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 three quarters 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 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, 2020 and 2019 is included on the following page.
RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - taxable equivalent
|
|
$
|
4,786
|
|
|
$
|
5,182
|
|
|
$
|
14,703
|
|
|
$
|
16,026
|
|
Taxable equivalent adjustment
|
|
|
(103
|
)
|
|
|
(41
|
)
|
|
|
(182
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (GAAP)
|
|
$
|
4,683
|
|
|
$
|
5,141
|
|
|
$
|
14,521
|
|
|
$
|
15,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income - taxable equivalent
|
|
$
|
4,466
|
|
|
$
|
4,370
|
|
|
$
|
13,390
|
|
|
$
|
13,444
|
|
Taxable equivalent adjustment
|
|
|
(103
|
)
|
|
|
(41
|
)
|
|
|
(182
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (GAAP)
|
|
$
|
4,363
|
|
|
$
|
4,329
|
|
|
$
|
13,208
|
|
|
$
|
13,289
|
|
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 as appropriate, installing germ shields in branch lobbies, allowing staff to work remotely, limiting in person meetings and endorsing the usage of face coverings by staff and customers. The Company is following guidance from the Centers for Disease Control and state and local orders.
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 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 a net loss of $4,262,000 for the third quarter of 2020 compared with net income of $476,000 for the third quarter of 2019. The Company reported a net loss of $3,416,000 for the first three quarters of 2020 compared with net income of $553,000 for the first three quarters of 2019. Results in 2020 included an increase in the provision for loan losses which was partially offset by an increase in non-interest income and a decrease in non-interest expense 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. This material reduction in rates decreased total interest income and total interest expense.
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 $4,551,00 was recorded in the third quarter of 2020 as compared with $59,000 for the third quarter of 2019. A provision for the allowance for loan losses of $5,948,000 was recorded for the first three quarters of 2020 as compared with $169,000 for the first three quarters of 2019. The increase in 2020, which is non-COVID-19 related, is primarily the result of specific events impacting one credit. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $3,955,000 and $9,266,000 at September 30, 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 decreased $129,000 for the third quarter of 2020 as compared with 2019 results. Current year results included a decrease in service charges on deposit accounts of $96,000. Non-interest income increased $825,000 for the first three quarters of 2020 as compared with 2019 results. Current year results included non-recurring gains on sales and calls of securities of $538,000, a gain from the sale of banking house of $318,000 and a gain from the redemption of death benefits on bank owned life insurance of $224,000.
Non-interest expense increased $151,000 for the quarter ended September 30, 2020 as compared with 2019 results. This increase for the third quarter of 2020 was primarily the result of the increase in other real estate expense of $375,000, which was partially offset be a decrease in salaries and employee benefits of $220,000 as compared with 2019. Non-interest expense decreased $1,066,000 for the three quarters of 2020 as compared with 2019 results. This decrease for the three quarters of 2020 was primarily the result of the decrease in salaries and employee benefits of $546,000 and other expense of $487,000 as compared with 2019.
Total assets at September 30, 2020 increased $94,252,000 as compared with December 31, 2019. Total deposits increased $95,575,000 primarily as governmental entities’ balances increased due to tax collections and some customers maintaining their PPP loan proceeds in their deposit accounts. This increase in deposits funded an increase in cash and due from banks of $81,178,000 and the $17,618,000 increase in loans.
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, 2020 as Compared with Quarter Ended September 30, 2019
The Company’s average interest-earning assets increased approximately $55,559,000, or 10%, from approximately $552,471,000 for the third quarter of 2019 to approximately $608,030,000 for the third quarter of 2020. The Company’s average balance sheet increased primarily as average loans increased approximately $26,345,000 and average balances due from depository institutions increased approximately $53,382,000 while average available for sale taxable securities decreased approximately $31,578,000. The Company’s average loans increased as new loans, primarily as part of the PPP, outpaced principal payments, maturities and charge-offs relating to existing loans. Average balances due from financial institutions increased as an increase in deposits and proceeds from sales and maturity of these securities were held in balances due to depository institutions as the Company managed its liquidity position.
