XNAS:PFBX Peoples Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2012

or

 

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

Commission File Number 001-12103

 

 

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Mississippi    64-0709834

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

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

(228) 435-5511

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At July 31, 2012, there were 15,000,000 shares of $1 par value common stock authorized, with 5,136,918 shares issued and outstanding.

 

 

 


Part 1 – Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

 

     June 30, 2012
(Unaudited)
     December 31, 2011
(Audited)
 

Assets

     

Cash and due from banks

   $ 34,202,485       $ 36,928,657   

Available for sale securities

     327,013,590         278,918,481   

Held to maturity securities, fair value of $5,075,817 at June 30, 2012; $1,492,374 at December 31, 2011

     4,983,923         1,428,887   

Other investments

     3,893,458         3,930,300   

Federal Home Loan Bank Stock, at cost

     4,259,400         2,580,700   

Loans

     427,591,007         432,407,286   

Less: Allowance for loan losses

     6,743,248         8,135,622   
  

 

 

    

 

 

 

Loans, net

     420,847,759         424,271,664   

Bank premises and equipment, net of accumulated depreciation

     27,022,147         28,035,308   

Other real estate

     7,522,811         6,153,238   

Accrued interest receivable

     3,103,191         2,698,241   

Cash surrender value of life insurance

     16,513,580         16,196,368   

Prepaid FDIC assessments

     1,278,989         2,096,320   

Other assets

     1,966,261         913,926   
  

 

 

    

 

 

 

Total assets

   $ 852,607,594       $ 804,152,090   
  

 

 

    

 

 

 

 

2


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

 

     June 30, 2012
(Unaudited)
     December 31, 2011
(Audited)
 

Liabilities & Shareholders’ Equity

     

Liabilities:

     

Deposits:

     

Demand, non-interest bearing

   $ 114,738,363       $ 97,581,073   

Savings and demand, interest bearing

     223,487,560         205,318,859   

Time, $100,000 or more

     94,501,700         115,014,220   

Other time deposits

     48,840,880         50,524,930   
  

 

 

    

 

 

 

Total deposits

     481,568,503         468,439,082   

Federal funds purchased and securities sold under agreements to repurchase

     161,987,702         157,600,967   

Borrowings from Federal Home Loan Bank

     83,017,894         53,323,568   

Employee and director benefit plans liabilities

     11,959,093         11,310,607   

Other liabilities

     3,346,358         4,025,565   
  

 

 

    

 

 

 

Total liabilities

     741,879,550         694,699,789   

Shareholders’ Equity:

     

Common stock, $1 par value, 15,000,000 shares authorized, 5,136,918 shares issued and outstanding at June 30, 2012 and December 31, 2011

     5,136,918         5,136,918   

Surplus

     65,780,254         65,780,254   

Undivided profits

     34,417,370         33,350,861   

Accumulated other comprehensive income, net of tax

     5,393,502         5,184,268   
  

 

 

    

 

 

 

Total shareholders’ equity

     110,728,044         109,452,301   
  

 

 

    

 

 

 

Total liabilities & shareholders’ equity

   $ 852,607,594       $ 804,152,090   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Interest income:

           

Interest and fees on loans

   $ 4,510,481       $ 4,381,186       $ 9,152,016       $ 9,287,948   

Interest and dividends on securities:

           

U.S. Treasuries

     114,400         62,933         169,225         126,459   

U.S. Government agencies

     1,198,685         1,676,822         2,240,355         3,074,718   

Mortgage-backed securities

     70,701         30,957         150,996         30,957   

States and political subdivisions

     376,146         395,564         739,835         806,468   

Other investments

     41         2,421         4,750         8,639   

Interest on federal funds sold

     2,648         3,386         9,066         4,738   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     6,273,102         6,553,269         12,466,243         13,339,927   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     409,184         651,406         843,946         1,354,117   

Borrowings from Federal Home Loan Bank

     68,502         45,402         119,121         95,467   

Federal funds purchased and securities sold under agreements to repurchase

     97,988         169,545         217,072         341,568   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     575,674         866,353         1,180,139         1,791,152   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     5,697,428         5,686,916         11,286,104         11,548,775   

Provision for allowance for loan losses

     1,290,000         546,000         1,830,000         1,187,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for allowance for loan losses

   $ 4,407,428       $ 5,140,916       $ 9,456,104       $ 10,361,775   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

4


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Non-interest income:

        

Trust department income and fees

   $ 328,093      $ 323,468      $ 671,892      $ 669,923   

Service charges on deposit accounts

     1,427,287        1,455,146        2,884,235        2,874,174   

Gain on sales and calls of securities

     859,942        7,174        964,175        7,174   

Gain (loss) on other investments

     17,796          (36,843     10,124   

Increase in cash surrender value of life insurance

     125,283        125,380        246,674        257,680   

Gain on death benefits from life insurance

       389,119          389,119   

Other income

     139,241        151,035        286,202        266,038   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     2,897,642        2,451,322        5,016,335        4,474,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Salaries and employee benefits

     3,047,676        3,395,090        6,319,397        6,771,387   

Net occupancy

     655,345        655,236        1,274,288        1,269,170   

Equipment rentals, depreciation and maintenance

     876,961        951,812        1,654,076        1,822,212   

FDIC assessments

     443,338        437,086        884,483        842,912   

Data processing

     364,908        148,562        736,589        292,860   

ATM Expense

     494,701        519,622        973,823        1,004,382   

Other expense

     917,388        866,957        1,710,274        1,927,667   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     6,800,317        6,974,365        13,552,930        13,930,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax benefit

     504,753        617,873        919,509        905,417   

Income tax benefit

     (57,000     (192,000     (147,000     (342,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 561,753      $ 809,873      $ 1,066,509      $ 1,247,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share

