10-K 1 d702826d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018        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 Number)

Lameuse and Howard Avenues, Biloxi, Mississippi  39533   

             228-435-5511

(Address of principal executive offices)  (Zip code)                   (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:

                                                 Name of Each Exchange on

Title of Each Class                           Which Registered        

None                                         None

Securities registered pursuant to Section 12 (g) of the Act:

                    Common, $1.00 Par Value                    

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ____ NO   X    

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ____ NO       X    

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes        X    No____

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 (§ 229.405 of this chapter) of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.     X    

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

Large accelerated filer ___      Accelerated filer ____             Non-Accelerated filer ___             Smaller reporting company X               Emerging growth company ___

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ____NO      X    

At June 30, 2018, the aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $62,914,000.

On February 15, 2019, the registrant had outstanding 4,943,186 shares of common stock, par value of $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement issued in connection with the Annual Meeting of Shareholders to be held April 24, 2019, are incorporated by reference into Part III of this report.


Table of Contents

Peoples Financial Corporation

Form 10-K

Index

 

PART I

    

Item 1.

 

DESCRIPTION OF BUSINESS

     3  

Item 1A.

 

RISK FACTORS

     36  

Item 1B.

 

UNRESOLVED STAFF COMMENTS

     45  

Item 2.

 

PROPERTIES

     45  

Item 3.

 

LEGAL PROCEEDINGS

     45  

Item 4.

 

MINE SAFETY DISCLOSURES

     45  

PART II

    

Item 5.

 

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     46  

Item 6.

 

SELECTED FINANCIAL DATA

     47  

Item 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     48  

Item 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     61  

Item 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     61  

Item 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     112  

Item 9A.

 

CONTROLS AND PROCEDURES

     112  

Item 9B.

 

OTHER INFORMATION

     112  

Part III

    

Item 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     113  

Item 11.

 

EXECUTIVE COMPENSATION

     113  

Item 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     113  

Item 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

     113  

Item 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

     113  

PART IV

    

Item 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     114  

 

2


Table of Contents

PART I

ITEM 1 - DESCRIPTION OF BUSINESS

BACKGROUND AND CURRENT OPERATIONS

General

Peoples Financial Corporation (the “Company”) was organized as a one bank holding company in 1985. The Company is headquartered in Biloxi, Mississippi. At December 31, 2018, the Company operated in the state of Mississippi through its wholly-owned subsidiary, The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Company is engaged, through this subsidiary, in the banking business. The Bank is the Company’s principal asset and primary source of revenue.

The Main Office, operations center and asset management and trust services of the Bank are located in downtown Biloxi, MS. At December 31, 2018, the Bank also had 17 branches located throughout Harrison, Hancock, Jackson and Stone Counties. The Bank has automated teller machines (“ATM”) at its Main Office, all branch locations and at numerous non-proprietary locations.

The Bank Subsidiary

The Company’s wholly-owned bank subsidiary was originally chartered in 1896 in Biloxi, Mississippi, as The Peoples Bank of Biloxi. The Bank is a state chartered bank whose deposits are insured under the Federal Deposit Insurance Act. The Bank is not a member of the Federal Reserve System. The legal name of the Bank was changed to The Peoples Bank, Biloxi, Mississippi, during 1991.

Most of the Bank’s business originates from Harrison, Hancock, Stone and Jackson Counties in Mississippi; however, some business is obtained from other counties in southern Mississippi, southern Louisiana and southern Alabama.

Nonbank Subsidiary

In 1985, PFC Service Corp. (“PFC”) was chartered and began operations as the second wholly-owned subsidiary of Peoples Financial Corporation. The purpose of PFC was principally the leasing of automobiles and equipment. PFC is inactive at this time.

Products And Services

The Bank currently offers a variety of services to individuals and small to middle market businesses within its trade area. The Company’s trade area is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary’s three most outlying locations.

The Bank’s primary lending focus is to offer business, commercial, real estate, construction, personal and installment loans, with an emphasis on commercial lending. The Bank’s exposure for out of area, residential and land development, construction and commercial real estate loans as well as concentrations in the hotel/motel and gaming industries are monitored by the Company.

