Peoples Financial Corp.
Annual Report 2013

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 3 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, If 2012 was a year without drama, 2013 made up for it. While your bank’s 2013 operating results remained steady, your board and senior management team made some extremely difficult decisions that ultimately generated a loss for the year. During both second and fourth quarters of last year, our loan loss provision was dramatically increased—$3,538,000 and $5,042,000 respectively— to take decisive action on a few large credit problems on our books, most notably one out of area residential development loan. The second quarter provision created a loss of $1,147,000 for that period. The fourth quarter provision, along with a number of other actions on out- standing loans, generated a loss of $883,000 for the period and a loss of $538,000 for the entire year. As painful as these steps were, they were finally deemed necessary to purge our balance sheet of problem credits so we can move forward in building a more profitable loan portfolio. The net effect reduced our nonaccrual loans by 51% from the year before, which positions your bank for better growth in the future. As a matter of fact, no new significant additions were made to nonaccruing loans in either 2012 or 2013, further reflecting the improvement of the quality of our asset base. By the end of 2013, our allowance for loan losses as a percentage of loans totaled 2.38%, compared to 2.05% the prior year, so we are better reserved now, after the large provision, than we were the year before. In fact, the loan loss provision in 2013 totaled more than the provisions of the previous two years combined. Despite these difficult actions, our primary capital ratio at the end of 2013 totaled 13.64%, just slightly lower than the year before and more than twice the regulatory minimum. As I have said on all too many occasions over these last few years, your bank was built to withstand times like these. Still, all the news was not bad. Net interest income increased 4.2% for the year and 28.8% in fourth quarter, compared to the same period the year before. Net interest margin increased 23 basis points year-to-year, from 3.11% in 2012 to 3.34% in 2013 as a result of $1,523,000 in interest income and fees from the sale of a gaming loan which had been on nonaccrual. Our Trust Department’s income increased significantly in 2013 from the year before, and ATM fees jumped by $218,000, mostly the result of improved performance at off-site ATMs. Beyond the numbers, your bank enjoyed another active year. We opened our 17th branch, one that we have long desired, at Keesler Air Force Base. This branch services the thousands of military and civilian workers at one of our nation’s largest bases, and we are proud to serve those who serve our country. Since its opening in mid-summer, the Keesler branch has consistently achieved and exceeded its initial business goals under the enthusiastic leadership of branch manager Toni Ganucheau. We also launched a new ad campaign with a direct, hard-hitting message that this bank, founded on the Gulf Coast more than 100 years ago, will remain on the Gulf Coast, headquartered on the Gulf Coast and staffed with the best bankers on the Gulf Coast. That is not a promise, but a commitment to our community and to our heritage. In that regard, I invite our customers, friends and neighbors to visit our Main Branch in Biloxi and view the restored gargoyle that was rescued after it was pitched off the roof of our old building back in 2005. Rebuilt by hand by the renowned local sculptor Mary Ott Davidson, the Peoples Bank gargoyle was unveiled on August 29, 2013, eight years to the day after its unfortunate fall. Like our bank, it stands resilient, battered but very vibrant to this day. Finally, I ask you to join me in recognizing the achievements of your directors, senior managers and the entire team of bankers at The Peoples Bank. They continue to form the foundation of our strength and a source of inspiration to their CEO. 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, 2013, 2012 and 2011. 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 Financial Accounting Standards Board (“FASB”) has issued new accounting standards updates, which have been disclosed in Note A to the Consolidated Financial Statements. The Company does not expect that these updates will have a material impact on its financial position, or results of operations. The adoption of Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, did result in additional disclosures.  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 liabil- ities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. Allowance for loan losses: The Company’s most critical accounting policy relates to its allowance for loan losses (“ALL”), which reflects the estimated losses resulting from the inabil- ity of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of 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 collateral and current economic conditions. Management believes that the ALL is adequate and appropriate for all periods presented in these financial statements. If there was a deterioration of any of the factors considered by Management in evaluating the ALL, the estimate of loss would be updated, and additional provisions for loan losses may be required. The analysis divides the portfolio into two segments: a pool analysis of loans based upon 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. 1 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 non-interest 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 I 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 the allowance 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 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 provision 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. The Company recorded a net loss of $538,000 for 2013 compared with net income of $2,641,000 for 2012. This significant decrease is primarily attributable to the provision for the allowance for loan losses, which was $9,661,000 in 2013 as compared with $4,264,000 in 2012. Current year results also included an increase in net interest income and non-interest expense and a decrease in non-interest income as compared with 2012 results. Managing the net interest margin in the Company’s highly competitive market and in context of larger economic conditions has been very challenging and will continue to be so for the foreseeable future. Interest income increased $328,000 in 2013 as compared with 2012. Although loans decreased significantly during 2013, the Company recognized interest income and fees of $1,523,000 from the sale of a gaming loan which had been on nonaccrual. Increases or decreases in interest income on other interest-earning assets are generally attributable to changes in balances during 2013. The increase in yield on taxable available for sale securities resulted from extending maturities on these investments. Interest expense decreased $620,000 in 2013 as compared with 2012 primarily due to the maturity of brokered certificates of deposit and a reduction in average borrowings from the Federal Home Loan Bank (“FHLB”) during 2013 and a reduction in the cost of funds for the Company’s savings and interest-bearing DDA deposits and federal funds purchased and securities sold under agreements to repurchase. Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans 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. The Company’s nonaccrual loans totaled $26,171,000 and $53,891,000 at December 31, 2013 and 2012, respectively. This significant reduction primarily results from the sale of a gaming loan with a balance of $10,786,000 and a partial charge-off totaling $7,500,000 on a single residential development loan that had a balance of $15,277,000. Additionally, there have not been any significant new loans placed on nonaccrual status during 2012 and 2013. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses. The Company is working diligently to reduce past due and nonaccrual loans. As part of resolving problem loans, foreclosures have increased in 2013 with Other Real Estate totaling $9,630,000 at December 31, 2013. Non-interest income decreased $462,000 for 2013 as compared with 2012 results. The decrease was primarily the result of decreased gains on sales and calls of securities in 2013 as compared with 2012. During 2013, the Company increased per transaction and account fees, which resulted in an increase in service charges on deposit accounts. 2 Non-interest expense increased $377,000 for 2013 as compared with 2012 results. Increases in FDIC assessments, other real estate expense and ATM expense were larger than decreases in salaries and employee benefits, depreciation, and data processing costs in 2013 as compared with 2012. Total assets at December 31, 2013 decreased $42,648,000 as compared with December 31, 2012. Available for sale securities increased $16,564,000 at December 31, 2013 as compared with December 31, 2012, with funds available from the net decrease in loans of $55,734,000. Total deposits decreased $47,161,000 at December 31, 2013 as compared with December 31, 2012. During 2013, brokered deposits, which are reported as time deposits of $100,000 or more, of $23,612,000 matured. Federal funds purchased and securities sold under agreements to repurchase decreased $54,595,000 as customers reallocated their funds from a non-deposit account. Borrowings from the FHLB increased at December 31, 2013 as compared with December 31, 2012, as a result of 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. 