10-Q 1 d83429e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended           June 30, 2011     
or
     
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number           001-12103     
PEOPLES FINANCIAL CORPORATION
 
(Exact name of registrant as specified in its charter)
     
Mississippi   64-0709834
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
Lameuse and Howard Avenues, Biloxi, Mississippi   39533
     
(Address of principal executive offices)   (Zip Code)
(228) 435-5511
 
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No      
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes   X   No      
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer         Accelerated filer         Non-accelerated filer         Smaller reporting company   X  
    Do not check if a smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes       No   X  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At July 29, 2011, there were 15,000,000 shares of $1 par value common stock authorized, with 5,136,918 shares issued and outstanding.
 
 

 


TABLE OF CONTENTS

Part 1 — Financial Information
Item 1: Financial Statements
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4: Controls and Procedures
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
Item 5: Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

Part 1 — Financial Information
Item 1: Financial Statements
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Condition
                 
    June 30, 2011     December 31, 2010  
    (Unaudited)     (Audited)  
     
Assets
               
Cash and due from banks
  $ 45,605,429     $ 24,146,939  
 
               
Available for sale securities
    319,529,536       287,078,463  
 
               
Held to maturity securities, fair value of $2,006,142 at June 30, 2011; $2,010,430 at December 31, 2010
    1,916,323       1,914,879  
 
               
Other investments
    3,843,455       3,926,371  
 
               
Federal Home Loan Bank Stock, at cost
    2,153,000       2,281,200  
 
               
Loans
    393,389,744       409,898,757  
 
               
Less: Allowance for loan losses
    6,713,484       6,650,258  
     
 
               
Loans, net
    386,676,260       403,248,499  
 
               
Bank premises and equipment, net of accumulated depreciation
    28,853,143       29,756,239  
 
               
Other real estate
    8,163,237       5,744,150  
 
               
Accrued interest receivable
    3,532,014       3,292,430  
 
               
Cash surrender value of life insurance
    16,076,138       15,951,117  
 
               
Prepaid FDIC assessments
    2,898,420       3,652,972  
 
               
Other assets
    1,968,018       5,552,225  
 
               
     
Total assets
  $ 821,214,973     $ 786,545,484  
     

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Condition (continued)
                 
    June 30, 2011     December 31, 2010  
    (Unaudited)     (Audited)  
     
Liabilities & Shareholders’ Equity    
Liabilities:
               
 
               
Deposits:
               
 
               
Demand, non-interest bearing
  $ 109,784,048     $ 108,277,985  
 
               
Savings and demand, interest bearing
    217,789,641       193,631,209  
 
               
Time, $100,000 or more
    124,242,102       134,667,660  
 
               
Other time deposits
    46,603,645       47,562,661  
     
 
               
Total deposits
    498,419,436       484,139,515  
 
               
Federal funds purchased and securities sold under agreements to repurchase
    169,044,469       140,102,019  
 
               
Borrowings from Federal Home Loan Bank
    28,955,873       42,957,016  
 
               
Other liabilities
    18,547,716       17,990,072  
     
 
               
Total liabilities
    714,967,494       685,188,622  
 
               
Shareholders’ Equity:
               
Common stock, $1 par value, 15,000,000 shares authorized, 5,136,918 and 5,151,139 shares issued and outstanding at June 30, 2011 and December 31, 2010
    5,136,918       5,151,139  
 
               
Surplus
    65,780,254       65,780,254  
 
               
Undivided profits
    33,909,136       33,302,381  
 
               
Accumulated other comprehensive income (loss), net of tax
    1,421,171       (2,876,912 )
 
               
     
Total shareholders’ equity
    106,247,479       101,356,862  
     
 
               
Total liabilities & shareholders’ equity
  $ 821,214,973     $ 786,545,484  
     
See accompanying notes to consolidated financial statements.

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
     
Interest income:
                               
Interest and fees on loans
  $ 4,381,186     $ 4,893,342     $ 9,287,948     $ 9,880,468  
 
                               
Interest and dividends on securities:
                               
 
                               
U.S. Treasuries
    63,266       131,216       127,129       325,478  
 
                               
U.S. Government agencies
    1,711,696       2,312,723       3,151,058       4,612,426  
 
                               
Mortgage-backed securities
    30,957       132,048       30,957       518,924  
 
                               
States and political subdivisions
    360,357       316,668       729,458       673,597  
 
                               
Other investments
    2,421       3,203       8,639       7,654  
 
                               
Interest on federal funds sold
    3,386       1,557       4,738       5,336  
     
 
                               
Total interest income
    6,553,269       7,790,757       13,339,927       16,023,883  
     
 
                               
Interest expense:
                               
Deposits
    651,406       849,297       1,354,117       1,666,786  
 
                               
Long-term borrowings
    45,402       109,559       95,467       246,204  
 
                               
Federal funds purchased and securities sold under agreements to repurchase
    169,545       276,351       341,568       562,741  
     
 
                               
Total interest expense
    866,353       1,235,207       1,791,152       2,475,731  
     
 
                               
Net interest income
    5,686,916       6,555,550       11,548,775       13,548,152  
 
                               
Provision for allowance for losses on loans
    546,000       1,585,000       1,187,000       2,735,000  
     
 
                               
Net interest income after provision for allowance for losses on loans
  $ 5,140,916     $ 4,970,550     $ 10,361,775     $ 10,813,152  
     

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Income (continued)
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
     
Non-interest income:
                               
Trust department income and fees
  $ 323,468     $ 282,941     $ 669,923     $ 590,237  
 
                               
Service charges on deposit accounts
    1,455,146       1,579,485       2,874,174       3,151,988  
 
                               
Gain on sales or calls of securities
    7,174       1,563,441       7,174       1,567,486  
 
                               
Increase in cash surrender value
    125,380       126,344       257,680       255,944  
 
                               
Gain from redemption of life insurance
    389,119               389,119          
 
                               
Other income
    151,035       132,316       276,162       252,005  
     
 
                               
Total non-interest income
    2,451,322       3,684,527       4,474,232       5,817,660  
     
 
                               
Non-interest expense:
                               
Salaries and employee benefits
    3,395,090       3,398,188       6,771,387       6,810,463  
 
                               
Net occupancy
    655,236       544,121       1,269,170       1,068,898  
 
                               
Equipment rentals, depreciation and maintenance
    951,812       951,312       1,822,212       1,886,765  
 
                               
FDIC assessments
    437,086       390,517       842,912       740,904  
 
                               
Other expense
    1,535,141       1,402,857       3,224,909       3,109,245  
     
 
                               
Total non-interest expense
    6,974,365       6,686,995       13,930,590       13,616,275  
     
 
                               
Income before income taxes
    617,873       1,968,082       905,417       3,014,537  
 
                               
Income tax expense (benefit)
    (192,000 )     522,000       (342,000 )     697,000  
     
 
                               
Net income
  $ 809,873     $ 1,446,082     $ 1,247,417     $ 2,317,537  
     
Basic and diluted earnings per share
  $ .16     $ .28     $ .24     $ .45  
     
See accompanying notes to consolidated financial statements.