   $ .11      $ .16      $ .21      $ .24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $        $ .09      $        $ .09   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Net Income

   $ 561,753      $ 809,873      $ 1,066,509      $ 1,247,417   

Other comprehensive income (loss), net of tax:

        

Net unrealized gain on available for sale securities, net of taxes of $1,311,457 and $1,744,254 for the three months ended June 30, 2012 and 2011, respectively, and $435,606 and $2,216,603 for the six months ended June 30, 2012 and 2011, respectively

     2,545,771        3,385,905        845,590        4,302,818   

Reclassification gains on available for sale securities called or sold in current year, net of taxes of $(246,462) and $(2,439) for the three months ended June 30, 2012 and 2011, respectively, and $(327,819) and $(2,439) for the six months ended June 30, 2012 and 2011, respectively

     (478,427     (4,735     (636,356     (4,735
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     2,067,344        3,381,170        209,234        4,298,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 2,629,097      $ 4,191,043      $ 1,275,743      $ 5,545,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

 

     Number of
Common
Shares
     Common
Stock
     Surplus      Undivided
Profits
     Accumulated
Other
Comprehensive
Income
     Total  

Balance, January 1, 2012

     5,136,918       $ 5,136,918       $ 65,780,254       $ 33,350,861       $ 5,184,268       $ 109,452,301   

Net income

              1,066,509            1,066,509   

Other comprehensive income, net of tax

                 209,234         209,234   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, June 30, 2012

     5,136,918       $ 5,136,918       $ 65,780,254       $ 34,417,370       $ 5,393,502       $ 110,728,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note: Balances as of January 1, 2012 were audited.

See accompanying notes to consolidated financial statements.

 

7


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 1,066,509      $ 1,247,417   

Adjustment to reconcile net income to net cash provided by operating activities:

    

Depreciation

     1,034,000        1,176,000   

Provision for allowance for loan losses

     1,830,000        1,187,000   

Writedown of other real estate

     153,300        124,606   

Loss on sales of other real estate

     24,739        25,291   

Gain (loss) on other investments

     36,843        (10,124

Gain on sales and calls of securities

     (964,175     (7,174

Accretion of held to maturity securities

     (436     (1,444

Change in accrued interest receivable

     (404,950     (239,584

Gain on death benefits from life insurance

       (389,119

Increase in cash surrender value of life insurance

     (246,674     (257,680

Change in other assets

     (235,443     2,605,373   

Change in other liabilities

     381,770        80,850   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 2,675,483      $ 5,541,412   
  

 

 

   

 

 

 

 

8


Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued) (unaudited)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from investing activities:

    

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

   $ 180,716,805      $ 78,710,848   

Purchases of available for sale securities

     (227,537,305     (104,646,484

Purchases of held to maturity securities

     (3,554,600  

Redemption of other investments

       93,040   

(Purchases) redemption of Federal Home Loan Bank stock

     (1,678,700     128,200   

Proceeds from sales of other real estate

     344,061        358,526   

Loans, net change

     (297,768     12,457,729   

Acquisition of premises and equipment

     (20,839     (272,904

Proceeds from death benefits from life insurance

       583,793   

Investment in cash surrender value of life insurance

     (70,099     (62,015
  

 

 

   

 

 

 

Net cash used in investing activities

     (52,098,445     (12,649,267
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Demand and savings deposits, net change

     35,325,991        25,664,495   

Time deposits, net change

     (22,196,570     (11,384,574

Cash dividends

     (513,692     (462,323

Retirement of common stock

       (192,560

Borrowings from Federal Home Loan Bank

     1,185,266,252        330,002,395   

Repayments to Federal Home Loan Bank

     (1,155,571,926     (344,003,538

Federal funds purchased and securities sold under agreements to repurchase, net change

     4,386,735        28,942,450   
  

 

 

   

 

 

 

Net cash provided by financing activities

     46,696,790        28,566,345   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (2,726,172     21,458,490   

Cash and cash equivalents, beginning of period

     36,928,657        24,146,939   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 34,202,485      $ 45,605,429   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

9


PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2012 and 2011

1. Basis of Presentation:

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

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of June 30, 2012 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2011 Annual Report and Form 10-K.

The results of operations for the quarter ended June 30, 2012, are not necessarily indicative of the results to be expected for the full year.

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

Summary of Significant Accounting Policies—The accounting and reporting policies of the Company conform with GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2011.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 5,136,918 for the six months ended June 30, 2012 and 2011.

 

10


3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $1,180,163 and $1,811,218 for the six months ended June 30, 2012 and 2011, respectively, for interest on deposits and borrowings. Income tax payments of $615,000 and $235,000 were made during the six months ended June 30, 2012 and 2011. Loans transferred to other real estate amounted to $1,891,673 and $2,927,510 during the six months ended June 30, 2012 and 2011, respectively. Dividends payable of $513,692 and $462,323 as of December 31, 2011 and 2010, were paid during the six months ended June 30, 2012 and 2011, respectively.