 

3


Table of Contents

Each loan officer has board approved lending limits on the principal amount of secured and unsecured loans that can be approved for a single borrower without prior approval of the senior credit committee. All loans, however, must meet the credit underwriting standards and loan policies of the Bank.

Deposit services include interest bearing and non-interest bearing checking accounts, savings accounts, certificates of deposit, and IRA accounts. The Bank generally provides depository accounts to individuals; small and middle market businesses; and state, county and local government entities in its trade area at interest rates consistent with market conditions.

The Bank’s Asset Management and Trust Services Department (“Trust Department”) offers personal trust, agencies and estate services, including living and testamentary trusts, executorships, guardianships, and conservatorships. Benefit accounts maintained by the Trust Department primarily include self-directed individual retirement accounts. Escrow management, stock transfer and bond paying agency accounts are available to corporate customers.

The Bank also offers a variety of other services including safe deposit box rental, wire transfer services, night drop facilities, collection services, cash management and internet banking. The Bank has 30 ATMs at its branch locations and other off-site, non-proprietary locations, providing bank customers access to their depository accounts. The Bank is a member of the PULSE network.

There has been no significant change in the kind of services offered by the Bank during the last three fiscal years.

Customers

The Bank has a large number of customers acquired over a period of many years and is not dependent upon a single customer or upon a few customers. The Bank also provides services to customers representing a wide variety of industries including seafood, retail, hospitality, hotel/motel, gaming and construction. While the Company has pursued external growth strategies on a limited basis, its primary focus has been on internal growth by the Bank through the establishment of new branch locations and an emphasis on strong customer relationships.

Employees

At December 31, 2018, the Bank employed 147 full-time employees and 8 part-time employees. The Company has no employees who are not employees of the bank subsidiary. Through the Bank, employees receive salaries and benefits, which include 401(k) and ESOP plans, cafeteria plan, and life, health and disability insurance. The Company considers its relationship with its employees to be good.

Competition

The Bank is in direct competition with numerous local and regional commercial banks as well as other non-bank institutions. Interest rates paid and charged on deposits and loans are the primary competitive factors within the Bank’s trade area. The Bank also competes for deposits and loans with insurance companies, finance companies, brokerage houses and credit unions. The principal competitive factors in the markets for deposits and loans are interest rates paid and charged. The

 

4


Table of Contents

Company also competes through efficiency, quality of customer service, the range of services and products it provides, the convenience of its branch and ATM locations and the accessibility of its staff. The Bank intends to continue its strategy of being a local, community bank offering traditional bank services and providing quality service in its local trade area.

Miscellaneous

The Bank holds no patents, licenses (other than licenses required to be obtained from appropriate bank regulatory agencies), franchises or concessions.

The Bank has not engaged in any research activities relating to the development of new services or the improvement of existing services except in the normal course of its business activities. The Bank presently has no plans for any new line of business requiring the investment of a material amount of total assets.

Available Information

The Company maintains an internet website at www.thepeoples.com. The Company’s Annual Report to Shareholders is available on the Company’s website. Also available through the website is a link to the Company’s filings with the Securities and Exchange Commission (“SEC”). Information on the Company’s website is not incorporated into this Annual Report on Form 10-K or the Company’s other securities filings and is not part of them.

REGULATION AND SUPERVISION

General

The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Atlanta (“Federal Reserve”). The Company is required to file semi-annual reports with the Federal Reserve and such other information as the Federal Reserve may require. The Federal Reserve also conducts examinations of the Company.

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

 

 

it may acquire direct or indirect ownership or control of any voting shares of any other bank holding company if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the other bank holding company;

 

 

it may acquire direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank;

 

 

it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or

 

5


Table of Contents
 

it may merge or consolidate with any other bank holding company.

The Bank Holding Company Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the performance under the Community Reinvestment Act of 1977, both of which are discussed below in more detail.

Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

 

 

the bank holding company has registered securities under Section 12 of the Exchange Act of 1934, as amended (“Exchange Act”); or

 

 

no other person owns a greater percentage of that class of voting securities immediately after the transaction.

The Company’s common stock is registered under Section 12 of the Exchange Act. The regulations provide a procedure for challenging rebuttable presumptions of control.

The Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries and acquiring or retaining direct or indirect control of any company engaged in any activities other than activities closely related to banking or managing or controlling banks. In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

The Bank is incorporated under the laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws and the laws of the various states in which it operates, as well as federal law. The Bank is subject to the supervision of the Mississippi Department of Banking and Consumer Finance (“MDBCF”) and to regular examinations by that department. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) and, therefore, the Bank is subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC.

 

6


Table of Contents

Federal Reserve policy historically has required bank holding companies to act as a source of strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) codifies this policy as a statutory requirement. This support may be required by the Federal Reserve at times when the Company might otherwise determine not to provide it. In addition, if a bank holding company commits to a federal bank regulator that it will maintain the capital of its bank subsidiary, whether in response to the Federal Reserve’s invoking its source-of-strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee and the bank will be entitled to priority payment in respect of that commitment, ahead of other creditors of the bank holding company.

In addition, the Company is required to file certain reports with, and otherwise comply with the rules and regulations of, the SEC under federal securities laws. The common stock of the Company is listed on the OTCQX Best Market, such listing subjecting the Company to compliance with the market’s requirements with respect to reporting and other rules and regulations.

The Dodd-Frank Act

The Dodd-Frank Act, enacted in 2010, significantly restructured financial regulation in the United States, including through the creation of a new resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies, and through numerous other provisions intended to strengthen the financial services sector.

The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank Act altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance requirements for all public companies, including financial institutions, with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions, and restricted certain proprietary trading and hedge fund and private equity activities of banks and their affiliates. The Dodd-Frank Act also required the issuance of numerous implementing regulations, many of which have not yet been issued.

In January 2013, the CFPB issued final regulations governing mainly consumer mortgage lending. One rule imposes additional requirements on lenders, including rules designed to require lenders to ensure borrowers’ ability to repay their mortgage. The CFPB also finalized a rule on escrow accounts for higher priced mortgage loans and a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act. The CFPB also issued final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing. In November 2013, the CFPB issued a final rule on integrated mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, compliance with which was required by August 1, 2015.

 

7


Table of Contents

The Dodd-Frank Act authorizes national and state banks to establish de novo branches in other states to the same extent as a bank chartered by that state would be so permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are now able to enter new markets more freely.

Recently, the CFPB and banking regulatory agencies have increasingly used a general consumer protection statute to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the “unfair or deceptive acts or practices” (“UDAP”) law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” which has been delegated to the CFPB for supervision.

Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years. Additionally, many provisions of the Dodd-Frank Act were amended by the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted in 2018, but like the Dodd-Frank Act, several of those provisions are subject to further rulemaking that has not yet been enacted. The overall financial impact on the Company and its subsidiaries or the financial services industry generally cannot be anticipated at this time.

Dividends

The Company is a legal entity that is separate and distinct from its subsidiaries. The primary source of funds for dividends paid to the Company’s shareholders are dividends paid to the Company by the Bank. Various federal and state laws limit the amount of dividends that the Bank may pay to the Company without regulatory approval. Under Mississippi law, the Bank must obtain non-objection of the Commissioner of the Mississippi Department of Banking and Consumer Finance (“MDBCF”) prior to paying any dividend on the Bank’s common stock. In addition, the Bank may not pay any dividends if, after paying the dividend, it would be undercapitalized under applicable capital requirements. The FDIC also has the authority to prohibit the Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which, depending on the financial condition of the Bank, could include the payment of dividends.

In addition, the Federal Reserve has the authority to prohibit the payment of dividends by a bank holding company if its actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement, Supervisory Release 09-4, on the payment of cash dividends by bank holding companies, which outlines the Federal Reserve’s view that a bank holding company that is experiencing earnings weaknesses or other financial pressures should not pay cash dividends that exceed its net income, that are inconsistent with its capital position, or that could only be funded in ways that weaken its financial health, such as by borrowing or selling assets. The Federal Reserve has indicated that, in some instances, it may be appropriate for a bank holding company to eliminate its dividends.

