Peoples Financial Corp.
Annual Report 2010

Plain-text annual report

P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S 2 0 1 0 A N N U A L R E P O R T T H I S P A G E L E F T B L A N K I N T E N T I O N A L L Y 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 dis- cussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2010, 2009 and 2008. 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. FF OO RR WW AA RR DD -- LL OO OO KK II NN GG II NN FF OO RR MM AA TT II OO NN 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. NN EE WW AA CC CC OO UU NN TT II NN GG PP RR OO NN OO UU NN CC EE MM EE NN TT SS The Financial Accounting Standards Board (“FASB”) has issued a number of Accounting Standards Updates, which have been disclosed in Note A. The Company does not expect that any of these updates will have a material impact on its results of operations or financial position. CC RR II TT II CC AA LL AA CC CC OO UU NN TT II NN GG PP OO LL II CC II EE SS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. Allowance for loan losses: The Company’s most critical accounting policy relates to its allowance for loan losses (“ALL”), which reflects the estimated losses resulting from the inabil- ity of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of determination. Credit losses arise not only from credit risk, but also from other risks inherent in the lend- ing process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are con- sidered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine when the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current eco- nomic conditions. Management believes that the ALL is adequate and appropriate for all periods presented in these financial statements. If there was a deterioration of any of the factors considered by Management in evaluating the ALL, the estimate of loss would be updated, and additional provisions for loan losses may be required. The analysis divides the portfolio into two segments: a pool analysis of loans based upon loss history which may be adjusted by qualitative factors by loan type and a specific reserve analysis for those loans considered impaired under generally accepted accounting principles. All credit relationships with an outstanding balance of $100,000 or greater that are included in Managment’s loan watch list are individually reviewed for impairment. All losses are charged to the ALL when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the ALL at the time of receipt. Employee Benefit Plans: Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the ben- efit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases. OO VV EE RR VV II EE WW 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 providing commercial and real estate lending in our trade area are the traditional focus of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future. With the focus of our core business being on the Mississippi Gulf Coast, any significant local events have the potential to impact the Company’s business. Although the oil spill in the Gulf of Mexico, which occurred in 2010, has not had a significant direct impact on the Company, its effects on the seafood and tourism industries in our trade area and the local economy in general may not be known for years to come. Additionally, the current interest rate envi- ronment, the decline in the value of real estate and the general economic downturn on a local and national level has affected the Company’s results. Managing the net interest margin in the Company’s highly competitive market and in the context of larger national economic conditions has been very challenging and will continue to be so for the foreseeable future. 1 Net income for 2010 was $1,484,963 compared with $3,220,473 for 2009. Results for 2010 included the decrease in net interest income of $1,814,345 and the increase in the provision for allowances for losses on loans of $1,620,000 as compared with 2009. More than $256 million of the Company’s investment in U.S. Agency securities were called during 2010, with most of the proceeds reducing borrowings or being invested in similar securities but at a significant- ly lower rate. During the fourth quarter of 2010, Management modified its investment strategy to seek opportunities to improve the yield on its invest- ment portfolio. Net income in 2010 also includes a tax benefit of $723,000 as compared with tax expense of $954,000 in 2009. The fluctuations are dis- cussed in further detail below. Monitoring asset quality and addressing potential losses in our loan portfolio continues to be emphasized during these difficult economic times. During 2009, the Company’s non-performing loans increased significantly, largely as a result of our exposure in the residential development industry. The Company charged-off $8,291,421 and $9,080,407 in loans during 2010 and 2009, respectively. Approximately 49% and 68% of these charge-offs in 2010 and 2009, respectively, related to three credit relationships in the residential development industry. Nonaccrual loans decreased to $14,537,098 at December 31, 2010 as compared with $22,005,748 at December 31, 2009, as a result of charge-offs and foreclosures. Nonaccrual loans at December 31, 2010 include one loan with a balance of $7,724,103, which is a performing loan that was classified as nonaccrual by the banking regulators in their annual shared national credit reviews in 2009 and 2010. Total assets decreased to $786,545,484 at December 31, 2010 from $869,006,899 at December 31, 2009. Available for sale securities decreased $24,355,974 while loans decreased $55,077,534 as principal payments, maturities and charge-offs outpaced new loan volume. Proceeds from the call of securities, as well as from two sales of available for sale securities and proceeds from loan payments and maturities, reduced borrowings and any remaining funds were re-invested in U.S. Agencies. Deposits increased $13,438,086 at December 31, 2010, providing the liquidity for borrowings from the Federal Home Loan Bank to decrease $61,313,436 as compared with December 31, 2009. RR EE SS UU LL TT SS OO FF OO PP EE RR AA TT II OO NN SS NNeett IInntteerreesstt IInnccoommee 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 deci- sions about interest rates and the growth of the United States money supply. During 2008, the Committee dropped the discount rate by 325 basis points, which resulted in similar decreases in prime interest rates during this time. 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 reductions was significant to the Company’s financial condition and results of operations in 2008 and succeeding years. 2010 as compared with 2009 The Company’s average interest-earning assets decreased approximately $65,566,000, or 8%, from approximately $819,626,000 for 2009 to approximate- ly $754,060,000 for 2010. The Company’s average balance sheet shrunk as principal payments and maturities of loans have outpaced new loans and invest- ments have been called or sold. Also as a result of the Committee’s actions, the average yield on earning assets decreased 23 basis points, from 4.26% for 2009 to 4.03% for 2010, with the biggest impact being to the yield on taxable available for sale securities. The Company’s investment and liquidity strat- egy has been to invest most of the proceeds from sales and calls of securities in similar securities with a maturity of two years or longer, the interest rates on which have decreased dramatically. As a result, the yield on taxable available for sale securities decreased from 4.18% for 2009 to 3.24% for 2010. Beginning in the fourth quarter of 2010, Management began acquiring such securities with a maturity of five years or longer in order to improve the yield. The Company’s loan portfolio generally has a 40%/60% blend of fixed/floating rate term. In addition to adjusting the duration of investment purchases, the Company is establishing floors on new and renewing loans in order to improve the net interest margin. Along with the impact of the calls of securi- ties, this results in the Company being more asset sensitive to market interest rates and generally is the cause of the decrease in interest income. Average interest-bearing liabilities decreased approximately $68,869,000, or 10%, from approximately $682,026,000 for 2009 to approximately $613,157,000 for 2010. The average rate paid on interest-bearing liabilities decreased 34 basis points, from 1.09% for 2009 to .75% for 2010. This dramatic decrease is the result of utilizing lower cost funding sources including brokered deposits and Federal Home Loan Bank advances in 2010 as compared with 2009. The Company believes that it is unlikely that its cost of funds can be materially reduced further. The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.42% at December 31, 2010, up 6 basis points from 3.36% at December 31, 2009. 2009 as compared with 2008 The Company’s average interest-earning assets increased approximately $14,784,000, or 2%, from approximately $804,842,000 for 2008 to approximate- ly $819,626,000 for 2009. Also as a result of the Committee’s actions, the average yield on earning assets decreased 122 basis points, from 5.48% for 2008 to 4.26% for 2009, with the biggest impact being to the yield on taxable available for sale securities and loans. The Company’s investment and liquidity strategy has been to invest most of the proceeds from sales and calls of securities in similar securities with a maturity of two years or longer, the interest rates on which have decreased dramatically. As a result, the yield on taxable available for sale securities decreased from 5.03% for 2008 to 4.18% for 2009. The yield on loans has been impacted by the increase in nonaccruals as well as the decrease in prime interest rates. The yield on loans decreased from 5.80% for 2008 to 4.31% for 2009. The Company’s loan portfolio generally has a 40%/60% blend of fixed/floating rate term. The Company began estab- lishing floors on new and renewing loans in 2009 in order to improve the net interest margin. Along with the impact of the calls of securities, this results in the Company being more asset sensitive to market interest rates and generally is the cause of the decrease in interest income. 2 Average interest-bearing liabilities increased approximately $17,288,000, or 3%, from approximately $664,738,000 for 2008 to approximately $682,026,000 for 2009. The decrease in time deposits that began in 2008 as a result of rate competition was reversed by the acquisition of brokered deposits during 2009. The average rate paid on interest-bearing liabilities decreased 116 basis points, from 2.25% for 2008 to 1.09% for 2009. The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.36% at December 31, 2009, down 26 basis points from 3.62% at December 31, 2008. The tables below analyze the changes in tax-equivalent net interest income for the years ended December 31, 2010 and 2009 and the years ended December 31, 2009 and 2008. A N A L Y S I S O F A V E R A G E B A L A N C E S , I N T E R E S T E A R N E D / P A I D A N D Y I E L D ( I N T H O U S A N D S ) Loans (2) (3) Federal Funds Sold Held to maturity: Non taxable (1) Available for sale: Taxable Non taxable (1) Other Total Savings and demand, interest bearing Time deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from FHLB Total Net tax-equivalent yield on earning assets Loans (2) (3) Federal Funds Sold Held to maturity: Non taxable (1) Available for sale: Taxable Non taxable (1) Other Total Savings and demand, interest bearing Time deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from FHLB Total Net tax-equivalent yield on earning assets 2010 2009 Average Balance 436,393 $ 4,842 Interest Earned/Paid Rate 4.51 $ 0.31 19,687 15 Average Balance 467,992 $ 3,227 Interest Earned/Paid $ 20,189 8 2,938 264,927 40,581 4,379 754,060 217,531 190,718 $ $ 154 8,589 1,903 26 $ 30,374 $ 1,084 2,173 152,000 52,908 $ 613,157 991 352 $ 4,600 5.24 3.24 4.69 0.59 4.03 0.50 1.14 0.65 0.65 0.75 3.42 3,265 307,332 34,437 3,373 819,626 232,916 192,893 $ $ 172 12,840 1,699 17 $ 34,925 $ 1,831 3,135 217,509 38,708 $ 682,026 1,905 530 $ 7,401 2009 2008 Average Balance 467,992 $ 3,227 Interest Earned/Paid Rate 4.31 $ 20,189 0.25 8 3,265 307,332 34,437 3,373 819,626 232,916 192,893 $ $ 172 12,840 1,699 17 $ 34,925 $ 1,831 3,135 217,509 38,708 $ 682,026 1,905 530 $ 7,401 5.27 4.18 4.93 .50 4.26 .79 1.63 .88 1.37 1.09 3.36 Average Balance 463,505 $ 5,694 Interest Earned/Paid $ 26,874 122 3,691 230 304,536 24,394 3,022 $ 804,842 $ 251,792 191,904 15,331 1,433 148 $ 44,138 $ 3,856 6,094 210,049 10,993 $ 664,738 4,521 492 $ 14,963 Rate 4.31\ 0.25 5.27 4.18 4.93 .50 4.26 .79 1.63 .88 1.37 1.09 3.36 Rate 5.80 2.14 6.23 5.03 5.87 4.90 5.48 1.53 3.18 2.15 4.48 2.25 3.62 (1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2010, 2009 and 2008. (2) Loan fees of $611, $476 and $786 for 2010, 2009 and 2008, respectively, are included in these figures. (3) Includes nonaccrual loans. 