Form 10-Q

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2016

or

 

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

Commission File Number 001-12103

 

 

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Mississippi   64-0709834

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Lameuse and Howard Avenues, Biloxi, Mississippi   39533
(Address of principal executive offices)   (Zip Code)

(228) 435-5511

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At October 31, 2016, there were 15,000,000 shares of $1 par value common stock authorized, with 5,123,186 shares issued and outstanding.

 

 

 


Part 1 – Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

 

     September 30, 2016
(unaudited)
     December 31, 2015
(audited)
 

Assets

     

Cash and due from banks

   $ 64,509       $ 31,396   

Available for sale securities

     208,920         202,807   

Held to maturity securities, fair value of $35,888 at September 30, 2016; $19,220 at December 31, 2015

     35,524         19,025   

Other investments

     2,717         2,744   

Federal Home Loan Bank Stock, at cost

     536         1,637   

Loans

     324,107         337,557   

Less: Allowance for loan losses

     6,947         8,070   
  

 

 

    

 

 

 

Loans, net

     317,160         329,487   

Bank premises and equipment, net of accumulated depreciation

     21,673         22,446   

Other real estate

     9,437         9,916   

Accrued interest receivable

     1,677         1,832   

Cash surrender value of life insurance

     19,115         18,735   

Other assets

     1,253         979   
  

 

 

    

 

 

 

Total assets

   $ 682,521       $ 641,004   
  

 

 

    

 

 

 

 

2


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

 

     September 30, 2016
(unaudited)
     December 31, 2015
(audited)
 

Liabilities and Shareholders’ Equity

     

Liabilities:

     

Deposits:

     

Demand, non-interest bearing

   $ 141,098       $ 122,743   

Savings and demand, interest bearing

     344,493         315,141   

Time, $100,000 or more

     39,719         35,389   

Other time deposits

     38,250         39,434   
  

 

 

    

 

 

 

Total deposits

     563,560         512,707   

Borrowings from Federal Home Loan Bank

     6,339         18,409   

Employee and director benefit plans liabilities

     16,556         16,283   

Other liabilities

     1,710         1,766   
  

 

 

    

 

 

 

Total liabilities

     588,165         549,165   

Shareholders’ Equity:

     

Common stock, $1 par value, 15,000,000 shares authorized, 5,123,186 shares issued and outstanding at September 30, 2016 and December 31, 2015

     5,123         5,123   

Surplus

     65,780         65,780   

Undivided profits

     19,694         19,151   

Accumulated other comprehensive income, net of tax

     3,759         1,785   
  

 

 

    

 

 

 

Total shareholders’ equity

     94,356         91,839   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 682,521       $ 641,004   
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

3


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands except per share data)(unaudited)

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2016      2015      2016      2015  

Interest income:

           

Interest and fees on loans

   $ 3,568       $ 3,665       $ 10,833       $ 11,031   

Interest and dividends on securities:

           

U.S. Treasuries

     283         187         740         461   

U.S. Government agencies

     161         475         728         1,534   

Mortgage-backed securities

     137         147         414         454   

States and political subdivisions

     333         245         954         970   

Corporate bonds

     7            23      

Other investments

     9         13         19         20   

Interest on balances due from depository institutions

     95         15         212         50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     4,593         4,747         13,923         14,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     237         179         661         508   

Borrowings from Federal Home Loan Bank

     30         57         115         152   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     267         236         776         660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     4,326         4,511         13,147         13,860   

Provision for allowance for loan losses

        285         137         2,807   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for allowance for loan losses

   $ 4,326       $ 4,226       $ 13,010       $ 11,053   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

4


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations (continued)

(in thousands except per share data)(unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Non-interest income:

        

Trust department income and fees

   $ 429      $ 438      $ 1,192      $ 1,238   

Service charges on deposit accounts

     946        943        2,796        3,331   

Gain on liquidation, sales and calls of securities

     67        8        158        8   

Loss from other investments

     (14     (29     (27     (100

Increase in cash surrender value of life insurance

     102        121        295        363   

Other income

     236        203        523        590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     1,766        1,684        4,937        5,430   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     2,776        2,943        8,305        8,918   

Net occupancy

     559        556        1,798        1,871   

Equipment rentals, depreciation and maintenance

     763        716        2,229        2,135   

FDIC and state banking assessments

     232        243        661        704   

Data processing

     334        344        1,006        1,036   

ATM expense

     147        179        422        1,004   

Other real estate expense

     26        962        500        1,704   

Loss on credit impairment of securities

       1,695          1,695   

Other expense

     849        825        2,405        2,725   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     5,686        8,463        17,326        21,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     406        (2,553     621        (5,309

Income tax expense

         78     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 406      $ (2,553   $ 543      $ (5,309
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings (loss) per share

   $ .08      $ (.50   $ .10      $ (1.04
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $        $        $        $     
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)(unaudited)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  

Net income (loss)

   $ 406      $ (2,553   $ 543      $ (5,309

Other comprehensive income (loss):

        

Net unrealized gain (loss) on available for sale securities

     (598     1,832        2,132        1,961   

Reclassification adjustment for realized gain on available for sale securities called or sold

     (67     (8     (158     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (665     1,824        1,974        1,953   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (259   $ (729   $ 2,517      $ (3,356
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(in thousands except share data)

 

     Number of
Common

Shares
     Common
Stock
     Surplus      Undivided
Profits
     Accumulated
Other
Comprehensive
Income
     Total  

Balance, January 1, 2016

     5,123,186       $ 5,123       $ 65,780       $ 19,151       $ 1,785       $ 91,839   

Net income

              543            543   

Other comprehensive income

                 1,974         1,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30, 2016

     5,123,186       $ 5,123       $ 65,780       $ 19,694       $ 3,759       $ 94,356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note: Balances as of January 1, 2016 were audited.

See notes to consolidated financial statements.

