,499,255			5,898,169			5,310,641
Total non-interest expense		26,520,854			25,262,958			23,050,152
Income before income taxes		7,010,690			16,068,129			19,226,900
Income taxes		1,977,000			5,042,000			6,459,000
Net income	$	5,033,690		$	11,026,129		$	12,767,900
Basic and diluted earnings per share	$	.94		$	2.01		$	2.30

See Notes to Consolidated Financial Statements.

9

	Number of
	Common			Common
	Shares			Stock			Surplus
Balance, January 1, 2006		5,549,128		$	5,549,128		$	65,780,254
Comprehensive Income:
Net income
Net unrealized gain on available for sale securities, net of tax
Reclassification adjustment for available for sale securities called or sold in current year, net of tax
Loss from unfunded post-retirement benefit obligation, net of tax
Total comprehensive income
Cash dividends ($.21 per share)
Dividend declared ($.23 per share)
Retirement of stock		(929	)		(929	)
Balance, December 31, 2006		5,548,199			5,548,199			65,780,254
Comprehensive Income:
Net income
Net unrealized gain on available for sale securities, net of tax
Reclassification adjustment for available for sale securities called or sold in current year, net of tax
Gain from unfunded post-retirement benefit obligation, net of tax
Total comprehensive income
Cash dividends ($.25 per share)
Dividend declared ($.27 per share)
Retirement of stock		(127,995	)		(127,995	)
Balance, December 31, 2007		5,420,204			5,420,204			65,780,254
Comprehensive Income:
Net income
Net unrealized gain on available for sale securities, net of tax
Reclassification adjustment for available for sale securities called or sold in current year, net of tax
Loss from unfunded post-retirement obligation, net of tax
Total comprehensive income
Cumulative effect adjustment from adoption of EITF 06-04
Effect of stock retirement on accrued dividends
Cash dividends ($.29 per share)
Dividend declared ($.30 per share)
Retirement of stock		(140,936	)		(140,936	)
Balance, December 31, 2008		5,279,268		$	5,279,268		$	65,780,254

See Notes to Consolidated Financial Statements.

10

			Accumulated
			Other
Undivided			Comprehensive			Comprehensive
Profits			Income			Income			Total
$	18,942,855		$	(2,769,106	)				$	87,503,131
	12,767,900					$	12,767,900			12,767,900
				1,158,333			1,158,333			1,158,333
				12,017			12,017			12,017
				(750,827	)		(750,827	)		(750,827	)
						$	13,187,423
	(1,165,122	)								(1,165,122	)
	(1,276,086	)								(1,276,086	)
	(15,722	)								(16,651	)
	29,253,825			(2,349,583	)					98,232,695
	11,026,129					$	11,026,129			11,026,129
				2,308,621			2,308,621			2,308,621
				399,837			399,837			399,837
				524,000			524,000			524,000
						$	14,258,587
	(1,378,945	)								(1,378,945	)
	(1,463,455	)								(1,463,455	)
	(2,979,263	)								(3,107,258	)
	34,458,291			882,875						106,541,624
	5,033,690					$	5,033,690			5,033,690
				745,909			745,909			745,909
				1,693,658			1,693,658			1,693,658
				(794,446	)		(794,446	)		(794,446	)
						$	6,678,811
	(56,732	)								(56,732	)
	8,816									8,816
	(1,548,703	)								(1,548,703	)
	(1,588,465	)								(1,588,465	)
	(2,894,301	)								(3,035,237	)
$	33,412,596		$	2,527,996					$	107,000,114

11

YEARS ENDED DECEMBER 31,	2008			2007			2006
Cash flows from operating activities:
Net income	$	5,033,690		$	11,026,129		$	12,767,900
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,451,966			1,712,000			1,606,000
Provision for allowance for loan losses		2,347,000			(1,045,000	)		141,000
Impairment loss on FHLMC preferred stock		2,964,000
Loss on other investments		270,676
Provision for losses on other real estate								14,908
Gain on sales of other real estate		(214,210	)		(10,470	)		(153,400	)
(Gain) loss on sales, calls and liquidation of securities		(397,852	)		605,813
Gain on sale of bank premises		(142,607	)		(635,271	)		(159,669	)
Gain on settlement of insurance								(3,792,942	)
Change in accrued interest receivable		1,926,449			771,014			(3,826,872	)
Change in other assets		314,965			(1,967,771	)		330,657
Change in other liabilities		85,281			(3,167,174	)		9,750,102
Net cash provided by operating activities		14,639,358			7,289,270			16,677,684
Cash flows from investing activities:
Proceeds from maturities, sales, liquidation and calls of available for sale securities		257,886,217			209,677,761			55,190,291
Investment in available for sale securities		(211,168,426	)		(195,300,371	)		(271,922,910	)
Proceeds from maturities of held to maturity securities		1,240,000			86,460,000			265,074,303
Investment in held to maturity securities		(4,220	)		(5,515,732	)		(216,601,604	)
Purchases of other investments		(3,160,000	)		(700,000	)		(300,000	)
Investment in Federal Home Loan Bank stock		(1,134,500	)					(51,900	)
Redemption of Federal Home Loan Bank stock					192,300
Proceeds from sales of other real estate		236,261			55,000			344,000
Loans, net increase		(17,396,252	)		(50,235,794	)		(52,257,325	)
Proceeds from sale and retirement of bank premises		266,812			1,020,247			5,400,045
Acquisition of premises and equipment		(1,765,552	)		(16,849,180	)		(4,824,112	)
Other assets		(1,083,450	)		(575,724	)		(493,320	)
Net cash provided by (used in) investing activities		23,916,890			28,228,507			(220,442,532	)
Cash flows from financing activities:
Demand and savings deposits, net change		3,671,696			(74,435,300	)		(57,892,909	)
Time deposits, net change		(62,326,639	)		30,395,985			78,845,361
Cash dividends		(3,003,342	)		(2,655,031	)		(2,274,948	)
Retirement of common stock		(3,035,237	)		(3,107,258	)		(16,651	)
Borrowings from Federal Home Loan Bank		111,513,000			47,900,375			20,940,973
Repayments to Federal Home Loan Bank		(81,675,619	)		(48,067,419	)		(21,025,629	)
Federal funds purchased and securities sold under agreements to repurchase, net change		(4,615,887	)		5,192,748			76,764,620
Net cash provided by (used in) financing activities		(39,472,028	)		(44,775,900	)		95,340,817
Net decrease in cash and cash equivalents		(915,780	)		(9,258,123	)		(108,424,031	)
Cash and cash equivalents, beginning of year		34,935,370			44,193,493			152,617,524
Cash and cash equivalents, end of year	$	34,019,590		$	34,935,370		$	44,193,493

See Notes to Consolidated Financial Statements. 12

NOTE A — BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Business of The Company

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Basis of Accounting

The Company and its subsidiaries recognize assets and liabilities, and income and expense, on the accrual basis of accounting. 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. Actual results could differ from these estimates.

New Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company’s financial statements.

In May 2008, FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The hierarchical guidance provided by SFAS 162 did not have a significant impact on the Company’s financial statements.

Cash and Due from Banks

The Company is required to maintain average reserve balances in its vault or on deposit with the Federal Reserve Bank. The average amount of these reserve requirements was approximately $696,000, $19,964,000 and $24,539,000 for the years ending December 31, 2008, 2007 and 2006, respectively. The Company’s bank subsidiary maintained account balances in excess of amounts insured by the Federal Deposit Insurance Corporation. At December 31, 2008, the bank subsidiary had excess deposits of $4,983,215.

Securities

The classification of securities is determined by Management at the time of purchase. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the security until maturity. Securities held to maturity are stated at amortized cost. Securities not classified as held to maturity are classified as available for sale and are stated at fair value. Unrealized gains and losses, net of tax, on these securities are recorded in shareholders’ equity as accumulated other comprehensive income. The amortized cost of available for sale securities and held to maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, determined using the interest method. Such amortization and accretion is included in interest income on securities. Declines in the fair value of securities below their cost that are deemed to be other than temporary would be reflected in earnings as realized losses. In estimating other-than-temporary losses, Management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and nature of the issuer, the cause of the decline, especially if related to a change in interest rates, and the intent and ability of the Company to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as gain or loss on liquidity, sale and calls of securities in non-interest income.

Other Investments

Other investments include a low income housing partnership in which the Company is a 99% limited partner. The partnership has qualified to receive annual low income housing federal tax credits that are recognized as a reduction of the current tax expense. The investment is accounted for using the equity method.

Federal Home Loan Bank Stock

Federal Home Loan Bank Stock has no readily determined market value and is carried at cost. Due to the redemption provisions of the investment, the fair value equals cost and no impairment exists.

