Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The Company is a
one-bank
holding company headquartered in Biloxi, Mississippi. The Company 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 Banks three most outlying locations (the trade area).
The
following presents Managements 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
Managements Discussion and Analysis included in the Companys Form
10-K
for the year ended December 31, 2016.
Forward-Looking Information
Congress passed the Private
Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a companys 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 Companys 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 Companys control.
New Accounting Pronouncements
The Financial Accounting
Standards Board (FASB) has issued several new accounting standards updates for the first three quarters of 2017 which are disclosed in the Notes to Unaudited Consolidated Financial Statements. The Company does not generally expect that
these updates will have a material effect on its financial position or results of operations but the effect of ASU
2016-13
is still being considered.
29
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.
Investments
Investments which are classified as
available for sale are stated at fair value. A decline in the market value of an investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the
security is established. The decline in value attributed to
non-credit
related factors is recognized in other comprehensive income. The determination of the fair value of securities may require Management to
develop estimates and assumptions regarding the amount and timing of cash flows.
Allowance for loan losses
The Companys allowance for loan losses (ALL) 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 Managements 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 ORE property
30
is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. If Management determines that the fair value
of a property has decreased subsequent to foreclosure, the Company records a write down which is included in
non-interest
expense.
Employee Benefit Plans
Employee benefit plan liabilities
and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates
regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.
Income Taxes
GAAP requires the asset and liability
approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. As part
of the process of preparing our consolidated financial statements, the Company is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items, such as the provision for the allowance for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are
included in our consolidated statement of condition. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a
valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent the
Company establishes a valuation allowance or adjusts this allowance in a period, we must include an expense or benefit within the tax provision in the consolidated statement of income.
GAAP Reconciliation and Explanation
This Form
10-Q
contains
non-GAAP
financial measures determined by methods other than in accordance with GAAP. Such
non-GAAP
financial measures
include taxable equivalent interest income and taxable equivalent net interest income. Management uses these
non-GAAP
financial measures because it believes they are useful for evaluating our operations and
performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these
non-GAAP
financial measures provide users
of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These
non-GAAP
financial measures should not be
considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP
performance measures for the three months and nine months ended September 30, 2017 and 2016 is included in the table on the following page.
31
RECONCILIATION OF
NON-GAAP
PERFORMANCE MEASURES (In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - taxable equivalent
|
|
$
|
4,751
|
|
|
$
|
4,753
|
|
|
$
|
14,232
|
|
|
$
|
14,401
|
|
Taxable equivalent adjustment
|
|
|
(128
|
)
|
|
|
(160
|
)
|
|
|
(410
|
)
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (GAAP)
|
|
$
|
4,623
|
|
|
$
|
4,593
|
|
|
$
|
13,822
|
|
|
$
|
13,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - taxable equivalent
|
|
$
|
4,362
|
|
|
$
|
4,486
|
|
|
$
|
13,219
|
|
|
$
|
13,625
|
|
Taxable equivalent adjustment
|
|
|
(128
|
)
|
|
|
(160
|
)
|
|
|
(410
|
)
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (GAAP)
|
|
$
|
4,234
|
|
|
$
|
4,326
|
|
|
$
|
12,809
|
|
|
$
|
13,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OVERVIEW
The Company is
a community bank serving the financial and trust needs of its customers in our trade area, which is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches,
the bank subsidiarys three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through
de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.
The Company earned net income of
$236,000 for the third quarter of 2017 compared with net income of $406,000 for the third quarter of 2016 and net income of $1,463,000 for the first three quarters of 2017 compared with net income of $543,000 for the first three quarters of 2016.
Results for the first three quarters of 2017 were significantly impacted by a
non-recurring
gain of $429,000 from the redemption of death benefits on bank owned life insurance and a tax benefit of $338,000,
which reflects a correction to expected refunds for prior years.
Managing the net interest margin in the Companys highly competitive market and in
the context of larger economic conditions has been very challenging and will continue to be so, for the foreseeable future. Net interest income for the third quarter of 2017 as compared with the third quarter of 2016 decreased $92,000 as the
reduction in interest and fees on loans was offset by the increase in interest and dividends on securities. Net interest income for the three quarters ended September 30, 2017, decreased $338,000 as compared with the three quarters ended
September 30, 2016 as the reduction in interest and fees on loans decreased more than the increase in interest expense on deposits.
