NOTE M.

REGULATORY MATTERS

On February 21, 2012, the Board of Directors of the Bank entered into a formal written agreement (referred to herein as the “Formal Agreement”) with the Comptroller. The Formal Agreement is based on, and arises out of, the findings of the Comptroller during its on-site examination of the Bank as of July 6, 2011 and the Comptroller's Report of Examination issued upon the completion of such on-site examination (the “Report of Examination”). Under the terms of the Agreement, the Bank is required to take the following actions within the time frames specified in the Agreement:

create a compliance committee composed of at least three of the Bank's directors (only one of whom may be a Bank employee) to monitor compliance with the Formal Agreement and make quarterly reports to the Bank's Board of Directors regarding actions the Bank has taken to comply with the Formal Agreement and the results and status of these actions;

adopt, implement and adhere to a written program to reduce the high level of credit risk in the Bank and at least quarterly prepare a written assessment of its credit risk;

adopt, implement and adhere to a written program to ensure that the Bank's officers and employees are timely identifying and accurately risk rating assets and employ or designate a sufficiently experienced and qualified person or firm to ensure the timely and independent identification of problem loans and leases;

adopt, implement and adhere to a written program to improve the Bank's ongoing loan portfolio management and ensure that the Bank has the processes, personnel and control systems to ensure the implementation and adherence to this program;

obtain a current (or updated) independent appraisal of any loan secured by real property (1) where the loan's appraisal violated federal regulations, (2) where the loan was criticized in the Report of Examination or by the Bank's internal or external review and the loan is more than 12 months old, or (3) where the borrower is in default under the loan agreement, relevant financial information, in the view of the loan officer, does not support the ongoing ability of the borrower or any guarantor to perform the terms of the loan agreement, and the most recent appraisal is more than 12 months old;

obtain current and satisfactory credit information on all loans lacking such information;

ensure that proper collateral documentation is maintained on all loans and correct each collateral exception listed in the Report of Examination (or any subsequent examination) or in any listings of loans lacking such information;

review the adequacy of the Bank's allowance for loan and lease losses and establish a program, approved in advance by the Comptroller, for the maintenance of an adequate allowance for loan and lease losses which incorporates relevant Comptroller guidance;

adopt, implement and adhere to a policy of the Bank to ensure that other real estate owned is managed in accordance with federal law and regulations;

adopt, implement and adhere to action plans for each parcel of other real estate owned valued in excess of $500,000;

adopt, implement and adhere to a written three-year capital program, approved in advance by the Comptroller, compliance with which will be a condition to the Bank's payment of dividends to the Company; and

adopt, implement and adhere to a three-year written strategic plan for the Bank, approved in advance by the Comptroller, that will establish objectives for, among other things, the Bank's overall risk profile and growth.

In addition, the Bank must deliver to the Comptroller copies of the programs as well as periodic reports regarding various aspects of the foregoing actions. In connection with the Report of Examination, the Bank has also agreed to the Comptroller establishing higher individual minimum capital ratios (the “IMCRs”) for the Bank, effective as of February 21, 2012.

Under the IMCRs, the Bank must maintain a Tier I capital to adjusted total assets ratio of 8% and a total risk-based capital to risk-weighted assets ratio of 12%. As of December 31, 2011, the Bank's Tier I capital to adjusted total assets ratio was 10.91% and its total risk-based capital to risk-weighted assets ratio was 19.22%.

The primary source of the Company's revenue is dividends from the Bank. Federal banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller of the Currency, may credit net profits to the bank's undivided profits account, and may declare a dividend from that account of so much of the net profits as they judge expedient. The Comptroller and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings. The Bank's ability to pay dividends is also limited by prudence, statutory and regulatory guidelines, and a variety of other factors. At December 31, 2011, $3.2 million was available for dividend transfer to the Company.