Loans

The loan portfolio consists of commercial and industrial and real estate loans within the Company’s trade area in South Mississippi. The loan policy establishes guidelines relating to pricing, repayment terms, collateral standards including loan to value limits, appraisal and environmental standards, lending authority, lending limits and documentation requirements.

Loans are stated at the amount of unpaid principal, reduced by unearned income and the allowance for loan losses. Interest on loans is recognized over the terms of each loan based on the unpaid principal balance. Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements.

The Company places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. Accrued interest on loans classified as nonaccrual is reversed at the time the loans are placed on nonaccrual. Interest received on nonaccrual loans is applied against principal. Loans are

13

restored to accrual 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 collectibility of the total contractual principal and interest is no longer in doubt.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include performing and non-performing material loans for which full payment of principal or interest is not expected. The Company calculates an allowance required for impaired loans 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. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a component of the allowance for loan losses. Changes to the valuation allowance are recorded as a component of the provision for loan losses.

Generally, loans which become 90 days delinquent are reviewed relative to collectibility. Unless such loans are in the process of terms revision to bring them to a current status or foreclosure or in the process of collection, those loans deemed uncollectible are charged off against the allowance account.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against earnings. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is based on Management’s evaluation of the loan portfolio under current economic conditions and is an amount that Management believes will be adequate to absorb probable losses on loans existing at the reporting date. The evaluation includes Management’s assessment of several factors: review and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic conditions and the related impact on specific borrowers and industry groups, a study of loss experience, a review of classified, nonperforming and delinquent loans, the estimated value of any underlying collateral, an estimate of the possibility of loss based on the risk characteristics of the portfolio, adverse situations that may affect the borrower’s ability to repay and the results of regulatory examinations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful or substandard. For such loans, a specific allowance is established when the collateral value is lower than the carrying value of the loan. The general component of the allowance relates to loans that are not classified and is based on historical loss experience.

Bank Premises and Equipment

Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of the related assets.

Other Real Estate

Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. If, at foreclosure, the carrying value of the loan is greater than the estimated market value of the property acquired, the excess is charged against the allowance for loan losses and any subsequent adjustments are charged to expense. Costs of operating and maintaining the properties, net of related income and gains (losses) on their disposition, are charged to expense as incurred.

Trust Department Income and Fees

Corporate trust fees are accounted for on an accrual basis and personal trust fees are recorded when received.

Income Taxes

The Company files a consolidated tax return with its wholly-owned subsidiaries. The tax liability of each entity is allocated based on the entity’s contribution to consolidated taxable income. The provision for applicable income taxes is based upon reported income and expenses as adjusted for differences between reported income and taxable income. The primary differences are exempt income on state, county and municipal securities; differences in provisions for losses on loans as compared to the amount allowable for income tax purposes; directors’ and officers’ life insurance; depreciation for income tax purposes over (under) that reported for financial statements and gains on the sale of bank premises which were structured under the provisions of Section 1031 of the Internal Revenue Code.

Leases

All leases are accounted for as operating leases in accordance with the terms of the leases.

Earnings Per Share

Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding, 5,342,470, 5,489,861 and 5,548,300 in 2008, 2007 and 2006, respectively.

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 $14,961,180, $24,853,712 and $18,444,672 in 2008, 2007 and 2006, respectively, for interest on deposits and borrowings. Income tax payments totaled $1,635,000, $4,819,000 and $5,310,000 in 2008, 2007 and 2006, respectively. Loans transferred to other real estate amounted to $399,725, $19,500 and $144,000 in 2008, 2007 and 2006, respectively. The income tax effect from the unrealized gain on available for sale securities on accumulated other comprehensive income was $1,277,519, $1,395,266 and $602,907, at December 31, 2008, 2007 and 2006, respectively. The income tax effect from the (gain) loss from unfunded post-retirement benefit obligation on accumulated other comprehensive income was $204,124, $(282,000) and $407,201 at December 31, 2008, 2007 and 2006, respectively.

Fair Value Measurement

The Company adopted Financial Accounting Standards Board Statement No. 157, “Fair Value Measurement” (“SFAS 157”) at January 1, 2008. There was no material impact to the financial statements presented herein as a result of this adoption. SFAS 157 applies to all assets and liabilities that are being measured and reported on a fair value basis. SFAS 157 requires new disclosure that establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1 — Quoted market prices in active markets for identical assets or liabilities, Level 2 — Observable market based inputs or unobservable inputs that are corroborated by market data, or Level 3 — Unobservable inputs that are not corroborated by market data. In determining the appropriate levels, a detailed analysis of the assets and liabilities that are subject to SFAS 157 is performed.

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Reclassifications

Certain reclassifications have been made to the prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income.

NOTE B — SECURITIES:

The amortized cost and estimated fair value of securities at December 31, 2008, 2007 and 2006, respectively, are as follows (in thousands):

			Gross		Gross			Estimated
December 31, 2008	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale securities:
Debt securities:
U.S. Treasury	$	64,963	$	1,746	$			$	66,709
U.S. Government agencies		208,918		3,552		(74	)		212,396
Mortgage-backed securities		28,993		788					29,781
States and political subdivisions		31,594		317		(985	)		30,926
Total debt securities		334,468		6,403		(1,059	)		339,812
Equity securities		650							650
Total available for sale securities	$	335,118	$	6,403	$	(1,059	)	$	340,462
Held to maturity securities:
States and political subdivisions	$	3,394	$	52	$	(8	)	$	3,438
Total held to maturity securities	$	3,394	$	52	$	(8	)	$	3,438

			Gross		Gross			Estimated
December 31, 2007	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale securities:
Debt securities:
U.S. Treasury	$	71,952	$	1,354	$			$	73,306
U.S. Government agencies		252,130		1,729		(60	)		253,799
Mortgage-backed securities		33,343		48		(7	)		33,384
States and political subdivisions		22,698		152		(367	)		22,483
Total debt securities		380,123		3,283		(434	)		382,972
Equity securities		4,229		62		(1,234	)		3,057
Total available for sale securities	$	384,352	$	3,345	$	(1,668	)	$	386,029
Held to maturity securities:
States and political subdivisions	$	4,630	$	53	$	(7	)	$	4,676
Total held to maturity securities	$	4,630	$	53	$	(7	)	$	4,676

			Gross		Gross			Estimated
December 31, 2006	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale securities:
Debt securities:
U.S. Treasury	$	73,937	$	81	$	(364	)	$	73,654
U.S. Government agencies		304,156		304		(1,950	)		302,510
States and political subdivisions		17,001		247		(163	)		17,085
Total debt securities		395,094		632		(2,477	)		393,249
Equity securities		4,228		62		(632	)		3,658
Total available for sale securities	$	399,322	$	694	$	(3,109	)	$	396,907
Held to maturity securities:
U.S. Treasury	$	53,517	$		$	(70	)	$	53,447
U.S. Government agencies		26,970				(29	)		26,941
States and political subdivisions		5,087		62		(18	)		5,131
Total held to maturity securities	$	85,574	$	62	$	(117	)	$	85,519

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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 by 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 table below presents the balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy as of December 31, 2008.

			Fair Value Measurement Using
	December 31, 2008		Level 1	Level 2		Level 3
Available for sale securities		$340,462,072		$	340,462,072

In accordance with FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Investments”, available for sale securities with an amortized cost of $335,117,237 were reported at December 31, 2008 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 2008.

The amortized cost and estimated fair value of debt securities at December 31, 2008, 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 (in thousands):

	Amortized Cost		Estimated Fair Value
Available for sale securities:
Due in one year or less	$	45,115	$	45,522
Due after one year through five years		130,261		133,372
Due after five years through ten years		41,283		41,632
Due after ten years		88,816		89,505
Mortgage-backed securities		28,993		29,781
Totals	$	334,468	$	339,812
Held to maturity securities:
Due in one year or less	$	195	$	196
Due after one year through five years		1,844		1,868
Due after five years through ten years		1,355		1,374
Totals	$	3,394	$	3,438

Information pertaining to securities with gross unrealized losses at December 31, 2008, 2007 and 2006, respectively, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows (in thousands):

	Less than twelve months				Over twelve months				Total
December 31, 2008	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
U.S. Government Agencies	$	10,781	$	74	$		$		$	10,781	$	74
States and political subdivisions		16,545		740		2,826		253		19,371		993
Total	$	27,326	$	814	$	2,826	$	253	$	30,152	$	1,067

	Less than twelve months				Over twelve months				Total
December 31, 2007	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
U.S. Government Agencies	$	10,974	$	24	$	17,464	$	36	$	28,438	$	60
States and political subdivisions		5,998		249		7,047		125		13,045		374
Mortgage-backed securities		14,201		7						14,201		7
FHLMC preferred stock						1,841		1,234		1,841		1,234
Total	$	31,173	$	280	$	26,352	$	1,395	$	57,525	$	1,675

	Less than twelve months				Over twelve months				Total
December 31, 2006	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
U.S. Treasury	$	65,458	$	102	$	29,647	$	332	$	95,105	$	434
U.S. Government Agencies		100,883		200		105,697		1,779		206,580		1,979
States and political subdivisions		2,970		15		7,016		166		9,986		181
FHLMC preferred stock						2,443		632		2,443		632
Total	$	169,311	$	317	$	144,803	$	2,909	$	314,114	$	3,226

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At December 31, 2008, 2 of the 48 securities issued by U.S. Government agencies and 61 of the 131 securities issued by state and political subdivisions contained unrealized losses.