4. Investments:

The amortized cost and fair value of securities at June 30, 2012 and December 31, 2011, are as follows:

 

June 30, 2012

   Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Available for sale securities:

          

Debt securities:

          

U.S. Treasuries

   $ 48,912,626       $ 604,585       $ (11,218   $ 49,505,993   

U.S. Government agencies

     215,666,588         1,838,275         (64,400     217,440,463   

Mortgage-backed securities

     19,168,371         356,332         (6,543     19,518,160   

States and political subdivisions

     37,659,159         2,239,832           39,898,991   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     321,406,744         5,039,024         (82,161     326,363,607   

Equity securities

     649,983              649,983   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale securities

   $ 322,056,727       $ 5,039,024       $ (82,161   $ 327,013,590   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity securities:

          

States and political subdivisions

   $ 4,983,923       $ 92,535       $ (641   $ 5,075,817   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held to maturity securities

   $ 4,983,923       $ 92,535       $ (641   $ 5,075,817   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

11


December 31, 2011

   Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Available for sale securities:

          

Debt securities:

          

U.S. Treasuries

   $ 53,994,598       $ 33,297       $ (18,284   $ 54,009,611   

U.S. Government agencies

     176,985,676         2,220,753         (26,144     179,180,285   

Mortgage-backed securities

     4,727,055         274,100           5,001,155   

States and political subdivisions

     37,914,334         2,163,113           40,077,447   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     273,621,663         4,691,263         (44,428     278,268,498   

Equity securities

     649,983              649,983   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale securities

   $ 274,271,646       $ 4,691,263       $ (44,428   $ 278,918,481   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity securities:

          

States and political subdivisions

   $ 1,428,887       $ 63,487       $        $ 1,492,374   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held to maturity securities

   $ 1,428,887       $ 63,487       $        $ 1,492,374   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of debt securities at June 30, 2012, by contractual maturity, are shown on the next page. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

12


 

     Amortized Cost      Fair Value  

Available for sale securities:

     

Due in one year or less

   $ 15,777,229       $ 15,783,341   

Due after one year through five years

     75,682,518         76,496,170   

Due after five years through ten years

     117,542,039         120,432,646   

Due after ten years

     93,236,587         94,133,290   

Mortgage-backed securities

     19,168,371         19,518,160   
  

 

 

    

 

 

 

Totals

   $ 321,406,744       $ 326,363,607   
  

 

 

    

 

 

 

Held to maturity securities:

     

Due in one year or less

   $ 169,813       $ 172,603   

Due after one year through five years

     1,545,816         1,595,798   

Due after five years through ten years

     1,206,445         1,221,271   

Due after ten years

     2,061,849         2,086,145   
  

 

 

    

 

 

 

Totals

   $ 4,983,923       $ 5,075,817   
  

 

 

    

 

 

 

Available for Sale and Held to Maturity Securities with gross unrealized losses at June 30, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:

 

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

June 30, 2012:

                 

U.S. Treasuries

   $ 21,978,420       $ 11,218       $         $         $ 21,978,420       $ 11,218   

U.S. Government agencies

     24,935,600         64,400               24,935,600         64,400   

Mortgage-backed securities

     5,097,099         6,543               5,097,099         6,543   

States and political subdivisions

     285,841         641               285,841         641   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 52,296,960       $ 82,802       $             $         $ 52,296,960       $ 82,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                 

U.S. Treasuries

   $ 16,975,720       $ 18,284       $         $         $ 16,975,720       $ 18,284   

U.S. Government agencies

     15,075,582         26,144               15,075,582         26,144   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 32,051,302       $ 44,428       $         $         $ 32,051,302       $ 44,428   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


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

Proceeds from sales of available for sale debt securities were $44,771,114 and $3,025,000 for the six months ended June 30, 2012 and 2011, respectively. Available for sale debt securities were sold and called for realized gains of $964,175 and $7,174 for the six months ended June 30, 2012 and 2011, respectively.

5. Loans:

The composition of the loan portfolio at June 30, 2012 and December 31, 2011, is as follows:

 

     June 30, 2012      December 31,
2011
 

Gaming

   $ 59,296,895       $ 57,219,236   

Residential and land development

     27,631,420         29,026,076   

Real estate, construction

     53,829,647         61,041,510   

Real estate, mortgage

     245,962,520         238,411,440   

Commercial and industrial

     30,846,870         33,950,494   

Other

     10,023,655         12,758,530   
  

 

 

    

 

 

 

Total

   $ 427,591,007       $ 432,407,286   
  

 

 

    

 

 

 

The age analysis of the loan portfolio, segregated by class of loans, as of June 30, 2012 and December 31, 2011, is as follows:

 

14


 

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

June 30, 2012:

                    

Gaming

   $            $            $            $            $ 59,296,895       $ 59,296,895       $        

Residential and land development

           1,615,039         1,615,039         26,016,381         27,631,420      

Real estate, construction

     1,763,617         2,105,773         4,427,823         8,297,213         45,532,434         53,829,647      

Real estate, mortgage

     7,908,629         1,859,221         7,596,158         17,364,008         228,598,512         245,962,520         67,011   

Commercial and industrial

     2,344,367         69,549         393,942         2,807,858         28,039,012         30,846,870      

Other

     241,878         29,578         387         271,843         9,751,812         10,023,655         387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,258,491       $ 4,064,121       $ 14,033,349       $ 30,355,961       $ 397,235,046       $ 427,591,007       $ 67,398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

                    

Gaming

   $         $         $         $         $ 57,219,236       $ 57,219,236       $     

Residential and land development

           24,161,722         24,161,722         4,864,354         29,026,076      

Real estate, construction

     2,084,061         1,394,738         6,364,135         9,842,934         51,198,576         61,041,510         368,524   

Real estate, mortgage

     13,569,639         2,340,776         12,963,395         28,873,810         209,537,630         238,411,440         1,314,317   

Commercial and industrial

     1,536,073         166,070         387,963         2,090,106         31,860,388         33,950,494         142,125   

Other

     183,900         22,665         130,576         337,141         12,421,389         12,758,530      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,373,673       $ 3,924,249       $ 44,007,791       $ 65,305,713       $ 367,101,573       $ 432,407,286       $ 1,824,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

15


recovery may be possible in the future. All loans 180 days or more past due are rated F and charged off unless the Bank is in the process of collection.

