Peoples Financial Corp.
Annual Report 2012

Plain-text annual report

P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S 2 0 1 2 A N N U A L R E P O R T P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S T O O U R S H A R E H O L D E R S Dear shareholders, Perhaps the most gratifying aspect of 2012 was its lack of drama. Each quarter saw decent earnings that increased each period. In fact, 2012 was your bank’s turnaround year. Our earnings are not back to pre-Katrina levels—much less the early post-Katrina years that saw a huge influx of construction and economic activity—but they show a positive trend. Overall, most results of 2012 were encouraging: • Net income for the year rose 120% over the previous year. • The annual dividend paid to our stockholders increased 5.2%. • Primary capital ratio increased again over the previous year to 14.71%, the highest since 2004. • Provision for loan losses averaged $790,000 for the first three quarters until a jump to $1,893,000 in fourth quarter 2012 due primarily to potential losses on two loan relationships identified late in the year. • Average interest earning assets increased about 4% as new loans outpaced principal payments, maturities, charge-offs and foreclosures related to existing loans. This improvement is the product of hard work and tough decisions by your senior management and directors, who have scrubbed our budgets and balance sheet as clean as a freshly minted coin. The results of their hard work showed that non-interest expense decreased by $3,503, 894 during the year. The majority of the reduction in non-interest expense was a decrease of more than $2 million in salary and employee benefits due to retirements, reduction in a number of overhead expense categories and a decrease in FDIC assessments. Our team of terrific bankers is working harder than ever by working smarter than ever. Today we offer our customers a number of competitive financial products and services that they have asked for, such as mobile banking with our exclusive Green2Go® and a range of checking accounts that includes a special product, Freedom Green Checking, aimed at the 18-24 year-old segment of our market. Of course, the majority of our earnings are generated from net interest income, the difference between our cost of funds and what we can charge in loans and earn on investments. That number remains more squeezed than ever. The Federal Reserve has committed to keeping interest rates unnaturally low for years to come, and loan demand in our region remains relatively soft. In fact, our total loan volume for 2012 was essentially flat compared to 2011. The average yield on earning assets in 2012 decreased to 3.39%, compared to 3.57% in 2011. At the same time, the average rate paid on interest-bearing accounts at our bank decreased a similar amount, to .34% in 2012, compared to .54% in 2011. The painful squeeze on our net interest margin is shared by anyone holding a savings account or CD with historically low yields. As we enter 2013, we are primed to increase our business here on the Mississippi Gulf Coast. Our local economy seems to be emerging ever so slowly from the darkness of the past few years. We will continue to refine and improve our retail products to offer convenience and security to every segment of our customer base. Our lenders are seeing signs of new business opportunities. As I have said many times during these most difficult years, this bank was made for times like these. We have endured, and we look forward to prospering. Once again, my gratitude goes to our directors, senior managers and the entire team of bankers at The Peoples Bank who themselves have endured so much. I hope you join us to enjoy the benefits of their hard work in what we believe will be better years ahead. Sincerely yours, Chevis C. Swetman Chairman of the Board President & Chief Executive Officer MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2012, 2011 and 2010. These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report. F O R W A R D - L O O K I N G I N F O R M A T I O N 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. N E W A C C O U N T I N G P R O N O U N C E M E N T S The Company adopted ASU 2011-05 – Amendments to Topic 220, Comprehensive Income (“ASU 2011-05”) during 2012. ASU 2011-05 grants an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. The Company has chosen to report comprehensive income in a separate statement in its 2012 financial statements. There were no other new accounting standards adopted by the Company during 2012. C R I T I C A L A C C O U N T I N G P O L I C I E S The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 the financial statements. 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 borrowers’ ability to repay and the estimated value of any underlying collat- eral and current economic conditions. Management believes that the ALL is adequate and appropriate for all periods presented in these financial state- ments. 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 a five year average loss history which is updated on a quarterly basis and which may be adjusted by qualitative factors by loan type and a specific reserve analysis for those loans considered impaired under GAAP. 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. Other Real Estate: Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. If Management determines that the fair value of a property has decreased subsequent to foreclosure, the Company records a write down which is included in noninterest expense. 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. Income Taxes: GAAP requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. See Note J to the Consolidated Financial Statements for additional details. As part of the process of preparing our Consolidated Financial Statements, the Company is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated statement of condition. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not 1 likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, we must include an expense within the tax provisions in the consolidated statement of income. O V E R V I E W The Company is a community bank serving the financial and trust needs of its customers in our trade area, which is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary’s three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future. Net income for 2012 was $2,640,824 compared with $1,202,834 for 2011. While net interest income increased $706,351 and non-interest expense decreased $3,503,894 in 2012 as compared with 2011, the provision for loan losses increased $1,329,000, non-interest income decreased $331,255 and income tax benefits decreased $1,112,000. 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. Interest income decreased $404,530 for 2012 as compared with 2011 as a result of the large balance of loans on nonaccrual and the decrease in yield on U.S. Agency securities. Interest expense decreased $1,110,881 primarily due to a reduction in the cost of funds in 2012 as compared with 2011. Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing assets continue to be emphasized during these difficult economic times, as the local and national economy continues to negatively impact collateral values and borrowers’ ability to repay their loans. Past due loans have stabilized and have shown some improvement in 2012. Nonaccrual loans totaled $53,890,511 and $57,592,715 at December 31, 2012 and 2011, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine poten- tial losses. The provision for loan losses increased in 2012 as a result of additional provision of $1,893,000 during the fourth quarter of 2012 as the Company identified potential losses in two relationships based on factors affecting the value of collateral securing these loans. Non-interest income for 2012 included increased gains on sales and calls of securities of $237,747 as compared with 2011. Results for 2012 also include a loss on impairment of other investments of $360,000. During 2011, the Company realized gains on death benefits from life insurance policies of $469,740 as a result of the death of participants in deferred compensation plans. Non-interest expense for 2012 decreased due to a reduction in salaries and employee benefits and FDIC assessments as compared with 2011. Salaries and employee benefits decreased $2,091,989 in 2012 largely due to the impact of the voluntary early retirement program which was offered in 2011. FDIC assessments decreased $1,184,865 in 2012 as compared with 2011 as a result of the change in estimate of the prepaid FDIC assessments as of December 31, 2012. Income tax benefits decreased $1,112,000 as a result of the increase in taxable income in 2012 as compared with 2011. Total assets at December 31, 2012 increased $760,365, as compared with December 31, 2011. Available for sale securities decreased $20,042,641 at December 31, 2012 as compared with December 31, 2011 as securities previously pledged for public funds matured or were sold. Balances in our non-deposit sweep accounts, reported as Federal funds purchased and securities sold under agreements to repurchase, increased $36,632,956 primarily due to the addition of one new large customer. Borrowings from the Federal Home Loan Bank (“FHLB”) decreased $45,411,637 at December 31, 2012 as compared with December 31, 2011 based on the liquidity needs of the bank subsidiary. R E S U L T S O F O P E R A T I O N S 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. The Federal Open Market Committee (the “Committee”), a component of the Federal Reserve System, is charged under United States law with overseeing the nation’s open market operations by making key decisions about interest rates and the growth of the U.S. money supply. The Committee dropped the discount rate significantly in 2008 and has not adjusted the rate since that time, which impacted interest rates then and in succeeding years. 2012 as compared with 2011 The Company’s average interest-earning assets increased approximately $26,699,000, or 4%, from approximately $722,316,000 for 2011 to approximately $749,015,000 for 2012. The Company’s average balance sheet increased primarily as new loans have outpaced principal payments, maturities, charge-offs and fore- closures relating to existing loans. The average yield on earning assets decreased 18 basis points, from 3.57% for 2011 to 3.39% for 2012, with the biggest impact being 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. As a result, the yield on taxable available for sale securities decreased from 2.10% for 2011 to 1.71% for 2012. The Company has more recently purchased securities with maturities of up to fifteen years, with call provisions, to improve its yield on these assets. Future security purchases may be of shorter duration in anticipation of rising rates in 2015. The yield on loans has decreased due to the increase in loans on nonaccrual during 2011. Average interest-bearing liabilities increased approximately $15,967,000, or 3%, from approximately $587,962,000 for 2011 to approximately $603,929,000 for 2012. The increase was primarily related to borrowings from the Federal Home Loan Bank, which increased due to the liquidity needs of the bank subsidiary. The average rate paid on interest-bearing liabilities decreased 20 basis points, from .54% for 2011 to .34% for 2012. Rates paid on deposit accounts and non-deposit accounts, which are reported as federal funds purchased and securities sold under agreements to repurchase, have decreased in 2012. The current unprecedent- ed low rate environment which exists on a national and local level has caused customers to tolerate lower interest rates in return for less risk. The Company believes that it is unlikely that its cost of funds can be materially reduced further; however, any opportunity to do so will be considered. The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.11% for the year ended December 31, 2012, down 2 basis points from 3.13% during 2011. 2 2011 as compared with 2010 The Company’s average interest-earning assets decreased approximately $31,744,000, or 4%, from approximately $754,060,000 for 2010 to approximately $722,316,000 for 2011. The Company’s average balance sheet shrunk primarily as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans during the first part of 2011. While the average balance sheet decreased for the year, loan demand increased during the last two quarters of 2011 which resulted in an increase in loans at December 31, 2011. The average yield on earning assets decreased 46 basis points, from 4.03% for 2010 to 3.57% for 2011, with the biggest impact being to the yield on taxable available for sale securities. The Company’s investment and liquid- ity 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 or longer, the interest rates on which have decreased dramatically. As a result, the yield on taxable available for sale securities decreased from 3.24% for 2010 to 2.10% for 2011. Beginning in the fourth quarter of 2010, Management began acquiring such securities with a maturity of five years or longer in order to improve the yield. The charge off of interest income on loans of $1,187,037 during 2011 reduced the average yield on earning assets by 16 basis points. Average interest-bearing liabilities decreased approximately $25,195,000, or 4%, from approximately $613,157,000 for 2010 to approximately $587,962,000 for 2011. The average rate paid on interest-bearing liabilities decreased 21 basis points, from .75% for 2010 to .54% for 2011. The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.13% for the year December 31, 2011, down 29 basis points from 3.42% during 2010, primarily due to the charge-off of interest income on loans and the decrease in yield on taxable available for sale securities. The tables below analyze the changes in tax-equivalent net interest income for the years ended December 31, 2012 and 2011 and the years ended December 31, 2011 and 2010. A N A L Y S I S O F A V E R A G E B A L A N C E S , I N T E R E S T E A R N E D / P A I D A N D Y I E L D ( I N T H O U S A N D S ) Loans (2) (3) Federal Funds Sold Held to maturity: Non taxable (1) Available for sale: Taxable Non taxable (1) Other Total Savings and interest-bearing DDA CD’s Federal funds purchased and securities sold under agreements to repurchase Borrowings from FHLB Total Net interest margin Loans (2) (3) Federal Funds Sold Held to maturity: Non taxable (1) Available for sale: Taxable Non taxable (1) Other Total Savings and interest-bearing DDA CD’s Federal funds purchased and securities sold under agreements to repurchase Borrowings from FHLB Total Net interest margin 2012 Average Balance 430,205 $  6,601 Interest Earned/Paid Rate 4.32 $  0.24 18,576 16 4,698 264,248 39,407 3,856 749,015 230,829 149,560 $  $  169,352 54,188 603,929 $  189 4,527 2,073 15 25,396 410 1,090 335 233 2,068 2011 $  $  $  4.02 1.71 5.26 0.39 3.39 0.18 0.73 0.20 0.43 0.34 3.11 Average Balance 405,367 $  2,857 Interest Earned/Paid Rate 4.42 $  0.25 17,923 7 1,882 269,401 39,941 2,868 722,316 226,097 169,617 $  $  154,423 37,825 587,962 $  107 5,662 2,041 23 25,763 819 1,535 638 186 3,178 $  $  $  5.69 2.10 5.11 0.80 3.57 0.36 0.90 0.41 0.49 0.54 3.13 Average Balance 405,367 $  2,857 1,882 269,401 39,941 2,868 722,316 226,097 169,617 $  $  2011 Interest Earned/Paid $  17,923 7 107 5,662 2,041 23 $ 25,763 $    819 1,535 154,423 37,825 $    587,962 638 186 $    3,178 2010 Average Balance 436,393 $  4,842 Interest Earned/Paid $     19,687 15 2,938 264,927 40,581 4,379 754,060 217,531 190,718 $  $   154 8,589 1,903 26 $ 30,374 $    1,084 2,173 152,000 52,908 $    613,157 991 352 $    4,600 Rate 4.42 0.25 5.69 2.10 5.11 0.80 3.57 0.36 0.90 0.41 0.49 0.54 3.13 Rate 4.51 0.31 5.24 3.24 4.69 0.59 4.03 0.50 1.14 0.65 0.67 0.75 3.42 (1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2012, 2011 and 2010. (2) Loan fees of $797, $647 and $611 for 2012, 2011 and 2010, respectively, are included in these figures. (3) Includes nonaccrual loans. 