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| PFBX > SEC Filings for PFBX > Form 10-Q on 13-Aug-2012 | All Recent SEC Filings |
13-Aug-2012
Quarterly Report
GENERAL
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 its 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, 2011.
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
There were no new accounting standards updates issued during the six months ended June 30, 2012. The Company did implement the disclosure requirements relating to the presentation of comprehensive income as set forth in Accounting Standards Update 2011-5.
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
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 determination. 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 generally accepted accounting principles. 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.
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.
OVERVIEW
The Company is a community bank serving the financial and trust needs of its customers in its trade area of south Mississippi, southeast Louisiana and southwest Alabama. 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.
Net income for the second quarter of 2012 was $561,753 compared with $809,873 for the second quarter of 2011 and for the first half of 2012 was $1,066,509 as compared with $1,247,417 for the first half of 2011. Current year results for the second quarter and first half included a reduction in net interest income, an increase in the provision for loan losses, gains on sales and calls of securities, a decrease in salaries and benefit costs and an increase in data processing expenses as compared with 2011 results. Prior year results included a gain from the redemption of life insurance of $389,119.
Net interest income increased $10,512 for the second quarter of 2012 as compared with the second quarter of 2011 and decreased $262,671 for the first half of 2012 as compared with the first half of 2011. Interest income on loans continues to be negatively impacted by the large balance of the loan portfolio on nonaccrual and the charge off of accrued interest on loans placed on nonaccrual. The yield on U.S. Agencies, our primary investment choice, continues to decline.
Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be emphasized during these difficult economic times. Borrowers' ability to repay has been significantly impacted by these conditions, which has resulted in nonaccrual loans totaling $54,968,213 and $57,592,715 at June 30, 2012 and December 31, 2011, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses. During the second quarter of 2012, the Company increased the specific reserve on one credit relationship by $800,000 as well as a number of other smaller adjustments in specific reserves to other loans. As a result, the provision for loan losses increased to $1,290,000 for the second quarter of 2012 from $546,000 for the second quarter of 2011 and to $1,830,000 for the first half of 2012 from $1,187,000 for the first half of 2011.
The Company realized gains of $859,942 in the second quarter of 2012 as compared with $7,174 in the second quarter of 2011 and $964,175 in the first half of 2012 as compared with $7,174 in the first half of 2011
Total assets at June 30, 2012 increased $48,455,504 as compared with December 31, 2011. During the first half of 2012, two public fund relationships increased their balances in a non-deposit product with the Bank by more than $80,000,000. These balances were included in federal funds purchased and securities sold under agreements to repurchase. These proceeds funded the purchase of available for sale securities, which were pledged against these public funds as required by law. While these entities began to reallocate their funds to other institutions during the first quarter of 2012, the securities pledging the accounts were still in place. Funds were borrowed from the Federal Home Loan Bank to fund the decrease in the public fund balances.
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 June 30, 2012 as Compared with Quarter Ended June 30, 2011
The Company's average interest earning assets increased approximately $39,720,000, or 5%, from approximately $734,761,000 for the second quarter of 2011 to approximately $774,481,000 for the second quarter of 2012. The Company's average balance sheet increased as new loans have outpaced principal payments, maturities, charge-offs and foreclosures relating to existing loans.
The average yield on earning assets decreased by 34 basis points, from 3.68% for the second quarter of 2011 to 3.34% for the second quarter of 2012, with the biggest impact to the yield on taxable available for sale securities. The Company's investment and liquidity strategy has been to invest most of the proceeds from sales, calls and maturities of securities in similar securities. As a result, the yield on taxable available for sale securities decreased from 2.40% for the second quarter of 2011 to 1.89% for the second quarter of 2012. The Company has more recently purchased securities with maturities of up to fifteen years, with call provisions, to improve its yield on these assets. Future security purchases may be of shorter duration in anticipation of rising rates in 2014. The yield on loans has decreased due to the increase in loans on nonaccrual during the last quarter of 2011 and the first half of 2012.
The average rate paid on interest bearing liabilities decreased 21 basis points, from .57% for the second quarter of 2011 to .36% for the second quarter of 2012. Rates paid on deposit accounts and non-deposit accounts, which are reported as federal funds purchased and securities sold under agreements to repurchase, have decreased in 2012. The current unprecedented low rate environment which exists on a national and local level has caused customers to tolerate lower interest rates in return for less risk. The Company believes that it is unlikely that its cost of funds can be materially reduced further; however, any opportunity to do so will be considered.
The Company's net interest margin on a tax-equivalent basis, which is net income as a percentage of average earning assets, was 3.04% for the quarter ended June 30, 2012, down 16 basis points from 3.20% for the quarter ended June 30, 2011.
Six Months Ended June 30, 2012 as Compared with Six Months Ended June 30, 2011
The Company's average interest earning assets increased approximately $46,977,000, or 7%, from approximately $720,795,000 for the first half of 2011 to approximately $767,772,000 for the first half of 2012. The Company's average loan balance increased as new loans have outpaced principal payments, maturities, charge-offs and foreclosures relating to existing loans.
The average yield on earning assets decreased by 47 basis points, from 3.82% for the first half of 2011 to 3.35% for the first half of 2012, with the biggest impact to the yield on taxable available for sale securities. The Company's investment and liquidity strategy has been to invest most of the proceeds from sales, calls and maturities of securities in similar securities. As a result, the yield on taxable available for sale securities decreased from 2.38% for the first half of 2011 to 1.79% for the first half of 2012. The Company has more recently purchased securities with maturities of up to fifteen years, with call provisions, to improve its yield on these assets. Future security purchases may be of shorter duration in anticipation of rising rates in 2014. The yield on loans has decreased due to the increase in loans on nonaccrual during the last quarter of 2011 and the first half of 2012.