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 economy continues to negatively
impact collateral values and borrowers ability to repay their
32
loans. The provision for the allowance for loan losses was $29,000 and $85,000 for the third quarter and first three quarters of 2017, respectively, compared with no provision and $137,000,
respectively, for the third quarter and first three quarters of 2016. The Company is working diligently to address and reduce its
non-performing
assets. The Companys nonaccrual loans totaled $14,384,000
and $11,854,000 at September 30, 2017 and December 31, 2016, 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 $156,000 and increased $390,000 for the third quarter and first three quarters of 2017
as compared with 2016. The decrease for the third quarter of 2017 as compared with the third quarter of 2016 was primarily the result of the prior year including a gain from the sale of bank premises. The increase for the first three quarters of
2017 as compared with the first three quarters of 2016 was a result of the gain discussed in the Overview.
Non-interest
expense decreased $107,000 and $400,000 for the third quarter and first three quarters of 2017 as
compared with 2016 results. The decrease for the third quarter of 2017 was primarily the result of decreases in net occupancy expenses of $66,000 and FDIC and state banking assessments of $102,000, which were partially offset by an increase in Other
real estate expense of $279,000 as compared with 2016. This decrease for the first three quarters of 2017 was the result of decreases in net occupancy expenses of $250,000 and FDIC and state banking assessments of $334,000, which were partially
offset by an increase in Other real estate expense of $135,000 as compared with 2016.
Total assets at September 30, 2017 decreased $31,027,000 as
compared with December 31, 2016. Available for sale securities increased $12,210,000 as excess funds were invested to increase earnings. Total loans decreased $42,532,000 as principal payments, maturities, charge-offs and foreclosures relating
to existing loans outpaced new loans. Total deposits decreased $29,949,000 at September 30, 2017 as compared with December 31, 2016 as customers in the casino industry and county and municipal entities reallocate their resources
periodically.
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 Companys income. Managements 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, 2017 as Compared with Quarter Ended September 30, 2016
The Companys average interest-earning assets decreased approximately $12,876,000, or 2%, from approximately $604,008,000 for the third quarter of 2016 to
approximately $591,132,000 for the third quarter of 2017. Average held to maturity taxable securities increased approximately
33
$21,538,000 and average available for sale taxable securities increased approximately $46,819,000 as a result of the decrease in average balances due from financial institutions and average
loans. Average balances due from financial institutions decreased $29,325,000 as the Companys liquidity needs decreased. The Companys average loans decreased approximately $44,389,000 as principal payments, maturities, charge-offs and
foreclosures relating to existing loans outpaced new loans.
The average yield on earning assets increased by 6 basis points, from 3.15% for the third
quarter of 2016 to 3.21% for the third quarter of 2017. The yield on average loans increased from 4.40% for the third quarter of 2016 to 4.53% for the third quarter of 2017 primarily as a result of the effect of the increase in prime rate during
2016 and 2017 on the Companys floating rate loans. The yield on average taxable available for sale securities increased from 1.27% for the third quarter of 2016 to 1.52% for the third quarter of 2017 as the Company has changed its investment
strategy to improve yield while not compromising duration and credit risk.
Average interest-bearing liabilities decreased approximately $10,639,000, or
2%, from approximately $443,591,000 for the third quarter of 2016 to approximately $432,952,000 for the third quarter of 2017. Average savings and interest-bearing DDA balances decreased $7,850,000 primarily as a result of one large public fund
reallocating most of their balance to another institution. Average borrowings from the Federal Home Loan Bank decreased approximately $5,694,000 due to the reduced liquidity needs of the bank subsidiary.
The average rate paid on interest-bearing liabilities for the third quarter of 2016 was .24% as compared with .36% for the third quarter of 2017. The increase
was the result of time deposit rates increasing in our trade area and the Company being able to pay off lower rate borrowings from FHLB.
The
Companys net interest margin on a
tax-equivalent
basis, which is net interest income as a percentage of average earning assets, was 2.97% for the third quarter of 2016 as compared with 2.95% for the
third quarter of 2017.
Nine Months Ended September 30, 2017 as Compared with Nine Months Ended September 30, 2016
The Companys average interest-earning assets increased approximately $13,349,000, or 2%, from approximately $592,372,000 for the first three quarters of
2016 to approximately $605,721,000 for the first three quarters of 2017. Average held to maturity taxable securities increased approximately $24,538,000 and average available for sale taxable securities increased approximately $27,743,000 as a
result of the decrease in average loans. The Companys average loans decreased approximately $36,530,000 as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans.
