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| PFBX > SEC Filings for PFBX > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
OVERVIEW
Net income for the third quarter of 2009 was $974,110 compared with a net loss
of $1,053,644 for the third quarter of 2008, an increase in earnings of
$2,027,754. Earnings in the third quarter of 2009 included an increase in FDIC
assessments of $200,264 over 2008's results. In the third quarter of 2008, the
Company recorded a charge to earnings for the impairment of its investment in
Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock of $2,964,000.
Net income for the first nine months 2009 was $2,877,784 compared with
$3,213,754 for the first nine months of 2008. Earnings for the nine months ended
September 30, 2009 and 2008 were impacted by the provision for loan losses, the
impairment loss of $2,964,000 recognized in the third quarter of 2008 and
increased FDIC insurance assessments in 2009. The provision for the allowance
for losses on loans was $3,725,000 in 2009 as compared with $2,095,000 in 2008.
FDIC assessments for the nine months ended September 30, 2009 were $729,968 more
than in the nine months ended September 30, 2008.
Monitoring asset quality and addressing potential losses in our loan portfolio
continues to be emphasized during these tough economic times. The Company
charged-off $7,066,761 in loans during the first nine months of 2009 as compared
with only $822,441 for the same period in 2008. Approximately 64% of the
charge-offs in 2009 related to three credit relationships in the residential
development industry. Nonaccrual loans increased to $25,256,847 at September 30,
2009 as compared with $15,553,447 at December 31, 2008. This large increase is
primarily attributable to the placement of one loan in the amount of $11,000,000
on nonaccrual at September 30, 2009. This credit is a performing loan, but was
classified as nonaccrual by the banking regulators in their annual shared
national credit review in the third quarter of 2009.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which interest income on loans, investments
and other interest earning assets exceeds interest expense on deposits and other
borrowed funds, is the single largest component of the Company's income.
Management's objective is to provide the largest possible amount of income while
balancing interest rate, credit, liquidity and capital risk. Changes in the
volume and mix of interest earning assets and interest-bearing liabilities
combined with changes in market rates of interest directly affect net interest
income.
The Federal Reserve, through the Federal Open Market Committee (the
"Committee"), dropped the discount rate by a total of 200 basis points during
the first quarter of 2008, and by another 200 basis points during the following
three quarters of 2008. The Committee's actions were their attempt to stabilize
financial markets as well as to stimulate the national economy and flow of
capital. Typically, changes in the discount rate result in corresponding changes
in prime interest rates. The impact of these rate reductions was significant to
the Company's financial condition and results of operations.
Quarter Ended September 30, 2009 as Compared with Quarter Ended September 30,
2008
The Company's average interest earning assets increased approximately
$18,752,000, or 2%, from approximately $804,323,000 for the third quarter of
2008 to approximately $823,075,000 for the third quarter of 2009.
The average yield on earning assets decreased 110 basis points, from 5.39% for
the third quarter of 2008 to 4.29% for the third quarter of 2009. The Company's
loan portfolio generally has a 40%/60% blend of fixed/floating rate term. This
results in the Company being more asset sensitive to market interest rates and
generally is the cause of the decrease in interest income. The Company also lost
interest income of approximately $43,000 due to loans being on nonaccrual during
the quarter.
Average interest bearing liabilities increased approximately $31,110,000, or 5%,
from approximately $662,140,000 for the third quarter of 2008 to approximately
$693,250,000 for the third quarter of 2009. The average rate paid on interest
bearing liabilities decreased 116 basis points, from 2.11% for the third quarter
of 2008 to .95% for the third quarter of 2009.
The Company's net interest margin on a tax-equivalent basis, which is net
interest income as a percentage of average earning assets, was 3.48% at
September 30, 2009, down 18 basis points from 3.66% at September 30, 2008.
Nine Months Ended September 30, 2009 as Compared with Nine Months Ended
September 30, 2008
The Company's average interest earning assets increased approximately
$14,519,000, or 2%, from approximately $812,956,000 for the first nine months of
2008 to approximately $827,475,000 for the first nine months of 2009.
Also as a result of the Committee's actions, the average yield on earning assets
decreased 135 basis points, from 5.59% for the first nine months of 2008 to
4.24% for the first nine months of 2009. The Company's loan portfolio generally
has a 40%/60% blend of fixed/floating rate term. This results in the Company
being more asset sensitive to market interest rates and generally is the cause
of the decrease in interest income. The Company also lost interest income of
approximately $334,000 due to loans being on nonaccrual during the first nine
months of 2009.
Average interest bearing liabilities increased approximately $19,976,000, or 3%,
from approximately $670,219,000 for the first nine months of 2008 to
approximately $690,195,000 for the first nine months of 2009. The average rate
paid on interest bearing liabilities decreased 127 basis points, from 2.42% for
the first nine months of 2008 to 1.15% for the first nine months of 2009.
The Company's net interest margin on a tax-equivalent basis, which is net
interest income as a percentage of average earning assets, was 3.28% at
September 30, 2009, down 31 basis points from 3.59% at September 30, 2008.