3 PPrroovviissiioonn ffoorr LLooaann LLoosssseess 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, 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 develop- ing 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, land, development, construction and commercial real estate loans, and their direct and indirect impact on its operations. A monthly 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. Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and to identify and estimate potential losses based on the best available information. The potential effect of the economic downturn on a national and local level, the decline in real estate values and actual losses incurred by the Company were key factors in our analysis. The potential direct and/or indirect impact of the oil spill in the Gulf of Mexico on the Company and its customers was also considered and will continue to be monitored as there is sufficient uncertainty as to the ultimate impact. However, no potential losses as a result of the spill were identified as of December 31, 2010. Note A discloses a summary of the accounting policies applicable to impaired and nonaccrual loans as well as the allowance for loan losses. Note C presents additional analyses of the composition, aging and performance of the loan portfolio as well as the trans- actions in the allowance for loan losses. The Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $6,845,000, $5,225,000 and $2,347,000 in 2010, 2009 and 2008, respectively. The allowance for loan losses as a percentage of loans was 1.62%, 1.68% and 2.38% at December 31, 2010, 2009, and 2008, respec- tively. This decrease is related to the increase in net charge-offs which were $8,023,000, $8,511,000 and $611,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Most of the Company’s charge-offs were partial charge-offs, which represent that portion of a loan which is deemed to be uncollectible. The Company believes that its allowance for loan losses is appropriate as of December 31, 2010. 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 the future 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. NNoonn--iinntteerreesstt iinnccoommee Total non-interest income decreased slightly by $32,471 in 2010 as compared with 2009. Included in this decrease, however, was a decrease in service charges on deposit accounts of $558,076 in 2010 as compared with 2009 as these fees were impacted by the local economy and customers opting out of overdraft protection for debit card transactions. During 2010, securities were sold at a gain of $1,690,670 as compared with only $869,123 in 2009 as the Company executed sales when it could maximize proceeds. The Company’s other investments had a loss of $109,933 in 2010 as compared with a gain of $146,979 in 2009. In 2009, non- interest income included a loss of $149,517 from the writedown of equity investments. Total non-interest income increased $2,878,172 in 2009 as compared with 2008. 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. In addition to the impact of the impairment loss, non-interest income in 2009 was affected by the change in trust department income and fees, gains on the liquidation, sales and calls of securities, gain (loss) on other investments and other income. The decrease in trust department income and fees of $274,258 was the result of the decrease in market value, on which fees are based, of personal trust accounts. In 2009, the Company realized a gain on the sale of securities of $869,123 as compared with only $397,852 in 2008. In 2009, the Company’s investment in a low-income housing partnership resulted in a gain of $146,979 as compared with a loss of $270,676 in 2008 as a result of the completion of renovations in 2009 which resulted in increased occupancy. Other income in 2008 included a gain of $150,000 from the sale of the bank subsidiary’s merchant card portfolio. NNoonn--iinntteerreesstt eexxppeennssee Total non-interest expense decreased slightly by $54,306 in 2010 as compared with 2009. Salaries and employee benefits decreased $668,274 in 2010 as compared with 2009 as a result of the decrease in the number of employees from attrition in 2009 and 2010. Net occupancy costs decreased $137,328 in 2010 as compared with 2009 as a result of decreased insurance and property tax costs. Insurance costs decreased $84,591 as the Company was able to reduce premiums on some of its liability coverage. Property tax expense decreased $44,635 due to the revaluation of some of the Company’s real prop- erty. Other expense increased $849,235 for 2010 as compared with 2009. This increase is the result of increased legal, data processing, franchise and other expenses as well as an increase in costs associated with managing our other real estate portfolio. Legal fees increased $236,862 in 2010 as compared with 2009 as the Company engaged legal counsel to assist with several non-performing loan issues. Data processing costs increased $186,683 as a result of the outsourcing of some of the bank’s I/T functions. Franchise tax expense increased $246,774 in 2010 as compared with 2009 as prior years’ refunds were received in 2009. Maintenance and repairs, property taxes, disposal costs and losses on sales of other real estate were $250,865 more in 2010 as compared with 2009 as a result of the increase in the number of foreclosures in the current year. While the Company had increased costs in these areas, it was able to reduce expenses as a part of a cost-cutting campaign in 2010 for a savings of more than approximately $385,000. Savings were realized in advertising, consulting, trust, dues, training and other expenditures. Total non-interest expense increased $1,114,702 for 2009 as compared with 2008. The largest component of this increase was from FDIC assessments, which were $1,259,560 greater in 2009 than in 2008. Salaries and employee benefits increased $198,347 for 2009 as compared with 2008. This change included a decrease in salaries and related payroll tax expense of $480,503 as a result of a hiring freeze and loss of employees through attrition and elimination of Management bonuses in 2009. This decrease was partially offset by an increase in costs of $180,209 for the Company’s liability for a deferred compensa- tion plan as the discount rate used to compute the liability was changed to bring the plan into alignment with other plans. Changes in other salaries and employee benefit components include the increase in health insurance costs of $317,490 and the increase of $196,400 for the retiree health plan. Net occupancy expense increased by $280,761 in 2009 as a result of the increase in property taxes of $102,132, the increase in insurance costs of $71,618 and the increase in telephone expense of $103,454. Property taxes increased as bank premises in Jackson County were reassessed and facilities in Pass Christian 4 and Biloxi were added to the tax rolls. Like most other businesses on the Mississippi Gulf Coast, the Company’s insurance costs continue to rise. The cost of additional data line availability for technology upgrades in 2009 resulted in increased telephone expenses. IInnccoommee TTaaxxeess Income taxes have been impacted by non-taxable income and federal tax credits during 2010, 2009 and 2008, respectively. Note I presents a reconcilia- tion of income taxes for these three years. FF II NN AA NN CC II AA LL CC OO NN DD II TT II OO NN Available for sale securities decreased $24,355,974 at December 31, 2010, compared with December 31, 2009. The Company sold its entire mortgage-backed portfolio and calls of the Company’s U.S. Agency securities totaled more than $256,000,000 in 2010. While some of these proceeds were reinvested in U.S. Agency securities, the remaining funds were utilized in the Company’s daily management of its liquidity needs, including funding the reduction in bor- rowings from the Federal Home Loan Bank. The Company’s held to maturity portfolio was invested solely in debt securities issued by state and political subdivisions at December 31, 2010 and December 31, 2009. The Company decreased its investment in Federal Home Loan Bank common stock by $2,734,700 as a result of decreased need for borrowing capacity from that agency during 2010. Gross loans decreased $55,077,534 at December 31, 2010 as compared with December 31, 2009. During 2010, regularly scheduled principal payments and maturities as well as gross charge-offs totaling $8,291,000 outpaced new loan volume. Other real estate increased by $4,222,837 at December 31, 2010 as compared with December 31, 2009. Loans transferred to other real estate were $5,715,037 in 2010. During 2010, proceeds from sales of some of these properties were $1,328,000, which resulted in a loss of $86,850. The Company intends to vigor- ously market this portfolio. Interest-earning assets, particularly available for sale securities, have decreased at December 31, 2010 as compared with December 31, 2009 along with a decrease in interest rates earned on these assets. These trends directly impact accrued interest receivable, which decreased $1,354,322 during 2010. Prepaid FDIC assessments decreased $1,305,337 at December 31, 2010 as compared with December 31, 2009 as a result of the amortization of these costs. Other assets increased $4,412,364 at December 31, 2010 as compared with December 31, 2009. At December 31, 2010, the Company recorded federal income taxes receivable of $2,459,715 as a result of overpayments during the year. Also included in other assets was an increase in deferred tax assets of $1,782,653 at December 31, 2010 as compared with December 31, 2009 as result of unrealized losses on available for sale securities. Total deposits increased $13,438,086 at December 31, 2010, as compared with December 31, 2009. Fluctuations among the different types of deposits rep- resent recurring activity for the Company. The Company anticipates that deposits will continue at or slightly above their present level during 2011. Federal funds purchased and securities sold under agreements to repurchase, which includes non-deposits accounts, decreased $34,328,858 at December 31, 2010 as compared with December 31, 2009, as customers periodically reallocated their funds. Borrowings from the Federal Home Loan Bank decreased $61,313,436 at December 31, 2010 as compared with December 31, 2009 as the Company utilized funds available from calls of securities to reduce its borrowings. SS HH AA RR EE HH OO LL DD EE RR SS ’’ EE QQ UU II TT YY AA NN DD CC AA PP II TT AA LL AA DD EE QQ UU AA CC YY 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 12.96% at December 31, 2010, 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. Significant transactions affecting shareholders’ equity during 2010 are described in Note J. The Statement of Shareholders’ Equity also presents all activ- ity in the Company’s equity accounts. LL II QQ UU II DD II TT YY 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. 5 The Company monitors and manages its liquidity position diligently through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses profor- ma liquidity projections which are updated on a continuous basis in the management of its liquidity needs and also conducts contingency testing on its liquidity plan. The Company has also been approved to participate in the Federal Reserve’s Discount Window Primary Credit Program, which it intends to use only as a contingency. 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 princi- pal 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 2011. RR EE GG UU LL AA TT OO RR YY MM AA TT TT EE RR SS During 2009, Management identified opportunities for improving risk management, addressing asset quality concerns, managing concentrations of cred- it risk and ensuring sufficient liquidity at the Bank as a result of its own investigation as well as examinations performed by certain bank regulatory agen- cies. In concert with the regulators, the Company has identified specific corrective steps and actions to enhance its risk management, asset quality and liquidity policies, controls and procedures. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators. OO FF FF -- BB AA LL AA NN CC EE SS HH EE EE TT AA RR RR AA NN GG EE MM EE NN TT SS 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 com- mitments and irrevocable letters of credit may expire without being drawn upon, the total amount does not necessarily represent future cash require- ments. 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. RR EE CC EE NN TT LL EE GG II SS LL AA TT II OO NN The Emergency Economic Stabilization Act of 2008 (the “Act”) was enacted to restore liquidity and stability to the financial system. The Troubled Asset Relief Program (“TARP”) is one of the provisions of the Act. The Company did not participate in TARP. The Act also temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor and subsequent legislation had made this change permanent. 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 Company is participating in TLGP to provide full coverage on non-interest bearing transaction accounts. