2013 Shareholders Letter

Peoples Financial Corporation Post Office Box 529 • Biloxi, Mississippi 39533-0529 • 228-435-5511
April 17, 2013 RE: Shareholder Address, Annual Meeting April 16,2013 Dear Shareholder: We would like to welcome everyone to our 117th Annual Shareholder Meeting. Peoples Financial Corporation earnings for 2012 were up 120% over last year. We earned $2,644,000 for the
year. In this address, we want to touch on our bank's biggest issue - asset quality.
ASSET QUALITY
The follovl'ing is a current overview of our asset quality:
2008
2009
2.38%
1.68%
1.62%
$ 2,340
$ 4,218
$ 2,962
15,553
22,005
14,537
Allowance for ivan loss es as a
pcrcent3.ge cf loans
Loa;;s past due 90 days and still
Accruing
Non-accrual loans
Year-Ended
December 31
2010
$
2011
2012
1.88%
2.05%
1,832
57,593
$ 1,539
53,891
NONACCRUAL LOANS Since March 31, 2011, the bank's nonaccrualloans have increased significantly as follows (in thousands): Nonaccruals as of:
March 31,2011
June 30, 2011
September 30,2011
December 31,2011
March 3 1, 201 2
June 30, 2012
September 30, 2012
December 31,2012
$
13 ,491
32,562
32,244
57,593
56,959
54,968
53,918
53,89J
Obviously, this represents a major challenge to the bank. During 2012, the bank implemented new
procedures to monitor and manage non-perfonning loans. Until the economy improves, we must work
prudently and patiently with our customers to reduce nonaccruals. The total amount of nonaccruais is
$53,891,000, down 6.5% from the year-ended December 31,2011. It is important to note that approximately
65% of nonaccrual loans as of December 31,2012 relate to two credit relationships for which the bank has
not allocated any specific reserves. The collateral values appear sufficient to cover any loan losses.
Management has carefully evaluated each loan on nonaccrual and their related collateral to detennine if
specific reserves, if any, should be allocated to these loans.
2
Non-accrual loans at December 31, 2012 included one loan with a balance of $14,527,799, which is a performing
loan, but was classified as non-accrual by the banking regulators in their annual shared national credit exam in the
third quarter of 2009. We agreed with the substandard classification, but disagreed with the non-accrual
classification in the third quarter 2009, and we still disagree today with this classification.
This non-accrual rating by the regulators has not allowed us to recognize $1,607,802 in net income through
December 31, 2012 . In addition, we are not able to recognize $55,650 in monthly income on this loan going forward.
This loan has never missed a payment in twenty-five years. Our bank has been the primary lender to the casino
industry on the Mississippi Gulf Coast for over twenty-four years. Our exposure to this industry on December 31 SI
was $84,433,869 with $60,187,035 drawn under term loans and revolving lines of credit (Enclosure 1). This
represents a 73.38% casino exposure to capital, but only a 14.01 % casino exposure to total outstanding loans. The
casino loans have performed as they were designed. We only have two casino loans on non-accrual. The affect of
this non-accrual status on the September 2009 non-accrual loan is illustrated below.
September 2009 Non-Accrual Evaluation (After Federal Reserve quantitative easing and affect on open market
valuations)
9/30/ 11
12/31111
3/31112
6/30/ 12
9/30112
12/31112
3/31/13
TOTAL
PAYOFF
$16,331 ,606
16,327,278
16,185,179
16,171,510
16,212,162
16, 135,601
12,847,726
TOTAL INT
APPLIED TO
PRINCIPAL
$ 742,496
924,805
1,100,178
1,270,575
1,440,853
1,607,802
1,767,207
QUARTERLY
INT APPLIED TO
PRINCIPAL
CURRENT
BOOK BALANCE
$15,589, 110
15,402,472
15,085,000
14,900,935
14,771,309
14,527,799
11,080,528
$182,3 10
175,373
170,397
170,278
166,950
159,400
OPEN
MARKET
VALUATION
80000
83.375
86.250
86.000
89.000
87.625
91.690
BREAK EVEN
ANALYSIS
(IF SOLDt
6/30/ 14
10/31/13
12/3 0/13
5/30/13
7/31/13
+ $1 ,087,031
The above break-even analysis includes $387,480 at March 31,2013 of original issue discount being amortized over
the remaining life of the loan.