3 A N A L Y S I S O F C H A N G E S I N I N T E R E S T I N C O M E A N D E X P E N S E ( I N T H O U S A N D S ) Interest earned on: Loans Federal funds sold Held to maturity securities: Non taxable Available for sale securities: Taxable Non taxable Other Total Interest paid on: Savings and interest-bearing DDA CD’s Federal funds purchased Borrowings from FHLB Total Interest earned on: Loans Federal funds sold Held to maturity securities: Non taxable Available for sale securities: Taxable Non taxable Other Total Interest paid on: Savings and interest-bearing DDA CD’s Federal funds purchased Borrowings from FHLB Total For the year ended December 31, 2012 compared with December 31, 2011 Volume Rate/Volume Rate Total $ 1,098 9 160 (108) (27) 8 $ 1,140 $ 17 (182) 62 80 $ (23) $ (420) (1) (31) (1,047) 60 (12) $ (1,451) $ (419) (299) (333) (23) $ (1,074) $ $ (25) 1 (47) 20 (1) (4) (56) $ (7) 36 (32) (10) $ (13) $ 653 9 82 (1,135) 32 (8) $ (367) $ (409) (445) (303) 47 $ (1,110) For the year ended December 31, 2011 compared with December 31, 2010 Volume Rate/Volume Rate Total $ (1,399) (6) $ (392) (3) (55) 13 145 (30) 9 $ (1,336) $ 43 (240) 16 (100) $ (281) (3,021) 171 (9) (3,241) $ $ (296) (447) (363) (92) $ (1,198) $ $ $ $ 27 1 (5) (51) (3) (3) (34) (12) 49 (6) 26 57 $(1,764) (8) (47) (2,927) 138 (3) $ (4,611) $ (265) (638) (353) (166) $(1,422) Provision for Allowance for Losses on Loans In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. A loan review process further assists with evaluating credit quality and assessing potential performance issues. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. In addition, on a monthly basis the Company 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; residential and land development; construction and commercial real estate loans, and their direct and indirect impact on its operations. A monthly watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation. Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and to identify and estimate potential losses based on the best available information. The potential effect 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. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral. Note A to the Consolidated Financial Statements discloses a summary of the accounting principles applicable to impaired and nonaccrual loans as well as the allowance for loan losses. Note C to the Consolidated Financial Statements presents additional analyses of the composition, aging and performance of the loan portfolio as well as the transactions in the allowance for loan losses. The decline in the value of real estate has negatively impacted the collateral relating to the Company’s residential and land development and real estate – mortgage portfolios. The Company’s evaluation of these portfolios and related collateral resulted in a significant increase in provisions for the residential and land development portfolio in 2010 and for the real estate-mortgage portfolio in 2011 and 2012. In the fourth quarter of 2012, a specific reserve of $1,100,000 was assigned to a gaming loan based on the decline in value of collateral securing the loan. The Company’s on-going, systematic evaluation resulted in the Company recording a total provision for loan losses of $4,264,000, $2,935,000 and $6,845,000 in 2012, 2011 and 2010, respectively. The allowance for loan losses as a percentage of loans was 2.05%, 1.88% and 1.62% at December 31, 2012, 2011 and 2010, respectively. The Company’s analysis includes evaluating the current value of collateral securing all nonaccrual loans. Even though nonaccrual loans were $53,890,511 at December 31, 2012, only $1,776,700 in specific reserves has been allocated to these loans as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value. The Company believes that its allowance for loan losses is appropriate as of December 31, 2012. 4 The allowance for loan losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in the future which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations. Non-interest income Total non-interest income decreased by $331,255 in 2012 as compared with 2011. Trust department income and fees increased $90,004 as a result of fees relating to several large estates. Service charges on deposit accounts increased $127,509 in 2012 as compared with 2011. This increase was the result of a decrease in NSF fees of $91,040, which were impacted by the local economy and customers opting out of overdraft protection for debit card transactions, and an increase in ATM fees of $217,077 as a result of the improvement in the local casinos at which the Company has off-site ATMs. Gains from sales and calls of securities increased $237,747 as sales were executed when proceeds would be maximized. The Company had a loss from impairment of other investments of $360,000 in 2012 and a loss on other investments of $84,480 in 2012 as compared with income of $96,969 in 2011. Results in 2011 included gains from death benefits from life insurance of $469,740. Other income increased $152,706 in 2012 as compared with 2011. This increase was primarily attributable to an increase in rental income of $49,801 as the Company was able to lease previously vacant property and gains of $31,380 on the sale of bank vehicles. Total non-interest income decreased by $253,954 in 2011 as compared with 2010. Included in this decrease was a decrease in service charges on deposit accounts of $319,817 in 2011 as compared with 2010 as these fees were impacted by the local economy and customers opting out of overdraft protection for debit card transactions. During 2010, securities were sold at a gain of $1,690,670 as compared with only $1,126,055 in 2011 as the Company executed sales when it could maximize proceeds. As a result of the death of participants in the Company’s deferred compensation plans, bank owned life insurance was redeemed in 2011, resulting in a gain of $469,740. The Company’s other investments had a gain of $96,969 in 2011 as compared with a loss of $109,933 in 2010. Non-interest expense Total non-interest expense decreased by $3,503,894 in 2012 as compared with 2011. Salaries and employee benefits decreased $2,091,989 in 2012 as compared with 2011. Salaries decreased $723,389 in 2012 as compared with 2011 as the employee census continues to decrease from attrition and the impact of the 2011 voluntary early retirement package. Expenses relating to deferred compensation plans decreased $565,405 in 2012 as a result of the 2011 voluntary early retirement package. Expenses relating to the retiree health plan decreased $953,894 as a result of amendments made to the plan which require plan participants to utilize drug benefits and health insurance coverage available under Medicare. Equipment rentals, depreciation and maintenance decreased $226,109 in 2012 as compared with 2011. Rental expense decreased $113,492 in 2012 as the Company discontinued use of leased equipment during 2011. Depreciation on furniture and equipment decreased $156,500 as equipment replaced during the years after Hurricane Katrina becomes fully depreciated. Maintenance costs increased $49,383 as a result of the timing of work performed. Other expense decreased $1,269,744 for 2012 as compared with 2011. Included in other expense are data processing expense, which increased $576,309 as a result of the outsourcing of most of the bank’s I/T functions, and ORE expenses, which were $702,174 less in 2012 as compared with 2011 primarily as a result of a decrease in write downs of other real estate to fair value. Other expense also includes FDIC assessments, which decreased $1,184,865 in 2012 as compared with 2011 as a result of the change in estimate of the prepaid FDIC assessments as of December 31, 2012. Total non-interest expense increased by $1,199,608 in 2011 as compared with 2010. Salaries and employee benefits increased $501,777 in 2011 as compared with 2010. While the Company had been able to reduce salaries and employee benefits through attrition in 2011 and 2010, current year expenses included additional costs of $851,406 relating to the voluntary early retirement program. Equipment rentals, depreciation and maintenance decreased $336,297 in 2011 as compared with 2010. Rental expense decreased $135,531 in 2011 as the Company discontinued use of leased equipment. Depreciation on furniture and equipment decreased $133,000 as equipment replaced during the years after Hurricane Katrina becomes fully depreciated. Maintenance costs decreased $59,766 as a result of a number of cost saving measures. Other expense increased $1,048,202 for 2011 as compared with 2010. Included in other expense are data processing expense, which increased $291,359 as a result of the outsourcing of most of the bank’s I/T functions, and ORE expenses, which were $938,486 more in 2011 as compared with 2010 primarily as a result of write downs of $711,006. Other expense also includes FDIC and state banking assessments. Based on formulas determined by those agencies, the bank subsidiary was assessed $177,940 more in 2011 than in the previous year. These increases in other expenses were partially reduced by the decrease in advertising and legal costs. Advertising expenses decreased $74,018 in 2011 as a result of cost saving measures. Legal fees decreased $176,756 in 2011 as compared with 2010 due to the resolution of a number of non-performing loan issues. Income Taxes Income taxes have been impacted by non-taxable income and federal tax credits during 2012, 2011 and 2010, respectively. Note J to the Consolidated Financial Statements presents a reconciliation of income taxes for these three years. F I N A N C I A L C O N D I T I O N Available for sale securities decreased $20,042,641 at December 31, 2012, compared with December 31, 2011. The Company reduced its investment in these securities during the last quarter of 2012 as pledging requirements for public funds decreased. The held to maturity portfolio increased $5,696,534 at December 31, 2012, compared with December 31, 2011, as the Company opted to classify some of its investment purchases during the current year as held to maturity. Other investments decreased $480,480 at December 31, 2012, compared with December 31, 2011. This decrease was the result of a loss from the impairment of these investments of $360,000 and a loss of $84,480 from these investments in 2012. The Company decreased its investment in FHLB common stock by $201,200 as a result of a reduced need to borrow from FHLB at December 31, 2012 as com- pared with December 31, 2011. Bank premises decreased $1,812,972 at December 31, 2012 as compared with December 31, 2011 as a result of depreciation. Other real estate increased by $854,946 at December 31, 2012 as compared with December 31, 2011. During 2012, loans totaling $2,576,000 were transferred into ORE, write downs of $153,000 were charged to earnings and ORE totaling $1,567,000 was sold. The Company is working diligently and prudently to reduce this portfolio. 5 Accrued interest receivable increased $197,179 at December 31, 2012, as compared with December 31, 2011. This increase is attributable to an increase in accrued interest on available for sale securities. During 2012, the Company invested in securities with extended maturities in order to increase yield. Cash surrender value of life insurance increased $664,447 at December 31, 2012 as compared with December 31, 2011 as primarily as a result of income earned on the life insurance. Prepaid FDIC assessments decreased $391,510 at December 31, 2012 as compared with December 31, 2011 as a result of the amortization of these costs. This decrease was affected by the change in estimate of the prepaid FDIC assessments as of December 31, 2012. Other assets increased $1,230,609 at December 31, 2012 as compared with December 31, 2011 as deferred taxes were impacted by the increase in liabilities for employee benefit plans and depreciation. Total deposits increased $7,280,166 at December 31, 2012, as compared with December 31, 2011. Fluctuations in total deposits and among the different types of deposits represent recurring activity for the Company as customers in the gaming industry and state, county and municipal entities reallocate their resources periodically. The Company anticipates that deposits will continue at or slightly above their present level during 2013. Federal funds purchased and securities sold under agreements to repurchase, which includes non-deposit accounts, increased $36,632,956 at December 31, 2012 as compared with December 31, 2011, primarily due to the one new large customer. Borrowings from the Federal Home Loan Bank decreased $45,411,637 at December 31, 2012 as compared with December 31, 2011 based on the liquidity needs of the bank subsidiary. Employee and director benefit plans liabilities increased $851,512 at December 31, 2012, as compared with December 31, 2011 due to deferred compensation benefits earned by officers and directors during 2012. Other liabilities increased $105,503 at December 31, 2012 as compared with December 31, 2011. At December 31, 2011, the Company had accrued $513,692 for dividends payable in 2012 while the dividend declared in December 2012 was paid on December 31, 2012. Other liabilities at December 31, 2012 included an increase in income taxes payable of $215,000 as taxable income was higher in 2012 as compared to 2011 and an increase in the retiree health plan liability of $404,229 as compared with December 31, 2011. S H A R E H O L D E R S ’ E Q U I T Y A N D C A P I T A L A D E Q U A C Y Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. The primary and risk-based capital ratios are important indicators of the strength of a Company’s capital. These figures are presented in the Five-Year Comparative Summary of Selected Financial Information. The measure of capital adequacy which is currently used by Management to evaluate the strength of the Company’s capital is the primary capital ratio which was 14.71% at December 31, 2012, which is well above the regulatory minimum of 6.00%. Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of maintaining its primary capital ratio at 8.00%, which is the minimum requirement for classification as being “well-capitalized” by the banking regulatory authorities. Significant transactions affecting shareholders’ equity during 2012 are described in Note K. The Statement of Changes in Shareholders’ Equity also presents all activity in the Company’s equity accounts. L I Q U I D I T Y Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Note M to the Consolidated Financial Statements discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Management monitors these funding requirements in such a manner as to satisfy these demands and to provide the maximum return on its earning assets. The Company monitors and manages its liquidity position diligently through a number of methods, including 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 also conducts contingency testing on its liquidity plan. The Company has also been approved to participate in the Federal Reserve’s Discount Window Primary Credit Program, which it intends to use only as a contingency. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits, and the Company has encountered no problems with meeting its liquidity needs. Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. The Company also uses other sources of funds, including borrowings from the Federal Home Loan Bank. The Company generally anticipates relying on deposits, purchases of federal funds and advances from the Federal Home Loan Bank for its liquidity needs in 2013. 6 R E G U L A T O R Y M A T T E R S 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 has identified specific corrective steps and actions to enhance its risk management, asset quality and liquidity policies, controls and procedures. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators. O F F - B A L A N C E S H E E T A R R A N G E M E N T S The Company is a party to off-balance-sheet arrangements in the normal course of business to meet the financing needs of its customers. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet arrangements. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amount does not necessarily represent future cash requirements. As discussed previously, the Company carefully monitors its liquidity needs and considers its cash requirements, especially for loan commitments, in making decisions on investments and obtaining funds from its other sources. Further information relating to off-balance-sheet instruments can be found in Note M to the Consolidated Financial Statements. Q U A N T I T A T I V E A N D Q U A L I T A T I V E D I S C L O S U R E A B O U T M A R K E T R I S K Market risk is the risk of loss arising from adverse changes in market prices and rates. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities. Also, the Company does not currently, and has no plans to, engage in trading activities or use derivative or off-balance sheet instruments to manage interest rate risk. The Company has risk management policies in place to monitor and limit exposure to market risk. The Asset/Liability Committee (“ALCO Committee”), whose members include the chief executive officer, the executive vice president, the chief credit officer, the chief financial officer and the investment officers of the bank subsidiary, is responsible for the day-to-day operating guidelines, approval of strategies affecting net interest income and coordination of activities within policy limits established by the Board of Directors based on the Company’s tolerance for risk. Specifically, the key objectives of the Company’s asset/liability management program are to manage the exposure of planned net interest margins to unexpected changes due to interest rate fluctuations. These efforts will also affect loan pricing policies, deposit interest rate policies, asset mix and volume guidelines and liquidity. The ALCO Committee utilizes a number of tools in its activities, including software to assist with interest rate risk management and balance sheet management. The ALCO Committee reports to the Board of Directors on a quarterly basis. The Company has implemented a conservative approach to its asset/liability management. The net interest margin is managed on a daily basis largely as a result of the management of the liquidity needs of the bank subsidiary. The Company generally follows a policy of investing in short term U.S. Agency securities with maturities of two years or more. Due to the low interest rate environment, the duration of investments has been extended to fifteen years with call provisions. The loan portfolio consists of a 40% /60% blend of fixed and floating rate loans. It is the general loan policy to offer loans with maturities of five years or less; however the market is now dictating floating rate terms to be extended to fifteen years. On the liability side, more than 70% of the deposits are demand and savings transaction accounts. Additionally, 89% of the certificates of deposit mature within eighteen months. Since the Company’s deposits are generally not rate-sensitive, they are considered to be core deposits. The short term nature of the financial assets and liabilities allows the Company to meet the dual requirements of liquidity and interest rate risk management. The interest rate sensitivity tables on the next page provide additional information about the Company’s financial instruments that are sensitive to changes in interest rates. The negative gap in 2013 is mitigated by the nature of the Company’s deposits, whose characteristics have been previously described. The tabular disclosure reflects contractual interest rate repricing dates and contractual maturity dates. Loan maturities have been adjusted for reserve for loan losses. There have been no adjustments for such factors as prepayment risk, early calls of investments, the effect of the maturity of balloon notes or the early withdrawal of deposits. The Company does not believe that the aforementioned factors have a significant impact on expected maturity. 7 Interest rate sensitivity at December 31, 2012 was as follows (in thousands): 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 B E Y O N D T O T A L 1 2 / 3 1 / 1 2 F A I R V A L U E Loans, net Average rate Securities Average rate Total Financial Assets Average rate Deposits Average rate Federal funds purchased and securities sold under agreements to repurchase Average rate Borrowings from FHLB Average rate Total Financial Liabilities Average rate $ 265,343 $ 24,188 $ 22,805 $ 27,768 $ 26,879   $ 55,243 $ 422,226 $ 425,627 4.83% 7,191 3.35% 272,534 4.82% 348,696 4.69% 194,234 0.20% 230 4.89% 543,160 4.59% 6.15% 15,694 1.90% 39,882 5.44% 8,166 2.04% 239 4.60% 8,405 2.20% 6.09% 10,453 2.54% 5.34% 22,159 1.77% 33,258 49,927 5.52% 4,581 1.77% 4.59% 7,000 1.31% 5.32% 12,392 2.62% 39,271 4.82% 4,667 1.31% 4.49% 203,942 2.47% 5.04% 271,831 2.31% 271,931 259,185 694,057 697,558 3.14% 4.42% 373,110 4.49% 376,209 239 239 4.60% 4.60% 4,820 2.11% 7,239 1.66% 5,236 3.56% 9,903 3.00% 194,234 194,234 0.20% 7,912 4.60% 575,256 4.40% 1,729 4.60% 1,729 4.60% 10,271 580,714 Interest rate sensitivity at December 31, 2011 was as follows (in thousands): 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 B E Y O N D T O T A L 1 2 / 3 1 / 1 1 F A I R V A L U E $ 279,302 $ 27,756 $ 35,559 $ 18,707 $ 22,032 $ 40,991 $ 424,347 $ 427,881 6.58% 7,203 3.35% 6.19% 21,725 1.90% 6.14% 4.96% 36,278 42,959 1.90% 1.69% 34,959 57,284 54,985 64,991 6.20% 11,153 1.40% 5.13% 3,012 2.18% 4.55% 3.65% 1,915 1.98% 2,177 1.98% 5.28% 136,931 3.00% 177,922 3.79% 5.22% 286,858 286,932 2.72% 711,205 4.57% 714,813 370,858 372,019 Loans, net Average rate Securities Average rate Total Financial Assets Average rate Deposits Average rate Federal funds purchased and securities sold under agreements to repurchase Average rate Borrowings from FHLB Average rate Total Financial Liabilities Average rate 4.81% 41,762 1.55% 321,064 4.66% 352,601 1.54% 157,601 0.16% 50,421 0.62% 560,623 1.43% 1.55% 157,601 0.16% 53,324 1.82% 581,783 1.54% 157,601 55,014 581,634 235 4.61% 11,388 1.61% 235 4.61% 3,247 2.52% 235 4.61% 2,150 2.56% 235 4.61% 2,412 2.51% 1,963 4.61% 1,963 4.61% 8 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C O N D I T I O N D E C E M B E R 3 1 , Assets Cash and due from banks Available for sale securities Held to maturity securities, fair value of $7,225,413 - 2012; $1,492,374 - 2011; $2,010,430 - 2010 Other investments Federal Home Loan Bank Stock, at cost Loans Less: Allowance for loan losses Loans, net Bank premises and equipment, net of accumulated depreciation Other real estate Accrued interest receivable Cash surrender value of life insurance Prepaid FDIC assessments Other assets Total assets Liabilities and Shareholders’ Equity Liabilities: Deposits: Demand, non-interest bearing Savings and demand, interest bearing Time, $100,000 or more Other time deposits Total deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank Employee and director benefit plans liabilities Other liabilities Total liabilities Shareholders’ Equity: Common Stock, $1 par value, 15,000,000 shares authorized, 5,136,918 shares issued and outstanding at December 31, 2012 and 2011 and 5,151,139 at December 31, 2010, respectively Surplus Undivided profits Accumulated other comprehensive income (loss), net of tax Total shareholders’ equity 2 0 1 2 2 0 1 1 2 0 1 0 $  54,019,718 258,875,840 $  36,928,657 278,918,481 $ 24,146,939 287,078,463 7,125,421 3,449,820 2,379,500 431,083,004 8,856,948 422,226,056 26,222,336 7,008,184 2,895,420 16,860,815 1,704,810 2,144,535 1,428,887 3,930,300 2,580,700 432,407,286 8,135,622 424,271,664 28,035,308 6,153,238 2,698,241 16,196,368 2,096,320 913,926 1,914,879 3,926,371 2,281,200 409,898,757 6,650,258 403,248,499 29,756,239 5,744,150 3,292,430 15,951,117 3,652,972 5,552,225 $  804,912,455 $  804,152,090 $ 786,545,484 $ 102,609,051 $  97,581,073 $ 108,277,985 232,400,896 94,605,926 46,103,375 475,719,248 194,233,923 7,911,931 12,162,119 4,131,068 694,158,289 5,136,918 65,780,254 34,964,301 4,872,693 110,754,166 205,318,859 115,014,220 50,524,930 468,439,082 157,600,967 53,323,568 11,310,607 4,025,565 694,699,789 5,136,918 65,780,254 33,350,861 5,184,268 109,452,301 193,631,209 134,667,660 47,562,661 484,139,515 140,102,019 42,957,016 9,905,732 8,084,340 685,188,622 5,151,139 65,780,254 33,302,381 (2,876,912) 101,356,862 Total liabilities and shareholders’ equity $ 804,912,455 $  804,152,090 $ 786,545,484 See Notes to Consolidated Financial Statements. 9 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 1 2 2 0 1 1 2 0 1 0 Interest income: Interest and fees on loans Interest and dividends on securities: U.S. Treasuries U.S. Government agencies Mortgage-backed securities States and political subdivisions Other investments Interest on federal funds sold Total interest income Interest expense: Deposits Borrowings from Federal Home Loan Bank Federal funds purchased and securities sold under agreements to repurchase Total interest expense Net interest income Provision for allowance for losses on loans Net interest income after provision for allowance for losses on loans Non-interest income: Trust department income and fees Service charges on deposit accounts Gain on liquidation, sales and calls of securities Loss on impairment of other investments Income (loss) on other investments Increase in cash surrender value of life insurance Gain on death benefits from life insurance Other income Total non-interest income Non-interest expense: Salaries and employee benefits Net occupancy Equipment rentals, depreciation and maintenance Other expense Total non-interest expense Income (loss) before income taxes Income tax benefit Net income Basic and diluted earnings per share Dividends declared per share See Notes to Consolidated Financial Statements. $   18,576,449  $ 17,923,213 $ 19,687,441  462,635 3,777,477 287,387 1,492,883 15,062 16,152 235,494 5,320,452 105,905 1,417,445 23,130 6,936 471,051 7,598,366 518,924 1,357,642 26,078 15,263 24,628,045 25,032,575 29,674,765 1,499,556 232,694 334,958 2,067,208 22,560,837 4,264,000 18,296,837 1,458,322 5,910,825 1,363,802 (360,000) (84,480) 573,237 667,245 9,528,951 11,991,516 2,433,977 3,106,237 7,745,234 25,276,964 2,548,824 92,000 2,353,878 185,925 638,286 3,178,089 21,854,486 2,935,000 18,919,486 1,368,318 5,783,316 1,126,055 96,969 501,268 469,740 514,540 9,860,206 14,083,505 2,350,029 3,332,346 9,014,978 28,780,858 (1,166) 1,204,000 3,257,391 351,883 991,438 4,600,712 25,074,053 6,845,000 18,229,053 1,354,338 6,103,133 1,690,670 (109,933) 531,283 544,669 10,114,160 13,581,728 2,364,103 3,668,643 7,966,776 27,581,250 761,963 723,000 $ 2,640,824 $ .51 $ .20 $ 1,202,834 $ 1,484,963 $ $ .23 .19 $ $ .29 .20 10 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E I N C O M E Y E A R S E N D E D D E C E M B E R 3 1 , 2 0 1 2 2 0 1 1 2 0 1 0 Net income Other comprehensive income (loss), net of tax: Net unrealized gain (loss) on available for sale securities, net of tax of $440,622, $2,897,176 and $705,978 for the years ended December 31, 2012, 2011 and 2010, respectively Reclassification adjustment for realized gains on available for sale securities called or sold in current year, net of tax of $463,693, $382,859 and $574,828 for the years ended December 31, 2012, 2011 and 2010, respectively Gain (loss) from unfunded post- retirement benefit obligation, net of tax of $137,438, $1,638,422 and $99,568 for the years ended December 31, 2012, 2011 and 2010, respectively $ 2,640,824 $ 1,202,834 $ 1,484,963 855,325 5,623,908 (1,370,429) (900,109) (743,196) (1,115,842) (266,791) 3,180,468 (193,281) Total other comprehensive (loss) (311,575) 8,061,180 (2,679,552) Total comprehensive income (loss) $ 2,329,249 $ 9,264,014 $ (1,194,589) See Notes to Consolidated Financial Statements. 11 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y N u m b e r o f C o m m o n S h a r e s 5,151,697 C o m m o n S t o c k $   5,151,697 S u r p l u s $    65,780,254 (558) 5,151,139 (14,221) 5,136,918 (558) 5,151,139 (14,221) 5,136,918 65,780,254 65,780,254 Balance, January 1, 2010 Net income Other comprehensive loss, net of tax Cash dividend ($.11 per share) Dividend declared ($.09 per share) Retirement of stock Balance, December 31, 2010 Net income Other comprehensive income, net of tax Cash dividend ($.11 per share) Dividend declared ($.09 per share) Retirement of stock Balance, December 31, 2011 Net income Other comprehensive income, net of tax Cash dividend ($.20 per share) U n d i v i d e d C o m p r e h e n s i v e A c c u m u l a t e d O t h e r I n c o m e $ (197,360) (2,679,552) P r o f i t s $ 32,853,346 1,484,963 (566,687) (462,323) (6,918) 33,302,381 1,202,834 (462,323) (513,692) (178,339) 33,350,861   2,640,824 (1,027,384) (2,876,912) 8,061,180 5,184,268 (311,575) T o t a l $ 103,587,937 1,484,963 (2,679,552) (566,687) (462,323) (7,476) 101,356,862 1,202,834 8,061,180 (462,323) (513,692) (192,560) 109,452,301 2,640,824 (311,575) (1,027,384) Balance, December 31, 2012 5,136,918 $   5,136,918 $    65,780,254 $    34,964,301 $   4,872,693 $  110,754,166 See Notes to Consolidated Financial Statements. 