PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2014 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-12103

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Mississippi

64-0709834

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Lameuse and Howard Avenues,

Biloxi, Mississippi

39533

(Address of principal executive offices)

(Zip Code)

(228) 435-5511

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At October 31, 2014, there were 15,000,000 shares of $1 par value common stock authorized, with 5,123,186 shares issued and outstanding.

Part 1 - Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)


	September 30, 2014		December 31, 2013
	(unaudited)		(audited)
Assets
Cash and due from banks	$	31,379	$	36,264

Federal funds sold		25,000

Available for sale securities		263,045		275,440

Held to maturity securities, fair value of $15,586 at September 30, 2014; $10,686 at December 31, 2013		15,617		11,142

Other investments		3,026		3,262

Federal Home Loan Bank Stock, at cost		4,302		3,834

Loans		358,192		375,349

Less: Allowance for loan losses		11,010		8,934


Loans, net		347,182		366,415

Bank premises and equipment, net of accumulated depreciation		24,105		25,308

Other real estate		9,710		9,630

Accrued interest receivable		2,206		2,607

Cash surrender value of life insurance		17,896		17,456

Other assets		9,802		10,906

Total assets	$	753,270	$	762,264

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)


	September 30, 2014			December 31, 2013
	(unaudited)			(audited)
Liabilities and Shareholders’ Equity
Liabilities:

Deposits:

Demand, non-interest bearing	$	134,954		$	107,117

Savings and demand, interest bearing		232,508			217,005

Time, $100,000 or more		41,056			60,519

Other time deposits		41,186			43,917


Total deposits		449,704			428,558

Federal funds purchased and securities sold under agreements to repurchase		120,774			139,639

Borrowings from Federal Home Loan Bank		62,505			77,684

Employee and director benefit plans liabilities		13,497			12,725

Other liabilities		4,417			4,511


Total liabilities		650,897			663,117

Shareholders’ Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 5,123,186 shares issued and outstanding at September 30, 2014 and December 31, 2013		5,123			5,123

Surplus		65,780			65,780

Undivided profits		32,862			34,259

Accumulated other comprehensive loss, net of tax		(1,392	)		(6,015	)


Total shareholders’ equity		102,373			99,147


Total liabilities and shareholders’ equity	$	753,270		$	762,264

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands except per share data)(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Interest income:

Interest and fees on loans	$	3,867	$	4,217	$	12,284	$	12,995

Interest and dividends on securities:

U.S. Treasuries		159		139		473		430

U.S. Government agencies		785		828		2,390		2,307

Mortgage-backed securities		234		228		720		458

States and political subdivisions		405		384		1,169		1,140

Other investments		12		6		16		12

Interest on federal funds sold		5		3		12		67


Total interest income		5,467		5,805		17,064		17,409


Interest expense:

Deposits		482		293		965		928

Borrowings from Federal Home Loan Bank		66		43		172		124

Federal funds purchased and securities sold under agreements to repurchase		23		38		72		127


Total interest expense		571		374		1,209		1,179


Net interest income		4,896		5,431		15,855		16,230

Provision for allowance for loan losses		3,541		542		4,615		4,619


Net interest income after provision for allowance for loan losses	$	1,355	$	4,889	$	11,240	$	11,611

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations (continued)

(in thousands except per share data)(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Non-interest income:

Trust department income and fees	$	391		$	368		$	1,108		$	1,062

Service charges on deposit accounts		1,437			1,618			4,656			4,649

Gain on sales and calls of securities					3						258

Income (loss) from other investments		(30	)		36						45

Increase in cash surrender value of life insurance		115			121			360			364

Other income		166			160			452			460


Total non-interest income		2,079			2,306			6,576			6,838


Non-interest expense:

Salaries and employee benefits		3,002			3,005			9,417			8,996

Net occupancy		600			544			1,867			1,780

Equipment rentals, depreciation and maintenance		748			722			2,321			2,164

FDIC assessments		259			162			799			607

Data processing		328			305			1,004			925

ATM expense		657			635			2,072			1,826

Other expense		893			1,041			2,799			2,742


Total non-interest expense		6,487			6,414			20,279			19,040


Income (loss) before income tax benefit		(3,053	)		781			(2,463	)		(591	)

Income tax benefit		(1,254	)		(105	)		(1,578	)		(936	)


Net income (loss)	$	(1,799	)	$	886		$	(885	)	$	345


Basic and diluted earnings (loss) per share	$	(.35	)	$	.18		$	(.17	)	$	.07

Dividends declared per share	$			$			$	.10		$

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013

Net income (loss)	$	(1,799	)	$	886		$	(885	)	$	345

Other comprehensive income (loss), net of tax:

Net unrealized gain (loss) on available for sale securities, net of tax of $294 and $981 for the three months ended September 30, 2014 and 2013, respectively, and $2,382 and $4,439 for the nine months ended September 30, 2014 and 2013, respectively		570			(1,904	)		4,623			(8,617	)

Reclassification adjustment for realized gains on available for sale securities called or sold, net of tax of $1 for the three months ended September 30, 2013 and $88 for the nine months ended September 30, 2013					(2	)					(170	)


Total other comprehensive income (loss)		570			(1,906	)		4,623			(8,787	)


Total comprehensive income (loss)	$	(1,229	)	$	(1,020	)	$	3,738		$	(8,442	)

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(in thousands except share and per share data)


										Accumulated
	Number of									Other
	Common		Common				Undivided			Comprehensive
	Shares		Stock		Surplus		Profits			Loss			Total

Balance, January 1, 2014		5,123,186	$	5,123	$	65,780	$	34,259		$	(6,015	)	$	99,147

Net loss								(885	)					(885	)

Other comprehensive income, net of tax											4,623			4,623

Cash dividends ($.10 per share)								(512	)					(512	)


Balance, September 30, 2014		5,123,186	$	5,123	$	65,780	$	32,862		$	(1,392	)	$	102,373

Note: Balances as of January 1, 2014 were audited.