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Peoples Financial Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income
                                                         
                                    Accumulated              
    Number of                             Other              
    Common     Common             Undivided     Comprehensive     Comprehensive        
    Shares     Stock     Surplus     Profits     Income (Loss)     Income     Total  
     
Balance, January 1, 2011
    5,151,139     $ 5,151,139     $ 65,780,254     $ 33,302,381     $ (2,876,912 )           $ 101,356,862  
 
                                                       
Comprehensive income:
                                                       
 
                                                       
Net income
                            1,247,417             $ 1,247,417       1,247,417  
 
                                                       
Net unrealized gain on available for sale securities, net of tax
                                    4,302,818       4,302,818       4,302,818  
 
                                                       
Reclassification adjustment for available for sale securities called or sold in current year, net of tax
                                    (4,735 )     (4,735 )     (4,735 )
 
                                                     
 
                                                       
Total comprehensive income
                                          $ 5,545,500          
 
                                                     
 
                                                       
Dividend declared ($.09 per share)
                            (462,323 )                     (462,323 )
 
                                                       
Retirement of stock
    (14,221 )     (14,221 )             (178,339 )                     (192,560 )
 
                                                       
                   
Balance, June 30, 2011
    5,136,918     $ 5,136,918     $ 65,780,254     $ 33,909,136     $ 1,421,171             $ 106,247,479  
                   
Note: Balances as of January 1, 2011 were audited.
See accompanying notes to consolidated financial statements.

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
                 
    Six Months Ended June 30,  
    2011     2010  
     
Cash flows from operating activities:
               
 
               
Net income
  $ 1,247,417     $ 2,317,537  
 
               
Adjustment to reconcile net income to net cash provided by operating activities:
               
 
               
Depreciation
    1,176,000       1,218,000  
 
               
Provision for allowance for loan losses
    1,187,000       2,735,000  
 
               
Loss on writedown of other real estate
    124,606       77,350  
 
               
Loss on sales of other real estate
    25,291       39,350  
 
               
Loss on other investments
    82,916       15,550  
 
               
Gain on sales and calls of securities
    (7,174 )     (1,567,486 )
 
               
Accretion of held to maturity securities
    (1,444 )     (1,413 )
 
               
Change in accrued interest receivable
    (239,584 )     625,954  
 
               
Change in other assets
    2,605,373       15,556  
 
               
Change in other liabilities
    80,850       20,596,976  
     
 
               
Net cash provided by operating activities
  $ 6,281,251     $ 26,072,374  
     

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued) (unaudited)
                 
    Six Months Ended June 30,  
    2011     2010  
     
Cash flows from investing activities:
               
Proceeds from maturities, sales and calls of available for sale securities
  $ 78,710,848     $ 147,206,124  
 
               
Investment in available for sale securities
    (104,646,484 )     (173,037,295 )
 
               
Proceeds from maturities of held to maturity securities
            389,920  
 
               
Redemption of Federal Home Loan Bank Stock
    128,200       1,645,100  
 
               
Proceeds from sales of other real estate
    358,526       807,500  
 
               
Loans, net change
    12,457,729       17,045,947  
 
               
Acquisition of premises and equipment
    (272,904 )     (172,932 )
 
               
Investment in other assets
    (125,021 )     (325,325 )
 
           
 
               
Net cash used in investing activities
    (13,389,106 )     (6,440,961 )
 
           
 
               
Cash flows from financing activities:
               
Demand and savings deposits, net change
    25,664,495       20,461,290  
 
               
Time deposits made, net change
    (11,384,574 )     28,392,369  
 
               
Cash dividends
    (462,323 )     (515,170 )
 
               
Retirement of common stock
    (192,560 )        
 
               
Borrowings from Federal Home Loan Bank
    330,002,395       390,669,662  
 
               
Repayments to Federal Home Loan Bank
    (344,003,538 )     (441,123,947 )
 
               
Federal funds purchased and securities sold under agreements to repurchase, net change
    28,942,450       (3,558,614 )
 
           
 
               
Net cash provided by (used in) financing activities
    28,566,345       (5,674,410 )
 
           
 
               
Net increase in cash and cash equivalents
    21,458,490       13,957,003  
 
               
Cash and cash equivalents, beginning of period
    24,146,939       29,155,294  
 
           
 
               
Cash and cash equivalents, end of period
  $ 45,605,429     $ 43,112,297  
 
           
See accompanying notes to consolidated financial statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2011 and 2010
1. Basis of Presentation:
Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. Its two operating subsidiaries are The Peoples Bank, Biloxi, Mississippi (the “Bank”), and PFC Service Corp. Its principal subsidiary is The Peoples Bank, Biloxi, Mississippi, which provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in Harrison, Hancock, Stone and Jackson counties.
The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of June 30, 2011 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2010 Annual Report and Form 10-K.
The results of operations for the six months ended June 30, 2011, are not necessarily indicative of the results to be expected for the full year.
Use of Estimates - The preparation of financial statements in conformity with 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 consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2010.
2. Earnings Per Share:
Per share data is based on the weighted average shares of common stock outstanding of 5,136,918 and 5,151,697 for the six months ended June 30, 2011 and 2010, respectively, and 5,136,918 and 5,151,697 for the quarters ended June 30, 2011 and 2010, respectively.
3. Statements of Cash Flows:
The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $1,811,218 and $2,475,536 for the six months ended June 30, 2011 and 2010, respectively, for interest on deposits and borrowings. Income tax payments of $235,000 and $625,000 were made

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during the six months ended June 30, 2011 and 2010, respectively. Loans transferred to other real estate amounted to $2,927,510 and $799,800 during the six months ended June 30, 2011 and 2010, respectively. Dividends payable of $462,323 as of December 31, 2010 were paid during the six months ended June 30, 2011.
4. Investments:
The amortized cost and fair value of securities at June 30, 2011 and December 31, 2010, are as follows:
                                 
            Gross     Gross        
            Unrealized     Unrealized        
June 30, 2011   Amortized Cost     Gains     Losses     Fair Value  
 
 
Available for sale securities:
                               
 
                               
Debt securities:
                               
 
                               
U.S. Treasuries
  $ 16,961,812     $ 129,805     $ (4,428 )   $ 17,087,189  
 
                               
U.S. Government agencies
    256,404,465       2,564,060       (377,975 )     258,590,550  
 
                               
Mortgage-backed securities
    4,879,688       92,224               4,971,912  
 
                               
States and political subdivisions
    36,872,481       1,359,439       (2,018 )     38,229,902  
     
 
                               
Total debt securities
    315,118,446       4,145,528       (384,421 )     318,879,553  
 
                               
Equity securities
    649,983                       649,983  
     
 
                               
Total available for sale securities
  $ 315,768,429     $ 4,145,528     $ (384,421 )   $ 319,529,536  
     
 
                               
Held to maturity securities:
                               
 
                               
States and political subdivisions
  $ 1,916,323     $ 89,819   $     $ $2,006,142
     
 
                               
Total held to maturity securities
  $ 1,916,323     $ 89,819     $     $ 2,006,142  
     

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            Gross     Gross        
            Unrealized     Unrealized        
December 31, 2010   Amortized Cost     Gains     Losses     Fair Value  
 
 
Available for sale securities:
                               
 
                               
Debt securities:
                               
 
                               
U.S. Treasuries
  $ 26,957,061     $ 51,729     $ (499,819 )   $ 26,508,971  
 
                               
U.S. Government agencies
    221,639,699       1,055,500       (4,099,256 )     218,595,943  
 
                               
States and political subdivisions
    40,578,877       1,114,322       (369,633 )     41,323,566  
     
 
                               
Total debt securities
    289,175,637       2,221,551       (4,968,708 )     286,428,480  
 
                               
Equity securities
    649,983                       649,983  
     
 
                               
Total available for sale securities
  $ 289,825,620     $ 2,221,551     $ (4,968,708 )   $ 287,078,463  
     
 
                               
Held to maturity securities:
                               
 
                               
States and political subdivisions
  $ 1,914,879     $ 95,551     $       $ 2,010,430  
     
 
                               
Total held to maturity securities
  $ 1,914,879     $ 95,551     $       $ 2,010,430  
     
The amortized cost and fair value of debt securities at June 30, 2011, 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.
                 