The average yield on interest-earning assets decreased by 60 basis points, from 3.75% for the third quarter of 2019 to 3.15% for the third quarter of 2020. The yield on average loans decreased from 5.10% for the third quarter of 2019 to 4.47% for the third quarter of 2020 primarily as a result of the decrease in rates during 2019 and 2020 discussed in the Overview.
Average interest-bearing liabilities increased approximately $13,951,000, or 4%, from approximately $383,763,000 for the third quarter of 2019 to approximately $397,714,000 for the third quarter of 2020. Average savings and interest bearing DDA deposits increased approximately $37,175,000 primarily as several large public fund customers maintained higher balances with our bank subsidiary in the current year and some of the PPP loan proceeds were deposited into customers’ accounts. Average time deposits decreased approximately $17,777,000 as some customers invested their matured time deposit proceeds in savings and interest bearing DDA deposit. Average borrowings from FHLB decreased $5,447,000 as the funds from the increase in deposits reduced the need to borrow.
The average rate paid on interest-bearing liabilities for the third quarter of 2019 was .85% as compared with .32% for the third quarter of 2020. This decrease is primarily due to decreased rates in 2019 and 2020.
The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.16% for the third quarter of 2019 as compared with 2.94% for the third quarter of 2020.
Nine Months Ended September 30, 2020 as Compared with Nine Months Ended September 30, 2019
The Company’s average interest-earning assets increased approximately $32,192,000, or 6%, from approximately $558,773,000 for the first three quarters of 2019 to approximately $590,965,000 for the first three quarters of 2020. The Company’s average balance sheet increased primarily as average loans increased approximately $14,018000 and average balances due from depository institutions increased approximately $31,657,000, while average available for sale taxable securities decreased approximately $10,675,000. The Company’s average loans increased as new loans, primarily as part of the PPP, outpaced principal payments, maturities and charge-offs relating to existing loans. Average balances due from financial institutions increased as an increase in deposits and proceeds from sales and maturity of these securities were held in balances due from depository institutions as the Company managed its liquidity position.
The average yield on earning assets decreased from 3.82% for the first three quarters of 2019 to 3.32% for the first three quarters of 2020. The yield on average loans decreased from 5.23% for the first three quarters of 2019 to 4.61% for the first three quarters of 2020 primarily as a result of the decrease in rates during 2019 and 2020 discussed in the Overview.
Average interest-bearing liabilities increased approximately $1,381,000, or 1%, from approximately $396,201,000 for the first three quarters of 2019 to approximately $397,582,000 for the first three quarters of 2020. Average savings and interest bearing DDA balances increased approximately $21,356,000 primarily as several large public fund customers maintained higher balances with our bank subsidiary in the current year and some of the PPP loan proceeds were deposited into customers’ accounts. Average borrowings from FHLB decreased $8,384,000 as the funds from the increase in deposits reduced the need to borrow.
The average rate paid on interest-bearing liabilities for the first three quarters of 2019 was .87% compared with .44% for the first three quarters of 2020. This decrease is primarily due to the decreased rates in 2019 and 2020.
The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.20% for the first three quarters of 2019 as compared with 3.02% for the first three quarters of 2020.
