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PFBX > SEC Filings for PFBX > Form 10-K on 18-Mar-2014All Recent SEC Filings

Show all filings for PEOPLES FINANCIAL CORP /MS/

Form 10-K for PEOPLES FINANCIAL CORP /MS/


18-Mar-2014

Annual Report


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Peoples Financial Corporation (the "Company") is a one-bank holding company headquartered in Biloxi, Mississippi. The following presents Management's discussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2013, 2012 and 2011. These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report.


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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 new accounting standards updates, which have been disclosed in Note A to the Consolidated Financial Statements. The Company does not expect that these updates will have a material impact on its financial position, or results of operations. The adoption of Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, did result in additional disclosures.

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 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 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


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periods presented in these financial statements. If there was a deterioration of any of the factors considered by Management in evaluating the ALL, the estimate of loss would be updated, and additional provisions for loan losses may be required. The analysis divides the portfolio into two segments: a pool analysis of loans based upon a five year average loss history which is updated on a quarterly basis and which may be adjusted by qualitative factors by loan type and a specific reserve analysis for those loans considered impaired under GAAP. All credit relationships with an outstanding balance of $100,000 or greater that are included in Management's loan watch list are individually reviewed for impairment. All losses are charged to the ALL when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the ALL at the time of receipt.

Other Real Estate:

Other real estate ("ORE") includes real estate acquired through foreclosure. Each other real estate 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. See Note I to the Consolidated Financial Statements for additional details. As part of the process of preparing our Consolidated Financial Statements, the Company is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for the allowance for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated statement of condition. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, we must include an expense within the tax provision in the consolidated statement of income.


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OVERVIEW

The Company is a community bank serving the financial and trust needs of its customers in our trade area, which is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary's three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.

The Company recorded a net loss of $538,000 for 2013 compared with net income of $2,641,000 for 2012. This significant decrease is primarily attributable to the provision for the allowance for loan losses, which was $9,661,000 in 2013 as compared with $4,264,000 in 2012. Current year results also included an increase in net interest income and non-interest expense and a decrease in non-interest income as compared with 2012 results.

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. Interest income increased $328,000 in 2013 as compared with 2012. Although loans decreased significantly during 2013, the Company recognized interest income and fees of $1,523,000 from the sale of a gaming loan which had been on nonaccrual. Increases or decreases in interest income on other interest-earning assets are generally attributable to changes in balances during 2013. The increase in yield on taxable available for sale securities resulted from extending maturities on these investments. Interest expense decreased $620,000 in 2013 as compared with 2012 primarily due to the maturity of brokered certificates of deposit and a reduction in average borrowings from the Federal Home Loan Bank ("FHLB") during 2013 and a reduction in the cost of funds for the Company's savings and interest-bearing DDA deposits and federal funds purchased and securities sold under agreements to repurchase.

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 and national economy continues to negatively impact collateral values and borrowers' ability to repay their loans. The Company's nonaccrual loans totaled $26,171,000 and $53,891,000 at December 31, 2013 and 2012, respectively. This significant reduction primarily results from the sale of a gaming loan with a balance of $10,786,000 and a partial charge-off totaling $7,500,000 on a single residential development loan that had a balance of $15,277,000. Additionally, there have not been any significant new loans placed on nonaccrual status during 2012 and 2013. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses. The Company is working diligently to reduce past due and nonaccrual loans. As part of resolving problem loans, foreclosures have increased in 2013 with Other Real Estate totaling $9,630,000 at December 31, 2013.

Non-interest income decreased $462,000 for 2013 as compared with 2012 results. The decrease was primarily the result of decreased gains on sales and calls of securities in 2013 as compared with 2012. During 2013, the Company increased per transaction and account fees, which resulted in an increase in service charges on deposit accounts.


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Non-interest expense increased $377,000 for 2013 as compared with 2012 results. Increases in FDIC assessments, other real estate expense and ATM expense were larger than decreases in salaries and employee benefits, depreciation, and data processing costs in 2013 as compared with 2012.

Total assets at December 31, 2013 decreased $42,648,000 as compared with December 31, 2012. Available for sale securities increased $16,564,000 at December 31, 2013 as compared with December 31, 2012, with funds available from the net decrease in loans of $55,734,000. Total deposits decreased $47,161,000 at December 31, 2013 as compared with December 31, 2012. During 2013, brokered deposits, which are reported as time deposits of $100,000 or more, of $23,612,000 matured. Federal funds purchased and securities sold under agreements to repurchase decreased $54,595,000 as customers reallocated their funds from a non-deposit account. Borrowings from the FHLB increased at December 31, 2013 as compared with December 31, 2012, as a result of the liquidity needs of the bank subsidiary.