 

7


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)(unaudited)

 

     Nine Months Ended September 30,  
     2016     2015  

Cash flows from operating activities:

    

Net income (loss)

   $ 543      $ (5,309

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation

     1,356        1,341   

Provision for allowance for loan losses

     137        2,807   

Writedown of other real estate

     420        443   

(Gains) losses on sales of other real estate

     (199     796   

Loss from other investments

     27        100   

Amortization of held to maturity securities

     111        52   

Amortization of available for sale securities

     17        175   

Gain on sales and calls of securities

     (158     (8

Loss on credit impairment of securities

       1,695   

Change in accrued interest receivable

     155        194   

Increase in cash surrender value of life insurance

     (295     (363

Change in other assets

     (274     357   

Change in other liabilities

     217        675   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 2,057      $ 2,955   
  

 

 

   

 

 

 

 

8


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

 

     Nine Months Ended September 30,  
     2016     2015  

Cash flows from investing activities:

    

Proceeds from maturities, sales and calls of available for sale securities

   $ 141,834      $ 48,615   

Proceeds from maturities of held to maturity securities

     510        210   

Purchases of available for sale securities

     (145,832     (35,049

Purchases of held to maturity securities

     (17,120     (1,534

Redemption of Federal Home Loan Bank stock

     1,101        1,033   

Proceeds from sales of other real estate

     2,017        2,819   

Loans, net change

     10,431        2,794   

Acquisition of bank premises and equipment

     (583     (259

Investment in cash surrender value of life insurance

     (85     (80
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (7,727     18,549   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Demand and savings deposits, net change

     47,707        14,477   

Time deposits, net change

     3,146        (3,818

Borrowings from Federal Home Loan Bank

     98,920        697,544   

Repayments to Federal Home Loan Bank

     (110,990     (717,768
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     38,783        (9,565
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     33,113        11,939   

Cash and cash equivalents, beginning of period

     31,396        23,556   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 64,509      $ 35,495   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

9


PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 and 2015

1. Basis of Presentation:

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

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of September 30, 2016 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2015 Annual Report and Form 10-K.

The results of operations for the quarter or nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year.

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

Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2015.

New Accounting Pronouncements – In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 82). ASU 2016-02 provides certain targeted improvements to align lessor accounting with the lessee accounting model. This update will be effective for fiscal years, and interim periods

 

10


within those fiscal years, beginning after January 1, 2019. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-03, Intangibles – Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance. ASU 2016-03 amends the guidance in ASUs 2014-02, 2014-03, 2014-07 and 2014-18 to remove their effective dates and render them effective immediately. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step by step basis. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2016. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Adoption of ASU 2016-13 will require financial institutions and other organizations to use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of determining the effect of ASU 2016-13 on its financial position, results of operations and cash flows.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). ASU 2016-15 provides classification guidance in order to reduce diversity in practice for certain transactions. Such transactions include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, distributions received from equity method investments, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2017. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

 

11


2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 5,123,186 for the quarters and nine months ended September 30, 2016 and 2015.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $761,440 and $655,764 for the nine months ended September 30, 2016 and 2015, respectively, for interest on deposits and borrowings. Income tax payments of $78,435 were made during the nine months ended September 30, 2016. Loans transferred to other real estate amounted to $1,758,764 and $7,278,605 during the nine months ended September 30, 2016 and 2015, respectively.

 

12


4. Investments:

The amortized cost and fair value of securities at September 30, 2016 and December 31, 2015, are as follows (in thousands):

 

September 30, 2016:

   Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Available for sale securities:

           

Debt securities:

           

U.S. Treasuries

   $ 124,691       $ 782       $ (12    $ 125,461   

U.S. Government agencies

     29,971         336         (5      30,302   

Mortgage-backed securities

     32,232         686         (16      32,902   

States and political subdivisions

     19,073         724            19,797   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     205,967         2,528         (33      208,462   

Equity securities

     458               458   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 206,425       $ 2,528       $ (33    $ 208,920   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity securities:

           

U.S. Government agencies

   $ 5,000       $            $ (21    $ 4,979   

States and political subdivisions

     29,046         429         (41      29,434   

Corporate bond

     1,478            (3      1,475   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $ 35,524       $ 429       $ (65    $ 35,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


December 31, 2015:

   Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Available for sale securities:

           

Debt securities:

           

U.S. Treasuries

   $ 63,845       $ 20       $ (111    $ 63,754   

U.S. Government agencies

     84,849         176         (479      84,546   

Mortgage-backed securities

     30,106         155         (131      30,130   

States and political subdivisions

     22,833         894            23,727   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     201,633         1,245         (721      202,157   

Equity securities

     650               650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 202,283       $ 1,245       $ (721    $ 202,807   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity securities:

           

States and political subdivisions

   $ 17,507       $ 222       $ (16    $ 17,713   

Corporate bond

     1,518            (11      1,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $ 19,025       $ 222       $ (27    $ 19,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of debt securities at September 30, 2016 (in thousands), by contractual maturity, are shown on the following page. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

14


     Amortized Cost      Fair Value  

Available for sale securities:

     

Due in one year or less

   $ 29,119       $ 29,190   

Due after one year through five years

     119,697         120,935   

Due after five years through ten years

     24,586         25,073   

Due after ten years

     333         362   

Mortgage-backed securities

     32,232         32,902   
  

 

 

    

 

 

 

Totals

   $ 205,967       $ 208,462   
  

 

 

    

 

 

 

Held to maturity securities:

     

Due in one year or less

   $ 2,762       $ 2,757   

Due after one year through five years

     7,354         7,454   

Due after five years through ten years

     15,433         15,600   

Due after ten years

     9,975         10,077   
  

 

 

    

 

 

 

Totals

   $ 35,524       $ 35,888   
  

 

 

    

 

 

 

 

15


Available for sale and held to maturity securities with gross unrealized losses at September 30, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):

 

     Less Than Twelve Months      Over Twelve Months      Total  
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 

