10-K 1 d444010d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012          Commission File Number 001-12103

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Mississippi

   

          64-0709834

(State or other jurisdiction of incorporation or organization)

    (I.R.S. Employer Identification Number)

Lameuse and Howard Avenues, Biloxi, Mississippi 39533

   

                                         228-435-5511

(Address of principal executive offices) (Zip code)

    (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

 

   

Title of Each Class

     

Name of Each Exchange on

Which Registered

   
    None       None    

Securities registered pursuant to Section 12 (g) of the Act:

                                                           Common, $1.00 Par Value                        

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES         NO   X  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES          NO   X  

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   X   NO        

Indicate by check mark whether the registrant has submitted electronically and posted on its web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   X   No         

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.   X  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer                          Accelerated filer                          Non-Accelerated filer                        Smaller reporting company   X  

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES          NO   X  

At June 30, 2012, the aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $40,469,000.

On February 22, 2013, the registrant had outstanding 5,136,918 shares of common stock, par value of $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement issued in connection with the Annual Meeting of Shareholders to be held April 16, 2013, are incorporated by reference into Part III of this report.


Table of Contents

Peoples Financial Corporation

Form 10-K

Index

 

PART I

     

Item 1.

   BUSINESS    3

Item 1A.

   RISK FACTORS    29

Item 1B.

   UNRESOLVED STAFF COMMENTS    33

Item 2.

   PROPERTIES    33

Item 3.

   LEGAL PROCEEDINGS    34

Item 4.

   MINE SAFETY DISCLOSURES    34

PART II

     

Item 5.

   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES    34

Item 6.

   SELECTED FINANCIAL DATA    35

Item 7.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    35

Item 7A.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    50

Item 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA    53

Item 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
   107

Item 9A.

   CONTROLS AND PROCEDURES    107

Item 9B.

   OTHER INFORMATION    108

Part III

     

Item 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    108

Item 11.

   EXECUTIVE COMPENSATION    108

Item 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS    108

Item 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE    109

Item 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES    109

PART IV

     

Item 15.

   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES    109

 

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PART I

ITEM 1 - DESCRIPTION OF BUSINESS

BACKGROUND AND CURRENT OPERATIONS

General

Peoples Financial Corporation (the “Company”) was organized as a one bank holding company in 1984. The Company is headquartered in Biloxi, Mississippi. At December 31, 2012, the Company operated in the state of Mississippi through its wholly-owned subsidiary, The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Company is engaged, through this subsidiary, in the banking business. The Bank is the Company’s principal asset and primary source of revenue.

The Main Office, operations center and asset management and trust services of the Bank are located in downtown Biloxi, MS. At December 31, 2012, the Bank also had 15 branches located throughout Harrison, Hancock, Jackson and Stone Counties. The Bank has automated teller machines (“ATM”) at its Main Office, all branch locations and at numerous non-proprietary locations.

The Bank Subsidiary

The Company’s wholly-owned bank subsidiary is The Peoples Bank, which was originally chartered in 1896 in Biloxi, Mississippi. The Bank is a state chartered bank whose deposits are insured under the Federal Deposit Insurance Act. The Bank is not a member of the Federal Reserve System. The legal name of the Bank was changed to The Peoples Bank, Biloxi, Mississippi, during 1991.

Most of the Bank’s business originates from the trade area of Harrison, Hancock, Stone and Jackson Counties in Mississippi; however, some business is obtained from other counties in southern Mississippi.

Nonbank Subsidiary

In 1985, PFC Service Corp. (“PFC”) was chartered and began operations as the second wholly-owned subsidiary of Peoples Financial Corporation. The purpose of PFC was principally the leasing of automobiles and equipment. PFC is inactive at this time.

Products And Services

The Bank currently offers a variety of services to individuals and small to middle market businesses within its trade area. The Company’s trade area 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.

The Bank’s primary lending focus is to offer business, commercial, real estate, construction, personal and installment loans, with an emphasis on commercial lending. The Bank’s exposure for out of area, land, development, construction and commercial real estate loans as well as concentrations in the hotel/motel and gaming industries are monitored by the Company. Each loan officer has board

 

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approved lending limits on the principal amount of secured and unsecured loans that can be approved for a single borrower without prior approval of the loan committee. All loans, however, must meet the credit underwriting standards and loan policies of the Bank.

Deposit services include interest bearing and non-interest bearing checking accounts, savings accounts, certificates of deposit, and IRA accounts. The Bank also offers a non-deposit funds management account, which is not insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank generally provides depository accounts to individuals and small and middle market businesses in its trade area at interest rates consistent with market conditions.

The Bank’s Asset Management and Trust Services Department offers personal trust, agencies and estate services, including living and testamentary trusts, executorships, guardianships, and conservatorships. Benefit accounts maintained by the Department primarily include self-directed individual retirement accounts. Escrow management, stock transfer and bond paying agency accounts are available to corporate customers.

The Bank also offers a variety of other services including safe deposit box rental, wire transfer services, night drop facilities, collection services, cash management and Internet banking. The Bank has 51 ATMs at its branch locations and other off-site, non-proprietary locations, providing bank customers access to their depository accounts. The Bank is a member of the PULSE network.

There has been no significant change in the kind of services offered by the Bank during the last three fiscal years.

Customers

The Bank has a large number of customers acquired over a period of many years and is not dependent upon a single customer or upon a few customers. The Bank also provides services to customers representing a wide variety of industries including seafood, retail, hospitality, hotel/motel, gaming and construction. While the Company has pursued external growth strategies on a limited basis, its primary focus has been on internal growth by the Bank through the establishment of new branch locations and an emphasis on strong customer relationships.

Employees

At December 31, 2012, the Bank employed 171 full-time employees and 11 part-time employees. The Company has no employees who are not employees of the bank subsidiary. Through the Bank, employees receive salaries and benefits, which include 401(k), ESOP, cafeteria plan, life, health and disability insurance. The Company considers its relationship with its employees to be good.

Competition

The Bank is in direct competition with numerous local and regional commercial banks as well as other non-bank institutions. Interest rates paid and charged on deposits and loans are the primary competitive factors within the Bank’s trade area. The Bank also competes for deposits and loans with insurance companies, finance companies, brokerage houses and credit unions. The principal competitive factors in the markets for deposits and loans are interest rates paid and charged. The

 

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Company also competes through efficiency, quality of customer service, the range of services and products it provides, the convenience of its branch and ATM locations and the accessibility of its staff. The Bank intends to continue its strategy of being a local, community bank offering traditional bank services and providing quality service in its local trade area.

Miscellaneous

The Bank holds no patents, licenses (other than licenses required to be obtained from appropriate bank regulatory agencies), franchises or concessions.

The Bank has not engaged in any research activities relating to the development of new services or the improvement of existing services except in the normal course of its business activities. The Bank presently has no plans for any new line of business requiring the investment of a material amount of total assets.

Available Information

The Company maintains an internet website at www.thepeoples.com. The Company’s Annual Report to Shareholders is available on the Company’s website. Also available through the website is a link to the Company’s filings with the Securities and Exchange Commission (“SEC”). Information on the Company’s website is not incorporated into this Annual Report on Form 10-K or the Company’s other securities filings and is not part of them.

REGULATION AND SUPERVISION

Bank Holding Company

The Company is required to file certain reports with, and otherwise comply with the rules and regulations of, the SEC under federal securities laws. The common stock of the Company is listed on the NASDAQ capital market exchange, such listing subjecting the Company to compliance with the exchange’s requirements with respect to reporting and other rules and regulations.

The Company is a registered one bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to extensive regulation by the Board of Governors of the Federal Reserve System. As such, the Company is required to file periodic reports and additional information required by the Federal Reserve. The Federal Reserve Board may also make examinations of the Company and its subsidiaries.

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board 1) before it may acquire substantially all the assets of any bank or ownership or control of any voting shares of any bank if, after the acquisition, it would own or control, directly or indirectly, more than 5 percent of the voting shares of the bank, 2) before it or any of its subsidiaries other than a bank may acquire all of the assets of a bank, 3) before it may merge with any other bank holding company or 4) before it may engage in permissible non-banking activities.

 

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A bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of, voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve to be so closely related to banking or the managing or controlling of banks as to be a proper incident thereto. Some of the activities the Federal Reserve Board has determined by regulation to be closely related to banking are the making and servicing of loans; performing certain bookkeeping or data processing services; acting as fiduciary or investment or financial advisor; making equity or debt investments in corporations or projects designed primarily to promote community welfare; and leasing transactions if the functional equivalent of an extension of credit and mortgage banking or brokerage. The Bank Holding Company Act does not place territorial limitations on permissible bank-related activities of bank holding companies. Despite prior approval, however, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or its control of any subsidiary when it has reasonable cause to believe that continuation of such activity or control of such subsidiary constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

A bank holding company and its subsidiaries are also prohibited from acquiring any voting shares of or interest in, any banks located outside the state in which the operations of the bank holding company’s subsidiaries are located, unless the acquisition is specially authorized by the statute of the state in which the target is located. Mississippi has enacted legislation which authorizes interstate acquisitions of banking organizations by bank holding companies outside of Mississippi, and also interstate branching transactions, subject to certain conditions and restrictions.

The Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) allows bank holding companies to engage in a wider range of financial activities. In order to engage in such activities, which, among others, include underwriting and selling insurance; providing financial, investment or economic advisory services; and underwriting, dealing in or making a market in securities, a bank holding company must elect to become a financial holding company. The Financial Services Modernization Act also authorized the establishment of financial subsidiaries in order to engage in such financial activities, with certain limitations.

The Financial Services Modernization Act also contains a number of other provisions affecting the Company’s operations. One of the most important provisions relates to the issue of privacy as federal banking regulators were authorized to adopt rules designed to protect the financial privacy of consumers. These rules implemented notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about consumers to non-affiliated third parties.

As of the date of this Annual Report on Form 10-K, the Company has not taken any action to adopt either the financial holding company or the financial subsidiary structures that were authorized by the Financial Services Modernization Act.

The Federal Reserve has adopted capital adequacy guidelines for use in its examination and regulation of bank holding companies. The regulatory capital of a bank holding company under applicable federal capital adequacy guidelines is particularly important in the Federal Reserve’s

 

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evaluation of a holding company and any applications by the bank holding company to the Federal Reserve. A financial institution’s failure to meet minimum regulatory capital standards can lead to other penalties, including termination of deposit insurance or appointment of a conservator or receiver for the financial institution. Risk-based capital ratios are the primary measure of regulatory capital presently applicable to bank holding companies. Risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets.

The Federal Reserve rates bank holding companies by a component and composite 1 - 5 rating system. This system is designed to help identify institutions which require special attention. Financial institutions are assigned ratings in the areas of capital adequacy, asset quality, management capability, the quality and level of earnings, the adequacy of liquidity and sensitivity to interest rate fluctuations based on the evaluation of the financial condition and operations.

The Company is a legal entity separate and distinct from the Bank. There are various restrictions that limit the ability of the Bank to finance, pay dividends or otherwise supply funds to the Company. In addition, the Bank is subject to certain restrictions on any extension of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities thereof and on the taking of such stock or securities as collateral for loans to any borrower. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with extensions of credit, leases or sale of property or furnishing of services.