    Amortized Cost     Fair Value  
     
Available for sale securities:
               
Due in one year or less
  $ 2,055,295     $ 2,094,894  
Due after one year through five years
    81,172,973       82,366,068  
Due after five years through ten years
    144,730,325       146,645,370  
Due after ten years
    82,280,165       82,801,309  
Mortgage-backed securities
    4,879,688       4,971,912  
     
Totals
  $ 315,118,446     $ 318,879,553  
     
 
               
Held to maturity securities:
               
Due after one year through five years
  $ 1,451,901     $ 1,524,683  
Due after five years through ten years
    464,422       481,459  
     
Totals
  $ 1,916,323     $ 2,006,142  
     

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Securities with gross unrealized losses at June 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:
                                                 
    Less Than Twelve Months     Over Twelve Months     Total  
            Gross             Gross             Gross  
            Unrealized             Unrealized             Unrealized  
June 30, 2011:   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
     
U.S. Treasuries
  $ 1,001,640     $ 4,428     $       $       $ 1,001,640     $ 4,428  
 
                                               
U.S. Government agencies
    49,538,250       377,975                       49,538,250       377,975  
 
                                               
States and political subdivisions
    321,155       2,018                       321,155       2,018  
     
 
                                               
TOTAL
  $ 50,861,045     $ 384,421     $       $       $ 50,861,045     $ 384,421  
     
 
                                               
December 31, 2010:
                                               
U.S. Treasuries
  $ 15,457,980     $ 499,819     $       $       $ 15,457,980     $ 499,819  
 
                                               
U.S. Government agencies
    138,075,993       4,099,256                       138,075,993       4,099,256  
 
                                               
States and political subdivisions
    5,295,359       172,435       2,028,616       197,198       7,323,975       369,633  
     
 
                                               
TOTAL
  $ 158,829,332     $ 4,771,510     $ 2,028,616     $ 197,198     $ 160,857,948     $ 4,968,708  
     
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 it 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 the evaluation of these securities, the Company has determined that the unrealized losses summarized in the tables above are not deemed to be other-than-temporary.

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5. Loans:
The composition of the loan portfolio at June 30, 2011 and December 31, 2010, is as follows:
                 
    June 30, 2011     December 31, 2010  
     
 
Gaming
  $ 44,909,921     $ 44,342,798  
 
               
Residential and land development
    29,123,815       30,063,593  
 
               
Real estate, construction
    62,008,715       60,982,989  
 
               
Real estate, mortgage
    220,177,439       222,578,080  
 
               
Commercial and industrial
    24,463,860       36,463,500  
 
               
Other
    12,705,994       15,467,797  
     
 
               
Total
  $ 393,389,744     $ 409,898,757  
     
The age analysis of the loan portfolio, segregated by class of loans, as of June 30, 2011 and December 31, 2010, is as follows:
                                                         
                                                    Loans Past  
    Number of Days Past Due                             Due Greater  
                    Greater     Total             Total     Than 90 Days  
    30 - 59     60 - 89     Than 90     Past Due     Current     Loans     & Still Accruing  
     
June 30, 2011:
                                                       
Gaming
  $       $       $ 275,165     $ 275,165     $ 44,634,756     $ 44,909,921     $ 275,165  
Residential and land development
                    15,819,820       15,819,820       13,303,995       29,123,815          
Real estate, construction
    4,348,383       473,891       762,625       5,584,899       56,423,816       62,008,715       762,624  
Real estate, mortgage
    5,234,786       6,727,950       812,286       12,775,022       207,402,417       220,177,439       32,420  
Commercial and industrial
    1,604,289       24,701       123,856       1,752,846       22,711,014       24,463,860       123,856  
Other
    394,430       58,810       818       454,058       12,251,936       12,705,994       817  
     
 
Total
  $ 11,581,888     $ 7,285,352     $ 17,794,570     $ 36,661,810     $ 356,727,934     $ 393,389,744     $ 1,194,882  
     
December 31, 2010:
                                                       
Gaming
  $       $       $ 2,808,409     $ 2,808,409     $ 41,534,389     $ 44,342,798     $    
Residential and land development
    2,281,675               2,317,327       4,599,002       25,464,591       30,063,593          
Real estate, construction
    8,041,900       4,433,125       4,373,103       16,848,128       44,134,861       60,982,989       1,990,772  
Real estate, mortgage
    18,479,501       4,639,802       5,139,974       28,259,277       194,318,803       222,578,080       955,715  
Commercial and industrial
    1,558,356       98,328       41,181       1,697,865       34,765,635       36,463,500       14,099  
Other
    273,940       33,544       969       308,453       15,159,344       15,467,797       969  
     
 
                                                       
Total
  $ 30,635,372     $ 9,204,799     $ 14,680,963     $ 54,521,134     $ 355,377,623     $ 409,898,757     $ 2,961,555  
     

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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. 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 June 30, 2011 and December 31, 2010, is as follows:

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    Loans With A Grade Of:        
    A or B     C     D     E     Total  
 
June 30, 2011:
                                       
Gaming
  $ 29,181,795     $       $       $ 15,728,126     $ 44,909,921  
 
                                       
Residential and land development
    5,012,773       4,220,000       19,258,722       632,320       29,123,815  
 
                                       
Real estate, construction
    52,101,038       73,594       9,640,556       193,527       62,008,715  
 
                                       
Real estate, mortgage
    181,993,752       5,792,770       29,939,922       2,450,995       220,177,439  
 
                                       
Commercial and industrial
    15,697,642       299,048       8,262,406       204,764       24,463,860  
 
                                       
Other
    12,372,826       38,145       289,718       5,305       12,705,994  
 
                                       
     
 
                                       
Total
  $ 296,359,826     $ 10,423,557     $ 67,391,324     $ 19,215,037     $ 393,389,744  
     
 
                                       
December 31, 2010:
                                       
Gaming
  $ 27,397,218     $       $ 6,413,068     $ 10,532,512     $ 44,342,798  
 
                                       
Residential and land development
    25,664,590       864,342       3,102,340       432,321       30,063,593  
 
                                       
Real estate, construction
    52,417,942       314,806       7,715,653       534,588       60,982,989  
 
                                       
Real estate, mortgage
    184,963,841       8,247,627       25,669,185       3,697,427       222,578,080  
 
                                       
Commercial and industrial
    33,702,021       289,222       2,323,291       148,966       36,463,500  
 
                                       
Other
    15,232,311       39,865       195,621               15,467,797  
 
                                       
     
 
                                       
Total
  $ 339,377,923     $ 9,755,862     $ 45,419,158     $ 15,345,814     $ 409,898,757  
     

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Total loans on nonaccrual as of June 30, 2011 and December 31, 2010, are as follows:
                 
    June 30, 2011     December 31, 2010  
     
 
Gaming
  $ 15,728,126     $ 10,221,662  
 
               
Residential and land development
    15,819,821       632,321  
 
               
Real estate, construction
            386,557  
 
               
Real estate, mortgage
    1,014,036       3,268,778  
 
               
Commercial and industrial
            27,081  
 
               
Other
            698  
     
 
               
Total
  $ 32,561,983     $ 14,537,097  
     
The Company has modified certain loans by granting interest rate concessions to these customers. These loans are classified as troubled debt restructurings. These loans are all in compliance with their modified terms and are currently accruing. Troubled debt restructurings as of June 30, 2011 and December 31, 2010 are as follows:
                                 
            Pre-Modification     Post-Modification        
    Number     Outstanding     Outstanding        
    of     Recorded     Recorded     Related  
    Contracts     Investment     Investment     Allowance  
     