September 30, 2016:

                 

U.S. Treasuries

   $ 9,973       $ 12       $         $         $ 9,973       $ 12   

U.S. Government agencies

     9,972         26               9,972         26   

Mortgage-backed securities

     4,078         16               4,078         16   

States and political subdivisions

     6,882         39         591         2         7,473         41   

Corporate bond

           1,475         3         1,475         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 30,905       $ 93       $ 2,066       $ 5       $ 32,971       $ 98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015:

                 

U.S. Treasuries

   $ 39,889       $ 111       $         $            $ 39,889       $ 111   

U.S. Government agencies

     14,894         87         12,581         392         27,475         479   

Mortgage-backed securities

     16,557         131               16,557         131   

States and political subdivisions

     2,225         8         1,362         8         3,587         16   

Corporate bond

     1,507         11               1,507         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 75,072       $ 348       $ 13,943       $ 400       $ 89,015       $ 748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2016, 2 of the 26 U.S. Treasuries, 2 of the 7 U.S. Government Agencies, 2 of the 13 mortgage-backed securities, 24 of the 145 securities issued by states and political subdivisions and the corporate bond contained unrealized losses.

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

 

16


As part of its routine evaluation of securities for other-than-temporary impairment, the Company identified a potential credit loss on bonds issued by a municipality with a carrying value of $1,875,000 at September 30, 2015. The Company’s evaluation considered the failure of the issuer to make scheduled interest payments and expectations of future performance. Principal and interest payments due under the current terms of the bonds are funded by sales and property tax collections by the related municipality. During the third quarter of 2015, the assessed value of the related real estate parcels was significantly reduced, which will reduce the level of future cash flows supporting the principal and interest payments on the bonds. The present value of the expected future cash flows was calculated by the Company. Based on its evaluation, it was determined that the investment in the bonds is impaired and that a credit loss should be recognized in earnings. During the third quarter of 2015, the Company recorded a loss of $1,695,000 from the credit impairment of these bonds. Accrued interest of $92,564 relating to these securities was also charged off during the third quarter of 2015.

Proceeds from sales and calls of available for sale securities were $29,250,806 and $5,600,000 during the nine months ended September 30, 2016 and 2015, respectively. Available for sale debt securities were sold or called for a realized gain of $157,918 and $7,993 for the nine months ended September 30, 2016 and 2015, respectively.

Securities with a fair value of $182,864,903 and $168,724,920 at September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

5. Loans:

The composition of the loan portfolio at September 30, 2016 and December 31, 2015, is as follows (in thousands):

 

     September 30, 2016      December 31, 2015  

Gaming

   $ 33,442       $ 31,655   

Residential and land development

     910         933   

Real estate, construction

     40,347         35,414   

Real estate, mortgage

     202,608         219,925   

Commercial and industrial

     39,092         42,480   

Other

     7,708         7,150   
  

 

 

    

 

 

 

Total

   $ 324,107       $ 337,557   
  

 

 

    

 

 

 

 

17


The age analysis of the loan portfolio, segregated by class of loans, as of September 30, 2016 and December 31, 2015, is as follows (in thousands):

 

     Number of Days Past Due                           Loans Past
Due Greater
Than 90
 
     30 - 59      60 - 89      Greater
Than 90
     Total
Past Due
     Current      Total
Loans
     Days &
Still Accruing
 

September 30, 2016:

                    

Gaming

   $         $         $         $            $ 33,442       $ 33,442       $     

Residential and land development

           300         300         610         910      

Real estate, construction

     259         349         1,104         1,712         38,635         40,347         14   

Real estate, mortgage

     1,842         2,245         4,843         8,930         193,678         202,608         161   

Commercial and industrial

     345         32         13         390         38,702         39,092      

Other

     41            81         122         7,586         7,708         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,487       $ 2,626       $ 6,341       $ 11,454       $ 312,653       $ 324,107       $ 180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015:

                    

Gaming

   $         $         $         $         $ 31,655       $ 31,655       $     

Residential and land development

           323         323         610         933      

Real estate, construction

     851         448         1,346         2,645         32,769         35,414      

Real estate, mortgage

     7,094         3,673         1,352         12,119         207,806         219,925         146   

Commercial and industrial

     1,206         31         237         1,474         41,006         42,480      

Other

     67               67         7,083         7,150      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,218       $ 4,152       $ 3,258       $ 16,628       $ 320,929       $ 337,557       $ 146   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

18


An analysis of the loan portfolio by loan grade, segregated by class of loans, as of September 30, 2016 and December 31, 2015, is as follows (in thousands):

 

     Loans With A Grade Of:         
     A, B or C      S      D      E      F      Total  

September 30, 2016:

                 

Gaming

   $ 33,442       $         $         $         $                    $ 33,442   

Residential and land development

     610               300            910   

Real estate, construction

     37,613         449         549         1,736            40,347   

Real estate, mortgage

     148,116         19,232         23,364         11,896            202,608   

Commercial and industrial

     13,179         24,180         1,151         582            39,092   

Other

     7,674         1         33               7,708   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 240,634       $ 43,862       $ 25,097       $ 14,514       $         $ 324,107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015:

                 

Gaming

   $ 31,655       $         $         $         $         $ 31,655   

Residential and land development

     610               323            933   

Real estate, construction

     31,935            883         2,596            35,414   

Real estate, mortgage

     167,286         16,678         23,686         12,275            219,925   

Commercial and industrial

     24,466         15,007         2,368         639            42,480   

Other

     7,114         1         35               7,150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 263,066       $ 31,686       $ 26,972       $ 15,833       $         $ 337,557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of September 30, 2016 and December 31, 2015, are as follows (in thousands):

 

     September 30, 2016      December 31, 2015  

Residential and land development

   $ 300       $ 323   

Real estate, construction

     1,736         2,523   

Real estate, mortgage

     10,920         11,759   

Commercial and industrial

     535         581   
  

 