We are taking the liberty of including our past due loan status showing the number and dollar amount of loans in
each category at the end of each quarter. We hope that you are as pleased with the improvement as we are.
END OF QUARTER AGING OF PAST DUE LOANS
60 - 89 Days
90 Days Accruing
Non Accruals
30-59 Days
12/31/11
3/31/12
6/30/12
9/30/12
12/31/12
#
Amt
#
Amt
#
Amt
136
127
101
97
137
$17,373,673
$12,296,758
$13,095,807
$9,640,844
$17,680,602
27
29
31
27
31
$3,924,249
$3,471,295
$3,524,265
$3,732,276
$2,808,965
13
18
3
4
11
$1,832,431
$1,025,197
$67,398
$166,898
$1 ,538,895
#
64 1
65
60
56
54
1
% of
Total
Total
Amt
#
Amt
$57,592,714
$56,905,666
$54,968,219
$53,918,000
$53,890,511
240
239
195
184
233
$80,723,067
$73,698,916
$71,655,689
$67,458,018
$75,918,973
Total
Loans
18.7%
17.2%
16.8%
15.5%
17.7%
$432,407,000
$428,200,000
$427,591,000
$435 ,336,000
$429,738,335
LOAN LOSS RESERVE
The most pressing issue we face is the deterioration of the real estate market and the adequacy of our loan loss
reserve. At year-end, our loan loss reserve was 2.05% of loans, or $8,859,000. In 2012, the bank provided
$4,264,000 for loan losses and charged-off $3,676,000 in loans.
We believe we have adequately charged-off and reserved for our loans. The total allowance for loan loss at the end
ofthe year increased $723,000. Charge-offs in 2012 increased $2,004,000 compared to 20 II. Non-accrual loans
decreased 6.4% from $57,593,000 at the end of2011 to $53,891,000 at the end of2012, as the bank continued to
clean up its balance sheet.
3
TRANSACTIONS IN THE ALLOWANCE
FOR LOAN LOSSES (in OOO's)
2008
$ 9,378
673
(1 ,284)
2,347
Allowance for loan losses beginning of period
Recoveries
Charge-Offs
Provision for loan losses
Allowance for loan losses end of period
$]1,11.4
Year Ended
December 31
2009
$11,114
569
(9,080)
5,225
$ 7,828
2010
$7,828
268
(8,291)
6,845
$6,650
2011
$6,650
223
(1,672)
2,935
~
2012
$8,136
133
(3,676)
4,262
~
Our aggressive program of identifying and managing problem loans continued throughout the year. This is a painful
process, but the end result is a cleaner, stronger balance sheet that will position us for more robust growth as our
economy gradually recovers.
The following is how our loan reserve-to-total loan percentage compares to our various Gulf Coast competitors from
2008 to 2012 year-end:
WHITNEY BANK
BAN CORP SOUTH
THE PEOPLES BANK
HANCOCK BANK
COMMUNITY BANK
MERCHANTS & MARlNE BANK
CENTURY BANK
THE FIRST
2008
2009
2010
2011
1.77
1.34
2.38
1.58
1.05
1.54
1.96
2.65
1.80
1.68
1.11
1.51
1.47
1.75
2.92
2.09
1.62
1.60
1.59
1.49
1.45
*
2.18
1.88
3.02
1.82
1.57
1.42
1.16
2012
*Assets sold to The First
1.87
2.05
2.14
1.79
1.36
1.54
1.14
The size of our bank's reserve and its loan loss provision compared to its charged-off loans will be the most
important factors in determining profitability for the next two years. Our budget includes a provision for 2013 of
$170,000 monthly, which is the same as the last two years. By year-end, this provision should tell us if our market
has reached bottom, which we think it has.