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of June 30, 2012 and December 31, 2011, is as follows:

 

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

June 30, 2012:

              

Gaming

   $ 26,471,751       $ 7,815,522       $ 10,108,687       $ 14,900,935       $ 59,296,895   

Residential and land development

     6,291,938               21,339,482         27,631,420   

Real estate, construction

     41,088,982         2,065,821         3,492,777         7,182,067         53,829,647   

Real estate, mortgage

     199,127,681         10,372,796         22,428,354         14,033,689         245,962,520   

Commercial and industrial

     20,390,301         7,684,953         2,646,851         124,765         30,846,870   

Other

     9,849,420         45,419         128,429         387         10,023,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 303,220,073       $ 27,984,511       $ 38,805,098       $ 57,581,325       $ 427,591,007   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

              

Gaming

   $ 41,816,764       $         $         $ 15,402,472       $ 57,219,236   

Residential and land development

     4,865,153            50,545         24,110,378         29,026,076   

Real estate, construction

     50,797,910         357,114         3,695,437         6,191,049         61,041,510   

Real estate, mortgage

     197,509,767         2,862,368         25,869,734         12,169,571         238,411,440   

Commercial and industrial

     23,972,076         6,551,489         3,077,347         349,582         33,950,494   

Other

     12,266,764         40,454         384,146         67,166         12,758,530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 331,228,434       $ 9,811,425       $ 33,077,209       $ 58,290,218       $ 432,407,286   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Total loans on nonaccrual as of June 30, 2012 and December 31, 2011, are as follows:

 

     June 30, 2012      December 31, 2011  

Gaming

   $ 14,900,935       $ 15,402,472   

Residential and land development

     21,339,482         24,110,378   

Real estate, construction

     5,680,262         6,041,822   

Real estate, mortgage

     12,928,691         11,661,628   

Commercial and industrial

     118,843         245,839   

Other

        130,576   
  

 

 

    

 

 

 

Total

   $ 54,968,213       $ 57,592,715   
  

 

 

    

 

 

 

The Company has modified certain loans by granting interest rate concessions to these customers. These loans are in compliance with their modified terms, are currently accruing and the Company has classified them as troubled debt restructurings. Troubled debt restructurings as of June 30, 2012 and December 31, 2011 were as follows:

 

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

June 30, 2012:

           

Real estate, construction

     1       $ 181,364       $ 181,364       $ 86,000   

Real estate, mortgage

     3         9,072,468         9,072,468         833,000   

Commercial and industrial

     1         705,262         705,262      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 9,959,094       $ 9,959,094       $ 919,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Real estate, construction

     3       $ 1,075,176       $ 1,075,176       $ 112,000   

Real estate, mortgage

     5         9,915,672         9,915,672         809,000   

Commercial and industrial

     1         706,336         706,336      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9       $ 11,697,184       $ 11,697,184       $ 921,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 2012, four loans which had been classified as troubled debt restructurings at December 31, 2011 became in default of their modified terms and were placed on nonaccrual. These loans included two loans that were included in the real estate – construction segment with a total balance of $891,986 and two loans that were included in the real estate – mortgage segment with a total balance of $1,018,076 as of December 31, 2011.

 

17


Impaired loans, segregated by class of loans, as of June 30, 2012 and December 31, 2011, are as follows:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

June 30, 2012:

           

With no related allowance recorded:

           

Gaming

   $ 14,900,935       $ 14,900,935       $            $ 15,054,087   

Residential and land development

     22,442,813         21,339,482            22,170,733   

Real estate, construction

     5,022,369         4,958,814            4,263,144   

Real estate, mortgage

     11,675,201         11,039,458            10,883,018   

Commercial and industrial

     858,105         824,105            814,174   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,899,423       $ 53,062,794       $         $ 53,185,156   
  

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

           

Real estate, construction

   $ 902,812       $ 902,812       $ 246,000       $ 912,159   

Real estate, mortgage

     10,961,701         10,961,701         1,254,054         9,370,443   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,864,513       $ 11,864,513       $ 1,500,054       $ 10,282,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total by class of loans:

           

Gaming

   $ 14,900,935       $ 14,900,935       $         $ 15,054,087   

Residential and land development

     22,442,813         21,339,482            22,170,733   

Real estate, construction

     5,925,181         5,861,626         246,000         5,175,303   

Real estate, mortgage

     22,636,902         22,001,159         1,254,054         20,253,461   

Commercial and industrial

     858,105         824,105            814,174   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,763,936       $ 64,927,307       $ 1,500,054       $ 63,467,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 

December 31, 2011:

           

With no related allowance recorded:

           

Gaming

   $ 15,402,472       $ 15,402,472       $            $ 12,488,307   

Residential and land development

     24,940,695         21,745,946            7,382,320   

Real estate, construction

     4,743,490         4,711,470            297,328   

Real estate, mortgage

     9,965,290         9,956,982            1,110,547   

Commercial and industrial

     864,485         864,485            412,683   

Other

     5,308         5,308         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 55,921,740       $ 52,686,663       $         $ 21,691,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

With a related allowance recorded:

           

Gaming

   $         $         $         $     

Residential and land development

     2,364,432         2,364,432         900,000      

Real estate, construction

     2,405,528         2,405,528         720,000         184,519   

Real estate, mortgage

     12,550,318         11,620,318         1,314,011         5,971,190   

Commercial and industrial

     87,690         87,690         76,818      

Other

     125,268         125,268         16,900         30,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,533,236       $ 16,603,236       $ 3,027,729       $ 6,186,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total by class of loans:

           

Gaming

   $ 15,402,472       $ 15,402,472       $         $ 12,488,307   

Residential and land development

     27,305,127         24,110,378         900,000         7,382,320   

Real estate, construction

     7,149,018         7,116,998         720,000         481,847   

Real estate, mortgage

     22,515,608         21,577,300         1,314,011         7,081,737   

Commercial and industrial

     952,175         952,175         76,818         412,683   

Other

     130,576         130,576         16,900         30,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73,454,976       $ 69,289,899       $ 3,027,729       $ 27,877,627   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income of $173,712 and $211,188 was recognized on impaired loans for the six months ended June 30, 2012 and the year ended December 31, 2011.

