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PFBX > SEC Filings for PFBX > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for PEOPLES FINANCIAL CORP /MS/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PEOPLES FINANCIAL CORP /MS/


13-Nov-2012

Quarterly Report


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. 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 nine months ended September 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 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.


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. 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 within the tax provisions in the statement of income.

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. Although Hurricane Isaac struck the trade area in August of 2012, there was minimal impact to the Company and its customers. 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 third quarter of 2012 was $749,560 compared with $577,676 for the third quarter of 2011. While non-interest income decreased $656,735 in 2012 as compared with 2011, net interest income increased $190,098 and non-interest expense decreased $833,521 and income taxes increased $198,000 as taxable income increased. Interest expense decreased as the Company was able to reduce its cost of funds. Results for 2011 included increased gains on sales and calls of securities and the gain on death benefits from life insurance as compared with 2012. During 2012, the Company had losses on its other investments. Non-interest expense decreased in 2012 as a result of the impact of the voluntary early retirement program and decreased costs associated with foreclosed property.

Net income for the first nine months of 2012 was $1,816,069 compared with $1,825,093 for the first nine months of 2011. While non-interest income decreased $114,632 in 2012 as compared with 2011, the provision for loan losses increased $640,000 and non-interest expense decreased $1,211,181 and income tax benefit decreased $393,000 as taxable income increased. Results for 2012 included increased gains on sales and calls of securities and a loss on the Company's other investments. During 2011, the Company had a gain on death benefits from life insurance. Non-interest expense decreased in 2012 as salaries and employee benefits decreased as a result of the impact of the voluntary early retirement program and other expense decreased as costs associated with foreclosed property declined. These decreases in non-interest expense were partially offset by an increase in data processing costs as the Company outsourced its computer operations in June of 2011.

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 $53,918,000 and $57,592,715 at September 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 reporting a number of other smaller adjustments in specific reserves to other loans. As a result, the provision for loan losses increased to $2,371,000 for the first nine months of 2012 from $1,731,000 for the first nine months of 2011. The provision for loan losses was $541,000 and $544,000 for the quarters ended September 30, 2012 and 2011, respectively.

Total assets at September 30, 2012 increased $9,282,195 as compared with December 31, 2011.

Available for sale securities increased $10,577,092 at September 30, 2012 as compared with December 31, 2011. Securities were purchased as public fund balances increased significantly during the first quarter of 2012. Balances in our non-deposit sweep accounts, reported as federal funds purchased and securities sold under agreements to repurchase, decreased $19,525,221 at September 30, 2012 as compared with December 31, 2011, as these customers reallocate their balances to deposit accounts or due to normal seasonal activity.

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, 2012 as Compared with Quarter Ended September 30, 2011

The Company's average interest earning assets increased approximately $18,756,000, or 3%, from approximately $721,117,000 for the third quarter of 2011 to approximately $739,873,000 for the third 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 and proceeds from maturing taxable available for sale securities were used to paydown borrowings.

The average yield on earning assets decreased by 12 basis points, from 3.51% for the third quarter of 2011 to 3.39% for the third 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 1.95% for the third quarter of 2011 to 1.65% for the third 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 nine months of 2012.

Average interest bearing liabilities increased approximately $5,170,000, or 1%, from approximately $586,589,000 for the third quarter of 2011 to approximately $591,759,000 for the third quarter of 2012. The increase was primarily related to borrowings from the Federal Home Loan Bank, which increased due to the liquidity needs of the bank subsidiary.


The average rate paid on interest bearing liabilities decreased 18 basis points, from .49% for the third quarter of 2011 to .31% for the third 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 3.14% for the quarter ended September 30, 2012, up 3 basis points from 3.11% for the quarter ended September 30, 2011.

Nine Months Ended September 30, 2012 as Compared with Nine Months Ended September 30, 2011

The Company's average interest earning assets increased approximately $36,139,000, or 5%, from approximately $722,325,000 for the first nine months of 2011 to approximately $758,464,000 for the first nine months 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 34 basis points, from 3.70% for the first nine months of 2011 to 3.36% for the first nine months 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 2.27% for the first nine months of 2011 to 1.75% for the first nine months 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 nine months of 2012.

Average interest bearing liabilities increased approximately $27,712,000, or 5%, from approximately $588,437,000 for the first nine months of 2011 to approximately $616,149,000 for the first nine months of 2012. The increase was primarily related to borrowings from the Federal Home Loan Bank, which increased due to the liquidity needs of the bank subsidiary.

The average rate paid on interest bearing liabilities decreased 22 basis points, from .57% for the first nine months of 2011 to .35% for the first nine months 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 3.07% for the nine months ended September 30, 2012, down 17 basis points from 3.24% for the nine months ended September 30, 2011.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 and 2011.


