10-Q 1 d84730e10vq.htm FORM 10-Q e10vq
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
or
     
o   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 þ No o
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (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 o No þ
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 November 1, 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
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
                 
    September 30, 2011     December 31, 2010  
    (Unaudited)     (Audited)  
     
Assets
               
Cash and due from banks
  $ 31,932,887     $ 24,146,939  
 
               
Available for sale securities
    304,260,526       287,078,463  
 
               
Held to maturity securities, fair value of $2,003,692 at September 30, 2011; $2,010,430 at December 31, 2010
    1,917,039       1,914,879  
 
               
Other investments
    3,843,455       3,926,371  
 
               
Federal Home Loan Bank Stock, at cost
    1,714,600       2,281,200  
 
               
Loans
    422,157,215       409,898,757  
 
               
Less: Allowance for loan losses
    7,024,517       6,650,258  
     
 
               
Loans, net
    415,132,698       403,248,499  
 
               
Bank premises and equipment, net of accumulated depreciation
    28,532,026       29,756,239  
 
               
Other real estate
    6,962,738       5,744,150  
 
               
Accrued interest receivable
    2,702,923       3,292,430  
 
               
Cash surrender value of life insurance
    16,066,420       15,951,117  
 
               
Prepaid FDIC assessments
    2,500,123       3,652,972  
 
               
Other assets
    1,701,195       5,552,225  
     
Total assets
  $ 817,266,630     $ 786,545,484  
     

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Condition (continued)
                 
    September 30, 2011     December 31, 2010  
    (Unaudited)     (Audited)  
     
Liabilities & Shareholders’ Equity
Liabilities:
               
 
               
Deposits:
               
 
               
Demand, non-interest bearing
  $ 111,213,054     $ 108,277,985  
 
               
Savings and demand, interest bearing
    218,669,274       193,631,209  
 
               
Time, $100,000 or more
    110,327,037       134,667,660  
 
               
Other time deposits
    47,644,726       47,562,661  
     
 
               
Total deposits
    487,854,091       484,139,515  
 
               
Federal funds purchased and securities sold under agreements to repurchase
    172,940,667       140,102,019  
 
               
Borrowings from Federal Home Loan Bank
    30,101,572       42,957,016  
 
               
Other liabilities
    18,759,640       17,990,072  
     
 
               
Total liabilities
    709,655,970       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 September 30, 2011 and December 31, 2010
    5,136,918       5,151,139  
 
               
Surplus
    65,780,254       65,780,254  
 
               
Undivided profits
    34,486,812       33,302,381  
 
               
Accumulated other comprehensive income (loss), net of tax
    2,206,676       (2,876,912 )
 
               
     
Total shareholders’ equity
    107,610,660       101,356,862  
     
 
               
Total liabilities & shareholders’ equity
  $ 817,266,630     $ 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 September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
     
Interest income:
                               
Interest and fees on loans
  $ 4,456,517     $ 4,814,583     $ 13,744,465     $ 14,695,051  
 
                               
Interest and dividends on securities:
                               
 
                               
U.S. Treasuries
    54,069       77,382       181,198       402,860  
 
                               
U.S. Government agencies
    1,254,858       1,620,180       4,405,916       6,232,606  
 
                               
Mortgage-backed securities
    37,773               68,730       518,924  
 
                               
States and political subdivisions
    339,376       332,366       1,068,833       1,005,963  
 
                               
Other investments
    12,351       14,769       20,990       22,423  
 
                               
Interest on federal funds sold
    1,686       4,496       6,425       9,832  
     
 
                               
Total interest income
    6,156,630       6,863,776       19,496,557       22,887,659  
     
 
                               
Interest expense:
                               
Deposits
    510,585       826,304       1,864,702       2,493,090  
 
                               
Long-term borrowings
    39,967       57,894       135,434       304,098  
 
                               
Federal funds purchased and securities sold under agreements to repurchase
    173,859       249,005       515,427       811,746  
     
 
                               
Total interest expense
    724,411       1,133,203       2,515,563       3,608,934  
     
 
                               
Net interest income
    5,432,219       5,730,573       16,980,994       19,278,725  
 
                               
Provision for allowance for losses on loans
    544,000       1,045,000       1,731,000       3,780,000  
     
 
                               
Net interest income after provision for allowance for losses on loans
  $ 4,888,219     $ 4,685,573     $ 15,249,994     $ 15,498,725  
     

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Income (continued)
(Unaudited)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
     
Non-interest income:
                               
Trust department income and fees
  $ 361,346     $ 352,712     $ 1,031,269     $ 942,949  
 
                               
Service charges on deposit accounts
    1,493,674       1,513,957       4,367,848       4,665,945  
 
                               
Gain on sales or calls of securities
    786,353       92,023       793,527       1,659,509  
 
                               
Increase in cash surrender value
    123,798       126,444       381,478       382,388  
 
                               
Gain on death benefits from life insurance
    80,621               469,740          
 
                               
Other income
    114,438       128,002       390,600       380,006  
     
 
                               
Total non-interest income
    2,960,230       2,213,138       7,434,462       8,030,797  
     
 
                               
Non-interest expense:
                               
Salaries and employee benefits
    3,393,984       3,393,160       10,165,371       10,203,623  
 