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was passed by the Congress. Dodd-Frank increases the supervisory authority of the Federal Reserve Board, creates a new Financial Services Oversight Council, creates a new process to liquidate failed financial firms, creates an independent Bureau of Consumer Financial Protection, implements comprehensive regulation of over-the-counter derivatives, establish- es a Federal Insurance Office and increases transparency and accountability for credit rating agencies. Dodd Frank requires more than 60 studies to be conducted and more than 200 regulations to be written over the next one to two years. The true impact of the legislation on the Company will be unknown until these are complete. QQ UU AA NN TT II TT AA TT II VV EE AA NN DD QQ UU AA LL II TT AA TT II VV EE DD II SS CC LL OO SS UU RR EE AA BB OO UU TT MM AA RR KK EE TT RR II SS KK 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, the executive vice president, the chief risk officer and other senior and middle management from the financial, lending, investing, and deposit areas of the bank subsidiary, 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 mar- gins 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. Agency securities with maturities of two years or more. Due to the low interest rate environment, the duration of investments has been extended to fifteen years 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 matu- rities of five years or less; however the market is now dictating floating rate terms to be extended to twenty years. On the liability side, more than 68% of the deposits are demand and savings transaction accounts. Additionally, more than 65% of the certificates of deposit mature within eighteen months. 6 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 below provide additional information about the Company’s financial instruments that are sensitive to changes in inter- est rates. The negative gap in 2011 is mitigated by the nature of the Company’s deposits, whose characteristics have been previously described. The tab- ular 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. Interest rate sensitivity at December 31, 2010 was as follows (in thousands): 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 B E Y O N D T O T A L 1 2 / 3 1 / 1 0 F A I R V A L U E $ 297,654 $ 17,242 $ 34,719 $ 23,746 $ 16,415 $ 13,472 $ 403,248 $ 407,363 Interest rate sensitivity at December 31, 2009 was as follows (in thousands): 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 B E Y O N D 1 2 / 3 1 / 0 9 F A I R V A L U E T O T A L $ 310,429 $ 42,856 $ 41,335 $ 28,025 $ 19,958 $ 14,545 $ 457,148 $ 460,588 4.65% 11,646 3.30% 309,300 4.61% 349,579 1.01% 4.33% 19,662 3.19% 330,091 4.28% 359,363 1.96% Loans, net Average rate Securities Average rate Total Financial Assets Average rate Interest Bearing Deposits Average rate Federal funds purchased and securities sold under agreements to repurchase 140,102 Average rate Long-term funds Average rate Total Financial Liabilities Average rate 0.42% 40,207 0.77% 529,888 0.91% Loans, net Average rate Securities Average rate Total Financial Assets Average rate Interest Bearing Deposits Average rate Federal funds purchased and securities sold under agreements to repurchase 174,431 Average rate Long-term funds Average rate Total Financial Liabilities Average rate 0.75% 102,178 4.86% 635,972 2.92% 6.12% 1,927 4.39% 19,169 5.99% 20,710 2.38% 223 4.70% 20,933 2.43% 6.53% 22,498 2.04% 52,217 4.77% 1,873 2.46% 6.21% 24,928 2.39% 48,674 5.11% 2,218 2.42% 6.28% 47,202 2.34% 63,617 4.04% 1,479 2.42% 223 4.70% 2,096 2.88% 223 4.70% 2,441 2.79% 223 4.70% 1,702 2.94% 6.09% 187,000 3.37% 200,472 3.68% 3 2.21% 1,858 4.70% 1,861 4.70% 5.19% 295,201 2.79% 698,449 4.56% 375,862 1.34% 140,102 0.42% 42,957 1.93% 558,921 1.17% 295,295 702,658 376,715 140,102 43,990 560,807 6.50% 6,276 4.42% 49,132 6.31% 7,756 2.80% 196 4.81% 7,952 2.88% 5.58% 14,394 3.80% 55,729 5.24% 4,168 3.07% 6.80% 30,719 3.24% 6.00% 20,480 3.23% 58,744 40,438 5.58% 1,723 2.68% 5.02% 1,149 2.68% 196 4.81% 4,364 3.19% 196 4.81% 1,919 3.04% 196 4.81% 1,345 3.18% 4.92% 232,157 4.68% 246,702 4.69% 1 2.52% 1,308 4.81% 1,309 4.81% 5.05% 323,688 4.28% 780,836 4.82% 374,160 2.03% 174,431 0.75% 104,270 4.86% 652,861 2.94% 323,828 784,416 375,052 174,431 105,815 655,298 7 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C O N D I T I O N D E C E M B E R 3 1 , Assets Cash and due from banks Federal funds sold Available for sale securities Held to maturity securities, fair value of $2,010,430 - 2010; $3,340,974 - 2009; $3,438,108 - 2008 Other investments Federal Home Loan Bank Stock, at cost Loans Less: Allowance for loan losses Loans, net Bank premises and equipment, net of accumulated depreciation Other real estate Accrued interest receivable Cash surrender value of life insurance Prepaid FDIC assessments Other assets Total assets Liabilities & Shareholders' Equity Liabilities: Deposits: Demand, non-interest bearing Savings and demand, interest bearing Time, $100,000 or more Other time deposits Total deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank Other liabilities Total liabilities Shareholders' Equity: Common Stock, $1 par value, 15,000,000 shares authorized, 5,151,139, 5,151,697 and 5,279,268 shares issued and outstanding at December 31, 2010, 2009 and 2008, respectively Surplus Undivided profits Accumulated other comprehensive income (loss), net of tax Total shareholders' equity 2 0 1 0 2 0 0 9 2 0 0 8 $ 24,146,939 $ 29,155,294 $ 34,015,590 287,078,463 311,434,437 1,914,879 3,926,371 2,281,200 409,898,757 6,650,258 403,248,499 29,756,239 5,744,150 3,292,430 15,951,117 3,652,972 5,552,225 3,201,966 4,036,304 5,015,900 464,976,291 7,827,806 457,148,485 31,418,884 1,521,313 4,646,752 15,329,394 4,958,309 1,139,861 4,000 340,462,072 3,394,212 3,889,324 2,070,700 467,377,039 11,113,575 456,263,464 33,600,170 397,182 5,444,767 14,688,160 52,097 2,125,763 $ 786,545,484 $ 869,006,899 $ 896,407,501 $ 108,277,985 $ 96,541,387 $ 109,033,184 193,631,209 134,667,660 47,562,661 484,139,515 140,102,019 42,957,016 17,990,072 685,188,622 5,151,139 65,780,254 33,302,381 (2,876,912) 101,356,862 206,167,484 117,347,663 50,644,895 470,701,429 174,430,877 104,270,452 16,016,204 765,418,962 5,151,697 65,780,254 32,853,346 (197,360) 103,587,937 239,990,238 104,540,112 56,912,002 510,475,536 226,609,231 36,937,686 15,384,934 789,407,387 5,279,268 65,780,254 33,412,596 2,527,996 107,000,114 Total liabilities and shareholders' equity $ 786,545,484 $ 869,006,899 $ 896,407,501 See Notes to Consolidated Financial Statements. 8 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 1 0 2 0 0 9 2 0 0 8 Interest income: Interest and fees on loans Interest and dividends on securities: U.S. Treasury U.S. Government agencies Mortgage-backed securities States and political subdivisions Other investments Interest on federal funds sold Total interest income Interest expense: Deposits Long-term borrowings Federal funds purchased and securities sold under agreements to repurchase Total interest expense Net interest income Provision for allowance for losses on loans Net interest income after provision for allowance for losses on loans Non-interest income: Trust department income and fees Service charges on deposit accounts Gain on liquidation, sales and calls of securities Writedown of investments to market value Gain (loss) on other investments Gain from sale of bank premises Other income Total non-interest income Non-interest expense: Salaries and employee benefits Net occupancy Equipment rentals, depreciation and maintenance Other expense Total non-interest expense Income before income taxes Income taxes Net income Basic and diluted earnings per share See Notes to Consolidated Financial Statements. $ 19,687,441 $ 20,189,200 $ 26,874,057 471,051 7,598,366 518,924 1,357,642 26,078 15,263 1,229,237 10,043,869 1,566,573 1,234,917 17,347 8,159 29,674,765 34,289,302 3,257,391 351,883 991,438 4,600,712 25,074,053 6,845,000 18,229,053 1,354,338 6,103,133 1,690,670 (109,933) 1,075,952 10,114,160 13,581,728 2,364,103 3,668,643 7,966,776 27,581,250 761,963 (723,000) 4,965,439 530,082 1,905,383 7,400,904 26,888,398 5,225,000 21,663,398 1,363,489 6,661,209 869,123 (149,517) 146,979 1,255,348 10,146,631 14,250,002 2,501,431 3,766,582 7,117,541 27,635,556 4,174,473 954,000 $ 1,484,963 $ .29 $ 3,220,473 $ .62 2,972,851 10,625,314 1,733,026 1,097,790 148,328 122,066 43,573,432 9,950,478 492,048 4,520,821 14,963,347 28,610,085 2,347,000 26,263,085 1,637,747 6,793,404 397,852 (2,964,000) (270,676) 142,607 1,531,525 7,268,459 14,051,655 2,220,670 3,749,274 6,499,255 26,520,854 7,010,690 1,977,000 $ 5,033,690 $ .94 9 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y N u m b e r o f C o m m o n S h a r e s 5,420,204 C o m m o n S t o c k $ 5,420,204 S u r p l u s $ 65,780,254 A c c u m u l a t e d O t h e r U n d i v i d e d C o m p r e h e n s i v e C o m p r e h e n s i v e I n c o m e $ 882,875 I n c o m e T o t a l $ 106,541,624 Balance, January 1, 2008 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 Cumulative effect adjustment from adoption of ETIF 06-04 Effect of stock retirements on accrued dividends Cash dividends ($ .29 per share) Dividend declared ($ .30 per share) Retirement of stock Balance, December 31, 2008 Comprehensive Income: Net income Net unrealized loss 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 Effect of stock retirement on accrued dividends Cash dividends ($ .20 per share) Dividend declared ($ .10 per share) Retirement of stock Balance, December 31, 2009 Comprehensive Income: Net income Net unrealized loss 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 loss Cash dividends ($ .11 per share) Dividend declared ($ .09 per share) Retirement of stock Balance, December 31, 2010 See Notes to Consolidated Financial Statements. (140,936) 5,279,268 (140,936) 5,279,268 65,780,254 (127,571) 5,151,697 (127,571) 5,151,697 65,780,254 (197,360) (558) $ 5,151,139 (558) 5,151,139 10 $ 65,780,254 $ 33,302,381 $ (2,876,912) $ 101,356,862 P r o f i t s $ 34,458,291 5,033,690 (56,732) 8,816 (1,548,703) (1,588,465) (2,894,301) 33,412,596 3,220,473 4,774 (1,030,339) (515,170) (2,238,988) 32,853,346 1,484,963 (566,687) (462,323) (6,918) $ 5,033,690 745,909 745,909 1,693,658 (794,446) 1,693,658 (794,446) $ 6,678,811 2,527,996 (474,940) 142,108 $ 3,220,473 (2,392,524) (2,392,524) (474,940) 142,108 495,117 $ $ 1,484,963 (1,370,429) (1,370,429) (1,115,842) (193,281) (1,115,842) (193,281) $ (1,194,589) 5,033,690 745,909 1,693,658 (794,446) (56,732) 8,816 (1,548,703) (1,588,465) (3,035,237) 107,000,114 3,220,473 (2,392,524) (474,940) 142,108 4,774 (1,030,339) (515,170) (2,366,559) 103,587,937 1,484,963 (1,370,429) (1,115,842) (193,281) (566,687) (462,323) (7,476) N u m b e r o f C o m m o n S h a r e s 5,420,204 C o m m o n S t o c k $ 5,420,204 S u r p l u s $ 65,780,254 Balance, January 1, 2008 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 Cumulative effect adjustment from adoption of ETIF 06-04 Effect of stock retirements on accrued dividends Cash dividends ($ .29 per share) Dividend declared ($ .30 per share) Retirement of stock Balance, December 31, 2008 Comprehensive Income: Net income Net unrealized loss 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 Effect of stock retirement on accrued dividends Cash dividends ($ .20 per share) Dividend declared ($ .10 per share) Retirement of stock Balance, December 31, 2009 Comprehensive Income: Net income Net unrealized loss 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 loss Cash dividends ($ .11 per share) Dividend declared ($ .09 per share) Retirement of stock Balance, December 31, 2010 See Notes to Consolidated Financial Statements. (140,936) 5,279,268 (140,936) 5,279,268 65,780,254 (127,571) 5,151,697 (127,571) 5,151,697 65,780,254 (558) 5,151,139 (558) $ 5,151,139 U n d i v i d e d P r o f i t s $ 34,458,291 5,033,690 (56,732) 8,816 (1,548,703) (1,588,465) (2,894,301) 33,412,596 3,220,473 4,774 (1,030,339) (515,170) (2,238,988) 32,853,346 1,484,963 (566,687) (462,323) (6,918) A c c u m u l a t e d O t h e r C o m p r e h e n s i v e I n c o m e $ 882,875 C o m p r e h e n s i v e I n c o m e T o t a l $ 106,541,624 $ 5,033,690 745,909 745,909 1,693,658 (794,446) 1,693,658 (794,446) $ 6,678,811 2,527,996 $ 3,220,473 (2,392,524) (2,392,524) (474,940) 142,108 (474,940) 142,108 495,117 $ (197,360) $ 1,484,963 (1,370,429) (1,370,429) (1,115,842) (193,281) (1,115,842) (193,281) $ (1,194,589) 5,033,690 745,909 1,693,658 (794,446) (56,732) 8,816 (1,548,703) (1,588,465) (3,035,237) 107,000,114 3,220,473 (2,392,524) (474,940) 142,108 4,774 (1,030,339) (515,170) (2,366,559) 103,587,937 1,484,963 (1,370,429) (1,115,842) (193,281) (566,687) (462,323) (7,476) $ 65,780,254 $ 33,302,381 $ (2,876,912) $ 101,356,862 11 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Y E A R S E N D E D D E C E M B E R 3 1 , Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for allowance for loan losses Provision for losses on other real estate Impairment loss on investments (Gain) loss on other investments (Gain) loss on sales of other real estate Gain on liquidation, sales and calls of securities Gain on sale of bank premises Change in accrued interest receivable Change in other assets Change in other liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from maturities, liquidation, sales and calls of available for sale securities Investment in available for sale securities Proceeds from maturities and calls of held to maturity securities Investment in held to maturity securities Purchases of other investments Investment in Federal Home Loan Bank stock Redemption of Federal Home Loan Bank stock Proceeds from sales of other real estate Loans, net change Proceeds from sale and retirement of bank premises Acquisition of premises and equipment Other assets Net cash provided by investing activities Cash flows from financing activities: Demand and savings deposits, net change Time deposits, net change Cash dividends Retirement of common stock Borrowings from Federal Home Loan Bank Repayments to Federal Home Loan Bank Federal funds purchased and securities sold under agreements to repurchase, net change Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See Notes to Consolidated Financial Statements. 