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. The Company has two 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, 2018.
Forward-Looking Information
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.
New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued several new accounting standards. The Notes to Unaudited Consolidated Financial Statements include disclosure of the standard which is applicable to the Company. The Company is in the process of determining the effect of Accounting Standards Update 2016-03, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on its financial position, results of operations or cash flows. Further disclosure relating to these efforts is included in Note 1.
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 Company’s 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 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 ORE property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. If Management determines that the fair value of a property has decreased subsequent to foreclosure, the Company records a write down which is included in non-interest expense.
Employee Benefit Plans
Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.
Income Taxes
GAAP requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. 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, 2019 and 2018 is included on the following page.
RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - taxable equivalent
|
|
$
|
5,182
|
|
|
$
|
5,044
|
|
|
$
|
16,026
|
|
|
$
|
14,780
|
|
Taxable equivalent adjustment
|
|
|
(41
|
)
|
|
|
(62
|
)
|
|
|
(155
|
)
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (GAAP)
|
|
$
|
5,141
|
|
|
$
|
4,982
|
|
|
$
|
15,871
|
|
|
$
|
14,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - taxable equivalent
|
|
$
|
4,370
|
|
|
$
|
4,335
|
|
|
$
|
13,444
|
|
|
$
|
12,952
|
|
Taxable equivalent adjustment
|
|
|
(41
|
)
|
|
|
(62
|
)
|
|
|
(155
|
)
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (GAAP)
|
|
$
|
4,329
|
|
|
$
|
4,273
|
|
|
$
|
13,289
|
|
|
$
|
12,761
|
|
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 subsidiary’s three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.
The Company earned net income of $476,000 for the third quarter of 2019 compared with net income of $172,000 for the third quarter of 2018 and earned net income of $553,000 for the first three quarters of 2019 compared with net income of $527,000 for the first three quarters of 2018. Results for the third quarter of 2019 included a gain from the sale of securities and a decrease in total non-interest expense as compared with the third quarter of 2018. Results for the three quarters ended September 30, 2019 included an increase in net interest income and a decrease in non-interest income which were partially offset by an increase in total non-interest expense as compared with 2018.
Managing the net interest margin is a key component of the Company’s earnings strategy. Net interest income for the third quarter of 2019 as compared with the third quarter of 2018 increased $56,000 and net interest income for the three quarters ended September 30, 2019 as compared with the three quarters ended September 30, 2018, increased $528,000. The increase for the third quarter of 2019 as compared with the third quarter of 2018, as well as the increase for the three quarters ended September 30, 2019 as compared with the three quarters ended September 30, 2018, is attributed to the increase in interest and fees on loans and income from investment securities.
Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be emphasized. The provision for the allowance for loan losses was $59,000 and $169,000 for the third quarter and first three quarters of 2019, respectively, compared with $28,000 and $91,000, respectively, for the third quarter and first three quarters of 2018. The Company continues to work diligently to reduce its non-performing assets. The Company’s nonaccrual loans totaled $9,473,000 and $8,250,000 at September 30, 2019 and December 31, 2018, 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 increased $75,000 and decreased $56,000 for the third quarter and first three quarters of 2019, respectively, as compared with the third quarter and first three quarters of 2018. Results in the third quarter of 2019 included a gain from the sale of securities of $61,000. Results in the first three quarters of 2019 included a decrease in Trust Department income and fees of $135,000.
Non-interest expense decreased $204,000 and increased $368,000 for the third quarter and first three quarters of 2019, respectively, as compared with 2018 results. This decrease for the third quarter of 2019 was the result of improvement in operations from other investments of $109,000 and a decrease in other non-interest expense of $120,000 as compared with 2018. The increase for the first three quarters of 2019 was the result of increases in net occupancy expenses of $97,000, equipment rentals, depreciation and maintenance of $110,000 and other expense of $240,000, which were partially offset by the improvement in operations from other investments of $96,000 as compared with 2018.
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, 2019 as Compared with Quarter Ended September 30, 2018
The Company’s average interest-earning assets decreased approximately $14,541,000, or 3%, from approximately $567,012,000 for the third quarter of 2018 to approximately $552,471,000 for the third quarter of 2019. The Company’s average balance sheet decreased primarily as average loans decreased approximately $7,213,000 and average taxable available for sale securities decreased approximately $5,014,000. The Company’s average loans decreased as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. Average available for sale securities decreased as maturities funded the decrease in average savings and interest bearing DDA deposits.