 

8


Table of Contents

Capital

The Federal Reserve has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies. The risk-based capital ratio guidelines establish a systematic analytical framework that:

 

 

makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations;

 

 

takes off-balance sheet exposures into explicit account in assessing capital adequacy; and

 

 

minimizes disincentives to holding liquid, low-risk assets.

Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements promulgated by the FDIC.

Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers. “Total capital” is Tier 1 plus Tier 2 capital. These two tiers are:

 

 

“Tier 1,” or core capital, that includes total equity plus qualifying capital securities and minority interests, excluding unrealized gains and losses accumulated in other comprehensive income, and non-qualifying intangible and servicing assets; and

 

 

“Tier 2,” or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the allowance for credit losses, up to 1.25% of risk-weighted assets.

The Federal Reserve and the other federal banking regulators require that all intangible assets (net of deferred tax), except originated or purchased mortgage-servicing rights, non-mortgage servicing assets, and purchased credit card relationships, be deducted from Tier 1 capital. However, the total amount of these items included in Total capital cannot exceed 100% of an institution’s Tier 1 capital.

The guidelines also provided that bank holding companies experiencing internal growth or making acquisitions would be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve indicated that it would consider a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.

Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on

 

9


Table of Contents

the ability to pay dividends, the issuance of a capital directive to increase capital, and the termination of deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described below under “Prompt Corrective Action” as applicable to “under-capitalized” institutions. Certain provisions of the EGRRCPA have the potential to limit the application of the guidelines to the Company and the Bank if certain elections are made by the Company or Bank, subject to further rulemaking that has not yet been enacted.

New Capital Rules

On July 2, 2013, the Federal Reserve approved the final rule for BASEL III capital requirements for all bank holding companies chartered in the United States. The rule was subsequently approved by the FDIC on July 9, 2013, and made applicable to the Bank as well. The rule implements in the United States certain of the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The major provisions of the new rule applicable to the Company and the Bank are:

 

 

The new rule implements higher minimum capital requirements, includes a new common equity Tier 1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the United States banking system to deal with adverse economic conditions.

 

 

The new minimum capital to risk-weighted assets requirements are a common equity Tier 1 capital ratio of 4.5% and a Tier 1 capital ratio of 6.0% which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%.

 

 

The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets, deferred tax assets, and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity Tier 1 capital.

 

 

Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk weighted assets. Phase-in of the capital conservation buffer requirements began on January 1, 2016. Subsequent to the completion of a “phase-in” period, a banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule

 

10


Table of Contents
 

also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action well-capitalized thresholds.

 

 

The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

The transition period for implementation of Basel III is January 1, 2015, through December 31, 2018. Certain provisions of the EGRRCPA have the potential to limit the application of BASEL III to the Company and the Bank if certain elections are made by the Company or Bank, subject to further rulemaking that has not yet been enacted.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991, known as FDICIA, requires federal banking regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: “well-capitalized,” “adequately-capitalized,” “under-capitalized,” “significantly under-capitalized,” and “critically under-capitalized.”

An institution is deemed to be:

 

 

“well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater (6% before January 1, 2015), a Tier 1 leverage ratio of 5% or greater, and, after January 1, 2015, a common equity Tier 1 capital ratio of 6.5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure;

 

 

“adequately-capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater (4% before January 1, 2015), generally, a Tier 1 leverage ratio of 4% or greater, and, after January 1, 2015, a common equity Tier 1 capital ratio of 4.5% or greater, and the institution does not meet the definition of a “well-capitalized” institution;

 

 

“under-capitalized” if it does not meet one or more of the “adequately-capitalized” tests;

 

 

“significantly under-capitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 4% (less than 3% before January 1, 2015), a Tier 1 leverage ratio that is less than 3%, and, after January 1, 2015, a common equity Tier 1 capital ratio that is less than 3%; and

 

 

“critically under-capitalized” if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%.