                               
Net occupancy
    573,274       604,669       1,842,444       1,673,567  
 
                               
Equipment rentals, depreciation and maintenance
    739,997       911,225       2,562,209       2,797,990  
 
                               
FDIC assessments
    430,204       400,307       1,273,116       1,141,211  
 
                               
Other expense
    2,281,314       1,621,950       5,506,223       4,731,194  
     
 
                               
Total non-interest expense
    7,418,773       6,931,311       21,349,363       20,547,585  
     
 
                               
Income (loss) before income taxes
    429,676       (32,600 )     1,335,093       2,981,937  
 
                               
Income tax expense (benefit)
    (148,000 )     (397,000 )     (490,000 )     300,000  
     
 
                               
Net income
  $ 577,676     $ 364,400     $ 1,825,093     $ 2,681,937  
     
Basic and diluted earnings per share
  $ .12     $ .07     $ .36     $ .52  
     
Dividends declared per share
  $       $       $ .09     $ .11  
     
 
                               
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
                            1,825,093             $ 1,825,093       1,825,093  
 
                                                       
Net unrealized gain on available for sale securities, net of tax
                                    5,607,316       5,607,316       5,607,316  
 
                                                       
Reclassification adjustment for available for sale securities called or sold in current year, net of tax
                                    (523,728 )     (523,728 )     (523,728 )
 
                                                     
 
                                                       
Total comprehensive income
                                          $ 6,908,681          
 
                                                     
 
                                                       
Dividend declared ($ .09 per share)
                            (462,323 )                     (462,323 )
 
                                                       
Retirement of stock
    (14,221 )     (14,221 )             (178,339 )                     (192,560 )
 
                                                       
                   
Balance, September 30, 2011
    5,136,918     $ 5,136,918     $ 65,780,254     $ 34,486,812     $ 2,206,676             $ 107,610,660  
                     
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)
                 
    Nine Months Ended September 30,  
    2011     2010  
Cash flows from operating activities:
               
 
               
Net income
  $ 1,825,093     $ 2,681,937  
 
               
Adjustment to reconcile net income to net cash provided by operating activities:
               
 
               
Depreciation
    1,670,000       1,807,000  
 
               
Provision for allowance for losses on loans
    1,731,000       3,780,000  
 
               
Loss on writedown of other real estate
    666,006       77,350  
 
               
Loss on sales of other real estate
    57,891       48,850  
 
               
Loss on other investments
    82,916       15,550  
 
               
Gain on sales and calls of securities
    (793,526 )     (1,659,509 )
 
               
Accretion of held to maturity securities
    (2,160 )     (2,091 )
 
               
Change in accrued interest receivable
    589,507       1,339,542  
 
               
Change in other assets
    3,512,853       (893,521 )
 
               
Change in other liabilities
    107,536       385,503  
 
           
 
               
Net cash provided by operating activities
  $ 9,447,116     $ 7,580,611  
 
           

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Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued) (unaudited)
                 
    Nine Months Ended September 30,  
    2011     2010  
Cash flows from investing activities:
               
Proceeds from maturities, sales and calls of available for sale securities
  $ 257,158,575     $ 337,327,553  
 
               
Investment in available for sale securities
    (265,848,144 )     (323,142,857 )
 
               
Proceeds from maturities of held to maturity securities
            389,920  
 
               
Redemption of Federal Home Loan Bank Stock
    566,600       1,640,500  
 
               
Proceeds from sales of other real estate
    1,201,025       1,092,500  
 
               
Loans, net change
    (16,758,709 )     37,686,504  
 
               
Acquisition of premises and equipment
    (445,787 )     (538,832 )
 
               
Investment in other assets
    (115,302 )     (458,474 )
 
           
 
               
Net cash provided by (used in) investing activities
    (24,241,742 )     53,996,814  
 
           
 
               
Cash flows from financing activities:
               
Demand and savings deposits, net change
    27,973,134       35,387,588  
 
               
Time deposits made, net change
    (24,258,558 )     26,827,275  
 
               
Cash dividends
    (924,646 )     (1,081,857 )
 
               
Retirement of common stock
    (192,560 )        
 
               
Borrowings from Federal Home Loan Bank
    460,700,115       621,880,492  
 
               
Repayments to Federal Home Loan Bank
    (473,555,559 )     (707,172,503 )
 
               
Federal funds purchased and securities sold under agreements to repurchase, net change
    32,838,648       (32,050,198 )
 
           
 
               
Net cash provided by (used in) financing activities
    22,580,574       (56,209,203 )
 
           
 
               
Net increase in cash and cash equivalents
    7,785,948       5,368,222  
 
               
Cash and cash equivalents, beginning of period
    24,146,939       29,155,294  
 
           
 
               
Cash and cash equivalents, end of period
  $ 31,932,887     $ 34,523,516  
 
           
See accompanying notes to consolidated financial statements.