The tables on the following pages analyze the changes in tax-equivalent net
interest income for the quarters ended September 30, 2009 and 2008 and the nine
months ended September 30, 2009 and 2008.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
Three Months Ended September 30, 2009 Three Months Ended September 30, 2008
Average Interest Average Interest
Balance Earned/Paid Rate Balance Earned/Paid Rate
Loans (2)(3) $ 466,954 $ 5,028 4.30 % $ 472,088 $ 6,603 5.59 %
Federal Funds Sold 7,631 5 0.26 % 11,397 50 1.75 %
HTM:
Non taxable (1) 3,201 39 4.87 % 3,393 52 6.13 %
AFS:
Taxable 306,267 3,336 4.36 % 285,869 3,738 5.23 %
Non taxable (1) 34,848 402 4.61 % 24,214 362 5.98 %
Other 4,174 10 0.96 % 7,362 42 2.82 %
Total $ 823,075 $ 8,820 4.29 % $ 804,323 $ 10,847 5.39 %
Savings & interest-
bearing DDA $ 225,233 $ 303 0.54 % $ 254,513 $ 972 1.53 %
CD's 203,479 769 1.51 % 184,393 1,303 2.83 %
Federal funds purchased 209,578 437 0.83 % 215,548 1,111 2.06 %
FHLB advances 54,960 142 1.03 % 7,686 103 5.36 %
Total $ 693,250 $ 1,651 0.95 % $ 662,140 $ 3,489 2.11 %
Net tax-equivalent yield
on earning assets 3.48 % 3.66 %
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(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2009 and 2008.
(2) Loan fees of $107,898 and $183,079 for 2009 and 2008, respectively, are included in these figures.
(3) Includes nonaccrual loans.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
Nine Months Ended September 30, 2009 Nine Months Ended September 30, 2008
Average Interest Average Interest
Balance Earned/Paid Rate Balance Earned/Paid Rate
Loans (2)(3) $ 470,290 $ 15,233 4.32 % $ 461,948 $ 20,711 5.98 %
Federal Funds Sold 3,409 7 0.27 % 7,024 112 2.12 %
HTM:
Non taxable (1) 3,286 129 5.23 % 3,791 178 6.26 %
AFS:
Taxable 313,690 9,674 4.11 % 309,603 11,939 5.14 %
Non taxable (1) 33,645 1,239 4.91 % 23,166 1,008 5.80 %
Other 3,155 17 0.72 % 7,424 143 2.57 %
Total $ 827,475 $ 26,299 4.24 % $ 812,956 $ 34,091 5.59 %
Savings & interest-
bearing DDA $ 235,388 $ 1,540 0.87 % $ 253,197 $ 3,032 1.60 %
CD's 198,821 2,486 1.67 % 201,571 5,080 3.36 %
Federal funds purchased 222,447 1,532 0.92 % 207,612 3,731 2.40 %
FHLB advances 33,539 413 1.64 % 7,839 343 5.83 %
Total $ 690,195 $ 5,971 1.15 % $ 670,219 $ 12,186 2.42 %
Net tax-equivalent yield
on earning assets 3.28 % 3.59 %
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(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2009 and 2008.
(2) Loan fees of $395,114 and $592,391 for 2009 and 2008, respectively, are included in these figures.
(3) Includes nonaccrual loans.
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. A loan review process further assists with evaluating credit
quality and assessing potential performance issues. Loan delinquencies and
deposit overdrafts are closely monitored in order to identify developing
problems as early as possible. In addition, the Company continuously monitors
its relationships with its loan customers in concentrated industries such as
gaming and hotel/motel, as well as the exposure for out of area, construction
and land development, and commercial real estate loans, and their direct and
indirect impact on its operations. 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.
With the recent economic downturn and its impact in the housing market during
the last year, the Company has closely evaluated its residential development
loan portfolio. Potential losses on these loans have been estimated based on the
best available information. The Company has charged-off $7,067,238 during the
first three quarters of 2009, $4,548,423 of which related to residential
developments. Based on its on-going analysis, the Company recorded a provision
for loan losses of $1,875,000 during the third quarter of 2009 and $3,725,000
for the nine months ended September 30, 2009 in order to adequately provide for
further potential losses. Of the allowance for loan losses of $8,106,588 at
September 30, 2009, approximately 43%, or $3,501,647, related to three credit
relationships.
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
Total non-interest income decreased $215,812 for the third quarter of 2009 as
compared with the third quarter of 2008. Contributing to this decrease is the
reduction in trust department income and fees of $51,661 as a result of the
decrease in market value, on which fees are based, of personal trust accounts.
Total non-interest income also was impacted by the decrease in other income of
$154,800 for the third quarter of 2009 as compared with the third quarter of
2008 due largely to the gain from the sale of the bank subsidiary's merchant
card portfolio in 2008.