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)(unaudited)


	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	(885	)	$	345
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation		1,364			1,331

Provision for allowance for loan losses		4,615			4,619

Loss on sales of other real estate		80			59

Writedown of other real estate		219			46

Gain on sales of bank premises and equipment					(15	)

Income from other investments					(45	)

Gain on sales and calls of securities					(258	)

Accretion of held to maturity securities		(2	)		(2	)

Change in accrued interest receivable		401			224

Increase in cash surrender value of life insurance		(360	)		(364	)

Change in other assets		964			756

Change in other liabilities		(1,562	)		(1,393	)

Net cash provided by operating activities	$	4,834		$	5,303

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)


	Nine Months Ended September 30,
	2014			2013
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities	$	21,193		$	125,329

Proceeds from maturities of held to maturity securities		215

Purchases of available for sale securities		(1,795	)		(174,169	)

Purchases of held to maturity securities		(4,688	)		(4,670	)

Purchases of Federal Home Loan Bank stock		(468	)		(685	)

Redemption of other investments		236			230

Proceeds from sales of bank premises and equipment					19

Proceeds from sales of other real estate		765			1,115

Insurance proceeds from casualty loss on other real estate					57

Loans, net change		13,474			29,186

Acquisition of bank premises and equipment		(161	)		(806	)

Investment in cash surrender value of life insurance		(80	)		(77	)

Net cash provided by (used in) investing activities		28,691			(24,471	)

Cash flows from financing activities:
Demand and savings deposits, net change		43,340			16,003

Time deposits, net change		(22,194	)		(28,758	)

Cash dividends		(512	)

Retirement of common stock					(181	)

Borrowings from Federal Home Loan Bank		1,667,500			212,500

Repayments to Federal Home Loan Bank		(1,682,679	)		(153,170	)

Federal funds purchased and securities sold under agreements to repurchase, net change		(18,865	)		(46,604	)

Net cash used in financing activities		(13,410	)		(210	)

Net decrease in cash and cash equivalents		20,115			(19,378	)
Cash and cash equivalents, beginning of period		36,264			54,020

Cash and cash equivalents, end of period	$	56,379		$	34,642

See notes to consolidated financial statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2014 and 2013

1. Basis of Presentation:

Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. It has two operating subsidiaries, PFC Service Corp., an inactive company, and The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the Bank’s three most outlying locations (the “trade area”).

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of September 30, 2014 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2013 Annual Report and Form 10-K.

The results of operations for the quarter or nine months ended September 30, 2014, are not necessarily indicative of the results to be expected for the full year.

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2013.

New Accounting Pronouncements - In April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-06, Technical Corrections and Improvements Related to Glossary Terms. This ASU added, deleted, corrected and modified terms in the Master Glossary of the Codification and was effective upon issuance. The adoption of this ASU did not have a material effect on the Company’s financial position, results of operations or cash flows. In August 2014, the FASB issued ASU No. 2014-14, Receivables - Troubled Debt

Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This ASU requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if certain conditions are met. ASU No. 2014-14 is effective for annual periods and interim periods within those annual periods beginning after December 31, 2014. In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 31, 2016, and interim periods within annual periods beginning after December 14, 2016. The adoption of ASU 2014-14 and ASU 2014-15 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 5,123,186 and 5,123,316 for the quarters ended September 30, 2014 and 2013, respectively, and 5,123,186 and 5,130,811 for the nine months ended September 30, 2014 and 2013, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks and federal funds sold. The Company paid $1,209,501 and $1,198,021 for the nine months ended September 30, 2014 and 2013, respectively, for interest on deposits and borrowings. Income tax payments of $320,000 and $810,000 were made during the nine months ended September 30, 2014 and 2013, respectively. Loans transferred to other real estate amounted to $1,143,953 and $3,695,825 during the nine months ended September 30, 2014 and 2013, respectively.

4. Investments:

The amortized cost and fair value of securities at September 30, 2014 and December 31, 2013, are as follows (in thousands):


			Gross		Gross
			Unrealized		Unrealized
September 30, 2014	Amortized Cost		Gains		Losses			Fair Value

Available for sale securities:

Debt securities:

U.S. Treasuries	$	37,669	$	146	$	(537	)	$	37,278

U.S. Government agencies		148,813		724		(5,462	)		144,075

Mortgage-backed securities		46,400		423		(452	)		46,371

States and political subdivisions		33,345		1,326					34,671


Total debt securities		266,227		2,619		(6,451	)		262,395

Equity securities		650							650


Total available for sale securities	$	266,877	$	2,619	$	(6,451	)	$	263,045


Held to maturity securities:

States and political subdivisions	$	15,617	$	73	$	(104	)	$	15,586


Total held to maturity securities	$	15,617	$	73	$	(104	)	$	15,586


			Gross		Gross
			Unrealized		Unrealized
December 31, 2013	Amortized Cost		Gains		Losses			Fair Value

Available for sale securities:

Debt securities:

U.S. Treasuries	$	44,636	$	54	$	(1,042	)	$	43,648

U.S. Government agencies		155,772		734		(10,701	)		145,805

Mortgage-backed securities		51,454		141		(1,269	)		50,326

States and political subdivisions		33,764		1,248		(1	)		35,011


Total debt securities		285,626		2,177		(13,013	)		274,790

Equity securities		650							650


Total available for sale securities	$	286,276	$	2,177	$	(13,013	)	$	275,440


Held to maturity securities:

States and political subdivisions	$	11,142	$	13	$	(469	)	$	10,686


Total held to maturity securities	$	11,142	$	13	$	(469	)	$	10,686

The amortized cost and fair value of debt securities at September 30, 2014 (in thousands), by contractual maturity, are shown on the next page. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost		Fair Value
Available for sale securities:
Due in one year or less	$	7,583	$	7,661
Due after one year through five years		66,926		67,065
Due after five years through ten years		58,613		58,927
Due after ten years		86,705		82,371
Mortgage-backed securities		46,400		46,371

Totals	$	266,227	$	262,395


Held to maturity securities:
Due in one year or less	$	657	$	659
Due after one year through five years		3,638		3,655
Due after five years through ten years		5,875		5,896
Due after ten years		5,447		5,376

Totals	$	15,617	$	15,586

Available for sale and held to maturity securities with gross unrealized losses at September 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):


	Less Than Twelve Months				Over Twelve Months				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
September 30, 2014:	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Treasuries	$	4,936	$	47	$	25,300	$	490	$	30,236	$	537

U.S. Government agencies		4,931		42		111,427		5,420		116,358		5,462

Mortgage-backed securities						28,317		452		28,317		452

States and political subdivisions		3,846		40		4,055		64		7,901		104

TOTAL	$	13,713	$	129	$	169,099	$	6,426	$	182,812	$	6,555


December 31, 2013:

U.S. Treasuries	$	29,708	$	1,042	$		$		$	29,708	$	1,042

U.S. Government agencies		113,446		10,322		4,621		379		118,067		10,701

Mortgage-backed securities		44,269		1,269						44,269		1,269

States and political subdivisions		7,690		470						7,690		470

TOTAL	$	195,113	$	13,103	$	4,621	$	379	$	199,734	$	13,482

At September 30, 2014, 7 of the 10 securities issued by the U.S. Treasury, 23 of the 29 securities issued by U.S. Government agencies, 7 of the 13 mortgage-backed securities and 21 of the 157 securities issued by states and political subdivisions contained unrealized losses.

Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell and it is not more likely than not that it will be required to sell these securities before maturity. While some available for sale securities have been sold for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of the evaluation of these securities, the Company has determined that the unrealized losses summarized in the tables above are not deemed to be other-than-temporary.

Securities with a fair value of $212,315,955 and $262,830,011 at September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

Proceeds from the sale of available for sale debt securities were $26,075,225 for the nine months ended September 30, 2013. Available for sale debt securities were sold for a realized gain of $257,997. There were no sales of available for sale securities in 2014.

5. Loans:

The composition of the loan portfolio at September 30, 2014 and December 31, 2013, is as follows (in thousands):


	September 30, 2014		December 31, 2013
Gaming	$	23,747	$	29,570

Residential and land development		16,873		19,403

Real estate, construction		39,976		44,987

Real estate, mortgage		242,128		237,158

Commercial and industrial		26,049		35,007

Other		9,419		9,224


Total	$	358,192	$	375,349

The age analysis of the loan portfolio, segregated by class of loans, as of September 30, 2014 and December 31, 2013, is as follows (in thousands):


													Loans Past
													Due Greater
	Number of Days Past Due												Than 90
					Greater		Total				Total		Days &
	30 - 59		60 - 89		Than 90		Past Due		Current		Loans		Still Accruing
September 30, 2014:
Gaming	$		$		$	591	$	591	$	23,156	$	23,747	$
Residential and land development						11,440		11,440		5,433		16,873
Real estate, construction		1,596		755		1,303		3,654		36,322		39,976		81
Real estate, mortgage		8,381		11,666		4,003		24,050		218,078		242,128		1,197
Commercial and industrial		878		1,061		216		2,155		23,894		26,049
Other		177		63				240		9,179		9,419


Total	$	11,032	$	13,545	$	17,553	$	42,130	$	316,062	$	358,192	$	1,278

December 31, 2013:
Gaming	$		$		$		$		$	29,570	$	29,570	$
Residential and land development		51				13,572		13,623		5,780		19,403
Real estate, construction		3,846				9,452		13,298		31,689		44,987		146
Real estate, mortgage		6,910		2,684		5,134		14,728		222,430		237,158		505
Commercial and industrial		1,192						1,192		33,815		35,007
Other		227		5				232		8,992		9,224


Total	$	12,226	$	2,689	$	28,158	$	43,073	$	332,276	$	375,349	$	651

The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A - F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. Loans with a grade of C may be placed on the watch list if weaknesses are not resolved which could result in potential loss or for other circumstances that require monitoring. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade of E will generally be applied to loans for customers with weaknesses inherent in the “D” classification and in which collection or liquidation in full is questionable. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. A grade of F is applied to loans which are considered uncollectible and of such little value that their continuance in an active bank is not warranted. Loans with this grade are charged off, even though partial or full recovery may be possible in the future.

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of September 30, 2014 and December 31, 2013, is as follows (in thousands):


	Loans With A Grade Of:
	A or B		C		D		E		F	Total
September 30, 2014:

Gaming	$	23,156	$		$		$	591	$	$	23,747

Residential and land development		4,004		1,401		28		11,440			16,873

Real estate, construction		33,069		729		3,813		2,365			39,976

Real estate, mortgage		202,585		4,025		17,396		18,122			242,128

Commercial and industrial		23,232		25		2,735		57			26,049

Other		9,377		9		31		2			9,419


Total	$	295,423	$	6,189	$	24,003	$	32,577	$	$	358,192

December 31, 2013:

Gaming	$	23,975	$	2,500	$		$	3,095	$	$	29,570

Residential and land development		4,236		1,544		51		13,572			19,403

Real estate, construction		38,808		781		2,220		3,178			44,987

Real estate, mortgage		204,569		4,495		17,852		10,242			237,158

Commercial and industrial		31,902		682		2,402		21			35,007

Other		9,131		24		50		19			9,224


Total	$	312,621	$	10,026	$	22,575	$	30,127	$	$	375,349

A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of September 30, 2014 and December 31, 2013, are as follows (in thousands):


	September 30, 2014		December 31, 2013

Gaming	$	591	$	1,223

Residential and land development		11,440		13,572

Real estate, construction		1,772		2,588

Real estate, mortgage		18,768		8,788

Commercial and industrial		880


Total	$	33,451	$	26,171

The Company has modified certain loans by granting interest rate concessions to these customers. These loans are in compliance with their modified terms, are currently accruing and the Company has classified them as troubled debt restructurings. Troubled debt restructurings as of September 30, 2014 and December 31, 2013 were as follows (in thousands except for number of contracts):


	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Related Allowance



September 30, 2014:
Real estate, construction		2	$	856	$	856	$	267
Real estate, mortgage		5		1,820		1,820		190

Total		7	$	2,676	$	2,676	$	457


December 31, 2013:
Real estate, construction		2	$	891	$	891	$	270
Real estate, mortgage		6		10,012		10,012		994
Commercial and industrial		1		678		678

Total		9	$	11,581	$	11,581	$	1,264

During September 2014, two loans which had been classified as troubled debt restructurings at December 31, 2013 became in default of their modified terms and were placed on nonaccrual. These loans included one loan that was included in the real estate – mortgage segment with a balance of $8,169,179 and one loan that was included in the commercial and industrial segment with a balance of $677,901 as of December 31, 2013.

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of September 30, 2014 and December 31, 2013, are as follows (in thousands):


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2014:
With no related allowance recorded:
Residential and land development	$	19,625	$	10,425	$		$	12,158	$
Real estate, construction		2,090		2,090				1,774		25
Real estate, mortgage		12,185		11,585				9,563		27
Commercial and industrial		880		880				680		15


Total		34,780		24,980				24,175		67


With a related allowance recorded:
Gaming		1,691		591		166		941
Residential and land development		2,119		1,015		177		1,016
Real estate, construction		538		538		291		567		11
Real estate, mortgage		9,003		9,003		4,312		8,965		202


Total		13,351		11,147		4,946		11,489		213


Total by class of loans:
Gaming		1,691		591		166		941
Residential and land development		21,744		11,440		177		13,174
Real estate, construction		2,628		2,628		291		2,341		36
Real estate, mortgage		21,188		20,588		4,312		18,528		229
Commercial and industrial		880		880				680		15


Total	$	48,131	$	36,127	$	4,946	$	35,664	$	280


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2013:
With no related allowance recorded:
Residential and land development	$	4,425	$	4,425	$		$	4,465	$
Real estate, construction		2,294		2,294				2,054		26
Real estate, mortgage		9,722		9,123				9,097		26
Commercial and industrial		678		678				689		24