2 0 1 0 2 0 0 9 2 0 0 8 $ 1,484,963 $ 3,220,473 $ 5,033,690 2,351,000 6,845,000 77,350 109,933 86,850 (1,690,670) 1,354,322 (1,322,873) 1,084,581 10,380,456 403,092,553 (380,565,980) 1,289,920 (2,833) 2,734,700 1,328,000 41,339,949 (688,355) (623,224) 67,904,730 (799,677) 14,237,763 (1,081,857) (7,476) 775,907,492 (837,220,928) (34,328,858) (83,293,541) (5,008,355) 29,155,294 2,390,912 5,225,000 149,517 (146,979) (150,058) (869,123) 798,015 (3,582,781) 2,975,089 10,010,065 277,022,490 (251,622,168) 195,000 (2,754) (2,945,200) 3,108,801 (10,192,895) (209,626) (627,636) 14,726,012 (46,314,551) 6,540,444 (2,614,119) (2,366,559) 377,346,745 (310,013,979) (52,178,354) (29,600,373) (4,864,296) 34,019,590 2,451,966 2,347,000 2,964,000 270,676 (214,210) (397,852) (142,607) 1,926,449 314,965 85,281 14,639,358 257,886,217 (211,168,426) 1,240,000 (4,220) (3,160,000) (1,134,500) 236,261 (17,396,252) 266,812 (1,765,552) (1,083,450) 23,916,890 3,671,696 (62,326,639) (3,003,342) (3,035,237) 111,513,000 (81,675,619) (4,615,887) (39,472,028) (915,780) 34,935,370 $ 24,146,939 $ 29,155,294 $ 34,019,590 12 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S NN OO TT EE AA -- BB UU SS II NN EE SS SS AA NN DD SS UU MM MM AA RR YY OO FF SS II GG NN II FF II CC AA NN TT AA CC CC OO UU NN TT II NN GG PP OO LL II CC II EE SS :: BBuussiinneessss ooff TThhee CCoommppaannyy 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 B∆ank, which provides a full range of banking, finan- cial 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. PPrriinncciipplleess ooff CCoonnssoolliiddaattiioonn 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. BBaassiiss ooff AAccccoouunnttiinngg The Company and its subsidiaries recognize assets and liabilities, and income and expense, on the accrual basis of accounting. The preparation of finan- cial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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. NNeeww AAccccoouunnttiinngg PPrroonnoouunncceemmeennttss In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010- 06”). ASU No. 2010-06 amends FASB ASC Topic 820-10-50, Fair Value Measurements and Disclosures,to require additional information to be disclosed prin- cipally regarding Level 3 measurements and transfers to and from Level 1 and 2. In addition, enhanced disclosure is required concerning inputs and val- uation techniques used to determine Level 2 and Level 3 measurements. This guidance is generally effective for interim and annual reporting periods beginning after December 15, 2009; however, requirements to disclose separately purchases, sales, issuances, and settlements in the Level 3 reconciliation are effective for fiscal years beginning after December 15, 2010 (and for interim periods within such years). ASU No. 2010-06 is not expected to have a material impact on the Company’s results of operations or financial position, and will have a minimal impact on its disclosures. In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements ("ASU No. 2010-09"). ASU No. 2010-09 removes some contradictions between the requirements of U.S. GAAP and the filing rules of the Securities and Exchange Commission ("SEC"). SEC filers are required to evaluate subsequent events through the date the financial statements are issued, and they are no longer required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance except for the use of the issued date for conduit debt obligors, and it is not expected to have a material impact on Company's results of operations or financial position. In February 2010, the FASB issued Accounting Standards Update No. 2010-10, Consolidation: Amendments for Certain Investment Funds ("ASU No. 2010- 10"). ASU No. 2010-10 indefinitely defers the effective date for certain investment funds, the amendments made to FASB ASC 810-10 related to variable interest entities by Statement of Financial Accounting Standard (“SFAS") No. 167, however this deferral does not apply to the disclosure requirements of SFAS No. 167. ASU No. 2010-10 also clarifies that (1) interests of related parties must be considered in determining whether fees paid to decision makers or service providers constitute a variable interest, and (2) a quantitative calculation should not be the only basis on which such determination is made. This guidance is effective as of the beginning of the first annual period beginning after November 15, 2009, and for interim periods within that first annual reporting period. It is not expected to have a material impact on Company's results of operations, financial position or disclosures. In March 2010, the FASB issued Accounting Standards Update No. 2010-11, Derivatives and Hedging: Scope Exception Related to Embedded Credit Derivatives (“ASU No. 2010-11”). ASU No. 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements, by resolving a potential ambiguity about the breadth of the embedded credit derivative scope exception with regard to some types of contracts, such as collateralized debt obligations ("CDO's") and synthetic CDO's. The scope exception will no longer apply to some contracts that contain an embedded credit derivative feature that transfers credit risk. The ASU is effective for fiscal quarters beginning after June 15, 2010, and is not expected to have a material impact on Company's results of operations, financial position or disclosures. In April 2010, the FASB issued Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool That Is Accounted for as a Single Asset (“ASU No. 2010-18”). ASU No. 2010-18 allows for the one-time election to terminate accounting for loans as a pool under ASU Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. ASU No. 2010-18 is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. It is not expected to have a material impact on Company's results of operations, financial position or disclosures. In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”). ASU No. 2010-20 requires enhanced disclosures, including a greater level of disaggregated information, about the credit quality of financial receivables and the allowance for credit losses. Additionally, this standards update also requires an entity to disclose credit quality indicators, past due information, modifications to financing receivables and significant purchases and sales of financing receivables. The disclo- sures as of the end of a reporting period under ASU No. 2010-20 are effective for the Company for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company for interim and annual reporting periods beginning on or after December 15, 2010. It is not expected to have a material impact on Company's results of operations or financial position, but will require additional disclosures. CCaasshh aanndd DDuuee ffrroomm BBaannkkss 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 $587,000, $542,000 and $696,000 for the years ending December 31, 2010, 2009 and 2008, respectively. SSeeccuurriittiieess 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 share- holders’ equity as accumulated other comprehensive income. 13 The amortized cost of available for sale securities and held to maturity securities is adjusted for amortization of premiums and accretion of discounts to matu- rity, determined using the interest method. Such amortization and accretion is included in interest income on securities. A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. 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 invest- ment 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 (loss) on liquidation, sales and calls of securities in non-interest income. OOtthheerr IInnvveessttmmeennttss 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. FFeeddeerraall HHoommee LLooaann BBaannkk SSttoocckk The Company is a member of the Federal Home Loan Bank of Dallas (“FHLB”) and as such is required to maintain a minimum investment in its stock that varies with the level of FHLB advances outstanding. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment in accordance with GAAP. LLooaannss The loan portfolio consists of commercial and industrial and real estate loans within the Company’s trade area in South Mississippi that we have the intent and ability to hold for the foreseeable future or until maturity. The loan policy establishes guidelines relating to pricing, repayment terms, collateral stan- dards 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 on a daily basis 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 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, land, development, construction and commercial real estate loans, and their direct and indirect impact on its operations. Loan delinquencies and deposit overdrafts are monitored on a monthly basis in order to identify developing problems as early as possible. Also on a monthly basis, the loan review department prepares a watch list of credits based on our loan grading system. Grades of A – F are applied to individual loans based on factors including repayment ability, financial condition of the borrower and payment performance. Loans with a grade of D – F, as well as some with a grade of C, are placed on the watch list of credits. The watch list is the primary tool for monitoring the credit quality of our loan portfolio. Once loans are determined to be past due, the loan officer and collection department work vigorously to bring the loans back to current status. The Company places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of inter- est 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 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 placement of loans on and removal of loans from nonaccrual status must be approved by Management. Generally, loans which become 90 days delinquent are reviewed relative to collectability. 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. That portion of a loan which is deemed uncollectible will be charged off against the allowance as a partial charge off. All charge offs must be approved by Management and are reported to the Board of Directors. AAlllloowwaannccee ffoorr LLooaann LLoosssseess The allowance for loan losses (“ALL”) is a valuation account available to absorb losses on loans. The ALL 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. On a quarterly basis, the Company’s problem asset committee meets to review the watch list of credits, which is formulated from the loan grading system. Members of this committee include loan offi- cers, loan review officers, collection officers, the chief lending officer, the chief credit officer, the chief risk officer, the chief financial officer and the chief executive officer. 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 pos- sibility 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 regu- latory examinations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The ALL consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component of the allowance relates to loans that are not impaired. Changes to the components of the ALL are recorded as a component of the provision for loan losses. Management must approve changes to the ALL and must report its actions to the Board of Directors. The Company believes that its allowance for loan loss- es is appropriate at December 31, 2010. 