2013 as compared with 2012 The Company’s average interest-earning assets decreased approximately $21,292,000, or 3%, from approximately $749,015,000 for 2012 to approximately $727,723,000 for 2013. The Company’s average balance sheet decreased primarily as decreased pledging requirements allowed for reduced investment in securities, the fair value of available for sale securities decreased and principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. The average yield on interest-earning assets increased 15 basis points, from 3.39% for 2012 to 3.54% for 2013, with the biggest impact being to the yield on loans. During 2013, the Company sold a gaming loan which had been on nonaccrual and recognized approximately $1,523,000 in interest and fees which increased the yield on loans to 4.67%. Without this transaction, the yield on loans would have been 4.29%. Recent investment strategy includes extending durations to improve yield on these assets, while planning for rising rates in the future. Average interest-bearing liabilities decreased approximately $25,008,000, or 4%, from approximately $603,929,000 for 2012 to approximately $578,921,000 for 2013. During 2013, brokered deposits, which are reported as time deposits, of $23,612,000 matured. Borrowings from the FHLB fluctuate based on the liquidity needs of the bank subsidiary. The average rate paid on interest-bearing liabilities decreased 9 basis points, from .34% for 2012 to .25% for 2013. 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 2013. The current unprecedented 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 3.34% at December 31, 2013, up 23 basis points from 3.11% at December 31, 2012. Without the additional interest income and fees from the sale of the gaming loan, the net interest margin for 2013 would have been 3.13% 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 foreclosures relating to existing loans. The average yield on interest-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 had 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 purchased securities with maturities of up to fifteen years, with call provisions, to improve its yield on these assets. The yield on loans 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 FHLB, 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, decreased in 2012. The unprecedented low rate environment which exists on a national and local level caused customers to tolerate lower interest rates in return for less risk. 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% at December 31, 2012, down 2 basis points from 3.13% at December 31, 2011. 3 The tables below analyze the changes in tax-equivalent net interest income for the years ended December 31, 2013 and 2012 and the years ended December 31, 2012 and 2011. 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 (1) (2) (3) Federal funds sold Held to maturity: Non taxable (4) Available for sale: Taxable Non taxable (4) Other Total Savings and interest-bearing DDA Time deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from FHLB Total Net tax-equivalent spread Net tax-equivalent margin on earning assets Loans (2) (3) Federal funds sold Held to maturity: Non taxable (4) Available for sale: Taxable Non taxable (4) Other Total Savings and interest-bearing DDA Time deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from FHLB Total Net tax-equivalent spread Net tax-equivalent margin on earning assets Interest Earned/Paid Rate $  Average Balance 405,463 $  26,306 9,936 247,097 36,605 2,316 727,723 246,728 123,198 $  $  2013 18,927 69 363 4,407 1,946 29 25,741 179 919 $  $  181,702 27,293 578,921 $  158 191 $ 1,447 2012 4.67% 0.26 3.65 1.78 5.32 1.25 3.54% 0.07% 0.75 0.09 0.70 0.25% 3.29% 3.34% 4.32% 0.24 Average Balance 430,205 $  6,601 4,698 264,248 39,407 3,856 749,015 230,829 149,560 $  $  169,352 54,188 603,929 $  Interest Earned/Paid Rate $  18,576 16 189 4,527 2,073 15 25,396 410 1,090 335 233 2,068 $  $  $  4.02 1.71 5.26 0.39 3.39% 0.18% 0.73 0.20 0.43 0.34% 3.05% 3.11% Average Balance 430,205 $  6,601 2012 Interest Earned/Paid $  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 $  $  $  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 Rate 4.32% 0.24 4.02 1.71 5.26 0.39 3.39% 0.18% 0.73 0.20 0.43 0.34% 3.05% 3.11% 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% 3.03% 3.13% (1) 2013 includes interest and fees of $1,523 recognized from sale of a nonaccrual loan during the fourth quarter. (2) Loan fees of $911, $797 and $647 for 2013, 2012 and 2011, respectively, are included in these figures. (3) Includes nonaccrual loans. (4) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2013, 2012 and 2011. 4 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 Time deposits 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 Time deposits Federal funds purchased Borrowings from FHLB Total For the year ended December 31, 2013 compared with December 31, 2012 Volume Rate/Volume Rate Total $ (1,068) 48 211 (294) (147) (6) $ (1,256) $ 28 (192) 24 (115) $ (255) $ 1,505 1 (17) 186 22 33 1,730 $ $ (242) 26 (188) 147 $ (257) $ (86) 4 (20) (12) (2) (13) $ (129) $ (17) (5) (13) (74) $ (109) $ 351 53 174 (120) (127) 14 $ 345 $ (231) (171) (177) (42) $ (621) 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) 5 Provision for Allowance for Loan Losses In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. The Company’s Loan Review and Special Assets Departments play key roles in monitoring the loan portfolio and managing problem loans. New loans and, on a periodic basis, existing loans are reviewed to evaluate compliance with the loan policy. 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 the Company’s operations are evaluated on a monthly basis. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. Lenders experienced in workout scenarios consult with loan officers and customers to address non-performing loans. 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 Company’s analysis includes evaluating the current value of collateral securing all nonaccrual loans. Included in nonaccrual loans is one out of area residential development loan with an unpaid principal balance of $15,277,000. This loan had been on nonaccrual for two years without a specific reserve. The Company became aware of specific conditions and information during 2013 which resulted in the assignment of specific reserves of $7,600,000 to this loan. A partial charge-off of $7,325,000 relating to this loan was recorded during 2013. During 2013, the Company sold a gaming loan which had been on nonaccrual. This loan totaled $14,527,799 as of December 31, 2012. Nonaccrual loans totaled $26,171,000 and $53,891,000 with specific reserves on these loans of $1,280,000 and $1,777,000 as of December 31, 2013 and 2012, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value. The Company’s on-going, systematic evaluation resulted in the Company recording a total provision for the allowance for loan losses of $9,661,000, $4,264,000 and $2,935,000 in 2013, 2012 and 2011, respectively. The allowance for loan losses as a percentage of loans was 2.38%, 2.05% and 1.88% at December 31, 2013, 2012 and 2011, respectively. The Company believes that its allowance for loan losses is appropriate as of December 31, 2013. 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 $462,000 in 2013 as compared with 2012. Service charges on deposit accounts increased $325,000 in 2013 as compared with 2012 as a result of increased service charges and ATM fees and a decrease in NSF fees. Fees from service charges increased $51,000 as a result of the Company increasing per account and per transactions fees in 2013 and an increase in ATM fees of $409,000 as a result of the improvement in the local casinos at which the Company has off-site ATMs. NSF fees decreased $153,000 as customers changed their overdraft activity based on economic conditions. Gains from sales and calls of securities decreased $1,106,000 as sales were executed when proceeds would be maximized. The increase in cash surrender value of life insurance decreased $72,000 in 2013 as compared with 2012 as a result of the decline in the stock market. The Company had a loss from impairment of other investments of $360,000 in 2012 and income on other investments of $42,000 in 2013 as compared with a loss of $84,000 in 2012. Other income decreased as prior year results included gains of $31,000 from the sale of bank vehicles. Total non-interest income decreased $331,000 in 2012 as compared with 2011. Trust department income and fees increased $90,000 as a result of fees relating to several large estates. Service charges on deposit accounts increased $128,000 in 2012 as compared with 2011. This increase was the result of a decrease in NSF fees of $90,000, 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 $218,000 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 $238,000 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 $84,000 in 2012 as compared with income of $97,000 in 2011. Results in 2011 included gains from death benefits from life insurance of $470,000. Other income increased $152,000 in 2012 as compared with 2011. This increase was primarily attributable to an increase in rental income of $50,000 as the Company was able to lease previously vacant property and gains of $31,000 on the sale of bank vehicles. 