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PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 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 September 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 nine months ended September 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 nine months ended September 30, 2011 and 2010, respectively, and 5,136,918 and 5,151,697 for the quarters ended September 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 $2,551,707 and $3,621,074 for the nine months ended September 30, 2011 and 2010, respectively, for interest on deposits and borrowings. Income tax payments of $235,000 and

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$2,332,000 were made during the nine months ended September 30, 2011 and 2010, respectively. Loans transferred to other real estate amounted to $3,143,510 and $2,516,220 during the nine months ended September 30, 2011 and 2010, respectively. Dividends payable of $462,323 as of December 31, 2010 were paid during the nine months ended September 30, 2011.
4. Investments:
The amortized cost and fair value of securities at September 30, 2011 and December 31, 2010, are as follows:
                                 
            Gross     Gross        
            Unrealized     Unrealized        
September 30, 2011   Amortized Cost     Gains     Losses     Fair Value  
 
Available for sale securities:
                               
 
Debt securities:
                               
 
U.S. Treasuries
  $ 98,975,014     $ 313,330     $ (16,973 )   $ 99,271,371  
 
U.S. Government agencies
    158,317,839       2,298,114       (16,885 )     160,599,068  
 
Mortgage-backed securities
    4,810,771       248,224               5,058,995  
 
States and political subdivisions
    36,555,109       2,126,000               38,681,109  
     
 
Total debt securities
    298,658,733       4,985,668       (33,858 )     303,610,543  
 
Equity securities
    649,983                       649,983  
     
 
Total available for sale securities
  $ 299,308,716     $ 4,985,668     $ (33,858 )   $ 304,260,526  
     
 
Held to maturity securities:
                               
 
States and political subdivisions
  $ 1,917,039     $ 86,653     $       $ 2,003,692  
     
 
Total held to maturity securities
  $ 1,917,039     $ 86,653     $       $ 2,003,692  
     

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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 September 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
  $ 86,928,621     $ 86,958,763  
Due after one year through five years
    75,380,778       76,255,402  
Due after five years through ten years
    85,655,717       88,317,101  
Due after ten years
    45,882,846       47,020,282  
Mortgage-backed securities
    4,810,771       5,058,995  
     
Totals
  $ 298,658,733     $ 303,610,543  
     
 
               
Held to maturity securities:
               
Due after one year through five years
  $ 1,452,596     $ 1,520,497  
Due after five years through ten years
    464,443       483,195  
     
Totals
  $ 1,917,039     $ 2,003,692  
     

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Securities with gross unrealized losses at September 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  
September 30, 2011:   Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
     
U.S. Treasuries
  $ 41,975,940     $ 16,973     $       $       $ 41,975,940     $ 16,973  
 
U.S. Government agencies
    9,995,500       16,885                       9,995,500       16,885  
     
 
TOTAL
  $ 51,971,440     $ 33,858     $       $       $ 51,971,440     $ 33,858  
     
 
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 September 30, 2011 and December 31, 2010, is as follows:
                 
    September 30, 2011     December 31, 2010  
     
Gaming
  $ 37,592,200     $ 44,342,798  
 
Residential and land development
    29,065,957       30,063,593  
 
Real estate, construction
    64,349,749       60,982,989  
 
Real estate, mortgage
    241,275,815       222,578,080  
 
Commercial and industrial
    36,935,888       36,463,500  
 
Other
    12,937,606       15,467,797  
     
 
Total
  $ 422,157,215     $ 409,898,757  
     
The age analysis of the loan portfolio, segregated by class of loans, as of September 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  
     
September 30, 2011:
                                                       
Gaming
  $       $       $       $       $ 37,592,200     $ 37,592,200     $    
Residential and land development
    5,578,335       344,747       18,178,652       24,101,734       4,964,223       29,065,957          
Real estate, construction
    3,936,458       865,012       1,925,317       6,726,787       57,622,962       64,349,749       4,308,259  
Real estate, mortgage
    11,493,401       7,733,635       2,610,259       21,837,295       219,438,520       241,275,815       1,848,052  
Commercial and industrial
    1,783,497       55,116       219,047       2,057,660       34,878,228       36,935,888       219,047  
Other
    173,386       32,417       66,019       271,822       12,665,784       12,937,606       5,124  
     
 
                                                       
Total
  $ 22,965,077     $ 9,030,927     $ 22,999,294     $ 54,995,298     $ 367,161,917     $ 422,157,215     $ 6,380,482  
     
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 September 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  
 
September 30, 2011:
                                       
Gaming
  $ 15,428,623     $ 6,299,367     $ 275,100     $ 15,589,110     $ 37,592,200  
 
                                       
Residential and land development
    4,964,222               8,281,915       15,819,820       29,065,957  
 
                                       
Real estate, construction
    54,506,091       348,807       9,343,856       150,995       64,349,749  
 
                                       
Real estate, mortgage
    202,039,876       2,829,951       35,696,164       709,824       241,275,815  
 
                                       
Commercial and industrial
    33,513,806       297,570       2,925,304       199,208       36,935,888  
 
                                       
Other
    12,448,480       47,239       376,096       65,791       12,937,606  
     
 
                                       
Total
  $ 322,901,098     $ 9,822,934     $ 56,898,435     $ 32,534,748     $ 422,157,215  
     
 
                                       
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 September 30, 2011 and December 31, 2010, are as follows:
                 
    September 30, 2011     December 31, 2010  
     
Gaming
  $ 15,589,110     $ 10,221,662  
 
               
Residential and land development
    15,819,820       632,321  
 
               
Real estate, construction
            386,557  
 
               
Real estate, mortgage
    774,756       3,268,778  
 
               
Commercial and industrial
            27,081  
 
               
Other
    60,895       698  
     
 
               