The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and nine months ended September 30, 2020 and 2019.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
|
|
Quarter Ended September 30, 2020
|
|
|
Quarter Ended September 30, 2019
|
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
Loans (2)(3)
|
|
$
|
289,878
|
|
|
$
|
3,242
|
|
|
|
4.47
|
%
|
|
$
|
263,533
|
|
|
$
|
3,362
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from depository institutions
|
|
|
68,844
|
|
|
|
27
|
|
|
|
0.16
|
%
|
|
|
15,462
|
|
|
|
98
|
|
|
|
2.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
46,526
|
|
|
|
332
|
|
|
|
2.85
|
%
|
|
|
38,168
|
|
|
|
290
|
|
|
|
3.04
|
%
|
Non taxable (1)
|
|
|
15,252
|
|
|
|
123
|
|
|
|
3.23
|
%
|
|
|
16,132
|
|
|
|
130
|
|
|
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
177,574
|
|
|
|
986
|
|
|
|
2.22
|
%
|
|
|
209,152
|
|
|
|
1,207
|
|
|
|
2.31
|
%
|
Non taxable (1)
|
|
|
7,763
|
|
|
|
63
|
|
|
|
3.25
|
%
|
|
|
7,921
|
|
|
|
91
|
|
|
|
4.60
|
%
|
Other
|
|
|
2,193
|
|
|
|
13
|
|
|
|
2.37
|
%
|
|
|
2,103
|
|
|
|
4
|
|
|
|
0.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
608,030
|
|
|
$
|
4,786
|
|
|
|
3.15
|
%
|
|
$
|
552,471
|
|
|
$
|
5,182
|
|
|
|
3.75
|
%
|
Savings & interest- bearing DDA
|
|
$
|
328,876
|
|
|
$
|
173
|
|
|
|
0.21
|
%
|
|
$
|
291,701
|
|
|
$
|
410
|
|
|
|
0.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
67,846
|
|
|
|
139
|
|
|
|
0.82
|
%
|
|
|
85,623
|
|
|
|
360
|
|
|
|
1.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
992
|
|
|
|
8
|
|
|
|
3.23
|
%
|
|
|
6,439
|
|
|
|
42
|
|
|
|
2.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
397,714
|
|
|
$
|
320
|
|
|
|
0.32
|
%
|
|
$
|
383,763
|
|
|
$
|
812
|
|
|
|
0.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent spread
|
|
|
|
|
|
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent margin on earning assets
|
|
|
|
2.94
|
%
|
|
|
|
|
|
|
|
|
|
|
3.16
|
%
|
(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 $219 and $78 for 2020 and 2019, 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, 2020
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Interest Earned/Paid
|
|
|
Rate
|
|
Loans (2)(3)
|
|
$
|
280,672
|
|
|
$
|
9,706
|
|
|
|
4.61
|
%
|
|
$
|
266,654
|
|
|
$
|
10,466
|
|
|
|
5.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from depository institutions
|
|
|
47,970
|
|
|
|
196
|
|
|
|
0.54
|
%
|
|
|
16,313
|
|
|
|
289
|
|
|
|
2.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
39,452
|
|
|
|
883
|
|
|
|
2.98
|
%
|
|
|
37,552
|
|
|
|
845
|
|
|
|
3.00
|
%
|
Non taxable (1)
|
|
|
14,849
|
|
|
|
367
|
|
|
|
3.30
|
%
|
|
|
16,643
|
|
|
|
419
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
199,298
|
|
|
|
3,333
|
|
|
|
2.23
|
%
|
|
|
209,973
|
|
|
|
3,624
|
|
|
|
2.30
|
%
|
Non taxable (1)
|
|
|
6,570
|
|
|
|
193
|
|
|
|
3.92
|
%
|
|
|
9,548
|
|
|
|
339
|
|
|
|
4.73
|
%
|
Other
|
|
|
2,154
|
|
|
|
25
|
|
|
|
1.55
|
%
|
|
|
2,090
|
|
|
|
44
|
|
|
|
2.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
590,965
|
|
|
$
|
14,703
|
|
|
|
3.32
|
%
|
|
$
|
558,773
|
|
|
$
|
16,026
|
|
|
|
3.82
|
%
|
Savings & interest- bearing DDA
|
|
$
|
319,734
|
|
|
$
|
679
|
|
|
|
0.28
|
%
|
|
$
|
298,378
|
|
|
$
|
1,367
|
|
|
|
0.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
75,959
|
|
|
|
608
|
|
|
|
1.07
|
%
|
|
|
87,550
|
|
|
|
1,015
|
|
|
|
1.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
1,889
|
|
|
|
26
|
|
|
|
1.84
|
%
|
|
|
10,273
|
|
|
|
200
|
|
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
397,582
|
|
|
$
|
1,313
|
|
|
|
0.44
|
%
|
|
$
|
396,201
|
|
|
$
|
2,582
|
|
|
|
0.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent spread
|
|
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tax-equivalent margin on earning assets
|
|
|
|
3.02
|
%
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
(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 $497 and $227 for 2020 and 2019, 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, 2020 compared with September 30, 2019
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/Volume
|
|
|
Total
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
336
|
|
|
$
|
(415
|
)
|
|
$
|