 

    

 

 

 

Total

   $ 13,491       $ 15,186   
  

 

 

    

 

 

 

The Company has modified certain loans by granting interest rate concessions to these customers. These loans are in compliance with their modified terms, are currently accruing and the Company has classified them as troubled debt restructurings. Troubled debt restructurings as of September 30, 2016 and December 31, 2015 were as follows (in thousands except for number of contracts):

 

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

September 30, 2016:

           

Real estate, mortgage

     3       $ 1,197       $ 1,197       $ 107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 1,197       $ 1,197       $ 107   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015:

           

Real estate, mortgage

     3       $ 1,232       $ 1,232       $ 107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 1,232       $ 1,232       $ 107   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of September 30, 2016 and December 31, 2015, are as follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

September 30, 2016:

              

With no related allowance recorded:

              

Real estate, construction

   $ 2,065       $ 1,460       $                    $ 1,395       $                

Real estate, mortgage

     9,579         8,848            8,715         17   

Commercial and industrial

     326         326            333      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11,970         10,634            10,443         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

              

Residential and land development

     300         300         109         308      

Real estate, construction

     276         276         165         287      

Real estate, mortgage

     3,269         3,269         1,089         2,967         23   

Commercial and industrial

     247         209         2         210      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,092         4,054         1,365         3,772         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total by class of loans:

              

Residential and land development

     300         300         109         308      

Real estate, construction

     2,341         1,736         165         1,682      

Real estate, mortgage

     12,848         12,117         1,089         11,682         40   

Commercial and industrial

     573         535         2         543      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,062       $ 14,688       $ 1,365       $ 14,215       $ 40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

December 31, 2015:

              

With no related allowance recorded:

              

Real estate, construction

   $ 2,228       $ 1,842       $                    $ 1,878       $                

Real estate, mortgage

     9,771         9,014            9,175         21   

Commercial and industrial

     619         581            653      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     12,618         11,437            11,706         21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

              

Residential and land development

     323         323         109         343      

Real estate, construction

     814         681         252         780      

Real estate, mortgage

     3,977         3,977         1,443         3,920         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,114         4,981         1,804         5,043         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total by class of loans:

              

Residential and land development

     323         323         109         343      

Real estate, construction

     3,042         2,523         252         2,658      

Real estate, mortgage

     13,748         12,991         1,443         13,095         39   

Commercial and industrial

     619         581            653      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,732       $ 16,418       $ 1,804       $ 16,749       $ 39   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the quarters and nine months ended September 30, 2016 and 2015, and the balances of loans, individually and collectively evaluated for impairment, as of September 30, 2016 and 2015, are as follows (in thousands):

 

     Gaming      Residential and
Land
Development
     Real Estate,
Construction
    Real Estate,
Mortgage
    Commercial
and Industrial
    Other     Total  

For the Nine Months Ended September 30, 2016:

                

Allowance for Loan Losses:

                

Beginning balance

   $ 582       $ 189       $ 589      $ 5,382      $ 1,075      $ 253      $ 8,070   

Charge-offs

           (173     (700     (509     (153     (1,535

Recoveries

           57        107        61        50        275   

Provision

     48         20         (113     (24     127        79        137   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 630       $ 209       $ 360      $ 4,765      $ 754      $ 229      $ 6,947   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Quarter Ended September 30, 2016:

  

          

Allowance for Loan Losses:

                

Beginning Balance

   $ 582       $ 202       $ 375      $ 4,976      $ 718      $ 256      $ 7,109   

Charge-offs

             (147       (59     (206

Recoveries

           19        8        1        16        44   

Provision

     48         7         (34     (72     35        16     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 630       $ 209       $ 360      $ 4,765      $ 754      $ 229      $ 6,947   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses, September 30, 2016:

                

Ending balance: individually evaluated for impairment

   $         $ 109       $ 239      $ 1,311      $ 218      $ 17      $ 1,894   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 630       $ 100       $ 121      $ 3,454      $ 536      $ 212      $ 5,053   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans, September 30, 2016:

                

Ending balance: individually evaluated for impairment

   $         $ 300       $ 2,285      $ 35,260      $ 1,733      $ 33      $ 39,611   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 33,442       $ 610       $ 38,062      $ 167,348      $ 37,359      $ 7,675      $ 284,496   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


     Gaming      Residential and
Land
Development
    Real Estate,
Construction
    Real Estate,
Mortgage
    Commercial
and Industrial
    Other     Total  

For the Nine Months Ended September 30, 2015:

               

Allowance for Loan Losses:

               

Beginning Balance

   $ 573       $ 251      $ 860      $ 6,609      $ 587      $ 326      $ 9,206   

Charge-offs

        (1,504     (955     (1,171     (62     (141     (3,833

Recoveries

          102        20        14        61        197   

Provision

     38         1,484        606        243        350        86        2,807   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 611       $ 231      $ 613      $ 5,701      $ 889      $ 332      $ 8,377   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Quarter Ended September 30, 2015:

               

Allowance for Loan Losses:

               

Beginning Balance

   $ 570       $ 226      $ 1,104      $ 6,639      $ 655      $ 356      $ 9,550   

Charge-offs

          (546     (952     (38     (44     (1,580

Recoveries

          102        7        1        12        122   

Provision

     41         5        (47     7        271        8        285   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 611       $ 231      $ 613      $ 5,701      $ 889      $ 332      $ 8,377   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses, September 30, 2015:

               

Ending balance: individually evaluated for impairment

   $                    $ 117      $ 479      $ 1,759      $ 364      $ 4      $ 2,723   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 611       $ 114      $ 134      $ 3,942      $ 525      $ 328      $ 5,654   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans, September 30, 2015:

               

Ending balance: individually evaluated for impairment

   $                    $ 3,117      $ 4,223      $ 36,947      $ 3,548      $ 20      $ 47,855   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 32,181       $ 650      $ 31,274      $ 183,338      $ 40,769      $ 12,632      $ 300,844   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

7. Deposits:

Time deposits of $100,000 or more at September 30, 2016 and December 31, 2015 included brokered deposits of $5,000,000, which mature in 2017.