Management evaluates securities for other-than-temporary impairment on a monthly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost. The Company has also considered that securities are primarily issued by U.S. Treasury and U.S. Government Agencies, the cause of the decline in value, the intent and ability of the Company to hold these securities until maturity and that the Company has traditionally held virtually all of its securities, including those classified as available for sale, until maturity. Any sales of available for sale securities, which have been infrequent and immaterial, have been for liquidity purposes. As a result of the evaluation of the impairment of these securities, the Company has determined that the declines summarized in the table above are not deemed to be other-than-temporary.

Proceeds from maturities and calls of held to maturity debt securities during 2008, 2007 and 2006 were $1,240,000, $86,460,000 and $265,074,303, respectively. There were no sales of held to maturity debt securities during 2008, 2007 and 2006. Proceeds from maturities, sales and calls of available for sale debt securities were $257,886,217, $209,677,761 and $55,190,291 during 2008, 2007 and 2006, respectively. Available for sale debt securities were sold in 2007 for a realized loss of $605,813. There were no sales of available for sale debt securities during 2008 and 2006. The Company realized a gain of $249,000 from the liquidation of equity securities in 2008. During 2008, the Company recorded a loss of $2,964,000 from the other-than-temporary impairment of its investment in Federal Home Loan Mortgage Corporation Preferred Stock.

Securities with an amortized cost of $328,047,697, $342,084,423 and $269,627,563 at December 31, 2008, 2007 and 2006, respectively, were pledged to secure public deposits, federal funds purchased and other balances as required by law.

Federal Home Loan Bank (FHLB) common stock was purchased during 1999 and 2008 in order for the Company to participate in certain FHLB programs. The amount to be invested in FHLB stock was calculated according to FHLB guidelines as a percentage of certain mortgage loans. Based on this calculation, the FHLB may periodically automatically redeem its common stock. The investment is carried at cost. Dividends received are reinvested in FHLB stock.

NOTE C — LOANS :

The composition of the loan portfolio was as follows (in thousands):

December 31,	2008		2007		2006
Real estate, construction	$	118,455	$	93,739	$	24,317
Real estate, mortgage		290,458		265,465		300,807
Loans to finance agricultural production		3,178		2,545		2,502
Commercial and industrial loans		43,312		76,267		57,796
Loans to individuals for household, family and other consumer expenditures		10,202		11,173		13,415
Obligations of states and political subdivisions		1,733		1,747		2,094
All other loans		39		56		263
Totals	$	467,377	$	450,992	$	401,194

Transactions in the allowance for loan losses were as follows (in thousands):

	2008			2007			2006
Balance, January 1	$	9,378		$	10,841		$	10,966
Recoveries		673			266			463
Loans charged off		(1,284	)		(684	)		(729	)
Provision for allowance for loan losses		2,347			(1,045	)		141
Balance, December 31	$	11,114		$	9,378		$	10,841

As a part of its evaluation of the quality of the loan portfolio, Management monitors the Company’s credit concentrations on a monthly basis. Total outstanding concentrations were as follows (in thousands):

December 31,	2008		2007		2006
Gaming	$	79,510	$	74,595	$	60,105
Hotel/motel		35,962		23,234		24,907
Out of area		44,458		31,325		19,357
Total	$	159,930	$	129,154	$	104,369

In the ordinary course of business, the Company’s subsidiary extends loans to certain officers and directors and their personal business interests at, in the opinion of Management, the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of similar credit risk with persons not related to the Company or its subsidiaries. These loans do not involve more than normal risk of collectibility and do not include other unfavorable features.

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An analysis of the activity with respect to such loans to related parties is as follows (in thousands):

Years Ended December 31,	2008			2007			2006
Balance, January 1	$	7,318		$	8,554		$	8,670
New loans and advances		2,733			3,548			10,248
Repayments		(2,258	)		(4,784	)		(10,364	)
Balance, December 31	$	7,793		$	7,318		$	8,554

Loans past due ninety days or more and still accruing were $2,340,190, $1,233,761 and $3,295,423 at December 31, 2008, 2007 and 2006, respectively.

Impaired loans include performing and non-performing loans for which full payment of principal or interest is not expected. Performing loans which were classified as impaired loans totaled $11,864,285, $11,655,572 and $12,346,433 at December 31, 2008, 2007 and 2006, respectively. Non-performing loans which were classified as impaired loans included nonaccrual loans which amounted to $15,553,447, $44,612 and $349,335 at December 31, 2008, 2007 and 2006, respectively.

The total average recorded investment in impaired loans amounted to $28,189,747, $11,092,658 and $15,877,328 at December 31, 2008, 2007 and 2006, respectively. The Company had $7,345,022, $5,642,719 and $4,389,390 of specific allowance related to impaired loans at December 31, 2008, 2007, and 2006, respectively. Interest income recognized on impaired loans was $833,055, $621,290 and $990,222 for the years ended December 31, 2008, 2007 and 2006, respectively. Interest income recognized on impaired loans if the Company had used the cash-basis method of accounting would have been $686,129, $669,971 and $899,852 for the years ended December 31, 2008, 2007 and 2006, respectively.

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, 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.

The table below presents the balances of impaired loans, which are the only assets measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2008.

			Fair Value Measurement Using
	December 31, 2008		Level 1	Level 2		Level 3
Imparied loans	$	20,072,210		$	20,072,210

In accordance with the provisions of FASB Statement No. 114, “Accounting by Creditors for Impairment of a Loan”, 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.

NOTE D — BANK PREMISES AND EQUIPMENT :

Bank premises and equipment are shown as follows (in thousands):

December 31,	Estimated Useful Lives	2008		2007		2006
Land		$	5,978	$	6,102	$	5,720
Buildings	5 – 40 years		30,427		29,180		14,731
Furniture, fixtures and equipment	3 – 10 years		14,982		15,187		13,806
Totals, at cost			51,387		50,469		34,257
Less: Accumulated depreciation			17,787		16,058		14,598
Totals		$	33,600	$	34,411	$	19,659

NOTE E — DEPOSITS :

At December 31, 2008, the scheduled maturities of time deposits are as follows (in thousands):

2009	$	135,308
2010		20,276
2011		3,290
2012		1,455
2013		1,116
Beyond		7
Total	$	161,452

Deposits held for related parties amounted to $8,659,875, $8,903,098 and $15,399,924 at December 31, 2008, 2007 and 2006, respectively.

NOTE F — FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE :

At December 31, 2008, the Company had facilities in place to purchase federal funds up to $66,000,000 under established credit arrangements.

At December 31, 2008, 2007 and 2006, federal funds purchased and securities sold under agreements to repurchase included funds invested by customers in a non-deposit product of the bank subsidiary of $176,909,231, $172,925,118 and $226,032,370, respectively. These accounts are non-insured, non-deposit accounts which allow customers to earn interest on their account with no restrictions as to the number of transactions. They are set up as sweep accounts with no check-writing capabilities and require the customer to have at least one operating deposit account.

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NOTE G — BORROWINGS FROM FEDERAL HOME LOAN BANK:

At December 31, 2008, the Company had $36,937,686 outstanding in advances under a $90,790,505 line of credit with the Federal Home Loan Bank of Dallas (“FHLB”). One advance in the amount of $5,000,000 bears interest at a fixed rate of 6.50% and matures in May 2010. One advance in the amount of $30,000,000 bears interest at a fixed rate of .80% and matures in January 2009. The remaining balance consists of smaller advances bearing interest from 3.35% to 7.00% with maturity dates from 2015 — 2030. The advances are collateralized by a blanket floating lien on the Company’s residential first mortgage loans.

NOTE H — NOTES PAYABLE:

The Company has a $5,000,000 unsecured line of credit with Silverton Bank, N.A. The line bears interest at 1/2% under Wall Street Journal Prime and requires interest only payments quarterly with all principal and accrued interest due at maturity, which is July 6, 2009. There was no outstanding balance on the line at December 31, 2008 and at December 31, 2007, the outstanding balance on the line was $150,000, which was included in Other Liabilities.