6 Non-interest expense Total non-interest expense increased $377,000 in 2013 as compared with 2012. Salaries and employee benefits decreased $424,000 in 2013 as compared with 2012. Salaries increased $101,000 in 2013 as compared with 2012 due to merit raises. Expenses relating to deferred compensation plans decreased $136,000 in 2013 as a result of the impact of recent and future retirements and changes in the discount rate utilized to compute related liabilities. The Company’s board of directors reduced contributions to its defined contribution plans $110,000 in 2013 as a result of the net loss. Health insurance costs decreased $270,000 as a result of a reduction in claims in 2013 as compared with 2012 and amendments made to the retiree health plan which require plan partici- pants to utilize drug benefits and health insurance coverage available under Medicare. Equipment rentals, depreciation and maintenance decreased $228,000 in 2013 as compared with 2012 primarily as a result of a decrease of $299,000 in depreciation on furniture and equipment replaced during the years after Hurricane Katrina becomes fully depreciated. Maintenance costs increased $33,000 as a result of the timing of work performed. Other expense increased $1,048,000 for 2013 as compared with 2012. This increase was the result of increases in advertising, FDIC and state assessments, other real estate and ATM expenses, which were partially offset by a decrease in data processing costs. Advertising expenses increased $107,000, which was primarily attributable to the production of a new advertising campaign. FDIC and state assessments increased $367,000 in 2013 as 2012 results included an adjustment in the estimate of prepaid assessments. Increased writedowns of other real estate to fair value caused these expenses to increase $315,000 in 2013 as compared with 2012. ATM expense increased $334,000 in 2013 as a result of increased ATM activity. Data processing expense decreased $180,000 as 2012 costs included several additional services and projects. Total non-interest expense decreased $3,504,000 in 2012 as compared with 2011. Salaries and employee benefits decreased $2,092,000 in 2012 as compared with 2011. Salaries decreased $723,000 in 2012 as compared with 2011 as the employee census decreased from attrition and the impact of the 2011 voluntary early retirement package. Expenses relating to deferred compensation plans decreased $565,000 in 2012 as a result of the 2011 voluntary early retirement package. Expenses relating to the retiree health plan decreased $954,000 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 $226,000 in 2012 as compared with 2011. Rental expense decreased $113,000 in 2012 as the Company discontinued use of leased equipment during 2011. Depreciation on furniture and equipment decreased $157,000 as equipment replaced during the years after Hurricane Katrina becomes fully depreciated. Maintenance costs increased $49,000 as a result of the timing of work performed. Other expense decreased $1,270,000 for 2012 as compared with 2011. Included in other expense are data processing expense, which increased $576,000 as a result of the outsourcing of most of the bank’s I/T functions, and ORE expenses, which were $702,000 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 $1,185,000 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 Taxes Income taxes have been impacted by non-taxable income and federal tax credits during 2013, 2012 and 2011, respectively. Note I 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 increased $16,564,000 at December 31, 2013, compared with December 31, 2012. Funds available from maturities and sales of available for sale securities and the decrease in loans were invested in available for sale securities. The Company recorded an unrealized loss of $15,413,000 on its available for sale securities during 2013 as a result of fluctuations in market values. The held to maturity portfolio increased $4,017,000 at December 31, 2013, compared with December 31, 2012, as the Company opted to classify some of its investment purchases during the current year as held to maturity. Other investments decreased $188,000 at December 31, 2013, compared with December 31, 2012, primarily as a result of a liquidating distribution of $230,000. The Company increased its investment in FHLB common stock by $1,454,000 to increase its borrowing capacity from FHLB at December 31, 2013 as compared with December 31, 2012. Loans decreased $55,734,000 at December 31, 2013 compared with December 31, 2012. During 2013, the Company charged-off loans of $10,122,000 and transferred loans totaling $4,537,000 into ORE. The remaining decease is the result of principal payments outpacing new loans during 2013. Other real estate increased by $2,622,000 at December 31, 2013 as compared with December 31, 2012. During 2013, loans totaling $4,537,000 were transferred into ORE, write downs of $670,000 were charged to earnings and ORE totaling $1,188,000 was sold. The Company is working diligently and prudently to reduce this portfolio. Accrued interest receivable decreased $288,000 at December 31, 2013 as compared with December 31, 2012. This decrease is due to the decrease in average accruing loans and average available for sale securities. Cash surrender value of life insurance increased $595,000 at December 31, 2013 as compared with December 31, 2012 primarily as a result of income earned on the life insurance. Prepaid FDIC assessments decreased $1,454,000 at December 31, 2013 as compared with December 31, 2012 as a result of the amortization of these costs and reimbursement of $1,177,000 from the FDIC of the remaining balance of its prepaid assessment. 7 Other assets increased $8,511,000 at December 31, 2013 as compared with December 31, 2012 due to changes in deferred taxes and income taxes receivable. Deferred taxes increased $6,590,000 as the decrease in fair value of available for sale securities reduced an unrealized gain. Income taxes receivable increased $1,950,000 as tax deposits exceeded income taxes currently payable. Total deposits decreased $47,161,166 at December 31, 2013, as compared with December 31, 2012. 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. In addition, brokered deposits, which are included as time deposits, $100,000 or more, of $23,612,000 matured during 2013. The Company anticipates that deposits will continue at or slightly above their present level during 2014. Federal funds purchased and securities sold under agreements to repurchase, which includes non-deposit accounts, decreased $54,595,000 at December 31, 2013 as compared with December 31, 2012. The total at December 31, 2012 included a new customer with a balance of $50,924,000. Borrowings from the FHLB increased $69,772,000 at December 31, 2013 as compared with December 31, 2012 based on the liquidity needs of the bank subsidiary. Employee and director benefit plans liabilities increased $563,000 at December 31, 2013, as compared with December 31, 2012 due to deferred compensation benefits earned by officers and directors during 2013. 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 13.64 % at December 31, 2013, 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 2013 are described in Note J to the Consolidated Financial Statements. 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 L 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 through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a continuous basis in the management of its liquidity needs and 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 FHLB. The Company generally anticipates relying on deposits, purchases of federal funds and borrowings from the FHLB for its liquidity needs in 2014. 8 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 L 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 seven years or less; however the market is now dictating floating rate terms to be extended up to twenty years. On the liability side, more than 75% of the deposits are demand and savings transaction accounts. Additionally, 85% 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 2014 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 the allowance 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. 