OTHER REAL ESTATE OWNED
Any time a financial institution enters a recessionary period, the Other Real Estate (ORE) that a bank acquires
through foreclosure increases and must be disposed . The following is the ORE on our books since its all-time low in
April 2008, in dollars and number of properties in parenthesis:
2009
2008
January
February
March
April
May
June
July
August
September
October
November
December
(7)
(9)
(9)
(9)
(9)
(10)
(10)
(10)
( (0)
$
7
148,007
148,007
148,007
148,007
371 ,632
371,632
369,082
397, 181
(13)
( 14)
( 14)
( 14)
( 16)
( (7)
( (9)
(20)
(20)
(22)
(25)
(22)
$ 757,771
811,771
811,771
811,771
3,015,472
3,083,812
2,652,468
2,745,468
2,745,468
3,339,715
3,277,027
1,521,313
2010
(19)
(21 )
(23)
(25)
(24)
(23)
(27)
(24)
(30)
(30)
(33)
(32)
$1 ,428 ,313
1,778,313
1,750,963
1,790,963
1,668,963
1,396,913
1,956,234
2,346,384
2,818,834
2,907,334
4,921,150
5,744,150
2011
(33) $5,904,150
(36) 6,625,884
(40) 6,937, 128
(47) 7,823,904
(47) 8,185,554
(46) 8,163 ,237
(46) 8,163,237
(44) 8,010,838
(4 1) 6,962,738
(40) 6,579,238
(35) 6,311,338
(34) 6,153,238
2012
(35) $6,825,338
(39) 7,831,261
(38) 7,725,111
(39) 7,729,111
(39) 7,729, 111
(39) 7,528,111
(37) 7,654,860
(39) 7,649,205
(39) 7.368.534
(39) 7,359,974
(38) 7,303,454
(35) 7,008, 184
Our ORE inventory has stabilized at $7 million and will slowly decline as we clean up our non-performing loans and
our foreclosure pipeline shrinks . Over the last four years, we disposed of sixty-six properties total ing $7,981,213.
This generated a loss from the sale of other real estate of $138,451 during this period. Based on our experience in the
last two recessions , we anticipate our ORE to remain in the mid seven-figure range for the next three years as it is
acquired and disposed of (Enclosure 2 - Financial Trends, Other Real Estate - Recession Column).
Historically, inflation has bailed out a financial institution's other real estate after it is acquired . However, we do not
expect this trend to continue as indicated on the next page:
Schedule of Gain or Loss on ORE Sold as of December 31
Year
I)
2)
3)
2009
2010
2011
2012
TOTAL
Carrying
Value
Net Sale
Price
Gain (Loss) on
ORE Sold
$2,897,673
1,414,850
2,101,416
1"567,274
$798 1,211
$3,047,731
1,328,000
1,921 ,026
1,546,005
$7842762
$ 150,058
(86,850)
(180,390)
(21,269)
$ (138 45 J)
# Properties
Disposed of
II
14
25
16
6.6.
ORE Book Value
at Dec. 31
$1,521,313
5,744,150
6,153,238
7,008,184
I) 20 I 0 Loss does not include $77,350 downward appraisal or adjustment to contact price that was expensed.
2) 20 II Loss does not include $127,300 downward appraisal or adjustment to contract price that was expensed.
3) 2012 Loss does not include $249,600 downward appraisal or adjustment to contract price that was expensed.
CAPITAL DISCUSSION
We are very fortunate that for its 117 years our bank has always provided for a rainy day by maintaining much more
capital than the regulators required. The lack of primary capital caused twenty-five banks to fail in 2008, one
hundred forty banks in 2009, one hundred fifty-seven banks in 20 I 0, ninety-two banks in 2011, and fifty-one banks
to fail in 2012. This year we estimate that nearly thirty banks will fail.
Capital has always been a hallmark of this institution. A strong capital position has allowed us to effectively deal
with the unforeseen situations during the current recession . The table below reflects the book value per share, the
total Company capital , and our primary capital-to-average assets since 2004.
Book Value per Share
Total Capital
$15.44
15.77
17.71
19.56
20.27
20.11
19.68
21 .31
21.61
$ 85,801,000
87,503,000
98,233,000
106,542,000
107,000,000
103,588,000
101,357,000
109,452,000
111,021,000
Date
*
Market Value
$20.32
$15.16
$10.31
$ 9.44
12/31104
12/31105
12/31106
12/31107
12/31/08
12/31109
12/31110
12/31111
12/31 11 2
Primary Capital to
Avg. Assets
15 .87%
13.67%
11.91%
12.13%
12.81%
12.49%
12.96%
14.65%
14.71 %
*Hurricane
Katrina
The strength of the Company ' s capital is demonstrated by the primary capital ratio, which was 14.71% at December
31,2012. This is well above the regulatory minimum of6 .00%.