The average yield on earning assets increased by 19 basis points, from 3.56% for the third quarter of 2018 to 3.75% for the third quarter of 2019. The yield on average loans increased from 4.93% for the third quarter of 2018 to 5.10% for the third quarter of 2019 primarily as a result of the increase in prime rate during 2018 on the Company’s floating rate loans. The yield on average taxable available for sale securities increased from 2.02% for the third quarter of 2018 to 2.31% for the third quarter of 2019 as the Company changed its investment strategy to improve yield while not compromising duration and credit risk.
Average interest-bearing liabilities decreased approximately $19,063,000, or 5%, from approximately $402,826,000 for the third quarter of 2018 to approximately $383,763,000 for the third quarter of 2019. Average savings and interest bearing DDA deposits decreased approximately $20,495,000 primarily as several large customers reallocated their funds to other institutions in the current year.
The average rate paid on interest-bearing liabilities for the third quarter of 2018 was .70% as compared with .85% for the third quarter of 2019. This increase is primarily due to increased rates in 2018.
The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.06% for the third quarter of 2018 as compared with 3.16% for the third quarter of 2019.
Nine Months Ended September 30, 2019 as Compared with Nine Months Ended September 30, 2018
The Company’s average interest-earning assets decreased approximately $19,513,000, or 3%, from approximately $578,286,000 for the first three quarters of 2018 to approximately $558,773,000 for the first three quarters of 2019. The Company’s average balance sheet decreased primarily as average loans decreased approximately $7,380,000 and average taxable available for sale securities decreased approximately $12,229,000. The Company’s average loans decreased as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. Average available for sale securities decreased as maturities funded the decrease in average savings and interest bearing DDA deposits.
The average yield on earning assets increased from 3.41% for the first three quarters of 2018 to 3.81% for the first three quarters of 2019. The yield on average loans increased from 4.77% for the first three quarters of 2018 to 5.23% for the first three quarters of 2019 primarily as a result of the effect of the increase in prime rate during 2018 on the Company’s floating rate loans. The yield on average taxable available for sale securities increased from 1.89% for the first three quarters of 2018 to 2.30% for the first three quarters of 2019 as the Company changed its investment strategy to improve yield while not compromising duration and credit risk.
Average interest-bearing liabilities decreased approximately $23,710,000, or 6%, from approximately $419,911,000 for the first three quarters of 2018 to approximately $396,201,000 for the first three quarters of 2019. Average savings and interest bearing DDA balances decreased approximately $27,391,000 primarily as several large commercial customers reallocated their funds to other institutions in the current year.
The average rate paid on interest-bearing liabilities for the first three quarters of 2018 was .58% compared with .87% for the first three quarters of 2019. This increase is primarily due to the increased rates in 2018.
The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.99% for the first three quarters of 2018 as compared with 3.20% for the first three quarters of 2019.
The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and nine months ended September 30, 2019 and 2018.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
|
|
Quarter Ended September 30, 2019
|
|
|
Quarter Ended September 30, 2018
|
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
Loans (2)(3)
|
|
$
|
263,533
|
|
|
$
|
3,362
|
|
|
|
5.10
|
%
|
|
$
|
270,746
|
|
|
$
|
3,335
|
|
|
|
4.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from depository institutions
|
|
|
15,462
|
|
|
|
98
|
|
|
|
2.54
|
%
|
|
|
14,823
|
|
|
|
80
|
|
|
|
2.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
38,168
|
|
|
|
290
|
|
|
|
3.04
|
%
|
|
|
34,535
|
|
|
|
249
|
|
|
|
2.88
|
%
|
Non taxable (1)
|
|
|
16,132
|
|
|
|
130
|
|
|
|
3.22
|
%
|
|
|
18,104
|
|
|
|
145
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
209,152
|
|
|
|
1,207
|
|
|
|
2.31
|
%
|
|
|
214,166
|
|
|
|
1,079
|
|
|
|
2.02
|
%
|
Non taxable (1)
|
|
|
7,921
|
|
|
|
91
|
|
|
|
4.60
|
%
|
|
|
12,741
|
|
|
|
146
|
|
|
|
4.58
|
%
|
Other
|
|
|
2,103
|
|
|
|
4
|
|
|
|
0.76
|
%
|
|
|
1,897
|
|
|
|
10
|
|
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
552,471
|
|
|
$
|
5,182
|
|
|
|
3.75
|
%
|
|
$
|
567,012
|
|
|
$
|
5,044
|
|
|
|
3.56
|
%
|
Savings & interest- bearing DDA
|
|
$
|
291,701
|
|
|
$
|
410
|
|
|
|
0.56
|
%
|
|
$
|
312,196
|
|
|
$
|
443
|
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
85,623
|
|
|
|
360
|
|
|
|
1.68
|
%
|
|
|
86,346
|
|
|
|
239
|
|
|
|
1.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
1
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
6,439
|
|
|
|
42
|
|
|
|
2.61
|
%
|
|
|
4,192
|
|
|
|
26
|
|
|
|
2.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
383,763
|
|
|
$
|
812
|
|
|
|
0.85
|
%
|
|
$
|
402,826
|
|
|
$
|
709
|
|
|
|
0.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent spread
|
|
|
|
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
2.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent margin on earning assets
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
|
|
|
3.06
|
%
|
(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2019 and 2018. See disclosure of Non-GAAP financial measures on pages 31 and 32.