9 Interest rate sensitivity at December 31, 2013 was as follows (in thousands): 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 B E Y O N D T O T A L 1 2 / 3 1 / 1 3 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 $ 238,254 $ 8,187 $ 27,900 $ 11,528 $ 31,264 $ 49,282 $ 366,415 $ 369,117 4.92% 17,191 2.93% 255,445 4.84% 295,583 1.96% 139,639 0.09% 70,246 1.59% 505,468 1.87% 6.23% 5,940 3.06% 14,127 5.40% 10,183 1.43% 254 4.58% 10,437 1.66% 6.47% 20,128 1.69% 5.83% 12,197 2.38% 4.94% 13,110 2.33% 4.45% 225,112 2.43% 4.68% 293,678 2.39% 293,222 48,028 23,725 44,374 274,394 660,093 662,339 5.71% 2,428 1.32% 4.79% 7,948 1.18% 4.51% 5,299 1.18% 251 4.58% 2,679 2.18% 5,233 1.64% 13,181 1.40% 179 4.58% 5,478 1.57% 3.01% 1,521 1.67% 1,521 1.67% 4.01% 321,441 1.86% 139,639 0.09% 77,684 1.66% 538,764 1.80% 322,535 139,639 79,051 541,225 Interest rate sensitivity at December 31, 2012 was as follows (in thousands): 2 0 1 3 $ 265,343 2 0 1 4 $ 24,188 2 0 1 5 $ 22,805 2 0 1 6 2 0 1 7 $ 27,768 $ 26,879   B E Y O N D $ 55,243 T O T A L $ 422,226 1 2 / 3 1 / 1 2 F A I R V A L U E $ 425,627 271,931 4.49% 203,942 2.47% 5.04% 271,831 2.31% 259,185 694,057 697,558 3.14% 4.42% 373,110 4.49% 376,209 194,234 194,234 0.20% 7,912 4.60% 575,256 4.40% 1,729 4.60% 1,729 4.60% 10,271 580,714 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 4.83% 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% 239 239 4.60% 4.60% 4,820 2.11% 7,239 1.66% 5,236 3.56% 9,903 3.00% 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 N D I T I O N (in thousands except share data) 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 $10,686 - 2013; $7,225 - 2012; $1,492 - 2011 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, 5,123,186 shares issued and outstanding at December 31, 2013 and 5,136,918 at December 31, 2012 and 2011 Surplus Undivided profits Accumulated other comprehensive income (loss), net of tax Total shareholders’ equity 2 0 1 3 2 0 1 2 $  36,264 $  54,020 $ 275,440 258,876 11,142 3,262 3,834 375,349 8,934 366,415 25,308 9,630 2,607 17,456 251 10,655 7,125 3,450 2,380 431,083 8,857 422,226 26,222 7,008 2,895 16,861 1,705 2,144 2 0 1 1 36,929 278,918 1,429 3,930 2,581 432,407 8,136 424,271 28,035 6,153 2,698 16,197 2,096 915 $   762,264 $  804,912 $ 804,152 $ 107,117 217,005 60,519 43,917 428,558 139,639 77,684 12,725 4,511 663,117 5,123 65,780 34,259 (6,015) 99,147 $  102,609 $ 232,401 94,606 46,103 475,719 194,234 7,912 12,162 4,131 694,158 5,137 65,780 34,964 4,873 110,754 97,581 205,319 115,014 50,525 468,439 157,601 53,324 11,311 4,025 694,700 5,137 65,780 33,351 5,184 109,452 Total liabilities and shareholders’ equity $ 762,264 $  804,912 $ 804,152 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 O P E R A T I O N S (in thousands except per share data) Y E A R S E N D E D D E C E M B E R 3 1 , 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 loan losses Net interest income after provision for allowance for loan losses 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 (loss) 2 0 1 3 2 0 1 2 2 0 1 1 $   18,927  $ 18,577 $ 17,923  590 3,114 703 1,524 29 69 24,956 1,098 191 158 1,447 23,509 9,661 13,848 1,423 6,236 258 42 501 607 9,067 11,568 2,415 2,878 8,793 25,654 (2,739) 2,201 (538) $ 463 3,777 287 1,493 15 16 24,628 1,500 232 335 2,067 22,561 4,264 18,297 1,458 5,911 1,364 (360) (84) 573 667 9,529 11,992 2,434 3,106 7,745 25,277 2,549 92 236 5,320 106 1,418 23 7 25,033 2,354 186 638 3,178 21,855 2,935 18,920 1,368 5,783 1,126 97 501 470 515 9,860 14,084 2,350 3,332 9,015 28,781 (1) 1,204 $ 2,641 $ 1,203 Basic and diluted earnings (loss) per share Dividends declared per share $ (.10) $1111111111111111111 $ $ .51 .20 $ $ .23 .19 See Notes to Consolidated Financial Statements. 12 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 ( L O S S ) (in thousands) Y E A R S E N D E D D E C E M B E R 3 1 , Net income (loss) Other comprehensive income (loss), net of tax: Net unrealized gain (loss) on available for sale securities, net of tax of $5,153, $440 and $2,897 for the years ended December 31, 2013, 2012 and 2011, respectively Reclassification adjustment for realized gains on available for sale securities called or sold in current year, net of tax of $88, $464 and $383 for the years ended December 31, 2013, 2012 and 2011, respectively Gain (loss) from unfunded post- retirement benefit obligation, net of tax of $369, $137 and $1,638 for the years ended December 31, 2013, 2012 and 2011, respectively Total other comprehensive income (loss) 2 0 1 3 2 0 1 2 2 0 1 1 $ (538) $ 2,641 $ 1,203 (10,002) 855 5,624 (170) (900) (743) (716) (10,888) (266) (311) 3,180 8,061 Total comprehensive income (loss) $ (11,426) $ 2,330 $ 9,264 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 S H A R E H O L D E R S ’ E Q U I T Y (in thousands except share and per share data) Balance, January 1, 2011 Net income Other comprehensive income, net of tax Cash dividend ($.09 per share) Dividend declared ($.10 per share) Retirement of stock Balance, December 31, 2011 Net income Other comprehensive loss, net of tax Cash dividend ($.20 per share) Balance, December 31, 2012 Net loss Other comprehensive loss, net of tax Retirement of stock Balance, December 31, 2013 See Notes to Consolidated Financial Statements. N u m b e r o f C o m m o n S h a r e s 5,151,139 C o m m o n S t o c k $   5,151 S u r p l u s $    65,780 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 ( L o s s ) $ (2,877) (14,221) 5,136,918 (14) 5,137 65,780 5,136,918 5,137 65,780 (13,732) 5,123,186 (14) $   5,123 $    65,780 $    34,259 $   (6,015) $  99,147 P r o f i t s $ 33,302 1,203 (462) (514) (178) 33,351 2,641 (1,028) 34,964   (538) (167) 8,061 5,184 (311) 4,873 (10,888) T o t a l $ 101,356 1,203 8,061 (462) (514) (192) 109,452 2,641 (311) (1,028) 110,754 (538) (10,888) (181) 14 (in thousands except share and per share data) Balance, January 1, 2011 Net income Other comprehensive income, net of tax Cash dividend ($.09 per share) Dividend declared ($.10 per share) Retirement of stock Balance, December 31, 2011 Net income Other comprehensive loss, net of tax Cash dividend ($.20 per share) Balance, December 31, 2012 Net loss Other comprehensive loss, net of tax Retirement of stock Balance, December 31, 2013 See Notes to Consolidated Financial Statements. N u m b e r o f C o m m o n S h a r e s 5,151,139 C o m m o n S t o c k $   5,151 S u r p l u s $    65,780 65,780 5,136,918 5,137 65,780 (14,221) 5,136,918 (13,732) 5,123,186 (14) 5,137 (14) $   5,123 U n d i v i d e d P r o f i t s $ 33,302 1,203 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 ( L o s s ) $ (2,877) 8,061 (462) (514) (178) 33,351 2,641 (1,028) 34,964   (538) (167) 5,184 (311) 4,873 (10,888) T o t a l $ 101,356 1,203 8,061 (462) (514) (192) 109,452 2,641 (311) (1,028) 110,754 (538) (10,888) (181) $    65,780 $    34,259 $   (6,015) $  99,147 15 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 (in thousands) 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 (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation Provision for allowance for loan losses 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 Gain on sale of bank premises and equipment 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 sales of banking premises and equipment Proceeds from death benefits from life insurance Insurance proceeds from casualty loss on other real estate 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 3 2 0 1 2 2 0 1 1 $   (538) $ 2,641 $ 1,203 1,750 9,661 670 63 (42) (2) (258) (501) (15) 288 (467) (1,122) 9,487 142,355 (174,074) 795 (4,810) (1,454) 230 1,125 41,613 (840) 19 57 (94) 4,922 (10,888) (36,273) (181) 868,560 (798,788) (54,595) (32,165) (17,756) 54,020 36,264 2,048 4,264 153 21 360 84 (1) (1,364) (573) (197) 600 (211) 7,825 358,404 (337,067) 170 (5,865) 201 36 1,546 (4,794) (235) (91) 12,305 32,110 (24,830) (1,541) 2,246,717 (2,292,128) 36,633 (3,039) 17,091 36,929 54,020 $ 2,210 2,935 711 180 (97) (3) (1,126) (470) (501) 594 4,061 96 9,793 358,538 (341,857) 489 (300) 93 1,921 (27,180) (489) 805 (79) (8,059) 991 (16,691) (925) (193) 500,975 (490,608) 17,499 11,048 12,782 24,147 36,929 $ $ 16 16 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 and director benefit plan liabilities and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income. New Accounting Pronouncements In January 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-01, Balance Sheet (Topic 210), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.  The amendments limit the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, to certain derivative instruments (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending arrangements that are either (1) offset on the balance sheet or (2) subject to an enforceable master netting arrangement or similar agreement. This ASU amends the scope of FASB ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires additional disclosure regarding offsetting of assets and liabilities to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.  The effective date of the amendments coincides with that of ASU 2011-11 (i.e., for fiscal years beginning on or after January 1, 2013, and interim periods within those years). The amendments will be applied retrospectively for all comparative periods presented on the balance sheet.  