 

11


Table of Contents

Throughout 2018, the Bank’s regulatory capital ratios were in excess of the levels established for “well-capitalized” institutions.

FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company, if the depository institution would be “under-capitalized” after such payment. “Under-capitalized” institutions are subject to growth limitations and are required by the appropriate federal banking agency to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan.

If an “under-capitalized” institution fails to submit an acceptable plan, it is treated as if it is “significantly under-capitalized.” “Significantly under-capitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately-capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

“Critically under-capitalized” institutions may not, beginning 60 days after becoming “critically under-capitalized,” make any payment of principal or interest on their subordinated debt. In addition, “critically under-capitalized” institutions are subject to appointment of a receiver or conservator within 90 days of becoming so classified.

Under FDICIA, a depository institution that is not “well-capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. As previously stated, the Bank is “well-capitalized” and the FDICIA brokered deposit rule did not adversely affect its ability to accept brokered deposits. Certain provisions of the EGRRCPA have the potential to limit the application of FDICIA and prompt corrective action to the Company and the Bank if certain elections are made by the Company or Bank, subject to further rulemaking that has not yet been enacted.

Interstate Banking and Branching Legislation

Federal law allows banks to establish and operate a de novo branch in a state other than the bank’s home state if the law of the state where the branch is to be located would permit establishment of the branch if the bank were chartered by that state, subject to standard regulatory review and approval requirements. Federal law also allows the Bank to acquire an existing branch in a state in which the bank is not headquartered and does not maintain a branch if the FDIC and MDBCF approve the branch or acquisition, and if the law of the state in which the branch is located or to be located would permit the establishment of the branch if the bank were chartered by that state.

Once a bank has established branches in a state through an interstate merger transaction or through de novo branching, the bank may then establish and acquire additional branches within that state to the same extent that a state chartered bank is allowed to establish or acquire branches within the state.

 

12


Table of Contents

Under the Bank Holding Company Act, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank holding company or bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states have opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years, and subject to certain deposit market-share limitations.

FDIC Insurance

The deposits of the Bank are insured by the Deposit Insurance Fund (the “DIF”), which the FDIC administers. The Dodd-Frank Act permanently increased deposit insurance on most accounts to $250,000. To fund the DIF, FDIC-insured banks are required to pay deposit insurance assessments to the FDIC. For institutions like the Bank with less than $10 billion in assets, the amount of the assessment is based on its risk classification. The higher an institution’s risk classification, the higher its rate of assessments (on the assumption that such institutions pose a greater risk of loss to the DIF). An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances.

In addition, all institutions with deposits insured by the FDIC must pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established as a financing vehicle for the Federal Savings & Loan Insurance Corporation. The annualized assessment rate for the first quarter of fiscal 2019 is .60% of the assessment base and is adjusted quarterly. These assessments will continue until the bonds mature in 2019.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. If the FDIC terminates an institution’s deposit insurance, accounts insured at the time of the termination, less withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC.

Affiliate Transactions

The Bank is subject to Regulation W, which comprehensively implements statutory restrictions on transactions between a bank and its affiliates. Regulation W combines the Federal Reserve’s interpretations and exemptions relating to Sections 23A and 23B of the Federal Reserve Act. Regulation W and Section 23A place limits on the amount of loans or extensions of credit to, investments in, or certain other transactions with affiliates, and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In general, the Bank’s “affiliates” are the Company and its non-bank subsidiary.

 

13


Table of Contents

Regulation W and Section 23B prohibit, among other things, a bank from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with non-affiliated companies.

The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders and their related interests. Such extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features.

The Community Reinvestment Act

The Community Reinvestment Act of 1977 (“CRA”) and its implementing regulations provide an incentive for regulated financial institutions to meet the credit needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The regulations provide that the appropriate regulatory authority will assess reports under CRA in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving bank holding companies. An unsatisfactory rating under CRA may serve as a basis to deny an application to acquire or establish a new bank, to establish a new branch or to expand banking services. As of December 31, 2018, the Bank had a “satisfactory” rating under CRA.