Average interest bearing liabilities increased approximately $39,596,000, or 7%, from approximately $588,905,000 for the first half of 2011 to approximately $628,501,000 for the first half of 2012.
The average rate paid on interest bearing liabilities decreased 23 basis points, from .61% for the first half of 2011 to .38% for the first half of 2012. Rates paid on deposit accounts and non-deposit accounts, which are reported as federal funds purchased and securities sold under agreements to repurchase, have decreased in 2012. The current unprecedented low rate environment which exists on a national and local level has caused customers to tolerate lower interest rates in return for less risk. The Company believes that it is unlikely that its cost of funds can be materially reduced further; however, any opportunity to do so will be considered.
The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended June 30, 2012 and 2011 and the six months ended June 30, 2012 and 2011.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
Three Months Ended June 30, 2012 Three Months Ended June 30, 2011
Average Balance Interest Earned/Paid Rate Average Balance Interest Earned/Paid Rate
Loans (2)(3) $ 428,951 $ 4,511 4.21 % $ 391,346 $ 4,381 4.48 %
Federal Funds Sold 3,841 3 0.31 % 2,318 4 0.69 %
HTM:
Non taxable (1) 4,109 43 4.19 % 1,916 31 6.47 %
AFS:
Taxable 292,811 1,384 1.89 % 295,317 1,770 2.40 %
Non taxable (1) 39,914 527 5.28 % 40,913 568 5.55 %
Other 4,855 1 0.80 % 2,951 3 0.41 %
Total $ 774,481 $ 6,469 3.34 % $ 734,761 $ 6,757 3.68 %
Savings & interest-bearing DDA $ 238,344 $ 157 0.26 % $ 249,035 $ 265 0.43 %
CD's 148,536 252 0.68 % 169,899 386 0.91 %
Federal funds purchased 161,933 98 0.24 % 147,997 170 0.46 %
FHLB advances 82,805 69 0.33 % 35,826 45 0.50 %
Total $ 631,618 $ 576 0.36 % $ 602,757 $ 866 0.57 %
Net tax-equivalent margin on earning assets 3.04 % 3.20 %
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(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2012 and 2011.
(2) Loan fees of $145 and $197 for 2012 and 2011, respectively, are included in these figures.
(3) Includes nonaccrual loans.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
Six Months Ended June 30, 2012 Six Months Ended June 30, 2011
Average Balance Interest Earned/Paid Rate Average Balance Interest Earned/Paid Rate
Loans (2)(3) $ 428,276 $ 9,153 4.27 % $ 399,497 $ 9,288 4.65 %
Federal Funds Sold 6,609 9 0.27 % 3,730 5 0.27 %
HTM:
Non taxable (1) 2,944 64 4.35 % 1,916 59 6.16 %
AFS:
Taxable 285,818 2,560 1.79 % 271,379 3,232 2.38 %
Non taxable (1) 40,046 1,056 5.27 % 41,266 1,163 5.64 %
Other 4,079 5 0.24 % 3,007 9 0.60 %
Total $ 767,772 $ 12,847 3.35 % $ 720,795 $ 13,756 3.82 %
Savings & interest-bearing DDA $ 231,928 $ 301 0.26 % $ 233,294 $ 525 0.45 %
CD's 152,624 543 0.71 % 175,304 829 0.95 %
Federal funds purchased 177,614 217 0.24 % 141,819 342 0.48 %
FHLB advances 66,335 119 0.36 % 38,488 95 0.49 %
Total $ 628,501 $ 1,180 0.38 % $ 588,905 $ 1,791 0.61 %
Net tax-equivalent margin on earning assets 3.04 % 3.31 %
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(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2012 and 2011.
(2) Loan fees of $389 and $363 for 2012 and 2011, respectively, are included in these figures.
(3) Includes nonaccrual loans.
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
For the Quarter Ended
June 30, 2012 compared with June 30, 2011
Volume Rate Rate/Volume Total
Interest earned on:
Loans $ 421 $ (266 ) $ (25 ) $ 130
Federal funds sold 2 (2 ) (1 ) (1 )
Held to maturity securities:
Non taxable 35 (10 ) (13 ) 12
Available for sale securities:
Taxable (15 ) (374 ) 3 (386 )
Non taxable (14 ) (28 ) 1 (41 )
Other 2 (2 ) (2 ) (2 )
Total $ 431 $ (682 ) $ (37 ) $ (288 )
Interest paid on:
Savings & interest-bearing deposits $ (11 ) $ (101 ) $ 4 $ (108 )
CD's (49 ) (98 ) 13 (134 )
Federal funds purchased 16 (80 ) (8 ) (72 )
FHLB advances 59 (15 ) (20 ) 24
Total $ 15 $ (294 ) $ (11 ) $ (290 )
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Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
For the Six Months Ended
June 30, 2012 compared with June 30, 2011
Volume Rate Rate/Volume Total
Interest earned on:
Loans $ 669 $ (750 ) $ (54 ) $ (135 )
Federal funds sold 4 1 (1 ) 4
Held to maturity securities:
Non taxable 32 (17 ) (10 ) 5
Available for sale securities:
Taxable 172 (801 ) (43 ) (672 )
Non taxable (34 ) (75 ) 2 (107 )
Other 3 (5 ) (2 ) (4 )
Total $ 846 $ (1,647 ) $ (108 ) $ (909 )
Interest paid on:
Savings & interest-bearing deposits $ (3 ) $ (222 ) $ 1 $ (224 )
CD's (107 ) (205 ) 26 (286 )
Federal funds purchased 86 (169 ) (42 ) (125 )
FHLB advances 69 (26 ) (19 ) 24
Total $ 45 $ (622 ) $ (34 ) $ (611 )
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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 . . .
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