June 30, 2011:
                               
 
                               
Real estate, construction
    1     $ 183,607     $ 183,607     $ 112,000  
 
                               
Real estate, mortgage
    2       8,874,063       8,874,063       498,000  
 
                               
Commercial and industrial
    1       708,352       708,352          
     
 
                               
 
    4     $ 9,766,022     $ 9,766,022     $ 610,000  
     
 
                               
December 31, 2010:
                               
 
                               
Real estate, construction
    1     $ 186,831     $ 186,831     $ 116,000  
 
                               
Real estate, mortgage
    1       515,663       515,663       110,000  
     
 
                               
 
    2     $ 702,494     $ 702,494     $ 226,000  
     

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Impaired loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010, are as follows:
                                 
    Unpaid                     Average  
    Principal     Recorded     Related     Recorded  
    Balance     Investment     Allowance     Investment  
     
June 30, 2011:
                               
Gaming
  $ 15,728,125     $ 15,728,126     $       $ 10,116,646  
Residential and land development
    19,500,599       15,819,821               632,321  
Real estate, construction
    183,607       183,607       112,000       185,120  
Real estate, mortgage
    10,818,096       9,888,099       935,201       1,207,129  
Commercial and industrial
    708,352       708,352               3,935  
     
 
                               
Total
  $ 46,938,779     $ 42,328,005     $ 1,047,201     $ 12,145,151  
     
 
                               
December 31, 2010:
                               
Gaming
  $ 10,532,512     $ 10,221,662     $ 107,328     $ 9,363,015  
Residential and land development
    4,313,098       632,321       8,220       2,692,751  
Real estate, construction
    573,388       573,388       179,000       199,531  
Real estate, mortgage
    4,762,356       3,784,441       649,392       2,366,888  
Commercial and industrial
    27,081       27,081       195       8,065  
Other
    698       698       698       590  
     
 
                               
Total
  $ 20,209,133     $ 15,239,591     $ 944,833     $ 14,630,840  
     
No material interest income was recognized on impaired loans for the six months ended June 30, 2011 and the year ended December 31, 2010.
6. Allowance for Loan Losses:
Transactions in the allowance for loan losses for the quarters and six months ended June 30, 2011 and 2010, and the balances of loans, individually and collectively evaluated for impairment as of June 30, 2011 and 2010, are as follows (in thousands):

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            Residential                                
            and Land     Real Estate,     Real Estate,     Commercial              
    Gaming     Development     Construction     Mortgage     and Industrial     Other     Total  
     
For the six months ended June 30, 2011:
                                                       
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 466     $ 1,069     $ 1,020     $ 3,413     $ 480     $ 202     $ 6,650  
Charge-offs
                    (212 )     (956 )     (46 )     (102 )     (1,316 )
Recoveries
    35       32               46       16       63       192  
Provision
    (249 )     (572 )     226       1,638       40       104       1,187  
     
Ending Balance
  $ 252     $ 529     $ 1,034     $ 4,141     $ 490     $ 267     $ 6,713  
     
 
For the quarter ended June 30, 2011:
                                                       
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 233     $ 613     $ 1,260     $ 4,217     $ 692     $ 90     $ 7,105  
Charge-offs
                    (212 )     (708 )     (25 )     (72 )     (1,017 )
Recoveries
    35                               3       41       79  
Provision
    (16 )     (84 )     (14 )     632       (180 )     208       546  
     
Ending Balance
  $ 252     $ 529     $ 1,034     $ 4,141     $ 490     $ 267     $ 6,713  
     
 
Allowance For Loan Losses, June 30, 2011:
                           
Ending balance: individually evaluated for impairment
  $     $     $ 250     $ 1,754     $ 302     $ 53     $ 2,359  
     
 
Ending Balance: collectively evaluated for impairment
  $ 252     $ 529     $ 784     $ 2,387     $ 188     $ 214     $ 4,354  
     
 
Total Loans, June 30, 2011:
                                                       
Ending balance: individually evaluated for impairment
  $ 22,303     $ 19,891     $ 9,834     $ 32,391     $ 1,892     $ 295     $ 86,606  
     
 
Ending balance: collectively evaluated for impairment
  $ 22,607     $ 9,233     $ 52,175     $ 187,786     $ 22,571     $ 12,411     $ 306,783  
     

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            Residential                                
            and Land     Real Estate,     Real Estate,     Commercial              
    Gaming     Development     Construction     Mortgage     and Industrial     Other     Total  
     
For the six months ended June 30, 2010:
                                                       
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 699     $ 1,198     $ 1,019     $ 3,549     $ 1,293     $ 70     $ 7,828  
Charge-offs
                    (562 )     (785 )             (122 )     (1,469 )
Recoveries
                                    11       63       74  
Provision
    297       1,442       75       1,439       (606 )     88       2,735  
     
Ending Balance
  $ 996     $ 2,640     $ 532     $ 4,203     $ 698     $ 99     $ 9,168  
     
 
For the quarter ended June 30, 2010:
                                                       
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 901     $ 1,844     $ 525     $ 4,208     $ 585     $ 216     $ 8,279  
Charge-offs
                    (11 )     (663 )             (40 )     (714 )
Recoveries
                                    1       17       18  
Provision
    95       796       18       658       112       (94 )     1,585  
     
Ending Balance
  $ 996     $ 2,640     $ 532     $ 4,203     $ 698     $ 99     $ 9,168  
     
 
Allowance for Loan Losses, June 30, 2010:
                                                       
Ending balance: individually evaluated for impairment
  $ 337     $ 1,309     $ 467     $ 1,625     $ 399     $ 5     $ 4,142  
     
 
Ending balance:
                                                       
collectively evaluated for impairment
  $ 659     $ 1,331     $ 65     $ 2,578     $ 299     $ 94     $ 5,026  
     
 
Total Loans, June 30, 2010:
                                                       
Ending balance: individually evaluated for impairment
  $ 2,808     $ 5,664     $ 2,308     $ 8,263     $ 1,240     $ 13     $ 20,296  
     
 
Ending balance: collectively evaluated for impairment
  $ 62,828     $ 35,195     $ 48,016     $ 220,999     $ 44,450     $ 13,952     $ 425,440  
     
7. Deposits:
At June 30, 2011, time deposits of $100,000 or more include brokered deposits of $22,696,000 which mature in 2012.
8. Shareholders’ Equity:
On June 29, 2011, the Board of Directors declared a semi-annual dividend of $.09 per share with a record date of July 13, 2011 and a payment date of July 20, 2011.
9. Accumulated Other Comprehensive Income (Loss):
At June 30, 2011, accumulated other comprehensive income (loss) included the unrealized gain on available for sale securities of $2,493,616, net of tax of $1,267,491, and the loss from the unfunded post-retirement benefit obligation of $1,072,445, net of tax of $552,471.

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10. Fair Value of Financial Instruments:
The Company reports certain assets and liabilities at their estimated fair value. These assets and liabilities are classified and disclosed in one of three categories 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 market based inputs or unobservable inputs or unobservable inputs that are corroborated by market data, or Level 3 — Unobservable inputs that are not corroborated by market data.
The Company is 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 disclosure 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 disclosures, Management made highly sensitive estimates and assumptions in developing the methodology to be utilized in the computation of fair value. These estimates and assumptions were formulated based on judgments regarding economic conditions and risk characteristics of the financial instruments that were present at the time the computations were made. Events may occur that alter these conditions and 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 discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax consequences related to the realization of the unrealized gains and losses have not been computed or disclosed herein. These methods and assumptions are set forth below.
Cash and Due from Banks
The carrying amount shown as cash and due from banks approximates fair value.
Federal Funds Sold
The carrying amount shown as federal funds sold approximates fair value.
Available for Sale Securities
The fair value of available for sale securities is based on quoted market prices. 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.