          Analysis of Average Balances, Interest Earned/Paid and Yield

                                 (In Thousands)



                                                        Three Months Ended September 30, 2012                            Three Months Ended September 30, 2011
                                              Average Balance         Interest Earned/Paid         Rate        Average Balance         Interest Earned/Paid         Rate
Loans (2)(3)                                  $        430,241       $                4,637         4.31 %     $        399,409       $                4,456         4.46 %
Federal Funds Sold                                       5,193                            3         0.23 %                2,851                            2         0.28 %
HTM:
Non taxable (1)                                          5,719                           57         3.99 %                1,917                           25         5.22 %
AFS:
Taxable                                                255,497                        1,054         1.65 %              276,372                        1,347         1.95 %
Non taxable (1)                                         39,151                          513         5.24 %               38,127                          486         5.10 %
Other                                                    4,072                           10         0.98 %                2,441                           12         1.97 %

Total                                         $        739,873       $                6,274         3.39 %     $        721,117       $                6,328         3.51 %

Savings & interest-bearing DDA                $        232,016       $                   66         0.11 %     $        223,237       $                  159         0.28 %
CD's                                                   149,169                          252         0.68 %              163,790                          351         0.86 %
Federal funds purchased                                159,273                           81         0.20 %              173,348                          174         0.40 %
FHLB advances                                           51,301                           60         0.47 %               26,214                           40         0.61 %

Total                                         $        591,759       $                  459         0.31 %     $        586,589       $                  724         0.49 %

Net tax-equivalent margin on earning assets                                                         3.14 %                                                           3.11 %

(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 $160 and $154 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)



                                                        Nine Months Ended September 30, 2012                              Nine Months Ended September 30, 2011
                                              Average Balance         Interest Earned/Paid         Rate         Average Balance         Interest Earned/Paid         Rate
Loans (2)(3)                                 $         428,944       $               13,789         4.29 %     $         399,465       $               13,744         4.59 %
Federal Funds Sold                                       6,184                           12         0.26 %                 4,858                            6         0.16 %
HTM:
Non taxable (1)                                          3,876                          121         4.16 %                 1,916                           80         5.57 %
AFS:
Taxable                                                275,638                        3,615         1.75 %               273,062                        4,656         2.27 %
Non taxable (1)                                         39,745                        1,569         5.26 %                40,208                        1,539         5.10 %
Other                                                    4,077                           15         0.49 %                 2,816                           21         0.99 %

Total                                        $         758,464       $               19,121         3.36 %     $         722,325       $               20,046         3.70 %

Savings & interest-bearing DDA               $         231,942       $                  367         0.21 %     $         230,217       $                  684         0.40 %
CD's                                                   151,464                          795         0.70 %               171,424                        1,181         0.92 %
Federal funds purchased                                171,456                          298         0.23 %               152,444                          515         0.45 %
FHLB advances                                           61,287                          179         0.39 %                34,352                          135         0.52 %

Total                                        $         616,149       $                1,639         0.35 %     $         588,437       $                2,515         0.57 %

Net tax-equivalent margin on earning assets                                                         3.07 %                                                            3.24 %

(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 $549 and $517 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
                                                   September 30, 2012 compared with September 30, 2011
                                           Volume                Rate               Rate/Volume           Total
Interest earned on:
Loans                                    $       344          $      (150 )        $         (13 )        $  181
Federal funds sold                                 2                   (1 )                                    1
Held to maturity securities:
Non taxable                                       50                   (6 )                  (12 )            32
Available for sale securities:
Taxable                                         (102 )               (207 )                   16            (293 )
Non taxable                                       13                   13                      1              27
Other                                              8                   (6 )                   (4 )            (2 )

Total                                    $       315          $      (357 )        $         (12 )        $  (54 )

Interest paid on:
Savings & interest-bearing deposits      $         6          $       (95 )        $          (4 )        $  (93 )
CD's                                             (31 )                (74 )                    6             (99 )
Federal funds purchased                          (14 )                (87 )                    8             (93 )
FHLB advances                                     38                   (9 )                   (9 )            20

Total                                    $        (1 )        $      (265 )        $           1          $ (265 )


          Analysis of Changes in Interest Income and Interest Expense

                                 (In Thousands)



                                                               For the Nine Months Ended
                                                  September 30, 2012 compared with September 30, 2011
                                          Volume                Rate              Rate/Volume           Total
Interest earned on:
Loans                                   $     1,014         $       (899 )       $         (70 )       $     45
Federal funds sold                                2                    3                     1                6
Held to maturity securities:
Non taxable                                      82                  (20 )                 (21 )             41
Available for sale securities:
Taxable                                          44               (1,065 )                 (20 )         (1,041 )
Non taxable                                     (18 )                 48                                     30
Other                                             9                  (10 )                  (5 )             (6 )

Total                                   $     1,133         $     (1,943 )       $        (115 )       $   (925 )

Interest paid on:
Savings & interest-bearing deposits     $         5         $       (321 )       $          (1 )       $   (317 )
CD's                                           (138 )               (282 )                  34             (386 )
Federal funds purchased                          64                 (252 )                 (29 )           (217 )
FHLB advances                                   105                  (33 )                 (28 )             44

Total                                   $        36         $       (888 )       $         (24 )       $   (876 )

. . .

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