Bank Subsidiary

The Bank is subject to the regulation of and examination by the Mississippi Department of Banking and Consumer Finance (“Department of Banking”) and the FDIC. Areas subject to regulation include required reserves, investments, loans, mergers, branching, issuance of securities, payment of dividends, capital adequacy, management practices and other areas of banking operations. These regulatory authorities examine such areas as loan and investment quality, management practices, procedures and practices and other aspects of operations. In addition to these regular examinations, the Bank must furnish periodic reports to its regulatory authorities containing a full and accurate statement of affairs. The Bank is subject to deposit insurance assessments by the FDIC and assessments by the Department of Banking to provide operating funds for that agency.

The Bank is a member of the FDIC, and its deposits are insured by law by the Bank Insurance Fund (“BIF”). On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) was enacted. The Federal Deposit Insurance Act, as amended by Section 302 of FDICIA, calls for risk-related deposit insurance assessment rates. This risk classification of an institution will determine its deposit insurance premium. Assignment to one of the three capital groups, coupled with assignment to one of three supervisory sub-groups, determines which of the nine risk classifications is appropriate for an institution.

In general, FDICIA subjects banks and bank holding companies to significantly increased regulation and supervision. FDICIA increased the borrowing authority of the FDIC in order to recapitalize the

 

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BIF, and the future borrowings are to be repaid by increased assessments on FDIC member banks. Other significant provisions of FDICIA require a new regulatory emphasis linking supervision to bank capital levels. Also, federal banking regulators are required to take prompt corrective regulatory action with respect to depository institutions that fall below specified capital levels and to draft non-capital regulatory measures to assure bank safety.

FDICIA further requires regulators to perform annual on-site bank examinations, places limits on real estate lending and tightens audit requirements. FDICIA eliminated the “too big to fail” doctrine, which protects uninsured deposits of large banks, and restricts the ability of undercapitalized banks to obtain extended loans from the Federal Reserve Board discount window. FDICIA also imposed new disclosure requirements relating to fees charged and interest paid on checking and deposit accounts. Most of the significant changes brought about by FDICIA required new regulations.

In addition to regulating capital, the FDIC has broad authority to prevent the development or continuance of unsafe or unsound banking practices. Pursuant to this authority, the FDIC has adopted regulations that restrict preferential loans and loan amounts to “affiliates” and “insiders” of banks, require banks to keep information on loans to major stockholders and executive officers and bar certain director and officer interlocks between financial institutions. The FDIC is also authorized to approve mergers, consolidations and assumption of deposit liability transactions between insured banks and between insured banks and uninsured banks or institutions to prevent capital or surplus diminution in such transactions where the resulting, continuing or assumed bank is an insured nonmember state bank.

Although the Bank is not a member of the Federal Reserve System, it is subject to Federal Reserve regulations that require the Bank to maintain reserves against transaction accounts, primarily checking accounts. Because reserves generally must be maintained in cash or in non-interest bearing accounts, the effect of the reserve requirement is to increase the cost of funds for the Bank.

The earnings of commercial banks and bank holding companies are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities, including the Federal Reserve Board. In particular, the Federal Reserve Board regulates money and credit conditions, and interest rates, primarily through open market operations in U. S. Government securities, varying the discount rate of member and nonmember bank borrowing, setting reserve requirements against bank deposits and regulating interest rates payable by banks on certain deposits. These policies influence to a varying extent the overall growth and distribution of bank loans, investments, deposits and the interest rates charged on loans. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted to restore liquidity and stability to the financial system. The Troubled Asset Relief Program (“TARP”) is one of the provisions of EESA. The Company did not participate in TARP. EESA also temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor and will be in effect through December 31, 2013.

 

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The most recent legislation to potentially impact the Bank is the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was passed in 2010. Dodd-Frank increases the supervisory authority of the Federal Reserve Board, creates a new Financial Services Oversight Council, creates a new process to liquidate failed financial firms, creates an independent Bureau of Consumer Financial Protection, implements comprehensive regulation of over-the-counter derivatives, established a Federal Insurance Office and increases transparency and accountability for credit rating agencies. Final rules are still be drafted, so the Company continues to monitor developments to ensure it is compliant with Dodd-Frank.

Additional information relating to regulation and supervision is disclosed in “Regulatory Matters” which can be found in Item 7 in this Annual Report on Form 10-K.

Summary

The foregoing is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. It is not intended to be an exhaustive discussion of all the statutes and regulations having an impact on the operations of the Company or the Bank. Additional legislation may be enacted at the federal or state level which may alter the structure, regulation and competitive relationships of financial institutions. It cannot be predicted whether and, in what form, any of these proposals will be adopted or the extent to which the business of the Company or the Bank may be affected thereby.

SUPPLEMENTAL STATISTICAL INFORMATION

Schedules I-A through VII present certain statistical information regarding the Company. This information is not audited and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements found in Item 8 of this Annual Report on Form 10-K.

Distribution of Assets, Liabilities and Shareholders’ Equity and Interest Rates and Differentials

Net Interest Income, the difference between Interest Income and Interest Expense, is the most significant component of the Company’s earnings. For interest analytical purposes, Management adjusts Net Interest Income to a “taxable equivalent” basis using a Federal Income Tax rate of 34% in 2012, 2011 and 2010 on tax-exempt items (primarily interest on municipal securities).

Another significant statistic in the analysis of Net Interest Income is the effective interest differential, also called the net yield on earning assets. The net margin is the difference between the rate of interest earned on earning assets and the effective rate paid for all funds, non-interest bearing as well as interest bearing. Since a portion of the Bank’s deposits do not bear interest, such as demand deposits, the rate paid for all funds is lower than the rate on interest bearing liabilities alone.

 

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Recognizing the importance of interest differential to total earnings, Management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional and area economic conditions, including the level of credit demand and interest rates, there are significant opportunities to influence interest differential through appropriate loan and investment policies which are designed to maximize the differential while maintaining sufficient liquidity and availability of incremental funds for purposes of meeting existing commitments and investment in lending and investment opportunities that may arise.

The information included in Schedule I-F presents the change in interest income and interest expense along with the reason(s) for these changes. The change attributable to volume is computed as the change in volume times the old rate. The change attributable to rate is computed as the change in rate times the old volume. The change in rate/volume is computed as the change in rate times the change in volume.

Credit Risk Management and Loan Loss Experience

In the normal course of business, the Bank assumes risks in extending credit. The Bank manages these risks through its lending policies, credit underwriting analysis, appraisal requirements, concentration and exposure limits, loan review procedures and the diversification of its loan portfolio. Although it is not possible to predict loan losses with complete accuracy, Management constantly reviews the characteristics of the loan portfolio to determine its overall risk profile and quality.

Constant attention to the quality of the loan portfolio is achieved by the loan review process. Throughout this ongoing process, Management is advised of the condition of individual loans and of the quality profile of the entire loan portfolio. Any loan or portion thereof which is classified “loss” by regulatory examiners or which is determined by Management to be uncollectible because of such factors as the borrower’s failure to pay interest or principal, the borrower’s financial condition, economic conditions in the borrower’s industry or the inadequacy of underlying collateral, is charged-off.

Provisions are charged to operating expense based upon historical loss experience, and additional amounts are provided when, in the opinion of Management, such provisions are not adequate based upon the current factors affecting loan collectibility.

The allocation of the allowance for loan losses by loan category is based on the factors mentioned in the preceding paragraphs. Accordingly, since all of these factors are subject to change, the allocation is not necessarily indicative of the breakdown of future losses.

Further information concerning the provision for loan losses and the allowance for loan losses is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K and in “Note A - Business and Summary of Significant Accounting Policies” to the 2012 Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

 

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Return on Equity and Assets

The Company’s results and key ratios for 2008 – 2012 are summarized in the “Selected Financial Data” in Item 6 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.

The Company’s dividend payout ratio for the years ended December 31, 2012, 2011 and 2010, was as follows:

 

                                                              
For the Years Ended December 31,    2012   2011   2010
   39%   83%   69%

 

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SCHEDULE I-A

Distribution of Average Assets, Liabilities and Shareholders’ Equity (1) (In thousands)

 

For the Years Ended December 31,    2012      2011      2010  

ASSETS:

        

Cash and due from banks

     $ 31,307       $ 31,686       $ 32,221     

Available for sale securities:

        

Taxable securities

     264,248         269,401         264,927     

Non-taxable securities

     39,407         39,941         40,581     

Other securities

     3,856         2,868         4,379     

Held to maturity securities:

        

Non-taxable securities

     4,698         1,882         2,938     

Other investments

     3,450         3,843         3,926     

Net loans (2)

     422,495         398,351         428,146     

Federal funds sold

     6,601         2,857         4,842     

Other assets

     56,708         61,215         58,446     
  

 

 

 

TOTAL ASSETS

     $         832,770       $         812,044       $         840,406     
  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

        

Non-interest bearing deposits

     $ 102,383       $ 100,854       $ 103,240     

Interest bearing deposits

     380,389         395,713         408,249     
  

 

 

 

Total deposits

     482,772         496,567         511,489     

Federal funds purchased and securities sold under agreements to repurchase

     169,352         154,423         152,000     

Other liabilities

     70,164         56,840         70,044     
  

 

 

 

Total liabilities

     722,288         707,830         733,533     

Shareholders’ equity

     110,482         104,214         106,873     
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     $ 832,770       $ 812,044       $ 840,406     
  

 

 

 

(1) All averages are computed on a daily basis.

(2) Gross loans and discounts, net of unearned income and allowance for loan losses.

 

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SCHEDULE I-B

Average (1) Amount Outstanding for Major Categories of Interest Earning Assets

And Interest Bearing Liabilities (In thousands)

 

For the Years Ended December 31,    2012      2011      2010  

INTEREST EARNING ASSETS:

        

Loans (2)

     $ 430,205       $ 405,367       $ 436,393     

Federal funds sold

     6,601         2,857         4,842     

Available for sale securities:

        

Taxable securities

     264,248         269,401         264,927     

Non-taxable securities

     39,407         39,941         40,581     

Other securities

     3,856         2,868         4,379     

Held to maturity securities:

        

Non-taxable securities

     4,698         1,882         2,938     
  

 

 

 

TOTAL INTEREST EARNING ASSETS

     $             749,015       $             722,316       $             754,060     
  

 

 

 

INTEREST BEARING LIABILITIES:

        

Savings and negotiable interest bearing DDA

     $ 230,829       $ 226,097       $ 217,531     

Time deposits

     149,560         169,617         190,718     

Federal funds purchased and securities sold under agreements to repurchase

     169,352         154,423         152,000     

Borrowings from FHLB

     54,188         37,825         52,908     
  

 

 

 

TOTAL INTEREST BEARING LIABILITIES

     $ 603,929       $ 587,962       $ 613,157     
  

 

 

 

(1) All averages are computed on a daily basis.

(2) Net of unearned income. Includes nonaccrual loans.

