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, 2019.
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: the effects of the COVID-19 pandemic on the Company’s business, customers, employees and third-party service providers, 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 including the potential impact of the COVID-19 pandemic used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in statutes, government regulations or regulatory policies or practices in general and specifically as a result of the COVID-19 pandemic and acts of terrorism, weather or other events beyond the Company’s control.
New Accounting Pronouncements
The Financial Accounting Standards Board issues several accounting standards updates during the first quarter of 2020, which have been disclosed in Note 1 to the Unaudited Consolidated Financial Statements. The Company does not expect that these updates discussed in the Notes will have a material impact on its 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.
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 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 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 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 a benefit within the tax provisions 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 ended March 31, 2020 and 2019 is included in the table on the following page.
RECONCILATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)
For the Three Months Ended March 31,
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - taxable equivalent
|
|
$
|
5,050
|
|
|
$
|
5,559
|
|
Taxable equivalent adjustment
|
|
|
(43
|
)
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
Interest income (GAAP)
|
|
$
|
5,007
|
|
|
$
|
5,500
|
|
|
|
|
|
|
|
|
|
|
Net interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - taxable equivalent
|
|
$
|
4,439
|
|
|
$
|
4,679
|
|
Taxable equivalent adjustment
|
|
|
(43
|
)
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
Net interest income (GAAP)
|
|
$
|
4,396
|
|
|
$
|
4,620
|
|
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 World Health Organization declared the coronavirus COVID-19 (“COVID-19”) a pandemic in March 2020. The pandemic has resulted in, among other things, a significant stock and global markets decline, disruption in business, leisure and tourism activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis and significant impact on the general economy including high unemployment, a 150 basis point decline in Federal funds rates and unprecedented government stimulus programs.
The Company has been proactive in ensuring the safety and health of its employees and customers during the pandemic. These steps include limiting access to branch lobbies to appointment only, increasing remote staff and segregating management and key functional departments.
Assisting our customers during the pandemic is a priority. The Company has granted modifications by extending payments 90 days to certain customers as a result of the economic challenges of business closures and growing unemployment resulting from COVID-19. We have also actively participated in the Paycheck Protection Program (“PPP”), a specific stimulus resource designed to provide assistance to small businesses.
The Company reported net income of $1,123,000 for the first quarter of 2020 compared with net income of $405,000 for the first quarter of 2019. Results in 2020 included an increase in non- interest income and a decrease in non-interest expense which was partially offset by a decrease in net interest income as compared with 2019.
Managing the net interest margin is a key component of the Company’s earnings strategy. The Federal Reserve reduced rates by 75 basis points during the second half of 2019 as a result of global issues and slowing growth. In March 2020, the Federal Reserve reduced rates by 150 basis points in two emergency moves to respond to the unprecedented economic disruptions of the COVID-19 pandemic. Interest income decreased as interest and fees on loans decreased $484,000 as compared with 2019 as a result of the material reduction in rates.
Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be a major focus of the Company. A provision for the allowance for loan losses of $64,000 was recorded in 2020 as compared with $54,000 in 2019. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $8,833,000 and $9,266,000 at March 31, 2020 and December 31, 2019, 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 $800,000 for the three months ended March 31, 2020 as compared with 2019 results. Current year results included non-recurring gains on sales and calls of securities of $433,000 and a gain from the sale of banking house of $318,000.
Non-interest expense decreased $152,000 for the three months ended March 31, 2020 as compared with 2019 results. This decrease for the three months ended March 31, 2020 was primarily the result of the decrease in salaries and employee benefits of $60,000, equipment rentals, depreciation and maintenance of $39,000 and other expense of $109,000, while other real estate expense increased $86,000 in 2020 as compared with 2019.
Total assets at March 31, 2020 increased $51,447,000 as compared with December 31, 2019. Total deposits increased $49,682,000 as governmental entities’ balances increased due to tax collections. This increase in funds was primarily invested in available for sale securities, which increased $43,348,000.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which interest income on loans, investments and other interest- earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company's income. Management's objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income.
The Company’s average interest earning assets increased approximately $8,801,000, or 2%, from approximately $566,524,000 for the first quarter of 2019 to approximately $575,325,000 for the first quarter of 2020. The Company’s average balance sheet increased primarily as average loans decreased approximately $6,246,000 while balances due from financial institutions increased $16,824,000 for the first quarter of 2020 as compared with the first quarter of 2019. Average loans decreased as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. Average balances due from financial institutions increased as the Company manages its liquidity position.
The average yield on interest-earning assets decreased from 3.92% for the first quarter of 2019 to 3.51% for the first quarter of 2020. This decrease is primarily the result of the yield on average loans decreasing as a result of the decrease in rates in 2019 and 2020 discussed in the Overview as well the recovery of $135,000 in interest income on a previously non-performing loan in the first quarter of 2019.
Average interest-bearing liabilities decreased approximately $6,876,000, or 2%, from approximately $411,553,000 for the first quarter of 2019 to approximately $404,667,000 for the first quarter of 2020. Average borrowings from FHLB decreased $6,877,000 as the Company managed its liquidity position.