12 A c c u m u l a t e d O t h e r C o m p r e h e n s i v e I n c o m e $ (197,360) (2,679,552) (2,876,912) 8,061,180 5,184,268 (311,575) U n d i v i d e d P r o f i t s $ 32,853,346 1,484,963 (566,687) (462,323) (6,918) 33,302,381 1,202,834 (462,323) (513,692) (178,339) 33,350,861   2,640,824 (1,027,384) T o t a l $ 103,587,937 1,484,963 (2,679,552) (566,687) (462,323) (7,476) 101,356,862 1,202,834 8,061,180 (462,323) (513,692) (192,560) 109,452,301 2,640,824 (311,575) (1,027,384) Balance, December 31, 2012 5,136,918 $   5,136,918 $    65,780,254 $    34,964,301 $   4,872,693 $  110,754,166 N u m b e r o f C o m m o n S h a r e s 5,151,697 C o m m o n S t o c k $   5,151,697 S u r p l u s $    65,780,254 (558) 5,151,139 (14,221) 5,136,918 (558) 5,151,139 (14,221) 5,136,918 65,780,254 65,780,254 Balance, January 1, 2010 Net income Other comprehensive loss, net of tax Cash dividend ($.11 per share) Dividend declared ($.09 per share) Retirement of stock Balance, December 31, 2010 Net income Other comprehensive income, net of tax Cash dividend ($.11 per share) Dividend declared ($.09 per share) Retirement of stock Balance, December 31, 2011 Net income Other comprehensive income, net of tax Cash dividend ($.20 per share) See Notes to Consolidated Financial Statements. 13 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Y E A R S E N D E D D E C E M B E R 3 1 , Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for allowance for losses on loans Writedown of other real estate Loss on sales of other real estate Loss on impairment of other investments (Income) loss on other investments Accretion of held to maturity securities Gain on liquidation, sales and calls of securities Gain on death benefits from life insurance Increase in cash surrender value of life insurance Change in accrued interest receivable Change in other assets Change in other liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from maturities, liquidation, sales and calls of available for sale securities Purchases of available for sale securities Proceeds from maturities of held to maturity securities Purchases of held to maturity securities Purchases of Federal Home Loan Bank Stock Redemption of Federal Home Loan Bank Stock Redemption of other investments Proceeds from sales of other real estate Loans, net change Acquisition of premises and equipment Proceeds from death benefits from life insurance Investment in cash surrender value of life insurance Net cash provided by (used in) investing activities Cash flows from financing activities: Demand and savings deposits, net change Time deposits, net change Cash dividends Retirement of common stock Borrowings from Federal Home Loan Bank Repayments to Federal Home Loan Bank Federal funds purchased and securities sold under agreements to repurchase, net change Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See Notes to Consolidated Financial Statements. 2 0 1 2 2 0 1 1 2 0 1 0 $   2,640,824 $   1,202,834 $  1,484,963 2,048,000 4,264,000 153,300 21,270 360,000 84,480 (1,454) (1,363,802) (573,237) (197,179) 600,601 (210,909) 7,825,894 358,403,846 (337,067,062) 169,998 (5,865,078) 201,200 36,000 1,546,004 (4,793,912) (235,028) (91,211) 12,304,757 32,110,015 (24,829,849) (1,541,075) 2,246,716,791 (2,292,128,428) 36,632,956 (3,039,590) 17,091,061 36,928,657 2,210,000 2,935,000 711,006 180,390 (96,969) (2,736) (1,126,055) (469,740) (501,268) 594,189 4,061,169 95,700 9,793,520 358,537,612 (341,857,583) 488,728 (299,500) 93,040 1,921,026 (27,179,675) (489,069) 804,883 (79,125) (8,059,663) 990,738 (16,691,171) (924,646) (192,560) 500,974,555 (490,608,003) 17,498,948 11,047,861 12,781,718 24,146,939 2,351,000 6,845,000 77,350 86,850 109,933 (2,833) (1,690,670) (531,283) 1,354,322 (1,322,873) 1,084,581 9,846,340 403,092,553 (380,565,980) 1,289,920 2,734,700 1,328,000 41,339,949 (688,355) (91,941) 68,438,846 (799,677) 14,237,763 (1,081,857) (7,476) 775,907,492 (837,220,928) (34,328,858) (83,293,541) (5,008,355) 29,155,294 $ 54,019,718 $   36,928,657 $    24,146,939 14 14 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S N O T E A - B U S I N E S S A N D S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S : Business of The Company 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 Bank, 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 those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the Bank’s three most outlying locations (the “trade area”). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Basis of Accounting The Company and its subsidiaries recognize assets and liabilities, and income and expense, on the accrual basis of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans, assumptions relating to employee benefit plan liabilities and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income. New Accounting Pronouncements The Company adopted ASU 2011-05 – Amendments to Topic 220, Comprehensive Income (“ASU 2011-05”) during 2012. ASU 2011-05 grants an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. The Company has chosen to report comprehensive income in a separate statement in its 2012 financial statements. There were no other new accounting standards adopted by the Company during 2012. Cash and Due from Banks The Company is required to maintain average reserve balances in its vault or on deposit with the Federal Reserve Bank. The average amount of these reserve requirements was approximately $566,000, $701,000 and $587,000 for the years ending December 31, 2012, 2011 and 2010, respectively. Securities The classification of securities is determined by Management at the time of purchase. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the security until maturity. Securities held to maturity are stated at amortized cost. Securities not classified as held to maturity are classified as available for sale and are stated at fair value. Unrealized gains and losses, net of tax, on these securities are recorded in shareholders’ equity as accumulated other comprehensive income. The amortized cost of available for sale securities and held to maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, determined using the interest method. Such amortization and accretion is included in interest income on securities. A decline in the market value of any investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. In estimating other-than-temporary losses, management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and nature of the issuer, the cause of the decline, especially if related to a change in interest rates, and the intent and ability of the Company to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as gain (loss) on sale and calls of securities in non-interest income. Other Investments Other investments include a low income housing partnership in which the Company is a 99% limited partner. The partnership has qualified to receive annual low income housing federal tax credits that are recognized as a reduction of the current tax expense. The investment is accounted for using the equity method. Federal Home Loan Bank Stock The Company is a member of the Federal Home Loan Bank of Dallas (“FHLB”) and as such is required to maintain a minimum investment in its stock that varies with the level of FHLB advances outstanding. The stock is bought from and sold to the FHLB based on its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment in accordance with GAAP. Loans The loan portfolio consists of commercial and industrial and real estate loans within the Company’s trade area that we have the intent and ability to hold for the foreseeable future or until maturity. The loan policy establishes guidelines relating to pricing, repayment terms, collateral standards including loan to value limits, appraisal and environmental standards, lending authority, lending limits and documentation requirements. Loans are stated at the amount of unpaid principal, reduced by unearned income and the allowance for loan losses. Interest on loans is recognized on a daily basis over the terms of each loan based on the unpaid principal balance. Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements. The Company continuously monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area, land, development, construction and commercial real estate loans, and their direct and indirect impact on its operations. Loan 15 delinquencies and deposit overdrafts are monitored on a monthly basis in order to identify developing problems as early as possible. Also on a monthly basis, a watch list of credits based on our loan grading system is prepared. Grades of A – F are applied to individual loans based on factors including repayment ability, financial condition of the borrower and payment performance. Loans with a grade of D – F, as well as some with a grade of C, are placed on the watch list of credits. The watch list is the primary tool for monitoring the credit quality of the loan portfolio. Once loans are determined to be past due, the loan officer and the loan collection department work vigorously to return the loans to a current status. The Company places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. Accrued interest on loans classified as nonaccrual is reversed at the time the loans are placed on nonaccrual. Interest received on nonaccrual loans is applied against principal. Loans are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The placement of loans on and removal of loans from nonaccrual status must be approved by Management. Loans which become 90 days delinquent are reviewed relative to collectability. Unless such loans are in the process of terms revision to bring them to a current status or foreclosure or in the process of collection, these loans are placed on nonaccrual and, if deemed uncollectible, are charged off against the allowance account. That portion of a loan which is deemed uncollectible will be charged off against the allowance as a partial charge off. All charge offs must be approved by Management and are reported to the Board of Directors. Allowance for Loan Losses The allowance for loan losses (“ALL”) is a valuation account available to absorb losses on loans. The ALL is established through provisions for loan losses charged against earnings. Loans deemed to be uncollectible are charged against the ALL, and subsequent recoveries, if any, are credited to the allowance. list of credits, which The ALL is based on Management’s evaluation of the loan portfolio under current economic conditions and is an amount that Management believes will be adequate to absorb probable losses on loans existing at the reporting date. On a quarterly basis, the Company’s problem asset committee meets to review the watch loan officers, collection officers, the special assets director, the chief lending officer, the chief credit officer, the chief financial officer and the chief executive officer. The evaluation includes Management’s assessment of several factors: review and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic conditions and the related impact on specific borrowers and industry groups, a study of loss experience, a review of classified, nonperforming and delinquent loans, the estimated value of any underlying collateral, an estimate of the possibility of loss based on the risk characteristics of the portfolio, adverse situations that may affect the borrower’s ability to repay and the results of regulatory examinations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. loan grading system. Members of this committee is formulated from the include The ALL consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component of the allowance relates to loans that are not impaired. Changes to the components of the ALL are recorded as a component of the provision for loan losses. Management must approve changes to the ALL and must report its actions to the Board of Directors. The Company believes that its allowance for loan losses is appropriate at December 31, 2012. The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructurings and performing and non-performing major loans for which full payment of principal or interest is not expected. A loan may be impaired but not on nonaccrual status when available information suggests that it is probable that the Bank may not receive all contractual principal and interest, however, the loan is still current and payments are received in accordance with the terms of the loan. Payments received for impaired loans not on nonaccrual status are applied to principal and interest. All impaired loans are reviewed, at a minimum, on a quarterly basis. The Company calculates the specific allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. Most of the Company’s impaired loans are collateral-dependent. The fair value of the collateral for collateral-dependent loans is based on appraisals performed by third-party valuation specialists, comparable sales and other estimates of fair value obtained principally from independent sources such as the Multiple Listing Service or county tax assessment valuations, adjusted for estimated selling costs. The Company has a Real Estate Appraisal Policy (the “Policy”) which is in compliance with the guidelines set forth in the “Interagency Appraisal and Evaluation Guidelines” which implement Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and the revised “Interagency Appraisal and Evaluation Guidelines” issued in 2010. The Policy further requires that appraisals be in writing and conform to the Uniform Standards of Professional Appraisal Practice (“USPAP”). An appraisal prepared by a state-licensed or state-certified appraiser is required on all new loans secured by real estate in excess of $250,000. Loans secured by real estate in an amount of $250,000 or less, or that qualify for an exemption under FIRREA, must have a summary appraisal report or in-house evaluation, depending on the facts and circumstances. Factors including the assumptions and techniques utilized by the appraiser, which could result in a downward adjustment to the collateral value estimates indicated in the appraisal, are considered by the Company. When Management determines that a loan is impaired and the loan is collateral-dependent, an evaluation of the fair value of the collateral is per- formed.  The Company maintains established criteria for assessing whether an existing appraisal continues to reflect the fair value of the property for col- lateral-dependent loans.  Appraisals are generally considered to be valid for a period of at least twelve months.  However, appraisals that are less than 12 months old may need to be adjusted. Management considers such factors as the property type, property condition, current use of the property, current market conditions and the passage of time when determining the relevance and validity of the most recent appraisal of the property.  