We feel that the market price of our holding company stock is undervalued when compared to our book value. With
the financial industry in such disarray, we feel that our stock - which is heavily capitalized - should outperform our
competitors in this low rate environment, especially in the next three years to come.
ZERO INTEREST RATE POLICY
The Federal Reserve has embarked upon another phase of the zero interest rate policy along with another round of
quantitative easing (QE3). The Federal Reserve cannot do much more rate cutting to bring interest rates down
further . New leadership is needed at the Treasury Department and at the Federal Reserve. The recent Fed
announcement to hold interest rates low until 2015 has created havoc in the fixed income market, especially since the
Fed is going to tie the interest rate to the unemployment rate .
FDIC INSURANCE
The constant rising cost of FDIC insurance on our deposits is a major concern and expense. The bank now has a
prepaid assessment credit of $1,705,000 on our balance sheet. Any unused pre-paid assessment credit, which we
estimate to be roughly $1 ,200,000, will be refunded in June . Our cost for this in 2012 was $503,000.
5
FUTURE PLANS
What is The Peoples Bank doing to insure its increased profitability for the future?
1. Our bank earned just over $2,041,000 in 2012. This is a $1,438,000 increase over 2011's earnings. We will do
better in 2013. The low interest rate environment is hurting our retirees on fixed income and their pension plans.
It is also very difficult to manage for the bank.
2 . The floors that we placed on new and renewed loans are helping to increase our net interest margin. Our cost of
funds is at a record low of 0.34%.
3. The opening of our Keesler Air Force Base (KAFB) branch is tentatively scheduled for June 4,2013. This is a
project that management has been working on for over one year. This branch fills a large gap in the Biloxi
market. We plan to reach a deposit level of$16 million within five years. We will tap into the military retiree
market and those professional and technical personnel that rotate through this training facility. This branch will
reach large segment of customers who are not being served at this time. We feel that this will expand our
consumer base and exceed our expectations.
4. Your bank has always operated very efficiently. We will continue to operate resourcefully and do more with
fewer employees. We now have 171 full-time employees, including any hires for the KAFB branch.
5. We created a new Special Assets Department in 2012. This department, under the leadership of Brian
Kozlowski, will devote more effort to managing our problem loans, while allowing the loan officers more time to
make new loans and service our customers. We are addressing our classified assets as well as laying the
groundwork for growth as the economy improves.
6. The bank hired Ceto and Associates, a bank consulting firm, to conduct a Revenue Enhancement Study. The
goal of this project is to identify strategies to increase non-interest income. We should see results in the third
quarter. We are also addressing further expense reductions.
7. The financial trends of Peoples Financial Corporation from 2000 to 2012 are included in this letter (Enclosure 2).
This twelve-year history highlights the last two major recessions in our area. It will be a guide to our future
success.
8. In February, your Board of Directors authorized the repurchase of 20,000 shares of common stock under our
2009 stock repurchase plan, which it previously suspended to preserve capital. Our stock was trading at
approximately half its book value, and our Directors concluded that a measured repurchase at this time is an
attractive use of capital under the current economic conditions.
9. With our expected return to a more normal environment, it is our goal to pay dividends at 35% of net Income
(apart from any extraordinary events).
We look forward to a prosperous 2013. Working together, I am confident that we will reach our goals.