Time deposits of $250,000 or more totaled approximately $26,853,000 and $24,090,000 at September 30, 2016 and December 31, 2015, respectively.

8. Fair Value Measurements and Disclosures:

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

 

24


Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets. If the fair value of available for sale securities is generated through model-based techniques, including the discounting of estimated cash flows, such securities are classified as Level 3 assets.

Held to Maturity Securities

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

Other Investments

The carrying amount shown as other investments approximates fair value.

 

25


Federal Home Loan Bank Stock

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

Loans

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

Other Real Estate

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

Cash Surrender Value of Life Insurance

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

Deposits

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

 

26


Borrowings from Federal Home Loan Bank

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

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of September 30, 2016 and December 31, 2015 are as follows (in thousands):

 

            Fair Value Measurements Using  
     Total      Level 1      Level 2      Level 3  

September 30, 2016:

           

U.S. Treasuries

   $ 125,461       $                    $ 125,461       $                

U.S. Government agencies

     30,302            30,302      

Mortgage-backed securities

     32,902            32,902      

States and political subdivisions

     19,797            19,797      

Equity securities

     458            458      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 208,920       $                    $ 208,920       $                
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015:

           

U.S. Treasuries

   $ 63,754       $                    $ 63,754       $                

U.S. Government agencies

     84,546            84,546      

Mortgage-backed securities

     30,130            30,130      

States and political subdivisions

     23,727            23,547         180   

Equity securities

     650            650      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 202,807       $                    $ 202,627       $ 180   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2016 and December 31, 2015 are as follows (in thousands):

 

            Fair Value Measurements Using  
     Total      Level 1      Level 2      Level 3  

September 30, 2016

   $ 6,605       $                    $                    $ 6,605   

December 31, 2015

     7,811               7,811   

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2016 and December 31, 2015 are as follows (in thousands):

 

            Fair Value Measurements Using  
     Total      Level 1      Level 2      Level 3  

September 30, 2016

   $ 9,437       $                    $                    $ 9,437   

December 31, 2015

     9,916               9,916   

 

27


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

 

     For the Nine
Months Ended
September 30, 2016
     For the Year
Ended
December 31, 2015
 

Balance, beginning of period

   $ 9,916       $ 7,646   

Loans transferred to ORE

     1,759         7,502   

Sales

     (1,818      (4,295

Writedowns

     (420      (937
  

 

 

    

 

 

 

Balance, end of period

   $ 9,437       $ 9,916   
  

 

 

    

 

 

 

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at September 30, 2016 and December 31, 2015, are as follows (in thousands):

 

     Carrying      Fair Value Measurements Using         
     Amount      Level 1      Level 2      Level 3      Total  

September 30, 2016:

              

Financial Assets:

              

Cash and due from banks

   $ 64,509       $ 64,509       $         $                    $ 64,509   

Available for sale securities

     208,920            208,920            208,920   

Held to maturity securities

     35,524            35,888            35,888   

Other investments

     2,717         2,717               2,717   

Federal Home Loan Bank stock

     536            536            536   

Loans, net

     317,160               321,510         321,510   

Other real estate

     9,437               9,437         9,437   

Cash surrender value of life insurance

     19,115            19,115            19,115   

Financial Liabilities:

              

Deposits:

              

Non-interest bearing

     141,098         141,098               141,098   

Interest bearing

     422,462               422,775         422,775   

Borrowings from Federal Home Loan Bank

     6,339            6,777            6,777   

 

28


December 31, 2015:

              

Financial Assets:

              

Cash and due from banks

   $ 31,396       $ 31,396       $         $                    $ 31,396   

Available for sale securities

     202,807            202,627         180         202,807   

Held to maturity securities

     19,025            19,220            19,220   

Other investments

     2,744         2,744               2,744   

Federal Home Loan Bank stock

     1,637            1,637            1,637   

Loans, net

     329,487               331,026         331,026   

Other real estate

     9,916               9,916         9,916   

Cash surrender value of life insurance

     18,735            18,735            18,735   

Financial Liabilities:

              

Deposits:

              

Non-interest bearing

     122,743         122,743               122,743   

Interest bearing

     389,964               390,205         390,205   

Borrowings from Federal Home Loan Bank

     18,409            19,731            19,731   

9. Reclassifications:

Certain reclassifications have been made to the prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income (loss).

 

29


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

The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2015.

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”) has issued several new accounting standards updates for the first three quarters of 2016 which are disclosed in the Notes to Unaudited Consolidated Financial Statements. The Company does not generally expect that these updates will have a material effect on its financial position or results of operations but the effect of ASU 2016-13 is still being considered.

 

30


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.

 

31


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 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.

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.

 

32


The Company earned net income of $406,000 for the third quarter of 2016 compared with a net loss of $2,553,000 for the third quarter of 2015 and earned net income of $543,000 for the first three quarters of 2016 compared with a net loss of $5,309,000 for the first three quarters of 2015. Results in 2016 for both time periods included decreases in the provision for the allowance for loan losses and non-interest expense which were partially offset by a decrease in net interest income as compared with 2015. In addition, non-interest income decreased for the first three quarters of 2016 as compared with 2015.