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 troubled debt restructurings and performing and non-performing major loans for which full payment of principal or interest is not expected. A loan may be impaired but not on nonaccrual status when available information suggests that it is probable the Bank may not receive all contractual principal and interest, however, the loan is still current and payments are received in accordance with the terms of the loan. Payments received for impaired loans not on nonaccrual status are applied to principal and interest. All impaired loans are reviewed, at a minimum, on a quarterly basis. The Company calculates the specific 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. Most of the Company’s impaired loans are collateral-dependent. The fair value of the collateral for collateral-dependent loans is based on appraisals performed by third-party valuation specialists, comparable sales and other estimates of fair value obtained principally from independent sources such as the Multiple Listing Service or county tax assessment valuations, 14 adjusted for estimated selling costs. The Company has a Real Estate Appraisal Policy (the “Policy”) which is in compliance with the guidelines set forth in the “Interagency Appraisal and Evaluation Guidelines” which implement Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). The Policy further requires that appraisals be in writing and conform to the Uniform Standards of Professional Appraisal Practice (“USPAP”). An appraisal prepared by a state-licensed or state-certified appraiser is required on all new loans secured by real estate in excess of $250,000. Loans secured by real estate in an amount of $250,000 or less, or that qualify for an exemption under FIRREA, must have a summary appraisal report or in-house evaluation, depending on the facts and circumstances. Factors including the assumptions and techniques utilized by the appraiser, which could result in a downward adjustment to the collateral value estimates indicated in the appraisal, are considered by the Company. In December 2010, revised “Interagency Appraisal and Evaluation Guidelines” were issued by the federal financial regulatory agencies to update and replace existing supervisory guidance. The Company has reviewed this guidance and does not anticipate that it will impact its policies and procedures with respect to appraisals. When Management determines that a loan is impaired and the loan is collateral-dependent, an evaluation of the fair value of the collateral is performed. The Company maintains established criteria for assessing whether an existing appraisal continues to reflect the fair value of the property for collateral- dependent loans. Appraisals are generally considered to be valid for a period of at least twelve months. However, appraisals that are less than 12 months old may need to be adjusted. Management considers such factors as the property type, property condition, current use of the property, current market conditions and the passage of time when determining the relevance and validity of the most recent appraisal of the property. If Management determines that the most recent appraisal is no longer valid, a new appraisal is ordered from an independent and qualified appraiser. During the interim period between ordering and receipt of the new appraisal, Management considers if the existing appraisal should be discounted to determine the estimated fair value of collateral. Discounts are applied to the existing appraisal and take into consideration the property type, condition of the property, external market data, internal data, reviews of recently obtained appraisals and evaluations of similar properties, comparable sales of similar properties and tax assessment valuations. When the new appraisal is received and approved by Management, the valuation stated in the apprais- al is used as the fair value of the collateral in determining impairment, if any. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a specific component of the allowance for loan losses. Any specific reserves recorded in the interim are adjust- ed accordingly. The general component of the ALL is the loss estimated by applying loss percentages to non-classified loans which have been dividend into segments. These segments include gaming; residential development; real estate, construction; real estate, mortgage; commercial and industrial and all other. The loss percentages are based on each segment’s historical five year average loss experience which may be adjusted by qualitative factors such as changes in the general economy, or economy or real estate market in a particular geographic area or industry. BBaannkk PPrreemmiisseess aanndd EEqquuiippmmeenntt 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. OOtthheerr RReeaall EEssttaattee Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at its fair value less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the allowance for loan losses. Any expense incurred in connection with holding such real estate or resulting from any writedowns in value subsequent to foreclosure is included in noninterest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference, if any, between the sales proceeds and the carrying amount of the property. If the fair value of the ORE, less estimated costs to sell at the time of foreclosure, decreases during the holding period, the ORE is written down with a charge to noninterest expense. All ORE properties are being actively marketed for sale and Management is continuously monitoring these properties in order to minimize any losses. TTrruusstt DDeeppaarrttmmeenntt IInnccoommee aanndd FFeeeess Corporate trust fees are accounted for on an accrual basis and personal trust fees are recorded when received. IInnccoommee TTaaxxeess 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 contri- bution to consolidated taxable income. The provision for applicable income taxes is based upon reported income and expenses as adjusted for differ- ences 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 provi- sions of Section 1031 of the Internal Revenue Code. LLeeaasseess All leases are accounted for as operating leases in accordance with the terms of the leases. EEaarrnniinnggss PPeerr SShhaarree Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding, 5,151,661, 5,170,430 and 5,342,470 in 2010, 2009 and 2008, respectively. SSttaatteemmeennttss ooff CCaasshh FFlloowwss The Company has defined cash and cash equivalents to include cash and due from banks and federal funds sold. The Company paid $4,621,778, $7,576,159 and $14,961,180 in 2010, 2009 and 2008, respectively, for interest on deposits and borrowings. Income tax payments totaled $2,232,000, $520,000 and $1,635,000 in 2010, 2009 and 2008, respectively. Loans transferred to other real estate amounted to $5,715,037, $4,082,874 and $399,725 in 2010, 2009 and 2008, respectively. The income tax effect from the unrealized gain (loss) on available for sale securities on accumulated other comprehensive income was $(1,280,806), $(1,477,178) and $1,277,519, at December 31, 2010, 2009 and 2008, respectively. The income tax effect from the gain (loss) from unfunded post- retirement benefit obligation on accumulated other comprehensive income was $(99,568), $(92,434) and $204,124 at December 31, 2010, 2009 and 2008, respectively. FFaaiirr VVaalluuee MMeeaassuurreemmeenntt The Company reports certain assets and liabilities at their estimated fair value. These assets and liabilities are classified and disclosed in one of three cat- egories based on the inputs used to develop the measurements. The categories, which establish a hierarchy for ranking the quality and reliability of the information used to determine fair value, are: Level 1 – Quoted market prices in active markets for identical assets or liabilities, Level 2 – Observable mar- ket based inputs or unobservable inputs that are corroborated by market data, or Level 3 – Unobservable inputs that are not corroborated by market data. RReeccllaassssiiffiiccaattiioonnss 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. 15 NN OO TT EE BB -- SS EE CC UU RR II TT II EE SS :: The amortized cost and fair value of securities at December 31, 2010, 2009, and 2008, respectively, are as follows (in thousands): December 31, 2010 Available for sale securities: Debt securities: U.S. Treasury U.S. Government agencies States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: States and political subdivisions Total held to maturity securities December 31, 2009 Available for sale securities: Debt securities: U.S. Treasury U.S. Government agencies Mortgage-backed securities States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: States and political subdivisions Total held to maturity securities December 31, 2008 Available for sale securities: Debt securities: U.S. Treasury U.S. Government agencies Mortgage-backed securities States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: States and political subdivisions Total held to maturity securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $ 26,957 221,639 40,579 289,175 650 $ 289,825 $ $ 1,915 1,915 $ 52 1,056 1,114 2,222 $ (500) (4,099) (370) (4,969) $ 2,222 $ (4,969) $ 95 $ 95 $ $ – – Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $ 23,987 216,473 30,035 39,291 309,786 650 $ 310,436 $ $ 3,202 3,202 $ 753 695 1,278 1,179 3,905 $ – (2,590) (51) (266) (2,907) $ 3,905 $ (2,907) $ 139 $ 139 $ $ – – Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $ 64,963 208,918 28,993 31,594 334,468 650 $ 335,118 $ $ 3,394 3,394 $ 1,746 3,552 788 317 6,403 $ – (74) (985) (1,059) $ 6,403 $ (1,059) $ 52 $ 52 $ (8) $ (8) Fair Value $ 26,509 218,596 41,323 286,428 650 $ 287,078 $ $ 2,010 2,010 Fair Value $ 24,740 214,578 31,262 40,204 310,784 650 $ 311,434 $ $ 3,341 3,341 Fair Value $ 66,709 212,396 29,781 30,926 339,812 650 $ 340,462 $ $ 3,438 3,438 16 The amortized cost and fair value of debt securities at December 31, 2010, (in thousands) 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. Available for sale securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Totals Held to maturity securities: Due after one year through five years Due after five years through ten years Totals Amortized Cost $ $ $ $ 11,627 94,903 109,309 73,336 289,175 1,451 464 1,915 Fair Value $ 11,646 95,104 107,971 71,707 $ 286,428 $ 1,531 479 $ 2,010 Information pertaining to securities with gross unrealized losses at December 31, 2010, 2009 and 2008, 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, 2010 U.S. Treasury U.S. Government Agencies States and political subdivisions Total Fair Value 15,458 $ 138,076 5,295 $ 158,829 Gross Unrealized Losses $ 500 4,099 173 $ 4,772 Fair Value 2,826 $ Gross Unrealized Losses $ 826 2,029 2,029 $ 197 197 $ Fair Value 15,458 $ 138,076 7,324 $ 160,858 $ Gross Unrealized Losses 500 4,099 370 $ 4,969 Less than twelve months Over twelve months Total December 31, 2009 U.S. Government Agencies States and political subdivisions Mortgage-backed securities Total Fair Value $ 138,914 9,501 4,856 $ 153,271 Gross Unrealized Losses $ 2,590 148 51 $ 2,789 Fair Value 2,826 $ 2,521 Gross Unrealized Losses $ 254 118 $ 2,521 $ 118 Fair Value 138,914 $ 12,022 4,856 $ 155,792 Gross Unrealized Losses $ 2,590 266 51 $ 2,907 Less than twelve months Over twelve months Total December 31, 2008 U.S. Government Agencies States and political subdivisions Total Fair Value 10,781 $ 16,545 $ 27,326 Gross Unrealized Losses $ 74 740 814 $ Fair Value 2,826 $ 2,826 2,826 $ Gross Unrealized Losses $ 254 253 $ 253 Fair Value 10,781 $ 19,371 $ 30,152 Gross Unrealized Losses $ 74 993 1,067 $ At December 31, 2010, 4 of 7 securities issued by the U.S. Treasury, 30 of the 47 securities issued by U.S. Government agencies and 24 of the 132 securities issued by state and political subdivisions contained unrealized losses. Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell and it is not more likely than not that we will be required to sell these securities before maturity. While some available for sale securities have been sold for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of this evaluation, the Company has determined that the declines summarized in the tables above are not deemed to be other-than-temporary. Proceeds from maturities and calls of held to maturity debt securities during 2010, 2009 and 2008 were $1,289,920, $195,000 and $1,240,000, respectively. There were no sales of held to maturity debt securities during 2010, 2009 and 2008. Proceeds from maturities, sales and calls of available for sale debt securities were $403,092,553, $277,022,490 and $257,886,217 during 2010, 2009 and 2008, respectively. Available for sale debt securities were sold and called in 2010 and 2009 for realized gains of $1,690,670 and $869,123, respectively. There were no sales of available for sale debt securities during 2008. The Company realized a gain of $249,000 from the liquidation of equity securities in 2008. During 2009, the Company recorded a loss of $149,517 from the other-than-temporary impairment of an equity investment. 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 \$285,925,360, $296,176,580 and $328,047,697 at December 31, 2010, 2009 and 2008, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law. The value of the Company’s investment in FHLB common stock is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) The sig- nificance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted, (b) Commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance, (c) The impact of legislative and regulatory changes on the customer base of the FHLB and (d) The liquidity position of the FHLB. While the Federal Home Loan Banks have been negatively impacted by the current economic conditions, the FHLB of Dallas has reported profits for the third quarter of 2010, remains in compliance with regulatory capital and liquidity requirements, continues to pay dividends on the stock and make redemptions at the par value. With consideration given to these factors, Management concluded that the stock was not impaired at December 31, 2010. 