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All of the Company’s available for sale securities are Level 2 assets.
Held to Maturity Securities
The fair value of held to maturity securities is based on quoted market prices.
Other Investments
The carrying amount shown as other investments approximates fair value.
Federal Home Loan Bank Stock
The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.
Loans
The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. 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 non-recurring 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 non-recurring Level 3 asset.
Other Real Estate
When Management determines that it has sustained a loss on a loan, it may be necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’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 non-recurring Level 2 asset. When an appraised value is

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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 as a non-recurring Level 3 asset.
Cash Surrender Value of Life Insurance
The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.
Deposits
The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.
Federal Funds Purchased and Securities Sold under Agreements to Repurchase
The carrying amount shown as federal funds purchased and securities sold under agreements to repurchase approximates fair value.
Borrowings from Federal Home Loan Bank
The fair value of FHLB fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The Company has no FHLB variable rate borrowings.
Commitments to Extend Credit and Standby Letters of Credit
Because commitments to extend credit and standby letters of credit are generally short-term and at variable rates, the contract value and estimated value associated with these instruments are immaterial.
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 June 30, 2011 and December 31, 2010 are as follows:
                                 
            Fair Value Measurement Using  
June 30, 2011:   Total     Level 1     Level 2     Level 3  
     
U.S. Treasuries
  $ 17,087,189     $       $ 17,087,189     $    
U.S. Government agencies
    258,590,550               258,590,550          
Mortgage-backed securities
    4,971,912               4,971,912          
States and political subdivisions
    38,229,902               38,229,902          
Equity securities
    649,983               649,983          
     
Total
  $ 319,529,536     $       $ 319,529,536     $    
     

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            Fair Value Measurement Using  
December 31, 2010:   Total     Level 1     Level 2     Level 3  
     
U.S. Treasuries
  $ 26,508,971     $       $ 26,508,971     $    
U.S. Government agencies
    218,595,943               218,595,943          
States and political subdivisions
    41,323,566               41,323,566          
Equity securities
    649,983               649,983          
     
Total
  $ 287,078,463     $       $ 287,078,463     $    
     
Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2011 and December 31, 2010 are as follows:
                                 
            Fair Value Measurement Using  
    Total     Level 1     Level 2     Level 3  
     
June 30, 2011
  $ 41,280,804     $       $       $ 41,280,804  
December 31, 2010
    14,294,758                       14,294,758  
The following table presents a summary of changes in the fair value of impaired loans which are measured using level 3 inputs:
                 
    For the Six Months     For the Year  
    Ended     Ended  
    June 30, 2011     December 31, 2010  
     
Balance, beginning of period
  $ 14,294,758     $ 20,110,330  
 
Additions to impaired loans and troubled debt restructurings
    33,612,742       5,519,905  
 
Principal payments, charge-offs and transfers to other real estate
    (6,524,327 )     (12,286,059 )
 
Change in allowance for loan losses on impaired loans
    (102,369 )     950,583  
     
 
Balance, end of period
  $ 41,280,804     $ 14,294,758  
     
Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2011 and December 31, 2010 are as follows:
                                 
            Fair Value Measurement Using  
    Total     Level 1     Level 2     Level 3  
     
June 30, 2011
  $ 8,163,237     $       $ 1,205,000     $ 6,958,237  
December 31, 2010
    5,744,150               1,248,816       4,495,334  
The following table presents a summary of changes in the fair value of other real estate which is measured using level 3 inputs:

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    For the Six     For the Year  
    Months Ended     Ended  
    June 30, 2011     December 31, 2010  
     
Balance, beginning of period
  $ 4,495,334     $ 1,521,313  
 
Loans transferred to ORE
    2,899,509       4,466,221  
 
Sales
    (312,000 )     (1,414,850 )
 
Writedowns
    (124,606 )     (77,350 )
 
     
 
Balance, end of period
  $ 6,958,237     $ 4,495,334  
     
The carrying value and estimated fair value of financial assets and financial liabilities at June 30, 2011 and December 31, 2010, are as follows:
                                 
    June 30, 2011     December 31, 2010  
    Carrying Amount     Fair Value     Carrying Amount     Fair Value  
 
Financial Assets:
                               
Cash and due from banks
  $ 45,605,429     $ 45,605,429     $ 24,146,939     $ 24,146,939  
Available for sale securities
    319,529,536       319,529,536       287,078,463       287,078,463  
Held to maturity securities
    1,916,323       2,006,142       1,914,879       2,010,430  
Other investments
    3,843,455       3,843,455       3,926,371       3,926,371  
Federal Home Loan Bank stock
    2,153,000       2,153,000       2,281,200       2,281,200  
Loans, net
    386,676,260       391,565,813       403,248,499       407,363,159  
     
Cash surrender value of life insurance
    16,076,138       16,076,138       15,951,117       15,951,117  
Financial Liabilities:
                               
Deposits:
                               
Non-interest bearing
    109,784,048       109,784,048       108,277,985       108,277,985  
Interest bearing
    388,635,388       389,714,767       375,861,530       376,715,446  
     
Total deposits
    498,419,436       499,498,815       484,139,515       484,993,431  
Federal funds purchased and securities sold under agreements to repurchase
    169,044,469       169,044,469       140,102,019       140,102,019  
Borrowings from Federal Home Loan Bank
    28,955,873       30,375,454       42,957,016       43,990,270  
11. New Accounting Pronouncements:
In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU No. 2011-01). ASU No. 2011-01 temporarily delays the effective date of the disclosures about troubled debt restructurings required in Accounting Standards Update No. 2010-20. It is not expected to have a material impact on the Company’s results of operations or financial position.

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In April 2011, the FASB issued Accounting Standards Update No. 2011-02, Receivables: A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU No. 2011-02”). ASU No. 2011-02 establishes the effective date for the disclosures about troubled debt restructurings required in ASU No. 2010-20. The standard is effective for the Company for fiscal quarters beginning after June 15, 2010 and is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (“ASU No. 2011-04”). ASU No. 2011-04 amends the fair value measurement and disclosure requirements in order to gain consistency between the generally accepted accounting principles in the United States and the International Financial Reporting Standards. The effective date for ASU No. 2011-04 is for the first interim or annual period beginning on or after December 15, 2011. The adoption of ASU No. 2011-04 is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (“ASU No. 2011-05”). ASU No. 2011-05 requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income in a single statement of comprehensive income or in two separate consecutive statements. The effective date for ASU 2011-05 is for the first interim or annual period beginning on or after December 15, 2011. The adoption of ASU No. 2011-05 is not expected to have a material impact on the Company’s results of operations or financial position. As the Company currently presents changes in comprehensive income in the Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income, the adoption of ASU No. 2011-05 will result in a change in how comprehensive income is disclosed.
12. Reclassifications:
Certain reclassifications, which had no effect on prior year net income, have been made to prior period statements to conform to current year presentation.