NOTE I — INCOME TAXES:

Deferred taxes (or deferred charges) as of December 31, 2008, 2007 and 2006, included in other assets or other liabilities, were as follows (in thousands):

December 31,	2008		2007		2006
Deferred tax assets:
Allowance for loan losses	$	3,779	$	3,282	$	4,089
Employee benefit plans’ liabilities		2,579		2,268		2,030
Unrealized loss on available for sale securities, charged to equity						911
Earned retiree health benefits plan liability		1,011		891		798
Unearned retiree health benefits plan liability		419		123		435
Other		316		327		356
Deferred tax assets		8,104		6,891		8,619
Deferred tax liabilities:
Unrealized gain on available for sale securities, charged to equity		1,817		589
Bank premises and equipment		6,093		6,094		3,989
Other		35		36		39
Deferred tax liabilities		7,945		6,719		4,028
Net deferred taxes	$	159	$	172	$	4,591

Income taxes consist of the following components (in thousands):

Years Ended December 31,	2008			2007		2006
Current	$	2,897		$	2,435	$	6,511
Deferred		(920	)		2,607		(52	)
Totals	$	1,977		$	5,042	$	6,459

Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2008 and 35.0% for 2007 and 2006 to earnings before income taxes The reason for these differences is shown below (in thousands):

Years Ended December 31,	2008 Amount			%			2007 Amount			%			2006 Amount			%
Taxes computed at statutory rate	$	2,384			34.0		$	5,624			35.0		$	6,729			35.0
Increase (decrease) resulting from:
Tax-exempt interest income		(420	)		(5.9	)		(341	)		(2.1	)		(292	)		(1.5	)
Other, net		13			(0.1	)		(241	)		(1.5	)		22			0.1
Total income taxes	$	1,977			28.0		$	5,042			31.4		$	6,459			33.6

FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation clarifies the accounting and disclosure for uncertainty in income tax positions and was effective for the year beginning January 1, 2007. The Company has considered the recognition and measurement requirements of FIN 48 of the benefits recorded in its financial statements for tax positions taken or expected to be taken in its tax returns. Based on its evaluation of these tax positions for its open tax years, the Company has not recorded any tax liability for uncertain tax positions as of December 31, 2008 and 2007.

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NOTE J — SHAREHOLDERS’ EQUITY:

Shareholders’ equity of the Company includes the undistributed earnings of the bank subsidiary. Dividends to the Company’s shareholders can generally be paid only from dividends paid to the Company by its bank subsidiary. Consequently, dividends are dependent upon the earnings, capital needs, regulatory policies and statutory limitations affecting the bank subsidiary. Dividends paid by the bank subsidiary are subject to the approval of the Commissioner of Banking and Consumer Finance of the State of Mississippi. At December 31, 2008, $25,703,213 of undistributed earnings of the bank subsidiary was available for future distribution to the Company as dividends.

On November 26, 2002 the Company’s Board of Directors (the “Board”) approved the repurchase of up to 2.50% of the Company’s common stock. On November 22, 2005, the Board approved a three year extension of the plan originally approved on November 26, 2002. As a result of this repurchase plan, which was completed during 2007, 139,475 shares were repurchased and retired. On July 25, 2007, the Board approved the repurchase of up to 2.50% of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, which was completed during 2008, 135,987 shares were repurchased and retired. On September 24, 2008, the Board approved the repurchase of up to 2.50% of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, 24,263 shares were repurchased and retired as of December 31, 2008. On December 16, 2008, the Company’s Board of Directors approved a semi-annual dividend of $.30 per share. This dividend has a record date of January 9, 2009 and a distribution date of January 16, 2009.

The bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the bank subsidiary’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank subsidiary must meet specific capital guidelines that involve quantitative measures of the bank subsidiary’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The bank subsidiary’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the bank subsidiary to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets.

As of December 31, 2008, the most recent notification from the Federal Deposit Insurance Corporation categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater and a Leverage capital ratio of 5.00% or greater. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2008, 2007 and 2006, are as follows (in thousands):

	Actual						For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
December 31, 2008:
Total Capital (to Risk Weighted Assets)	$	111,714		19.28	%	$	46,348	8.00	%
Tier 1 Capital (to Risk Weighted Assets)		104,472		18.03	%		23,174	4.00	%
Tier 1 Capital (to Average Assets)		104,472		11.61	%		35,983	4.00	%
December 31, 2007:
Total Capital (to Risk Weighted Assets)	$	112,510		19.63	%	$	45,854	8.00	%
Tier 1 Capital (to Risk Weighted Assets)		105,345		18.38	%		22,927	4.00	%
Tier 1 Capital (to Average Assets)		105,345		10.93	%		38,555	4.00	%
December 31, 2006:
Total Capital (to Risk Weighted Assets)	$	102,480		21.12	%	$	38,818	8.00	%
Tier 1 Capital (to Risk Weighted Assets)		96,415		19.87	%		19,409	4.00	%
Tier 1 Capital (to Average Assets)		96,415		10.60	%		36,374	4.00	%

The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2008, 2007 and 2006, are as follows (in thousands):

	Actual						For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
December 31, 2008:
Total Capital (to Risk Weighted Assets)	$	108,207		18.83	%	$	45,984	8.00	%
Tier 1 Capital (to Risk Weighted Assets)		101,022		17.58	%		22,992	4.00	%
Tier 1 Capital (to Average Assets)		101,022		11.31	%		35,743	4.00	%
December 31, 2007:
Total Capital (to Risk Weighted Assets)	$	111,413		19.51	%	$	45,676	8.00	%
Tier 1 Capital (to Risk Weighted Assets)		104,276		18.26	%		22,838	4.00	%
Tier 1 Capital (to Average Assets)		104,276		10.84	%		38,481	4.00	%
December 31, 2006:
Total Capital (to Risk Weighted Assets)	$	102,111		21.06	%	$	38,791	8.00	%
Tier 1 Capital (to Risk Weighted Assets)		95,991		19.80	%		19,396	4.00	%
Tier 1 Capital (to Average Assets)		95,991		9.98	%		38,482	4.00	%

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NOTE K — OTHER INCOME AND EXPENSES:

Other income consisted of the following (in thousands):

Years Ended December 31,	2008		2007		2006
Other service charges, commissions and fees	$	117	$	171	$	223
Rentals		538		345		257
Other		877		721		798
Totals	$	1,532	$	1,237	$	1,278

Other expenses consisted of the following (in thousands):

Years Ended December 31,	2008		2007		2006
Advertising	$	636	$	597	$	587
Data processing		344		457		315
Legal and accounting		680		452		492
ATM expense		2,024		1,814		1,066
Consulting fees		176		90		429
Trust expense		356		421		426
Other		2,283		2,067		1,995
Totals	$	6,499	$	5,898	$	5,310

NOTE L — FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and irrevocable letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the bank subsidiary has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and irrevocable letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the agreement. Irrevocable letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Commitments and irrevocable letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluated each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on Management’s credit evaluation of the customer. Collateral obtained varies but may include equipment, real property and inventory.

The Company generally grants loans to customers in its primary trade area of Harrison, Hancock, Jackson and Stone counties.

At December 31, 2008, 2007 and 2006, the Company had outstanding irrevocable letters of credit aggregating $7,201,053, $7,128,972 and $3,038,096, respectively. At December 31, 2008, 2007 and 2006, outstanding unused loan commitments were approximately $116,091,000, $133,771,000 and $149,457,000, respectively. Approximately $69,684,000, $72,208,000 and $67,621,000 of outstanding commitments were at fixed rates and the remainder were at variable rates at December 31, 2008, 2007 and 2006, respectively.

NOTE M — CONTINGENCIES:

In 2007, USF&G filed a civil action against the Company’s bank subsidiary and other non-related parties alleging fraud in connection with the outcome of a lawsuit between the bank subsidiary and USF&G. On December 29, 2008, the Company’s bank subsidiary and USF&G reached an out of court settlement, pursuant to which the bank subsidiary did not admit any wrongdoing. This settlement effectively concludes the matter between USF&G and the bank subsidiary only.

The bank is involved in various other legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters is expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company.

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NOTE N — CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION:

Peoples Financial Corporation began its operations September 30, 1985, when it acquired all the outstanding stock of The Peoples Bank, Biloxi, Mississippi. A condensed summary of its financial information is shown below.