17 NN OO TT EE CC -- LL OO AA NN SS :: The composition of the loan portfolio was as follows (in thousands): December 31, Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Totals 2010 $ 44,343 30,064 60,983 222,577 36,464 15,468 $ 409,899 2009 $ 69,938 35,329 59,132 241,601 40,114 18,862 $ 464,976 $ 2008 76,510 36,571 81,884 223,325 30,935 15,152 $ 467,377 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 collectability and do not include other unfavorable features. An analysis of the activity with respect to such loans to related parties is as follows (in thousands): Years Ended December 31, Balance, January 1 New loans and advances Repayments Balance, December 31 2010 $ 6,891 2,308 (2,506) $ 6,693 2009 $ 7,800 1,128 (2,037) 6,891 $ 2008 $ 7,318 2,743 (2,261) $ 7,800 As a part of its evaluation of the quality of the loan portfolio, Management continuously monitors the Company’s credit concentrations on a monthly basis. Total outstanding concentrations were as follows (in thousands): December 31, Gaming Hotel/motel Out of area 2010 2009 2008 $ 44,343 $ 69,938 $ 79,510 47,908 42,790 47,714 46,697 35,962 44,458 The age analysis of the loan portfolio, segregated by class of loans, as of December 31, 2010, 2009 and 2008, respectively, was as follows (in thousands): Number of Days Past Due 30-59 60-89 Greater Than 90 Total Past Due Current Total Loans Loans Past Due Greater Than 90 Days and Still Accruing December 31, 2010: Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2009: Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2008: Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Total $ 2222 2,282 8,042 18,480 1,558 274 $30,636 $9,205 17,171 2,004 15,090 231 184 $34,680 $9 ,205 22,685 1,292 8,163 2,232 219 $34,591 $9,205 4,433 4,640 98 34 $9,205 $9,20 102 2,611 27 55 $2,795 $9,205 1,084 6,728 211 17 $8,040 $ 2,808 4,599 22,906 28,260 1,697 309 $60,579 $9,205 23,157 2,236 27,026 868 287 $53,574 $9,205 26,520 4,322 19,069 3,143 276 $53,330 $41,535 25,465 38,077 194,317 34,767 15,159 $349,320 $69,938 12,172 56,896 214,575 39,246 18,575 $411,402 $79,510 10,051 77,562 204,256 27,792 14,876 $414,047 $ 44,343 30,064 60,983 222,577 36,464 15,468 $409,899 $69,938 35,329 59,132 241,601 40,114 18,862 $464,976 $79,510 36,571 81,884 223,325 30,935 15,152 $467,377 $9,205 1,991 955 14 1 $2,961 $9,205 3,560 610 48 $4,218 $9,205 377 1,269 654 40 $2,340 $ 2,808 2,317 10,431 5,140 41 1 $20,738 $9,205 5,986 130 9,325 610 48 $16,099 $9,205 3,835 1,946 4,178 700 40 $10,699 18 The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A - F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. Loans with a grade of C may be placed on the watch list if weaknesses are not resolved which could result in potential loss or for other circircumstances that require monitoring. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade of E will generally be applied to loans for customers with weaknesses inherent in the D classification and in which collection or liquidation in full is questionable. All loans 90 days or more past due are rated E. A grade of F is applied to loans which are considered uncollectible and of such little value that their continuance in an active bank is not warranted. Loans with this grade are charged off, even though partial or full recovery may be possible in the future. All loans 180 days or more past due are rated F and charged off unless the Bank is in the process of collection. An analysis of the loan portfolio by loan grade, segregated by class of loans, as of December 31, 2010, 2009 and 2008, respectively is as follows (in thousands): December 31, 2010: Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2009: Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2008: Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Total A or B $ 27,397 25,666 52,417 184,963 33,703 15,232 $339,378 A or B $ 53,797 27,622 53,875 196,408 36,804 18,575 $ 387,081 A or B $ 76,510 25,542 72,527 194,711 27,326 14,780 $ 411,396 Loans With A Grade Of: D $ 6,413 3,102 7,716 25,669 2,323 196 $45,419 F $9, 56 E $10,533 432 535 3,697 149 $15,346 $9, 56 Loans With A Grade Of: D $6,298 1,721 3,515 26,243 2,896 174 $40,847 Loans With A Grade Of: D $ 9,756 7,334 14,119 2,279 275 $24,007 E $ 9,843 5,986 1,010 6,257 26 $23,122 E $9 ,756 11,029 360 1,023 4 24 $12,440 F $9756 31 $9 631 F $9, 56 1,585 2,899 47 $4,531 Total $ 44,343 30,064 60,983 222,577 36,464 15,468 $ 409,899 Total $ 69,938 35,329 59,132 241,601 40,114 18,862 $ 464,976 $$ Total 76,510 36,571 81,884 223,325 30,935 15,152 $ 464,377 C $9,756 864 315 8,248 289 40 $9,756 C $9,756 732 12,693 414 56 $13,895 C $9,756 78 10,573 1,279 73 $12,003 19 Total loans on non accrual as of December 31, 2010, 2009 and 2008, respectively, were as follows (in thousands): December 31, Gaming Residential development Real estate, construction Real estate, mortgage Commercial and Industrial Other Total 2010 $ 10,222 632 387 3,268 27 1 $ 14,537 2009 $ 9,843 5,386 1,010 5,764 2 $ 22,005 $ 2008 11,028 1,569 2,909 47 $ 15,553 On September 1, 2010, the Company modified two loans by granting interest rate concessions to the borrowers. These loans, which had a balance of $702,494 at December 31, 2010, are in compliance with these modified terms and are currently accruing and the Company has classified them as troubled debt restructurings. Impaired loans, segregated by class of loans, as of December 31, 2010, 2009 and 2008, respectively, were as follows (in thousands): December 31, 2010 Gaming Residential development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2009 Gaming Residential development Real estate, construction Real estate, mortgage Other Total December 31, 2008 Residential development Real estate, construction Real estate, mortgage Commercial and industrial Total Unpaid Principal Balance $10,533 4,313 573 4,762 27 1 $20,209 Unpaid Principal Balance $ 9,843 11,085 1,010 6,262 2 $28,202 Unpaid Principal Balance $11,028 1,569 2,909 47 $15,553 Recorded Investment $10,222 632 573 3,784 27 1 $15,239 Recorded Investment $ 9,843 5,386 1,010 5,764 2 $22,005 Recorded Investment $11,028 1,569 2,909 47 $15,553 Related Allowance $107 8 179 649 1 1 $945 Related Allowance $ 98 844 10 942 1 $1,895 Related Allowance $2,535 784 360 47 $3,726 Average Investment $ 9,363 2,693 199 2,367 8 1 $14,631 Average Investment $ 9,512 8,976 1,010 6,052 2 $25,552 Average Investment $11,076 1,563 2,908 49 $15,596 No material interest income was recognized on impaired loans for the years ended December 31, 2010, 2009 and 2008, respectively. 20 Transactions in the allowance for loan losses for the years ended December 31, 2010, 2009 and 2008, and the balances of loans individually and collectively evaluated for impairment at December 31, 2010, 2009 and 2008, were as follows (in thousands): Residential Development Real Estate, Construction Real Estate, Mortgage Commercial Industrial Other Total $ 1,019 (744) 61 684 $ 1,020 $ 3,549 (2,622) 84 2,402 $ 3,413 $ 1,245 (348) 14 (431) $ 480 $ 118 (226) 109 201 $ 202 $ 7,828 (8,291) 268 6,845 $ 6,650 $ 301 $ 1,332 $ 201 $ 9 $ 1,843 $ 719 $ 2,081 $ 279 $ 193 $ 4,807 $ 1,140 $ 7,337 $ 404 $ 12 $ 19,747 $59,843 $215,240 $36,060 $15,456 $390,152 $ 2,438 (417) (1,002) 1,019 $ $ $ 500 519 $ 3,385 (1,576) 77 1,663 $ 3,549 $ 1,479 (104) 85 (215) $ 1,245 $ 338 (405) 407 (222) $ 118 $ 11,114 (9,080) 569 5,225 $ 7,828 $ 1,919 $ 1,015 $ 28 $ 4,271 $ 1,630 $ 230 $ 90 $ 3,557 $ 3,338 $ 10,732 $ 1,128 $ 55 $ 30,482 $55,794 $230,869 $38,986 $18,807 $434,494 $ 2,313 (111) 236 $ 2,438 $ 3,811 (115) 135 (446) $ 3,385 $ 2,377 (334) 18 (582) $ 1,479 $ 102 (724) 520 440 $ 338 $ 9,378 (1,284) 673 2,347 $ 11,114 $ 1,879 $ 1,614 $ 1,233 $ 230 $ 7,491 $ 559 $ 1,771 $ 246 $ 10 8 $ 3,623 $ 8,358 $ 25,334 $ 3,423 $ 1,527 $ 49,671 $73,526 $197,991 $27,512 $13,625 $ 417,706 December 31, 2010: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Ending Balance Individually evaluated for impairment Ending Balance Collectively evaluated for impairment Total Loans: Ending Balance Individually evaluated for impairment Ending Balance Collectively evaluated for impairment December 31, 2009: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Ending Balance Individually evaluated for impairment Ending Balance Collectively evaluated for impairment Total Loans: Ending Balance Individually evaluated for impairment Ending Balance Collectively evaluated for impairment December 31, 2008: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Ending Balance Individually evaluated for impairment Ending Balance Collectively evaluated for impairment Total Loans: Ending Balance Individually evaluated for impairment Ending Balance Collectively evaluated for impairment Gaming $ 699 (311) 77 $ 465 $ 00000 $ 465 $ 10,222 $ 34,121 $ 711 (12) $ 699 $ 00000 $ 699 $ 9,843 $60,095 $ 1,198 (4,040) 3,912 $ 1,070 $ 00000 $ 1,070 $ 632 $29,432 $ 2,763 (6,578) 5,013 1,198 $ $ 809 $ 389 $ 5,386 $29,943 $ 562 $ 213 149 $ 711 $ 00000 $ 711 $ 00000 $ 79,510 2,550 $ 2,763 $ 2,535 $ 228 $ 11,029 $25,542 21 NN OO TT EE DD -- BB AA NN KK PP RR EE MM II SS EE SS AA NN DD EE QQ UU II PP MM EE NN TT :: Bank premises and equipment are shown as follows (in thousands): December 31, Land Buildings Furniture, fixtures and equipment Totals, at cost Less: Accumulated depreciation Totals Estimated Useful Lives 5 – 40 years 3 – 10 years 2010 $ 5,985 30,359 14,037 50,381 20,625 $ 29,756 2009 $ 5,986 30,233 15,378 51,597 20,178 $ 31,419 $ 2008 5,978 30,427 14,982 51,387 17,787 $ 33,600 NN OO TT EE EE –– OO TT HH EE RR RR EE AA LL EE SS TT AA TT EE :: The Company’s other real estate consisted of the following as of December 31, 2010, 2009 and 2008, respectively (in thousands): December 31, 2010 2009 2008 Construction, land development and other land 1-4 family residential properties Non farm non residential Total Number of Properties 11 9 4 24 Balance $1,744 778 3,222 $5,744 Number of Properties 8 8 Balance $ 694 827 Number of Properties 2 2 Balance $ 68 329 16 $1,521 4 $397 NN OO TT EE FF –– DD EE PP OO SS II TT SS :: At December 31, 2010, the scheduled maturities of time deposits (in thousands) are as follows: $ 155,948 20,710 1,873 2,218 1,479 2 182,230 2011 2012 2013 2014 2015 Beyond Total $ Time deposits of $100,000 or more at December 31, 2010 included brokered deposits of $29,399,000, of which $19,399,000 matures in 2011 and the remain- ing balance matures in 2012. Deposits held for related parties amounted to $9,448,582, $9,889,556 and $8,659,875 at December 31, 2010, 2009 and 2008, respectively. Overdrafts totaling $3,027,718, $740,320 and $1,191,788 were reclassified as loans at December 31, 2010, 2009 and 2008, respectively. NN OO TT EE GG –– FF EE DD EE RR AA LL FF UU NN DD SS PP UU RR CC HH AA SS EE DD AA NN DD SS EE CC UU RR II TT II EE SS SS OO LL DD UU NN DD EE RR AA GG RR EE EE MM EE NN TT SS TT OO RR EE PP UU RR CC HH AA SS EE :: At December 31, 2010, the Company had facilities in place to purchase federal funds up to $71,600,000 under established credit arrangements. At December 31, 2010, 2009 and 2008, 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 $124,802,000, $167,280,777 and $176,909,231, 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. NN OO TT EE HH –– BB OO RR RR OO WW II NN GG SS :: At December 31, 2010, the Company was able to borrow up to $33,256,954 from the Federal Reserve Bank Discount Window Primary Credit Program. The borrowing limit is based on the amount of collateral pledged, with certain loans from the Bank’s portfolio serving as collateral. Borrowings bear interest at 25 basis points over the current fed funds rate and have a maturity of one day. There was no outstanding balance at December 31, 2010. At December 31, 2010, the Company had $42,957,016 outstanding in advances under a $126,588,341 line of credit with the Federal Home Loan Bank of Dallas (“FHLB”). One advance in the amount of $25,000,000 bears interest at a fixed rate of .09%. One advance in the amount of $10,000,000 bears interest at a fixed rate of .11%. One advance in the amount of $5,000,000 bears interest at .10%. All of these advances mature in January 2011. The remaining balance consists of smaller advances bearing interest from 3.35% to 7.00% with maturity dates from 2015 – 2040. The advances are collateralized by a blanket float- ing lien on the Company’s residential first mortgage loans. NN OO TT EE II –– NN OO TT EE SS PP AA YY AA BB LL EE :: The Company had a $5,000,000 unsecured line of credit with Silverton Bank, N.A. The line bore interest at .50% under Wall Street Journal Prime and required interest only payments quarterly with all principal and accrued interest due at maturity, which was July 6, 2009. The Company had a $2,500,000 unsecured line of credit with Mississippi National Bankers Bank. The line bore interest at Wall Street Journal Prime with a floor of 4.00% and required inter- est only payments quarterly with all principal and accrued interest due at maturity, which was March 11, 2010. 