The adoption of the guidance did not have a material impact on the Company’s financial position, results of operations or disclosures. In February 2013, the FASB issued ASU No. 2013-02, Reporting ofAmounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and by the respective line items of net income. The standard was effective for fiscal years, and interim periods within those years, beginning after  December 15, 2012. This guidance did not have a material impact on the Company’s financial position or results of operations, and resulted in additional disclosures.  In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740), which clarifies the presentation requirements of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and should be applied prospectively. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.  In January 2014, the FASB issued ASU No. 2014-1, Investments – Equity Method and Joint Ventures (Topic 323 ) – Accounting for Investments in Qualified Affordable Housing Projects, which permits an entity to make an accounting policy election to account for their investment in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.  In  January 2014, the FASB issued ASU No. 2014-4,  Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized ConsumerMortgage Loans Upon Foreclosure, which clarifies when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and should be applied prospectively. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.  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 $407,000, $566,000 and $701,000 for the years ending December 31, 2013, 2012 and 2011, 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 consid- ers 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 sales and calls of securities in non-interest income. 17 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 delinquencies and deposit overdrafts are monitored on a weekly basis in order to identify developing problems as early as possible. 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 repay- ment ability, financial condition of the borrower and payment performance. Loans with a grade of D – F, as well as some loans 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 special assets 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 inter- est or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. Accrued interest on loans classified as nonaccrual is reversed at the time the loans are placed on nonaccrual. Interest received on nonaccrual loans is applied against principal. Loans are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The placement of loans on and removal of loans from nonaccrual status must be approved by Management. Loans which become 90 days delinquent are reviewed relative to collectibility. 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 for loan losses. 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. 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 list of credits, which is formulated from the loan grading system. Members of this committee include 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 evaluation 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 evalu- ation is inherently subjective as it requires material estimates that may be susceptible to significant change. The ALL consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component of the allowance relates to loans that are not impaired. Changes to the components of the ALL are recorded as a component of the provision for the allowance 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, 2013. 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 sta- tus 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. 18 When Management determines that a loan is impaired and the loan is collateral-dependent, an evaluation of the fair value of the collateral is performed.  The Company maintains established criteria for assessing whether an existing appraisal continues to reflect the fair value of the property for collateral-dependent loans.  Appraisals are generally considered to be valid for a period of at least twelve months.  However, appraisals that are less than 12 months old may need to be adjusted. Management considers such factors as the property type, property condition, current use of the property, current market conditions and the passage of time when determining the relevance and validity of the most recent appraisal of the property.   If Management determines that the most recent appraisal is no longer valid, a new appraisal is ordered from an independent and qualified appraiser. During the interim period between ordering and receipt of the new appraisal, Management considers if the existing appraisal should be discounted to determine the estimated fair value of collateral. Discounts are applied to the existing appraisal and take into consideration the property type, condition of the property, external market data, internal data, reviews of recently obtained appraisals and evaluations of similar properties, comparable sales of similar properties and tax assessment valuations.   When the new appraisal is received and approved by Management, the valuation stated in the 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 valua- tion allowance is required as a specific component of the allowance for loan losses. Any specific reserves recorded in the interim are adjusted accordingly. The general component of the ALL is the loss estimated by applying historical loss percentages to non-classified loans which have been divided into segments. 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 non-interest 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 non-interest 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. Earnings Per Share Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding, 5,128,889 in 2013 and 5,136,918, in 2012 and 2011. Accumulated Other Comprehensive Income At December 31, 2013, 2012 and 2011, 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 $1,470,945, $2,082,914 and $3,222,385 in 2013, 2012 and 2011, respectively, for interest on deposits and borrowings. Income tax payments totaled $810,000, $835,000 and $755,000 in 2013, 2012 and 2011, respectively. Loans transferred to other real estate amounted to $4,536,710, $2,575,520 and $3,221,510 in 2013, 2012 and 2011, respec- tively. 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 categories based on the inputs used to develop the measurements. The categories establish a hierarchy for ranking the quality and reliability of the information used to determine fair value. 19 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, 2013, 2012 and 2011, respectively, are as follows (in thousands): December 31, 2013 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, 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 Fair Value $     43,648 145,805 50,326 35,011 274,790 650 $    275,440 $   10,686 10,686 $   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 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses $  44,636 155,772 51,454 33,764 285,626 650 $   286,276 $ $ 11,142 11,142 $   $ $ $ 54 734 141 1,248 2,177 2,177 13 13 $ (1,042)   (10,701) (1,269) (1) (13,013) $ (13,013) $   $   (469) (469) 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 $  33 2,220 274 2,163 4,690 $ (18)   (26) (44) $      4,690 $ (44) $        63 $          63 $   $   – – $    $ 1,492 1,492 $ 53,995 176,986 4,727 37,914 273,622 650 $ 274,272 $ $ 1,429 1,429 20 The amortized cost and fair value of debt securities at December 31, 2013, (in thousands) by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for sale securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years 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 Amortized Cost $ $ 16,442 49,769 80,136 87,825 51,454 285,626 $ 664 1,323 6,286 2,869 11,142 $  Fair Value $  16,527 50,052 78,561 79,324 50,326 $ 274,790 $ 671 1,320 6,125 2,570 $  10,686 Available for sale and held to maturity securities with gross unrealized losses at December 31, 2013, 2012 and 2011, 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, 2013: U.S. Treasuries U.S. Government agencies Mortgage-backed securities States and political subdivisions Total Fair Value $ 29,708 113,446 44,269 7,690 195,113 $ $   Gross Unrealized Losses 1,042 10,322 1,269 470 13,103 $ Fair Value $ 2,826 4,621 Gross Unrealized Losses $ 826 379 $ 4,621 $  379 Fair Value $  29,708 118,067 44,269 7,690 $ 199,734 $   Gross Unrealized Losses 1,042 10,701 1,269 470 $  13,482 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 $ At December 31, 2013, 7 of the 11 securities issued by the U.S. Treasury, 25 of the 31 securities issued by U.S. Government agencies, 11 of the 13 mortgage- backed securities and 28 of the 143 securities 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 $26,075,225, $77,605,104 and $60,714,150 during 2013, 2012 and 2011, respectively. Available for sale debt securities were sold and called for realized gains of $257,997, $1,363,802 and $1,126,055 during 2013, 2012 and 2011, respectively. The Company recorded a loss from the impairment of its other investments of $360,000 in 2012. Securities with a fair value of $262,830,011, $241,879,775 and $278,540,119 at December 31, 2013, 2012 and 2011, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law. 21 N O T E C - L O A