The average rate paid on interest bearing liabilities for the first quarter of 2019 was .86% as compared with .60% for the first quarter of 2020. This decrease is primarily due to decreases in rates by the Federal Reserve Bank in 2019 and 2020 discussed in the Overview.
The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.30% for the quarter ended March 31, 2019 and 3.09% for the quarter ended March 31, 2020.
The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended March 31, 2020 and 2019.
Analysis of Average Balances, Interest Earned/Paid and Yield (In Thousands)
|
|
Three Months Ended March 31, 2020
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
Average
Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
Loans (2)(3)
|
|
$
|
263,626
|
|
|
$
|
3,205
|
|
|
|
4.86
|
%
|
|
$
|
269,872
|
|
|
$
|
3,689
|
|
|
|
5.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from financial institutions
|
|
|
35,413
|
|
|
|
155
|
|
|
|
1.75
|
%
|
|
|
18,589
|
|
|
|
87
|
|
|
|
1.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
35,434
|
|
|
|
275
|
|
|
|
3.10
|
%
|
|
|
37,078
|
|
|
|
271
|
|
|
|
2.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non taxable (1)
|
|
|
15,073
|
|
|
|
126
|
|
|
|
3.34
|
%
|
|
|
17,496
|
|
|
|
157
|
|
|
|
3.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
217,595
|
|
|
|
1,216
|
|
|
|
2.24
|
%
|
|
|
210,320
|
|
|
|
1,211
|
|
|
|
2.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non taxable (1)
|
|
|
6,055
|
|
|
|
72
|
|
|
|
4.76
|
%
|
|
|
11,092
|
|
|
|
133
|
|
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,129
|
|
|
|
1
|
|
|
|
0.19
|
%
|
|
|
2,077
|
|
|
|
11
|
|
|
|
2.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
575,325
|
|
|
$
|
5,050
|
|
|
|
3.51
|
%
|
|
$
|
566,524
|
|
|
$
|
5,559
|
|
|
|
3.92
|
%
|
Savings & interest- bearing DDA
|
|
$
|
316,658
|
|
|
$
|
313
|
|
|
|
0.40
|
%
|
|
$
|
314,018
|
|
|
$
|
491
|
|
|
|
0.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
84,329
|
|
|
|
286
|
|
|
|
1.36
|
%
|
|
|
86,968
|
|
|
|
311
|
|
|
|
1.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
3,680
|
|
|
|
12
|
|
|
|
1.30
|
%
|
|
|
10,557
|
|
|
|
78
|
|
|
|
2.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
404,667
|
|
|
$
|
611
|
|
|
|
0.60
|
%
|
|
$
|
411,543
|
|
|
$
|
880
|
|
|
|
0.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent spread
|
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
|
|
|
|
|
|
|
|
|
|
3.07
|
%
|
Net tax-equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
margin on earning assets
|
|
|
|
|
|
|
|
|
|
|
3.09
|
%
|
|
|
|
|
|
|
|
|
|
|
3.30
|
%
|
(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2020 and 2019. See disclosure of Non-GAAP financial measures on pages 31 and 32.
(2) Loan fees of $97 and $73 for 2020 and 2019, respectively, are included in these figures.
(3) Includes nonaccrual loans.
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
|
|
For the Three Months Ended
|
|
|
|
March 31, 2020 compared with March 31, 2019
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/Volume
|
|
|
Total
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(85
|
)
|
|
$
|
(408
|
)
|
|
$
|
9
|
|
|
$
|
(484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from finanicial institutions
|
|
|
79
|
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(12
|
)
|
|
|
17
|
|
|
|
(1
|
)
|
|
|
4
|
|
Non taxable
|
|
|
(22
|
)
|
|
|
(10
|
)
|
|
|
1
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
42
|
|
|
|
(36
|
)
|
|
|
(1
|
)
|
|
|
5
|
|
Non taxable
|
|
|
(60
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
(61
|
)
|
Other
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(58
|
)
|
|
$
|
(455
|
)
|
|
$
|
4
|
|
|
$
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing DDA
|
|
$
|
4
|
|
|
$
|
(180
|
)
|
|
$
|
(2
|
)
|
|
$
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
(9
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
(50
|
)
|
|
|
(44
|
)
|
|
|
28
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(55
|
)
|
|
$
|
(240
|
)
|
|
$
|
26
|
|
|
$
|
(269
|
)
|
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 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 $8,833,000 and $9,266,000 at March 31, 2020 and December 31, 2019, respectively, specific reserves of only $44,000 and $59,000, 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.
Additional consideration was given to the impact of COVID-19 on the loan portfolio. The Company granted modifications by extending payments 90 days to certain customers as a result of the economic challenges of business closures and growing unemployment resulting from COVID-19. These credits were current at the time they were modified. In compliance with guidance from the regulatory and accounting authorities, these modifications have not been classified as troubled debt restructurings at March 31, 2020. The Company continues its policy of closely monitoring past due loans and deposit overdrafts which may serve as indicators of performance issues. Proactive outreach to our loan customers has also been emphasized.