22 NN OO TT EE JJ -- II NN CC OO MM EE TT AA XX EE SS :: Deferred taxes (or deferred charges) as of December 31, 2010, 2009 and 2008, included in other assets or other liabilities, were as follows (in thousands): December 31, Deferred tax assets: Allowance for loan losses Employee benefit plans' liabilities Unrealized loss on available for sale securities charged from equity Earned retiree health benefits plan liability Unearned retiree health benefits plan liability Other Deferred tax assets Deferred tax liabilities: Unrealized gain on available for sale securities, charged to equity Bank premises and equipment Other Deferred tax liabilities Net deferred taxes Income taxes consist of the following components (in thousands): Years Ended December 31, Current Deferred Totals 2010 2009 2008 $ 2,261 $ 2,661 $ 3,779 3,368 934 1,454 364 423 8,804 6,071 370 6,441 3,005 1,225 299 540 7,730 339 6,547 489 7,375 2,579 1,011 419 316 8,104 1,817 6,093 35 7,945 $ 2,363 √$ 355 $ 159 2010 2009 2008 $ (119) $ (208) $ 2,897 (604) 1,162 (920) $ (723) $ 954 $ 1,977 Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2010, 2009 and 2008 to earnings before income taxes. The reason for these differences is shown below (in thousands): Years Ended December 31, Taxes computed at statutory rate Increase (decrease) resulting from: Tax-exempt interest income Income from BOLI Federal tax credits Deferred expense adjustment Other Total income taxes 2010 Amount $ 259 (428) (181) (366) (7) $ (723) % 34.0 (56.2) (23.8) (48.1) (0.9) (95.0) 2009 Amount % 2008 Amount $ 1,419 34.0 $ 2,384 % 34.0 (5.2) (2.4) (365) (168) 126 1.8 $ 1,977 28.20 (385) (183) (129) 228 4 $ º954 (9.2) (4.4) (3.1) 5.5 0.1 22.9 The Company has reviewed its income tax positions and specifically considered the recognition and measurement requirements 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 believes that it is more likely than not we will realize the net deferred tax asset and it has not recorded any tax liability for uncertain tax positions as of December 31, 2010, 2009 and 2008. NN OO TT EE KK -- SS HH AA RR EE HH OO LL DD EE RR SS ’’ EE QQ UU II TT YY :: Shareholders’ equity of the Company includes the undistributed earnings of the bank subsidiary. Dividends to the Company’s shareholders can general- ly 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, 2010, approximately $23,793,000 of undistributed earnings of the bank subsidiary included in consolidated surplus and retained earnings was available for future distribution to the Company as dividends. Dividends paid by the Company are subject to the approval of the Federal Reserve Bank (“FRB”). On December 29, 2010, the Company’s Board of Directors approved a semi-annual dividend of $.09 per share. After receiving approval from the FRB on January 19, 2011, the board declared this dividend, which has a record date of February 2, 2011 and a distribution date of February 9, 2011. 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 repur- chase 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, which was completed during 2009, 132,588 shares were repurchased and retired. On February 25, 2009, the Board approved the repurchase of up to 3% of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, 34,024 shares were repurchased and retired as of December 31, 2010. 23 The bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capi- tal 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 cer- tain off-balance sheet items as calculated under regulatory accounting practices. The bank subsidiary’s capital amounts and classification are also sub- ject 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, 2010, 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 cap- ital 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 2010, 2009 and 2008, are as follows (in thousands): Actual For Capital Adequacy Purposes December 31, 2010: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2009: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2008: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) Amount $ 110,435 104,233 104,233 $ 111,060 103,785 103,785 $ 111,714 104,472 104,472 Ratio 22.26% 21.01% 12.40% 19.08% 17.83% 11.47% 19.28% 18.03% 11.61% Amount $39,691 19,846 33,616 $46,559 23,280 36,194 $46,348 23,174 35,983 Ratio 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2010, 2009 and 2008, are as follows (in thousands): December 31, 2010: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2009: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2008: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) Amount $ 105,255 99,111 99,111 $ 105,728 98,512 98,512 $ 108,207 101,022 101,022 Actual Ratio 21.41% 20.16% 11.86% 18.31% 17.06% 10.94% 18.83% 17.58% 11.31% For Capital Adequacy Purposes Ratio Amount $39,320 19,660 33,431 $46,184 23,092 36,006 $45,984 22,992 35,743 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 24 NN OO TT EE LL -- OO TT HH EE RR II NN CC OO MM EE AA NN DD EE XX PP EE NN SS EE SS :: Other income consisted of the following (in thousands): Years Ended December 31, Other service charges, commissions and fees Rentals Increase in cash surrender value of life insurance Other Totals Other expenses consisted of the following (in thousands): Years Ended December 31, Advertising Data processing FDIC and state banking assessments Legal and accounting Other real estate ATM expense Consulting fees Trust expense Other Totals $ 2010 84 400 531 61 $ 1,076 2010 $ 580 567 1,510 839 411 2,024 26 298 1,712 $7,967 $ 2009 83 484 535 153 $ 1,255 2009 $ 583 380 1,429 518 161 2,038 90 326 1,593 $ 7,118 2008 $ 117 538 494 383 $ 1,532 2008 $ 636 344 169 680 (166) 2,024 176 356 2,280 $6,499 NN OO TT EE MM -- FF II NN AA NN CC II AA LL II NN SS TT RR UU MM EE NN TT SS WW II TT HH OO FF FF -- BB AA LL AA NN CC EE -- SS HH EE EE TT RR II SS KK :: 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, 2010, 2009 and 2008, the Company had outstanding irrevocable letters of credit aggregating $4,564,004, $6,037,976 and $7,201,053, respectively. At December 31, 2010, 2009 and 2008, the Company had outstanding unused loan commitments aggregating $110,677,857, $97,882,869 and $116,091,000, respectively. Approximately $71,244,000, $63,298,000 and $69,684,000 of outstanding commitments were at fixed rates and the remainder were at variable rates at December 31, 2010, 2009 and 2008, respectively. NN OO TT EE NN -- CC OO NN TT II NN GG EE NN CC II EE SS :: 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 settle- ment, 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. 25 NN OO TT EE OO -- CC OO NN DD EE NN SS EE DD PP AA RR EE NN TT CC OO MM PP AA NN YY OO NN LL YY FF II NN AA NN CC II AA LL II NN FF OO RR MM AA TT II OO NN :: 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. C O N D E N S E D B A L A N C E S H E E T S ( I N T H O U S A N D S ) : December 31, Assets Investments in subsidiaries, at underlying equity: Bank subsidiary Nonbank subsidiary Cash in bank subsidiary Other assets Total assets Liabilities and Shareholders' Equity Other liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity 2010 2009 2008 $ 96,386 $ 98,467 $ 103,701 1 957 4,637 1 1,103 4,694 1 496 4,552 $ 101,981 $ 104,265 $ 108,750 $ 624 624 101,357 $ 101,981 $ 677 677 103,588 $ 104,265 $ 1,750 1,750 107,000 $ 108,750 C O N D E N S E D S T A T E M E N T S O F I N C O M E ( I N T H O U S A N D S ) : Years Ended December 31, Income Earnings of unconsolidated bank subsidiary: Distributed earnings Undistributed earnings Interest income Other income Total income Expenses Other Total expenses Income before income taxes Income taxes Net income 2010 2009 2008 $ 1,000 599 $ 5,800 (2,511) (96) 1,503 71 71 1,432 (53) 7 3,296 71 71 3,225 5 $ 8,550 (3,511) 4 75 5,118 87 87 5,031 (3) $ 1,485 $ 3,220 $ 5,034 26 C O N D E N S E D S T A T E M E N T S O F C A S H F L O W S ( I N T H O U S A N D S ) : Years Ended December 31, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on liquidation of investment (Gain) loss on other investments Impairment loss on equity investments Net income of consolidated subsidiaries Change in assets and liabilities: Other assets Net cash provided by (used in) operating activities Cash flows from investing activities: Investment in equity securities Proceeds from liquidation of investment Dividends from unconsolidated subsidiary Net cash provided by investing activities Advances on line of credit Principal payments on line of credit Retirement of stock Dividends paid Net cash used in financing activities Net increase (decrease) in cash Cash, beginning of year 2010 2009 2008 $ 1,485 $ 3,220 $ 5,034 110 (1,599) (53) (57) – – 1,000 1,000 – – (7) (1,082) (1,089) (146) 1,103 (147) 150 (3,290) 5 (62) (150) 5,800 5,650 1,500 (1,500) (2,367) (2,614) (4,981) 607 496 (249) 270 (5,039) (3) 13 (3,160) 753 8,550 6,143 300 (450) (3,035) (3,003) (6,188) (32) 528 $ 957 $ 1,103 $ 496 Peoples Financial Corporation paid income taxes of $2,232,000, $520,000 and $1,650,000 in 2010, 2009 and 2008, respectively. No interest was paid dur- ing the three years ended December 31, 2010. NN OO TT EE PP -- EE MM PP LL OO YY EE EE BB EE NN EE FF II TT PP LL AA NN SS :: 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 $380,000, $400,000 and $400,000 in 2010, 2009 and 2008, respectively. Compensation expense of $8,548,297, $9,091,240 and $9,504,193 was the basis for determining the ESOP contribution allocation to participants for 2010, 2009 and 2008, respectively. The ESOP held 441,316, 445,884 and 445,741 allocated shares at December 31, 2010, 2009 and 2008, 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 retire- ment date. The normal retirement date is the later of the normal retirement age (65) or separation of service. Interest on deferred fees accrues at an annu- al rate of ten percent, compounded annually. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which 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 $14,667,545, $14,167,091 and $13,648,077 at December 31, 2010, 2009 and 2008, respectively. The present value of accumulated benefits under these plans, using an interest rate of 6.00% and the interest ramp-up method in 2010, 2009 and 2008, has been accrued. The accrual amounted to $8,723,365, $7,768,888 and $6,798,774 at December 31, 2010, 2009 and 2008, respectively, and is included in Other Liabilities. 27 The Company also 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, which 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 $890,086, $793,434 and $687,407 at December 31, 2010, 2009 and 2008, respectively. The pres- ent value of accumulated benefits under these plans using an interest rate of 6.00% in 2010 and 2009 and 7.50% in 2008, and the projected unit cost method has been accrued. The accrual amounted to $936,566, $835,249 and $584,699 at December 31, 2010, 2009 and 2008, 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 ben- efit to the participants’ beneficiaries. These contracts are carried at their cash surrender value, which amounted to $248,087, $241,059 and $233,903 at December 31, 2010, 2009 and 2008, respectively. The present value of accumulated benefits under these plans using an interest rate of 6.00% and the pro- jected unit cost method has been accrued. The accrual amounted to $73,602, $66,717 and $60,232 at December 31, 2010, 2009 and 2008, respectively, 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, which 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 $139,703, $127,810 and $118,773 at December 31, 2010, 2009 and 2008, respectively. The present value of accumu- lated benefits under these plans using an interest rate of 6.00% and the projected unit cost method has been accrued. The accrual amounted to $172,199, $163,173 and $142,088 at December 31, 2010, 2009 and 2008, 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 addi- tion, the employee must have at least 25 continuous years of service with the Company immediately preceding retirement. However, any active employ- ee 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 obli- gation 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 elim- inate 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, Service cost, including amortization of loss Interest cost Amortization of net transition obligation 2010 $ 411,915 276,293 20,600 2009 $ 396,918 245,511 20,600 2008 $ 179,330 159,316 20,600 Net periodic post-retirement benefit cost $ 708,808 $ 663,029 $ 359,246 The discount rate used in determining the accumulated post-retirement benefit obligation was 5.60% in 2010, 6.05% in 2009 and 6.00% in 2008. 