 

19


6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the quarters and six months ended June 30, 2012 and 2011, and the balances of loans, individually and collectively evaluated for impairment as of June 30, 2012 and 2011, are as follows (in thousands):

 

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

For the Six Months Ended June 30, 2012:

              

Allowance for Loan Losses:

              

Beginning Balance

   $ 457      $ 1,081      $ 937      $ 4,800      $ 557      $ 304      $ 8,136   

Charge-offs

     (275     (1,103     (474     (1,102     (160     (179     (3,293

Recoveries

             14        56        70   

Provision

     292        225        (14     1,178        46        103        1,830   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 474      $ 203      $ 449      $ 4,876      $ 457      $ 284      $ 6,743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Quarter Ended June 30, 2012:

              

Allowance for Loan Losses:

              

Beginning Balance

   $ 632      $ 1,041      $ 496      $ 5,016      $ 547      $ 316      $ 8,048   

Charge-offs

     (275     (1,103       (1,003     (101     (126     (2,608

Recoveries

             4        9        13   

Provision

     117        265        (47     863        7        85        1,290   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 474      $ 203      $ 449      $ 4,876      $ 457      $ 284      $ 6,743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2012:

              

Ending balance: individually evaluated for impairment

   $        $        $ 401      $ 1,605      $ 236      $ 35      $ 2,277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 474      $ 203      $ 48      $ 3,271      $ 221      $ 249      $ 4,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans, June 30, 2012:

              

Ending balance: Individually evaluated for impairment

   $ 25,010      $ 21,339      $ 9,572      $ 36,462      $ 2,772      $ 129      $ 95,284   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 34,287      $ 6,292      $ 44,258      $ 209,500      $ 28,075      $ 9,895      $ 332,307   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


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

For the Six Months Ended June 30, 2011:

              

Allowance for Loan Losses:

              

Beginning Balance

   $ 466      $ 1,069      $ 1,020      $ 3,413      $ 480      $ 202      $ 6,650   

Charge-offs

         (212     (956     (46     (102     (1,316

Recoveries

     35        32          46        16        63        192   

Provision

     (249     (572     226        1,638        40        104        1,187   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 252      $ 529      $ 1,034      $ 4,141      $ 490      $ 267      $ 6,713   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the Quarter Ended June 30, 2011:

              

Allowance for Loan Losses:

              

Beginning Balance

   $ 233      $ 613      $ 1,260      $ 4,217      $ 692      $ 90      $ 7,105   

Charge-offs

         (212     (708     (25     (72     (1,017

Recoveries

     35              3        41        79   

Provision

     (16     (84     (14     632        (180     208        546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 252      $ 529      $ 1,034      $ 4,141      $ 490      $ 267      $ 6,713   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, June 30, 2011:

              

Ending balance: individually evaluated for impairment

   $        $        $ 250      $ 1,754      $ 302      $ 53      $ 2,359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 252      $ 529      $ 784      $ 2,387      $ 188      $ 214      $ 4,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans, June 30, 2011:

              

Ending balance: Individually evaluated for impairment

   $ 22,303      $ 19,891      $ 9,834      $ 32,391      $ 1,892      $ 295      $ 86,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 22,607      $ 9,233      $ 52,175      $ 187,786      $ 22,571      $ 12,411      $ 306,783   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

7. Deposits:

At June 30, 2012, time deposits of $100,000 or more include brokered deposits of $23,612,000. Of the total brokered deposits, $10,000,000 matures in 2012 and the remaining balance matures in 2013.

8. Shareholders’ Equity:

On July 25, 2012, the Board of Directors of the Company declared a semi-annual dividend of $ .10 per share. The dividend has a record date of August 10, 2012 and a distribution date of August 17, 2012.

9. Accumulated Other Comprehensive Income:

At June 30, 2012, accumulated other comprehensive income included the unrealized gain on available for sale securities of $3,285,479, net of tax of $1,692,519, and the gain from the unfunded post-retirement benefit obligation of $2,108,023, net of tax of $1,085,528.

 

21


10. Fair Value Measurements and Disclosures:

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

Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Available for Sale Securities

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

Held to Maturity Securities

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

 

22


Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

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

Loans

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

Other Real Estate

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

Cash Surrender Value of Life Insurance

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

Deposits

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

 

23


Federal Funds Purchased and Securities Sold under Agreements to Repurchase

The carrying amount shown as federal funds purchased and securities sold under agreements to repurchase approximates fair value.

Borrowings from Federal Home Loan Bank

The fair value of FHLB fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The Company has no FHLB variable rate borrowings.

Commitments to Extend Credit and Standby Letters of Credit

Because commitments to extend credit and standby letters of credit are generally short-term and at variable rates, the contract value and estimated value associated with these instruments are immaterial.