Total
  $ 32,244,581     $ 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 September 30, 2011 and December 31, 2010 are as follows:
                                 
            Pre-Modification     Post-Modification        
    Number     Outstanding     Outstanding        
    of     Recorded     Recorded     Related  
    Contracts     Investment     Investment     Allowance  
     
September 30, 2011:
                               
 
                               
Real estate, construction
    6     $ 2,956,526     $ 2,956,526     $ 112,000  
 
                               
Real estate, mortgage
    6       10,349,797       10,349,797       830,000  
 
                               
Commercial and industrial
    1       707,410       707,410          
     
 
                               
 
    13     $ 14,013,733     $ 14,013,733     $ 942,000  
     
 
                               
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 September 30, 2011 and December 31, 2010, are as follows:
                                 
    Unpaid                     Average  
    Principal     Recorded     Related     Recorded  
    Balance     Investment     Allowance     Investment  
     
September 30, 2011:
                               
Gaming
  $ 15,589,110     $ 15,589,110     $       $ 11,516,919  
Residential and land development
    19,014,568       15,819,820               7,382,320  
Real estate, construction
    3,032,631       2,956,526       112,000       184,818  
Real estate, mortgage
    12,114,942       11,124,553       1,216,114       4,850,146  
Commercial and industrial
    707,410       707,410               314,718  
Other
    60,895       60,895       6,800       20,165  
     
 
                               
Total
  $ 50,519,556     $ 46,258,314     $ 1,334,914     $ 24,269,086  
     
 
                               
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 nine months ended September 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 nine months ended September 30, 2011 and 2010, and the balances of loans, individually and collectively evaluated for impairment as of September 30, 2011 and 2010, are as follows (in thousands):

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            Residential                                
            and     Real Estate,     Real Estate,     Commercial and              
    Gaming     Land Development     Construction     Mortgage     Industrial     Other     Total  
     
For the nine months ended September 30, 2011:                                      
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 466     $ 1,069     $ 1,020     $ 3,413     $ 480     $ 202     $ 6,650  
Charge-offs
                    (275 )     (1,098 )     (46 )     (144 )     (1,563 )
Recoveries
    35               32       46       17       76       206  
Provision
    (118 )     (514 )     280       1,705       234       144       1,731  
     
Ending Balance
  $ 383     $ 555     $ 1,057     $ 4,066     $ 685     $ 278     $ 7,024  
     
 
                                                       
For the quarter ended September 30, 2011:                                  
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 252     $ 530     $ 1,034     $ 4,141     $ 491     $ 266     $ 6,714  
Charge-offs
                    (64 )     (142 )             (41 )     (247 )
Recoveries
                                            13       13  
Provision
    131       25       87       67       194       40       544  
     
Ending Balance
  $ 383     $ 555     $ 1,057     $ 4,066     $ 685     $ 278     $ 7,024  
     
 
                                                       
Allowance for Loan Losses, September 30, 2011:                                      
Ending balance: individually evaluated for impairment
  $       $       $ 249     $ 1,876     $ 402     $ 60     $ 2,587  
     
 
                                                       
Ending balance: collectively evaluated for impairment
  $ 383     $ 555     $ 808     $ 2,190     $ 283     $ 218     $ 4,437  
     
 
                                                       
Total Loans, September 30, 2011:
                                                       
Ending balance: individually evaluated for impairment
  $ 15,589     $ 23,712     $ 24,248     $ 38,295     $ 8,185     $ 3,626     $ 113,655  
     
 
                                                       
Ending balance: collectively evaluated for impairment
  $ 22,003     $ 5,354     $ 40,102     $ 202,981     $ 28,751     $ 9,311     $ 308,502  
     

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            Residential                                
            and     Real Estate,     Real Estate,     Commercial and              
    Gaming     Land Development     Construction     Mortgage     Industrial     Other     Total  
     
For the nine months ended September 30, 2010:                                      
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 699     $ 1,198     $ 1,019     $ 3,549     $ 1,293     $ 70     $ 7,828  
Charge-offs
    (481 )             (568 )     (1,202 )     (350 )     (176 )     (2,777 )
Recoveries
                    61               12       92       165  
Provision
    271       1,833       145       1,659       (355 )     227       3,780  
     
Ending Balance
  $ 489     $ 3,031     $ 657     $ 4,006     $ 600     $ 213     $ 8,996  
     
 
                                                       
For the quarter ended September 30, 2010:                                      
Allowance for Loan Losses:
                                                       
Beginning Balance
  $ 996     $ 2,640     $ 532     $ 4,203     $ 698     $ 99     $ 9,168  
Charge-offs
    (481 )             (6 )     (417 )     (350 )     (54 )     (1,308 )
Recoveries
                    61               2       28       91  
Provision
    (26 )     391       70       220       250       140       1,045  
     
Ending Balance
  $ 489     $ 3,031     $ 657     $ 4,006     $ 600     $ 213     $ 8,996  
     
 
                                                       
Allowance for Loan Losses, September 30, 2010:                                      
Ending balance: individually evaluated for impairment
  $       $ 1,809     $ 475     $ 1,521     $ 314     $ 19     $ 4,138  
     
 
                                                       