The average yield on earning assets decreased by 11 basis points, from 3.24% for the first three quarters of 2016 to 3.13% for the first three quarters of
2017. This decrease was the result of the increase in volume in lower yielding assets, such as investment securities, as compared with higher yielding assets, such as loans.
34
Average interest-bearing liabilities increased approximately $638,000, or 1%, from approximately $446,475,000 for
the first three quarters of 2016 to approximately $447,113,000 for the first three quarters of 2017. Average savings and interest bearing DDA balances increased approximately $4,605,000 and average time deposits increased $3,483,000 primarily as
customers in the casino industry and county and municipal entities reallocate their balances periodically. Average borrowings from the Federal Home Loan Bank decreased approximately $7,450,000 due to the liquidity needs of the bank subsidiary.
The average rate paid on interest-bearing liabilities for the first three quarters of 2016 was .23% compared with .30% for the first three quarters of 2017 as
a result of the increase in prime rate.
The Companys net interest margin on a
tax-equivalent
basis, which
is net interest income as a percentage of average earning assets, was 3.07% for the first three quarters of 2016 as compared with 2.91% for the first three quarters of 2017.
The tables on the following pages analyze the changes in
tax-equivalent
net interest income for the quarters and nine
months ended September 30, 2017 and 2016.
35
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2017
|
|
|
Quarter Ended September 30, 2016
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Rate
|
|
Loans (2)(3)
|
|
$
|
279,771
|
|
|
$
|
3,165
|
|
|
|
4.53
|
%
|
|
$
|
324,160
|
|
|
$
|
3,568
|
|
|
|
4.40
|
%
|
Balances due from depository institutions
|
|
|
25,409
|
|
|
|
148
|
|
|
|
2.33
|
%
|
|
|
54,734
|
|
|
|
95
|
|
|
|
0.69
|
%
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
30,131
|
|
|
|
207
|
|
|
|
2.75
|
%
|
|
|
8,593
|
|
|
|
60
|
|
|
|
0.01
|
%
|
Non taxable (1)
|
|
|
18,802
|
|
|
|
177
|
|
|
|
3.77
|
%
|
|
|
19,981
|
|
|
|
191
|
|
|
|
3.82
|
%
|
AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
221,196
|
|
|
|
842
|
|
|
|
1.52
|
%
|
|
|
174,377
|
|
|
|
553
|
|
|
|
1.27
|
%
|
Non taxable (1)
|
|
|
14,821
|
|
|
|
204
|
|
|
|
5.51
|
%
|
|
|
20,422
|
|
|
|
277
|
|
|
|
5.43
|
%
|
Other
|
|
|
1,002
|
|
|
|
8
|
|
|
|
3.19
|
%
|
|
|
1,741
|
|
|
|
9
|
|
|
|
2.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
591,132
|
|
|
$
|
4,751
|
|
|
|
3.21
|
%
|
|
$
|
604,008
|
|
|
$
|
4,753
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing DDA
|
|
$
|
350,100
|
|
|
$
|
218
|
|
|
|
0.25
|
%
|
|
$
|
357,950
|
|
|
$
|
116
|
|
|
|
0.13
|
%
|
Time deposits
|
|
|
81,632
|
|
|
|
163
|
|
|
|
0.80
|
%
|
|
|
78,727
|
|
|
|
121
|
|
|
|
0.61
|
%
|
Borrowings from FHLB
|
|
|
1,220
|
|
|
|
8
|
|
|
|
2.62
|
%
|
|
|
6,914
|
|
|
|
30
|
|
|
|
1.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
432,952
|
|
|
$
|
389
|
|
|
|
0.36
|
%
|
|
$
|
443,591
|
|
|
$
|
267
|
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tax-equivalent
spread
|
|
|
|
|
|
|
|
|
|
|
2.86
|
%
|
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tax-equivalent
margin on earning assets
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2017 and 2016. See disclosure of
Non-GAAP
financial measures on pages 31 and 32.
|
(2)
|
Loan fees of $59 and $119 for 2017 and 2016, respectively, are included in these figures.
|
(3)
|
Includes nonaccrual loans.