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of June 30, 2012 and December 31, 2011 are as follows:

 

                                                                                       
            Fair Value Measurement Using  
     Total      Level 1      Level 2      Level 3  

June 30, 2012:

           

U.S. Treasuries

   $ 49,505,993       $         $ 49,505,993       $     

U.S. Government agencies

     217,440,463            217,440,463      

Mortgage-backed securities

     19,518,160            19,518,160      

States and political subdivisions

     39,898,991            39,898,991      

Equity securities

     649,983            649,983      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 327,013,590       $         $ 327,013,590       $     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

U.S. Treasuries

   $ 54,009,611       $         $ 54,009,611       $     

U.S. Government agencies

     179,180,285            179,180,285      

Mortgage-backed securities

     5,001,155            5,001,155      

States and political subdivisions

     40,077,447            40,077,447      

Equity securities

     649,983            649,983      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 278,918,481       $                $ 278,918,481       $            
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2012 and December 31, 2011 are as follows:

 

                                                                                       
            Fair Value Measurement Using  
     Total      Level 1      Level 2      Level 3  

June 30, 2012

   $ 63,427,253       $                $                $ 63,427,253   

December 31, 2011

     66,262,170               66,262,170   

 

24


The following table presents a summary of changes in the fair value of impaired loans which are measured using level 3 inputs:

 

     For the Six
Months Ended
June 30, 2012
    For the Year Ended
December 31, 2011
 

Balance, beginning of period

   $ 66,262,170      $ 14,294,758   

Additions to impaired loans and troubled debt restructurings

     3,822,892        61,165,501   

Principal payments, charge-offs and transfers to other real estate

     (8,185,484     (7,115,192

Change in allowance for loan losses on impaired loans

     1,527,675        (2,082,897
  

 

 

   

 

 

 

Balance, end of period

   $ 63,427,253      $ 66,262,170   
  

 

 

   

 

 

 

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2012 and December 31, 2011 are as follows:

 

                                                                                                   
            Fair Value Measurement Using  
     Total      Level 1      Level 2      Level 3  

June 30, 2012

   $ 7,522,811       $            $            $ 7,522,811   

December 31, 2011

     6,153,238               6,153,238   

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

 

     For the Six
Months Ended
June 30, 2012
    For the Year Ended
December 31, 2011
 

Balance, beginning of period

   $ 6,153,238      $ 5,744,150   

Loans transferred to ORE

     1,891,673        3,221,510   

Sales

     (368,800     (2,101,416

Writedowns

     (153,300     (711,006
  

 

 

   

 

 

 

Balance, end of period

   $ 7,522,811      $ 6,153,238   
  

 

 

   

 

 

 

 

25


The carrying value and estimated fair value of financial assets and financial liabilities, by level within the fair value hierarchy, at June 30, 2012 and December 31, 2011, are as follows:

 

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

June 30, 2012:

              

Financial Assets:

              

Cash and due from banks

   $ 34,202,485       $ 34,202,485       $            $            $ 34,202,485   

Available for sale securities

     327,013,590            327,013,590            327,013,590   

Held to maturity securities

     4,983,923            5,075,817            5,075,817   

Other investments

     3,893,458         3,893,458               3,893,458   

Federal Home Loan Bank stock

     4,259,400            4,259,400            4,259,400   

Loans, net

     420,847,759               422,431,841         422,431,841   

Other real estate

     7,522,811               7,522,811         7,522,811   

Cash surrender value of life insurance

     16,513,580               16,513,580         16,513,580   

Financial Liabilities:

              

Deposits:

              

Non-interest bearing

     114,738,363         114,738,363               114,738,363   

Interest bearing

     366,830,140            367,546,286            367,546,286   

Federal funds purchased and securities sold under agreements to repurchase

     161,987,702         161,987,702               161,987,702   

Borrowings from Federal Home Loan Bank

     83,017,894            84,912,241            84,912,241   

December 31, 2011:

              

Financial Assets:

              

Cash and due from banks

   $ 36,928,657       $ 36,928,657       $         $         $ 36,928,657   

Available for sale securities

     278,918,481            278,918,481            278,918,481   

Held to maturity securities

     1,428,887            1,492,374            1,492,374   

Other investments

     3,930,300         3,930,300               3,930,300   

Federal Home Loan Bank stock

     2,580,700            2,580,700            2,580,700   

Loans, net

     424,271,664               427,880,554         427,880,554   

Other real estate

     6,153,238               6,153,238         6,153,238   

Cash surrender value of life insurance

     16,196,368               16,196,368         16,196,368   

Financial Liabilities:

              

Deposits:

              

Non-interest bearing

     97,581,073         97,581,073               97,581,073   

Interest bearing

     370,858,009            372,018,592            372,018,592   

Federal funds purchased and securities sold under agreements to repurchase

     157,600,967         157,600,967               157,600,967   

Borrowings from Federal Home Loan Bank

     53,323,568            55,013,522            55,013,522   

10. Reclassifications:

Certain reclassifications, which had no effect on prior year net income, have been made to prior period statements to conform to current year presentation.

 

26


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 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

 

27


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.

 

28


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. 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

 

29


from the sale and call of securities. The voluntary early retirement program offered in the fourth quarter of 2011 resulted in a net decrease in salaries and employee benefit costs of $347,414 for the second quarter of 2012 as compared with 2011 and $451,990 for the first half of 2012 as compared with the first half of 2011. In June 2011, the Company outsourced its data processing operations, which resulted in increased costs for the second quarter of 2012 of $216,346 as compared with the second quarter of 2011 and $443,729 for the first half of 2012 as compared with 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.

 

30


Average interest bearing liabilities increased approximately $28,861,000, or 5%, from approximately $602,757,000 for the second quarter of 2011 to approximately $631,618,000 for the second quarter of 2012. The increase was primarily related to borrowing 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 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.

 

31


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 six months ended June 30, 2012, down 27 basis points from 3.31% for the six months ended June 30, 2011.

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.

 

32


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
        

 

 

         

 

 

 

 

(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.

 

33


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
        

 

 

         

 

 

 

 

(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.

 

34


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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

35


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
  

 

 

   

 

 

   

 

 

   

 

 

 

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. The Company 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, land, development, construction and commercial real estate loans, and their direct and indirect impact on its operations on a monthly basis. 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.

 

36


Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and identify and estimate potential losses based on the best available information. The potential effect resulting from the economic downturn on a national and local level, the decline in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral.

The Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $1,290,000 and $546,000 for the second quarters of 2012 and 2011, respectively, and $1,830,000 and $1,187,000 for the first half of 2012 and 2011, respectively. The allowance for loan losses as a percentage of loans was 1.58% and 1.75% at June 30, 2012 and December 31, 2011, respectively. The Company’s evaluation includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans grew to $54,968,213 and $57,592,715 at June 30, 2012 and December 31, 2011, respectively, specific reserves of only $581,054 and $2,106,729, respectively, have been allocated to these loans as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value. The Company believes that its allowance for loan losses is appropriate as of June 30, 2012.

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

Non-interest income increased $446,320 for the second quarter of 2012 as compared with the second quarter of 2011. During the second quarter of 2012, gains from sales and calls of securities increased $852,768 in comparison with the second quarter of 2011 as sales were executed when proceeds would be maximized. Gains from the redemption of life insurance were $389,119 for the second quarter of 2011.

Non-interest income increased $543,103 for the first half of 2012 as compared with the first half of 2011. During the first half of 2012, gains from sales and calls of securities increased $957,001 in comparison with the first half of 2011 as sales were executed when proceeds would be maximized. Gains from the redemption of life insurance were $389,119 for the first half of 2011. The Company experienced a loss on its investment in a low income housing partnership and other equity investments of $36,843 in 2012 as compared with a gain of $10,124 in 2011.

Non-interest expense

Total non-interest expense decreased $174,048 for the second quarter of 2012 as compared with the second quarter of 2011. Salaries and employee benefits decreased $347,414; equipment rentals, depreciation and maintenance decreased $74,851; data processing expenses increased $216,346 and other expenses increased $50,431 for the second quarter of 2012 as compared with the second quarter of 2011.

 

37


Salaries decreased $159,273 in the second quarter of 2012 as compared with the second quarter of 2011 as the employee census continues to decrease from attrition and the impact of the 2011 voluntary early retirement package. Expenses relating to the retiree health plan decreased $110,085 as a result of amendments made to the plan which require plan participants to utilize drug benefits and health insurance coverage available under Medicare. Costs associated with the Company’s deferred compensation plans decreased $40,353 due to the 2011 voluntary early retirement package.

Equipment maintenance and servicing increased $25,543 in 2012 due to the timing of payment for these services. Depreciation costs have decreased by $103,500 in 2012, as computer and other equipment acquired after Hurricane Katrina in 2005 are now fully depreciated.

Data processing costs increased in 2012 as a result of the outsourcing of these activities during the second quarter of 2011.

Included in other expense are expenses relating to the ORE portfolio which increased $106,085 in 2012 a result of the write down of several of these properties to their fair value, less estimated cost to sell. The remaining net increase in other expense is primarily due to the timing of payments for various services.

Total non-interest expense decreased $377,660 for the first half of 2012 as compared with the first half of 2011. Salaries and employee benefits decreased $451,990; equipment rentals, depreciation and maintenance decreased $168,136; data processing expenses increased $443,729 and other expenses decreased $217,393 for the first half of 2012 as compared with the first half of 2011.

Salaries decreased $332,729 in the first half of 2012 as compared with the first half of 2011 as the employee census continues to decrease from attrition and the impact of the 2011 voluntary early retirement package. Expenses relating to the retiree health plan decreased $186,127 as a result of amendments made to the plan which require plan participants to utilize drug benefits and health insurance coverage available under Medicare. Costs associated with the Company’s deferred compensation plans increased $96,593 due to the 2011 voluntary early retirement package.

Equipment maintenance and servicing decreased $55,861 in 2012 due to the timing of payment for these services. Depreciation costs have decreased by $139,500 in 2012, as computer and other equipment acquired after Hurricane Katrina in 2005 are now fully depreciated.

Data processing costs increased in 2012 as a result of the outsourcing of these activities during the second quarter of 2011.

Included in other expense are expenses relating to the ORE portfolio which increased $46,024 in 2012 a result of the write down of several of these properties to their fair value, less estimated cost to sell. The remaining net increase in other expense is primarily due to the timing of payments for various services.

 

38


Income Tax Benefit

Income taxes have been impacted by non-taxable income and federal tax credits during the quarters and six months ended June 30, 2012 and 2011, as follows:

 

     Quarters Ended June 30,  
     2012     2011  
     Tax     Rate     Tax     Rate  

Taxes at statutory rate

   $ 171,616                  34      $ 210,077                  34   

Increase (decrease) resulting from:

        

Tax-exempt interest income

     (95,463     (19     (137,935     (23

Income from BOLI

     (42,596     (8     (174,930     (28

Federal tax credits

     (91,410     (18     (91,410     (15

Other

     853        1        2,198        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income taxes (benefit)

   $ (57,000     (10   $ (192,000     (31
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2012     2011  
     Tax     Rate     Tax     Rate  

Taxes at statutory rate

   $ 312,633                  34      $ 307,842                  34   

Increase (decrease) resulting from:

        

Tax-exempt interest income

     (200,504     (22     (263,429     (29

Income from BOLI

     (83,869     (9     (219,912     (24

Federal tax credits

     (182,820     (20     (182,820     (20

Other

     7,560        1        16,319        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income taxes (benefit)

   $ (147,000     (16   $ (342,000     (38
  

 

 

   

 

 

   

 

 

   

 

 

 

FINANCIAL CONDITION

Available for sale securities increased $48,095,109 at June 30, 2012, compared with December 31, 2011, as a large increase in funds in a non-deposit product during the first quarter were invested in these securities.

Held to maturity securities increased $3,555,036 at June 30, 2012, compared with December 31, 2011, as the Company opted to classify some of its investment purchases during the second quarter as held to maturity.

The investment in Federal Home Loan Bank (“FHLB”) stock increased $1,678,700 at June 30, 2012 as compared with December 31, 2011 so that the Company could increase its borrowing capacity from the FHLB during the period.