If Management determines that the most recent appraisal is no longer valid, a new appraisal is ordered from an independent and qualified appraiser. During the interim period between ordering and receipt of the new appraisal, Management considers if the existing appraisal should be discounted to determine the estimated fair value of collateral. Discounts are applied to the existing appraisal and take into consideration the property type, condition of the property, external market data, internal data, reviews of recently obtained appraisals and evaluations of similar properties, comparable sales of similar properties and tax assessment valuations.   When the new appraisal is received and approved by Management, the valuation stated in the appraisal is used as the fair value of the collateral in determining impairment, if any.  If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a specific component of the allowance for loan losses. Any specific reserves recorded in the interim are adjusted accordingly. 16 The general component of the ALL is the loss estimated by applying historical loss percentages to non-classified loans which have been dividend into seg- ments. These segments include gaming; residential and land development, real estate, construction; real estate, mortgage; commercial and industrial and all other. The loss percentages are based on each segment’s historical five year average loss experience which may be adjusted by qualitative factors such as changes in the general economy, or economy or real estate market in a particular geographic area or industry. Bank Premises and Equipment Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of the related assets. Other Real Estate Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the ALL. Any expense incurred in connection with holding such real estate or resulting from any writedowns in value subsequent to foreclosure is included in noninterest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference, if any, between the sales proceeds and the carrying amount of the property. If the fair value of the ORE, less estimated costs to sell at the time of foreclosure, decreases during the holding period, the ORE is written down with a charge to noninterest expense. Generally, ORE properties are actively marketed for sale and Management is continuously monitoring these properties in order to minimize any losses. Trust Department Income and Fees Corporate trust fees are accounted for on an accrual basis and personal trust fees are recorded when received. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carry forwards, is required to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if it is probable that the tax position will be challenged, it is probable that the future resolution of the challenge will confirm that a loss has been incurred and the amount of such loss can be reasonably estimated. Post-Retirement Benefit Plan The Company accounts for its post-retirement benefit plan under Accounting Standards Codification (“Codification” or “ASC”) Topic 715, Retirement Benefits (“ASC 715”). The under or over funded status of the Company’s post-retirement benefit plan is recognized as a liability or asset in the statement of condition. Changes in the plan’s funded status are reflected in other comprehensive income. Net actuarial gains and losses and adjustments to prior service costs that are not recorded as components of the net periodic benefit cost are charged to other comprehensive income. Leases All leases are accounted for as operating leases in accordance with the terms of the leases. Earnings Per Share Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding, 5,136,918, in 2012 and 2011, and 5,151,661 in 2010, respectively. Accumulated Other Comprehensive Income At December 31, 2012, 2011 and 2010, accumulated other comprehensive income (loss) consisted of net unrealized gains (losses) on available for sale securities and over (under) funded liabilities related to the Company’s post-retirement benefit plan. Statements of Cash Flows The Company has defined cash and cash equivalents to include cash and due from banks and federal funds sold. The Company paid $2,082,914, $3,222,385 and $4,621,778 in 2012, 2011 and 2010, respectively, for interest on deposits and borrowings. Income tax payments totaled $835,000, $755,000 and $2,232,000 in 2012, 2011 and 2010, respectively. Loans transferred to other real estate amounted to $2,575,520, $3,221,510 and $5,715,037 in 2012, 2011 and 2010, respectively. Dividends payable of $513,692 and $462,323 as of December 31, 2011 and 2010 were paid during the years ended December 31, 2012 and 2011, respectively. Fair Value Measurement The Company reports certain assets and liabilities at their estimated fair value. These assets and liabilities are classified and disclosed in one of three cat- egories based on the inputs used to develop the measurements. The categories establish a hierarchy for ranking the quality and reliability of the infor- mation used to determine fair value. Reclassifications Certain reclassifications have been made to the prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income. 17 N O T E B - S E C U R I T I E S : The amortized cost and fair value of securities at December 31, 2012, 2011 and 2010, respectively, are as follows (in thousands): December 31, 2012 Available for sale securities: Debt securities: U.S. Treasuries U.S. Government agencies Mortgage-backed securities States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: States and political subdivisions Total held to maturity securities December 31, 2011 Available for sale securities: Debt securities: U.S. Treasuries U.S. Government agencies Mortgage-backed securities States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: States and political subdivisions Total held to maturity securities December 31, 2010 Available for sale securities: Debt securities: U.S. Treasuries U.S. Government agencies States and political subdivisions Total debt securities Equity securities Total available for sale securities Held to maturity securities: States and political subdivisions Total held to maturity securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $  53,661 147,652 16,903 35,433 253,649 650 $ 254,299 $ $ 7,125 7,125 $  490 1,810 538 2,158 4,996 $   (55)– (364) (419) $  4,996 $  (419) $        112 $           112 $   $ (12) (12) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $ 53,995 176,986 4,727 37,914 273,622 650 $ 274,272 $ $ 1,429 1,429 $  33 2,220 274 2,163 4,690 $ (18)   (26) (44) $      4,690 $ (44) $        63 $          63 $   $   – – Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $  26,957 221,639 40,579 289,175 650 $   289,825 $ $ 1,915 1,915 $   $ $ $ 52 1,056 1,114 2,222 2,222 95 95 $ (500)   (4,099) (370) (4,969) $ (4,969) $   $   – – Fair Value $ 54,096 149,098 17,441 37,591 258,226 650 $    258,876 $ $ $ $  7,225 7,225 Fair Value 54,010 179,180 5,001 40,077 278,268 650 278,918 $    $ 1,492 1,492 Fair Value $     26,509 218,596 41,323 286,428 650 $    287,078 $    $ 2,010 2,010 18 The amortized cost and fair value of debt securities at December 31, 2012, (in thousands) by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Fair Value Available for sale securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed securities Totals Held to maturity securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Totals $ $ 6,373 59,052 102,410 68,911 16,903 253,649 $ 795 750 1,677 3,903 7,125 $  $  $ $ $  6,396 59,947 105,089 69,353 17,441 258,226 818 766 1,698 3,943 7,225 Available for Sale and Held to Maturity Securities with gross unrealized losses at December 31, 2012, 2011 and 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands): Less Than Twelve Months Over Twelve Months Total December 31, 2012: U.S. Treasuries U.S. Government agencies States and political subdivisions Total Fair Value 9,887 $ 30,335 1,451 $ 41,673 Gross Unrealized Losses $    55 364 12 431 $ Fair Value $ 2,826 Gross Unrealized Losses $ 254 $ 41,67 $ 41, Fair Value 9,887 $ 30,335 1,451 $ 41,673 Gross Unrealized Losses $ 55 364 12 431 $ Less Than Twelve Months Over Twelve Months Total December 31, 2011: U.S. Treasuries U.S. Government agencies Total Fair Value 16,976 $ 15,075 32,051 $ Gross Unrealized Losses 18 26 44 $  $  Fair Value $  15,458 Gross Unrealized Losses $ ,458 $ 15,458 $ ,458 Fair Value 16,976 $ 15,075 32,051 $ Gross Unrealized Losses 18 26 $   44 $ Less Than Twelve Months Over Twelve Months Total December 31, 2010: U.S. Treasuries U.S. Government agencies States and political subdivisions Total Fair Value 15,458 $ 138,076 5,295 $ 158,829 $   Gross Unrealized Losses 500 4,099 173 $ 4,772 Fair Value 2,826 $ Gross Unrealized Losses $ 826 2,029 2,029 $ 197 197 $  Fair Value 15,458 $  138,076 7,324 $ 160,858 $   Gross Unrealized Losses 500 4,099 370 $   4,969 At December 31, 2012, 2 of the 12 securities issued by the U.S. Treasury, 7 of the 12 securities issued by U.S. Government agencies and 4 of the 140 securi- ties issued by states and political subdivisions contained unrealized losses. Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell and it is not more likely than not that we will be required to sell these securities before maturity. While some available for sale securities have been sold for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of this evaluation, the Company has determined that the declines summarized in the tables above are not deemed to be other-than-temporary. Proceeds from sales of available for sale debt securities were $77,605,104, $60,714,150 and $33,993,865 during 2012, 2011 and 2010, respectively. Available for sale debt securities were sold and called for realized gains of $1,363,802, $1,126,055 and $1,690,670 during 2012, 2011 and 2010, respectively. The Company recorded a loss from the impairment of its other investments of $360,000 in 2012. Securities with a fair value of $241,879,775, $278,540,119 and $283,462,810 at December 31, 2012, 2011 and 2010, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law. The value of the Company’s investment in FHLB common stock is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted, (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB. While the Federal Home Loan Banks have been negatively impacted by the current economic conditions, the FHLB of Dallas has reported profits, remains in compliance with regulatory capital and liquidity requirements, continues to pay dividends on its stock and make redemptions at par value. With consideration given to these factors, Management concluded that the stock was not impaired at December 31, 2012. 19 N O T E C - L O A N S : The composition of the loan portfolio at December 31, 2012, 2011 and 2010 is as follows (in thousands): December 31, Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total 2012 $    60,187 27,338 52,586 246,420 35,004 9,548 431,083 $ $ 2011 57,219 29,026 61,042 238,411 33,950 12,759 $  432,407 2010 44,343 30,064 60,983 222,577 36,464 15,468 409,899 $ $ In the ordinary course of business, the Company’s bank subsidiary extends loans to certain officers and directors and their personal business interests at, in the opinion of Management, the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of similar credit risk with persons not related to the Company or its subsidiaries. These loans do not involve more than normal risk of collectability and do not include other unfavorable features. An analysis of the activity with respect to such loans to related parties is as follows (in thousands): Years Ended December 31, Balance, January 1 January 1 balance, loans of officers and directors appointed during the year New loans and advances Repayments Balance, December 31 2012 $ 5,681 3,755 (3,126) 6,310 $ 2011 5,552 123 2,426 (2,420) 5,681 $  $ 2010 $  5,813 2,081 (2,342) 5,552 $ As part of its evaluation of the quality of the loan portfolio, Management monitors the Company’s credit concentrations on a monthly basis. Total outstanding concentrations were as follows (in thousands): December 31, Gaming Hotel/motel Out of area $ 2012 60,187 52,776 25,413 2011 $  57,219 $ 46,956 26,171 2010 44,343 47,908 42,790 The age analysis of the loan portfolio, segregated by class of loans, as of December 31, 2012, 2011 and 2010 is as follows (in thousands): Number of Days Past Due 30-59 60-89 Greater Than 90 Total Past Due Current Total Loans Loans Past Due Greater Than 90 Days And Still Accruing December 31, 2012: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total $9 ˜,205 $ 1,721 3,989 12,012 1,804 127 $ 17,932 878 2,702 79 26 $5,406 December 31, 2011: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2010: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total $ 2222 $9,205 2,084 13,569 1,536 184 $ 17,373 $ 2222 2,282 8,042 18,480 1,558 274 $30,636 1,395 2,341 166 23 $3,925 $9,205 4,433 4,640 98 34 $9,205 $ 1,721 5,765 11,018 22,319 1,990 154 $42,967 $5 7,219 24,161 9,843 28,873 2,090 338 $65,305 $ 2,808 4,599 22,906 28,260 1,697 309 $60,579 $ 58,466 21,573 41,568 224,101 33,014 9,394 $ 388,116 $ 57,219 4,865 51,199 209,538 31,860 12,421 $ 367,102 $ 41,535 25,465 38,077 194,317 34,767 15,159 $349,320 $ 60,187 27,338 52,586 246,420 35,004 9,548 $ 431,083 $ 57,219 29,026 61,042 238,411 33,950 12,759 $432,407 $ 44,343 30,064 60,983 222,577 36,464 15,468 $409,899 $ ,205 572 872 1 $1,445 $ ,205 376 1,314 142 $1,832 $ ,205 1,991 955 14 1 $2,961 $ 9,205 5,765 6,151 7,605 107 1 $ 19,629 $5 7,219 24,161 6,364 12,963 388 131 $44,007 $ 2,808 2,317 10,431 5,140 41 1 $20,738 20 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 repay- ment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. Loans with a grade of C may be placed on the watch list if weaknesses are not resolved which could result in potential loss or for other circumstances that require monitoring. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade of E will generally be applied to loans for customers with weaknesses inherent in the D classification and in which collection or liquidation in full is questionable. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. 