 

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SCHEDULE I-C

Interest Earned or Paid on Major Categories of Interest Earning Assets

And Interest Bearing Liabilities (In thousands)

 

For the Years Ended December 31,    2012      2011      2010  

INTEREST EARNED ON:

        

Loans (1)

     $ 18,576       $ 17,923       $ 19,687     

Federal funds sold

     16         7         15     

Available for sale securities:

        

Taxable securities

     4,527         5,662         8,589     

Non-taxable securities

     2,073         2,041         1,903     

Other securities

     15         23         26     

Held to maturity securities:

        

Non-taxable securities

     189         107         154     
  

 

 

 

TOTAL INTEREST EARNED (1)

     $             25,396       $             25,763       $             30,374     
  

 

 

 

INTEREST PAID ON:

        

Savings and negotiable interest bearing DDA

     $ 410       $ 819       $ 1,084     

Time deposits

     1,090         1,535         2,173     

Federal funds purchased and securities sold under agreements to repurchase

     335         638         991     

Borrowings from FHLB

     233         186         352     
  

 

 

 

TOTAL INTEREST PAID

     $ 2,068       $ 3,178       $ 4,600     
  

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% for 2012, 2011 and 2010.

 

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SCHEDULE I-D

Average Interest Rate Earned or Paid for Major Categories of

Interest Earning Assets And Interest Bearing Liabilities

 

For the Years Ended December 31,    2012     2011     2010  

AVERAGE RATE EARNED ON:

      

Loans

     4.32     4.42     4.51%   

Federal funds sold

     .24     .25     .31%   

Available for sale securities:

      

Taxable securities

     1.71     2.10     3.24%   

Non-taxable securities

     5.26     5.11     4.69%   

Other securities

     .39     .80     .59%   

Held to maturity securities:

      

Non-taxable securities

     4.02     5.69     5.24%   
  

 

 

 

TOTAL (weighted average rate)(1)

                 3.39                 3.57                 4.03%   
  

 

 

 

AVERAGE RATE PAID ON:

      

Savings and negotiable interest bearing DDA

     .18     .36     .50%   

Time deposits

     .73     .90     1.14%   

Federal funds purchased and securities sold under agreements to repurchase

     .20     .41     .65%   

Borrowings from FHLB

     .43     .49     .65%   
  

 

 

 

TOTAL (weighted average rate)

     .34     .54     .75%   
  

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% for 2012, 2011 and 2010.

 

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SCHEDULE I-E

Net Interest Earnings and Net Yield on Interest Earning Assets

(In thousands, except percentages)

 

For the Years Ended December 31,    2012     2011     2010  

Total interest income (1)

     $ 25,396      $ 25,763      $ 30,374    

Total interest expense

     2,068        3,178        4,600    
  

 

 

 

Net interest earnings

     $             23,328      $             22,585      $             25,774    
  

 

 

 

Net margin on interest earning assets

     3.11     3.13     3.42%   
  

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% for 2012, 2011 and 2010.

 

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SCHEDULE I-F

Analysis of Changes in Interest Income and Interest Expense

(In thousands)

 

For the Years Ended December 31,    2012      2011      Increase
(Decrease)
    Volume     Rate     Rate/Volume  

INTEREST EARNED ON:

              

Loans (1)(2)

     $ 18,576       $ 17,923       $ 653      $ 1,098      $ (420   $ (25)     

Federal funds sold

     16         7         9        9        (1     1     

Available for sale securities:

              

Taxable securities

     4,527         5,662         (1,135     (108     (1,047     20     

Non-taxable securities

     2,073         2,041         32        (27     60        (1)     

Other securities

     15         23         (8     8        (12     (4)     

Held to maturity securities:

              

Non-taxable securities

     189         107         82        160        (31     (47)     
  

 

 

 

TOTAL INTEREST EARNED (3)

     $         25,396       $         25,763       $         (367   $         1,140      $         (1,451   $       (56)     
  

 

 

 

INTEREST PAID ON:

              

Savings and negotiable interest bearing DDA

     $ 410       $ 819       $ (409   $ 17      $ (419   $ (7)     

Time deposits

     1,090         1,535         (445     (182     (299     36     

Federal funds purchased and securities sold under agreements to repurchase

     335         638         (303     62        (333     (32)     

Borrowings from FHLB

     233         186         47        80        (23     (10)     
  

 

 

 

TOTAL INTEREST PAID

     $ 2,068       $ 3,178       $ (1,110   $ (23   $ (1,074   $ (13)     
  

 

 

 

(1) Loan fees of $797 and $647 for 2012 and 2011, respectively, are included in these figures.

(2) Includes interest on nonaccrual loans.

(3) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% for 2012 and 2011.

 

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SCHEDULE I-F (continued)

Analysis of Changes in Interest Income and Interest Expense

(In thousands)

 

For the Years Ended December 31,    2011      2010      Increase
(Decrease)
    Volume     Rate     Rate/Volume  

INTEREST EARNED ON:

              

Loans (1)(2)

     $ 17,923       $ 19,687       $ (1,764   $ (1,399   $ (392   $ 27     

Federal funds sold

     7         15         (8     (6     (3     1     

Available for sale securities:

              

Taxable securities

     5,662         8,589         (2,927     145        (3,021     (51)     

Non-taxable securities

     2,041         1,903         138        (30     171        (3)     

Other securities

     23         26         (3     9        (9     (3)     

Held to maturity securities:

              

Non-taxable securities

     107         154         (47     (55     13        (5)     
  

 

 

 

TOTAL INTEREST EARNED (3)

     $         25,763       $         30,374       $         (4,611   $         (1,336   $         (3,241   $         (34)     
  

 

 

 

INTEREST PAID ON:

              

Savings and negotiable interest bearing DDA

     $ 819       $ 1,084       $ (265   $ 43      $ (296   $ (12)     

Time deposits

     1,535         2,173         (638     (240     (447     49     

Federal funds purchased and securities sold under agreements to repurchase

     638         991         (353     16        (363     (6)     

Borrowings from FHLB

     186         352         (166     (100     (92     26     
  

 

 

 

TOTAL INTEREST PAID

     $ 3,178       $ 4,600       $ (1,422   $ (281   $ (1,198   $ 57     
  

 

 

 

(1) Loan fees of $647 and $611 for 2011 and 2010, respectively, are included in these figures.

(2) Includes interest on nonaccrual loans.

(3) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% for 2011 and 2010.

 

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SCHEDULE II-A

Book Value of Securities Portfolio

(In thousands)

 

 December 31,    2012      2011      2010   

 

 

 Available for sale securities:

        

 U.S. Treasuries, U.S. Government
agencies and Mortgage-backed securities

     $     220,635         $     238,191         $     245,105     

 States and political subdivisions

     37,591           40,077           41,323     

 Other securities

     650           650           650     
  

 

 

 

 Total

     $ 258,876         $ 278,918         $ 287,078     
  

 

 

 

 Held to maturity securities:

        

 States and political subdivisions

     $ 7,125         $ 1,429         $ 1,915     
  

 

 

 

 Total

     $ 7,125         $ 1,429         $ 1,915     
  

 

 

 

 

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SCHEDULE II-B

Maturity Securities Portfolio at December 31, 2012

And Weighted Average Yields of Such Securities

 

     Maturity (In thousands, except percentage data)  
          
 
After one year but
within five years
  
  
    
 
After five years but
within ten years
  
  
     After ten years       
     Within one year            
  

 

 

 
December 31, 2012      Amount         Yield         Amount         Yield         Amount         Yield         Amount         Yield     

 

 

Available for sale securities:

                       

U.S. Treasuries, U.S. Government agencies and Mortgage-backed securities

     $     5,004         .28%       $     50,585         1.23%       $ 92,124         1.96%       $ 72,922         2.23%     

States and political subdivisions

     1,392         4.01%         9,362         3.56%         17,963         3.67%         8,874         3.89%     

Other securities

                       650         2.00%     
  

 

 

 

Total

     $ 6,396         3.26%       $ 59,947         2.04%       $   110,087         2.43%       $ 82,446         2.71%     
  

 

 

 

Held to maturity securities:

                       

States and political subdivisions

     $ 795         3.58%       $ 750         3.91%       $ 1,677         2.05%       $ 3,903         2.35%     
  

 

 

 

Total

     $ 795         3.58%       $ 750         3.91%       $ 1,677         2.05%       $ 3,903         2.35%     
  

 

 

 

Note: The weighted average yields are calculated on the basis of cost. Average yields on investments in states and political subdivisions are based on their contractual yield. Available for sale securities are stated at fair value and held to maturity securities are stated at amortized cost.

 

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SCHEDULE III-A

Loan Portfolio

Loans by Type Outstanding (1) (In thousands)

 

December 31,

     2012         2011         2010         2009         2008   

 

 

Gaming

     $ 60,187        $ 57,219        $ 44,343        $ 69,938        $ 79,510     

Residential and land development

     27,338          29,026          30,064          35,329          36,571     

Real estate, construction

     52,586          61,042          60,983          59,132          81,884     

Real estate, mortgage

     246,420          238,411          222,577          241,601          223,325     

Commercial and industrial

     35,004          33,950          36,464          40,114          30,935     

Other

     9,548          12,759          15,468          18,862          15,152     
  

 

 

 

Total

     $     431,083       $     432,407       $     409,899       $     464,976       $     467,377     
  

 

 

 

(1) No foreign debt outstanding.

 

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SCHEDULE III-B

Maturities and Sensitivity to Changes in

Interest Rates of the Loan Portfolio as of December 31, 2012

 

     Maturity (In thousands)  
     One year or less       Over one year
through 5 years  
     Over 5 years         

Total

 
December 31,            

 

 

Gaming

     $         2,680       $ 42,979       $ 14,528       $ 60,187     

Residential and land development

     1,598         24,196         1,544         27,338     

Real estate, construction

     1,148         28,072         23,366         52,586     

Real estate, mortgage

     3,595         116,465         126,360         246,420     

Commercial and industrial

     443         31,545         3,016         35,004     

Other

     398         8,895         255         9,548     
  

 

 

 

Total

     $ 9,862       $         252,152       $ 169,069       $         431,083     
  

 

 

 

Loans with pre-determined
interest rates

     $ 4,268       $ 136,466       $ 56,402       $ 197,136     

Loans with floating interest
rates

     5,594         115,686         112,667         233,947     
  

 

 

 

Total

     $ 9,862       $ 252,152       $ 169,069       $ 431,083     
  

 

 

 

 

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SCHEDULE III-C

Non-Performing Loans (In thousands)

 

December 31,    2012      2011      2010      2009      2008  

Loans accounted for on a nonaccrual basis (1)

   $         53,891       $         57,592       $         14,537       $         22,005       $         15,553     

Loans which are contractually
past due 90 or more days as to
interest or principal payment,
but are not included above

     1,445         1,832         2,961         4,218         2,340     

(1) The Bank places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. See “Note A – Business and Summary of Significant Accounting Policies” and “Note C – Loans” to the 2012 Consolidated Financial Statements in Item 8 in this Annual Report on Form 10-K for discussion of impaired loans.