Loans decreased $4,816,279 at June 30, 2012 as compared with December 31, 2011 as the result of charge-offs of $3,293,002 and transfers to Other Real Estate of $1,891,673.

Other real estate (“ORE”) increased $1,369,573 at June 30, 2012 as compared with December 31, 2011. Loans totaling $1,891,673 were transferred into ORE while $368,800 was sold for a loss of $24,739 and write downs of ORE to fair value of $153,300 were recorded during the first six months of 2012.

 

39


Prepaid FDIC assessments decreased by $817,331 at June 30, 2012 as compared with December 31, 2011 as a result of the amortization of these costs.

Other assets increased $1,052,335 at June 30, 2012 as compared with December 31, 2011 primarily as income taxes receivable increased $715,000 due to overpayments during 2011.

Total deposits increased $13,129,421 at June 30, 2012, as compared with December 31, 2011. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically.

Federal funds purchased and securities sold under agreements to repurchase increased $4,386,735 at June 30, 2012 as compared with December 31, 2011 as several county and municipal entities increased their balances in a non-deposit account during the first half of 2012.

Borrowings from the FHLB increased $29,694,326 at June 30, 2012 as compared with December 31, 2011 based on the liquidity needs of the bank subsidiary.

Employee and director benefit plans liabilities increased $648,486 at June 30, 2012 as compared with December 31, 2011 due to the deferred compensation benefits earned by officers and directors during 2012.

Other liabilities decreased $679,207 at June 30, 2012 as compared with December 31, 2011 as a result of the payment of officer incentives and director fees which has been accrued at December 31, 2011.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders.

The Company and the Bank are subject to regulatory capital adequacy requirements imposed by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of the bank subsidiary’s assets and certain off-balance sheet items, adjusted for credit risk, as calculated under regulatory accounting practices must be met. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks and to account for off-balance sheet exposure. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets.

 

40


As of June 30, 2012, the most recent notification from the Federal Deposit Insurance Corporation categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater and a Leverage capital ratio of 5.00% or greater. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Company as of June 30, 2012 and December 31, 2011, are as follows (in thousands):

 

     Actual     For Capital Adequacy Purposes  
     Amount      Ratio     Amount      Ratio  

June 30, 2012:

          

Total Capital (to Risk Weighted Assets)

   $ 111,924         20.60   $ 43,466         8.00

Tier 1 Capital (to Risk Weighted Assets)

     105,181         19.36     21,733         4.00

Tier 1 Capital (to Average Assets)

     105,181         12.00     35,046         4.00

December 31, 2011:

          

Total Capital (to Risk Weighted Assets)

   $ 110,762         20.86   $ 42,475         8.00

Tier 1 Capital (to Risk Weighted Assets)

     104,116         19.61     21,238         4.00

Tier 1 Capital (to Average Assets)

     104,116         12.84     32,436         4.00

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of June 30, 2012 and December 31, 2011, are as follows (in thousands):

 

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

June 30, 2012:

               

Total Capital (to Risk Weighted Assets)

   $ 109,090         21.15   $ 41,262         8.00   $ 51,578         10.00

Tier 1 Capital (to Risk Weighted Assets)

     102,639         19.90     20,631         4.00     30,947         6.00

Tier 1 Capital (to Average Assets)

     102,639         12.03     34,121         4.00     42,652         5.00

December 31, 2011:

               

Total Capital (to Risk Weighted Assets)

   $ 108,149         20.40   $ 42,413         8.00   $ 53,014         10.00

Tier 1 Capital (to Risk Weighted Assets)

     101,503         19.15     21,207         4.00     31,809         6.00

Tier 1 Capital (to Average Assets)

     101,503         12.56     32,332         4.00     40,407         5.00

In addition to monitoring its risk-based capital ratios, the Company also determines the primary capital ratio on a quarterly basis. This ratio was 14.05% at June 30, 2012, 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.

 

41


LIQUIDITY

Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. The Company manages and monitors its liquidity position through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a monthly basis in the management of its liquidity needs and also conducts periodic contingency testing on its liquidity plan.

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. Borrowings from the FHLB, federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position. The Company has also been approved to participate in the Federal Reserve Bank’s Discount Window Primary Credit Program, which it intends to use only as a contingency.

REGULATORY MATTERS

During 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 a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company and the Bank identified specific corrective steps and actions to enhance its risk management, asset quality and liquidity policies, controls and procedures. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators.

Item 4: Controls and Procedures

As of June 30, 2012, 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 June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

42


PART II—OTHER INFORMATION

Item 1: Legal Proceedings

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

Item 5: Other Information

None.

Item 6—Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

Exhibit 31.1:    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 31.2:    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 32.1:    Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2:    Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 101    The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at June 30, 2012 and December 31, 2011, (ii)Consolidated Statements of Income for the quarters and six months ended June 30, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income for the quarters and six months ended June 30, 2012 and 2011, (iv) Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2012, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 and (vi) Notes to the Unaudited Consolidated Financial Statements for the six months ended June 30, 2012 and 2011.

 

(b) Reports on Form 8-K

A Form 8-K was filed on April 25, 2012, April 27, 2012, July 25, 2012 and July 27, 2012.

 

43


SIGNATURES

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

 

PEOPLES FINANCIAL CORPORATION

                        (Registrant)

Date:   August 13, 2012
By:   /s/ Chevis C. Swetman
 

Chevis C. Swetman

Chairman, President and Chief Executive Officer

(principal executive officer)

 

Date:   August 13, 2012
By:   /s/ Lauri A. Wood
 

Lauri A. Wood

Chief Financial Officer and Controller

(principal financial and accounting officer)

 

44

XNAS:PFBX Peoples Financial Corp Quarterly Report 10-Q Filling

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