CONDENSED BALANCE SHEETS (IN THOUSANDS):

December 31,	2008		2007		2006
Assets
Investments in subsidiaries, at underlying equity:
Bank subsidiary	$	103,701	$	105,592	$	98,147
Nonbank subsidiary		1		1		1
Cash in bank subsidiary		496		528		55
Other assets		4,552		2,226		1,535
Total assets	$	108,750	$	108,347	$	99,738
Liabilities and Shareholders’ Equity
Other liabilities	$	1,750	$	1,805	$	1,505
Total liabilities		1,750		1,805		1,505
Shareholders’ equity		107,000		106,542		98,233
Total liabilities and shareholders’ equity	$	108,750	$	108,347	$	99,738

CONDENSED STATEMENTS OF INCOME (IN THOUSANDS):

Years Ended December 31,	2008			2007			2006
Income
Earnings of unconsolidated bank subsidiary:
Distributed earnings	$	8,550		$	6,800		$	2,800
Undistributed earnings		(3,511	)		4,250			10,014
Interest income		4			6			5
Other income		75			43			25
Total income		5,118			11,099			12,844
Expenses
Other		87			90			93
Total expenses		87			90			93
Income before income taxes		5,031			11,009			12,751
Income tax benefit		(3	)		(17	)		(17	)
Net income	$	5,034		$	11,026		$	12,768

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CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS):

Years Ended December 31,	2008			2007			2006
Cash flows from operating activities:
Net income	$	5,034		$	11,026		$	12,768
Adjustments to reconcile net income to
net cash used in operating activities:
Gain on liquidation of investment		(249	)
Loss on other investments		270
Net income of unconsolidated subsidiaries		(5,039	)		(11,050	)		(12,814	)
Change in other assets		(3	)		9			8
Net cash provided by (used in) operating activities		13			(15	)		(38	)
Cash flows from investing activities:
Purchase of other investments		(3,160	)		(700	)		(700	)
Proceeds from liquidation of investment		753
Dividends from unconsolidated subsidiary		8,550			6,800			2,800
Net cash provided by investing activities		6,143			6,100			2,100
Cash flows from financing activities:
Advances on line of credit		300			950
Principal payments on line of credit		(450	)		(800	)
Retirement of stock		(3,035	)		(3,107	)		(17	)
Dividends paid		(3,003	)		(2,655	)		(2,275	)
Net cash used in financing activities		(6,188	)		(5,612	)		(2,292	)
Net increase (decrease) in cash		(32	)		473			(230	)
Cash, beginning of year		528			55			285
Cash, end of year	$	496		$	528		$	55

Peoples Financial Corporation paid income taxes of $1,650,000, $4,819,000 and $5,310,000 in 2008, 2007 and 2006, respectively. No interest was paid during the three years ended December 31, 2008.

NOTE O — EMPLOYEE BENEFIT PLANS:

The Company sponsors the Peoples Financial Corporation Employee Stock Ownership Plan (“ESOP”). Employees who are in a position requiring at least 1,000 hours of service during a plan year and who are 21 years of age are eligible to participate in the ESOP. The Plan included 401(k) provisions and the former Gulf National Bank Profit Sharing Plan. Effective January 1, 2001, the ESOP was amended to separate the 401(k) funds into the Peoples Financial Corporation 401(k) Profit Sharing Plan. The separation had no impact on the eligibility or benefits provided to participants of either plan. The 401(k) provides for a matching contribution of 75% of the amounts contributed by the employee (up to 6% of compensation). Contributions are determined by the Board of Directors and may be paid either in cash or Peoples Financial Corporation capital stock. Total contributions to the plans charged to operating expense were $400,000, $410,000 and $460,000 in 2008, 2007 and 2006, respectively.

Compensation expense of $9,504,193, $9,207,514 and $8,245,151 was the basis for determining the ESOP contribution allocation to participants for 2008, 2007 and 2006, respectively. The ESOP held 445,741, 445,038 and 457,691 allocated shares at December 31, 2008, 2007 and 2006, respectively.

The Company established an Executive Supplemental Income Plan and a Directors’ Deferred Income Plan, which provide for pre-retirement and post-retirement benefits to certain key executives and directors. Benefits under the Executive Supplemental Income Plan are based upon the position and salary of the officer at retirement or death. Normal retirement benefits under the plan are equal to 67% of salary for the president and chief executive officer, 58% of salary for the executive vice president and 50% of salary for all other executive officers and are payable monthly over a period of fifteen years. Under the Directors’ Deferred Income Plan, the directors are given an opportunity to defer receipt of their annual directors’ fees until age sixty-five. For those who choose to participate, benefits are payable monthly for ten years beginning the first day of the month following the director’s normal retirement date. The normal retirement date is the later of the normal retirement age (65) or separation from service. Interest on deferred fees accrues at an annual rate of ten percent, compounded annually. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, that it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $13,648,077, $12,648,035 and $12,157,922 at December 31, 2008, 2007 and 2006, respectively. The present value of accumulated benefits under these plans, using an interest rate of 6.00% in 2008 and 2007 and 7.00% in 2006 and the interest ramp-up method for 2008, 2007 and 2006, has been accrued. The accrual amounted to $6,798,774, $5,796,097 and $4,769,461 at December 31, 2008, 2007 and 2006, respectively, and is included in Other Liabilities.

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The Company has additional plans for non-vested post-retirement benefits for certain key executives. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, that it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $687,407, $593,946 and $506,565 at December 31, 2008, 2007 and 2006, respectively. The present value of accumulated benefits under these plans using an interest rate as prescribed by the plan of 7.50% in 2008, 2007 and 2006 and the projected unit cost method has been accrued. The accrual amounted to $584,699, $534,205 and $468,568 at December 31, 2008, 2007 and 2006, respectively, and is included in Other Liabilities.

Additionally, there are two endorsement split dollar policies, with the bank subsidiary as owner and beneficiary, which provide a guaranteed death benefit to the participants’ beneficiaries. These contracts are carried at their cash surrender value, which amounted to $233,903, $226,417 and $218,341 at December 31, 2008, 2007 and 2006, respectively. The Company adopted Emerging Issue Task Force Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF 06-4”) on January 1, 2008. EITF 06-4 requires the accrual of the post-retirement benefit over the service period for deferred compensation plans funded through endorsement split-dollar life insurance. As a result of adopting EITF 06-4 at January 1, 2008, a cumulative effect adjustment to undivided profits of $56,732 was recorded. The present value of accumulated benefits under these plans using an interest rate of 6.00% and the projected unit cost method has been accrued. The accrual amounted to $60,232 at December 31, 2008 and is included in Other Liabilities.

The Company has additional plans for non-vested post-retirement benefits for directors. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, that it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $118,773, $110,138 and $101,874 at December 31, 2008, 2007 and 2006, respectively. The present value of accumulated benefits under these plans using an interest rate as prescribed by the plan of 6.00% in 2008 and 7.50% in 2007 and 2006 and the projected unit cost method has been accrued. The accrual amounted to $142,088, $150,587 and $144,942 at December 31, 2008, 2007 and 2006, respectively, and is included in Other Liabilities.

The Company provides post-retirement health insurance to certain of its retired employees. Employees are eligible to participate in the retiree health plan if they retire from active service no earlier than their Social Security normal retirement age, which varies from 65 to 67 based on the year of birth. In addition, the employee must have at least 25 continuous years of service with the Company immediately preceding retirement. However, any active employee who was at least age 65 as of January 1, 1995, does not have to meet the 25 years of service requirement. The accumulated post-retirement benefit obligation at January 1, 1995, was $517,599, which the Company elected to amortize over 20 years. The Company reserves the right to modify, reduce or eliminate these health benefits. The Company has chosen to not offer this post-retirement benefit to individuals entering the employ of the Company after December 31, 2006.

The following is a summary of the components of the net periodic post-retirement benefit cost:

Years Ended December 31,	2008		2007		2006
Service cost, including amortization of loss	$	179,330	$	275,345	$	315,561
Interest cost		159,316		175,700		175,982
Amortization of net transition obligation		20,600		20,600		20,600
Net periodic post-retirement benefit cost	$	359,246	$	471,645	$	512,143

The discount rate used in determining the accumulated post-retirement benefit obligation was 6.00% in 2008, 6.50% in 2007, and 6.00% in 2006. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 10.00% in 2003. The rate was assumed to decrease gradually to 5.00% for 2013 and remain at that level thereafter. If the health care cost trend rate assumptions were increased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2008, would be increased by 23.93%, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have increased by 26.25%. If the health care cost trend rate assumptions were decreased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2008, would be decreased by 18.48%, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have decreased by 19.93%.

The following table presents the estimated benefit payments for each of the next five years and in the aggregate for the next five years:

Year
2009	$	58,000
2010		63,000
2011		72,000
2012		74,000
2013		92,000
2014 – 2018		925,000

The Company adopted FASB No. 158, “Employers Accounting for Defined Benefit Pensions and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R),” (“SFAS 158”) at December 31, 2006. SFAS 158 requires the recognition of the funded status of the Company’s postretirement benefit plan in its Statement of Condition, with corresponding adjustment to accumulated other comprehensive income, net of tax.