 

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SCHEDULE IV-A

Summary of Loan Loss Expenses

(In thousands, except percentage data)

 

December 31,    2012      2011      2010      2009      2008   

Average amount of loans
outstanding (1)(2)

     $         430,205         $         405,367         $         436,393         $         467,992         $         463,505     
  

 

 

 

Balance of allowance for loan losses at beginning of period

     $ 8,136         $ 6,650         $ 7,828        $ 11,114        $ 9,378     

Loans charged-off:

              

Commercial, financial and agricultural

     448           22           348          103          334     

Consumer and other

     3,228           1,650           7,943          8,977          950     
  

 

 

 

Total loans charged-off

     3,676           1,672           8,291          9,080          1,284     
  

 

 

 

Recoveries of loans:

              

Commercial, financial and agricultural

     23           14           14             19     

Consumer and other

     110           209           254          569          654     
  

 

 

 

Total recoveries

     133           223           268          569          673     
  

 

 

 

Net loans charged-off

     3,543           1,449           8,023          8,511          611     
  

 

 

 

Provision for loan losses charged to operating expense

     4,264           2,935           6,845          5,225          2,347     
  

 

 

 

Total

     $ 8,857         $ 8,136         $ 6,650        $ 7,828        $ 11,114     
  

 

 

 

Ratio of net charge-offs during period to average loans outstanding

     0.82%         0.36%         1.84%         1.82%         .13%   
  

 

 

 

(1) Net of unearned income.

(2) Includes nonaccrual loans.

 

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SCHEDULE IV-B

Allocation of the Allowance for Loan Losses

(In thousands)

 

     2012      2011      2010      2009      2008  
  

 

 

 
December 31,    Amount      % of
Loans to
Total
Loans  
     Amount      % of
Loans to
Total
Loans  
     Amount      % of
Loans to
Total
Loans  
     Amount      % of
Loans to
Total
Loans  
     Amount      % of
Loans to
Total
Loans  
 

 

 

Gaming

     $ 1,541         14       $ 457         13       $ 465         11       $ 699         15       $ 711         17    

Residential and land development

     200         6         1,081         7         1,070         7         1,198         7         2,763           

Real estate, construction

     967         12         937         14         1,020         15         1,019         13         2,438         19    

Real estate, mortgage

     5,273         57         4,800         55         3,413         54         3,549         52         3,385         48    

Commercial and industrial

     593         8         557         8         480         9         1,245         9         1,479           

Other

     283         3         304         3         202         4         118         4         338           
  

 

 

 

Total

     $     8,857         100       $     8,136         100       $     6,650         100       $     7,828         100       $     11,114         100    
  

 

 

 

 

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SCHEDULE V

Summary of Average Deposits and Their Costs

(In thousands, except percentage data)

 

     2012     2011     2010  
  

 

 

 
Years Ended December 31,    Amount      Rate     Amount      Rate     Amount      Rate  

 

 

Demand deposits in domestic offices

     $     102,383         N/A      $     100,854         N/A      $     103,240         N/A     

Negotiable interest bearing deposits in domestic offices

     184,262         .20     181,353         .42     175,240         .58%   

Savings deposits in domestic offices

     46,567         .07     44,744         .13     42,291         .16%   

Time deposits in domestic offices

     149,560         .73     169,617         .90     190,718         1.14%   
  

 

 

 

Total

     $ 482,772         .31   $ 496,568         .47   $ 511,489         .64%   
  

 

 

 

Certificates of deposit in amounts of $100,000 or more (in thousands) by the amount of time remaining until maturity as of December 31, 2012, are as follows:

 

Remaining maturity:       

3 months or less

     $     54,951   

Over 3 months through 6 months

     7,054   

Over 6 months through 12 months

     25,639   

Over 12 months

     6,962   
  

 

 

 

Total

     $ 94,606   
  

 

 

 

 

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SCHEDULE VI

Short Term Borrowings

(In thousands, except percentage data)

 

     2012      2011      2010  
  

 

 

 

Balance, December 31,

     $         194,234       $         206,601       $         180,102   

Weighted average interest rate at December 31,

     .02%         .09%         .44%   

Maximum outstanding at any month-end during year

     $ 241,988       $ 226,038       $ 245,260   

Average amount outstanding during year

     $ 215,810       $ 188,954       $ 187,750   

Weighted average interest rate

     .29%         .43%         .62%   

Note: Short term borrowings include federal funds purchased from other banks and securities sold under agreements to repurchase and short term borrowings from the Federal Home Loan Bank.

 

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SCHEDULE VII

Interest Sensitivity/Gap Analysis

(In thousands)

 

December 31, 2012:    0 - 3 Months      4 -12 Months      1 - 5 Years      Over 5 Years      Total  

ASSETS:

              

Loans (1)

     $         240,653       $         25,171       $         79,876       $         31,492       $         377,192     

Available for sale securities

        6,396         59,947         192,533         258,876     

Held to maturity securities

        795         750         5,580         7,125     
  

 

 

 

Totals

     $ 240,653       $ 32,362       $ 140,573       $ 229,605       $ 643,193     
  

 

 

 

FUNDING SOURCES:

              

Interest bearing deposits

     $ 298,049       $ 50,647       $ 24,414       $         $ 373,110     

Federal funds purchased and securities sold under agreements to repurchase

     194,234                  194,234     

Borrowings from FHLB

     58         172         5,953         1,729         7,912     
  

 

 

 

Totals

     $ 492,341       $ 50,819       $ 30,367       $ 1,729       $ 575,256     
  

 

 

 

REPRICING/MATURITY GAP:

              

Period

     $ (251,688)       $ (18,457)       $ 110,206       $ 227,876      

Cumulative

     (251,688)         (270,145)         (159,939)         67,937      

Cumulative Gap/Total Assets

     (31.27)%         (33.56)%         (19.87)%         8.44%      

(1) Amounts stated include fixed and variable rate loans on the balance sheet that are still accruing interest. Variable rate instruments are included in the next period in which they are subject to a change in rate. The principal portions of scheduled payments on fixed instruments are included in the period in which they become due or mature.

 

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Capital Resources

Information about the Company’s capital resources is included in “Note K – Shareholders’ Equity” to the 2012 Consolidated Financial Statements in this Annual Report on Form 10-K.

ITEM 1a - RISK FACTORS

An investment in the Company’s stock involves a number of risks. Investors should carefully consider the following risks as well as the other information in this Annual Report on Form 10-K and the documents incorporated by reference before making an investment decision. The realization of any of the risks described below could have a material adverse affect on the Company and the price of its common stock.

RISKS RELATING TO THE COMPANY’S BUSINESS

Greater than expected loan losses may adversely affect the Company’s earnings.

The Company’s investment and loan portfolio subject the Company to credit risk. Credit losses are always inherent in the banking business but the current economic downturn presents even more exposure to loss. The Company makes various assumptions and judgments about the collectibility of its loan portfolio and provides an allowance for loan losses based on a number of factors. The Company believes that its current allowance for loan losses is adequate and appropriate. However, if the Company’s assumptions or judgments prove to be incorrect, the allowance for loan losses may not be sufficient to cover actual loan losses. In the event that our loan customers do not repay their loans according to the terms of the loans, and the collateral securing the repayment of these loans is insufficient to cover any remaining loan balances, the Company could experience significant loan losses or increase the provision for loan losses or both, which could have a material adverse effect on its operating results. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.

The Company has a high concentration of loans secured by real estate, and a greater downturn in the real estate market could materially and adversely affect earnings.

A significant portion of the Company’s loan portfolio is dependent on real estate. At December 31, 2012, approximately 87% of the Company’s loans had real estate as a primary or secondary component of collateral. The collateral in each case provides an alternate source of repayment if the borrower defaults and may deteriorate in value during the time the credit is extended. A continued deterioration in the economy affecting the value of real estate generally or in the Company’s trade area specifically could significantly impair the value of the collateral and the ability to sell the collateral upon foreclosure. Furthermore, it is likely that the Company would be required to increase the provision for loan losses. If the Company were required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate value or to increase the allowance for loan losses, the Company’s profitability and financial condition could be adversely impacted.

 

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The Company has a high concentration of exposure to a number of industries.

The Company has concentrations of loan exposure to the hotel/motel and gaming industries. At December 31, 2012, these exposures were approximately $52,776,000 and $60,187,000 or 12 % and 14%, respectively, of the total loan portfolio. The recent downturn in the economy has negatively impacted tourism, which is one of the major factors for success in these industries. Given the size of these relationships, a significant loss in either of these portfolios could materially and adversely affect the Company’s earnings.

The current economic downturn or a natural disaster, especially one affecting the Company’s trade area, could adversely affect the Company.

The Company’s trade area includes the Mississippi Gulf Coast and portions of southeast Louisiana and southwest Alabama. With the exception of a number of credits that are considered out of area, the Company’s credit exposure is generally limited to the Mississippi Gulf Coast. As a result, the Company is at risk from continuing adverse business developments in its trade area, including declining real estate value, increasing loan delinquencies, personal and business bankruptcies and unemployment rates. The Company is also at risk to weather-related disasters including hurricanes, floods and tornadoes. If the economy in the Company’s trade area experiences a natural disaster or worsening economic conditions, our operating results could be negatively impacted.

Current economic factors could negatively impact the Company’s liquidity.

In addition to funds provided by its banking activities such as deposits, loan payments and proceeds from the maturity of investment securities, the Company’s liquidity needs have traditionally been met through the purchase of federal funds, often on an unsecured basis, and advances from the Federal Home Loan Bank (“FHLB”). The recent disruption in the financial markets has negatively impacted the availability of these unsecured funds. As a result, the Company has increased its borrowing lines with the FHLB and secured approval to participate in the Federal Reserve Bank’s Discount Window Primary Credit Program.

The Company is subject to industry competition which may have an impact on its success.

The profitability of the Company depends on its ability to compete successfully. The Company operates in a highly competitive financial services environment. Certain competitors are larger and may have more resources than the Company. The Company faces competition in its trade area from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, insurance companies, brokerage and investment banking firms and other financial intermediaries. Some of these non-bank competitors are not subject to the same extensive regulations that govern the Company or the Bank and may have greater flexibility in competing for business. Increased competition could require the Company to increase the rates paid on deposits or lower the rates offered on loans, which could adversely affect and also limit future growth and earnings prospects.

The Company’s profitability is vulnerable to interest rate fluctuations.

The Company’s profitability is dependent to a large extent on net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. The

 

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Company is asset sensitive to market interest rates, as its assets reprice more quickly to changes in interest rates than do its liabilities. Interest rates dropped by the unprecedented amount of 400 basis points during 2008 as the Federal Reserve, through its Federal Open Market Committee, attempted to stabilize the financial markets, reduce the effects of the recession and stimulate the economy. These actions taken by the Federal Reserve continued to impact the Company’s earnings in 2012. During 2010, the Federal Reserve increased the discount rate 25 basis points; however, there was no effect on the fed funds or prime interest rates. Discount or fed funds rate changes that occur in 2013 may affect the Company’s earnings in the current year and/or in the future.

Changes in the policies of monetary authorities and other government action could adversely affect the Company’s profitability.