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. An analysis of the loan portfolio by loan grade, segregated by class of loans, as of December 31, 2012, 2011 and 2010 is as follows (in thousands): Loans With A Grade Of: December 31, 2012: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2011: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2010: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total A or B 27,530 4,630 43,318 209,479 32,036 9,449 326,442 $ $ $ 41,817 4,865 50,798 197,509 23,972 12,268 $ 331,229 $ $ 27,397 25,666 52,417 184,963 33,703 15,232 339,378 C 12,300 1,544 1,001 3,093 442 27 18,407 $ $ $9 ,756 357 2,862 6,551 40 9,810 ,756 864 315 8,248 289 40 9,756 $ $9 $ D 4,108 81 2,701 21,167 2,312 72 30,441 33,077 51 3,695 25,870 3,077 384 33,077 6,413 3,102 7,716 25,669 2,323 196 45,419 $ $ $ $ $ $ Total loans on nonaccrual as of December 31, 2012, 2011 and 2010 are as follows (in thousands): F $ 756 $ $ E 16,249 21,083 5,566 12,681 214 $ 55,793 $ 756 $ $ 56 56 $ $ $ $, 56 $ $ $ 15,402 24,110 6,192 12,170 350 67 58,291 10,533 432 535 3,697 149 $ 15,346 $9, 56 Total 60,187 27,338 52,586 246,420 35,004 9,548 431,083 57,219 29,026 61,042 238,411 33,950 12,759 432,407 $ $ 44,343 30,064 60,983 222,577 36,464 15,468 409,899 2010 $  10,222 632 387 3,268 27 1 $  14,537 December 31, Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and Industrial Other Total 2012 $ 16,249 21,083 5,171 11,174 214 $ 53,891 2011 $ 15,402 24,110 6,042 11,662 246 131 $ 57,593 The Company has modified certain loans by granting interest rate concessions to these customers. These loans are in compliance with their modified terms, are currently accruing and the Company has classified them as troubled debt restructurings. Troubled debt restructurings as of December 31, 2012, 2011 and 2010, were as follows (in thousands except for number of contracts): December 31, 2012: Real estate, construction Real estate, mortgage Commercial and industrial Total December 31, 2011: Real estate, construction Real estate, mortgage Commercial and industrial Total December 31, 2010: Real estate, construction Real estate, mortgage Total Number of Numbers of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Related Allowance 3 3 1 7 3 5 1 9 1 1 2 $ 1,095 9,054 702 $10,851 $ 1,075 9,916 706 $11,697 $ 186 516 $ 702 $ 1,095 9,054 702 $10,851 $ 1,075 9,916 706 $11,697 $ 186 516 $ 702 $ 340 957 $1,297 $ 112 809 $ 921 $ 116 110 $ 226 During 2012, four loans which had been classified as troubled debt restructurings at December 31, 2011 became in default of their modified terms and were placed on nonaccrual. These loans included two loans that were included in the real estate – construction segment with a total balance of $891,986 and two loans that were included in the real estate – mortgage segment with a total balance of $1,018,076 as of December 31, 2011. 21 Impaired loans, segregated by class of loans, as of December 31, 2012, 2011 and 2010 were as follows (in thousands): Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment December 31, 2012: With no related allowance recorded: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Total With a related allowance recorded: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Total Total by class of loans: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Total December 31, 2011: With no related allowance recorded: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total With a related allowance recorded: Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total Total by class of loans: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2010: With no related allowance recorded: Real estate, mortgage Total With a related allowance recorded: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total Total by class of loans: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total $ 14,528 21,837 4,635 9,971 892 51,863 1,721 350 1,694 10,893 24 14,682 16,249 22,187 6,329 20,864 916 $66,545 $ 15,402 24,941 4,743 9,965 864 5 55,920 2,364 2,406 12,552 88 126 17,536 15,402 27,305 7,149 22,517 952 131 $ 73,456 $ 1,891 1,891 10,533 4,313 573 2,871 27 1 18,318 10,533 4,313 573 4,762 27 1 $ 20,209 $ 14,528 20,733 4,580 9,935 892 50,668 1,721 350 1,686 10,293 24 14,074 16,249 21,083 6,266 20,228 916 $64,742 $ 15,402 21,746 4,711 9,957 864 5 52,685 2,364 2,406 11,621 88 126 16,605 15,402 24,110 7,117 21,578 952 131 $69,290 $ 1,843 1,843 10,222 632 573 1,941 27 1 13,396 10,222 632 573 3,784 27 1 $15,239 22 $3,028 1,100 70 663 1,229 12 3,074 1,100 70 663 1,229 12 $3,074 $3,028 900 720 1,314 77 17 3,028 900 720 1,314 77 17 $3,028 $3,028 107 8 179 649 1 1 945 107 8 179 649 1 1 $ 945 $ 14,869 21,288 3,833 9,821 791 50,602 350 1,314 10,199 11,863 14,869 21,638 5,147 20,020 791 $ 62,465 $ 12,488 7,382 297 1,111 413 21,691 185 5,971 31 6,187 12,488 7,382 482 7,082 413 31 $27,878 $ 1,116 1,116 9,363 2,693 199 1,251 8 1 13,515 9,363 2,693 199 2,367 8 1 $ 14,631 Interest income of $350,818, $211,188 and $2,060 was recognized on impaired loans for the years ended December 31, 2012, 2011 and 2010, respectively. Transactions in the allowance for loan losses for the years ended December 31, 2012, 2011 and 2010 and the balances of loans, individually and collectively evaluated for impairment as of December 31, 2012, 2011 and 2010 are as follows (in thousands): December 31, 2012: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Allowance for Loan Losses: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Total Loans: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2011: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Allowance for Loan Losses: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Total Loans: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2010: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Allowance for Loan Losses: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Total Loans: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Gaming $ 457 (275) 1,359 $ 1,541 $ 1,100 $ 441 $ 20,357 $39,830 $ 465 35 (43) 457 $ $ 0 0000 $ 457 $ 15,677 $ 41,542 $ 699 (311) 77 $ 465 $ 00000 $ 465 $ 10,222 $ 34,121 Residential and Land Development Real Estate, Construction Real Estate, Mortgage Commercial and Industrial Other Total $ 937 (474) 504 967 922 45 $ $ $ $ 4,800 (1,348) 7 1,814 $ 5,273 $ 557 (203) 41 198 593 $ $ 304 (273) 85 167 $ 283 $ 1,758 $ 300 $ 35 $ 3,515 $ 293 $ 248 $ $ $ $ 8,136 (3,676) 133 4,264 8,857 4,115 4,742 $ 8,267 $ 33,848 $ 2,525 $ 72 $ 86,234 $44,319 $212,572 $32,479 $ 9,476 $344,849 $ 1,020 (276) 32 161 937 $ $ 3,413 (1,126) 48 2,465 $ 4,800 $ 480 (95) 24 148 $ 557 $ 202 (175) 84 193 $ 304 $ 6,650 (1,672) 223 2,935 8,136 $ $ 853 $ 1,953 $ 349 $ 57 $ 4,112 $ 84 $ 2,847 $ 208 $ 247 $ 4,024 $ 9,660 $ 37,988 $ 9,493 $ 3,013 $ 99,941 $51,382 $200,423 $24,457 $ 9,746 $332,466 $ 1,019 (744) 61 684 $ 1,020 $ 3,549 (2,622) 84 2,402 $ 3,413 $ 1,245 (348) 14 (431) $ 480 $ 118 (226) 109 201 $ 202 $ 7,828 (8,291) 268 6,845 $ 6,650 $ 301 $ 1,332 $ 201 $ 9 $ 1,843 $ 719 $ 2,081 $ 279 $ 193 $ 4,807 $ 1,140 $ 7,337 $ 404 $ 12 $ 19,747 $59,843 $215,240 $36,060 $ 15,456 $ 390,152 $ 1,081 (1,103) 222 200 $ $ 200 $ 200 $ 21,165 $ 6,173 $ 1,070 11 1,081 $ $ 900 $ 181 $ 24,110 $ 4,916 $ 1,198 (4,040) 3,912 $ 1,070 $ 00000 $ 1,070 $ 632 $29,432 23 N O T E D - B A N K P R E M I S E S A N D E Q U I P M E N T : Bank premises and equipment are shown as follows (in thousands): December 31, Land Building Furniture, fixtures and equipment Totals, at cost Less: Accumulated depreciation Totals N O T E E – O T H E R R E A L E S T A T E : Estimated Useful Lives 5 – 40 years 3 – 10 years $ 2012 5,985 30,504 14,487 50,976 24,754 $ 26,222 2011 $  5,985 30,494 14,377 50,856 22,821 $ 28,035 $ 2010 5,985 30,359 14,037 50,381 20,625 $  29,756 The Company’s other real estate consisted of the following as of December 31, 2012, 2011 and 2010, respectively (in thousands): December 31, 2012 2011 2010 Construction, land development and other land 1-4 family residential properties Non farm non residential Other Total N O T E F – D E P O S I T S : Number of Properties 11 6 14 1 32 Balance $ 2,834 576 3,573 25 $ 7,008 Number of Properties 8 8 16 Balance $ 1,544 821 3,788 Number of Properties 11 9 4 Balance $ 1,744 778 3,222 32 $ 6,153 24 $ 5,744 At December 31, 2012, the scheduled maturities of time deposits (in thousands) are as follows: 2013 2014 2015 2016 2017 Total $ 116,295 8,166 4,581 7,000 4,667 $ 140,709 Time deposits of $100,000 or more at December 31, 2012 included brokered deposits of $28,612,000, of which $23,612,000 matures in 2013 and the remaining balance matures in 2017. Deposits held for related parties amounted to $8,720,550, $7,499,805 and $9,448,582 at December 31, 2012, 2011 and 2010, respectively. Overdrafts totaling $1,435,922, $679,220 and $3,027,718 were reclassified as loans at December 31, 2012, 2011 and 2010, respectively. N O T E G – F E D E R A L F U N D S P U R C H A S E D A N D S E C U R I T I E S S O L D U N D E R A G R E E M E N T S T O R E P U R C H A S E : At December 31, 2012, the Company had facilities in place to purchase federal funds up to $48,500,000 under established credit arrangements. At December 31, 2012, 2011 and 2010, federal funds purchased and securities sold under agreements to repurchase included funds invested by customers in a non-deposit product of the bank subsidiary of $194,233,923, $157,600,967 and $124,802,000, respectively. These accounts are non-insured, non-deposit accounts which allow customers to earn interest on their account with no restrictions as to the number of transactions. They are set up as sweep accounts with no check- writing capabilities and require the customer to have at least one operating deposit account. N O T E H – B O R R O W I N G S : At December 31, 2012, the Company was able to borrow up to $46,388,902 from the Federal Reserve Bank Discount Window Primary Credit Program. The borrowing limit is based on the amount of collateral pledged, with certain loans from the Bank’s portfolio serving as collateral. Borrowings bear interest at 25 basis points over the current fed funds rate and have a maturity of one day. There was no outstanding balance at December 31, 2012. At December 31, 2012, the Company had $7,911,931 outstanding in advances under a $114,643,824 line of credit with the FHLB. One advance in the amount of $5,000,000 bears interest at a variable rate of 43.2 basis points above the 1 month LIBOR rate, which was .643% at December 31, 2012, and matures in 2017. The remaining balance consists of smaller advances bearing interest from 3.04% to 7.00% with maturity dates from 2015 – 2042. The advances are collateralized by a blanket floating lien on a substantial portion of the Company’s real estate loans. N O T E I – N O T E S P A Y A B L E : The Company had a $2,500,000 unsecured line of credit with Mississippi National Bankers Bank. The line bore interest at Wall Street Journal Prime with a floor of 4.00% and required interest only payments quarterly with all principal and accrued interest due at maturity, which was March 11, 2010. There was no outstanding balance on this line at December 31, 2012. 24 N O T E J - I N C O M E T A X E S : Deferred taxes (or deferred charges) as of December 31, 2012, 2011 and 2010, included in other assets or other liabilities, were as follows (in thousands): December 31, Deferred tax assets: Allowance for loan losses Employee benefit plans’ liabilities Unrealized loss on available for sale securities, charged from equity Earned retiree health benefits plan liability Unearned retiree health benefits plan liability Other Deferred tax assets Deferred tax liabilities: Unrealized gain on available for sale securities, charged to equity Unearned retiree health benefits plan asset Bank premises and equipment Other Deferred tax liabilities Net deferred taxes Income taxes consist of the following components (in thousands): Years Ended December 31, Current Deferred Totals 2012 2011 $  3,011 $   2,777 $ 4,135 3,846 1,673 1,170 9,989 1,556 948 5,366 92 7,962 1,673 781 9,077 1,580 1,086 5,720 343 8,729 2010 2,261 3,368 934 1,454 364 423 8,804 6,071 370 6,441 $   2,027 $ 348 $    2,363 2012 2011 $ 1,425 $ 721 $ (1,517) (1,925) 2010 (119) (604) $ (92) $ (1,204) $ (723) Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2012, 2011 and 2010 to earnings before income taxes. The reason for these differences is shown below (in thousands): Taxes computed at statutory rate $ 867 2012 Tax Increase (decrease) resulting from: Tax-exempt interest income Income from BOLI Federal tax credits Death benefits on life insurance Other Total income tax benefit $ (532) (195) (372) 140 (92) Rate 34.0 (21.0) (8.0) (15.0) 6.0 (4.0) 2011 Tax $ (1) Rate 34.0 Tax 259 $ 2010 Rate 34.0 (56.2) (23.8) (48.1) (428) (181) (366) $ (1,204) $ (723) (95.0) (7) (0.9) (557) (170) (366) (159)  49 The Company has reviewed its income tax positions and specifically considered the recognition and measurement requirements of the benefits recorded in its financial statements for tax positions taken or expected to be taken in its tax returns. Based on its evaluation of these tax positions for its open tax years, the Company believes that it is more likely than not we will realize the net deferred tax asset and it has not recorded any tax liability for uncertain tax positions as of December 31, 2012, 2011 and 2010. N O T E K - S H A R E H O L D E R S ’ E Q U I T Y : Shareholders’ equity of the Company includes the undistributed earnings of the bank subsidiary. Dividends to the Company’s shareholders can generally be paid only from dividends paid to the Company by its bank subsidiary. Consequently, dividends are dependent upon the earnings, capital needs, regulatory policies and statutory limitations affecting the bank subsidiary. Dividends paid by the bank subsidiary are subject to the written approval of the Commissioner of Banking and Consumer Finance of the State of Mississippi and the Federal Deposit Insurance Corporation (the “FDIC”). At December 31, 2012, approx- imately $25,922,941 of undistributed earnings of the bank subsidiary included in consolidated surplus and retained earnings was available for future distribution to the Company as dividends. Dividends paid by the Company are subject to the written approval of the Federal Reserve Bank (“FRB”). 