(41
|
)
|
|
$
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from financial institutions
|
|
|
338
|
|
|
|
(92
|
)
|
|
|
(317
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
64
|
|
|
|
(18
|
)
|
|
|
(4
|
)
|
|
|
42
|
|
Non taxable
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(182
|
)
|
|
|
(46
|
)
|
|
|
7
|
|
|
|
(221
|
)
|
Non taxable
|
|
|
(2
|
)
|
|
|
(27
|
)
|
|
|
1
|
|
|
|
(28
|
)
|
Other
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
548
|
|
|
$
|
(590
|
)
|
|
$
|
(354
|
)
|
|
$
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDA
|
|
$
|
52
|
|
|
$
|
(257
|
)
|
|
$
|
(32
|
)
|
|
$
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
(75
|
)
|
|
|
(185
|
)
|
|
|
39
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
(36
|
)
|
|
|
10
|
|
|
|
(8
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(59
|
)
|
|
$
|
(432
|
)
|
|
$
|
(1
|
)
|
|
$
|
(492
|
)
|
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2020 compared with September 30, 2019
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/Volume
|
|
|
Total
|
|
Interest earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
550
|
|
|
$
|
(1,245
|
)
|
|
$
|
(65
|
)
|
|
$
|
(760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances due from financial institutions
|
|
|
561
|
|
|
|
(222
|
)
|
|
|
(432
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
43
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
38
|
|
Non taxable
|
|
|
(85
|
)
|
|
|
42
|
|
|
|
(9
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(184
|
)
|
|
|
(112
|
)
|
|
|
5
|
|
|
|
(291
|
)
|
Non taxable
|
|
|
(106
|
)
|
|
|
(59
|
)
|
|
|
19
|
|
|
|
(146
|
)
|
Other
|
|
|
1
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
780
|
|
|
$
|
(1,621
|
)
|
|
$
|
(482
|
)
|
|
$
|
(1,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings & interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDA
|
|
$
|
98
|
|
|
$
|
(733
|
)
|
|
$
|
(53
|
)
|
|
$
|
(688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
(134
|
)
|
|
|
(314
|
)
|
|
|
41
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from FHLB
|
|
|
(163
|
)
|
|
|
(59
|
)
|
|
|
48
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(199
|
)
|
|
$
|
(1,106
|
)
|
|
$
|
36
|
|
|
$
|
(1,269
|
)
|
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 $3,955,000 and $9,266,000 at September 30, 2020 and December 31, 2019, respectively, specific reserves of only $52,000 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 or granting interest only payments for 3 – 6 months for certain customers as a result of the economic challenges of business closures and unemployment resulting from COVID-19. These credits were generally 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 September 30, 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 September 30, 2020. As of September 30, 2020, a general reserve of approximately $320,000 was allocated to non-classified loans as a result of COVID-19. As of September 30, 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 the allowance for loan losses of $4,551,000 and $59,000 for the third quarters of 2020 and 2019, respectively, and $5,948,000 and $169,000 for the first three quarters of 2020 and 2019, respectively. The increase in the third quarter of 2020 is the direct result of a charge-off of $5,429,000 of one credit that was on nonaccrual and in bankruptcy. This loss is the result of specific events impacting this specific customer and was not related to COVID-19. The allowance for loan losses as a percentage of loans was 1.54% and 1.56% at September 30, 2020 and December 31, 2019, respectively. The Company believes that its allowance for loan losses is appropriate as of September 30, 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 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, 2020 as Compared with Quarter Ended September 30, 2019
Non-interest income decreased $129,000 for the third quarter of 2020 as compared with the third quarter of 2019. Results in the third quarter of 2020 included the decrease in service charges on deposit accounts of $96,000 due the impact of COVID-19 on the local economy and consumer spending in 2020.