(2) Loan fees of $78 and $75 for 2019 and 2018, respectively, are included in these figures.
(3) Average balance includes nonaccrual loans.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
|
|
Nine Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
Loans (2)(3)
|
|
$
|
266,654
|
|
|
$
|
10,466
|
|
|
|
5.23
|
%
|
|
$
|
274,034
|
|
|
$
|
9,798
|
|
|
|
4.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from depository institutions
|
|
|
16,313
|
|
|
|
289
|
|
|
|
2.36
|
%
|
|
|
14,742
|
|
|
|
179
|
|
|
|
1.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
37,552
|
|
|
|
845
|
|
|
|
3.00
|
%
|
|
|
33,547
|
|
|
|
722
|
|
|
|
2.87
|
%
|
Non taxable (1)
|
|
|
16,643
|
|
|
|
419
|
|
|
|
3.36
|
%
|
|
|
18,326
|
|
|
|
437
|
|
|
|
3.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
209,973
|
|
|
|
3,624
|
|
|
|
2.30
|
%
|
|
|
222,202
|
|
|
|
3,152
|
|
|
|
1.89
|
%
|
Non taxable (1)
|
|
|
9,548
|
|
|
|
339
|
|
|
|
4.73
|
%
|
|
|
13,554
|
|
|
|
472
|
|
|
|
4.64
|
%
|
Other
|
|
|
2,090
|
|
|
|
44
|
|
|
|
2.81
|
%
|
|
|
1,881
|
|
|
|
20
|
|
|
|
1.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
558,773
|
|
|
$
|
16,026
|
|
|
|
3.82
|
%
|
|
$
|
578,286
|
|
|
$
|
14,780
|
|
|
|
3.41
|
%
|
Savings & interest- bearing DDA
|
|
$
|
298,378
|
|
|
$
|
1,367
|
|
|
|
0.61
|
%
|
|
$
|
325,769
|
|
|
$
|
1,045
|
|
|
|
0.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
87,550
|
|
|
|
1,015
|
|
|
|
1.55
|
%
|
|
|
85,423
|
|
|
|
644
|
|
|
|
1.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398
|
|
|
|
8
|
|
|
|
2.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
10,273
|
|
|
|
200
|
|
|
|
2.60
|
%
|
|
|
8,321
|
|
|
|
131
|
|
|
|
2.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
396,201
|
|
|
$
|
2,582
|
|
|
|
0.87
|
%
|
|
$
|
419,911
|
|
|
$
|
1,828
|
|
|
|
0.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent spread
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent margin on earning assets
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
2.99
|
%
|
(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2019 and 2018. See disclosure of Non-GAAP financial measures on pages 31 and 32.
(2) Loan fees of $227 and $232 for 2019 and 2018, respectively, are included in these figures.
(3) Average balance includes nonaccrual loans.