|
36
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Rate
|
|
Loans (2)(3)
|
|
$
|
294,492
|
|
|
$
|
9,734
|
|
|
|
4.41
|
%
|
|
$
|
331,022
|
|
|
$
|
10,833
|
|
|
|
4.36
|
%
|
Balances due from depository institutions
|
|
|
34,050
|
|
|
|
384
|
|
|
|
1.50
|
%
|
|
|
29,814
|
|
|
|
212
|
|
|
|
0.95
|
%
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
28,449
|
|
|
|
524
|
|
|
|
2.46
|
%
|
|
|
3,911
|
|
|
|
61
|
|
|
|
2.08
|
%
|
Non taxable (1)
|
|
|
19,239
|
|
|
|
541
|
|
|
|
3.75
|
%
|
|
|
19,473
|
|
|
|
541
|
|
|
|
3.70
|
%
|
AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
212,435
|
|
|
|
2,370
|
|
|
|
1.49
|
%
|
|
|
184,692
|
|
|
|
1,870
|
|
|
|
1.35
|
%
|
Non taxable (1)
|
|
|
16,055
|
|
|
|
665
|
|
|
|
5.52
|
%
|
|
|
21,482
|
|
|
|
865
|
|
|
|
5.37
|
%
|
Other
|
|
|
1,001
|
|
|
|
14
|
|
|
|
1.86
|
%
|
|
|
1,978
|
|
|
|
19
|
|
|
|
1.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
605,721
|
|
|
$
|
14,232
|
|
|
|
3.13
|
%
|
|
$
|
592,372
|
|
|
$
|
14,401
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing DDA
|
|
$
|
364,732
|
|
|
$
|
535
|
|
|
|
0.20
|
%
|
|
$
|
360,127
|
|
|
$
|
330
|
|
|
|
0.12
|
%
|
Time deposits
|
|
|
80,928
|
|
|
|
446
|
|
|
|
0.73
|
%
|
|
|
77,445
|
|
|
|
331
|
|
|
|
0.57
|
%
|
Borrowings from FHLB
|
|
|
1,453
|
|
|
|
32
|
|
|
|
2.94
|
%
|
|
|
8,903
|
|
|
|
115
|
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
447,113
|
|
|
$
|
1,013
|
|
|
|
0.30
|
%
|
|
$
|
446,475
|
|
|
$
|
776
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tax-equivalent
spread
|
|
|
|
|
|
|
|
|
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
tax-equivalent
margin on earning assets
|
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2017 and 2016. See disclosure of
Non-GAAP
financial measures on pages 31 and 32.
|
(2)
|
Loan fees of $238 and $314 for 2017 and 2016, respectively, are included in these figures.
|
(3)
|
Includes nonaccrual loans.
|
37
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
|
|
September 30, 2017 compared with
September 30, 2016
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/Volume
|
|
|
Total
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(489
|
)
|
|
$
|
99
|
|
|
$
|
(13
|
)
|
|
$
|
(403
|
)
|
Balances due from financial institutions
|
|
|
(51
|
)
|
|
|
224
|
|
|
|
(120
|
)
|
|
|
53
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
150
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
147
|
|
Non taxable
|
|
|
(11
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(14
|
)
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
148
|
|
|
|
111
|
|
|
|
30
|
|
|
|
289
|
|
Non taxable
|
|
|
(76
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(73
|
)
|
Other
|
|
|
(4
|
)
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(333
|
)
|
|
$
|
439
|
|
|
$
|
(108
|
)
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing DDA
|
|
$
|
(3
|
)
|
|
$
|
107
|
|
|
$
|
(2
|
)
|
|
$
|
102
|
|
Time deposits
|
|
|
4
|
|
|
|
36
|
|
|
|
2
|
|
|
|
42
|
|
Borrowings from FHLB
|
|
|
(25
|
)
|
|
|
15
|
|
|
|
(12
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(24
|
)
|
|
$
|
158
|
|
|
$
|
(12
|
)
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2017 compared with
September 30, 2016
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/Volume
|
|
|
Total
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(1,195
|
)
|
|
$
|
108
|
|
|
$
|
(12
|
)
|
|
$
|
(1,099
|
)
|
Balances due from financial institutions
|
|
|
30
|
|
|
|
124
|
|
|
|
18
|
|
|
|
172
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
383
|
|
|
|
11
|
|
|
|
69
|
|
|
|
463
|
|
Non taxable
|
|
|
(7
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
281
|
|
|
|
190
|
|
|
|
29
|
|
|
|
500
|
|
Non taxable
|
|
|
(219
|
)
|
|
|
25
|
|
|
|
(6
|
)
|
|
|
(200
|
)
|
Other
|
|
|
(9
|
)
|
|
|
8
|
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(736
|
)
|
|
$
|
473
|
|
|
$
|
94
|
|
|
$
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing DDA
|
|
$
|
4
|
|
|
$
|
198
|
|
|
$
|
3
|
|
|
$
|
205
|
|
Time deposits
|
|
|
15
|
|
|
|
96
|
|
|
|
4
|
|
|
|
115
|
|
Borrowings from FHLB
|
|
|
(96
|
)
|
|
|
81
|
|
|
|
(68
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(77
|
)
|
|
$
|
375
|
|
|
$
|
(61
|
)
|
|
$
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for the Allowance for Loan Losses
In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan
policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan
grading. The Companys 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 Companys
allowance for loan loss computation.