N S : The composition of the loan portfolio at December 31, 2013, 2012 and 2011 is as follows (in thousands): December 31, Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total 2013 $    29,570 19,403 44,987 237,158 35,007 9,224 $    375,349 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 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 collectibility 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 2011 5,552 123 2,426 (2,420) 5,681 1,647 (1,196) $ 6,761 2012 $ 5,681 2013 $ 6,310 3,755 (3,126) 6,310 $  $ $ 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 $ 2013 29,570 49,842 24,945 $ 2012 60,187 52,776 25,413 2011 $  57,219 46,956 26,171 The age analysis of the loan portfolio, segregated by class of loans, as of December 31, 2013, 2012 and 2011 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 $9,205 $ December 31, 2013: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total $ 2222 51 3,846 6,910 1,192 227 $ 12,226 2,684 5 $2,689 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 $ 2222 $9,205 2,084 13,569 1,536 184 $ 17,373 1,395 2,341 166 23 $3,925 $ 13,623 13,298 14,728 1,192 232 $43,073 $ 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 $ 29,570 5,780 31,689 222,430 33,815 8,992 $332,276 $ 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 $ 29,570 19,403 44,987 237,158 35,007 9,224 $375,349 $ 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 $ ,205 146 505 $ 651 $ ,205 572 872 1 $1,445 $ ,205 376 1,314 142 $1,832 13,572 9,452 5,134 $ 28,158 $ 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 22 The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A - F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. Loans with a grade of C may be placed on the watch list if weaknesses are not resolved which could result in potential loss or for other 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, 2013, 2012 and 2011 is as follows (in thousands): Loans With A Grade Of: December 31, 2013: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Other Total 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 A or B $ 23,975 4,236 38,808 204,569 31,902 9,131 $ 312,621 $ $ 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 C $ 2,500 1,544 781 4,495 682 24 $ 10,026 $ $ 12,300 1,544 1,001 3,093 442 27 18,407 $9 ,756 357 2,862 6,551 40 9,810 $ D $ 9, 5 51 2,220 17,852 2,402 50 $ 22,575 $ $ $ $ 4,108 81 2,701 21,167 2,312 72 30,441 33,077 51 3,695 25,870 3,077 384 33,077 E $ 3,095 13,572 3,178 10,242 21 19 $ 30,127 $ 16,249 21,083 5,566 12,681 214 $ $ 15,402 24,110 6,192 12,170 350 67 58,291 $ 55,793 $ 756 $ $ $ 56 56 $ $ F $9, 5 $ Total $ 29,570 19,403 44,987 237,158 35,007 9,224 $ 375,349 $ 756 $ 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 A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of December 31, 2013, 2012 and 2011 are as follows (in thousands): December 31, Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and Industrial Other Total 2011 $ 15,402 24,110 6,042 11,662 246 131 $ 57,593 2012 $ 16,249 21,083 5,171 11,174 214 2013 $ 1,223 13,572 2,588 8,788 $ 26,171 $ 53,891 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, 2013, 2012 and 2011, were as follows (in thousands except for number of contracts): December 31, 2013: Real estate, construction Real estate, mortgage Commercial and industrial Total 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 Number of Numbers of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Related Allowance 2 6 1 9 3 3 1 7 3 5 1 9 $ 891 10,012 678 $ 11,581 $ 1,095 9,054 702 $10,851 $ 1,075 9,916 706 $11,697 $ 891 10,012 678 $ 11,581 $ 1,095 9,054 702 $10,851 $ 1,075 9,916 706 $11,697 $ 270 994 $1,264 $ 340 957 $1,297 $ 112 809 $ 921 During 2013, the Company classified four additional loans as troubled debt restructurings. The loans are included in the real estate-mortgage segment and had a total balance of $1,652,903 when they were modified. During 2013, two loans which had been classified as troubled debt restructurings at December 31, 2012 became in default of their modified terms and were placed on nonaccrual. These loans included one loan that was included in the real estate-construction segment with a balance of $182,164 and one loan that was included in the real estate-mortgage segment with a balance of $527,677 at December 31, 2012. 23 Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of December 31, 2013, 2012 and 2011 were as follows (in thousands): Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2013: With no related allowance recorded: 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 Total Total by class of loans: Gaming Residential and land development Real estate, construction Real estate, mortgage Commercial and industrial Total 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 $ 4,425 2,294 9,722 678 17,119 1,698 17,576 1,185 9,677 30,136 1,698 22,001 3,479 19,399 678 $47,255 $ 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 $ 4,425 2,294 9,123 678 16,520 1,223 9,147 1,185 9,677 21,232 1,223 13,572 3,479 18,800 678 $37,752 $ 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 24 $0000 626 471 337 1,110 2,544 626 471 337 1,110 $2,544 $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 $4,465 2,054 9,097 689 16,305 1,316 15,909 1,239 8,801 27,265 1,316 20,374 3,293 17,898 689 $43,570 $ 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 $0000 26 26 24 76 23 306 329 49 332 24 $ 405 $0000 23 23 8 319 327 8 319 23 $ 350 $0000 13 13 11 187 198 11 187 13 $ 211 Transactions in the allowance for loan losses for the years ended December 31, 2013, 2012 and 2011, and the balances of loans, individually and collectively evaluated for impairment, as of December 31, 2013, 2012 and 2011 are as follows (in thousands): December 31, 2013: 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, 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 Gaming $ 1,541 (474) 110 (200) $ 977 $ 626 $ 351 $ 3,095 $26,475 $ 457 (275) 1,359 $ 1,541 $ 1,100 $ 441 $ 20,357 $39,830 $ 465 35 (43) 457 $ $ 0 0000 $ 457 $ 15,677 $ 41,542 Residential and Land Development Real Estate, Construction Real Estate, Mortgage Commercial and Industrial Other Total $ 967 (1,013) 97 644 $695 $ 5,273 (1,048) 150 1,178 $5,553 $ 593 (24) 26 37 $632 $ 283 (238) 88 168 $301 $ 8,857 (10,122) 538 9,661 $8,934 $ 615 $ 1,698 $ 342 $ 33 $ 3,785 $ 80 $ 3,855 $ 290 $ 268 $ 5,149 $ 5,399 $ 28,094 $ 2,423 $ 69 $ 52,704 $39,588 $209,064 $32,584 $ 9,155 $322,645 $ 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 $ 200 (7,325) 67 7,834 $776 $ 471 $ 305 $ 13,624 $ 5,779 $ 1,081 (1,103) 222 200 $ $ 200 $ 200 $ 21,165 $ 6,173 $ 1,070 11 1,081 $ $ 900 $ 181 $ 24,110 $ 4,916 25 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 $ 2013 5,982 30,540 15,272 51,794 26,486 $ 25,308 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 The Company’s other real estate consisted of the following as of December 31, 2013, 2012 and 2011, respectively (in thousands): December 31, 2013 2012 2011 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 18 6 17 Balance $4,887 180 4,563 41 $9,630 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 32 $ 6,153 At December 31, 2013, the scheduled maturities of time deposits are as follows (in thousands): 2014 2015 2016 2017 2018 Total $ 78,579 10,183 2,428 7,948 5,298 $ 104,436 Time deposits of $100,000 or more at December 31, 2013 included brokered deposits of $5,000,000, which mature in 2017. Deposits held for related parties amounted to $7,511,446, $8,720,550 and $7,499,805 at December 31, 2013, 2012 and 2011, respectively. Overdrafts totaling $764,262, $1,435,922 and $679,220 were reclassified as loans at December 31, 2013, 2012 and 2011, 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, 2013, the Company had facilities in place to purchase federal funds up to $44,000,000 under established credit arrangements. At December 31, 2013, 2012 and 2011, federal funds purchased and securities sold under agreements to repurchase included only funds invested by customers in a non- deposit product of the bank subsidiary. 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, 2013, the Company was able to borrow up to $32,863,511 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, 2013. At December 31, 2013, the Company had $77,683,716 outstanding in advances under a $85,036,571 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 .599% at December 31, 2013, and matures in 2017. Additional advances in the amounts of $40,000,000, $10,000,000 and $20,000,000 bear interest at .20%, .20% and .16%, respectively, and mature in 2014. 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. 