25 On February 25, 2009, the Board approved the repurchase of up to 3% of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, 34,024 shares have been repurchased and retired through December 31, 2012. On December 18, 2012, the Company’s Board of Directors approved a semi-annual dividend of $.10 per share. This dividend has a record date of December 28, 2012 and a distribution date of December 31, 2012. The bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the bank subsidiary’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank subsidiary must meet specific capital guidelines that involve quantitative measures of the bank subsidiary’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The bank subsidiary’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the bank subsidiary to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets. As of December 31, 2012, the most recent notification from the FDIC 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 notifica- tion that Management believes have changed the bank subsidiary’s category. The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2012, 2011 and 2010, are as follows (in thousands): December 31, 2012: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2011: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2010: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) Amount $ 112,342 105,728 105,728 $ 110,762 104,116 104,116 $ 110,435 104,233 104,233 Actual Ratio 21.29% 20.04% 13.07% 20.86% 19.61% 12.84% 22.26% 21.01% 12.40% For Capital Adequacy Purposes Ratio Amount $ 42,216 21,108 32,361 $42,475 21,238 32,436 $ 39,691 19,846 33,616 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios and capital amounts and ratios to be well capitalized for 2012, 2011 and 2010, are as follows (in thousands): Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well Capitalized Ratio Amount December 31, 2012: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2011: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2010: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) $ 107,885 101,241 101,241 $ 108,149 101,503 101,503 $ 105,255 99,111 99,111 20.47% 19.22% 12.62% 20.40% 19.15% 12.56% 21.41% 20.16% 11.86% $ 42,148 21,074 32,086 $ 42,413 21,207 32,332 $39,320 19,660 33,431 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% $52,685 31,611 40,108 $ 53,014 31,809 40,407 $ 49,162 29,497 41,784 10.00% 6.00% 5.00% 10.00% 6.00% 5.00% 10.00% 6.00% 5.00% 26 N O T E L - O T H E R I N C O M E A N D E X P E N S E S : \ Other income consisted of the following (in thousands): Years Ended December 31, Other service charges, commissions and fees Rentals Other Totals Other expenses consisted of the following (in thousands): Years Ended December 31, Advertising Data processing FDIC and state banking assessments Legal and accounting Other real estate ATM expense Trust expense Other Totals $ 2012 83 442 142 $ 667 2012 $ 489 1,434 503 511 648 2,033 314 1,813 $ 7,745 2011 $ 78 392 45 $ 515 2011 $ 506 858 1,688 600 1,350 1,973 331 1,709 $ 9,015 2010 $ 84 400 61 $ 545 2010 $ 580 567 1,510 839 411 2,024 298 1,738 $7,967 N O T E M - F I N A N C I A L I N S T R U M E N T S W I T H O F F - B A L A N C E - S H E E T R I S K : The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and irrevocable letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the bank subsidiary has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and irrevocable letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the agreement. Irrevocable letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Commitments and irrevocable letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluated each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on Management’s credit evaluation of the customer. Collateral obtained varies but may include equipment, real property and inventory. The Company generally grants loans to customers in its trade area. At December 31, 2012, 2011 and 2010, the Company had outstanding irrevocable letters of credit aggregating $3,599,011, $3,094,258 and $4,564,004, respectively. At December 31, 2012, 2011 and 2010, the Company had outstanding unused loan commitments aggregating $80,741,699, $76,421,050 and $110,667,857, respectively. Approximately $46,956,000, $42,051,000 and $71,244,000 of outstanding commitments were at fixed rates and the remainder were at variable rates at December 31, 2012, 2011 and 2010, respectively. N O T E N - C O N T I N G E N C I E S : 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. 27 N O T E O - C O N D E N S E D P A R E N T C O M P A N Y O N L Y F I N A N C I A L I N F O R M A T I O N : Peoples Financial Corporation began its operations September 30, 1985, when it acquired all the outstanding stock of The Peoples Bank, Biloxi, Mississippi. A condensed summary of its financial information is shown below. C O N D E N S E D B A L A N C E S H E E T S ( I N T H O U S A N D S ) : C O N D E N S E D S T A T E M E N T S O F I N C O M E ( I N T H O U S A N D S ) : December 31, Assets Investments in subsidiaries, at underlying equity: Bank subsidiary Nonbank subsidiary Cash in bank subsidiary Other assets Total assets Liabilities and Shareholders’ Equity: Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Years Ended December 31, Income Earnings of unconsolidated bank subsidiary: Distributed earnings Undistributed earnings Impairment loss on other investments Other income Total income Expenses Other Total expenses Income before income taxes Income tax benefit Net income 2012 2011 2010 $ 106,266 $ 104,731 $ 96,386 1 360 4,288 1 808 4,588 1 957 4,637 $ 110,915 $ 110,128 $ 101,981 $ 161 161 110,754 $ 110,915 $ 676 676 109,452 $ 110,128 2012 $    1,150 $ 1,845 (360) (71) 2,564 105 105 2,459 (182) 2011 898 285 110 1,293 95 95 1,198 (5) $ 624 624 101,357 $ 101,981 2010 $ 1,000 599 (96) 1,503 71 71 1,432 (53) $ 2,641 $ 1,203 $       1,485 28 C O N D E N S E D S T A T E M E N T S O F C A S H F L O W S ( I N T H O U S A N D S ) : Years Ended December 31, Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: (Income) loss on other investments Impairment loss on other investments Undistributed income of unconsolidated subsidiaries Other assets Other liabilities Net cash provided by operating activities Cash flows from investing activities: Redemption of equity securities Net cash provided by investing activities Cash flows from financing activities: Retirement of stock Dividends paid Net cash used in financing activities Net decrease in cash Cash, beginning of year Cash, end of year 2012 2011 2010 $ 2,641 $ 1,203 $ 1,485 84 360 (1,845) (182) (1) 1,057 36 36 (1,541) (1,541) (448) 808 360 $ (97) (285) 54 875 93  93 (193) (924) (1,117) (149) 957 110 (599) (53) 943 (7) (1,082) (1,089) (146) 1,103 $ 808 $ 957 The Company paid income taxes of $835,000, $755,000 and $2,232,000 in 2012, 2011 and 2010, respectively. No interest was paid during the three years ended December 31, 2012. N O T E P - E M P L O Y E E B E N E F I T P L A N S : The Company sponsors the Peoples Financial Corporation Employee Stock Ownership Plan (“ESOP”). Employees who are in a position requiring at least 1,000 hours of service during a plan year and who are 21 years of age are eligible to participate in the ESOP. The Plan included 401(k) provisions and the former Gulf National Bank Profit Sharing Plan. Effective January 1, 2001, the ESOP was amended to separate the 401(k) funds into the Peoples Financial Corporation 401(k) Profit Sharing Plan. The separation had no impact on the eligibility or benefits provided to participants of either plan. The 401(k) provides for a matching contribution of 75% of the amounts contributed by the employee (up to 6% of compensation). Contributions are determined by the Board of Directors and may be paid either in cash or Peoples Financial Corporation capital stock. Total contributions to the plans charged to operating expense were $330,000, $270,000 and $380,000 in 2012, 2011 and 2010, respectively. Compensation expense of $7,691,059, $8,426,829 and $8,548,297 was the basis for determining the ESOP contribution allocation to participants for 2012, 2011 and 2010, respectively. The ESOP held 383,141, 429,158 and 441,316 allocated shares at December 31, 2012, 2011 and 2010, respectively. The Company established an Executive Supplemental Income Plan and a Directors’ Deferred Income Plan, which provide for pre-retirement and post- retirement benefits to certain key executives and directors. Benefits under the Executive Supplemental Income Plan are based upon the position and salary of the officer at retirement or death. Normal retirement benefits under the plan are equal to 67% of salary for the president and chief executive officer, 58% of salary for the executive vice president and 50% of salary for all other executive officers and are payable monthly over a period of fifteen years. Under the Directors’ Deferred Income Plan, the directors are given an opportunity to defer receipt of their annual directors’ fees until age sixty-five. For those who choose to participate, benefits are payable monthly for ten years beginning the first day of the month following the director’s normal retire- ment date. The normal retirement date is the later of the normal retirement age (65) or separation of service. Interest on deferred fees accrues at an annu- al rate of ten percent, compounded annually. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $15,363,241, $14,833,939 and $14,667,545 at December 31, 2012, 2011 and 2010, respectively. The present value of accumulated benefits under these plans, using an interest rate of 5.25% in 2012 and 2011 and 6.00% in 2010, and the interest ramp-up method in 2012, 2011 and 2010, has been accrued. The accrual amounted to $10,572,681, $9,764,957 and $8,723,365 at December 31, 2012, 2011 and 2010, respectively, and is included in Employee and director benefit plans liabilities. The Company also has additional plans for non-vested post-retirement benefits for certain key executives. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $1,105,741, $997,133 and $890,086 at December 31, 2012, 2011 and 2010, respectively. The present value of accumulated benefits under these plans using an interest rate of 5.25% in 2012 and 2011 and 6.00% in 2010, and the projected unit cost method has been accrued. The accrual amounted to $1,328,657, $1,314,727, and $936,566 at December 31, 2012, 2011 and 2010, respectively, and is included in Employee and director benefit plans liabilities. 29 Additionally, there are two endorsement split dollar policies, with the bank subsidiary as owner and beneficiary, which provide a guaranteed death ben- efit to the participants’ beneficiaries. These contracts are carried at their cash surrender value, which amounted to $262,466, $255,166 and $248,087 at December 31, 2012, 2011 and 2010, respectively. The present value of accumulated benefits under these plans using an interest rate of 5.25% in 2012 and 6.00% in 2011 and 2010, and the projected unit cost method has been accrued. The accrual amounted to $68,253, $78,142 and $73,602 at December 31, 2012, 2011 and 2010, respectively, and is included in Employee and director benefit plans liabilities. The Company has additional plans for non-vested post-retirement benefits for directors. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $129,367, $118,787 and $139,703 at December 31, 2012, 2011 and 2010, respectively. The present value of accumu- lated benefits under these plans using an interest rate of 5.25% in 2012 and 2011 and 6.00% in 2010, and the projected unit cost method has been accrued. The accrual amounted to $192,528, $152,781 and $172,199 at December 31, 2012, 2011 and 2010, respectively, and is included in Other Liabilities. The Company provides post-retirement health insurance to certain of its retired employees. Employees are eligible to participate in the retiree health plan if they retire from active service no earlier than their Social Security normal retirement age, which varies from 65 to 67 based on the year of birth. In addition, the employee must have at least 25 continuous years of service with the Company immediately preceding retirement. However, any active employee who was at least age 65 as of January 1, 1995, does not have to meet the 25 years of service requirement. The accumulated post-retirement benefit obligation at January 1, 1995, was $517,599, which the Company elected to amortize over 20 years. The Company reserves the right to modify, reduce or eliminate these health benefits. The Company has chosen to not offer this post-retirement benefit to individuals entering the employ of the Company after December 31, 2006. In 2011, the Company offered a voluntary early retirement program to employees who, as of December 31, 2011, were between the ages of 55 and 64 and had at least 25 continuous years of service. Eight employees accepted the package, which resulted in special termination benefits for the retiree health plan of $459,064 for 2011. Effective January 1, 2012, the Company amended the retiree health plan. The amendment requires that employees who are eligible and enroll in the bank subsidiary’s group medical and dental health care plans upon their retirement must enroll in Medicare Parts A, B and D when first eligible upon their retirement from the bank subsidiary. This results in the bank subsidiary’s programs being secondary insur- ance coverage for retired employees and any dependent(s), if applicable, while Medicare Part A and B will be their primary coverage, and Medicare Part D will be the sole and exclusive prescription drug benefit plan for retired employees. The amendment reduced the accumulated post-retirement benefit obligation by $3,799,308 as of December 31, 2011. The following is a summary of the components of the net periodic post-retirement benefit cost (credit): Years Ended December 31, 2012 2011 2010 Service cost Interest cost Amortization of net gain Amortization of net transition obligation Amortization of prior service cost (credit) Special termination benefit $ 45,334 $ 292,942 $    328,506 72,164 (16,006) (203,619) 222,440 (46,167) 20,600 83,409 459,064 276,293 20,600 83,409 Net periodic post-retirement benefit cost (credit) $ (102,127) $  1,032,288 $    708,808 The discount rate used in determining the accumulated post-retirement benefit obligation was 4.00% in 2012, 4.50% in 2011 and 5.60% in 2010. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 7.50% in 2012. The rate was assumed to decrease gradually to 5.00% for 2022 and remain at that level thereafter. If the health care cost trend rate assumptions were increased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2012, would be increased by 14.70 %, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have increased by 20.67%. If the health care cost trend rate assumptions were decreased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2012, would be decreased by 11.75%, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have decreased by 15.80%. The following table presents the estimated benefit payments for each of the next five years and in the aggregate for the next five years: 2013 2014 2015 2016 2017 2018 – 2022 $143,000 150,000 149,000 125,000 110,000 310,000 The following is a reconciliation of the accumulated post-retirement benefit obligation, which is included in Other Liabilities: Accumulated post-retirement benefit obligation as of December 31, 2011 Service cost Interest cost Actuarial loss Benefits paid Accumulated post-retirement benefit obligation as of December 31, 2012 $  1,671,211 45,334 72,164 184,604 (66,971) $  1,906,342 30 The following is a summary of the change in plan assets: Fair value of plan assets at beginning of year Actual return on assets Employer contribution Benefits paid, net Fair value of plan assets at end of year 2012 2011 2010 $  $  66,971 (66,971) $ $ 75,666 (75,666) $ 67,486 (67,486) $ Amounts recognized in the Accumulated Other Comprehensive Income (Loss), net of tax, were: For the year ended December 31, 2012 2011 2010 Net gain (loss) Transition obligation Prior service charge (cost) Total accumulated other comprehensive income (loss) $ 123,471 $ 255,873 1,717,482 $1,840,953 1,851,871 $2,107,744 Amounts recognized in the accumulated post-retirement benefit obligation and other comprehensive income were: For the year ended December 31, Unrecognized actuarial loss Amortization of prior service cost Total accumulated other comprehensive loss $ (348,127) (54,382) (669,936) $(1,072,445) 2012 $ 200,610 203,619 $ 404,229 The prior service credit for the other postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2013 is $203,619. N O T E Q - F A I R V A L U E M E A S U R E M E N T S A N D D I S C L O S U R E S : The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a non-recurring basis, such as impaired loans and ORE. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments. Fair Value Hierarchy The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliabil- ity of the assumptions used to determine fair value. These levels are: Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 - Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in mar- kets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobserv- able assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. Following is a description of valuation methodologies used to determine the fair value of financial assets and liabilities. Cash and Due from Banks The carrying amount shown as cash and due from banks 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 by asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. The other source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. All of the Company’s available for sale securities are Level 2 assets. 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 bor- rowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into 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 31 valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded invest- ment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. When the fair value of the collateral is based on an observable market price, 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 val- uation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. When the fair value of the property is based on an observable market price, the Company records the other real estate as a non-recurring Level 2 asset. When an appraised value is not avail- able or Management determines the fair value of the other real estate 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 December 31, 2012, 2011 and 2010, were as follows (in thousands): December 31, 2012 U.S. Treasuries U.S. Government agencies Mortgage-backed securities States and political subdivisions Equity securities Total December 31, 2011 U.S. Treasuries U.S. Government agencies Mortgage-backed securities States and political subdivisions Equity securities Total December 31, 2010 U.S. Treasuries U.S. Government agencies States and political subdivisions Equity securities Total Fair Value Measurements Using Level 2 $ 54,096 149,098 17,441 37,591 650 258,876 $ Fair Value Measurements Using Level 2 $ 54,010 179,180 5,001 40,077 650 $ 278,918 Fair Value Measurements Using Level 2 $ 26,509 218,596 41,323 650 $ 287,078 Level 3 $287,078 $287,078 Level 3 $287,078 $287,078 Level 3 $287,078 $287,078 Level 1 $287,078 $287,078 Level 1 $287,078 $287,078 Level 1 $287,078 $287,078 Total $ 54,096 149,098 17,441 37,591 650 258,876 $ Total $ 54,010 179,180 5,001 40,077 650 $ 278,918 Total $ 26,509 218,596 41,323 650 $ 287,078 32 Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2012, 2011 and 2010 were as follows (in thousands): December 31: 2012 2011 2010 Total $ 46,248 49,991 14,295 Fair Value Measurements Using Level 2 287,07820$ 87,078 87,078 Level 1 $ 7,078 87,078 Level 3 $ 46,248 49,991 14,295 The following table presents a summary of changes in the fair value of impaired loans which are measured using Level 3 inputs (in thousands): For the year ended December 31, Balance, beginning of year Additions to impaired loans and troubled debt restructurings Principal payments, charge-offs and transfers to other real estate Change in allowance for loan losses on impaired loans Balance, end of year $ 2012 49,991 4,409 (8,106) (46) $ 46,248 2011 $ 14,295 44,894 (7,115) (2,083) $ 49,991 2010 $ 20,110 5,519 (12,286) 952 $ 14,295 Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2012, 2011 and 2010 are as follows (in thousands): December 31: 2012 2011 2010 Total $ 7,008 6,153 5,744 Level 1 $ 287,078 87,078 Fair Value Measurements Using Level 2 $ Level 3 $ 7,008 6,153 5,744 The following table presents a summary of changes in the fair value of other real estate which is measured using Level 3 inputs (in thousands): Balance, beginning of year Loans transferred to ORE Sales Writedowns Balance, end of year $ 2012 6,153 2,576 (1,568) (153) $ 7,008 2011 5,744 3,221 (2,101) (711) 6,153 $ $ 2010 1,521 5,715 (1,415) (77) 5,744 $ $ 33 The carrying value and estimated fair value of assets and liabilities, by level within the fair value hierarchy, at December 31, 2012, 2011 and 2010, are as follows (in thousands): December 31,2012: Financial Assets: Cash and due from banks Available for sale securities Held to maturity securities Other Investments Federal Home Loan Bank stock Loans, net Other real estate Cash surrender value of life insurance Financial Liabilities: Deposits: Non-interest bearing Interest bearing Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank December 31,2011: Financial Assets: Cash and due from banks Available for sale securities Held to maturity securities Other Investments Federal Home Loan Bank stock Loans, net Other real estate Cash surrender value of life insurance Financial Liabilities: Deposits: Non-interest bearing Interest bearing Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank December 31,2010: Financial Assets: Cash and due from banks Available for sale securities Held to maturity securities Other Investments Federal Home Loan Bank stock Loans, net Other real estate Cash surrender value of life insurance Financial Liabilities: Deposits: Non-interest bearing Interest bearing Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank Carrying Amount Level 1 Fair Value Measurements Using Level 2 Level 3 $287,078 425,627 7,008 16,861 376,209 $287,078 427,881 6,153 16,196 372,019 $287,078 407,363 5,744 15,951 376,715 $287,078 258,876 7,225 2,380 10,271 $287,078 278,918 1,492 2,581 55,014 $287,078 287,078 2,010 2,281 43,990 $ 54,020 258,876 7,125 3,450 2,380 422,226 7,008 16,861 102,609 373,110 194,234 7,911 $ 36,929 278,918 1,429 3,930 2,581 424,272 6,153 16,196 97,581 370,858 157,601 53,324 $ 24,147 287,078 1,915 3,926 2,281 403,248 5,744 15,951 108,278 375,862 140,102 42,957 $ 54,020 3,450 102,609 194,234 $ 36,929 3,930 97,581 157,601 $ 24,147 3,926 108,278 140,102 34 Total $ 54,020 258,876 7,225 3,450 2,380 425,627 7,008 16,861 102,609 376,209 194,234 10,271 $ 36,929 278,918 1,492 3,930 2,581 427,881 6,153 16,196 97,581 372,019 157,601 55,014 $ 24,147 287,078 2,010 3,926 2,281 407,363 5,744 15,951 108,278 376,715 140,102 43,990 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M To the Board of Directors and Shareholders Peoples Financial Corporation Biloxi, Mississippi We have audited the accompanying consolidated statements of condition of Peoples Financial Corporation and subsidiaries (the “Company”) as of December 31, 2012, 2011 and 2010, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Financial Corporation and subsidiaries as of December 31, 2012, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Atlanta, Georgia March 18, 2013 35 F I V E - Y E A R C O M P A R A T I V E S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N ( I N T H O U S A N D S E X C E P T P E R S H A R E D A T A ) : Peoples Financial Corporation and Subsidiaries Balance Sheet Summary Total assets Available for sale securities Held to maturity securities Loans, net of unearned discount Deposits Borrowings from FHLB Shareholders' equity Summary of Operations Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before taxes Applicable income taxes Net income Per Share Data 2012 2011 2010 2009 2008 $    804,912 $    804,152 $   786,545 $   869,007 $   896,408 258,875 7,125 431,083 475,719 7,912 110,754 278,918 1,428 432,407 468,439 53,324 109,452 287,078 1,915 409,899 484,140 42,957 101,357 311,434 3,202 464,976 470,701 104,270 103,588 340,642 3,394 467,377 510,476 36,938 107,000 $   24,628 $   25,033 $  29,675 $   34,289 $   43,573 2,067 22,561 4,264 18,297 9,529 25,277 2,549 (92) 3,178 21,855 2,935 18,920 9,860 28,781 (1) (1,204) 4,601 25,074 6,845 18,229 10,114 27,581 762 (723) 7,401 26,888 5,225 21,663 10,147 27,636 4,174 954 14,963 28,610 2,347 26,263 7,268 26,520 7,011 1,977 $ 2,641 $ 1,203 $  1,485 $ 3,220 $     5,034 Basic and diluted earnings per share $   Dividends per share Book value .51 .20 21.56 $   .23 .19 21.31 Weighted average number of shares 5,136,918 5,136,918 $   .29 .20 19.68 5,151,661 $  .62 .50 20.11 $  .94 .56 20.27 5,170,430 5,342,470 Selected Ratios Return on average assets Return on average equity Primary capital to average assets Risk-based capital ratios: Tier 1 Total .32% 2.40% 14.71% 20.04% 21.29% .15% 1.14% 14.59% 19.61% 20.86% .18% 1.45% 12.96% 21.01% 22.26% .36% 3.06% 12.49% 17.83% 19.08% .55% 4.73% 12.81% 18.03% 19.28% 36 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S Summary of Quarterly Results of Operations (In Thousands Except per Share Data): Quarter Ended, 2012 Interest income Net interest income Provision for loan losses Income (loss) before income taxes Net income (loss) Basic and diluted earnings per share March 31 $   6,193 5,589 540 415 505 .10 Quarter Ended, 2011 Interest income Net interest income Provision for loan losses Income (loss) before income taxes Net income (loss) Basic and diluted earnings per share Market Information March 31 $   6,787 5,862 641 288 438 .09 June 30 $   6,273 5,697 1,290 505 562 .11 June 30 $   6,553 5,687 546 617 810 .16 September 30 $ 6,081 5,622 541 800 750 .14 September 30 $ 6,156 5,432 544 430 578 .11 $ December 31 6,081 5,653 1,893 829 824 .16 $ December 31 5,537 4,874 1,204 (1,336) (623) (.13) The Company's stock is traded under the symbol PFBX and is quoted in publications under "PplFnMS". The following table sets forth the high and low sale prices of the Company's common stock as reported on the NASDAQ Stock Market. Year 2012 Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th High $  11.95 9.98 11.79 9.46 $  16.99 16.50 14.10 10.51 Low $   9.39 8.61 8.16 8.36 13.50 12.74 10.20 9.50 $   Dividend per share $     .10 .10 $    .09 .09 2011 Performance Graph The graph below compares the Company’s annual percentage change in cumulative total shareholder return on common shares over the last five years with the cumulative total return of a broad equity market index of companies, the NASDAQ Market Index, and a peer group consisting of the Morningstar Industry Group, Regional - Southeast Banks (“Morningstar”). This presentation assumes $100 was invested in shares of the relevant issuers on January 1, 2008, and that dividends received were immediately invested in additional shares. The graph plots the value of the initial $100 investment at one year intervals. For purposes of constructing this data, the returns of each component issuer have been weighted according to that issuer’s market capitalization. 37 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O R P O R A T E I N F O R M A T I O N Corporate Office Mailing Address P. O. Box 529 Biloxi, MS 39533-0529 Physical Address 152 Lameuse Street Biloxi, MS 39530 (228) 435-8205 Website www.thepeoples.com Corporate Stock Shareholder Information For complete information concerning the common stock of Peoples Financial Corporation, including dividend reinvestment, or general information about the Company, direct inquiries to transfer agent/investor relations: Asset Management & Trust Services Department The Peoples Bank, Biloxi, Mississippi P. O. Box 1416, Biloxi, Mississippi 39533-1416 (228) 435-8208, e-mail: investorrelations@thepeoples.com Independent Registered Public Accounting Firm Porter Keadle Moore, LLC Atlanta, Georgia The common stock of Peoples Financial Corporation is traded on the NASDAQ Capital Market under the symbol: PFBX. S.E.C. Form 10-K Requests The current market makers are: A copy of the Annual Report on Form 10-K, as filed with the FIG Partners LLC Hovde Capital Advisors Knight Equity Markets, L.P. Securities and Exchange Commission, may be obtained without charge by directing a written request to: Lauri A. Wood, Chief Financial Officer and Controller RAYMOND JAMES Morgan Keegan Peoples Financial Corporation Stifel Nicolaus & Co. Sterne, Agee & Leach, Inc. P. O. Drawer 529, Biloxi, Mississippi 39533-0529 (228) 435-8412, e-mail: lwood@thepeoples.com 38 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S B R A N C H L O C A T I O N S The Peoples Bank, Biloxi, Mississippi Biloxi Branches Main Office Other Branches Bay St. Louis Office 152 Lameuse Street, Biloxi, Mississippi 39530 408 Highway 90 East, Bay St. Louis, Mississippi 39520 (228) 435-5511 (228) 897-8710 Asset Management and Trust Services Department Diamondhead Office Personal and Corporate Trust Services 5429 West Aloha Drive, Diamondhead, Mississippi 39525 758 Vieux Marche, Biloxi, Mississippi 39530 (228) 897-8714 (228) 435-8208 Cedar Lake Office D’Iberville-St. Martin Office 10491 Lemoyne Boulevard, D’Iberville, Mississippi 39532 1740 Popps Ferry Road, Biloxi, Mississippi 39532 (228) 435-8202 (228) 435-8688 West Biloxi Office Gautier Office 2609 Highway 90, Gautier, Mississippi 39553 2560 Pass Road, Biloxi, Mississippi 39531 (228) 497-1766 (228) 435-8203 Gulfport Branches Downtown Gulfport Office 1105 30th Avenue, Gulfport, Mississippi 39501 (228) 897-8715 Handsboro Office 0412 E. Pass Road, Gulfport, Mississippi 39507 (228) 897-8717 Orange Grove Office 12020 Highway 49 North, Gulfport, Mississippi 39503 (228) 897-8718 Long Beach Office 298 Jeff Davis Avenue, Long Beach, Mississippi 39560 (228) 897-8712 Ocean Springs Office 2015 Bienville Boulevard, Ocean Springs, Mississippi 39564 (228) 435-8204 Pass Christian Office 301 East Second Street, Pass Christian, Mississippi 39571 (228) 897-8719 Saucier Office 17689 Second Street, Saucier, Mississippi 39574 (228) 897-8716 Waveland Office 470 Highway 90, Waveland, Mississippi 39576 (228) 467-7257 Wiggins Office 1312 S. Magnolia Drive, Wiggins, Mississippi 39577 (228) 897-8722 39 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S B O A R D O F D I R E C T O R S B O A R D O F D I R E C T O R S Peoples Financial Corporation B O A R D O F D I R E C T O R S The Peoples Bank, Biloxi, Mississippi Chevis C. Swetman, Chairman of the Board Chevis C. Swetman, Chairman Dan Magruder, Vice Chairman; President, Rex Distributing Co., Inc. Tyrone J. Gollott, Vice-Chairman; President, G & W Enterprises, Inc. Drew Allen, President,Allen Beverages, Inc. Rex E. Kelly, Principal, Strategic Communications Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc. O F F I C E R S Peoples Financial Corporation Chevis C. Swetman, President and CEO A. Wes Fulmer, Executive Vice-President Thomas J. Sliman, First Vice-President Ann F. Guice, Second Vice-President J. Patrick Wild, Vice-President and Secretary Evelyn R. Herrington, Vice-President Lauri A. Wood, Chief Financial Officer and Controller A. Wynn Alexander, President, Desoto Land and Timber and Desoto Treated Materials, Inc. Drew Allen, President, Allen Beverages, Inc. A. Wes Fulmer, Executive Vice-President Liz Corso Joachim, President, Frank P. Corso, Inc. Rex E. Kelly, Principal, Strategic Communications Dan Magruder, President, Rex Distributing Co., Inc. Jeffrey H. O’Keefe, President, Bradford-O’Keefe Funeral Homes, Inc. S E N I O R M A N A G E M E N T The Peoples Bank, Biloxi, Mississippi Chevis C. Swetman, President and CEO A. Wes Fulmer, Executive Vice-President Thomas J. Sliman, Senior Vice-President Lauri A. Wood, Senior Vice-President and Cashier Ann F. Guice, Senior Vice-President J. Patrick Wild, Senior Vice-President Evelyn R. Herrington, Senior Vice-President 40 

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