Many factors affect the demand for loans and the ability to attract deposits, including changes in government economic and monetary policies, particularly by the Federal Reserve, modifications to tax, banking and credit laws and regulations, national, state and local economic growth rates and employment rates. EESA was enacted in 2008 to address the asset quality, capital and liquidity issues facing certain financial institutions and to improve the general availability of credit for consumers and businesses. In addition, the American Recovery and Reinvestment Act (“ARRA”) was passed in 2009 in an effort to save and create jobs, stimulate the national economy and promote long-term growth and stability. Dodd-Frank was passed in 2010 to increase transparency, accountability and oversight over financial firms and products as well as to provide protection to consumers. There can be no assurance that EESA, ARRA or Dodd-Frank will achieve their intended purposes. Furthermore, their failure could result in continuing or worsening economic and market conditions, and this could adversely affect our operations.

The Company is subject to regulation by various federal and state entities.

The Company is subject to the regulations of the SEC, the Federal Reserve Board, the FDIC and the Department of Banking. New regulations issued by these agencies may adversely affect the Company’s ability to carry on its business activities. The Company is also subject to various other federal and state laws and certain changes in these laws and regulations may adversely affect the Company’s operations. Noncompliance with certain of these regulations may impact the Company’s business plans.

The Company is also subject to the accounting rules and regulations of the SEC and the Financial Accounting Standards Board. Changes in accounting rules could adversely affect the reported financial statements or results of operations of the Company and may also require additional effort or cost to implement.

The Company is subject to the requirements under The Sarbanes-Oxley Act of 2002 with respect to the assessment of internal controls over financial reporting.

The Company’s management is required to report on the effectiveness of internal controls over financial reporting for each fiscal year end. The rules governing the standards that must be met for management to assess internal controls are complex and require significant documentation and testing. In connection with this effort, the Company has and will continue to incur increased expenses and diversion of Management’s time and other internal resources. If the Company cannot

 

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make the required report, investor confidence in the Company’s common stock could be adversely affected.

The Company is subject to anti-terrorism and money laundering legislation.

The Company is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (the “USA PATRIOT Act”), the Bank Secrecy Act, and rules and regulations of the Office of Foreign Assets Control (the “OFAC”). These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism financing. Noncompliance with these rules and regulations may adversely affect the Company’s operations and may impact the Company’s business plans.

The Company relies heavily on technology and computer systems, and advances and changes in technology could significantly affect business.

The Company’s ability to compete depends on the ability to continue to adapt to changes in technology on a timely and cost-effective basis to meet customers’ demands. In addition, the Company’s operations are susceptible to negative effects from computer system failures, communication and energy disruption and unethical individuals with technological ability to cause disruptions or failures of data processing systems.

RISKS RELATING TO AN INVESTMENT IN THE COMPANY’S COMMON STOCK

Securities issued by the Company are not FDIC insured.

The Company’s common stock is not a savings or deposit account or other obligation of the Bank and is not insured by the FDIC, the Bank Insurance Fund or any other government agency or instrumentality, or any private insurer and is subject to investment risk, including the possible loss of principal.

The directors of the Company and executive management own a significant number of shares of stock, allowing further control over business and corporate affairs.

The Company’s directors and executive officers beneficially own approximately 9% of the outstanding common stock of Peoples Financial Corporation. As a result, in addition to their day-to-day management roles, they will be able to exercise significant influence on the Company’s business as shareholders, including influence over election of the Board and the authorization of other corporate actions requiring shareholder approval.

Provisions of the Company’s articles of incorporation and bylaws, Mississippi law and state and federal banking regulations could delay or prevent a takeover by a third party.

Certain provisions of the Company’s articles of incorporation and bylaws and of state and federal law may make it more difficult for someone to acquire control of the Company. Under federal law, subject to certain exemptions, a person, entity or group must notify the federal banking agencies before acquiring 10% or more of the outstanding voting stock of a bank holding company, including

 

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the Company’s shares. Banking agencies review the acquisition to determine if it will result in a change of control. The banking agencies have 60 days to act on the notice, and take in to account several factors, including the resources of the acquirer and the antitrust effects of the acquisition. There are also Mississippi statutory provisions and provisions in the Company’s articles of incorporation and bylaws that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in the Company’s articles and bylaws could result in the Company being less attractive to a potential acquirer.

The Company’s future ability to pay dividends is subject to restrictions.

Since the Company is a holding company with no significant assets other than the Bank, the Company has no material source of funds other than dividends received from the Bank. Therefore, the ability to pay dividends to the shareholders will depend on the Bank’s ability to pay dividends to the Company. Moreover, banks and bank holding companies are both subject to certain federal and state regulatory restrictions on cash dividends. Currently, the Federal Reserve Bank and the FDIC must approve the declaration and payment of dividends by the Company and the Bank, respectively.

ITEM 1b - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

The principal properties of the Company are its 16 business locations, including the Main Office, which is located at 152 Lameuse Street in Biloxi, MS, 39530. All such properties are owned by the Company. The address of the other branch locations are:

 

Bay St. Louis Office

  

408 Highway 90 East, Bay St. Louis, MS 39520

Cedar Lake Office

  

1740 Popps Ferry Road, Biloxi, MS 39532

Diamondhead Office

  

5429 West Aloha Drive, Diamondhead, MS 39525

D’Iberville-St. Martin Office

  

10491 Lemoyne Boulevard, D’Iberville, MS 39540

Downtown Gulfport Office

  

1105 30th Avenue, Gulfport, MS 39501

Gautier Office

  

2609 Highway 90, Gautier, MS 39553

Handsboro Office

  

412 E. Pass Road, Gulfport, MS 39507

Long Beach Office

  

298 Jeff Davis Avenue, Long Beach, MS 39560

Ocean Springs Office

  

2015 Bienville Boulevard, Ocean Springs, MS 39564

Orange Grove Office

  

12020 Highway 49 North, Gulfport, MS 39503

Pass Christian Office

  

301 East Second Street, Pass Christian, MS 39571

Saucier Office

  

17689 Second Street, Saucier, MS 39574

Waveland Office

  

470 Highway 90, Waveland, MS 39576

West Biloxi Office

  

2560 Pass Road, Biloxi, MS 39531

Wiggins Office

  

1312 S. Magnolia Drive, Wiggins, MS 39577

 

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ITEM 3 - LEGAL PROCEEDINGS

Information relating to legal proceedings is included in “Note N – Contingencies” to the 2012 Consolidated Financial Statements which is in Item 8 in this Annual Report on Form 10-K.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

At December 31, 2012, there were 515 holders of the common stock of the Company. 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 Capital Market.

 

Year    Quarter    High      Low     

Dividend

Per share

 

                             2012

   1st    $                              11.95       $                              9.39       $                                .10   
   2nd      9.98         8.61      
   3rd      11.79         8.16         .10   
   4th      9.46         8.36         .10   

                             2011

   1st    $ 16.99       $ 13.50         .09   
   2nd      16.50         12.74      
   3rd      14.10         10.20         .09   
   4th      10.51         9.50      

 

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ITEM 6 - SELECTED FINANCIAL DATA (In thousands except per share data)

 

     2012      2011      2010      2009      2008   
  

 

 

 

Balance Sheet Summary

              

Total assets

     $ 804,912        $ 804,152        $ 786,545        $ 869,007         $ 896,408     

Available for sale securities

     258,875          278,918          287,078          311,434           340,642     

Held to maturity securities

     7,125          1,428          1,915          3,202           3,394     

Loans, net of unearned discount

     431,083          432,407          409,899          464,976           467,377     

Deposits

     475,719          468,439          484,140          470,701           510,476     

Borrowings from FHLB

     7,912          53,324          42,957          104,270           36,938     

Shareholders’ equity

     110,754          109,452          101,357          103,588           107,000     

Summary of Operations

              

Interest income

     $ 24,628        $ 25,033        $ 29,675        $ 34,289         $ 43,573     

Interest expense

     2,067          3,178          4,601          7,401           14,963     
  

 

 

 

Net interest income

     22,561          21,855          25,074          26,888           28,610     

Provision for loan losses

     4,264          2,935          6,845          5,225           2,347     
  

 

 

 

Net interest income after provision for loan losses

     18,297          18,920          18,229          21,663           26,263     

Non-interest income

     9,529          9,860          10,114          10,147           7,268     

Non-interest expense

     25,277          28,781          27,581          27,636           26,520     
  

 

 

 

Income before taxes

     2,549          (1)         762          4,174           7,011     

Applicable income taxes

     (92)         (1,204)         (723)         954           1,977     
  

 

 

 

Net income

     $ 2,641        $ 1,203        $ 1,485        $ 3,220         $ 5,034     
  

 

 

 

Per Share Data

              

Basic and diluted earnings per share

     $ .51        $ .23        $ .29        $ .62         $ .94     

Dividends per share

     .20          .19          .20          .50           .56     

Book value

     21.56          21.31          19.68          20.11           20.27     

Weighted average number of shares

         5,136,918              5,136,918              5,151,661              5,170,430               5,342,470     

Selected Ratios

              

Return on average assets

     0.32%         0.15%         0.18%         0.36%         0.55%    

Return on average equity

     2.40%         1.14%         1.45%         3.06%         4.73%    

Primary capital to average assets

     14.71%         14.59%         12.96%         12.49%         12.81%    

Risk-based capital ratios:

              

Tier 1

     20.04%         19.61%         21.01%         17.83%         18.03%    

Total

     21.29%         20.86%         22.26%         19.08%         19.28%    

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company is a one-bank holding company headquartered in Biloxi, Mississippi. The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2012, 2011 and 2010. These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report.

 

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Forward-Looking Information

Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.

New Accounting Pronouncements

The Company adopted ASU 2011-05 – Amendments to Topic 220, Comprehensive Income (“ASU 2011-05”) during 2012. ASU 2011-05 grants an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. The Company has chosen to report comprehensive income in a separate statement in its 2012 financial statements. There were no other new accounting standards adopted by the Company during 2012.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Allowance for loan losses:

The Company’s most critical accounting policy relates to its allowance for loan losses (“ALL”), which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of the financial statements. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine whether the

 

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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.

Other Real Estate:

Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. If Management determines that the fair value of a property has decreased subsequent to foreclosure, the Company records a write down which is included in noninterest expense.

Employee Benefit Plans:

Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.

Income Taxes:

GAAP requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. See Note J to the Consolidated Financial Statements for additional details. As part of the process of preparing our Consolidated Financial Statements, the Company is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated statement of condition. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, we must include an expense within the tax provisions in the consolidated statement of income.

 

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OVERVIEW

The Company is a holding company for a community bank serving the financial and trust needs of its customers in our trade area, which is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary’s three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.

Net income for 2012 was $2,640,824 compared with $1,202,834 for 2011. While net interest income increased $706,351 and non-interest expense decreased $3,503,894 in 2012 as compared with 2011, the provision for loan losses increased $1,329,000, non-interest income decreased $331,255 and income tax benefits decreased $1,112,000.

Managing the net interest margin in the Company’s highly competitive market and in context of larger national economic conditions has been very challenging and will continue to be so for the foreseeable future. Interest income decreased $404,530 for 2012 as compared with 2011 as a result of the large balance of loans on nonaccrual and the decrease in yield on U.S. Agency securities. Interest expense decreased $1,110,881 primarily due to a reduction in the cost of funds in 2012 as compared with 2011.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing assets continue to be emphasized during these difficult economic times, as the local and national economy continues to negatively impact collateral values and borrowers’ ability to repay their loans. Past due loans have stabilized and have shown some improvement in 2012. Nonaccrual loans totaled $53,890,511 and $57,592,715 at December 31, 2012 and 2011, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses. The provision for loan losses increased in 2012 as a result of additional provision of $1,893,000 during the fourth quarter of 2012 as the Company identified potential losses in two relationships based on factors affecting the value of collateral securing these loans.