In addition to these general restrictions, the Formal Agreement imposes additional restrictions on the Bank's ability to pay a dividend. Management of the Bank must adopt, with the Comptroller's prior approval, implement and adhere to a three-year capital plan, which must address, among other things, the Bank's plans for the maintenance of adequate capital, projections for growth and capital requirements and projections for the sources and timing of additional capital to satisfy the Bank's capital needs. Although management does not currently foresee any impediment to the Bank's adopting the capital plan within the required timeframe, the capital plan must be approved by the Comptroller; the Bank cannot provide any assurances as to the date by which the Comptroller will approve the capital plan. The Bank may only pay a dividend if it is in compliance, and would remain in compliance after payment of the dividend, with this capital plan. Additionally, the Bank must obtain prior written non-objection from the Assistant Deputy Comptroller before the Bank can declare a dividend.

Federal Reserve regulations limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. At December 31, 2011, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $2.0 million. There were no loans outstanding from the Bank to the Company at December 31, 2011. Any such distribution is also subject to the requirements described in the following paragraphs.

In accordance with regulations issued by the Office of Thrift Supervision (which have been reissued by the Comptroller following absorption of the OTS into the Comptroller in July, 2011), a special “Liquidation Account” has been established for the benefit of certain Qualifying Depositors of Natchez First Federal Savings Bank (acquired by the Bank in 1993) in an initial amount of approximately $2.8 million. The Liquidation Account serves as a restriction on the distribution of stockholders' equity in the Bank and no cash dividend may be paid on its capital stock if the effect thereof would be to cause the regulatory capital of the Bank to be reduced below an amount equal to the adjusted Liquidation Account balance.

In the event of a complete liquidation of the Bank, each Qualifying Depositor would be entitled to his or her pro rata interest in the Liquidation Account. Such claims would be paid before payment to the Company as the Bank's sole shareholder. A merger, consolidation, purchase of assets and assumption of deposits and/or other liabilities or similar transaction, with an FDIC-insured institution, would not be a complete liquidation for the purpose of paying the Liquidation Account. In such a transaction, the Liquidation Account would be required to be assumed by the surviving institution.

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2011, that the Company and the Bank met all quantitative capital adequacy requirements to which they are subject. However, there are qualitative factors established under federal regulation that also can affect a depositary institution's capitalization status notwithstanding its actual capital amounts and ratios. The Company's (consolidated) and the Bank's actual capital amounts and ratios as of December 31, 2011 and 2010, are presented in the following table.

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
As of December 31, 2011
Total Capital (to Risk-Weighted Assets)
Consolidated	$	44,878		20.21	%	$	17,763		8.00	%		N/A		N/A
The Bank	$	42,623		19.22	%	$	17,743		8.00	%	$	22,179		10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	$	42,083		18.95	%	$	8,882		4.00	%		N/A		N/A
The Bank	$	39,831		17.96	%	$	8,872		4.00	%	$	13,307		6.00	%
Tier I Capital (to Average Assets)
Consolidated	$	42,083		11.51	%	$	14,630		4.00	%		N/A		N/A
The Bank	$	39,831		10.91	%	$	14,606		4.00	%	$	18,257		5.00	%

	Actual					Minimum Capital Requirement					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
As of December 31, 2010
Total Capital (to Risk-Weighted Assets)
Consolidated	$	45,092		17.84	%	$	20,216		8.00	%		N/A		N/A
The Bank	$	42,323		16.76	%	$	20,197		8.00	%	$	25,246		10.00	%
Tier I Capital (to Risk-Weighted Assets)
Consolidated	$	42,672		16.89	%	$	10,108		4.00	%		N/A		N/A
The Bank	$	39,903		15.81	%	$	10,099		4.00	%	$	15,148		6.00	%
Tier I Capital (to Average Assets)
Consolidated	$	42,672		11.57	%	$	14,749		4.00	%		N/A		N/A
The Bank	$	39,903		10.90	%	$	14,639		4.00	%	$	18,298		5.00	%