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.

2013 as compared with 2012

The Company's average interest-earning assets decreased approximately $21,292,000, or 3%, from approximately $749,015,000 for 2012 to approximately $727,723,000 for 2013. The Company's average balance sheet decreased primarily as decreased pledging requirements allowed for reduced investment in securities, the fair value of available for sale securities decreased and principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. The average yield on interest-earning assets increased 15 basis points, from 3.39% for 2012 to 3.54% for 2013, with the biggest impact being to the yield on loans. During 2013, the Company sold a gaming loan which had been on nonaccrual and recognized approximately $1,523,000 in interest and fees which increased the yield on loans to 4.67%. Without this transaction, the yield on loans would have been 4.29%. Recent investment strategy includes extending durations to improve yield on these assets, while planning for rising rates in the future.

Average interest-bearing liabilities decreased approximately $25,008,000, or 4%, from approximately $603,929,000 for 2012 to approximately $578,921,000 for 2013. During 2013, brokered deposits, which are reported as time deposits, of $23,612,000 matured. Borrowings from the FHLB fluctuate based on the liquidity needs of the bank subsidiary. The average rate paid on interest-bearing liabilities decreased 9 basis points, from .34% for 2012 to .25% for 2013. 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 2013. The current unprecedented low rate environment which exists on a national and local level has caused customers


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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 interest income as a percentage of average earning assets, was 3.34% at December 31, 2013, up 23 basis points from 3.11% at December 31, 2012. Without the additional interest income and fees from the sale of the gaming loan, the net interest margin for 2013 would have been 3.13%.

2012 as compared with 2011

The Company's average interest-earning assets increased approximately $26,699,000, or 4%, from approximately $722,316,000 for 2011 to approximately $749,015,000 for 2012. The Company's average balance sheet increased primarily as new loans have outpaced principal payments, maturities, charge-offs and foreclosures relating to existing loans. The average yield on interest-earning assets decreased 18 basis points, from 3.57% for 2011 to 3.39% for 2012, with the biggest impact being to the yield on taxable available for sale securities. The Company's investment and liquidity strategy had 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 2.10% for 2011 to 1.71% for 2012. The Company purchased securities with maturities of up to fifteen years, with call provisions, to improve its yield on these assets. The yield on loans decreased due to the increase in loans on nonaccrual during 2011.

Average interest-bearing liabilities increased approximately $15,967,000, or 3%, from approximately $587,962,000 for 2011 to approximately $603,929,000 for 2012. The increase was primarily related to borrowings from the FHLB, which increased due to the liquidity needs of the bank subsidiary. The average rate paid on interest-bearing liabilities decreased 20 basis points, from .54% for 2011 to .34% for 2012. Rates paid on deposit accounts and non-deposit accounts, which are reported as federal funds purchased and securities sold under agreements to repurchase, decreased in 2012. The unprecedented low rate environment which exists on a national and local level caused customers to tolerate lower interest rates in return for less risk.

The Company's net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.11% at December 31, 2012, down 2 basis points from 3.13% at December 31, 2011.

The tables below analyze the changes in tax-equivalent net interest income for the years ended December 31, 2013 and 2012 and the years ended December 31, 2012 and 2011.


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          Analysis of Average Balances, Interest Earned/Paid and Yield

                                 (In Thousands)



                                                              2013                                                                 2012
                                   Average Balance        Interest Earned/Paid          Rate            Average Balance        Interest Earned/Paid          Rate

Loans (1)(2)(3)                   $         405,463       $             18,927            4.67%        $         430,205       $             18,576            4.32%

Federal funds sold                           26,306                         69            0.26%                    6,601                         16            0.24%

Held to maturity:
Non taxable (4)                               9,936                        363            3.65%                    4,698                        189            4.02%

Available for Sale:
Taxable                                     247,097                      4,407            1.78%                  264,248                      4,527            1.71%

Non taxable (4)                              36,605                      1,946            5.32%                   39,407                      2,073            5.26%

Other                                         2,316                         29            1.25%                    3,856                         15            0.39%