26 N O T E I - I N C O M E T A X E S : Deferred taxes (or deferred charges) as of December 31, 2013, 2012 and 2011, 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 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 2013 2012 2011 $  $  3,037 4,326 3,684 1,638 1,218 13,903 579 5,075 129 5,783 8,120 $  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 $   2,027 $ 348 2013 2012 2011 $ (1,717) $ 1,425 $ 721 (484) (1,517) (1,925) $ (2,201) $ (92) $ (1,204) Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2013, 2012 and 2011 to income (loss) before income taxes. The reasons for these differences are shown below (in thousands): Taxes computed at statutory rate $ (931) 2013 Tax Increase (decrease) resulting from: Tax-exempt interest income Income from BOLI Federal tax credits Death benefits on life insurance Other (539) (170) (298) (263) Total income tax benefit $ (2,201) Rate (34) (20) (6) (11) (9) (80) 2012 Tax $ 867 (532) (195) (372) 140 (92) $ Rate 34 (21) (8) (15) 6 (4) 2011 Tax $ (1) Rate 34 (557) (170) (366) (159)  49 $ (1,204) 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 it will realize the net deferred tax asset and it has not recorded any tax liability for uncertain tax positions as of December 31, 2013, 2012 and 2011. N O T E J - 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, 2013, $25,428,742 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”). 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, 47,756 shares have been repurchased and retired through December 31, 2013. 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 27 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, 2013, 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 notification that Management believes have changed the bank subsidiary’s category. The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2013, 2012 and 2011, are as follows (in thousands): December 31, 2013: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) 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) Amount $ 111,141 105,009 105,009 $ 112,342 105,728 105,728 $ 110,762 104,116 104,116 Actual Ratio 22.79% 21.54% 13.48% 21.29% 20.04% 13.07% 20.86% 19.61% 12.84% For Capital Adequacy Purposes Ratio Amount $39,022 19,511 31,170 $ 42,216 21,108 32,361 $42,475 21,238 32,436 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 2013, 2012 and 2011, are as follows (in thousands): Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well Capitalized Ratio Amount December 31, 2013: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) 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) $ 106,870 100,746 100,746 $ 107,885 101,241 101,241 $ 108,149 101,503 101,503 21.94% 20.69% 13.02% 20.47% 19.22% 12.62% 20.40% 19.15% 12.56% $38,968 19,484 30,958 $ 42,148 21,074 32,086 $ 42,413 21,207 32,332 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% $ 48,711 29,227 38,697 $52,685 31,611 40,108 $ 53,014 31,809 40,407 10.00% 6.00% 5.00% 10.00% 6.00% 5.00% 10.00% 6.00% 5.00% 28 N O T E K - 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 2013 $ 74 433 100 $ 607 2013 $ 596 1,254 870 535 963 2,367 332 1,876 $ 8,793 $ 2012 83 442 142 $ 667 2012 $ 489 1,434 503 511 648 2,033 314 1,813 $ 7,745 201\1 $ 78 392 45 $ 515 2011 $ 506 858 1,688 600 1,350 1,973 331 1,709 $ 9,015 N O T E L - 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, 2013, 2012 and 2011, the Company had outstanding irrevocable letters of credit aggregating $3,059,011, $3,599,011 and $3,094,258, respectively. At December 31, 2013, 2012 and 2011, the Company had outstanding unused loan commitments aggregating $68,171,024, $80,741,699 and $76,421,050, respectively. Approximately $38,324,000, $46,956,000 and $42,051,000 of outstanding commitments were at fixed rates and the remainder was at variable rates at December 31, 2013, 2012 and 2011, respectively. N O T E M - 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. 29 N O T E N - 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 ) : 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 2013 2012 2011 $ 94,883 $ 106,266 $ 104,731 1 487 3,937 1 360 4,288 1 808 4,588 $ 99,308 $ 110,915 $ 110,128 $ 161 161 99,147 $ 99,308 $ 161 161 110,754 $ 110,915 $ 676 676 109,452 $ 110,128 C O N D E N S E D S T A T E M E N T S O F O P E R A T I O N S ( I N T H O U S A N D S ) : Years Ended December 31, Income Earnings of unconsolidated bank subsidiary: Distributed earnings Undistributed earnings (loss) Loss on impairment of other investments Other income Total income Expenses Other Total expenses Income (loss) before income taxes Income tax benefit Net income (loss) 2013 2012 $ (538) (494) 57 (437) 122 122 (559) (21) $    1,150 $ 1,845 (360) (71) 2,564 105 105 2,459 (182) 2011 898 285 110 1,293 95 95 1,198 (5) $ (538) $ 2,641 $ 1,203 30 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 (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: (Income) loss on other investments Loss on impairment of other investments Undistributed (income) loss 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 increase (decrease) in cash Cash, beginning of year Cash, end of year 2013 2012 2011 $ (538) $ 2,641 $ 1,203 (42) 494 164 78 230 230 (181) (181) 127 360 487 $ 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 $ 808 The Company paid income taxes of $810,000, $835,000 and $755,000 in 2013, 2012 and 2011, respectively. No interest was paid during the three years ended December 31, 2013. N O T E O - E M P L O Y E E A N D D I R E C T O R 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 $220,000, $330,000 and $270,000 in 2013, 2012 and 2011, respectively. Compensation expense of $7,594,790, $7,691,059 and $8,426,829 was the basis for determining the ESOP contribution allocation to participants for 2013, 2012 and 2011, respectively. The ESOP held 359,030, 383,141 and 429,158 allocated shares at December 31, 2013, 2012 and 2011, 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 retirement 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 annual 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 $15,824,497, $15,363,241 and $14,833,939 at December 31, 2013, 2012 and 2011, respectively. The present value of accumulated benefits under these plans, using an interest rate of 4.50% in 2013 and 5.25% in 2012 and 2011, and the interest ramp-up method in 2013, 2012 and 2011, has been accrued. The accrual amounted to $11,004,738, $10,572,681 and $9,764,957 at December 31, 2013, 2012 and 2011, 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 $1,218,175, $1,105,741 and $997,133 at December 31, 2013, 2012 and 2011, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.50% in 2013 and 5.25% in 2012 and 2011, and the projected unit cost method has been accrued. The accrual amounted to $1,435,554, $1,328,657, and $1,314,727 at December 31, 2013, 2012 and 2011, respectively, and is included in Employee and director benefit plans liabilities. 31 Additionally, there are two endorsement split dollar policies, with the bank subsidiary as owner and beneficiary, which provide a guaranteed death benefit to the participants’ beneficiaries. These contracts are carried at their cash surrender value, which amounted to $269,271, $262,466 and $255,166 at December 31, 2013, 2012 and 2011, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.50% in 2013, 5.25% in 2012 and 6.00% in 2011, and the projected unit cost method has been accrued. The accrual amounted to $78,759, $68,253 and $78,142 at December 31, 2013, 2012 and 2011, 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 $138,001, $129,367 and $118,787 at December 31, 2013, 2012 and 2011, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.50% in 2013 and 5.25% in 2012 and 2011, and the projected unit cost method has been accrued. The accrual amounted to $206,650, $192,528 and $152,781 at December 31, 2013, 2012 and 2011, respectively, and is included in employee and director benefit plans 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. This 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 insurance coverage for retired employees and any dependent(s), if applicable, while Medicare Parts 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. This amendment reduced the accumulated post-retirement benefit obligation by $3,799,308 as of December 31, 2011. Effective January 1, 2014, the Company amended the retiree health plan. This amendment reduces the age for eligibility to 60 for those employees meeting all other eligibility requirements. This amendment increased the accumulated post-retirement benefit obligation by $1,150,229 as of December 31, 2013. The following is a summary of the components of the net periodic post-retirement benefit cost (credit) (in thousands): Years Ended December 31, Service cost Interest cost Amortization of net gain Amortization of net transition obligation Amortization of prior service cost (credit) Special termination benefit $ 2013 55 82 (2) (183) $ 2012 45 72 (16) (203) $ 2011 293 222 (46) 21 83 459 Net periodic post-retirement benefit cost (credit) $ (48) $ (102) $  1,032 The discount rate used in determining the accumulated post-retirement benefit obligation was 4.80% in 2013, 4.00% in 2012 and 4.50% in 2011. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 7.25% in 2013. 