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.
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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