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The Company is a one-bank holding company headquartered in Biloxi, Mississippi. It has two operating subsidiaries, PFC Service Corp., an inactive company, and The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in Harrison, Hancock, Stone and Jackson counties in Mississippi.
The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2010.
Forward-Looking Information
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.
New Accounting Pronouncements
The FASB has issued new accounting standards updates, which are disclosed in Note 11 to the accompanying consolidated financial statements. The Company does not expect that these updates will have a material impact on its results of operations or financial position. As the Company currently presents changes in comprehensive income in the Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income, the adoption of ASU No. 2011-05 will result in a change in how comprehensive income is disclosed.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Management to make estimates and assumptions that affect

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the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.
Allowance for loan losses:
The Company’s most critical accounting policy relates to its allowance for loan losses (“ALL”), which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of determination. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. 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 Management’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 benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.
OVERVIEW
The Company is a community bank serving the financial and trust needs of its customers in Harrison, Hancock, Jackson and Stone Counties in Mississippi. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the

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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 the second quarter of 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 environment, the decline in the value of real estate and the general economic downturn on local and national levels have affected the Company’s results. Managing the net interest margin in the Company’s highly competitive market and in context of larger national economic conditions has been very challenging and will continue to be so for the foreseeable future.
Net income for the second quarter of 2011 was $809,873 compared with $1,446,082 for the second quarter of 2010 and for the first half of 2011 was $1,247,417 as compared with $2,317,537 for the first half of 2010. Net interest income decreased $868,634 for the second quarter of 2011 as compared with the second quarter of 2010 and $1,999,377 for the first half of 2011 as compared with the first half of 2010 primarily from a decrease in interest rates earned on U.S. Agency securities. In the second quarter of 2011, interest income of $375,469 was charged-off as a result of placing a loan with a balance of $15,187,500 on nonaccrual. Results for the second quarter and first half of 2011 included a decrease in the provision for loan losses of $1,309,000 and $1,548,000, a decrease in gains on sales or calls of securities of $1,556,267 and $1,560,312 and a decrease in tax expense of $714,000 and $1,039,000 as compared with 2010.
Monitoring asset quality and addressing potential losses in our loan portfolio continues to be emphasized during these difficult economic times. Nonaccrual loans and loans past due 90 days and still accruing were $32,561,983 and $1,194,882 at June 30, 2011 as compared with $14,537,097 and $2,961,555 at June 30, 2010, respectively. While nonaccrual loans have increased significantly at June 30, 2011, the balance includes one gaming credit totaling $15,728,126, which has been classified by the regulatory authorities for two years even though the loan is performing, and one residential development loan totaling $15,187,500, which has no specific reserve. Net charge-offs decreased to $1,123,773 for the first half of 2011 from $1,394,879 for the first half of 2010.
Total assets at June 30, 2011 increased $34,669,489 as compared with December 31, 2010. Deposits increased $14,279,921 and federal funds purchased and securities sold under agreements to repurchase increased $28,942,450 at June 30, 2011 as compared with December 31, 2010, which funded the increase of $32,451,073 in available for sale securities and the decrease in borrowings from the Federal Home Loan Bank (“FHLB”) of $14,001,143 for the same period. Loans decreased $16,509,013 at June 30, 2011 as compared with December 31, 2010. Included in this decrease was the unexpected payoff of a loan relationship of $15,500,000 during the second quarter of 2011.

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RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which interest income on loans, investments and other interest earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company’s income. Management’s objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income.
Quarter Ended June 30, 2011 as Compared with Quarter Ended June 30, 2010
The Company’s average interest earning assets decreased approximately $29,055,000, or 4%, from approximately $763,816,000 for the second quarter of 2010 to approximately $734,761,000 for the second quarter of 2011. The Company’s average balance sheet shrunk as principal payments, maturities, charge-offs and foreclosures relating to existing loans have outpaced new loans and investments.
The average yield on earning assets decreased by 50 basis points, from 4.17% for the second quarter of 2010 to 3.67% for the second quarter of 2011, with the biggest impact to the yield on taxable available for sale securities. The Company’s investment and liquidity strategy has been to invest most of the proceeds from sales, calls and maturities of securities in similar securities with a maturity of two years, the interest rates on which have decreased dramatically. As a result, the yield on taxable available for sale securities decreased from 3.85% for the second quarter of 2010 to 2.45% for the second quarter of 2011. Beginning in the fourth quarter of 2010, maturities have been extended to five years and longer in order to improve yield.
Average interest bearing liabilities decreased approximately $24,357,000, or 4%, from approximately $627,114,000 for the second quarter of 2010 to approximately $602,757,000 for the second quarter of 2011.
The average rate paid on interest bearing liabilities decreased 22 basis points, from .79% for the second quarter of 2010 to .57% for the second quarter of 2011. This decrease is the result of utilizing lower cost funding sources including brokered deposits and FHLB advances in 2011 as compared with 2010. 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 income as a percentage of average earning assets, was 3.20% for the quarter ended June 30, 2011, down 32 basis points from 3.52% for the quarter ended June 30, 2010.
Six Months Ended June 30, 2011 as Compared with Six Months Ended June 30, 2010
The Company’s average interest earning assets decreased approximately $50,322,000, or 7% , from approximately $771,117,000 for the first half of 2010 to approximately $720,795,000 for the first half of 2011. The Company’s average balance sheet shrunk as principal payments, maturities,

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charge-offs and foreclosures relating to existing loans have outpaced new loans and investments.
The average yield on earning assets decreased by 44 basis points, from 4.25% for the first half of 2010 to 3.81% for the first half of 2011, with the biggest impact to the yield on taxable available for sale securities. The Company’s investment and liquidity strategy has been to invest most of the proceeds from sales, calls and maturities of securities in similar securities with a maturity of two years, the interest rates on which have decreased dramatically. As a result, the yield on taxable available for sale securities decreased from 4.08% for the first half of 2010 to 2.44% for the first half of 2011. Beginning in the fourth quarter of 2010, maturities have been extended to five years and longer in order to improve yield.
Average interest bearing liabilities decreased approximately $48,203,000, or 8%, from approximately $637,108,000 for the first half of 2010 to approximately $588,905,000 for the first half of 2011.
The average rate paid on interest bearing liabilities decreased 17 basis points, from .78% for the first half of 2010 to .61% for the first half of 2011. This decrease is the result of utilizing lower cost funding sources including brokered deposits and FHLB advances in 2011 as compared with 2010. 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 income as a percentage of average earning assets, was 3.31% for the six months ended June 30, 2011, down 29 basis points from 3.60% for the six months ended June 30, 2010.
The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended June 30, 2011 and 2010 and the six months ended June 30, 2011 and 2010.

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Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
                                                 
    Quarter Ended June 30, 2011     Quarter Ended June 30, 2010  
    Average Balance     Interest Earned/Paid     Rate     Average Balance     Interest Earned/Paid     Rate  
         
Loans (2)(3)
  $ 391,346     $ 4,381       4.48 %   $ 445,601     $ 4,893       4.39 %
 
                                               
Federal Funds Sold
    2,318       4       0.69 %     2,670       2       0.30 %
 
                                               
HTM:
                                               
Non taxable (1)
    1,916       27       5.64 %     3,025       36       4.76 %
 
                                               
AFS:
                                               
Taxable
    295,317       1,806       2.45 %     267,579       2,576       3.85 %
 
                                               
Non taxable (1)
    40,913       519       5.07 %     40,340       444       4.40 %
 
                                               
Other
    2,951       3       0.41 %     4,601       3       0.26 %
                         
 
                                               
Total
  $ 734,761     $ 6,740       3.67 %   $ 763,816     $ 7,954       4.17 %
                         
Savings & interest-bearing DDA
  $ 249,035     $ 265       0.43 %   $ 223,111     $ 289       0.52 %
 
                                               
CD’s
    169,899       386       0.91 %     197,044       560       1.14 %
 
                                               
Federal funds purchased
    147,997       170       0.46 %     155,629       276       0.71 %
 
                                               
FHLB advances
    35,826       45       0.50 %     51,330       110       0.86 %
                         
 
                                               
Total
  $ 602,757     $ 866       0.57 %   $ 627,114     $ 1,235       0.79 %
                         
Net tax-equivalent margin on earning assets
                    3.20 %                     3.52 %
 
                                           
(1)  
All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2011 and 2010.
 