Sincerely yours,
Chevis C. Swetman President and CEO CCS/jtb
Enclosures: I)
2)
Casino Credit Exposure
Financial Trends 2000-2012
Casino Credit Exposure Month End Balances
Date
7/31/2008
8/29/2008
9/312008
10/31/2008
11/28/2008
12/31/2008
1/30/2009
2/27/2009
3/31/2009
4/30/2009
5/29/2009
6/30/2009
7/31/2009
8/31/2009
9/30/2009
10/30/2009
11/30/2009
1(1 ) 12/31/2009
1/29/2010 ,
2/26/2010 1:
3/31/2010
4/30/20 10
5/31/2010
6/30/201,0
7/31/2010
8/31/2010
9/30/2010
10/31/2010
11/30/2010
12/31/2010
1/31/2011
2/28/2011
3/31/2011
4/30/2011
5/31/2011
6/30/2011
7/31/2011
8/3 1/2011
9/30/2011
10/31/2011
11/30/20 11
12/31/2011
1/31/2012
2/29/2012
3/31/2012
4/30/2012
5/31/2012
6/30/2012
7/31/2012
8/31/2012
9/30/2012
10/31 /2012
11/30/2012
12/31/2012
1/31/2013
2/28/2013
313112013
Total Committed
$120,077,821
$120,977 ,821
$120,595,321
$119,595,321
$119,595 ,321
$118,230,632
$117,925,632
$117,925,7 18
$117,350 ,148
$117 ,144,267
$114 ,134,878
$111,506 ,946
$111,301 ,063
$111 ,301 ,062
$109,617 ,075
$108 ,981 ,518
$108,856,519
$103,534,294
$103,456,619
$100,509,250
$97,658,415
$97,296,112
$97,296, 112
$96,311,807
$95 ,244 ,181
$80 ,008 ,887
$79 ,350,314
$79,266,357
$80 ,153,630 .
$74 ,750,351
$74 ,682, 545
$74,682 ,545
$72 ,607 ,604
$72,540,975
$72,487,958
$68,220 ,057
$78 ,081,041
$78,073,541
$77 ,190,390
$77 ,003,752
$77,976,252
1
$76 , 9~2 , 055
$76,860,565
$84 ,444,494
$84 ,909,504
$84,848 ,796
$84,780,629
$83,211,419
$85,921 ,875
$85,800 ,294
$85,327,426
$8~267 , 059
$90,191 ,882
$84,433,869
$81,428,103
$81,365,903
$77,084,842
-
As % of Capital
Total Casino EXQosure
Outstanding Month End
122.23%
$75 ,353,883
120.71 %
$75,220 ,669
121 .66%
$75,692,4 76
120.03%
$79 ,024 ,688
120.06%
$76,019,297
113.12%
$79,509,573
114.47%
$81 ,923,635
118.67%
$87,518,505
117.00%
$85,550 ,146
114.92%
$84,805,549
113.00%
$80,102,1861
112.00%
$74,807 ,011
117.00%
$74,105 ,325
112.00%
$72 ,757,064
109.75%
$69,461 ,919
109.26%
$64,779 ,038
107.94%
$66,536,927
104.48%
$69,938,002
103.48%
$67,092,581
100.92%
$67,111,059
97.12%
$64,414,871
96.72%
$62 ,950,012
$60,934,061
94.48%
93.18%
$62 ,827 ,989
$60,033,771
92 .82%
$46,410,895
77.12%
$4§,602 ,697
76.98%
$45,4 79,289
76.42%
$43 ,198,735
79.30%
$44,432 ,798
77.52%
$44,431,403
76.93%
$43,312,411
78.21%
$41,226 ,783
74 .77%
$40,787,567
74.46%
$48,583,550
72.49%
$44 ,909,921
67.40%
$49 ,512,874
77.30%
$49 ,573,445
76.30%
$53,456,410
75.25%
$51 ,321 ,994
75.91%
$54 ,084,542
76.35%
$57 ,219,236
75.20%
$52,715,787
73.12%
$60 ,151,458
80.70%
$58 ,935,612
82 .20%
$59,564 ,197
80 .07%
$60,424 ,339
79 .65%
$59,571,995
78.31 %
$60,721,092
80 .10%
$60,426,518
80 .72%
$61 ,526,795
80.08%
$61,988,959
79.92%
$63,255,1 56
84.09%
$60,187,035
76.38%
$55,714,750
76.63%
$55,330,896
76.95%
$51 ,294,223
72.56%
Casinos as % of
Total Outstanding Loans
15.93%
15.98%
16.42%
16.78%
16.14%
17.06%
17.41 %
18.50%
18.00%
17.80%
17.00%
16.00%
16.00%
16.00%
14.94%
14.09%
14.40%
15.05%
14.63%
14.72%
14 .37%
14.10%
13.68%
14.10%
13.70%
10.97%
11 .04%
10.79%
10.41 %
10.82%
10.80%
10.57%
10.13%
10.45%
12.29%
11.42%
12.37%
12 .37%
12.68%
12.16%
12.69%
13.25%
12.40%
13.99%
13.79%
13.89%
14.04%
13.98%
14.06%
14.05%