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The following is a reconciliation of the accumulated post-retirement benefit obligation, which is included in Other Liabilities:

Accumulated post-retirement benefit obligation as of December 31, 2007	$	2,473,520
Service cost		179,330
Interest cost		159,316
Actuarial loss		298,577
Plan amendment		1,181,872
Benefits paid		(84,186	)
Accumulated post-retirement benefit obligation as of December 31, 2008	$	4,208,429

The following is a summary of the change in plan assets:

	2008			2007			2006
Fair value of plan assets at beginning of year	$			$			$
Actual return of assets
Employer contribution		84,186			80,122			73,202
Benefits paid (net)		(84,186	)		(80,122	)		(73,202	)
Fair value of plan assets at end of year	$			$			$

Amounts recognized in Accumulated Other Comprehensive Income, net of tax, were:
December 31,	2008		2007		2006
Net loss	$	159,662	$	134,749	$	645,600
Transition obligation		81,574		92,078		105,227
Prior service cost		780,036
Total accumulated other comprehensive income	$	1,021,272	$	226,827	$	750,827

Amounts recognized in the accumulated post-retirement benefit obligation and other comprehensive income were: For the year ended December 31,	2008
Unrecognized actuarial loss	$	298,577
Unrecognized prior service cost		1,181,872
Amortization of transition obligation		(20,600	)
Total accumulated other comprehensive income	$	1,459,849

The estimated net loss and prior transition obligation for the other postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2009 is $78,929 and $20,600, respectively.

NOTE P — FAIR VALUE OF FINANCIAL INSTRUMENTS:

All entities are required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of condition, for which it is practical to estimate its fair value. SFAS 107 excluded certain financial instruments and all nonfinancial instruments from its disclosure requirements. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and bank premises and equipment.

25

Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In preparing these disclosures, Management made highly sensitive estimates and assumptions in developing the methodology to be utilized in the computation of fair value. These estimates and assumptions were formulated based on judgments regarding economic conditions and risk characteristics of the financial instruments that were present at the time the computations were made. Events may occur that alter these conditions and thus perhaps change the assumptions as well. A change in the assumptions might affect the fair value of the financial instruments disclosed in this footnote. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax consequences related to the realization of the unrealized gains and losses have not been computed or disclosed herein. These fair value estimates, methods and assumptions are set forth below.

Cash and Due from Banks

The carrying amount shown as cash and due from banks approximates fair value.

Federal Funds Sold

The carrying amount shown as federal funds sold approximates fair value.

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value.

Cash Surrender Value of Life Insurance

The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.

Deposits

The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

The carrying amount shown as federal funds purchased and securities sold under agreements to repurchase approximates fair value.

Borrowings from Federal Home Loan Bank

The fair value of FHLB fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The Company has no FHLB variable rate borrowings.

Commitments to Extend Credit and Standby Letters of Credit

Because commitments to extend credit and standby letters of credit are generally short-term and at variable rates, the contract value and estimated value associated with these instruments are immaterial.

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The following table presents carrying amounts and estimated fair values for financial assets and financial liabilities at December 31, 2008, 2007 and 2006 (in thousands):

	2008				2007				2006
	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value
Financial Assets:
Cash and due from banks	$	34,016	$	34,016	$	34,665	$	34,665	$	37,793	$	37,793
Federal funds sold		4		4		270		270		6,400		6,400
Available for sale securities		340,462		340,462		386,029		386,029		396,907		396,907
Held to maturity securities		3,394		3,438		4,630		4,676		85,574		85,519
Other investments		3,889		3,889		1,000		1,000		300		300
Federal Home Loan Bank Stock		2,071		2,071		936		936		1,129		1,129
Loans, net		456,263		461,113		441,614		439,694		390,353		389,072
Cash surrender value of life insurance		14,688		14,688		13,579		13,579		12,985		12,985
Financial Liabilities:
Deposits:
Non — interest bearing		109,033		109,033		113,916		113,916		148,456		148,456
Interest bearing		401,442		402,361		455,214		456,490		464,714		464,873
Total deposits		510,475		511,394		569,130		570,406		613,170		613,329
Federal funds purchased and securities sold under agreements to repurchase		226,609		226,609		231,255		231,255		226,032		226,032
Borrowings from Federal Home Loan Bank		36,938		37,547		7,100		7,811		7,267		8,002

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To the Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi

We have audited Peoples Financial Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Peoples Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Peoples Financial Corporation and subsidiaries maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of Peoples Financial Corporation and subsidiaries as of December 31, 2008, 2007 and 2006, and the related statements of income, shareholders’ equity and cash flows for the years then ended, and our report dated March 3, 2009, expressed an unqualified opinion on those consolidated financial statements.

Atlanta, Georgia
March 3, 2009

28

To the Board of Directors
Peoples Financial Corporation
Biloxi, Mississippi

We have audited the accompanying consolidated statements of condition of Peoples Financial Corporation and subsidiaries (“the Company”) as of December 31, 2008, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Financial Corporation and subsidiaries as of December 31, 2008, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Peoples Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 3, 2009, expressed an unqualified opinion on the effectiveness of Peoples Financial Corporation’s internal control over financial reporting.

Atlanta, Georgia
March 3, 2009

29

FIVE-YEAR COMPARATIVE SUMMARY OF SELECTED FINANCIAL INFORMATION
(IN THOUSANDS EXCEPT PER SHARE DATA) :

Peoples Financial Corporation and Subsidiaries

	2008			2007			2006			2005			2004
Balance Sheet Summary
Total assets	$	896,408		$	927,357		$	964,023		$	845,325		$	577,441
Available for sale securities		340,642			386,029			396,907			178,394			173,030
Held to maturity securities		3,394			4,630			85,574			134,047			6,588
Loans, net of unearned discount		467,377			450,992			401,194			349,346			334,193
Deposits		510,476			569,130			613,170			592,217			389,192
Borrowings from FHLB		36,938			7,100			7,267			7,352			7,203
Shareholders’ equity		107,000			106,542			98,233			87,503			85,801
Summary of Operations
Interest income	$	43,573		$	55,971		$	48,894		$	32,343		$	24,566
Interest expense		14,963			25,452			18,785			7,550			5,091
Net interest income		28,610			30,519			30,109			24,793			19,475
Provision for loan losses		2,347			(1,045	)		141			3,614			448
Net interest income after provision for loan losses		26,263			31,564			29,968			21,179			19,027
Non-interest income		7,268			9,767			12,309			7,237			9,563
Non-interest expense		(26,520	)		(25,263	)		(23,050	)		(20,468	)		(20,765	)
Income before taxes and extraordinary gain		7,011			16,068			19,227			7,948			7,825
Applicable income taxes		1,977			5,042			6,459			2,604			2,031
Extraordinary gain											538
Net income	$	5,034		$	11,026		$	12,768		$	5,882		$	5,794
Per Share Data
Basic and diluted earnings per share	$	.94		$	2.01		$	2.30		$	1.06		$	1.04
Basic and diluted earnings per share before extraordinary gain		.94			2.01			2.30			.96			1.04
Dividends per share		.56			.52			.44			.38			.32
Book value		20.27			19.56			17.71			15.77			15.44
Weighted average number of shares		5,342,470			5,489,861			5,548,300			5,550,477			5,556,251
Selected Ratios
Return on average assets		.55	%		1.15	%		1.41	%		.82	%		1.00	%
Return on average equity		4.73	%		10.77	%		13.75	%		6.79	%		6.84	%
Primary capital to average assets		12.81	%		12.13	%		11.91	%		13.67	%		15.87	%
Risk-based capital ratios:
Tier 1		18.03	%		18.38	%		19.87	%		20.26	%		23.04	%
Total		19.28	%		19.63	%		21.12	%		21.51	%		24.29	%

30

SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA) :

Peoples Financial Corporation and Subsidiaries

Quarter Ended, 2008	March 31		June 30		September 30			December 31
Interest income	$	12,081	$	10,901	$	10,706		$	9,885
Net interest income		7,201		7,084		7,217			7,108
Provision for loan losses		46		48		2,001			252
Income before income taxes		3,128		3,262		(1,658	)		2,279
Net income		2,089		2,178		(1,053	)		1,820
Basic and diluted earnings per share		.39		.41		(.20	)		.35

Quarter Ended, 2007	March 31		June 30		September 30			December 31
Interest income	$	13,795	$	14,280	$	14,336		$	13,560
Net interest income		7,429		7,565		7,860			7,665
Provision for loan losses		49		51		(1,197	)		52
Income before income taxes		4,003		3,196		4,975			3,894
Net income		2,715		1,986		3,395			2,930
Basic and diluted earnings per share		.49		.36		.62			.54

Market Information

The Company’s stock is traded under the symbol PFBX and is quoted in publications under “PplFnMS”. The following table sets forth the high and low sale prices of the Company’s common stock as reported on the NASDAQ Stock Market.