Ending balance: collectively evaluated for impairment
  $ 489     $ 1,222     $ 182     $ 2,485     $ 286     $ 194     $ 4,858  
     
 
                                                       
Total Loans, September 30, 2010:                                                
Ending balance: individually evaluated for impairment
  $       $ 5,428     $ 1,646     $ 8,232     $ 734     $ 12     $ 16,052  
     
 
                                                       
Ending balance: collectively evaluated for impairment
  $ 46,603     $ 29,690     $ 60,525     $ 212,619     $ 43,131     $ 13,542     $ 406,110  
     
7. Deposits:
At September 30, 2011, time deposits of $100,000 or more include brokered deposits of $24,262,000 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. During 2011, the Company repurchased and retired 14,221 shares of its common stock for a total purchase price of $192,560.
9. Accumulated Other Comprehensive Income (Loss):
At September 30, 2011, accumulated other comprehensive income (loss) included the unrealized gain on available for sale securities of $3,279,121, net of tax of $1,672,690, 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 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

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specific securities but rather by relying on the securities’ relationship to other benchmark securities. All of the Company’s available for sale securities are Level 2 assets.
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
In the course of lending operations, Management may determine that it is 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

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Company records the other real estate 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 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 September 30, 2011 and December 31, 2010 are as follows:
                                 
            Fair Value Measurement Using  
September 30, 2011:   Total     Level 1     Level 2     Level 3  
     
U.S. Treasuries
  $ 99,271,371     $       $ 99,271,371     $    
U.S. Government agencies
    160,599,068               160,599,068          
Mortgage-backed securities
    5,058,995               5,058,995          
States and political subdivisions
    38,681,109               38,681,109          
Equity securities
    649,983               649,983          
     
Total
  $ 304,260,526     $       $ 304,260,526     $    
     

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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 September 30, 2011 and December 31, 2010 are as follows:
                                 
            Fair Value Measurement Using  
    Total     Level 1     Level 2     Level 3  
     
September 30, 2011
  $ 44,923,400     $       $       $ 44,923,400  
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 Nine Months     For the Year  
    Ended     Ended  
    September 30, 2011     December 31, 2010  
     
Balance, beginning of period
  $ 14,294,758     $ 20,110,330  
 
               
Additions to impaired loans and troubled debt restructurings
    38,015,735       5,519,905  
 
               
Principal payments, charge-offs and transfers to other real estate
    (6,997,012 )     (12,286,059 )
 
               
Change in allowance for loan losses on impaired loans
    (390,081 )     950,583  
     
 
               
Balance, end of period
  $ 44,923,400     $ 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 September 30, 2011 and December 31, 2010 are as follows:
                                 
            Fair Value Measurement Using  
    Total     Level 1     Level 2     Level 3  
     
September 30, 2011
  $ 6,962,738     $       $ 3,803,000     $ 3,159,738  
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 Nine     For the Year  
    Months Ended     Ended  
    September 30, 2011     December 31, 2010  
     
Balance, beginning of period
  $ 4,495,334     $ 1,521,313  
 
               
Loans transferred to ORE
    3,029,510       4,466,221  
 
               
Sales and transfers to Level 2
    (3,774,100 )     (1,414,850 )
 
               
Writedowns
    (591,006 )     (77,350 )
     
 
               
Balance, end of period
  $ 3,159,738     $ 4,495,334  
     
The carrying value and estimated fair value of financial assets and financial liabilities at September 30, 2011 and December 31, 2010, are as follows:
                                 
    September 30, 2011     December 31, 2010  
    Carrying Amount     Fair Value     Carrying Amount     Fair Value  
 
Financial Assets:
                               
Cash and due from banks
  $ 31,932,887     $ 31,932,887     $ 24,146,939     $ 24,146,939  
Available for sale securities
    304,260,526       304,260,526       287,078,463       287,078,463  
Held to maturity securities
    1,917,039       2,003,692       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
    1,714,600       1,714,600       2,281,200       2,281,200  
Loans, net
    415,132,698       420,081,198       403,248,499       407,363,159  
Cash surrender value of life insurance
    16,066,420       16,066,420       15,951,117       15,951,117  
Financial Liabilities:
                               
Deposits:
                               
Non-interest bearing
    111,213,054       111,213,054       108,277,985       108,277,985  
Interest bearing
    376,641,037       377,719,904       375,861,530       376,715,446  
     