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, 2013, would be increased by 13.26 %, 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 19.18%. If the health care cost trend rate assumptions were decreased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2013, would be decreased by 10.87%, 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 14.91%. The following table presents the estimated benefit payments for each of the next five years and in the aggregate for the next five years (in thousands): 2014 2015 2016 2017 2018 2019 – 2023 $206 222 190 170 144 645 The following is a reconciliation of the accumulated post-retirement benefit obligation, which is included in Other Liabilities (in thousands): Accumulated post-retirement benefit obligation as of December 31, 2012 Service cost Interest cost Actuarial gain Plan changes Benefits paid Accumulated post-retirement benefit obligation as of December 31, 2013 $   1,906 55 82 (250) 1,150 (90) $  2,853 32 The following is a summary of the change in plan assets (in thousands): 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 2013 2012 2011 $  $  90 (90) $ $ 67 (67) $ $ 76 (76) Amounts recognized in the Accumulated Other Comprehensive Income (Loss), net of tax, were (in thousands): For the year ended December 31, 2013 2012 2011 Net gain Prior service charge Total accumulated other comprehensive income $ 288 837 1,125 $ $ 123 1,718 1,841 $ $ 256 1,852 $ 2,108 Amounts recognized in the accumulated post-retirement benefit obligation and other comprehensive income (loss) were (in thousands): For the year ended December 31, Unrecognized actuarial loss Amortization of prior service cost Total accumulated other comprehensive loss 2013 $ (249) 1,334 $ 1,085 The actuarial gain and prior service credit that will be recognized in accumulated other comprehensive income during 2014 are $13,484 and $81,381, respectively. N O T E P - 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 the 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 reliability 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 markets 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 unobservable 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 borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded 33 investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as a non-recurring Level 2 asset. When an appraised value is not available or Management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as a non-recurring Level 3 asset. Other Real Estate In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. When the fair value of the 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 available 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 for 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 fair value of FHLB variable rate borrowings is estimated to be its carrying value. 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, 2013, 2012 and 2011, were as follows (in thousands): December 31, 2013: U.S. Treasuries U.S. Government agencies Mortgage-backed securities States and political subdivisions Equity securities Total 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 Fair Value Measurements Using Level 2 $ 43,648 145,805 50,326 35,011 650 $ 275,440 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 Level 1 $287,078 $287,078 Level 1 $287,078 $287,078 Level 1 $287,078 $287,078 Level 3 $287,078 $287,078 Level 3 $287,078 $287,078 Level 3 $287,078 $287,078 Total $ 43,648 145,805 50,326 35,011 650 $ 275,440 Total $ 54,096 149,098 17,441 37,591 650 258,876 $ Total $ 54,010 179,180 5,001 40,077 650 $ 278,918 34 Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2013, 2012 and 2011 were as follows (in thousands): December 31: 2013 2012 2011 Total $ 18,831 16,030 15,202 Fair Value Measurements Using Level 2 287,07820$ 87,078 87,078 Level 1 $ 7,078 87,078 Level 3 $ 18,831 16,030 15,202 The following table presents a summary of changes in the fair value of impaired loans which are measured using Level 3 inputs (in thousands): 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 2013 16,030 17,424 (15,153) 530 18,831 $ $ 2012 $ 15,202 2,960 (2,086) (46) $ 16,030 2011 $ 2,136 17,101 (1,447) (2,588) $ 15,202 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, 2013, 2012 and 2011 are as follows (in thousands): December 31: 2013 2012 2011 Total $ 9,630 7,008 6,153 Fair Value Measurements Using Level 2 $ Level 1 $ 287,078 Level 3 $ 9,630 7,008 6,153 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 Insurance proceeds from casualty loss Balance, end of year 2013 $ 7,008 4,537 (1,188) (670) (57) $ 9,630 $ 2012 6,153 2,576 (1,568) (153) $ 2011 5,744 3,221 (2,101) (711) $ 7,008 $ 6,153 35 The carrying value and estimated fair value of assets and liabilities, by level within the fair value hierarchy, at December 31, 2013, 2012 and 2011, are as fol- lows (in thousands): December 31,2013: 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 31,2012: 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 Carrying Amount Level 1 Fair Value Measurements Using Level 2 Level 3 $287,078 369,117 9,630 17,456 322,535 $287,078 425,627 7,008 16,861 376,209 $287,078 427,881 6,153 16,197 372,019 $287,078 275,440 10,686 3,834 79,051 $287,078 258,876 7,225 2,380 10,271 $287,078 278,918 1,492 2,581 55,014 $ 36,264 275,440 11,142 3,262 3,834 366,415 9,630 17,456 107,117 321,441 139,639 77,684 $ 54,020 258,876 7,125 3,450 2,380 422,226 7,008 16,861 102,609 373,110 194,234 7,912 $ 36,929 278,918 1,429 3,930 2,581 424,271 6,153 16,197 97,581 370,858 157,601 53,324 $ 36,264 3,262 107,117 139,639 $ 54,020 3,450 102,609 194,234 $ 36,929 3,930 97,581 157,601 36 Total $ 36,264 275,440 10,686 3,262 3,834 369,117 9,630 17,456 107,117 322,535 139,639 79,051 $ 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 16,197 97,581 372,019 157,601 55,014 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, 2013, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), 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, 2013, 2012 and 2011, 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, 2014 37 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 (loss) before taxes Applicable income taxes Net income (loss) Per Share Data 2013 2012 2011 2010 2009 $    762,264 $    804,912 $    804,152 $   786,545 $   869,007 275,440 11,142 375,349 428,558 77,684 99,147 258,875 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 $   24,956 $   24,628 $   25,033 $  29,675 $   34,289 1,447 23,509 9,661 13,848 9,067 25,654 (2,739) (2,201) 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 $ (538) $ 2,641 $ 1,203 $  1,485 $ 3,220 Basic and diluted earnings (loss) per share $ (.10) $   Dividends per share Book value Weighted average number of shares Selected Ratios Return on average assets Return on average equity Primary capital to average assets Risk-based capital ratios: Tier 1 Total 19.35 5,128,889 (.07)% (.51)% 13.64% 21.54% 22.79% $   .29 .20 19.68 5,151,661 $  .62 .50 20.11 5,170,430 .18% 1.45% 12.96% 21.01% 22.26% .36% 3.06% 12.49% 17.83% 19.08% .51 .20 21.56 $   .23 .19 21.31 5,136,918 5,136,918 .32% 2.40% 14.71% 20.04% 21.29% .15% 1.14% 14.59% 19.61% 20.86% 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 Summary of Quarterly Results of Operations (In Thousands Except per Share Data): Quarter Ended, 2013 Interest income Net interest income Provision for loan losses Income (loss) before income taxes Net income (loss) Basic and diluted earnings (loss) per share March 31 $   5,854 5,447 539 617 606 .12 Quarter Ended, 2012 Interest income Net interest income Provision for loan losses Income before income taxes Net income Basic and diluted earnings per share March 31 $   6,193 5,589 540 415 505 .10 June 30 $   5,750 5,352 3,538 (1,989) (1,147) (0.23) June 30 $   6,273 5,697 1,290 505 562 .11 $ September 30 5,805 5,431 542 781 886 .18 September 30 $ 6,081 5,622 541 800 750 .14 $ December 31 7,547 7,279 5,042 (2,148) (883) (.17) $ December 31 6,081 5,653 1,893 829 824 .16 Market Information 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 2013 Dividend per share $     . Quarter 1st 2nd 3rd 4th High $  12.75 13.44 13.14 13.24 Low $   9.27 12.02 11.17 11.53 2012 1st 2nd 3rd 4th $  11.95 9.98 11.79 9.46 $   9.39 8.61 8.16 8.36 $     .10 .10 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, 2009, 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. 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 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 40 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 Keesler AFB Office 1507 Meadows Drive Keesler AFB, MS 39534 (228) 435-8690 West Biloxi Office 2560 Pass Road, Biloxi, Mississippi 39531 (228) 435-8203 Gulfport Branches Downtown Gulfport Office Gautier Office 2609 Highway 90, Gautier, Mississippi 39553 (228) 497-1766 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 1105 30th Avenue, Gulfport, Mississippi 39501 Pass Christian Office (228) 897-8715 Handsboro Office 301 East Second Street, Pass Christian, Mississippi 39571 (228) 897-8719 0412 E. Pass Road, Gulfport, Mississippi 39507 Saucier Office (228) 897-8717 Orange Grove Office 17689 Second Street, Saucier, Mississippi 39574 (228) 897-8716 12020 Highway 49 North, Gulfport, Mississippi 39503 Waveland Office (228) 897-8718 470 Highway 90, Waveland, Mississippi 39576 (228) 467-7257 Wiggins Office 1312 S. Magnolia Drive, Wiggins, Mississippi 39577 (228) 897-8722 41 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 Home, 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 Home, 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 42 

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