39
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 of the continuing decline in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the
Companys loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral.
The Companys
analysis includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans were $14,384,000 and $11,854,000 at September 30, 2017 and December 31, 2016, respectively, specific reserves of only
$810,000 and $303,000, 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 Companys
on-going,
systematic evaluation resulted in the Company recording a provision for the allowance for
loan losses of $29,000 for the third quarter of 2017 and $85,000 and $137,000 for the first three quarters of 2017 and 2016, respectively. The allowance for loan losses as a percentage of loans was 2.25% and 1.73% at September 30, 2017 and
December 31, 2016, respectively. The Company believes that its allowance for loan losses is appropriate as of September 30, 2017.
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, 2017 as Compared with Quarter Ended September 30, 2016
Non-interest
income decreased $156,000 for the third quarter of 2017 as compared with the third quarter of 2016
primarily as the result of the decrease in gain on liquidation, sales and calls of securities and other income. The Company had opportunities to sell securities in order to generate gains in the prior year and, as a result, recognized $67,000 in
2016. Other income decreased $108,000 in 2017 as compared with 2016 primarily as a result of the prior year including a gain of $88,000 from the sale of bank premises.
Nine Months Ended September 30, 2017 as Compared with Nine Months Ended September 30, 2016
Non-interest
income increased $390,000 for the first three quarters of 2017 as compared with the first three quarters
of 2016 primarily as the result of the increase in income from other investments as well as the gain from death benefits from life insurance. These increases were partially offset by the decrease in other income of $147,000 in 2017 as compared with
2016. Income from other investments increased $63,000 from operations of the investment in a low income housing partnership as a result of increased occupancy in 2017 as compared with 2016. As a result of the death of a participant in the
Companys deferred compensation plans during 2017, a
non-recurring
40
gain of $429,000 from the redemption of bank owned life insurance was recorded. Other income decreased $108,000 in 2017 as compared with 2016 primarily as a result of the prior year including a
gain of $88,000 from the sale of bank premises.
Non-interest
expense
Quarter Ended September 30, 2017 as Compared with Quarter Ended September 30, 2016
Total
non-interest
expense decreased $107,000 for the third quarter of 2017 as compared with the third quarter of 2016.
Net occupancy decreased $66,000, Equipment rentals, depreciation and maintenance decreased $41,000, FDIC and state banking assessments decreased $102,000 and other expense decreased $129,000 while other real estate expense increased $279,000 in 2017
as compared with 2016.
Net occupancy expense decreased as result of the Companys efforts to decrease its telecommunication and insurance costs.
Equipment rentals, depreciation and maintenance primarily decreased as a result of the Company reducing its janitorial costs.
FDIC and state banking assessments decreased as the regulators decreased the premiums for deposit insurance in the current year.
ORE expense increased due to the increase in writedowns in the value of ORE.
Other expense decreased as a result of the reduction of legal, advertising and other costs largely due to the time in which services were performed.
Nine Months Ended September 30, 2017 as Compared with Nine Months Ended September 30, 2016
Total
non-interest
expense decreased $400,000 for the first three quarters of 2017 as compared with the first three
quarters of 2016. Net occupancy decreased $250,000 and FDIC and state banking assessments decreased $334,000, while other real estate expense increased $135,000 in 2017 as compared with 2016.
Net occupancy expense decreased as result of the Companys efforts to decrease its telecommunication and insurance costs.
FDIC and state banking assessments decreased as the regulators decreased the premiums for deposit insurance in the current year.
ORE expense increased due to the increase in writedowns in the value of ORE.
41
Income Taxes
At December 31, 2014, the Company established a full valuation allowance on its deferred tax assets. Until such time as the Company returns to sustained
earnings, and it is determined that it is more likely than not that the deferred tax asset will be realized, no income tax benefit or expense will generally be recorded.