Total deposits
    487,854,091       488,932,958       484,139,515       484,993,431  
Federal funds purchased and securities sold under agreements to repurchase
    172,940,667       172,940,667       140,102,019       140,102,019  
Borrowings from Federal Home Loan Bank
    30,101,572       32,032,055       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 third quarter of 2011 was $577,676 compared with $364,400 for the third quarter of 2010 and for the first three quarters of 2011 was $1,825,093 as compared with $2,681,937 for the first three quarters of 2010. Net interest income decreased $298,354 for the third quarter of 2011 as compared with the third quarter of 2010 and $2,297,731 for the first three quarters of 2011 as compared with the first three quarters of 2010 primarily from a decrease in interest rates earned on U.S. Agency securities. In the third quarter of 2011, interest income of $160,000 was charged-off as a result of placing a loan on nonaccrual. There were no such charge-offs in 2010. Results for the third quarter and first three quarters of 2011 included a decrease in the provision for loan losses of $501,000 and $2,049,000, write downs of other real estate (“ORE”) of $466,400 and $666,000, an increase (decrease) in gains on sales or calls of securities of $694,330 and $(865,982) and as compared with 2010. Results for the first three quarters of 2011 also includes a decrease in service charges on deposits of $298,097 and gains on death benefits from life insurance policies of $469,740.
Monitoring asset quality and addressing potential losses in our loan portfolio continue to be emphasized during these difficult economic times. Nonaccrual loans and loans past due 90 days and still accruing were $32,244,581 and $6,380,482 at September 30, 2011 as compared with $22,127,000 and $3,158,755 at September 30, 2010, respectively. Nonaccrual loans at September 30, 2011, includes one gaming credit totaling $15,589,110, which has been classified as nonaccrual 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 $1,356,742 for the first three quarters of 2011 from $2,611,978 for the first three quarters of 2010.
Total assets at September 30, 2011 increased $30,721,146 as compared with December 31, 2010. Federal funds purchased and securities sold under agreements to repurchase increased $32,838,648 at September 30, 2011 as compared with December 31, 2010, which funded the increase of $17,182,063 in available for sale securities and the decrease in borrowings from the Federal Home Loan Bank (“FHLB”) of $12,855,444 for the same period.

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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 September 30, 2011 as Compared with Quarter Ended September 30, 2010
The Company’s average interest earning assets decreased approximately $35,764,000, or 5%, from approximately $756,881,000 for the third quarter of 2010 to approximately $721,117,000 for the third 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 21 basis points, from 3.72% for the third quarter of 2010 to 3.51% for the third 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 2.51% for the third quarter of 2010 to 1.95% for the third quarter of 2011. Beginning in the fourth quarter of 2010, maturities have been extended to five years and longer in order to improve yield. The charge off of interest income on loans of $160,000 during the third quarter of 2011 reduced the average yield on earning assets by 9 basis points.
Average interest bearing liabilities decreased approximately $25,211,000, or 4%, from approximately $611,800,000 for the third quarter of 2010 to approximately $586,589,000 for the third quarter of 2011.
The average rate paid on interest bearing liabilities decreased 25 basis points, from .74% for the third quarter of 2010 to .49% for the third 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 3.11% and 3.12% for the quarters ended September 30, 2011 and 2010, respectively. The charge off of interest income on loans of $160,000 during the third quarter of 2011 reduced the net interest margin by 9 basis points.

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Nine Months Ended September 30, 2011 as Compared with Nine Months Ended September 30, 2010
The Company’s average interest earning assets decreased approximately $44,072,000, or 6% , from approximately $766,397,000 for the first three quarters of 2010 to approximately $722,325,000 for the first three quarters 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 37 basis points, from 4.07% for the first three quarters of 2010 to 3.70% for the first three quarters 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 3.55% for the first three quarters of 2010 to 2.27% for the first three quarters of 2011. Beginning in the fourth quarter of 2010, maturities have been extended to five years and longer in order to improve yield. The charge off of interest income on loans of $535,469 during the first three quarters of 2011 reduced the average yield on earning assets by 9 basis points.
Average interest bearing liabilities decreased approximately $40,422,000, or 6%, from approximately $628,859,000 for the first three quarters of 2010 to approximately $588,437,000 for the first three quarters of 2011.
The average rate paid on interest bearing liabilities decreased 20 basis points, from .77% for the first three quarters of 2010 to .57% for the first three quarters 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 3.24% for the nine months ended September 30, 2011, down 20 basis points from 3.44% for the nine months ended September 30, 2010. The charge off of interest income on loans of $535,469 during the first three quarters of 2011 reduced the average yield on earning assets by 9 basis points.
The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010.

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Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
                                                 
    Quarter Ended September 30, 2011     Quarter Ended September 30, 2010  
    Average Balance     Interest Earned/Paid     Rate     Average Balance     Interest Earned/Paid     Rate  
Loans (2)(3)
  $ 399,409     $ 4,456       4.46 %   $ 428,664     $ 4,815       4.49 %
 
                                               
Federal Funds Sold
    2,851       2       0.28 %     10,202       5       0.20 %
 
                                               
HTM:
                                               
Non taxable (1)
    1,917       25       5.22 %     2,814       40       5.69 %
 
                                               
AFS:
                                               
Taxable
    276,372       1,347       1.95 %     270,549       1,698       2.51 %
 
                                               
Non taxable (1)
    38,127       486       5.10 %     40,627       462       4.55 %
 
                                               
Other
    2,441       12       1.97 %     4,025       15       1.49 %
                         
 
                                               
Total
  $ 721,117     $ 6,328       3.51 %   $ 756,881     $ 7,035       3.72 %
                         
Savings & interest-bearing DDA
  $ 223,237     $ 159       0.28 %   $ 217,807     $ 251       0.46 %
 
                                               
CD’s
    163,790       351       0.86 %     194,379       575       1.18 %
 
                                               
Federal funds purchased
    173,348       174       0.40 %     151,615       249       0.66 %
 
                                               
FHLB advances
    26,214       40       0.61 %     47,999       58       0.48 %
                         
 
                                               