Managing the net interest margin in the Company’s highly competitive market and in context of larger economic conditions has been very challenging and will continue to be so, for the foreseeable future. Net interest income was impacted primarily by the decrease in interest on U.S. Government agency securities of $314,000 and $806,000 for the third quarter and first three quarters ended September 30, 2016, respectively, as compared with 2015. This decrease in both time periods is the result of recent purchases of these securities having shorter durations, and therefore lower yields, in anticipation of rising rates as well as proceeds from calls and maturities of U.S. Agency securities being invested in U.S. Treasury securities which generally have a lower rate.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be emphasized during these difficult economic times, as the local economy continues to negatively impact collateral values and borrowers’ ability to repay their loans. The Company did not record a provision for the allowance for loan losses for the third quarter of 2016 and only recorded a provision of $137,000 for the first three quarters of 2016. Provisions for the allowance for loan losses of $285,000 and $2,807,000, respectively, were recorded for the third quarter and first three quarters of 2015. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $13,491,000 and $15,186,000 at September 30, 2016 and December 31, 2015, 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 $82,000 for the third quarter of 2016 and decreased $493,000 for the first three quarters of 2016 as compared with 2015 results. The increase between the quarters primarily is the result of the gain on the liquidation, sale and calls of securities of $67,000 during the third quarter of 2016. The decrease between the three quarters is the result of service charges on deposit accounts decreasing $535,000 for the first three quarters of 2016 as compared with 2015 primarily as a result of decreased ATM fee income.

Non-interest expense decreased $2,777,000 and $4,466,000 for the third quarter and first three quarters of 2016 as compared with 2015 results. This decrease for the third quarter of 2016 was the result of the decrease in ORE expense of $936,000 as compared with 2015 and 2015’s results including the loss on credit impairment of securities of $1,695,000. This decrease for the first three quarters of 2016 was the result of decreases in salaries and employee benefits of $613,000, ATM expenses of $582,000 and ORE expense of $1,204,000 as compared with 2015 and 2015’s results including the loss on credit impairment of securities.

 

33


Total assets at September 30, 2016 increased $41,517,000 as compared with December 31, 2015. Cash and due from banks increased $33,113,000 and held to maturity securities increased $16,499,000 at September 30, 2016. These increases were funded by total deposits which increased $50,853,000 at September 30, 2016 as compared with December 31, 2015 as customers in the casino industry and county and municipal entities reallocate their resources periodically.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the amount by which interest income on loans, investments and other interest-earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the 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, 2016 as Compared with Quarter Ended September 30, 2015

The Company’s average interest-earning assets increased approximately $12,797,000, or 2%, from approximately $591,211,000 for the third quarter of 2015 to approximately $604,008,000 for the third quarter of 2016. Average balances due from financial institutions increased approximately $49,872,000 as a result of the decrease in average loans and the increase in average savings and interest-bearing DDA. The Company’s average loans decreased approximately $30,673,000 as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans.

The average yield on earning assets decreased by 15 basis points, from 3.30% for the third quarter of 2015 to 3.15% for the third quarter of 2016. The yield on average loans increased from 4.13% for the third quarter of 2015 to 4.40% for the third quarter of 2016 primarily as a result of the effect of the increase in prime rate during December 2015 on the Company’s floating rate loans. Offsetting this was the yield on average taxable available for sale securities which decreased from 1.75% for the third quarter of 2015 to 1.27% for the third quarter of 2016 as recent purchases have shorter durations, and therefore lower yields, in anticipation of rising rates.

Average interest bearing liabilities increased approximately $2,135,000, or .50%, from approximately $441,456,000 for the third quarter of 2015 to approximately $443,591,000 for the third quarter of 2016. Average savings and interest bearing DDA balances increased approximately $15,725,000 primarily as several large commercial customers reallocate their balances periodically. Average borrowings from the Federal Home Loan Bank decreased approximately $18,158,000 due to the liquidity needs of the bank subsidiary.

The average rate paid on interest bearing liabilities for the third quarter of 2015 was .21% as compared with .24% for the third quarter of 2016.

 

34


The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.14% for the third quarter of 2015 as compared with 2.97% for the third quarter of 2016.

Nine Months Ended September 30, 2016 as Compared with Nine Months Ended September 30, 2015

The Company’s average interest-earning assets decreased approximately $14,620,000, or 2%, from approximately $606,993,000 for the first three quarters of 2015 to approximately $592,373,000 for the first three quarters of 2016. Average balances due from financial institutions increased approximately $21,742,000 primarily as a result of the decrease in average loans. The Company’s average loans decreased approximately $30,079,000 as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans.

The average yield on earning assets decreased by 6 basis points, from 3.30% for the first three quarters of 2015 to 3.24% for the first three quarters of 2016. The yield on average loans increased from 4.07% for the first three quarters of 2015 to 4.36% for the first three quarters of 2016 primarily as a result of the effect of the increase in prime rate during December 2015 on the Company’s floating rate loans. The yield on average taxable available for sale securities decreased from 1.73% for the first three quarters of 2015 to 1.35% for the first three quarters of 2016 as recent purchases have shorter durations, and therefore lower yields, in anticipation of rising rates.

Average interest-bearing liabilities decreased approximately $17,536,000, or 4%, from approximately $464,011,000 for the first three quarters of 2015 to approximately $446,475,000 for the first three quarters of 2016. Average borrowings from the Federal Home Loan Bank decreased approximately $19,120,000 due to the liquidity needs of the bank subsidiary.

The average rate paid on interest-bearing liabilities for the first three quarters of 2015 was .19% compared with .23% for the first two quarters of 2016.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.15% for the first three quarters of 2015 as compared with 3.07% for the first three quarters of 2016.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and nine months ended September 30, 2016 and 2015.