Non-interest income for 2012 included increased gains on sales and calls of securities of $237,747 as compared with 2011. Results for 2012 also include a loss on impairment of other investments of $360,000. During 2011, the Company realized gains on death benefits from life insurance policies of $469,740 as a result of the death of participants in deferred compensation plans. Non-interest expense for 2012 decreased due to a reduction in salaries and employee benefits and FDIC assessments as compared with 2011. Salaries and employee benefits decreased $2,091,989 in 2012 largely due to the impact of the voluntary early retirement program which was offered in 2011. FDIC assessments decreased $1,184,865 in 2012 as compared with 2011 as a result of the change in estimate of the prepaid FDIC assessments as of December 31, 2012. Income tax benefits decreased $1,112,000 as a result of the increase in taxable income in 2012 as compared with 2011.

Total assets at December 31, 2012 increased $760,365, as compared with December 31, 2011. Available for sale securities decreased $20,042,641 at December 31, 2012 as compared with

 

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December 31, 2011 as securities previously pledged for public funds matured or were sold. Balances in our non-deposit sweep accounts, reported as Federal funds purchased and securities sold under agreements to repurchase, increased $36,632,956 primarily due to the addition of one new large customer. Borrowings from the FHLB decreased $45,411,637 at December 31, 2012 as compared with December 31, 2011 based on the liquidity needs of the bank subsidiary.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the amount by which interest income on loans, investments and other interest-earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company’s income. Management’s objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income. The Federal Open Market Committee (the “Committee”), a component of the Federal Reserve System, is charged under United States law with overseeing the nation’s open market operations by making key decisions about interest rates and the growth of the U.S. money supply. The Committee dropped the discount rate significantly in 2008 and has not adjusted the rate since that time, which impacted interest rates then and in succeeding years.

2012 as compared with 2011

The Company’s average interest-earning assets increased approximately $26,699,000, or 4%, from approximately $722,316,000 for 2011 to approximately $749,015,000 for 2012. The Company’s average balance sheet increased primarily as new loans have outpaced principal payments, maturities, charge-offs and foreclosures relating to existing loans. The average yield on earning assets decreased 18 basis points, from 3.57% for 2011 to 3.39% for 2012, with the biggest impact being to the yield on taxable available for sale securities. The Company’s investment and liquidity strategy has been to invest most of the proceeds from sales, calls and maturities of securities in similar securities. As a result, the yield on taxable available for sale securities decreased from 2.10% for 2011 to 1.71% for 2012. The Company has more recently purchased securities with maturities of up to fifteen years, with call provisions, to improve its yield on these assets. Future security purchases may be of shorter duration in anticipation of rising rates in 2015. The yield on loans has decreased due to the increase in loans on nonaccrual during 2011.

Average interest-bearing liabilities increased approximately $15,967,000, or 3%, from approximately $587,962,000 for 2011 to approximately $603,929,000 for 2012. The increase was primarily related to borrowings from the 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, have decreased in 2012. 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

 

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will be considered.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.11% for the year ended December 31, 2012, down 2 basis points from 3.13% during 2011.

2011 as compared with 2010

The Company’s average interest-earning assets decreased approximately $31,744,000, or 4%, from approximately $754,060,000 for 2010 to approximately $722,316,000 for 2011. The Company’s average balance sheet shrunk primarily as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans during the first part of 2011. While the average balance sheet decreased for the year, loan demand increased during the last two quarters of 2011 which resulted in an increase in loans at December 31, 2011. The average yield on earning assets decreased 46 basis points, from 4.03% for 2010 to 3.57% for 2011, with the biggest impact being to the yield on taxable available for sale securities. The Company’s investment and liquidity strategy has been to invest most of the proceeds from sales, calls and maturities of securities in similar securities with a maturity of two years or longer, the interest rates on which have decreased dramatically. As a result, the yield on taxable available for sale securities decreased from 3.24% for 2010 to 2.10% for 2011. Beginning in the fourth quarter of 2010, Management began acquiring such securities with a maturity of five years or longer in order to improve the yield. The charge off of interest income on loans of $1,187,037 during 2011 reduced the average yield on earning assets by 16 basis points.

Average interest-bearing liabilities decreased approximately $25,195,000, or 4%, from approximately $613,157,000 for 2010 to approximately $587,962,000 for 2011. The average rate paid on interest-bearing liabilities decreased 21 basis points, from .75% for 2010 to .54% for 2011.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.13% for the year ended December 31, 2011, down 29 basis points from 3.42% during 2010, primarily due to the charge-off of interest income on loans and the decrease in yield on taxable available for sale securities.

The tables below analyze the changes in tax-equivalent net interest income for the years ended December 31, 2012 and 2011 and the years ended December 31, 2011 and 2010.

 

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Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

 

     2012      2011  
       Average Balance      Interest Earned/Paid      Rate              Average Balance      Interest Earned/Paid      Rate        
  

 

 

    

 

 

 

Loans (2)(3)

     $ 430,205       $ 18,576         4.32%          $ 405,367       $ 17,923          4.42%    

Federal Funds Sold

     6,601         16         0.24%          2,857                 0.25%    

Held to Maturity:

                 

Non taxable (1)

     4,698         189         4.02%          1,882         107          5.69%    

Available for Sale:

                 

Taxable

     264,248         4,527         1.71%          269,401         5,662          2.10%    

Non taxable (1)

     39,407         2,073         5.26%          39,941         2,041          5.11%    

Other

     3,856         15         0.39%          2,868         23          0.80%    
  

 

 

       

 

 

    

Total

     $ 749,015       $ 25,396         3.39%          $ 722,316       $ 25,763          3.57%    
  

 

 

       

 

 

    

Savings & interest-bearing DDA

     $ 230,829       $ 410         0.18%          $ 226,097       $ 819          0.36%    

CD’s

     149,560         1,090         0.73%          169,617         1,535          0.90%    

Federal funds purchased

and securities sold under

agreements to repurchase

     169,352         335         0.20%          154,423         638          0.41%    

Borrowings from FHLB

     54,188         233         0.43%          37,825         186          0.49%    
  

 

 

       

 

 

    

Total

     $ 603,929       $ 2,068         0.34%          $ 587,962       $ 3,178          0.54%    
  

 

 

       

 

 

    

Net interest margin

           3.11%                3.13%    

 

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Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

 

    

2011

 

    

2010

 

 
       Average Balance      Interest Earned/Paid      Rate              Average Balance      Interest Earned/Paid      Rate        
  

 

 

    

 

 

 

Loans (2)(3)

     $ 405,367       $ 17,923         4.42%          $ 436,393       $ 19,687          4.51%    

Federal Funds Sold

     2,857         7         0.25%          4,842         15          0.31%    

Held to Maturity:

                 

Non taxable (1)

     1,882         107         5.69%          2,938         154          5.24%    

Available for Sale:

                 

Taxable

     269,401         5,662         2.10%          264,927         8,589          3.24%    

Non taxable (1)

     39,941         2,041         5.11%          40,581         1,903          4.69%    

Other

     2,868         23         0.80%          4,379         26          0.59%    
  

 

 

       

 

 

    

Total

     $ 722,316       $ 25,763         3.57%          $ 754,060       $ 30,374          4.03%    
  

 

 

       

 

 

    

Savings & interest-

bearing DDA

     $ 226,097       $ 819         0.36%          $ 217,531       $ 1,084          0.50%    

CD’s

     169,617         1,535         0.90%          190,718         2,173          1.14%    

Federal funds purchased

and securities sold under

agreements to repurchase

     154,423         638         0.41%          152,000         991          0.65%    

Borrowings from FHLB

     37,825         186         0.49%          52,908         352          0.67%    
  

 

 

       

 

 

    

Total

     $ 587,962       $ 3,178         0.54%          $ 613,157       $ 4,600          0.75%    
  

 

 

       

 

 

    

Net interest margin

           3.13%                3.42%    

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2012, 2011 and 2010.

(2) Loan fees of $797, $647 and $611 for 2012, 2011 and 2010, respectively, are included in these figures.

(3) Includes nonaccrual loans.

 

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Analysis of Changes In Interest Income and Expense (in thousands)

 

     For the Year Ended  
  

 

 

 
     December 31, 2012 compared with December 31, 2011  
  

 

 

 
     Volume      Rate      Rate/Volume      Total  
  

 

 

 

Interest earned on:

           

Loans

     $ 1,098         $ (420)       $ (25)       $ 653     

Federal funds sold

     9           (1)                 9     

Held to maturity securities:

           

Non taxable

     160           (31)         (47)         82     

Available for sale securities:

           

Taxable

     (108)          (1,047)         20                  (1,135)    

Non taxable

     (27)          60          (1)         32     

Other

     8           (12)         (4)         (8)    
  

 

 

 

Total

     $         1,140         $         (1,451)       $         (56)       $ (367)    
  

 

 

 

Interest paid on:

           

Savings and interest-bearing DDA

     $ 17         $ (419)       $ (7)       $ (409)    

CD’s

     (182)          (299)         36          (445)    

Federal funds purchased

     62           (333)         (32)         (303)    

Borrowings from FHLB

     80           (23)         (10)         47     
  

 

 

 

Total

     $ (23)        $ (1,074)       $ (13)       $ (1,110)    
  

 

 

 

 

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Analysis of Changes in Interest Income and Expense (in thousands)

 

     For the Year Ended  
  

 

 

 
     December 31, 2011 compared with December 31, 2010  
  

 

 

 
     Volume      Rate      Rate/Volume      Total  
  

 

 

 

Interest earned on:

           

Loans

     $ (1,399)        $ (392)       $ 27       $ (1,764)    

Federal funds sold

     (6)          (3)                 (8)    

Held to maturity securities:

           

Non taxable

     (55)          13          (5)         (47)    

Available for sale securities:

           

Taxable

     145           (3,021)         (51)         (2,927)    

Non taxable

     (30)          171          (3)         138     

Other

     9           (9)         (3)         (3)    
  

 

 

 

Total

     $         (1,336)        $         (3,241)       $             (34)       $         (4,611)    
  

 

 

 

Interest paid on:

           

Savings and interest-bearing DDA

     $ 43         $ (296)       $ (12)       $ (265)    

CD’s

     (240)          (447)         49          (638)    

Federal funds purchased

     16           (363)         (6)         (353)    

Borrowings from FHLB

     (100)          (92)         26          (166)    
  

 

 

 

Total

     $ (281)        $ (1,198)       $ 57        $ (1,422)    
  

 

 

 

Provision for Allowance for Losses on Loans

In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. A loan review process further assists with evaluating credit quality and assessing potential performance issues. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. In addition, on a monthly basis the Company monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel; as well as the exposure for out of area; residential and land development; construction and commercial real estate loans, and their direct and indirect impact on its operations. A monthly watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation.