14.15%
14.24%
14.58%
14.01 %
13.17%
13.12%
12,33%
Syndicated & Non-Syndicated Casino Exposure Approved By Board July 2006 is 150% of Capital
Syndicated & Non-Syndicated Casino Exposure Approved By Board October 2009 is 125% of Capital
Enclosure 1
Encolosure 2
432,407
804,152
109,452
1,203
431,083
804,775
111,021
2,641
Total Loans
Total Assets
Total Capital
2009 (4)
2008 (3)
2007
2006
2005 (2)
169
12
185
11
1.62
1.45
0.18
1,485
101,550
786,446
409,899
5,744
189
15
1.68
3.06
0.36
3,220
103,588
869,007
464,976
1,521
207
14
2.38
4.71
0.55
5,034
107,000
896,408
467,377
397
207
11
2.07
10.77
1.15
11,026
106,542
927,357
445,336
20
211
16
2.70
13.75
1.41
12,768
98,233
964,023
401,194
46
203
19
3.14
6.79
0.82
5,882
87,503
845,325
349,346
106
2003
2002
2001(1)
2000
218
14
1.97
6.84
1.00
5,794
85,801
577,441
334,193
168
207
17
2.12
6.07
0.88
5,018
83,504
579,669
302,155
1,383
208
22
2.12
3.94
0.56
3,191
81,732
550,139
315,827
1,196
213
22
1.63
5.04
0.68
3,999
80,069
587,012
347,169
1,800
227
24
1.21
5.93
0.82
4,638
78,717
587,244
377,485
1,061
6,399 $ 6,697 $ 5,658 $ 4,568 $ 4,338
494
600
676
561
699
(771)
(1,345)
(2,065)
(1,974)
(4,661)
448
447
2,428
2,503
4,192
6,570
6,399
6,697
5,658
4,568
2004
Dot Com Recession
(7) Eurozone crisis continues; U. S. Treasury Bonds hit record lows; Fiscal cliff looms on horizon; Taxes increased sequestration a possibility on March 1,2013.
(6) Debt ceiling debate; U.S. Government debt downgraded to AA; U.S. Treasury bonds hit record lows as world stock markets tank; Greece defaults; European Union in crisis; 92 banks fail.
(1) 9/11 Terror Attack/ Recession begins; Enron fraud
(2) Hurricane Katrina - August 2005
(3) 200 b.p. drop in Fed funds rate 1st Quarter. Federal Reserve/Treasury bailout "Too big to Fail" bank, investment banks and money market funds. Oil reaches peak of $147/barrell
in August, then falls 75%. Stock market crashes, recession declared 12/07. Federal Reserve embarks on zero interest rate policy. Freddie Mac preferred Loss of $2,964,000 on
09/29/08
(4) GM and Chrysler declare bankruptcy. Unemployment rates highest since Great Depression. U.S. Government runs $1.2 trillion deficit. Bernie Madoff pleads guilty to largest
ponzi scheme of all time. 140 banks fail.
(5) Health care bill passes BP Oil spill - largest man made environmental disaster of all time. Financial regulatory reform bill (2,300 pages) passes. Bill does not address FNMA and
FHLMC crisis. Bush tax cuts extended. 157 banks fail.
Notes:
171
11
2.05
Loan reserve %
Employees:
Full-time
Part-time
1.14
2.4
Return on equity
1.88
0.15
0.33
Return on average assets
Selected Ratios:
Net Income
2010 (5)
The Great Recession
8,136 $ 6,650 $ 7,828 $ 11,114 $ 9,378 $ 10,841 $ 10,966 $ 6,570 $
133
223
268
569
673
266
463
1,344
(3,676)
(1,672)
(8,291)
(9,080)
(1,284)
(684)
(729)
(562)
4,264
2,950
6,845
5,225
2,347
(1,045)
141
3,614
8,857
8,136
6,650
7,828
11,114
9,378
10,841
10,966
2011 (6)
6,153
$
2012 (7)
7,008
Other real estate
Allowance for loan losses:
Balance, January 1
Recoveries
Charged off
Provision for loan losses
Balance, December 31
Peoples Financial Corporation and Subsidiaries
(in 000's)