In addition to the factors considered when assessing risk in the loan portfolio which are identified in the Notes to the Consolidated Financial Statements included in the Company’s 2019 Annual Report, the Company included the potential negative impact of COVID-19 on its loan portfolio in performing this risk assessment as of March 31, 2020. As of March 31, 2020, a general reserve of $330,000 was allocated to non-classified loans as a result of COVID-19. As of March 31, 2020, no specific reserves were allocated to classified loans as a result of COVID-19.
The Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $64,000 and $54,000 for the first quarters of 2020 and 2019, respectively. The increase in general reserves due to the potential impact of COVID-19 was significantly offset by the decrease in general reserves due to lower historical loss rates. The allowance for loan losses as a percentage of loans was 1.55% and 1.56% at March 31, 2020 and December 31, 2019, respectively. The Company believes that its allowance for loan losses is appropriate as of March 31, 2020.
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, particularly the potential effect of COVID-19 on loan performance, 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
Non-interest income increased $800,000 for the first quarter of 2020 as compared with the first quarter of 2019. The Company recognized gains of $433,000 from the sale and call of securities during the first quarter of 2020, while no such transactions occurred in 2019. A parcel of land that had housed the bank’s main vault and which became vacant as a result of Hurricane Katrina in 2005 was sold for a gain of $318,000 in 2020.
Non-interest expense
Total non-interest expense decreased $152,000 for the first quarter of 2020 as compared with the first quarter of 2019. Salaries and employee benefits decreased $60,000, equipment rentals, depreciation and maintenance decreased $39,000 and other expense decreased $109,000 while other real estate expenses increased $86,000 for the first quarter of 2020 as compared with the first quarter of 2019.
Salaries decreased as a result of attrition.
Equipment rentals, depreciation and maintenance decreased as the Company reconfigured some IT-related resources to more efficient and less-costly options.
Other real estate expense increased as a result of the write-down of properties to contract prices, less estimated cost to sell, for sales we expect to close during the second quarter of 2020.
Other expense decreased in 2020 as the Company implemented cost savings strategies that resulted in the decrease in consulting fees of $28,000, advertising and media costs of $61,000, courier expense of $17,000 and conferences and classes of $14,000.
FINANCIAL CONDITION
Cash and due from banks increased $10,952,000 at March 31, 2020, compared with December 31, 2019 in the management of the bank subsidiary’s liquidity position.
Available for sale securities increased $43,348,000 at March 31, 2020, compared with December 31, 2019. The large increase in total deposits, specifically public funds, was invested in short-term securities for pledging purposes.
Total deposits increased $49,682,000 at March 31, 2020, compared with December 31, 2019. 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. Deposits from county and municipal entities increased significantly during the first quarter of each year based on property tax collections.
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 March 31, 2020, 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. 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 March 31, 2020 and December 31, 2019, are as follows (in thousands):
|
|
Actual
|
|
|
|
|
|
|
For Capital Adequacy Purposes
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
97,159
|
|
|
|
26.17
|
%
|
|
$
|
29,696
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
92,968
|
|
|
|
25.04
|
%
|
|
|
16,784
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
92,968
|
|
|
|
25.04
|
%
|
|
|
22,272
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
92,968
|
|
|
|
14.98
|
%
|
|
|
24,817
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
96,632
|
|
|
|
26.22
|
%
|
|
$
|
29,487
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
92,425
|
|
|
|
25.08
|
%
|
|
|
16,586
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
92,425
|
|
|
|
25.08
|
%
|
|
|
22,115
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
92,425
|
|
|
|
15.26
|
%
|
|
|
24,230
|
|
|
|
4.00
|
%
|
The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of March 31, 2020 and December 31, 2019, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For Capital Adequacy
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Purposes
|
|
|
To Be Well Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
94,392
|
|
|
|
25.75
|
%
|
|
$
|
29,328
|
|
|
|
8.00
|
%
|
|
$
|
36,660
|
|
|
|
10.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
90,201
|
|
|
|
24.60
|
%
|
|
|
16,497
|
|
|
|
4.50
|
%
|
|
|
23,829
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
90,201
|
|
|
|
24.60
|
%
|
|
|
21,996
|
|
|
|
6.00
|
%
|
|
|
29,328
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
90,201
|
|
|
|
14.04
|
%
|
|
|
25,696
|
|
|
|
4.00
|
%
|
|
|
32,130
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
93,228
|
|
|
|
25.48
|
%
|
|
$
|
29,274
|
|
|
|
8.00
|
%
|
|
$
|
36,592
|
|
|
|
10.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
89,021
|
|
|
|
24.33
|
%
|
|
|
16,466
|
|
|
|
4.50
|
%
|
|
|
23,785
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
89,021
|
|
|
|
24.33
|
%
|
|
|
21,955
|
|
|
|
6.00
|
%
|
|
|
29,274
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
89,021
|
|
|
|
14.72
|
%
|
|
|
24,198
|
|
|
|
4.00
|
%
|
|
|
30,248
|
|
|
|
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.
The Company has actively participated in the PPP, facilitating approximately $20 million in funding. As an additional liquidity resource for this funding, the Company will be seeking approval to participate in the Federal Reserve Bank’s PPP Liquidity Facility.
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.