Total		17,119		16,520				16,305		76


With a related allowance recorded:
Gaming		1,698		1,223		626		1,316
Residential and land development		17,576		9,147		471		15,909
Real estate, construction		1,185		1,185		337		1,239		23
Real estate, mortgage		9,677		9,677		1,110		8,801		306


Total		30,136		21,232		2,544		27,265		329


Total by class of loans:
Gaming		1,698		1,223		626		1,316
Residential and land development		22,001		13,572		471		20,374
Real estate, construction		3,479		3,479		337		3,293		49
Real estate, mortgage		19,399		18,800		1,110		17,898		332
Commercial and industrial		678		678				689		24


Total	$	47,255	$	37,752	$	2,544	$	43,570	$	405

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the quarters and nine months ended September 30, 2014 and 2013, and the balances of loans, individually and collectively evaluated for impairment, as of September 30, 2014 and 2013, are as follows (in thousands):


	Gaming			Residential and Land Development			Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Nine Months Ended September 30, 2014:
Allowance for Loan Losses:
Beginning Balance	$	977		$	776		$	695		$	5,553		$	632		$	301		$	8,934
Charge-offs		(701	)		(1,875	)		(108	)		(163	)		(9	)		(176	)		(3,032	)
Recoveries		261									147			18			67			493
Provision		12			1,550			73			2,975			(98	)		103			4,615

Ending Balance	$	549		$	451		$	660		$	8,512		$	543		$	295		$	11,010


For the Quarter Ended September 30, 2014:
Allowance for Loan Losses:
Beginning Balance	$	355		$	705		$	686		$	6,749		$	653		$	286		$	9,434
Charge-offs		(75	)		(1,875	)		(104	)		(127	)		(3	)		(60	)		(2,244	)
Recoveries		171									66			4			38			279
Provision		98			1,621			78			1,824			(111	)		31			3,541

Ending Balance	$	549		$	451		$	660		$	8,512		$	543		$	295		$	11,010


Allowance for loan losses, September 30, 2014:
Ending balance: individually evaluated for impairment	$	166		$	177		$	563		$	5,102		$	293		$	2		$	6,303

Ending balance: collectively evaluated for impairment	$	383		$	274		$	97		$	3,410		$	250		$	293		$	4,707


Total Loans, September 30, 2014:
Ending balance: individually evaluated for impairment	$	591		$	11,467		$	6,179		$	35,518		$	2,792		$	33		$	56,580

Ending balance: collectively evaluated for impairment	$	23,156		$	5,406		$	33,797		$	206,610		$	23,257		$	9,386		$	301,612


	Gaming			Residential and Land Development			Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Nine Months Ended September 30, 2013:
Allowance for Loan Losses:
Beginning Balance	$	1,541		$	200		$	967		$	5,273		$	593		$	283		$	8,857
Charge-offs		(474	)					(947	)		(623	)		(21	)		(173	)		(2,238	)
Recoveries		65			67			79			150			24			73			458
Provision		(143	)		3,068			586			999			4			105			4,619

Ending Balance	$	989		$	3,335		$	685		$	5,799		$	600		$	288		$	11,696


For the Quarter Ended September 30, 2013:
Allowance for Loan Losses:
Beginning Balance	$	986		$	3,343		$	1,330		$	5,588		$	627		$	276		$	12,150
Charge-offs								(900	)		(342	)		(21	)		(43	)		(1,306	)
Recoveries		65						79			148			2			16			310
Provision		(62	)		(8	)		176			405			(8	)		39			542

Ending Balance	$	989		$	3,335		$	685		$	5,799		$	600		$	288		$	11,696


Allowance for loan losses, September 30, 2013:
Ending balance: individually evaluated for impairment	$	626		$	3,149		$	651		$	2,128		$	330		$	33		$	6,917

Ending balance: collectively evaluated for impairment	$	363		$	186		$	34		$	3,671		$	270		$	255		$	4,779


Total Loans, September 30, 2013:
Ending balance: individually evaluated for impairment	$	13,888		$	20,974		$	5,570		$	28,693		$	2,505		$	80		$	71,710

Ending balance: collectively evaluated for impairment	$	28,679		$	5,836		$	39,035		$	210,327		$	32,359		$	8,476		$	324,712

7. Deposits:

At September 30, 2014, time deposits of $100,000 or more include brokered deposits of $5,000,000, which mature in 2017.

8. Fair Value Measurements and Disclosures:

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a non-recurring basis, such as impaired loans and ORE. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used to determine the fair value of financial assets and liabilities.

Cash and Due from Banks

The carrying amount shown as cash and due from banks approximates fair value.

Federal Funds Sold

The carrying amount shown as federal funds sold approximates fair value.

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. The other source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. All of the Company’s available for sale securities are Level 2 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.

Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal

maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets.

Other Real Estate

In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. Other real estate is a non-recurring Level 3 asset.

Cash Surrender Value of Life Insurance

The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.

Deposits

The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

The carrying amount shown as federal funds purchased and securities sold under agreements to repurchase approximates fair value.

Borrowings from Federal Home Loan Bank

The fair value of Federal Home Loan Bank (“FHLB”) fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of FHLB variable rate borrowings is estimated to be its carrying value.

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of September 30, 2014 and December 31, 2013 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
September 30, 2014:
U.S. Treasuries	$	37,278	$	$	37,278	$
U.S. Government agencies		144,075			144,075
Mortgage-backed securities		46,371			46,371
States and political subdivisions		34,671			34,671
Equity securities		650			650

Total	$	263,045	$	$	263,045	$


December 31, 2013:
U.S. Treasuries	$	43,648	$	$	43,648	$
U.S. Government agencies		145,805			145,805
Mortgage-backed securities		50,326			50,326
States and political subdivisions		35,011			35,011
Equity securities		650			650

Total	$	275,440	$	$	275,440	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2014 and December 31, 2013 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
September 30, 2014	$	12,346	$	$	$	12,346
December 31, 2013		18,831				18,831

The following table presents a summary of changes in the fair value of impaired loans which are measured using level 3 inputs (in thousands):


	For the Nine Months Ended September 30, 2014			For the Year Ended December 31, 2013
Balance, beginning of period	$	18,831		$	16,030

Additions to impaired loans and troubled debt restructurings		212			17,424

Principal payments, charge-offs and transfers to other real estate		(4,297	)		(15,153	)

Change in allowance for loan losses on impaired loans		(2,400	)		530


Balance, end of period	$	12,346		$	18,831

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2014 and December 31, 2013 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
September 30, 2014	$	9,710	$	$	$	9,710
December 31, 2013		9,630				9,630

The following table presents a summary of changes in the fair value of other real estate which is measured using level 3 inputs (in thousands):


	For the Nine Months Ended September 30, 2014			For the Year Ended December 31, 2013
Balance, beginning of period	$	9,630		$	7,008