Total
  $ 586,589     $ 724       0.49 %   $ 611,800     $ 1,133       0.74 %
                         
Net tax-equivalent margin on earning assets
                    3.11 %                     3.12 %
 
                                           
 
(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 $154 and $61 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)
                                                 
    Nine Months Ended September 30, 2011     Nine Months Ended September 30, 2010  
    Average Balance     Interest Earned/Paid     Rate     Average Balance     Interest Earned/Paid     Rate  
Loans (2)(3)
  $ 399,465     $ 13,744       4.59 %   $ 443,282     $ 14,695       4.42 %
 
                                               
Federal Funds Sold
    4,858       6       0.16 %     6,315       10       0.21 %
 
                                               
HTM:
                                               
Non taxable (1)
    1,916       80       5.57 %     3,012       116       5.14 %
 
                                               
AFS:
                                               
Taxable
    273,062       4,656       2.27 %     268,584       7,154       3.55 %
 
                                               
Non taxable (1)
    40,208       1,539       5.10 %     40,446       1,408       4.64 %
 
                                               
Other
    2,816       21       0.99 %     4,758       22       0.62 %
                         
 
                                               
Total
  $ 722,325     $ 20,046       3.70 %   $ 766,397     $ 23,405       4.07 %
                         
Savings & interest-bearing DDA
  $ 230,217     $ 684       0.40 %   $ 221,561     $ 829       0.50 %
 
                                               
CD’s
    171,424       1,181       0.92 %     189,707       1,664       1.17 %
 
                                               
Federal funds purchased
    152,444       515       0.45 %     159,281       812       0.68 %
 
                                               
FHLB advances
    34,352       135       0.52 %     58,310       304       0.70 %
                         
 
                                               
Total
  $ 588,437     $ 2,515       0.57 %   $ 628,859     $ 3,609       0.77 %
                         
Net tax-equivalent margin on earning assets
                    3.24 %                     3.44 %
 
                                           
 
(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 $517 and $376 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

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limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. A loan review process further assists with evaluating credit quality and assessing potential performance issues. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. In addition, the Company continuously monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area, 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 Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $544,000 and $1,045,000 for the third quarters of 2011 and 2010, respectively, and $1,731,000 and $3,780,000 for the first three quarters 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 37% and 49% of the provisions for the third quarter and first three quarters 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 last quarter 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 $3,031,000 at September 30, 2010 to $555,000 at September 30, 2011. One loan included in this portfolio with a balance of $15,187,500 at September 30, 2011 has no specific reserve as Management’s specific analysis has determined that the underlying collateral is sufficient to cover the outstanding loan balance.
The allowance for loan losses as a percentage of loans was 1.66% and 1.62% at September 30, 2011 and December 31, 2010, respectively. The Company believes that its allowance for loan losses is appropriate as of September 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 third quarter of 2011 increased $747,092 as compared with the third quarter of 2010 as a result of changes in gains on sales or calls of securities and a gain on death benefits from life insurance policies. Gains on sales or calls of securities were $786,353 for the third quarter of 2011 as compared with $92,023 for the third quarter of 2010. As a result of the death of a participant in the Company’s deferred compensation plans, bank owned life insurance was redeemed during the third quarter of 2011, resulting in a gain of $80,621.
Non-interest income for the first three quarters of 2011 decreased $596,335 as compared with the first three quarters of 2010 as a result of changes in service charges on deposit accounts, gains on sales or calls of securities and a gain on death benefits from life insurance policies. Service charges on deposit accounts decreased $298,097 in 2011 as compared with 2010, primarily due to the decrease in NSF fee income of $239,650. 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 $793,527 for the first three quarters of 2011 as compared with $1,659,509 for the first three quarters 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 participants in the Company’s deferred compensation plans, bank owned life insurance was redeemed during the first three quarters of 2011, resulting in a gain of $469,740.
Non-interest expense
Total non-interest expense increased $487,462 for the third quarter of 2011 as compared with the third quarter of 2010 as a result of equipment rentals, depreciation and maintenance expense and other expense. Rental expense decreased $54,384 in 2011 as the Company discontinued use of leased equipment. Depreciation on furniture and equipment decreased $95,000 as equipment replaced after Hurricane Katrina is now fully depreciated. Other expenses increased $659,364 for the third quarter of 2011 as compared with the third quarter of 2010 as costs associated with the larger volume of foreclosures increased $675,221 in 2011 as compared with 2010.
Total non-interest expense increased $801,778 for the first three quarters of 2011 as compared with the first three quarters half of 2010 as a result of net occupancy, equipment rentals, depreciation and maintenance expense, FDIC assessments and other expense. Net occupancy costs increased $168,877 primarily due to insurance expense being $103,159 higher in 2011 as compared with 2010 as a result of increased insurance rates on our properties. Rental expense decreased $57,133 in 2011 as the Company discontinued use of leased equipment. Depreciation on furniture and equipment decreased $137,000 as equipment replaced after Hurricane Katrina is now fully depreciated. FDIC and state insurance assessments increased $131,905 for the first three quarters of 2011 as compared with the first three quarters 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 $775,029 for the first three quarters of 2011 as compared with the first three quarters of 2010 as costs associated with the larger volume of

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foreclosures increased $805,452 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 quarters and nine months ended September 30, 2011 and 2010, as follows:
                                 