Total                             $         727,723       $             25,741            3.54%        $         749,015       $             25,396            3.39%

Savings and interest-bearing
DDA                               $         246,728       $                179            0.07%        $         230,829       $                410            0.18%

Time deposits                               123,198                        919            0.75%                  149,560                      1,090            0.73%

Federal funds purchased
and securities sold under
agreements to repurchase                    181,702                        158            0.09%                  169,352                        335            0.20%

Borrowings from FHLB                         27,293                        191            0.70%                   54,188                        233            0.43%


Total                             $         578,921       $              1,447            0.25%        $         603,929       $              2,068            0.34%

Net tax-equivalent spread                                                                 3.29%                                                                3.05%

Net tax-equivalent margin on
earning assets                                                                            3.34%                                                                3.11%


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          Analysis of Average Balances, Interest Earned/Paid and Yield

                                 (In Thousands)



                                                                    2012                                                                 2011
                                         Average Balance        Interest Earned/Paid          Rate            Average Balance        Interest Earned/Paid          Rate

Loans (2)(3)                            $         430,205       $             18,576            4.32%        $         405,367       $             17,923            4.42%

Federal funds sold                                  6,601                         16            0.24%                    2,857                          7            0.25%

Held to maturity:
Non taxable (4)                                     4,698                        189            4.02%                    1,882                        107            5.69%

Available for Sale:
Taxable                                           264,248                      4,527            1.71%                  269,401                      5,662            2.10%

Non taxable (4)                                    39,407                      2,073            5.26%                   39,941                      2,041            5.11%

Other                                               3,856                         15            0.39%                    2,868                         23            0.80%


Total                                   $         749,015       $             25,396            3.39%        $         722,316       $             25,763            3.57%

Savings and interest-bearing DDA        $         230,829       $                410            0.18%        $         226,097       $                819            0.36%

Time deposits                                     149,560                      1,090            0.73%                  169,617                      1,535            0.90%

Federal funds purchased
and securities sold under
agreements to repurchase                          169,352                        335            0.20%                  154,423                        638            0.41%

Borrowings from FHLB                               54,188                        233            0.43%                   37,825                        186            0.49%


Total                                   $         603,929       $              2,068            0.34%        $         587,962       $              3,178            0.54%

Net tax-equivalent spread                                                                       3.05%                                                                3.03%

Net tax-equivalent margin on
earning assets                                                                                  3.11%                                                                3.13%

(1) 2013 includes interest and fees of $1,523 recognized from sale of a nonaccrual loan during the fourth quarter.

(2) Loan fees of $911, $797 and $647 for 2013, 2012 and 2011, respectively, are included in these figures.

(3) Includes nonaccrual loans.

(4) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2013, 2012 and 2011.


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       ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands)



                                                              For the Year Ended
                                               December 31, 2013 compared with December 31, 2012

                                             Volume               Rate         Rate/Volume            Total

Interest earned on:

Loans                               $       (1,068)      $       1,505      $         (86)      $       351

Federal funds sold                               48                  1                   4               53

Held to maturity securities:
Non taxable                                     211               (17)                (20)              174

Available for sale securities:
Taxable                                       (294)                186                (12)            (120)
Non taxable                                   (147)                 22                 (2)            (127)
Other                                           (6)                 33                (13)               14


Total                               $       (1,256)      $       1,730      $        (129)      $       345


Interest paid on:

Savings and interest-bearing DDA    $            28      $       (242)      $         (17)      $     (231)

Time deposits                                 (192)                 26                 (5)            (171)

Federal funds purchased                          24              (188)                (13)            (177)

Borrowings from FHLB                          (115)                147                (74)             (42)


Total                               $         (255)      $       (257)      $        (109)      $     (621)


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       ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands)



                                                                For the Year Ended
                                                December 31, 2012 compared with December 31, 2011

                                           Volume                 Rate          Rate/Volume              Total

Interest earned on:

Loans                               $       1,098      $         (420)      $          (25)      $         653

Federal funds sold                              9                  (1)                    1                  9

Held to maturity securities:
Non taxable                                   160                 (31)                 (47)                 82

Available for sale securities:
Taxable                                     (108)              (1,047)                   20            (1,135)
Non taxable                                  (27)                   60                  (1)                 32
Other                                           8                 (12)                  (4)                (8)


Total                               $       1,140      $       (1,451)      $          (56)      $       (367)

. . .
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