Loans transferred to ORE		1,144			4,537

Sales		(845	)		(1,188	)

Writedowns		(219	)		(670	)

Insurance proceeds for casualty loss					(57	)


Balance, end of period	$	9,710		$	9,630

The carrying value and estimated fair value of assets and liabilities, by level within the fair value hierarchy, at September 30, 2014 and December 31, 2013, are as follows (in thousands):


	Carrying Amount		Fair Value Measurements Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
September 30, 2014:
Financial Assets:
Cash and due from banks	$	31,379	$	31,379	$		$		$	31,379
Federal funds sold		25,000		25,000						25,000
Available for sale securities		263,045				263,045				263,045
Held to maturity securities		15,617				15,586				15,586
Other investments		3,025		3,025						3,025
Federal Home Loan Bank stock		4,302				4,302				4,302
Loans, net		347,182						348,610		348,610
Other real estate		9,710						9,710		9,710
Cash surrender value of life insurance		17,896						17,896		17,896
Financial Liabilities:
Deposits:
Non-interest bearing		134,954		134,954						134,954
Interest bearing		314,750						315,920		315,920
Federal funds purchased and securities sold under agreements to repurchase		120,774		120,774						120,774
Borrowings from Federal Home Loan Bank		62,505				63,377				63,377


December 31, 2013:
Financial Assets:
Cash and due from banks	$	36,264	$	36,264	$		$		$	36,264
Available for sale securities		257,440				275,440				275,440
Held to maturity securities		11,142				10,686				10,686
Other investments		3,262		3,262						3,262
Federal Home Loan Bank stock		3,834				3,834				3,834
Loans, net		366,415						369,117		369,117
Other real estate		9,630						9,630		9,630
Cash surrender value of life insurance		17,456						17,456		17,456
Financial Liabilities:
Deposits:
Non-interest bearing		107,117		107,117						107,117
Interest bearing		321,441						322,535		322,535
Federal funds purchased and securities sold under agreements to repurchase		139,639		139,639						139,639
Borrowings from Federal Home Loan Bank		77,684				79,051				79,051

9. Reclassifications:

Certain reclassifications, which had no effect on prior year net income, have been made to prior period statements to conform to current year presentation.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The Company is a one-bank holding company headquartered in Biloxi, Mississippi. It has two operating subsidiaries, PFC Service Corp., an inactive company, and The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the Bank’s three most outlying locations (the “trade area”).

The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2013.

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

In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-06, Technical Corrections and Improvements Related to Glossary Terms. This ASU added, deleted, corrected and modified terms in the Master Glossary of the Codification and was effective upon issuance. The adoption of this ASU did not have a material effect on the Company’s financial position, results of operations or cash flows.

In August 2014, the FASB issued ASU No. 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This ASU requires that a mortgage loan be derecognized and a separate other

receivable be recognized upon foreclosure if certain conditions are met. ASU No. 2014-14 is effective for annual periods and interim periods within those annual periods beginning after December 31, 2014. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This ASU defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 31, 2016, and interim periods within annual periods beginning after December 14, 2016. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

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 allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. Management believes that the ALL is adequate and appropriate for all periods presented in these financial statements. If there was a deterioration of any of the factors considered by Management in evaluating the ALL, the estimate of loss would be updated, and additional provisions for loan losses may be required. The analysis divides the portfolio into two segments: a pool analysis of loans based upon 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. 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.

OVERVIEW

The Company is a community bank serving the financial and trust needs of its customers in its trade area of south Mississippi, southeast Louisiana and southwest Alabama. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.

The Company incurred a net loss of $1,799,000 for the third quarter of 2014 compared with net income of $886,000 for the third quarter of 2013 and a net loss of $885,000 for the first three quarters of 2014 compared with net income of $345,000 for the first three quarters of 2013. Results

in 2014 were directly related to the large provision for the allowance for loan losses recorded in the third quarter of 2014. Management updated its evaluation of collateral relating to two loans during the third quarter of 2014 as a result of receiving new appraisals. These new evaluations resulted in additional loan loss provisions for these two credits. The provision for the allowance for loan losses was $3,541,000 and $4,615,000 for the third quarter and first three quarters of 2014, respectively, compared with $542,000 and $4,619,000, respectively, for the third quarter and first three quarters of 2013.

Managing the net interest margin in the Company’s highly competitive market and in context of larger economic conditions has been very challenging and will continue to be so for the foreseeable future. The yield on average loans has increased as average nonaccrual loans have decreased significantly in 2014 as compared with 2013. The Company extended durations on its investments during 2013 in order to increase yield, which can be seen from the improved yield on average available for sale securities.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be emphasized during these difficult economic times, as the local and national economy continues to negatively impact collateral values and borrowers’ ability to repay their loans. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $33,451,000 and $26,171,000 at September 30, 2014 and December 31, 2013, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

Non-interest income decreased $227,000 and $262,000 for the three and nine months ended September 30, 2014 as compared with 2013 results. Service charges on deposit accounts decreased $181,000 for the three months ended September 30, 2014. Results for the nine months ended September 30, 2013 included gains on sales of securities of $258,000, while there were no sales in 2014.

Non-interest expense increased $73,000 and $1,239,000 for the three and nine months ended September 30, 2014 as compared with 2013 results. This increase for the three months ended September 30, 2014 was the result of increases in net occupancy expense of $56,000 and FDIC assessments of $97,000, while other expenses decreased $148,000 as compared with 2013. This increase for the nine months ended September 30, 2014 was the result of increases in salaries and employee benefits of $421,000, equipment rentals, depreciation and maintenance of $157,000, FDIC assessments of $192,000, and ATM expenses of $246,000 as compared with 2013.

Total assets at September 30, 2014 decreased $8,994,000 as compared with December 31, 2013. Loans decreased $17,157,000 at September 30, 2014 as compared with December 31, 2013, as principal payments, maturities, charge-offs and foreclosures on existing loans exceeded new loans. Federal funds sold were $25,000,000 at September 30, 2014 in the management of the Company’s liquidity position.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the amount by which interest income on loans, investments and other interest earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company’s income. Management’s objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income.

Quarter Ended September 30, 2014 as Compared with Quarter Ended September 30, 2013

The Company’s average interest earning assets decreased approximately $56,762,000, or 8%, from approximately $711,253,000 for the third quarter of 2013 to approximately $654,491,000 for the third quarter of 2014. Average loans decreased as loan demand has been weak in the Company’s trade area and the volume of maturities and pay-offs, particularly in the gaming portfolio, have been significant.

The average yield on earning assets increased by 9 basis points, from 3.38% for the third quarter of 2013 to 3.47% for the third quarter of 2014. The yield on average loans increased from 4.21% in 2013 to 4.33% in 2014 as a result of the reduction in average nonaccrual loans. Average nonaccrual loans decreased from approximately $47,632,000 in 2013 to approximately $29,180,000 in 2014.