Total non-interest income decreased $595,522 for the first nine months of 2009
as compared with the first nine months of 2008. Contributing to this decrease is
the reduction in trust department income and fees of $218,760 as a result of the
decrease in market value, on which fees are based, of personal trust accounts. A
loss of $149,517 on the Company's investment in preferred stock of an
unaffiliated bank holding company was recognized as the FDIC closed that
company's bank subsidiary during
2009. Other income during the first nine months of 2008 included gains from the
sale of bank premises of $142,607.
Non-interest expense
Total non-interest expense decreased $2,956,203 for the third quarter of 2009 as
compared with the third quarter of 2008. During the third quarter of 2008, the
Company recorded a charge to earnings for the impairment of its investment in
FHLMC preferred stock of $2,964,000, which is included in Other Expense.
Total non-interest expense decreased $2,346,208 for the first nine months of
2009 as compared with the first nine months of 2008 as occupancy expense and
other expense increased.
Occupancy expenses increased $211,777 for the first nine months of 2009 compared
with the first nine months of 2008. Contributing to this increase was an
increase in insurance costs of $107,550 and telephone expense of $71,613.
Included in the decrease of $2,647,632 in other expense for the first nine
months of 2009 as compared with the first nine months of 2008 are the impairment
charge on the FHLMC preferred stock of $2,964,000 in 2008.
Income Taxes
Income taxes increased $640,000 for the third quarter of 2009 as compared with
the third quarter of 2008, and decreased $1,183,000 for the first nine months of
2009 as compared with the first nine months of 2008. These fluctuations were the
result of the overall increase in taxable earnings for the third quarter of 2009
as compared with the third quarter of 2008 and the overall decrease in taxable
earnings for first nine months of 2009 as compared with the first nine months of
2008, respectively. Other factors in these fluctuations were the increase in
non-taxable income as a component of total income and the effect of tax credits
in 2009.
FINANCIAL CONDITION
The Company increased its investment in Federal Home Loan Bank ("FHLB") stock to
$3,523,800 as a prerequisite to increasing its borrowing with the FHLB.
The composition of the loan portfolio was as follows:
September 30, 2009 December 31, 2008
Real estate, construction $ 99,936,020 $ 118,455,302
Real estate, mortgage 300,622,822 290,458,002
Loans to finance agricultural production 2,028,883 3,177,723
Commercial and industrial loans 50,036,294 43,311,552
Loans to individuals for household, family and other
consumer expenditures 9,979,166 10,201,518
Obligations of states and political subdivisions 3,419,078 1,733,194
All other loans 39,748
Total $ 466,022,263 $ 467,377,039
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Accrued interest receivable decreased $461,749 during the first nine months of
2009 as a result of the decrease in the yield on interest-earning assets.
Other real estate increased $2,348,286 at September 30, 2009 as compared with
December 31, 2008 as a result of the foreclosure on non-performing loans. Of the
total increase, $1,794,983 related to one credit relationship.
Other assets increased $789,733 at September 30, 2009 as compared with
December 31, 2008. Income taxes receivable increased by $661,571 at September 30
as a result of tax credits.
Total deposits increased $31,091,673 at September 30, 2009, as compared with
December 31, 2008. Fluctuations among the different types of deposits represent
recurring activity for the Company. During the first nine months of 2009, time
deposits of $100,000 or more have increased by $56,147,106 as a result of the
acquisition of $55,342,000 in brokered deposits. In October 2009, $20,000,000 of
these brokered deposits matured.
Federal funds purchased and securities sold under agreements to repurchase
primarily include the bank subsidiary's funds management account, which is a
non-deposit product. Balances in the funds management accounts decreased
$30,025,640 at September 30, 2009, as compared with December 31, 2008, as the
result of the periodic reallocation of funds by certain customers between
deposit products and non-deposit products.
SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY
As a part of its on-going stock repurchase program, the Company repurchased and
retired 127,571 shares of its common stock, at a total repurchase price of
$2,366,559 during the first nine months of 2009.
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. One measure of capital adequacy is the primary capital ratio which
was 12.61% at September 30, 2009, which is well above the regulatory minimum of
6.00%. Management continues to emphasize the importance of maintaining the
appropriate capital levels of the Company and has established the goal of
maintaining its primary capital ratio at 8.00%, which is the minimum requirement
for classification as 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. 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 Federal Home Loan Bank, federal funds sold and federal funds
purchased are utilized by the Company to manage its daily liquidity position.
During the second quarter of 2009, the Company was approved to participate in
the Federal Reserve Bank Discount Window Primary Credit Program and may draw
upon this resource for liquidity as needed. During the third quarter of 2009,
the Company successfully tested this liquidity source.
REGULATORY MATTERS
During the quarter ended September 30, 2009, Management identified opportunities
for improving risk management, addressing asset quality concerns, managing
concentrations of credit risk and ensuring sufficient liquidity at the Bank as
the result of its own investigation as well as examinations performed by certain
bank regulatory agencies. In concert with the regulators, the Company has
identified specific corrective steps and actions to enhance its risk management,
asset quality and liquidity policies, controls and procedures. The Bank, without
the prior written approval of its regulators, may not declare or pay any cash
dividends.
Item 4: Controls and Procedures
As of September 30, 2009, 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, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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