Year	Quarter	High		Low		Dividend per share
2008	1st	$	25.49	$	19.89	$	.27
	2nd		23.35		20.50
	3rd		23.57		18.00		.29
	4th		22.60		17.80
2007	1st	$	27.05	$	25.00	$	.23
	2nd		26.36		24.15
	3rd		25.50		18.20		.25
	4th		22.78		19.99

31

Corporate Office

Mailing Address
P. O. Box 529
Biloxi, MS 39533-0529

Physical Address
152 Lameuse Street
Biloxi, MS 39530
(228)435-8205

Website

www.thepeoples.com

Corporate Stock

The common stock of Peoples Financial Corporation is traded on the NASDAQ Capital Market under the symbol: PFBX.
The current market makers are:

FIG Partners
FTN Midwest Research Secs.
Howe Barnes Hoefer & Arnett
Knight Equity Markets, L.P.
Morgan Keegan & Company, Inc.
Sterne, Agee & Leach, Inc.
Stifel Nicolaus & Co.

Shareholder Information

For complete information concerning the common stock of Peoples Financial Corporation, including dividend reinvestment, or general information about the Company, direct inquiries to transfer agent/investor relations:

Asset Management & Trust Services Department
The Peoples Bank, Biloxi, Mississippi
P. O. Box 1416, Biloxi, Mississippi 39533-1416
(228) 435-8208, e-mail: investorrelations@thepeoples.com

Independent Auditors

Porter Keadle Moore, LLP
Atlanta, Georgia

S.E.C. Form 10-K Requests

A copy of the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained without charge by directing a written request to:

Lauri A. Wood, Chief Financial Officer and Controller
Peoples Financial Corporation
P. O. Drawer 529, Biloxi, Mississippi 39533-0529
(228) 435-8412, e-mail: lwood@thepeoples.com

32

EX-13.2

Early last year, the Federal Reserve’s abrupt reductions of interest rates threatened our ability to maintain net interest margins. This policy effectively reduced rates to zero later in the year.

In spite of these precipitous reductions, we were actually able to increase our net interest margin slightly for 2008, up to 3.62%, a modest increase of seven basis points over the year before. That was no easy accomplishment in a period punctuated by rapidly declining short term rates but increasing—and increasingly irrational—certificate of deposit rate pricing as the weaker banks scrambled to add deposits at any cost. We refused to participate in a competition without winners.

We let a number of higher cost certificates of deposit leave our bank rather than pay unprofitable rates to keep the money. As a result, our deposit base decreased about 10% to $510 million by the end of the year. This was not unanticipated. We have watched much of the post-Katrina deposit bubble gradually become deployed over the last two years, and the disruptions caused by the current economic conditions have only exacerbated that trend. As we move into 2009, we are seeing a gradual leveling off and eventual decline of deposit pricing.

Despite what you may have read in the headlines about the freeze in the credit markets, our loan volume actually increased by the end of 2008, although not at the rate we had hoped or expected at the beginning of the year. Our local economy is unquestionably feeling the effects of the national economic malaise. But we continue to aggressively seek quality loans. We enjoy a strong team of experienced lenders and credit analysts who are daily evaluating opportunities and deploying our funds in profitable loans.

The addition to our loan loss provision we took in the third quarter of 2008 leaves us in a solid conservative position going into 2009. Our program of carefully evaluating individual loans served us well following Katrina and continues to serve us well in the economic storm we endure today. As a result of our decisive action in the third quarter, our loan reserves remain high, giving us confidence that the worst is behind us.

What our global and national economy needs now to emerge from the current disaster is forceful but coherent leadership. The TARP program is a perfect example of the lack of consistent direction that has frozen capital markets in fear. At first the funds were approved by Congress to sop up the bad loans and complex investment concoctions festering on the books of so many major money center and regional banks. However, before the first funds were disbursed, the direction changed to simply provide handouts for capital cushions to those same banks who created the problem with no firm guidance on what to do with the money, thus rewarding bad behavior. Inevitably, banks did what common prudence would dictate — hoard the money in case the program changed again.

Our Board and senior management team wisely and politely said no thanks to the offer of federal bailout funds for two major reasons: 1) we did not need the money and 2) it came with some very significant restrictions.

First, the cost of issuing preferred shares at 5% is simply too high, when the prime loan rate is at 3.25%. No one can make money borrowing high and lending low.

Accepting federal funds requires participating banks to give up important aspects of their own governance. Participating banks must ask permission from the U.S. Treasury to raise dividends to shareholders. We raised our dividend twice in 2008, most recently in December. That decision

to share our profits with our shareholders will remain securely with our Board of Directors as long as we retain our independence from federal intervention.

Additionally, had we accepted federal assistance, we would have been forced to suspend our stock repurchase program. When the equity markets price our stock lower than its tangible book value, we must retain the flexibility to buy our own shares and sustain a reasonable price for our shareholders. We would also have been required to offer the Treasury options to purchase our common stock, which would be harmfully dilutive to present shareholders.

There may be more consequences lurking in the future. Banks accepting the TARP funds were obligated to agree to other undisclosed requirements that federal regulators may impose at some undetermined time. We concluded quickly that is no way to run a bank.

Experience is a great teacher, especially the lesson that there really is nothing new. The TARP program is actually an updated version of a Great Depression era federal program to purchase preferred shares in banks. The only difference then was that banks were forced to participate. The Peoples Bank reluctantly complied in 1935 but not without a struggle—the FDIC later refused a pre-payment of the funds that our bank did not want to accept in the first place. We eventually repaid the money and recovered our independence as soon as we were allowed. History has a way of repeating itself.

One of our great strengths is the value of an experienced, dedicated team of directors, senior management and staff who have weathered economic storms before. Our bank benefits from their wisdom and courage forged in adversity. That represents an incalculable asset, one that will profit us immensely in the inevitable better days to come.

On behalf of the entire team at The Peoples Bank, we thank you for your trust and support in our efforts to earn a handsome return on your investment in this company in bad times and good.

Sincerely yours,

Chevis C. Swetman

Chairman of the Board

President & Chief Executive Officer

Quarter Ended, 2008	March 31		June 30		September 30			December 31
Interest income	$	12,081	$	10,901	$	10,706		$	9,885
Net interest income		7,201		7,084		7,217			7,108
Provision for loan losses		46		48		2,001			252
Income before income taxes		3,128		3,262		(1,658	)		2,279
Net income		2,089		2,178		(1,053	)		1,820
Basic and diluted earnings per share		.39		.41		(.20	)		.35

Quarter Ended, 2007	March 31		June 30		September 30			December 31
Interest income	$	13,795	$	14,280	$	14,336		$	13,560
Net interest income		7,429		7,565		7,860			7,665
Provision for loan losses		49		51		(1,197	)		52
Income before income taxes		4,003		3,196		4,975			3,894
Net income		2,715		1,986		3,395			2,930
Basic and diluted earnings per share		.49		.36		.62			.54

Market Information

The Company’s stock is traded under the symbol PFBX and is quoted in publications under “PplFnMS”. The following table sets forth the high and low sale prices of the Company’s common stock as reported on the NASDAQ Stock Market.

Year	Quarter	High		Low		Dividend per share
2008	1st	$	25.49	$	19.89	$	.27
	2nd		23.35		20.50
	3rd		23.57		18.00		.29
	4th		22.60		17.80
2007	1st	$	27.05	$	25.00	$	.23
	2nd		26.36		24.15
	3rd		25.50		18.20		.25
	4th		22.78		19.99