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
|
|
For the Quarter Ended
|
|
|
|
September 30, 2019 compared with September 30, 2018
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/Volume
|
|
|
Total
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(89
|
)
|
|
$
|
119
|
|
|
$
|
(3
|
)
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from financial institutions
|
|
|
3
|
|
|
|
14
|
|
|
|
1
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
26
|
|
|
|
14
|
|
|
|
1
|
|
|
|
41
|
|
Non taxable
|
|
|
(16
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(25
|
)
|
|
|
157
|
|
|
|
(4
|
)
|
|
|
128
|
|
Non taxable
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
Other
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(155
|
)
|
|
$
|
299
|
|
|
$
|
(6
|
)
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing DDA
|
|
$
|
(29
|
)
|
|
$
|
(4
|
)
|
|
$
|
|
|
|
$
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
(2
|
)
|
|
|
124
|
|
|
|
(1
|
)
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
14
|
|
|
|
1
|
|
|
|
1
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(18
|
)
|
|
$
|
121
|
|
|
$
|
-
|
|
|
$
|
103
|
|
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2019 compared with September 30, 2018
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/Volume
|
|
|
Total
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(264
|
)
|
|
$
|
958
|
|
|
$
|
(26
|
)
|
|
$
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from financial institutions
|
|
|
19
|
|
|
|
82
|
|
|
|
9
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
86
|
|
|
|
33
|
|
|
|
4
|
|
|
|
123
|
|
Non taxable
|
|
|
8
|
|
|
|
(25
|
)
|
|
|
(1
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(173
|
)
|
|
|
683
|
|
|
|
(38
|
)
|
|
|
472
|
|
Non taxable
|
|
|
(140
|
)
|
|
|
9
|
|
|
|
(2
|
)
|
|
|
(133
|
)
|
Other
|
|
|
2
|
|
|
|
20
|
|
|
|
2
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(462
|
)
|
|
$
|
1,760
|
|
|
$
|
(52
|
)
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing DDA
|
|
$
|
(88
|
)
|
|
$
|
447
|
|
|
$
|
(37
|
)
|
|
$
|
322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
16
|
|
|
|
346
|
|
|
|
9
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
31
|
|
|
|
31
|
|
|
|
7
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(48
|
)
|
|
$
|
822
|
|
|
$
|
(20
|
)
|
|
$
|
754
|
|
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 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 of the continuing 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 analysis includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans were $9,473,000 and $8,250,000 at September 30, 2019 and December 31, 2018, respectively, specific reserves of only $79,000 and $315,000, 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’s on-going, systematic evaluation resulted in the Company recording a provision for the allowance for loan losses of $59,000 and $28,000 for the third quarters of 2019 and 2018, respectively, and $169,000 and $91,000 for the first three quarters of 2019 and 2018, respectively. The allowance for loan losses as a percentage of loans was 1.66% and 1.95% at September 30, 2019 and December 31, 2018, respectively. The Company believes that its allowance for loan losses is appropriate as of September 30, 2019.
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, 2019 as Compared with Quarter Ended September 30, 2018
Non-interest income increased $75,000 for the third quarter of 2019 as compared with the third quarter of 2018. Results in the third quarter of 2019 included a gain from the sale of securities of $61,000 and an increase in service charges on deposit accounts of $30,000 as the Company adjusted some its transaction fees to market rates. This increase was partially offset by Trust Department income and fees, which decreased $36,000 due to the decrease in account relationships in 2019.
Nine Months Ended September 30, 2019 as Compared with Nine Months Ended September 30, 2018
Non-interest income decreased $56,000 for the first three quarters of 2019 as compared with the first three quarters of 2018. Results in 2019 included a decrease in Trust Department income and fees, which decreased $135,000 due to the decrease in account relationships. This decrease was partially offset by the gain from the sale of securities of $61,000.
Non-interest expense
Quarter Ended September 30, 2019 as Compared with Quarter Ended September 30, 2018
Total non-interest expense decreased $204,000 for the third quarter of 2019 as compared with the third quarter of 2018. In 2019, net occupancy decreased $29,000, other real estate expenses decreased $26,000, the loss from other investments decreased $109,000 and other expense decreased $120,000 while salaries and employee benefits increased $52,000 and equipment rentals, depreciation and maintenance increased $37,000, as compared with 2018.
Salaries and employee benefits increased as a result of an increase in the liability for our retiree health plan.
Net occupancy expense decreased as result of adjustments to insurance costs.