Average interest bearing liabilities decreased approximately $54,781,000, or 10%, from approximately $564,722,000 for the third quarter of 2013 to approximately $509,941,000 for the third quarter of 2014. Average time deposits decreased primarily as customers have moved their accounts to transaction deposits and brokered deposits matured in 2013. Average federal funds purchased and securities sold under agreements to repurchase, which only included non-deposit accounts, decreased $76,901,000 as these customers reallocate their balances periodically. Average borrowings from the Federal Home Loan Bank increased $66,165,000 due to the liquidity needs of the bank subsidiary.

The average rate paid on interest bearing liabilities for the third quarter of 2013 was .26% as compared with .45% for the third quarter of 2014. This increase was due to an immaterial interest expense adjustment of $231,000 on time deposits. The average rate paid on time deposits would have been .27% in 2014 without this adjustment.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.12% for the quarter ended September 30, 2014, down 5 basis points from 3.17% for the quarter ended September 30, 2013. The net interest margin on tax-equivalent basis would have been 3.26% without the interest adjustment on time deposits.

Nine Months Ended September 30, 2014 as Compared with Nine Months Ended September 30, 2013

The Company’s average interest earning assets decreased approximately $79,567,000, or 11%, from approximately $740,290,000 for the first three quarters of 2013 to approximately $660,723,000 for the first three quarters of 2014. Average loans decreased as loan demand has been weak in the Company’s trade area and the volume of maturities and pay-offs, particularly in the gaming portfolio, have been significant. Average federal funds sold also decreased based on the liquidity position of the bank subsidiary.

The average yield on earning assets increased by 33 basis points, from 3.24% for the first three quarters of 2013 to 3.57% for the first three quarters of 2014. The yield on average loans increased from 4.22% for the first three quarters of 2013 to 4.49% for the first three quarters of 2014 as a result of the reduction in average nonaccrual loans. Average nonaccrual loans decreased from approximately $49,743,000 in 2013 to approximately $29,811,000 in 2014. The yield on average taxable available for sale securities increased from 1.73% for the first three quarters of 2013 to 2.01% for the first three quarters of 2014 as a result of the Company’s strategy of extending the duration of new investments. Future security purchases may be of shorter duration in anticipation of rising rates in the future.

Average interest bearing liabilities decreased approximately $72,094,000, or 12%, from approximately $590,582,000 for the first three quarters of 2013 to approximately $518,488,000 for the first three quarters of 2014. Average time deposits decreased primarily as $24,000,000 in brokered deposits matured during 2013. Average federal funds purchased and securities sold under agreements to repurchase, which only included non-deposit accounts, decreased $66,607,000 as these customers reallocate their balances periodically. Average borrowings from the Federal Home Loan Bank increased $50,460,000 due to the liquidity needs of the bank subsidiary.

The average rate paid on interest bearing liabilities increased 4 basis points, from .27% for the first three quarters of 2013 to .31% for the first three quarters of 2014.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.32% for the first three quarters of 2014, up 29 basis points from 3.03% for the first three quarters 2013.

The tables below analyze the changes in tax-equivalent net interest income for the quarters ended September 30, 2014 and 2013 and the nine months ended September 30, 2014 and 2013.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)


	Three Months Ended September 30, 2014							Three Months Ended September 30, 2013
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	356,980	$	3,868		4.33	%	$	400,355	$	4,217		4.21	%

Federal funds sold		9,083		5		0.22	%		7,805		3		0.15	%

HTM:

Non taxable (1)		13,427		116		3.46	%		11,788		97		3.29	%

AFS:

Taxable		234,779		1,178		2.01	%		253,553		1,195		1.89	%

Non taxable (1)		35,437		498		5.62	%		35,905		485		5.40	%

Other		4,785		12		1.00	%		1,847		6		1.30	%


Total	$	654,491	$	5,677		3.47	%	$	711,253	$	6,003		3.38	%

Savings & interest-bearing DDA	$	227,304	$	42		0.07	%	$	237,141	$	42		0.07	%

Time deposits		86,529		440		2.03	%		120,737		251		0.83	%

Federal funds purchased		112,031		23		0.08	%		188,932		38		0.08	%

FHLB advances		84,077		66		0.31	%		17,912		43		0.96	%


Total	$	509,941	$	571		0.45	%	$	564,722	$	374		0.26	%


Net tax-equivalent spread						3.02	%						3.11	%


Net tax-equivalent margin on earning assets						3.12	%						3.17	%

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2014 and 2013.

(2)	Loan fees of $193 and $104 for 2014 and 2013, respectively, are included in these figures.

(3)	Includes nonaccrual loans.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)


	Nine Months Ended September 30, 2014							Nine Months Ended September 30, 2013
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	364,427	$	12,284		4.49	%	$	410,921	$	12,995		4.22	%

Federal funds sold		6,753		12		0.24	%		34,371		67		0.26	%

HTM:
Non taxable (1)		12,786		334		3.48	%		9,412		259		3.67	%

AFS:
Taxable		237,569		3,583		2.01	%		246,918		3,195		1.73	%

Non taxable (1)		35,023		1,438		5.47	%		36,955		1,468		5.30	%

Other		4,165		16		0.51	%		1,713		12		0.93	%


Total	$	660,723	$	17,667		3.57	%	$	740,290	$	17,996		3.24	%

Savings & interest-bearing DDA	$	232,981	$	130		0.07	%	$	253,401	$	139		0.07	%

Time deposits		93,081		835		1.20	%		128,608		789		0.82	%

Federal funds purchased		130,721		72		0.07	%		197,328		127		0.09	%

FHLB advances		61,705		172		0.37	%		11,245		124		1.47	%


Total	$	518,488	$	1,209		0.31	%	$	590,582	$	1,179		0.27	%


Net tax-equivalent spread						3.25	%						2.97	%


Net tax-equivalent margin on earning assets						3.32	%						3.03	%

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2014 and 2013.

(2)	Loan fees of $449 and $350 for 2014 and 2013, respectively, are included in these figures.

(3)	Includes nonaccrual loans.