	2008			2007			2006			2005			2004
Balance Sheet Summary
Total assets	$	896,408		$	927,357		$	964,023		$	845,325		$	577,441
Available for sale securities		340,642			386,029			396,907			178,394			173,030
Held to maturity securities		3,394			4,630			85,574			134,047			6,588
Loans, net of unearned discount		467,377			450,992			401,194			349,346			334,193
Deposits		510,476			569,130			613,170			592,217			389,192
Borrowings from FHLB		36,938			7,100			7,267			7,352			7,203
Shareholders’ equity		107,000			106,542			98,233			87,503			85,801
Summary of Operations
Interest income	$	43,573		$	55,971		$	48,894		$	32,343		$	24,566
Interest expense		14,963			25,452			18,785			7,550			5,091
Net interest income		28,610			30,519			30,109			24,793			19,475
Provision for loan losses		2,347			(1,045	)		141			3,614			448
Net interest income after
provision for loan losses		26,263			31,564			29,968			21,179			19,027
Non-interest income		7,268			9,767			12,309			7,237			9,563
Non-interest expense		(26,520	)		(25,263	)		(23,050	)		(20,468	)		(20,765	)
Income before taxes and extraordinary gain		7,011			16,068			19,227			7,948			7,825
Applicable income taxes		1,977			5,042			6,459			2,604			2,031
Extraordinary gain											538
Net income	$	5,034		$	11,026		$	12,768		$	5,882		$	5,794
Per Share Data
Basic and diluted earnings per share	$	.94		$	2.01		$	2.30		$	1.06		$	1.04
Basic and diluted earnings per share before extraordinary gain		.94			2.01			2.30			.96			1.04
Dividends per share		.56			.52			.44			.38			.32
Book value		20.27			19.56			17.71			15.77			15.44
Weighted average number of shares		5,342,470			5,489,861			5,548,300			5,550,477			5,556,251
Selected Ratios
Return on average assets		.55%			1.15%			1.41%			.82%			1.00%
Return on average equity		4.73%			10.77%			13.75%			6.79%			6.84%
Primary capital to average assets		12.81%			12.13%			11.91%			13.67%			15.87%
Risk-based capital ratios:
Tier 1		18.03%			18.38%			19.87%			20.26%			23.04%
Total		19.28%			19.63%			21.12%			21.51%			24.29%

Main Office      152 Lameuse Street, Biloxi, Mississippi 39530      (228) 435-5511

Asset Management & Trust Services	Long Beach
758 Vieux Marché, Biloxi, MS 39530	298 Jeff Davis Avenue, Long Beach, Mississippi 39560
(228) 435-8208	(228) 897-8712
Bay St. Louis	Ocean Springs
408 Highway 90 East, Bay St. Louis, Mississippi 39520	2015 Bienville Boulevard, Ocean Springs, Mississippi 39564
(228) 467-9296	(228) 435-8204
Cedar Lake	Orange Grove
1740 Popps Ferry Road, Biloxi, Mississippi 39532	12020 Highway 49 North , Gulfport, Mississippi 39503
(228) 435-8688	(228) 897-8718
Diamondhead	Pass Christian
5429 West Aloha Drive, Diamondhead, Mississippi 39525	301 East Second Street, Pass Christian, Mississippi 39571
(228) 255-4450	(228) 897-8719
D’Iberville-St. Martin	Saucier
10491 Lemoyne Boulevard, D’Iberville, Mississippi 39540	17689 Second Street, Saucier, Mississippi 39574
(228) 435-8202	(228) 897-8716
Downtown Gulfport	Waveland
1105 30th Avenue, Gulfport, Mississippi 39501	470 Highway 90, Waveland, Mississippi 39576
(228) 897-8715	(228) 467-7257
Gautier	West Biloxi
2609 Highway 90, Gautier, Mississippi 39553	2560 Pass Road, Biloxi, Mississippi 39531
(228) 497-1766	(228) 435-8203
Handsboro	Wiggins
412 E. Pass Road, Gulfport, Mississippi 39507	1312 S. Magnolia Drive, Wiggins, Mississippi 39577
(228) 897-8717	(601) 928-1761 or (228) 897-8722

CORPORATE OFFICE	Shareholder Information
Mailing Address	For complete information concerning the common
P. O. Box 529	stock of Peoples Financial Corporation,
Biloxi, MS 39533-0529	including dividend reinvestment, or general
Physical Address 152 Lameuse Street Biloxi, MS 39530 (228) 435-8205  Website www.thepeoples.com	information about the Company, direct inquiries
	to transfer agent/investor relations:
	Asset Management & Trust Services Department
	The Peoples Bank, Biloxi, Mississippi
	P.O. Box 1416, Biloxi, Mississippi 39533-1416
	(228) 435-8208
	e-mail: investorrelations@thepeoples.com
Corporate Stock  The common stock of Peoples Financial Corporation is traded on the NASDAQ Capital Market under the symbol: PFBX. The current market makers are:    FIG Partners    FTN Midwest Research Secs.    Howe Barnes Hoefer & Arnett    Knight Equity Markets, L.P.    Morgan Keegan & Company, Inc.    Sterne, Agee & Leach, Inc.    Stifel Nicolaus & Co.	Independent Auditors
	Porter Keadle Moore, LLP
	Atlanta, Georgia
	S.E.C. Form 10 -K Requests
	A copy of the Annual Report on Form 10-K, as
	filed with the Securities and Exchange
	Commission, may be obtained without charge by
	directing a written request to:
	Lauri A. Wood, Chief Financial Officer and Controller
	Peoples Financial Corporation
	P. O. Drawer 529, Biloxi, Mississippi 39533-0529
	(228) 435-8412
	e-mail: lwood@thepeoples.com

B O A R D  O F  D I R E C T O R S

Peoples Financial Corporation
Chevis C. Swetman, Chairman of the Board
Dan Magruder, Vice-Chairman; President, Rex Distributing Co., Inc.
Drew Allen, President, Allen Beverages, Inc.
Rex E. Kelly, Business Executive (retired)
Lyle M. Page, Partner, Page, Mannino, Peresich & McDermott, PLLC

O F F I C E R S

Peoples Financial Corporation
Chevis C. Swetman, President and CEO
A. Wes Fulmer, Executive Vice-President
Thomas J. Sliman, First Vice-President
Jeannette E. Romero, Second Vice-President
Robert M. Tucei, Vice -President
Lauri A. Wood, Chief Financial Officer and Controller
Ann F. Guice, Vice-President and Secretary
J. Patrick Wild, Vice-President

B O A R D  O F  D I R E C T O R S

The Peoples Bank, Biloxi, Mississippi
Chevis C. Swetman, Chairman of the Board
Tyrone J. Gollott, Vice-Chairman; President, G & W Enterprises, Inc.
Drew Allen, President, Allen Beverages, Inc.
Liz Corso Joachim, President, Frank P. Corso , Inc.
Rex E. Kelly, Business Executive (Retired)
Dan Magruder, President, Rex Distributing Co. , Inc.
Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc.
Lyle M. Page , Partner, Page, Mannino, Peresich & McDermott, PLLC

S E N I O R  M A N A G E M E N T

The Peoples Bank, Biloxi, Mississippi
Chevis C. Swetman, President and CEO
A. Wes Fulmer, Executive Vice-President
Thomas J. Sliman, Senior Vice-President
Jeannette E. Romero, Senior Vice-President
Robert M. Tucei, Senior Vice -President
Lauri A. Wood, Senior Vice-President and Cashier
Ann F. Guice, Senior Vice-President
J. Patrick Wild, Senior Vice-President

Seated from left: Lyle M. Page * , Liz Corso Joachim, Tyrone J. Gollott
Standing from left: Rex E. Kelly*, Jeffrey H. O’Keefe , Chevis C. Swetman*, Drew Allen*, Dan Magruder*

* Member of both boards

EX-23.1

Exhibit 23.1: Consent of Independent Registered Public Accounting Firm — Porter Keadle Moore, LLP

We consent to the incorporation by reference in Registration Statement No. 333-144181 on Form S-8 of Peoples Financial Corporation of our reports dated March 3, 2009 relating to our audits of the consolidated financial statements and internal control over financial reporting, which appear in the Annual Report on Form 10-K of Peoples Financial Corporation for the year ended December 31, 2008.

/s/ PORTER KEADLE MOORE, LLP 

Atlanta, Georgia
March 10, 2009

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Chevis C. Swetman, certify that:

1. I have reviewed this annual report on Form 10-K of Peoples Financial Corporation.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Dated: March 13, 2009

/s/ Chevis C. Swetman 

Chevis C. Swetman, 

President and Chief Executive Officer
(principal executive officer) 

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO SECTION 302 OF THE
SARBANES — OXLEY ACT OF 2002

I, Lauri A. Wood, certify that:

1. I have reviewed this annual report on Form 10-K of Peoples Financial Corporation.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 13, 2009

/s/ Lauri A. Wood 

Lauri A. Wood, 

Chief Financial Officer
(principal financial and accounting officer) 

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C. ss. 1350

I, Chevis C. Swetman, Chairman, President and Chief Executive Officer of Peoples Financial Corporation (the “Company”), hereby certify that the accompanying report on Form 10-K for the period ending December 31, 2008 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the requirements of that section.

I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

BY:	/s/ Chevis C. Swetman
	Chevis C. Swetman
	Chairman, President and Chief Executive Officer (principal executive officer)

DATE: March 13, 2009

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C. ss. 1350

I, Lauri A. Wood, Chief Financial Officer and Controller of Peoples Financial Corporation (the “Company”), hereby certify that the accompanying report on Form 10-K for the period ending December 31, 2008, and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the requirements of that section.

I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

BY:	/s/ Lauri A. Wood
	Lauri A. Wood
	Chief Financial Officer (principal financial and accounting officer)

DATE: March 13, 2009