(2)  
Loan fees of $197 and $115 for 2011 and 2010, respectively, are included in these figures.
 
(3)  
Includes nonaccrual loans.

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Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
                                                 
    Six Months Ended June 30, 2011     Six Months Ended June 30, 2010  
    Average Balance     Interest Earned/Paid     Rate     Average Balance     Interest Earned/Paid     Rate  
         
Loans (2)(3)
  $ 399,497     $ 9,288       4.65 %   $ 450,712     $ 9,880       4.38 %
 
                                               
Federal Funds Sold
    3,730       5       0.27 %     4,222       5       0.24 %
 
                                               
HTM:
                                               
Non taxable (1)
    1,916       52       5.43 %     3,113       80       5.14 %
 
                                               
AFS:
                                               
Taxable
    271,379       3,309       2.44 %     267,586       5,457       4.08 %
 
                                               
Non taxable (1)
    41,266       1,053       5.10 %     40,353       941       4.66 %
 
                                               
Other
    3,007       9       0.60 %     5,131       8       0.31 %
                         
 
                                               
Total
  $ 720,795     $ 13,716       3.81 %   $ 771,117     $ 16,371       4.25 %
                         
Savings & interest- bearing DDA
  $ 233,294     $ 525       0.45 %   $ 223,047     $ 578       0.52 %
 
                                               
CD’s
    175,304       829       0.95 %     187,331       1,089       1.16 %
 
                                               
Federal funds purchased
    141,819       342       0.48 %     163,178       563       0.69 %
 
                                               
FHLB advances
    38,488       95       0.49 %     63,552       246       0.77 %
                         
 
                                               
Total
  $ 588,905     $ 1,791       0.61 %   $ 637,108     $ 2,476       0.78 %
                         
Net tax-equivalent margin on earning assets
                    3.31 %                     3.60 %
 
                                           
(1)  
All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2011 and 2010.
 
(2)  
Loan fees of $363 and $316 for 2011 and 2010, respectively, are included in these figures.
 
(3)  
Includes nonaccrual loans.
Provision for Loan Losses
In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, 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

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grading. A loan review process further assists with evaluating credit quality and assessing potential performance issues. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. In addition, the Company continuously monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area, land, development, construction and commercial real estate loans, and their direct and indirect impact on its operations. A watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation.
Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and identify and estimate potential losses based on the best available information. The potential effect resulting from 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 still sufficient uncertainty as to the ultimate impact. However, no direct potential losses as a result of the spill were identified as of June 30, 2011.
The Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $546,000 and $1,585,000 for the second quarters of 2011 and 2010, respectively, and $1,187,000 and $2,735,000 for the first half of 2011 and 2010, respectively.
The decline in the value of real estate has negatively impacted the collateral relating to the Company’s residential and land development portfolio. In 2010, the Company’s evaluation of this portfolio and related collateral resulted in a significant increase in provisions for this portfolio. Specifically, approximately 50% and 53% of the provisions for the second quarter and first half of 2010, respectively, related to the residential and land development portfolio. Additional provisions were charged to expense and, where appropriate, charge-offs against the allowance for loan losses were recorded during the remaining quarters of 2010. As a result of actions taken by Management in 2010, the allowance for loan losses on residential and land development portfolio decreased from $2,640,000 at June 30, 2010 to $529,000 at June 30, 2011. One loan included in this portfolio with a balance of $15,187,500 at June 30, 2011 has no specific reserve.
The allowance for loan losses as a percentage of loans was 1.71% and 1.62% at June 30, 2011 and December 31, 2010, respectively. The Company believes that its allowance for loan losses is appropriate as of June 30, 2011.
The allowance for loan losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in future quarters which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations.

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Non-interest income
Non-interest income for the second quarter of 2011 decreased $1,233,205 as compared with the second quarter of 2010 as a result of changes in service charges on deposit accounts, gains on sales or calls of securities and a gain from redemption of life insurance. Service charges on deposit accounts decreased $124,339 in 2011 as compared with 2010, primarily due to the decrease in NSF fee income of $86,804. NSF fee income has decreased as a result of the local and national economy impacting customers’ overdraft activity as well as customers opting out of overdraft protection service for debit card transactions. Gains on sales or calls of securities were $7,174 for the second quarter of 2011 as compared with $1,563,441 for the second quarter of 2010. During 2010, the Company liquidated its entire mortgage-backed securities portfolio and some of its short-term U.S. Treasuries. As a result of the death of a participant in one of the Company’s deferred compensation plans, bank owned life insurance was redeemed during the second quarter of 2011, resulting in a gain of $389,119.
Non-interest income for the first half of 2011 decreased $1,343,428 as compared with the first half of 2010 as a result of changes in service charges on deposit accounts, gains on sales or calls of securities and a gain from redemption of life insurance. Service charges on deposit accounts decreased $277,814 in 2011 as compared with 2010, primarily due to the decrease in NSF fee income of $212,728. NSF fee income has decreased as a result of the local and national economy impacting customers’ overdraft activity as well as customers opting out of overdraft protection service for debit card transactions. Gains on sales or calls of securities were $7,174 for the first half of 2011 as compared with $1,567,486 for the first half quarter of 2010. During 2010, the Company liquidated its entire mortgage-backed securities portfolio and some of its short-term U.S. Treasuries. As a result of the death of a participant in one of the Company’s deferred compensation plans, bank owned life insurance was redeemed during the first half of 2011, resulting in a gain of $389,119.
Non-interest expense
Total non-interest expense increased $287,370 for the second quarter of 2011 as compared with the second quarter of 2010 as a result of net occupancy, FDIC assessments and other expense. Net occupancy costs increased $111,115 primarily due to insurance expense being $91,565 higher in 2011 as compared with 2010 as a result of increased insurance rates on our properties. FDIC and state insurance assessments increased $46,569 for the second quarter of 2011 as compared with the second quarter of 2010 as banks fund the replenishment of the bank insurance fund which was depleted by the recent swell of bank closures and more frequent state assessments have been levied in the current year. Other expenses increased $132,284 for the second quarter of 2011 as compared with the second quarter of 2010 as costs associated with the larger volume of foreclosures increased $82,459 in 2011 as compared with 2010.
Total non-interest expense increased $314,315 for the first half of 2011 as compared with the first half of 2010 as a result of net occupancy, FDIC assessments and other expense. Net occupancy costs increased $200,272 primarily due to insurance expense being $195,115 higher in 2011 as compared with 2010 as a result of increased insurance rates on our properties. FDIC and state insurance assessments increased $102,008 for the first half of 2011 as compared with the first half of

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2010 as banks fund the replenishment of the bank insurance fund which was depleted by the recent swell of bank closures and more frequent state assessments have been levied in the current year. Other expenses increased $115,664 for the first half of 2011 as compared with the first half of 2010 as costs associated with the larger volume of foreclosures increased $130,230 in 2011 as compared with 2010.
Income Tax Expense (Benefit)
Income taxes have been impacted by non-taxable income and federal tax credits during the six months and quarters ended June 30, 2011 and 2010, as follows:
                                 
    Quarters Ended June 30,  
    2011     2010  
    Tax     Rate     Tax     Rate  
     
Taxes at statutory rate
  $ 210,077       34     $ 669,148       34  
Increase (decrease) resulting from:
                               