Management relies on its guidelines and existing methodology to monitor the performance of its loan

 

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portfolio and to identify and estimate potential losses based on the best available information. The potential effect resulting from the economic downturn on a national and local level, the decline in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral. Note A to the Consolidated Financial Statements discloses a summary of the accounting principles applicable to impaired and nonaccrual loans as well as the allowance for loan losses. Note C to the Consolidated Financial Statements presents additional analyses of the composition, aging and performance of the loan portfolio as well as the transactions in the allowance for loan losses.

The decline in the value of real estate has negatively impacted the collateral relating to the Company’s residential and land development and real estate – mortgage portfolios. The Company’s evaluation of these portfolios and related collateral resulted in a significant increase in provisions for the residential and land development portfolio in 2010 and for the real estate-mortgage portfolio in 2011 and 2012. In the fourth quarter of 2012, a specific reserve of $1,100,000 was assigned to a gaming loan based on the decline in value of collateral securing the loan. The Company’s on-going, systematic evaluation resulted in the Company recording a total provision for loan losses of $4,264,000, $2,935,000 and $6,845,000 in 2012, 2011 and 2010, respectively.

The allowance for loan losses as a percentage of loans was 2.05%, 1.88% and 1.62% at December 31, 2012, 2011 and 2010, respectively. The Company’s analysis includes evaluating the current value of collateral securing all nonaccrual loans. Even though nonaccrual loans were $53,890,511 at December 31, 2012, only $1,776,700 in specific reserves has been allocated to these loans as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value. The Company believes that its allowance for loan losses is appropriate as of December 31, 2012.

The allowance for loan losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in the future which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations.

Non-interest income

Total non-interest income decreased by $331,255 in 2012 as compared with 2011. Trust department income and fees increased $90,004 as a result of fees relating to several large estates. Service charges on deposit accounts increased $127,509 in 2012 as compared with 2011. This increase was the result of a decrease in NSF fees of $91,040, which were impacted by the local economy and customers opting out of overdraft protection for debit card transactions, and an increase in ATM fees of $217,077 as a result of the improvement in the local casinos at which the Company has off-site ATMs. Gains from sales and calls of securities increased $237,747 as sales were executed when proceeds would be maximized. The Company had a loss from impairment of other investments of $360,000 in 2012 and a loss on other investments of $84,480 in 2012 as compared with income of $96,969 in 2011. Results in 2011 included gains from death benefits from life insurance of $469,740. Other income increased $152,706 in 2012 as compared with 2011. This increase was

 

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primarily attributable to an increase in rental income of $49,801 as the Company was able to lease previously vacant property and gains of $31,380 on the sale of bank vehicles.

Total non-interest income decreased by $253,954 in 2011 as compared with 2010. Included in this decrease was a decrease in service charges on deposit accounts of $319,817 in 2011 as compared with 2010 as these fees were impacted by the local economy and customers opting out of overdraft protection for debit card transactions. During 2010, securities were sold at a gain of $1,690,670 as compared with only $1,126,055 in 2011 as the Company executed sales when it could maximize proceeds. As a result of the death of participants in the Company’s deferred compensation plans, bank owned life insurance was redeemed in 2011, resulting in a gain of $469,740. The Company’s other investments had a gain of $96,969 in 2011 as compared with a loss of $109,933 in 2010.

Non-interest expense

Total non-interest expense decreased by $3,503,894 in 2012 as compared with 2011. Salaries and employee benefits decreased $2,091,989 in 2012 as compared with 2011. Salaries decreased $723,389 in 2012 as compared with 2011 as the employee census continues to decrease from attrition and the impact of the 2011 voluntary early retirement package. Expenses relating to deferred compensation plans decreased $565,405 in 2012 as a result of the 2011 voluntary early retirement package. Expenses relating to the retiree health plan decreased $953,894 as a result of amendments made to the plan which require plan participants to utilize drug benefits and health insurance coverage available under Medicare. Equipment rentals, depreciation and maintenance decreased $226,109 in 2012 as compared with 2011. Rental expense decreased $113,492 in 2012 as the Company discontinued use of leased equipment during 2011. Depreciation on furniture and equipment decreased $156,500 as equipment replaced during the years after Hurricane Katrina becomes fully depreciated. Maintenance costs increased $49,383 as a result of the timing of work performed. Other expense decreased $1,269,744 for 2012 as compared with 2011. Included in other expense are data processing expense, which increased $576,309 as a result of the outsourcing of most of the bank’s I/T functions, and ORE expenses, which were $702,174 less in 2012 as compared with 2011 primarily as a result of a decrease in write downs of other real estate to fair value. Other expense also includes FDIC assessments, which decreased $1,184,865 in 2012 as compared with 2011 as a result of the change in estimate of the prepaid FDIC assessments as of December 31, 2012.

Total non-interest expense increased by $1,199,608 in 2011 as compared with 2010. Salaries and employee benefits increased $501,777 in 2011 as compared with 2010. While the Company had been able to reduce salaries and employee benefits through attrition in 2011 and 2010, current year expenses included additional costs of $851,406 relating to the voluntary early retirement program. Equipment rentals, depreciation and maintenance decreased $336,297 in 2011 as compared with 2010. Rental expense decreased $135,531 in 2011 as the Company discontinued use of leased equipment. Depreciation on furniture and equipment decreased $133,000 as equipment replaced during the years after Hurricane Katrina becomes fully depreciated. Maintenance costs decreased $59,766 as a result of a number of cost saving measures. Other expense increased $1,048,202 for 2011 as compared with 2010. Included in other expense are data processing expense, which increased $291,359 as a result of the outsourcing of most of the bank’s I/T functions, and ORE expenses, which were $938,486 more in 2011 as compared with 2010 primarily as a result of write downs of $711,006. Other expense also includes FDIC and state banking assessments. Based on

 

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formulas determined by those agencies, the bank subsidiary was assessed $177,940 more in 2011 than in the previous year. These increases in other expenses were partially reduced by the decrease in advertising and legal costs. Advertising expenses decreased $74,018 in 2011 as a result of cost saving measures. Legal fees decreased $176,756 in 2011 as compared with 2010 due to the resolution of a number of non-performing loan issues.

Income Taxes

Income taxes have been impacted by non-taxable income and federal tax credits during 2012, 2011 and 2010, respectively. Note J to the Consolidated Financial Statements presents a reconciliation of income taxes for these three years.

FINANCIAL CONDITION

Available for sale securities decreased $20,042,641 at December 31, 2012, compared with December 31, 2011. The Company reduced its investment in these securities during the last quarter of 2012 as pledging requirements for public funds decreased.

The held to maturity portfolio increased $5,696,534 at December 31, 2012, compared with December 31, 2011, as the Company opted to classify some of its investment purchases during the current year as held to maturity.

Other investments decreased $480,480 at December 31, 2012, compared with December 31, 2011. This decrease was the result of a loss from the impairment of these investments of $360,000 and a loss of $84,480 from these investments in 2012.

The Company decreased its investment in FHLB common stock by $201,200 as a result of a reduced need to borrow from FHLB at December 31, 2012 as compared with December 31, 2011.

Bank premises decreased $1,812,972 at December 31, 2012 as compared with December 31, 2011 as a result of depreciation.

Other real estate increased by $854,946 at December 31, 2012 as compared with December 31, 2011. During 2012, loans totaling $2,576,000 were transferred into ORE, write downs of $153,000 were charged to earnings and ORE totaling $1,567,000 was sold. The Company is working diligently and prudently to reduce this portfolio.

Accrued interest receivable increased $197,179 at December 31, 2012 as compared with December 31, 2011. This increase is attributable to an increase in accrued interest on available for sale securities. During 2012, the Company invested in securities with extended maturities in order to increase yield.

Cash surrender value of life insurance increased $664,447 at December 31, 2012 as compared with December 31, 2011 as primarily as a result of income earned on the life insurance.

Prepaid FDIC assessments decreased $391,510 at December 31, 2012 as compared with December

 

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31, 2011 as a result of the amortization of these costs. This decrease was affected by the change in estimate of prepaid FDIC assessments as of December 31, 2012.

Other assets increased $1,230,609 at December 31, 2012 as compared with December 31, 2011 as deferred taxes were impacted by the increase in liabilities for employee benefit plans and depreciation.

Total deposits increased $7,280,166 at December 31, 2012, as compared with December 31, 2011. Fluctuations in total deposits and among the different types of deposits represent recurring activity for the Company as customers in the gaming industry and state, county and municipal entities reallocate their resources periodically. The Company anticipates that deposits will continue at or slightly above their present level during 2013.

Federal funds purchased and securities sold under agreements to repurchase, which includes non-deposit accounts, increased $36,632,956 at December 31, 2012 as compared with December 31, 2011, primarily due to one new large customer.

Borrowings from the Federal Home Loan Bank decreased $45,411,637 at December 31, 2012 as compared with December 31, 2011 based on the liquidity needs of the bank subsidiary.

Employee and director benefit plans liabilities increased $851,512 at December 31, 2012, as compared with December 31, 2011 due to deferred compensation benefits earned by officers and directors during 2012.

Other liabilities increased $105,503 at December 31, 2012 as compared with December 31, 2011. At December 31, 2011, the Company had accrued $513,692 for dividends payable in 2012 while the dividend declared in December 2012 was paid on December 31, 2012. Other liabilities at December 31, 2012 included an increase in income taxes payable of $215,000 as taxable income was higher in 2012 as compared to 2011 and an increase in the retiree health plan liability of $404,229 as compared with December 31, 2011.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. The primary and risk-based capital ratios are important indicators of the strength of a Company’s capital. These figures are presented in Item 6, “Selected Financial Data,” in this Annual Report on Form 10-K.

The measure of capital adequacy which is currently used by Management to evaluate the strength of the Company’s capital is the primary capital ratio which was 14.71 % at December 31, 2012, which is well above the regulatory minimum of 6.00%. Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of maintaining its primary capital ratio at 8.00%, which is the minimum requirement for classification as being “well-capitalized” by the banking regulatory authorities.

 

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Significant transactions affecting shareholders’ equity during 2012 are described in “Note K – Shareholders’ Equity” in Item 8 in this Annual Report on Form 10-K. The Statement of Changes in Shareholders’ Equity also presents all activity in the Company’s equity accounts and can be found in Item 8 in this Annual Report on Form 10-K.

REGULATORY MATTERS

During 2009, Management identified opportunities for improving risk management, addressing asset quality concerns, managing concentrations of credit risk and ensuring sufficient liquidity at the Bank as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company 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.

LIQUIDITY

Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. “Note M – Financial Instruments with Off-Balance-Sheet Risk” to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Management monitors these funding requirements in such a manner as to satisfy these demands and to provide the maximum return on its earning assets.

The Company monitors and manages its liquidity position diligently through a number of methods, including the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a continuous basis in the management of its liquidity needs and also conducts contingency testing on its liquidity plan. The Company has also been approved to participate in the Federal Reserve’s Discount Window Primary Credit Program, which it intends to use only as a contingency. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits, and the Company has encountered no problems with meeting its liquidity needs.

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. The Company also uses other sources of funds, including borrowings from the Federal Home Loan Bank. The Company generally anticipates relying on deposits, purchases of federal funds and

 

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advances from the Federal Home Loan Bank for its liquidity needs in 2013.