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)


	For the Quarter Ended
	September 30, 2014 compared with September 30, 2013
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	(457	)	$	121		$	(13	)	$	(349	)

Federal funds sold		1			1						2

Held to maturity securities:

Non taxable		13			5			1			19
Available for sale securities:
Taxable		(88	)		77			(6	)		(17	)
Non taxable		(6	)		20			(1	)		13
Other		10			(1	)		(3	)		6


Total	$	(527	)	$	223		$	(22	)	$	(326	)


Interest paid on:

Savings & interest-bearing DDA	$	(2	)	$	2		$			$

Time deposits		(71	)		363			(103	)		189

Federal funds purchased		(15	)		1			(1	)		(15	)

FHLB advances		159			(29	)		(107	)		23


Total	$	71		$	337		$	(211	)	$	197

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)


	For the Nine Months Ended
	September 30, 2014 compared with September 30, 2013
	Volume			Rate			Rate/ Volume			Total
Interest earned on:

Loans	$	(1,470	)	$	855		$	(96	)	$	(711	)

Federal funds sold		(54	)		(6	)		5			(55	)

Held to maturity securities:
Non taxable		93			(13	)		(5	)		75

Available for sale securities:
Taxable		(121	)		529			(20	)		388
Non taxable		(77	)		49			(2	)		(30	)
Other		17			(5	)		(8	)		4


Total	$	(1,612	)	$	1,409		$	(126	)	$	(329	)


Interest paid on:

Savings & interest-bearing DDA	$	(11	)	$	2		$			$	(9	)

Time deposits		(218	)		365			(101	)		46

Federal funds purchased		(43	)		(18	)		6			(55	)

FHLB advances		556			(93	)		(415	)		48


Total	$	284		$	256		$	(510	)	$	30

Provision for Loan Losses

In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. The Company’s Loan Review and Special Assets Departments play key roles in monitoring the loan portfolio and managing problem loans. New loans and, on a periodic basis, existing loans are reviewed to evaluate compliance with the loan policy. Loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area; residential and land development; construction and commercial real estate loans; and their direct and indirect impact on its operations are evaluated on a monthly basis. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. Lenders experienced in workout scenarios consult with loan officers and customers to address non-performing loans. A watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation.

Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and identify and estimate potential losses based on the best available information. The potential effect resulting from the economic downturn on a national and local level, the decline in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral.

The Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $3,541,000 and $542,000 for the third quarters of 2014 and 2013, respectively, and $4,615,000 and $4,619,000 for the first three quarters of 2014 and 2013, respectively. As a result of receiving new appraisals during the third quarter of 2014, the Company updated the evaluation of the collateral value relating to two previously impaired loans. An additional loan loss provision of $1,700,000 was recorded for one out-of-area residential development loan. An additional loan loss provision of $2,100,000 was recorded for one commercial real estate loan secured by a hotel in our trade area. During the second quarter of 2013, the Company recorded a loan loss provision of $3,000,000 on the out-of-area residential development loan. The allowance for loan losses as a percentage of loans was 3.07% and 2.38% at September 30, 2014 and December 31, 2013, respectively. The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans were $33,451,000 and $26,171,000 at September 30, 2014 and December 31, 2013, respectively, specific reserves of only $4,489,000 and $1,280,000, respectively, have 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 September 30, 2014.

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

Non-interest income

Quarter Ended September 30, 2014 as Compared with Quarter Ended September 30, 2013

Non-interest income decreased $227,000 for the third quarter of 2014 as compared with the third quarter of 2013. Trust department income and fees increased while service charges on deposit accounts and income from other investments decreased in 2014 as compared with 2013.

Trust department income and fees increased $23,000 in 2014 as compared with 2013 as a result of the increase in market value, on which fees are based, of personal trust accounts.

Service charges on deposit accounts decreased by $181,000 during the third quarter of 2014 as compared with the third quarter of 2013. ATM fee income decreased $182,000 as the Company’s off-site ATMs at a casino transferred to another vendor during 2014.

The Company realized a loss from operations of its investment in a low income housing partnership in 2014 as compared with income from operations in 2013 as a result of decreased occupancy.

Nine Months Ended September 30, 2014 as Compared with Nine Months Ended September 30, 2013

Non-interest income decreased $262,000 for the first three quarters of 2014 as compared with the first three quarters of 2013. Trust department income accounts increased and income from other investments decreased in 2014 as compared with 2013. During the first three quarters of 2013, the Company realized gains from sales and calls of securities while there were no sales or calls in 2014.

Trust department income and fees increased $46,000 in 2014 as compared with 2013 as a result of the increase in market value, on which fees are based, of personal trust accounts.

The Company realized no income from operations of its investment in a low income housing partnership in 2014 as compared with income from operations in 2013 as a result of decreased occupancy.

Non-interest expense

Quarter Ended September 30, 2014 as Compared with Quarter Ended September 30, 2013

Total non-interest expense increased $73,000 for the third quarter of 2014 as compared with the third quarter of 2013. Net occupancy increased $56,000; equipment rentals, depreciation and maintenance increased $26,000; FDIC assessments increased $97,000; data processing expenses increased $23,000; ATM expense increased $22,000 and other expenses decreased $148,000 for the third quarter of 2014 as compared with the third quarter of 2013.

The increase in net occupancy was primarily the result of increased insurance costs during 2014.

The increase in equipment rentals, depreciation and maintenance expense was primarily the result of servicing costs associated with bank-wide hardware and software conversions during 2014.

FDIC assessment costs in 2013 included a refund of prepaid assessments which results in 2013 expense being lower than 2014 expense.

Data processing costs increased in 2014 as compared with 2013 as result of additional costs associated with bank-wide hardware and software conversions.

ATM expenses increased in 2014 as a result of increased ATM activity in the current year.

Other expenses decreased in 2014 as 2013’s results included costs incurred to produce a new advertising campaign and the Company’s legal fees decreased in 2014 as compared with 2013.

Nine Months Ended September 30, 2014 as Compared with Nine Months Ended September 30, 2013

Total non-interest expense increased $1,239,000 for the first three quarters of 2014 as compared with the first three quarters of 2013. Salaries and employee benefits increased $421,000; equipment rentals, depreciation and maintenance increased $157,000; FDIC assessments increased $192,000; data processing expenses increased $79,000 and ATM expense increased $246,000 for the first three quarters of 2014 as compared with the first three quarters of 2013.

The increase in salaries and employee benefits was primarily the result of an increase in salaries and increase in costs relating to the deferred compensation plans. Salaries increased $170,000 in the first three quarters of 2014 as compared with the first three quarters of 2013 due to merit raises. Costs associated with the Company’s deferred compensation plans increased $204,000 as a result of a change in the discount rate utilized to compute the related liabilities.

The increase in equipment rentals, depreciation and maintenance expense was primarily the result of servicing costs associated with bank-wide hardware and software conversions during 2014.

FDIC assessment costs in 2013 included a refund of prepaid assessments which results in 2013 expense being lower than 2014 expense.

Data processing costs increased in 2014 as compared with 2013 as result of additional costs associated with bank-wide hardware and software conversions.

ATM expenses increased in 2014 as a result of increased ATM activity in the current year.