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 2015 and remain at that level thereafter. If the health care cost trend rate assumptions were increased 1.00%, the accumu- lated post-retirement benefit obligation as of December 31, 2010, would be increased by 22.10%, and the aggregate of the service and interest cost com- ponents of the net periodic post-retirement benefit cost for the year then ended would have increased by 22.69%. If the health care cost trend rate assump- tions were decreased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2010, would be decreased by 17.20%, and the aggre- gate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have decreased by 17.27%. 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 2011 2012 2013 2014 2015 $ 73,000 74,000 87,000 104,000 130,000 2016 – 2020 1,348,000 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, 2009 Service cost Interest cost Actuarial gain Benefits paid Accumulated post-retirement benefit obligation as of December 31, 2010 $ 4,598,887 328,506 276,293 396,858 (67,486) $ 5,533,058 28 The following is a summary of the change in plan assets: Fair value of plan assets at beginning of year Actual return on assets Employer contribution Benefits paid, net Fair value of plan assets at end of year Amounts recognized in Accumulated Other Comprehensive Income, net of tax, were: December 31, Net loss Transition obligation Prior service cost Total accumulated other comprehensive income 2010 2009 2008 $ $ 67,486 (67,486) $ $ 57,257 (57,257) $ $ 84,186 (84,186) 2010 2009 2008 $ 348,127 54,382 669,936 $1,072,445 $ 86,201 67,965 724,998 $ 879,164 $ 159,662 81,574 780,036 $1,021,272 Amounts recognized in the accumulated post-retirement benefit obligation and other comprehensive income were: For the year ended December 31, Unrecognized actuarial loss Amortization of prior service cost Amortization of transition obligation Total accumulated other comprehensive income 2010 $ 396,858 (83,409) (20,600) $ 292,849 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 2011 is $83,409 and $20,600, respectively. NN OO TT EE QQ -- FF AA II RR VV AA LL UU EE OO FF FF II NN AA NN CC II AA LL II NN SS TT RR UU MM EE NN TT SS :: 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. Certain financial instruments and all nonfinancial instruments are excluded from these dis- closure requirements. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and bank premises and equipment. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In preparing these disclo- sures, 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 may 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 dis- count 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 loss- es have not been computed or disclosed herein. These methods and assumptions are set forth below. CCaasshh aanndd DDuuee ffrroomm BBaannkkss The carrying amount shown as cash and due from banks approximates fair value. FFeeddeerraall FFuunnddss SSoolldd The carrying amount shown as federal funds sold approximates fair value. AAvvaaiillaabbllee ffoorr SSaallee SSeeccuurriittiieess The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. The other source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. All of the Company’s available for sale securities are Level 2 assets. HHeelldd ttoo MMaattuurriittyy SSeeccuurriittiieess The fair value of held to maturity securities is based on quoted market prices. OOtthheerr IInnvveessttmmeennttss The carrying amount shown as Other Investments approximates fair value. FFeeddeerraall HHoommee LLooaann BBaannkk SSttoocckk The carrying amount shown as Federal Home Loan Bank Stock approximates fair value. LLooaannss The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to bor- rowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into 29 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. 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 invest- ment 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. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as a nonrecurring Level 2 asset. When an appraised value is not available or Management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as a nonrecurring Level 3 asset. OOtthheerr rreeaall eessttaattee When Management determines that it has sustained a loss on a loan, it may be necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party val- uation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the other real estate as a nonrecurring Level 2 asset. When an appraised value is not available or Management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the other real estate asset as a nonrecurring Level 3 asset. CCaasshh SSuurrrreennddeerr VVaalluuee ooff LLiiffee IInnssuurraannccee The carrying amount of cash surrender value of bank-owned life insurance approximates fair value. DDeeppoossiittss 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 auto- matic renewal at current interest rates. FFeeddeerraall FFuunnddss PPuurrcchhaasseedd aanndd SSeeccuurriittiieess SSoolldd uunnddeerr AAggrreeeemmeennttss ttoo RReeppuurrcchhaassee The carrying amount shown as federal funds purchased and securities sold under agreements to repurchase approximates fair value. BBoorrrroowwiinnggss ffrroomm FFeeddeerraall HHoommee LLooaann BBaannkk 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. CCoommmmiittmmeennttss ttoo EExxtteenndd CCrreeddiitt aanndd SSttaannddbbyy LLeetttteerrss ooff CCrreeddiitt 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. 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 and by investment type as of December 31, 2010 were as follows (in thousands): December 31, 2010 U.S. Treasury U.S. Government agencies States and political subdivisions Equity securities Total Total $ 26,509 218,596 41,323 650 $287,078 Fair Value Measurements Using Level 2 $ 26,509 218,596 41,323 650 $287,078 Level 3 $287,078 $287,078 Level 1 $287,078 $287,078 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, 2009 and 2008 were as follows (in thousands): December 31: 2009 2008 Total $ 311,434 340,462 Level 1 $287,078 Fair Value Measurements Using Level 2 $ 311,434 340,462 Level 3 $287,078 30 The balances of impaired loans, which are measured at fair value on a non-recurring basis, by level within the hierarchy as of December 31, 2010, 2009 and 2008 were as follows (in thousands): December 31: 2010 2009 2008 Total $ 14,295 20,110 11,828 Level 1 $287,078 Fair Value Measurements Using Level 2 $287,078 287,07820 Level 3 $ 14,295 20,110 11,828 The following table sets forth a summary of changes in the fair value of impaired loans which are measured using level 3 inputs (in thousands): Fair value, January 1, Net gains (losses) Fair value, December 31, 2010 $ 20,110 (5,815) $ 14,295 2009 $ 11,828 8,282 $ 20,110 2008 $11,828 11,828 $11,828 The balances of other real estate, which are measured at fair value on a non-recurring basis, by level within the hierarchy as of December 31, 2010, 2009 and 2008 were as follows (in thousands): December 31: 2010 2009 2008 Total $ 5,744 1,521 397 Fair Value Measurements Using Level 2 $ 1,249 Level 1 $287,078 Level 3 $ 4,495 1,521 397 The following table sets forth a summary of changes in the fair value of other real estate which are measured using level 3 inputs (in thousands): Fair value, January 1, Net gains Fair value, December 31, 2010 $ 1,521 2,974 $ 4,495 2009 $ 397 1,124 $ 1,521 2008 $11,828 397 $ 397 The following table presents carrying amounts and estimated fair values for financial assets and financial liabilities at December 31, 2010, 2009 and 2008 (in thousands): 2010 2009 2008 Carrying Amount Fair Value Carrying Amount Financial Assets: Cash and due from banks Federal funds sold Available for sale securities Held to maturity securities Other Investments Federal Home Loan Bank Stock Loans, net Other real estate Cash surrender value of life insurance Financial Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank $24,147 $24,147 287,078 1,915 3,926 2,281 403,248 5,744 287,078 2,010 3,926 2,281 407,363 5,744 15,951 15,951 108,278 375,862 484,140 140,102 42,957 108,278 376,715 484,993 140,102 43,990 $29,155 311,434 3,202 4,036 5,016 457,148 1,521 15,329 96,541 374,160 470,701 174,431 104,270 31 Fair Value $29,155 311,434 3,341 4,036 5,016 460,588 1,521 Carrying Amount $34,016 4 340,462 3,394 3,889 2,071 456,263 397 Fair Value $34,016 4 340,462 3,438 3,889 2,071 461,113 397 15,329 14,688 14,688 96,541 375,052 471,593 174,431 105,815 109,033 401,442 510,475 109,033 402,361 511,394 226,609 226,609 36,938 37,547 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M 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, 2010, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 pro- vide 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, 2010, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Atlanta, Georgia March 4, 2011 We have audited Peoples Financial Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 32 F I V E - Y E A R C O M P A R A T I V E S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N ( I N T H O U S A N D S E X C E P T P E R S H A R E D A T A ) : Peoples Financial Corporation and Subsidiaries Balance Sheet Summary Total assets Available for sale securities Held to maturity securities Loans, net of unearned discount Deposits Borrowings from FHLB Shareholders' equity Summary of Operations Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before taxes Applicable income taxes Net income Per Share Data Basic and diluted earnings per share Dividends per share Book value 2010 2009 2008 2007 2006 $ 786,545 $ 869,007 $ 896,408 $ 927,357 $ 964,023 287,078 1,915 409,899 484,140 42,957 101,357 311,434 3,202 464,976 470,701 104,270 103,588 340,642 3,394 467,377 510,476 36,938 107,000 386,029 4,630 450,992 569,130 7,100 106,542 396,907\ 85,574 401,194 613,170 7,267 98,233 $ 29,675 $ 34,289 $ 43,573 $ 55,971 $ 48,894 4,601 25,074 6,845 18,229 10,114 27,581 762 (723) 7,401 26,888 5,225 21,663 10,147 27,636 4,174 954 14,963 28,610 2,347 26,263 7,268 26,520 7,011 1,977 25,452 30,519 (1,045) 31,564 9,767 ª25,263 16,068 5,042 18,785 30,109 141 29,968 12,309 23,050 19,227 6,459 $ 1,485 $ 3,220 $ 5,034 $ 11,026 $ 12,768 $ .29 .20 19.68 $ .62 .50 20.11 $ .94 .56 20.27 $ 2.01 .52 19.56 $ 2.30 .44 17.71 Weighted average number of shares 5,151,661 5,170,430 5,342,470 5,489,861 5,548,300 Selected Ratios Return on average assets Return on average equity Primary capital to average assets Risk-based capital ratios: Tier 1 Total .18% 1.45% 12.96% 21.01% 22.26% .36% 3.06% 12.49% 17.83% 19.08% .55% 4.73% 12.81% 18.03% 19.28% 1.15% 10.77% 12.13% 18.38% 19.63% 1.41% 13.75% 11.91% 19.87% 21.12% 33 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S Summary of Quarterly Results of Operations (In Thousands Except per Share Data): Quarter Ended, 2010 Interest income Net interest income Provision for loan losses Income (loss) before income taxes Net income (loss) Basic and diluted earnings per share March 31 $ 8,233 6,993 1,150 1,046 871 .17 Quarter Ended, 2009 Interest income Net interest income Provision for loan losses Income before income taxes Net income Basic and diluted earnings per share Market Information March 31 $ 8,568 6,274 348 1,993 1,703 .33 June 30 $ 7,791 6,555 1,585 1,968 1,446 .28 June 30 $ 8,595 6,569 1,502 151 201 .04 September 30 $ 6,864 5,731 1,045 (33) 364 .07 September 30 $ 8,671 7,019 1,875 1,069 974 .19 $ December 31 6,787 5,795 3,065 (2,219) (1,196) (.23) $ December 31 8,455 7,026 1,500 961 342 .06 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 2010 Quarter 1st 2nd 3rd 4th 2009 1st 2nd 3rd 4th High $ 23.12 16.47 14.83 15.62 $ 20.00 21.49 21.49 21.39 $ $ Low 14.97 10.50 10.63 12.42 15.76 16.00 17.30 15.35 Dividend per share $ .10 .11 $ .30 .20 Performance Graph 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 Morningstar Industry Group, Regional - Southeast Banks (“Morningstar”). This presentation assumes $100 was invested in shares of the relevant issuers on January 1, 2006, and that dividends received were immediately invested in additional shares. The graph plots the value of the initial $100 investment at one year intervals. For purposes of constructing this data, the returns of each component issuer have been weighted according to that issuer’s market capitalization. 7!';#$-%!.)!6)7&'&"#0-/()0!0#")$(0&$. *+,-.+/012343524.06,7-,7482,3 9:;<:=0>47?+80@3A+B >,7323C/8470D7,E-0@3A+B &%! &$! &#! &"! &!! %! $! #! "! % $ # " " ! ! "!!' "!!$ "!!( "!!% "!!) "!&! #%%&'(%)*+,,)-./(%0( )!.)1#.2),+3)4,,5 #%%&'(%) -/- (. )$(-./(%0( 6-%7#")8(#$)(. -.9) (72):+3)4,+, PDF created with FinePrint pdfFactory trial version www.pdffactory.com 34 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O R P O R A T E I N F O R M A T I O N 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 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 Registered Public Accounting Firm Porter Keadle Moore, LLP Atlanta, Georgia The common stock of Peoples Financial Corporation is traded on the NASDAQ Capital Market under the symbol: PFBX. S.E.C. Form 10-K Requests The current market makers are: A copy of the Annual Report on Form 10-K, as filed with the 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. 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 35 

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