OFF-BALANCE SHEET ARRANGEMENTS

The Company is a party to off-balance-sheet arrangements in the normal course of business to meet the financing needs of its customers. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet arrangements. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amount does not necessarily represent future cash requirements. As discussed previously, the Company carefully monitors its liquidity needs and considers its cash requirements, especially for loan commitments, in making decisions on investments and obtaining funds from its other sources. Further information relating to off-balance-sheet instruments can be found in “Note M – Financial Instruments with Off-Balance-Sheet Risk” to the 2012 Consolidated Financial Statements in Item 8 in this Annual Report on Form 10-K.

CONTRACTUAL OBLIGATIONS

The Company’s long-term contractual obligations relate to its borrowings from the Federal Home Loan Bank and the maturities of certificates of deposits. Information relating the maturity of these obligations is found in Item  7a below.

ITEM 7a - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

 

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assist with interest rate risk management and balance sheet management. The ALCO Committee reports to the Board of Directors on a quarterly basis.

The Company has implemented a conservative approach to its asset/liability management. The net interest margin is managed on a daily basis largely as a result of the management of the liquidity needs of the bank subsidiary. The Company generally follows a policy of investing in short term U.S. Agency securities with maturities of two years or more. Due to the low interest rate environment, the duration of investments has been extended to fifteen years with call provisions. The loan portfolio consists of a 40% /60% blend of fixed and floating rate loans. It is the general loan policy to offer loans with maturities of five years or less; however the market is now dictating floating rate terms to be extended to fifteen years. On the liability side, more than 70% of the deposits are demand and savings transaction accounts. Additionally, 89% of the certificates of deposit mature within eighteen months. Since the Company’s deposits are generally not rate-sensitive, they are considered to be core deposits. The short term nature of the financial assets and liabilities allows the Company to meet the dual requirements of liquidity and interest rate risk management.

The interest rate sensitivity tables on the next page provide additional information about the Company’s financial instruments that are sensitive to changes in interest rates. The negative gap in 2013 is mitigated by the nature of the Company’s deposits, whose characteristics have been previously described. The tabular disclosure reflects contractual interest rate repricing dates and contractual maturity dates. Loan maturities have been adjusted for reserve for loan losses. There have been no adjustments for such factors as prepayment risk, early calls of investments, the effect of the maturity of balloon notes or the early withdrawal of deposits. The Company does not believe that the aforementioned factors have a significant impact on expected maturity.

Interest rate sensitivity at December 31, 2012 and 2011 was as follows (in thousands):

 

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December 31, 2012:            2013              2014      2015      2016      2017      Beyond      Total      Fair Value          
  

 

 

 

Loans, net

     $ 265,343         $ 24,188         $ 22,805         $ 27,768         $ 26,879         $ 55,243         $ 422,226         $ 425,627     

Average rate

     4.83%         6.15%         6.09%         5.34%         5.32%         4.49%         5.04%      

Securities

     7,191           15,694           10,453           22,159           12,392           203,942           271,831           271,931     

Average rate

     3.35%         1.90%         2.54%         1.77%         2.62%         2.47%         2.31%      

Total Financial Assets

     272,534           39,882           33,258           49,927           39,271           259,185           694,057           697,558     

Average rate

     4.82%         5.44%         5.52%         4.59%         4.82%         3.14%         4.42%      

Deposits

     348,696           8,166           4,581           7,000           4,667              373,110           376,209     

Average rate

     4.69%         2.04%         1.77%         1.31%         1.31%            4.49%      

Federal funds purchased
and securities sold under
agreements to repurchase

     194,234                          194,234           194,234     

Average Rate

     0.20%                        0.20%      

Borrowings from FHLB

     230           239           239           239           5,236           1,729           7,912           10,271     

Average rate

     4.89%         4.60%         4.60%         4.60%         3.56%         4.60%         4.60%      

Total Financial Liabilities

     543,160           8,405           4,820           7,239           9,903           1,729           575,256           580,714     

Average rate

     4.59%         2.20%         2.11%         1.66%         3.00%         4.60%         4.40%      
December 31, 2011:    2012      2013      2014      2015      2016      Beyond      Total      Fair Value  
  

 

 

 

Loans, net

     $       279,302         $     27,756         $     35,559         $     18,707         $     22,032         $ 40,991         $     424,347         $     427,881     

Average rate

     4.81%         6.58%         6.19%         6.14%         4.96%         5.28%         5.22%      

Securities

     41,762           7,203           21,725           36,278           42,959           136,931           286,858           286,932     

Average rate

     1.55%         3.35%         1.90%         1.90%         1.69%         3.00%         2.72%      

Total Financial Assets

     321,064           34,959           57,284           54,985           64,991               177,922           711,205           714,813     

Average rate

     4.66%         6.20%         5.13%         4.55%         3.65%         3.79%         4.57%      

Deposits

     352,601           11,153           3,012           1,915           2,177              370,858           372,019     

Average rate

     1.54%         1.40%         2.18%         1.98%         1.98%            1.55%      

Federal funds purchased
and securities sold under
agreements to repurchase

     157,601                          157,601           157,601     

Average Rate

     0.16%                        0.16%      

Borrowings from FHLB

     50,421           235           235           235           235           1,963           53,324           55,014     

Average rate

     0.62%         4.61%         4.61%         4.61%         4.61%         4.61%         1.82%      

Total Financial Liabilities

     560,623           11,388           3,247           2,150           2,412           1,963           581,783           581,634     

Average rate

     1.43%         1.61%         2.52%         2.56%         2.51%         4.61%         1.54%      

 

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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statements of Condition as of December 31, 2012, 2011 and 2010

Consolidated Statements of Income for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012, 2011 and 2010

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

Notes to the Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

 

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Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

 

December 31,    2012      2011      2010   

 

 

Assets

        

Cash and due from banks

     $ 54,019,718         $ 36,928,657         $ 24,146,939     

Available for sale securities

     258,875,840           278,918,481           287,078,463     

Held to maturity securities, fair value of $7,225,413 - 2012; $1,492,374 - 2011; $2,010,430 - 2010

     7,125,421           1,428,887           1,914,879     

Other investments

     3,449,820           3,930,300           3,926,371     

Federal Home Loan Bank Stock, at cost

     2,379,500           2,580,700           2,281,200     

Loans

     431,083,004           432,407,286           409,898,757     

Less: Allowance for loan losses

     8,856,948           8,135,622           6,650,258     
  

 

 

 

Loans, net

     422,226,056           424,271,664           403,248,499     

Bank premises and equipment, net of accumulated depreciation

     26,222,336           28,035,308           29,756,239     

Other real estate

     7,008,184           6,153,238           5,744,150     

Accrued interest receivable

     2,895,420           2,698,241           3,292,430     

Cash surrender value of life insurance

     16,860,815           16,196,368           15,951,117     

Prepaid FDIC assessments

     1,704,810           2,096,320           3,652,972     

Other assets

     2,144,535           913,926           5,552,225     
        
  

 

 

 

Total assets

     $       804,912,455         $       804,152,090         $       786,545,484     
  

 

 

 

 

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Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

 

December 31,    2012      2011      2010   

 

 

Liabilities and Shareholders’ Equity

        

Liabilities:

        

Deposits:

        

Demand, non-interest bearing

     $ 102,609,051         $ 97,581,073         $ 108,277,985     

Savings and demand, interest bearing

     232,400,896           205,318,859           193,631,209     

Time, $100,000 or more

     94,605,926           115,014,220           134,667,660     

Other time deposits

     46,103,375           50,524,930           47,562,661     
  

 

 

 

Total deposits

     475,719,248           468,439,082           484,139,515     

Federal funds purchased and securities sold under agreements to repurchase

     194,233,923           157,600,967           140,102,019     

Borrowings from Federal Home Loan Bank

     7,911,931           53,323,568           42,957,016     

Employee and director benefit plans liabilities

     12,162,119           11,310,607           9,905,732     

Other liabilities

     4,131,068           4,025,565           8,084,340     
  

 

 

 

Total liabilities

     694,158,289           694,699,789           685,188,622     

Shareholders’ Equity:

        

Common stock, $1 par value, 15,000,000 shares
authorized, 5,136,918 shares issued and
outstanding at December 31, 2012 and 2011 and
5,151,139 at December 31, 2010, respectively

     5,136,918           5,136,918           5,151,139     

Surplus

     65,780,254           65,780,254           65,780,254     

Undivided profits

     34,964,301           33,350,861           33,302,381     

Accumulated other comprehensive income (loss), net of tax

     4,872,693           5,184,268           (2,876,912)   
        
  

 

 

 

Total shareholders’ equity

     110,754,166           109,452,301           101,356,862     
  

 

 

 

Total liabilities and shareholders’ equity

     $       804,912,455         $       804,152,090         $       786,545,484     
  

 

 

 

See notes to consolidated financial statements.

 

55


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

 

Years Ended December 31,    2012      2011      2010   

 

 

Interest income:

        

Interest and fees on loans

     $ 18,576,449         $ 17,923,213         $ 19,687,441     

Interest and dividends on securities:

        

U. S. Treasuries

     462,635           235,494           471,051     

U.S. Government agencies

     3,777,477           5,320,452           7,598,366     

Mortgage-backed securities

     287,387           105,905           518,924     

States and politicial subdivisions

     1,492,883           1,417,445           1,357,642     

Other investments

     15,062           23,130           26,078     

Interest on federal funds sold

     16,152           6,936           15,263     
  

 

 

 

Total interest income

     24,628,045           25,032,575           29,674,765     
  

 

 

 

Interest expense:

        

Deposits

     1,499,556           2,353,878           3,257,391     

Borrowings from Federal Home Loan Bank

     232,694           185,925           351,883     

Federal funds purchased and securities sold under
agreements to repurchase

     334,958           638,286           991,438     
  

 

 

 

Total interest expense

     2,067,208           3,178,089           4,600,712     
  

 

 

 

Net interest income

     22,560,837           21,854,486           25,074,053     

Provision for allowance for losses on loans

     4,264,000           2,935,000           6,845,000     
  

 

 

 

Net interest income after provision for allowance
for losses on loans

     $       18,296,837         $       18,919,486         $       18,229,053     
  

 

 

 

 

56


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

 

Years Ended December 31,    2012      2011      2010   

 

 

Non-interest income:

        

Trust department income and fees

     1,458,322           1,368,318           1,354,338     

Service charges on deposit accounts

     5,910,825           5,783,316           6,103,133     

Gain on liquidation, sales and calls of securities

     1,363,802           1,126,055           1,690,670     

Loss on impairment of other investments

     (360,000)          

Income (loss) on other investments

     (84,480)          96,969           (109,933)    

Increase in cash surrender value of life insurance

     573,237           501,268           531,283     

Gain on death benefits from life insurance

        469,740        

Other income

     667,245           514,540           544,669     
  

 

 

 

Total non-interest income

     9,528,951           9,860,206           10,114,160     
  

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     11,991,516           14,083,505           13,581,728     

Net occupancy

     2,433,977           2,350,029           2,364,103     

Equipment rentals, depreciation and maintenance

     3,106,237           3,332,346           3,668,643     

Other expense

     7,745,234           9,014,978           7,966,776