Tax-exempt interest income
    (137,935 )     (23 )     (107,668 )     (6 )
Income from BOLI
    (174,930 )     (28 )     (42,956 )     (2 )
Federal tax credits
    (91,410 )     (15 )                
Other
    2,198       1       3,476       1  
     
Total income taxes (benefit)
  $ (192,000 )     (31 )   $ 522,000       27  
     
                                 
    Six Months Ended June 30,  
    2011     2010  
    Tax     Rate     Tax     Rate  
     
Taxes at statutory rate
  $ 307,842       34     $ 1,024,943       34  
Increase (decrease) resulting from:
                               
Tax-exempt interest income
    (263,429 )     (29 )     (229,024 )     (8 )
Income from BOLI
    (219,912 )     (24 )     (87,020 )     (3 )
Federal tax credits
    (182,820 )     (20 )     (32,160 )     (1 )
Other
    16,319       1       20,261       1  
     
Total income taxes (benefit)
  $ (342,000 )     (38 )   $ 697,000       23  
     
FINANCIAL CONDITION
Available for sale securities increased $32,451,073 at June 30, 2011, compared with December 31, 2010, as funds available from the increase in deposits and federal funds purchased and securities sold under agreements to repurchase are invested in these securities.
Loans decreased $16,509,013 at June 30, 2011 as compared with December 31, 2010 as a result of loan payments, maturities, foreclosures, charge-offs and a slower volume of new loans. The Company anticipates that its loan portfolio will decline further in the remaining quarters of 2011.
Other real estate (“ORE”) increased $2,419,087 at June 30, 2011 as compared with December 31, 2010. Loans totaling $2,927,510 were transferred into ORE, one property included in ORE was

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written down by $124,606 and ORE totaling $383,817 was sold during 2011.
Prepaid FDIC assessments decreased by $754,552 at June 30, 2011 as compared with December 31, 2010 as a result of the amortization of these costs.
Other assets decreased $3,584,207 at June 30, 2011 as compared with December 31, 2010 primarily as a result of the refund of income taxes of $2,130,362 and a decrease in deferred tax assets of $1,733,386. The increase in the fair value of available for securities changed from an unrealized loss to an unrealized gain which created a deferred tax asset.
Total deposits increased $14,279,921 at June 30, 2011, as compared with December 31, 2010. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically.
Federal funds purchased and securities sold under agreements to repurchase increased $28,942,450. This includes non-deposit accounts which fluctuate as customers periodically reallocate their funds.
Borrowings from the Federal Home Loan Bank decreased $14,001,143 at June 30, 2011 as compared with December 31, 2010 based on the liquidity needs of the bank subsidiary.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders.
The Company and the Bank are subject to regulatory capital adequacy requirements imposed by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of the bank subsidiary’s assets and certain off-balance sheet items, adjusted for credit risk, as calculated under regulatory accounting practices must be met. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks and to account for off-balance sheet exposure. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank 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 June 30, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater and a Leverage capital ratio of 5.00% or greater. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.
The actual capital amounts and ratios and required minimum capital amounts and ratios for the

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Company as of June 30, 2011 and December 31, 2010, are as follows (in thousands):
                                 
    Actual     For Capital Adequacy Purposes  
    Amount     Ratio     Amount     Ratio  
     
June 30, 2011:
                               
Total Capital (to Risk Weighted Assets)
  $ 110,069       21.25 %   $ 41,438       8.00 %
Tier 1 Capital (to Risk Weighted Assets)
    103,602       20.00 %     20,719       4.00 %
Tier 1 Capital (to Average Assets)
    103,602       12.53 %     33,069       4.00 %
 
                               
December 31, 2010:
                               
Total Capital (to Risk Weighted Assets)
  $ 110,435       22.26 %   $ 39,691       8.00 %
Tier 1 Capital (to Risk Weighted Assets)
    104,233       21.01 %     19,846       4.00 %
Tier 1 Capital (to Average Assets)
    104,233       12.40 %     33,616       4.00 %
The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of June 30, 2011 and December 31, 2010, are as follows (in thousands):
                                 
    Actual     For Capital Adequacy Purposes  
    Amount     Ratio     Amount     Ratio  
     
June 30, 2011:
                               
Total Capital (to Risk Weighted Assets)
  $ 105,191       20.34 %   $ 41,372       8.00 %
Tier 1 Capital (to Risk Weighted Assets)
    98,723       19.09 %     20,686       4.00 %
Tier 1 Capital (to Average Assets)
    98,723       11.95 %     33,047       4.00 %
 
                               
December 31, 2010:
                               
Total Capital (to Risk Weighted Assets)
  $ 105,255       21.41 %   $ 39,320       8.00 %
Tier 1 Capital (to Risk Weighted Assets)
    99,111       20.16 %     19,660       4.00 %
Tier 1 Capital (to Average Assets)
    99,111       11.86 %     33,431       4.00 %
In addition to monitoring its risk-based capital ratios, the Company also determines the primary capital ratio on a quarterly basis. This ratio was 13.94% at June 30, 2011, 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.
LIQUIDITY
Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. The Company manages and monitors its liquidity position 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 proforma liquidity projections which are updated on a continuous basis in the management of its liquidity needs and

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also conducts contingency testing on its liquidity plan.
Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. Borrowings from the FHLB, federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position. The Company has also been approved to participate in the Federal Reserve Bank’s Discount Window Primary Credit Program, which it intends to use only as a contingency.
REGULATORY MATTERS
During 2009, Management identified opportunities for improving risk management, addressing asset quality concerns, managing concentrations of credit risk and ensuring sufficient liquidity at the Bank as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company and the Bank 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.
Item 4: Controls and Procedures
As of June 30, 2011, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no changes in the Company’s internal control over financial reporting that occurred during the period ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters is expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company.

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Item 5: Other Information
Lyle M. Page, a director of the Company, passed away on July 22, 2011, after many years of service to the Company and its bank subsidiary. The Company will appoint a new director to complete Mr. Page’s one year term on the board at its next meeting on August 24, 2011.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
         
 
  Exhibit 31.1:   Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes - Oxley Act of 2002
 
  Exhibit 31.2:   Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes - Oxley Act of 2002
 
  Exhibit 32.1:   Certification of Chief Executive Officer Pursuant
to 18 U.S.C. ss. 1350
 
  Exhibit 32.2:   Certification of Chief Financial Officer Pursuant
to 18 U.S.C. ss. 1350
 
  Exhibit 101  
The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at June 30, 2011 and December 31, 2010, (ii)Consolidated Statements of Income for the quarters ended June 30, 2011 and 2010 and for the six months ended June 30, 2011 and 2010, (iii) Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income for the six months ended June 30, 2011, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 and (v) Notes to the Unaudited Consolidated Financial Statements for the six months ended June 30, 2011 and 2010 tagged as blocks of text.
 
       
 
     
     In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
(b) Reports on Form 8-K
A Form 8-K was filed on April 27, 2011, April 28, 2011, June 29, 2011 and July 27, 2011.

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SIGNATURES
Pursuant to the requirement of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
             
    PEOPLES FINANCIAL CORPORATION
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
Date:
  August 12, 2011
 
 
 
 
 
 
 
 
 
 
 
 
     By:
  /s/ Chevis C. Swetman
 
Chevis C. Swetman
 
 
        Chairman, President and Chief Executive Officer
 
 
        (principal executive officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
  August 12, 2011
 
 
 
 
 
 
 
 
 
 
 
 
     By:
  /s/ Lauri A. Wood  
 
 
 
 
     
 
 
 
 
  Lauri A. Wood  
 
        Chief Financial Officer and Controller
 
 
        (principal financial and accounting officer)
 
 

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