The Company did record income tax expense of $78,000 during the second quarter of 2016 relating to the resolution of a recent examination by the Internal
Revenue Service.
For the year ended December 31, 2014, the Company estimated it would be able to carryback net operating losses and general business
credits resulting in Federal refunds totaling $300,000. Accordingly, a $300,000 income tax receivable was recorded at December 31, 2014. Upon preparation of the amended 2011 and 2012 Federal tax returns, the actual refunds recoverable were
$642,000. As a result, the Company recorded an income tax benefit of $338,000 during the second quarter of 2017 as an immaterial correction of an error.
FINANCIAL CONDITION
Available for sale securities
increased $12,210,000 at September 30, 2017, as compared with December 31, 2016. This is the result of the Company investing excess funds not needed currently for loans in order to improve earnings.
Loans decreased $42,532,000 at September 30, 2017, as compared with December 31, 2016 as principal payments, maturities, charge-offs and
foreclosures relating to existing loans outpaced new loans.
Total deposits decreased $29,949,000 at September 30, 2017, as compared with
December 31, 2016. 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.
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.
As of
September 30, 2017, 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 Common Equity Tier 1 Capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater and a Leverage capital ratio
42
of 5.00% or greater. As of January 1, 2017, the Company must have a capital conservation buffer above these requirements of 1.25% for 2017. There are no conditions or events since that
notification that Management believes have changed the bank subsidiarys category.
The Companys actual capital amounts and ratios and required
minimum capital amounts and ratios as of September 30, 2017 and December 31, 2016, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
For Capital
Adequacy Purposes
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2017 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
96,231
|
|
|
|
25.41
|
%
|
|
$
|
30,293
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
91,480
|
|
|
|
24.16
|
%
|
|
|
17,040
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
91,480
|
|
|
|
24.16
|
%
|
|
|
22,719
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
91,480
|
|
|
|
13.13
|
%
|
|
|
27,863
|
|
|
|
4.00
|
%
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
95,262
|
|
|
|
22.94
|
%
|
|
$
|
33,220
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
90,068
|
|
|
|
21.69
|
%
|
|
|
18,687
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
90,068
|
|
|
|
21.69
|
%
|
|
|
24,915
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
90,068
|
|
|
|
13.12
|
%
|
|
|
27,464
|
|
|
|
4.00
|
%
|
The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of September 30,
2017 and December 31, 2016, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
To Be Well
Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2017 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
92,980
|
|
|
|
24.68
|
%
|
|
$
|
30,142
|
|
|
|
8.00
|
%
|
|
$
|
37,678
|
|
|
|
10.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
88,252
|
|
|
|
23.42
|
%
|
|
|
16,955
|
|
|
|
4.50
|
%
|
|
|
24,491
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
88,252
|
|
|
|
23.42
|
%
|
|
|
22,607
|
|
|
|
6.00
|
%
|
|
|
30,142
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
88,252
|
|
|
|
13.13
|
%
|
|
|
26,876
|
|
|
|
4.00
|
%
|
|
|
33,596
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
91,882
|
|
|
|
22.29
|
%
|
|
$
|
32,975
|
|
|
|
8.00
|
%
|
|
$
|
41,219
|
|
|
|
10.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
86,726
|
|
|
|
21.04
|
%
|
|
|
18,548
|
|
|
|
4.50
|
%
|
|
|
26,792
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
86,726
|
|
|
|
21.04
|
%
|
|
|
24,731
|
|
|
|
6.00
|
%
|
|
|
32,975
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
86,726
|
|
|
|
12.47
|
%
|
|
|
27,820
|
|
|
|
4.00
|
%
|
|
|
34,775
|
|
|
|
5.00
|
%
|
Management continues to emphasize the importance of maintaining the appropriate capital
levels of the Company and has
established the goal of being well-capitalized by the banking regulatory authorities.
43
LIQUIDITY
Liquidity represents the Companys 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 Banks Discount Window Primary Credit Program, which it intends to use only as a contingency.
REGULATORY MATTERS
During 2016, Management identified opportunities for improving information technology operations and security, risk management and earnings, addressing asset
quality concerns, analyzing and assessing the Banks management and staffing needs, and managing concentrations of credit risk as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In
concert with the regulators, the Company had identified specific corrective steps and actions to enhance its information technology operations and security, risk management, earnings, asset quality and staffing. The Company and the Bank may not
declare or pay any cash dividends without the prior written approval of their regulators.