Income Taxes (Benefit)

Income taxes have been impacted by non-taxable income and federal tax credits during the quarters and nine months ended September 30, 2014 and 2013, as follows (in thousands except rate):


	Quarters Ended September 30,
	2014						2013
	Tax			Rate			Tax			Rate
Taxes at statutory rate	$	(1,038	)		(34	)	$	265			34
Increase (decrease) resulting from:
Tax-exempt interest income		(142	)		(5	)		(249	)		(32	)
Income from BOLI		(39	)		(1	)		(42	)		(5	)
Federal tax credits		(75	)		(2	)		(74	)		(9	)
Other		40			1			(5	)		(1	)

Total income taxes (benefit)	$	(1,254	)		(41	)	$	(105	)		(13	)


	Nine Months Ended September 30,
	2014						2013
	Tax			Rate			Tax			Rate
Taxes at statutory rate	$	(837	)		(34	)	$	(201	)		(34	)
Increase (decrease) resulting from:
Tax-exempt interest income		(402	)		(16	)		(395	)		(66	)
Income from BOLI		(122	)		(5	)		(124	)		(21	)
Federal tax credits		(223	)		(10	)		(222	)		(38	)
Other		6			1			6			1

Total income taxes (benefit)	$	(1,578	)		(64	)	$	(936	)		(158	)

FINANCIAL CONDITION

Cash and due from banks decreased $4,885,000 at September 30, 2014, compared with December 31, 2013 in the management of the bank subsidiary’s liquidity position.

Federal funds sold totaled $25,000,000 at September 30, 2014 as a result of the bank subsidiary’s liquidity position.

Loans decreased $17,157,000 at September 30, 2014 compared with December 31, 2013, as principal payments, maturities, charge-offs and foreclosures on existing loans exceeded new loans.

Other real estate (“ORE”) increased $80,000 at September 30, 2014 as compared with December 31, 2013. Loans totaling $1,144,000 were transferred into ORE while $845,000 was sold for a loss of $80,000 and writedowns of ORE to fair value were $219,000 during the first nine months of 2014.

Other assets decreased $1,104,000 at September 30, 2014 as compared with December 31, 2013 primarily as the Company received an income tax refund of $1,215,000.

Total deposits increased $21,146,000 at September 30, 2014, as compared with December 31, 2013. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically.

Federal funds purchased and securities sold under agreements to repurchase decreased $18,865,000 at September 30, 2014 as compared with December 31, 2013 as several county and municipal entities reallocated their balances from a non-deposit account during 2014.

Borrowings from the Federal Home Loan Bank decreased $15,179,000 at September 30, 2014 as compared with December 31, 2013 based on the liquidity needs of the bank subsidiary.

Employee and director benefit plans liabilities increased $772,000 at September 30, 2014 as compared with December 31, 2013 due to deferred compensation benefits earned by officers and directors during 2014.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders.

The Company and the Bank are subject to regulatory capital adequacy requirements imposed by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of the bank subsidiary’s assets and certain off-balance sheet items, adjusted for credit risk, as calculated under regulatory accounting practices must be met. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks and to account for off-balance sheet exposure. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets.

As of September 30, 2014, the most recent notification from the Federal Deposit Insurance Corporation categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater and a Leverage capital ratio of 5.00% or greater. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Company as of September 30, 2014 and December 31, 2013, are as follows (in thousands):


	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
September 30, 2014:
Total Capital (to Risk Weighted Assets)	$	109,580		23.20	%	$	37,792		8.00	%
Tier 1 Capital (to Risk Weighted Assets)		103,612		21.93	%		18,896		4.00	%
Tier 1 Capital (to Average Assets)		103,612		13.89	%		29,842		4.00	%

December 31, 2013:
Total Capital (to Risk Weighted Assets)	$	111,141		22.79	%	$	39,022		8.00	%
Tier 1 Capital (to Risk Weighted Assets)		105,009		21.54	%		19,511		4.00	%
Tier 1 Capital (to Average Assets)		105,009		13.48	%		31,170		4.00	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of September 30, 2014 and December 31, 2013, are as follows (in thousands):


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2014:
Total Capital (to Risk Weighted Assets)	$	105,879		22.44	%	$	37,743		8.00	%	$	47,179		10.00	%
Tier 1 Capital (to Risk Weighted Assets)		99,918		21.18	%		18,872		4.00	%		28,307		6.00	%
Tier 1 Capital (to Average Assets)		99,918		13.56	%		29,473		4.00	%		36,842		5.00	%

December 31, 2013:
Total Capital (to Risk Weighted Assets)	$	106,870		21.94	%	$	38,968		8.00	%	$	48,711		10.00	%
Tier 1 Capital (to Risk Weighted Assets)		100,746		20.69	%		19,484		4.00	%		29,227		6.00	%
Tier 1 Capital (to Average Assets)		100,746		13.02	%		30,958		4.00	%		38,697		5.00	%

In addition to monitoring its risk-based capital ratios, the Company also determines the primary capital ratio on a quarterly basis. This ratio was 14.77% at September 30, 2014, which is well above the regulatory minimum of 6.00%. Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of maintaining its primary capital ratio at 8.00%, which is the minimum requirement for classification as being “well-capitalized” by the banking regulatory authorities.

LIQUIDITY

Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. The Company manages and monitors its liquidity position through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a monthly basis in the management of its liquidity needs and also conducts periodic contingency testing on its liquidity plan.

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. Borrowings from the FHLB, federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position. The Company has also been approved to participate in the Federal Reserve Bank’s Discount Window Primary Credit Program, which it intends to use only as a contingency.

REGULATORY MATTERS

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

steps and actions to enhance its risk management, asset quality and liquidity policies, controls and procedures. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators.

Item 4: Controls and Procedures

As of September 30, 2014, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters is expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company.

Item 5: Other Information

None.

Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits



Exhibit 31.1:		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

Exhibit 31.2:		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

Exhibit 32.1:		Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350

Exhibit 32.2:		Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350

Exhibit 101		The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the quarters and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2014, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 and (vi) Notes to the Unaudited Consolidated Financial Statements for the nine months ended September 30, 2014 and 2013.

(b) Reports on Form 8-K

A Form 8-K was filed on July 23, 2014 and October 22, 2014.

SIGNATURES

Pursuant to the requirement of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PEOPLES FINANCIAL CORPORATION

(Registrant)



Date:		November 13, 2014

By:		/s/ Chevis C. Swetman
		Chevis C. Swetman
		Chairman, President and Chief Executive Officer
		(principal executive officer)



Date:		November 13, 2014

By:		/s/ Lauri A. Wood
		Lauri A. Wood
		Chief Financial Officer and Controller
		(principal financial and accounting officer)