    Quarters Ended September 30,  
    2011     2010  
    Tax     Rate     Tax     Rate  
     
Taxes at statutory rate
  $ 146,090       34.00     $ (11,084 )     (34.00 )
Increase (decrease) resulting from:
                               
Tax-exempt interest income
    (122,539 )     (28.52 )     (113,016 )     (346.68 )
Income from BOLI
    (69,502 )     (16.18 )     (42,991 )     (131.87 )
Federal tax credits
    (91,410 )     (21.27 )     (208,289 )     (638.92 )
Other
    (10,639 )     (2.48 )     (21,620 )     (66.32 )
     
Total income taxes (benefit)
  $ (148,000 )     (34.45 )   $ (397,000 )     (1,217.79 )
     
                                 
    Nine Months Ended September 30,  
    2011     2010  
    Tax     Rate     Tax     Rate  
Taxes at statutory rate
  $ 453,932       34.00     $ 1,013,859       34.00  
Increase (decrease) resulting from:
                               
Tax-exempt interest income
    (385,968 )     (28.91 )     (342,027 )     (11.47 )
Income from BOLI
    (289,414 )     (21.68 )     (130,012 )     (4.36 )
Federal tax credits
    (274,230 )     (20.54 )     (223,289 )     (7.49 )
Other
    5,680       0.43       (18,531 )     (0.62 )
     
Total income taxes (benefit)
  $ (490,000 )     (36.70 )   $ 300,000       10.06  
     
FINANCIAL CONDITION
Available for sale securities increased $17,182,063 at September 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 increased $12,258,458 at September 30, 2011 as compared with December 31, 2010. For the first two quarters of 2011, loan payments, maturities, foreclosures, charge-offs and a slower volume of new loans reduced the loan portfolio to $393,389,744 at June 30, 2011. During the third quarter of 2011, new loans outpaced payments, maturities, foreclosures and charge-offs. The Company anticipates that its loan portfolio will have moderate growth in the fourth quarter of 2011.
Other real estate (“ORE”) increased $1,218,588 at September 30, 2011 as compared with December 31, 2010. Loans totaling $3,143,510 were transferred into ORE, one property included in ORE was written down by $666,006 and ORE totaling $1,258,916 was sold during the first nine months of 2011. The Company is working diligently and prudently to reduce its ORE portfolio.

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Prepaid FDIC assessments decreased by $1,152,849 at September 30, 2011 as compared with December 31, 2010 as a result of the amortization of these costs.
Other assets decreased $3,851,030 at September 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 $1,491,026. The increase in the fair value of available for securities changed from an unrealized loss to an unrealized gain which reduced a net deferred tax asset.
Total deposits increased $3,714,576 at September 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 $32,838,640 at September 30, 2011, as compared with December 31, 2010. This primarily includes non-deposit accounts which fluctuate as customers periodically reallocate their funds.
Borrowings from the Federal Home Loan Bank decreased $12,855,444 at September 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 September 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 September 30, 2011 and December 31, 2010, are as follows (in thousands):
                                 
    Actual     For Capital Adequacy Purposes  
    Amount     Ratio     Amount     Ratio  
     
September 30, 2011:
                               
Total Capital (to Risk Weighted Assets)
  $ 111,796       21.33 %   $ 41,931       8.00 %
Tier 1 Capital (to Risk Weighted Assets)
    105,249       20.08 %     20,966       4.00 %
Tier 1 Capital (to Average Assets)
    105,249       12.85 %     32,763       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 September 30, 2011 and December 31, 2010, are as follows (in thousands):
                                 
    Actual     For Capital Adequacy Purposes  
    Amount     Ratio     Amount     Ratio  
     
September 30, 2011:
                               
Total Capital (to Risk Weighted Assets)
  $ 105,849       20.23 %   $ 41,864       8.00 %
Tier 1 Capital (to Risk Weighted Assets)
    99,302       18.98 %     20,932       4.00 %
Tier 1 Capital (to Average Assets)
    99,302       12.34 %     32,200       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 14.17% at September 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. All dividends declared and paid by the Company and the Bank have been approved by the regulatory authorities.
Item 4: Controls and Procedures
As of September 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 September 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 appointed Jeffrey H. O’Keefe, a long time director of the bank subsidiary, to complete Mr. Page’s one year term on the Company’s board on August 24, 2011. The Company elected A. Wynn Alexander and A. Wes Fulmer to the board of directors of its bank subsidiary.
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 September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at September 30, 2011 and December 31, 2010, (ii)Consolidated Statements of Income for the quarters ended September 30, 2011 and 2010 and for the nine months ended September 30, 2011 and 2010, (iii) Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income for the nine months ended September 30, 2011, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) Notes to the Unaudited Consolidated Financial Statements for the nine months ended September 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 July 27, 2011, August 25, 2011, September 28, 2011 and October 26, 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: November 14, 2011
 
 
  By:   /s/ Chevis C. Swetman    
    Chevis C. Swetman   
    Chairman, President and Chief Executive Officer
(principal executive officer) 
 
 
         
  Date: November 14, 2011
 
 
  By:   /s/ Lauri A. Wood    
    Lauri A. Wood   
    Chief Financial Officer and Controller
(principal financial and accounting officer) 
 

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