 

35


Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

 

     Quarter Ended September 30, 2016     Quarter Ended September 30, 2015  
     Average Balance      Interest Earned/Paid      Rate     Average Balance      Interest Earned/Paid      Rate  

Loans (2)(3)

   $ 324,160       $ 3,568         4.40   $ 354,833       $ 3,665         4.13

Balances due from depository institutions

     54,734         95         0.69     4,862         15         1.23

HTM:

                

Taxable

     8,593         60         2.79        

Non taxable (1)

     19,981         191         3.82     17,534         150         3.42

AFS:

                

Taxable

     174,377         553         1.27     184,473         809         1.75

Non taxable (1)

     20,422         277         5.43     26,779         221         3.30

Other

     1,741         9         2.07     2,730         13         1.90
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 604,008       $ 4,753         3.15   $ 591,211       $ 4,873         3.30
  

 

 

    

 

 

      

 

 

    

 

 

    

Savings & interest-bearing DDA

   $ 357,950       $ 116         0.13   $ 342,225       $ 87         0.10

Time deposits

     78,727         121         0.61     74,159         92         0.50

Borrowings from FHLB

     6,914         30         1.74     25,072         57         0.91
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 443,591       $ 267         0.24   $ 441,456       $ 236         0.21
  

 

 

    

 

 

      

 

 

    

 

 

    

Net tax-equivalent spread

  

        2.91           3.09
     

 

 

         

 

 

 

Net tax-equivalent margin on earning assets

  

     2.97           3.14
  

 

 

         

 

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2016 and 2015.
(2) Loan fees of $119 and $67 for 2016 and 2015, respectively, are included in these figures.
(3) Includes nonaccrual loans.

 

36


Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

 

     Nine Months September 30, 2016     Nine Months September 30, 2015  
     Average Balance      Interest Earned/Paid      Rate     Average Balance      Interest Earned/Paid      Rate  

Loans (2)(3)

   $ 331,022       $ 10,833         4.36   $ 361,101       $ 11,031         4.07

Balances due from depository institutions

     29,814         212         0.95     8,072         50         0.83

HTM:

                

Taxable

     3,911         61         2.08        

Non taxable (1)

     19,473         541         3.70     17,687         452         3.41

AFS:

                

Taxable

     184,692         1,870         1.35     188,650         2,449         1.73

Non taxable (1)

     21,482         865         5.37     28,838         1,018         4.71

Other

     1,979         19         1.28     2,645         20         1.01
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 592,373       $ 14,401         3.24   $ 606,993       $ 15,020         3.30
  

 

 

    

 

 

      

 

 

    

 

 

    

Savings & interest-bearing DDA

   $ 360,127       $ 330         0.12   $ 360,757       $ 232         0.09

Time deposits

     77,445         331         0.57     75,231         276         0.49

Borrowings from FHLB

     8,903         115         1.72     28,023         152         0.72
  

 

 

    

 

 

      

 

 

    

 

 

    

Total

   $ 446,475       $ 776         0.23   $ 464,011       $ 660         0.19
  

 

 

    

 

 

      

 

 

    

 

 

    

Net tax-equivalent spread

  

     3.01           3.11
  

 

 

         

 

 

 

Net tax-equivalent margin on earning assets

  

     3.07           3.15
  

 

 

         

 

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2016 and 2015.
(2) Loan fees of $314 and $251 for 2016 and 2015, respectively, are included in these figures.
(3) Includes nonaccrual loans.

 

37


Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

 

     For the Quarter Ended  
     September 30, 2016 compared with September 30, 2015  
     Volume     Rate     Rate/Volume     Total  

Interest earned on:

        

Loans

   $ (317   $ 240      $ (20   $ (97

Balances due from financial institutions

     154        (7     (67     80   

Held to maturity securities:

        

Taxable

     60            60   

Non taxable

     21        18        2        41   

Available for sale securities:

        

Taxable

     (44     (224     12        (256

Non taxable

     (52     142        (34     56   

Other

     (5     1          (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (183   $ 170      $ (107   $ (120
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest paid on:

        

Savings & interest-bearing DDA

   $ 4      $ 24      $ 1      $ 29   

Time deposits

     6        22        1        29   

Borrowings from FHLB

     (41     52        (38     (27
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (31   $ 98      $ (36   $ 31   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

 

     For the Nine Months Ended  
     September 30, 2016 compared with September 30, 2015  
     Volume     Rate     Rate/Volume     Total  

Interest earned on:

        

Loans

   $ (919   $ 786      $ (65   $ (198

Balances due from financial institutions

     135        7        20        162   

Held to maturity securities:

        

Taxable

     61            61   

Non taxable

     46        39        4        89   

Available for sale securities:

        

Taxable

     (51     (539     11        (579

Non taxable

     (260     143        (36     (153

Other

     (5     5        (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (993   $ 441      $ (67   $ (619
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest paid on:

        

Savings & interest-bearing DDA

   $ (1   $ 99      $        $ 98   

Time deposits

     8        46        1        55   

Borrowings from FHLB

     (104     210        (143     (37
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (97   $ 355      $ (142   $ 116   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

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The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans were $13,491,000 and $15,186,000 at September 30, 2016 and December 31, 2015, respectively, specific reserves of only $1,258,000 and $1,697,000, 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 records a provision for loan losses based on its on-going, systematic evaluation. This process resulted in the Company recording no provision for loan losses for the third quarter of 2016 and a provision for loan losses of $285,000 for the third quarter of 2015 and $137,000 and $2,807,000 for the first three quarters of 2016 and 2015, respectively. The allowance for loan losses as a percentage of loans was 2.14% and 2.39% at September 30, 2016 and December 31, 2015, respectively. The Company believes that its allowance for loan losses is appropriate as of September 30, 2016.

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, 2016 as Compared with Quarter Ended September 30, 2015

Non-interest income increased $82,000 for the third quarter of 2016 as compared with the third quarter of 2015 primarily as the Company realized a gain of $67,000 in 2016 from the liquidation, sale and call of securities as compared with $8,000 in 2015.

Nine Months Ended September 30, 2016 as Compared with Nine Months Ended September 30, 2015

Non-interest income decreased $493,000 for the first three quarters of 2016 as compared with the first three quarters of 2015 primarily as the result of the decrease in service charges on deposit accounts of $535,000. More specifically, ATM fee income decreased $451,000 as the Company’s off-site ATMs at two casinos transferred to other vendors. The Company also realized a gain of $158,000 from the liquidation, sale and call of securities in 2016 as compared with $8,000 in 2015.