Equipment rentals, depreciation and maintenance increased as a result of purchases of depreciable assets, primarily technology-related, and an increase in maintenance contracts related to technology services.
ORE expense decreased as writedowns in the value of ORE and the repair costs associated with recent foreclosures were less in 2019.
The loss from other investments decreased as operations of an investment in a low-income housing partnership improved as a result of increased occupancy.
Other expenses decreased as advertising and consulting fees decreased largely due to the time in which the services were performed.
Nine Months Ended September 30, 2019 as Compared with Nine Months Ended September 30, 2018
Total non-interest expense increased $368,000 for the first three quarters of 2019 as compared with the first three quarters of 2018. In 2019, net occupancy increased $97,000, equipment rentals, depreciation and maintenance increased $110,000 and other expense increased $240,000 while the loss from other investments decreased $96,000, as compared with 2018.
Net occupancy expense increased as result of adjustments to insurance costs.
Equipment rentals, depreciation and maintenance increased as a result of purchases of depreciable assets, primarily technology-related, and an increase in maintenance contracts related to technology services.
The loss from other investments decreased as operations of an investment in a low-income housing partnership improved as a result of increased occupancy.
Other expenses increased as a result of non-recurring expenses related to the settlement of a lawsuit of $201,000 as well as consulting fees for operations and strategic planning projects of $60,000.
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.
FINANCIAL CONDITION
Cash and due from banks increased $11,288,000 at September 30, 2019, as compared with December 31, 2018 in the management of the bank subsidiary’s liquidity position.
Loan decreased $8,531,000 at September 30, 2019, as compared with December 31, 2018 as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans.
Total deposits increased $27,940,000 at September 30, 2019, as compared with December 31, 2018. 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.
Borrowings from the Federal Home Loan Bank decreased $35,101,000 at September 30, 2019 compared with December 31, 2018 as the Company utilized funds from increased deposits to reduce borrowings.
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, 2019, 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 of 5.00% or greater. As of January 1, 2019, the Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.
The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios as of September 30, 2019 and December 31, 2018, are as follows (in thousands):
|
|
Actual
|
|
|
For Capital Adequacy Purposes
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2019 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
96,105
|
|
|
|
25.52
|
%
|
|
$
|
30,130
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
91,397
|
|
|
|
24.27
|
%
|
|
|
16,948
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
91,397
|
|
|
|
24.27
|
%
|
|
|
22,598
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
91,397
|
|
|
|
14.81
|
%
|
|
|
24,686
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
95,627
|
|
|
|
25.30
|
%
|
|
$
|
30,240
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
90,894
|
|
|
|
24.05
|
%
|
|
|
17,010
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
90,894
|
|
|
|
24.05
|
%
|
|
|
22,680
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
90,894
|
|
|
|
14.35
|
%
|
|
|
25,344
|
|
|
|
4.00
|
%
|
The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of September 30, 2019 and December 31, 2018, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
To Be Well Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
92,907
|
|
|
|
24.79
|
%
|
|
$
|
29,978
|
|
|
|
8.00
|
%
|
|
$
|
37,472
|
|
|
|
10.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
88,524
|
|
|
|
23.62
|
%
|
|
|
16,862
|
|
|
|
4.50
|
%
|
|
|
24,357
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
88,524
|
|
|
|
23.62
|
%
|
|
|
22,483
|
|
|
|
6.00
|
%
|
|
|
29,978
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
88,524
|
|
|
|
14.27
|
%
|
|
|
24,814
|
|
|
|
4.00
|
%
|
|
|
31,018
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
92,485
|
|
|
|
24.61
|
%
|
|
$
|
60,062
|
|
|
|
8.00
|
%
|
|
$
|
37,577
|
|
|
|
10.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
87,780
|
|
|
|
23.36
|
%
|
|
|
16,910
|
|
|
|
4.50
|
%
|
|
|
24,425
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
87,780
|
|
|
|
23.36
|
%
|
|
|
22,546
|
|
|
|
6.00
|
%
|
|
|
30,062
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
87,780
|
|
|
|
14.11
|
%
|
|
|
24,884
|
|
|
|
4.00
|
%
|
|
|
31,105
|
|
|
|
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.
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 2016, Management identified opportunities for improving information technology operations and security, risk management and earnings, addressing asset quality concerns, analyzing and assessing the Bank’s 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.