Nine Months Ended September 30, 2020 as Compared with Nine Months Ended September 30, 2019
Non-interest income increased $825,000 for the first three quarters of 2020 as compared with the first three quarters of 2019. Results for the first three quarters of 2020 included an increase in gains from the sale of securities of $477,000 and an increase in other income of $510,000 as the Company realized a gain from death benefits from life insurance of $224,000 and a gain from the sale of banking house of $318,000. This increase was partially offset by the decrease in service charges on deposit accounts of $174,000 primarily due the impact of COVID-19 on the local economy and consumer spending in 2020.
Non-interest expense
Quarter Ended September 30, 2020 as Compared with Quarter Ended September 30, 2019
Total non-interest expense increased $151,000 for the third quarter of 2020 as compared with the third quarter of 2019. In 2020, other real estate expenses increased $375,000, which was partially offset by the decrease in salaries and employee benefits of $220,000 and net occupancy of $51,000.
Salaries and employee benefits decreased as a result of attrition and a reduction in costs associated with the retiree health plan.
Net occupancy expense decreased as the Company was able to eliminate some redundant telecommunication costs.
ORE expense increased as write-downs in the value of ORE were higher in 2020.
Nine Months Ended September 30, 2020 as Compared with Nine Months Ended September 30, 2019
Total non-interest expense decreased $1,066,000 for the first three quarters of 2020 as compared with the first three quarters of 2019. In 2020, salaries and employee benefits decreased $546,000, net occupancy decreased $158,000, equipment rentals, depreciation and maintenance expenses decreased $99,000 and other expense decreased $487,000. These decreases were partially offset by other real estate expense, which increased $251,000
Salaries and employee benefits decreased as a result of attrition and a reduction in costs associates with the retiree health plan.
Net occupancy expense decreased as the Company was able to eliminate some redundant telecommunication costs.
Equipment rentals, depreciation and maintenance decreased as the Company was able to reduce inefficient costs.
ORE expense increased as write-downs in the value of ORE were higher in 2020.
Other expense primarily decreased as advertising costs were reduced by $137,000 and legal fees were reduced by $166,000. Advertising expenditures have been curtailed as a result of COVID-19. Prior year results included expense of $201,000 in settlement of a lawsuit.
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 $81,178,000 at September 30, 2020, as compared with December 31, 2019 in the management of the bank subsidiary’s liquidity position.
Loan increased $17,618,000 at September 30, 2020, as compared with December 31, 2019 as new loans, particularly relating to the PPP program, outpaced principal payments, maturities and charge-offs relating to existing loans.
Total deposits increased $95,575,000 at September 30, 2020, as 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. In addition, some of the PPP loan proceeds were deposited into customers’ accounts.
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, 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. 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, 2020 and December 31, 2019, are as follows (in thousands):
|
|
Actual
|
|
|
For Capital Adequacy Purposes
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
92,577
|
|
|
|
22.98
|
%
|
|
$
|
32,233
|
|
|
|
8.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
88,176
|
|
|
|
21.88
|
%
|
|
|
18,131
|
|
|
|
4.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
88,176
|
|
|
|
21.88
|
%
|
|
|
24,174
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
88,176
|
|
|
|
13.74
|
%
|
|
|
25,673
|
|
|
|
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 September 30, 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
|
|
September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
89,874
|
|
|
|
22.45
|
%
|
|
$
|
32,026
|
|
|
|
8.00
|
%
|
|
$
|
40,033
|
|
|
|
10.00
|
%
|
Common Equity Tier 1 Capital (to Risk Weighted Assets)
|
|
|
85,474
|
|
|
|
21.35
|
%
|
|
|
18,015
|
|
|
|
4.50
|
%
|
|
|
26,021
|
|
|
|
6.50
|
%
|
Tier 1 Capital (to Risk Weighted Assets)
|
|
|
85,474
|
|
|
|
21.35
|
%
|
|
|
24,020
|
|
|
|
6.00
|
%
|
|
|
32,026
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to Average Assets)
|
|
|
85,474
|
|
|
|
12.43
|
%
|
|
|
27,506
|
|
|
|
4.00
|
%
|
|
|
34,382
|
|
|
|
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 actively participated in the PPP, facilitating approximately $23 million in funding. As an additional liquidity resource for this funding, the Company was approved 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.