 

40


Non-interest expense

Quarter Ended September 30, 2016 as Compared with Quarter Ended September 30, 2015

Total non-interest expense decreased $2,777,000 for the third quarter of 2016 as compared with the third quarter of 2015. This decrease is partly due to the decrease in other real estate expense in 2016 as compared with 2015. This decrease of $936,000 was the result of the decrease in ORE and the impact of the auction of properties in 2015. The decrease in total non-interest expense is also the result of the Company recording a loss from the credit impairment of a municipal security of $1,695,000 in 2015.

Nine Months Ended September 30, 2016 as Compared with Nine Months Ended September 30, 2015

Total non-interest expense decreased $4,466,000 for the first three quarters of 2016 as compared with the first three quarters of 2015. Salaries and employee benefits decreased $613,000, ATM expense decreased $582,000 and other real estate expense decreased $1,204,000 in 2016 as compared with 2015. The Company recorded a loss from the credit impairment of a municipal security of $1,695,000 in 2015.

Salaries and employee benefits decreased in 2016 as salaries decreased $231,000 as a result of attrition and health insurance costs declined $348,000 as a result of decreasing claims.

ATM expenses decreased in 2016 as a result of decreased ATM activity in the current year as a result of off-site ATMs at two casinos transferring to other vendors.

ORE expense decreased in 2016 as compared with 2015 due to the decrease in ORE and the impact of the auction of properties in 2015.

Income Taxes

At December 31, 2014, the Company established a full valuation allowance on its deferred tax assets. Until such time as the Company returns to sustained earnings, and it is determined that it is more likely than not that the deferred tax asset will be realized, no income tax benefit or expense will generally be recorded. The Company did record income tax expense of $78,000 during the second quarter of 2016 relating to the resolution of a recent examination by the Internal Revenue Service.

FINANCIAL CONDITION

Cash and due from banks increased $33,113,000 at September 30, 2016, compared with December 31, 2015 in the management of the bank subsidiary’s liquidity position.

Held to maturity securities increased $16,499,000 at September 30, 2016, compared with December 31, 2015 as the Company has invested some of its excess funding in order to increase its interest income.

Loan decreased $13,450,000 at September 30, 2016, as compared with December 31, 2015 as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans.

 

41


Total deposits increased $50,853,000 at September 30, 2016, as compared with December 31, 2015. 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 $12,070,000 at September 30, 2016 as compared with December 31, 2015 based on the liquidity needs of the bank subsidiary.

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.

New rules relating to risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act became effective for the Company on January 1, 2015. The rules establish a new common equity Tier 1 minimum capital requirement, increase the minimum capital ratios and assign a higher risk weight to certain assets based on the risk associated with these assets.

As of September 30, 2016, 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. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

 

42


The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios as of September 30, 2016 and December 31, 2015, are as follows (in thousands):

 

     Actual     For Capital Adequacy Purposes  
     Amount      Ratio     Amount      Ratio  

September 30, 2016 :

          

Total Capital (to Risk Weighted Assets)

   $ 95,760         22.60   $ 33,895         8.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)

     90,444         21.35     19,066         4.50

Tier 1 Capital (to Risk Weighted Assets)

     90,444         21.35     25,421         6.00

Tier 1 Capital (to Average Assets)

     90,444         13.25     27,312         4.00

December 31, 2015:

          

Total Capital (to Risk Weighted Assets)

   $ 95,395         21.83   $ 34,954         8.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)

     89,901         20.58     19,662         4.50

Tier 1 Capital (to Risk Weighted Assets)

     89,901         20.58     26,215         6.00

Tier 1 Capital (to Average Assets)

     89,901         13.18     27,291         4.00

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of September 30, 2016 and December 31, 2015, are as follows (in thousands):

 

     Actual     For Capital Adequacy
Purposes
    To Be Well Capitalized  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2016 :

               

Total Capital (to Risk Weighted Assets)

   $ 92,349         21.93   $ 33,694         8.00   $ 42,118         10.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)

     87,063         20.67     18,953         4.50     27,377         6.50

Tier 1 Capital (to Risk Weighted Assets)

     87,063         20.67     25,271         6.00     33,694         8.00

Tier 1 Capital (to Average Assets)

     87,063         12.72     27,373         4.00     34,217         5.00

December 31, 2015:

               

Total Capital (to Risk Weighted Assets)

   $ 91,963         21.09   $ 34,889         8.00   $ 43,611         10.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)

     86,479         19.83     19,625         4.50     28,347         6.50

Tier 1 Capital (to Risk Weighted Assets)

     86,479         19.83     26,166         6.00     34,889         8.00

Tier 1 Capital (to Average Assets)

     86,479         13.47     25,680         4.00     32,100         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,

 

43


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 2014, Management identified opportunities for improving 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 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.

Item 4: Controls and Procedures

As of September 30, 2016, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

44


PART II - OTHER INFORMATION

Item 1: Legal Proceedings

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

Item 5: Other Information

None.

Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits

 

Exhibit 31.1:    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 31.2:    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 32.1:    Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2:    Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 101    The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at September 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the quarters and nine months ended September 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters and nine months ended September 30, 2016 and 2015, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2016, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 and (vi) Notes to the Unaudited Consolidated Financial Statements for the nine months ended September 30, 2016 and 2015.

(b) Reports on Form 8-K

A Form 8-K was filed on July 27, 2016, October 26, 2016 and October 28, 2016.

 

45


SIGNATURES

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

 

PEOPLES FINANCIAL CORPORATION

(Registrant)

Date:  

November 14, 2016

By:  

/s/    Chevis C. Swetman        

  Chevis C. Swetman
 

Chairman, President and Chief Executive Officer

(principal executive officer)

Date:  

November 14, 2016

By:  

/s/    Lauri A. Wood        

  Lauri A. Wood
 

Chief Financial Officer and Controller

(principal financial and accounting officer)

 

46