Patriot Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as extended and revised by the PATRIOT Improvement and Reauthorization Act of 2005 (the “Patriot Act”), requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign financial institutions; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign financial institutions that do not have a physical presence in any country. The Patriot Act also requires that financial institutions follow certain minimum standards to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants.

Consumer Privacy and Other Consumer Protection Laws

The Bank, like all other financial institutions, is required to maintain the privacy of its customers’ non-public, personal information. Such privacy requirements direct financial institutions to:

 

 

provide notice to customers regarding privacy policies and practices;

 

14


Table of Contents
 

inform customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties; and

 

 

give customers an option to prevent disclosure of such information to non-affiliated third parties.

Under the Fair and Accurate Credit Transactions Act of 2003, the Bank’s customers may also opt out of information sharing between and among the Bank and its affiliates.

The Bank is also subject, in connection with its deposit, lending and leasing activities, to numerous federal and state laws aimed at protecting consumers, including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Truth-in-Savings Act, the Fair Housing Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, the Currency and Foreign Transactions Reporting Act, the National Flood Insurance Act, the Flood Protection Act, the Bank Secrecy Act, laws and regulations governing unfair, deceptive, and/or abuse acts and practices, the Servicemembers Civil Relief Act, the Housing and Economic Recovery Act, and the Credit Card Accountability Act, among others, as well as various state laws.

Incentive Compensation

In 2010, the Federal Reserve issued guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance also provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

The scope and content of banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.

Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002 is applicable to all companies with equity or debt securities registered under the Exchange Act. In particular, the Sarbanes-Oxley Act established: (i)

 

15


Table of Contents

requirements for audit committees, including independence, expertise and responsibilities; (ii) certification and related responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) civil and criminal penalties for violation of the securities laws.

Effect of Governmental Policies

The Company and the Bank are affected by the policies of regulatory authorities, including the Federal Reserve, the FDIC, and the MDBCF. An important function of the Federal Reserve is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: (i) purchases and sales of U.S. government and other securities in the marketplace; (ii) changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; (iii) changes in the reserve requirements of depository institutions; and (iv) indirectly, changes in the federal funds rate, which is the rate at which depository institutions lend money to each other overnight. These instruments are intended to influence economic and monetary growth, interest rate levels, and inflation.

The monetary policies of the Federal Reserve and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and in the money markets, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand, or the business and results of operations of the Company and the Bank, or whether changing economic conditions will have a positive or negative effect on operations and earnings.

Other Proposals

Bills occasionally are introduced in the United States Congress and the Mississippi State Legislature and other state legislatures, and regulations occasionally are proposed by the Company’s regulatory agencies, any of which could affect the businesses, financial results, and financial condition of the Company or the Bank. Generally it cannot be predicted whether or in what form any particular proposals will be adopted or the extent to which the Company and the Bank may be affected.

Summary

The foregoing discussion sets forth certain material elements of the regulatory framework applicable to the Company and the Bank. This discussion is a brief summary of the regulatory environment in which the Company and its subsidiaries operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations. Regulation of financial institutions is intended primarily for the protection of depositors, the deposit insurance fund and the banking system, and generally is not intended for the protection of shareholders. Changes in applicable laws, and their application by regulatory agencies, cannot necessarily be predicted, but could have a material effect on the business and results of the Company and its subsidiaries.

 

16


Table of Contents

SUPPLEMENTAL STATISTICAL INFORMATION

Schedules I-A through VII present certain statistical information regarding the Company. This information is not audited and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements found in Item 8 of this Annual Report on Form 10-K.

Distribution of Assets, Liabilities and Shareholders’ Equity and Interest Rates and Differentials

Net Interest Income, the difference between Interest Income and Interest Expense, is the most significant component of the Company’s earnings. For interest analytical purposes, Management adjusts Net Interest Income to a “taxable equivalent” basis using a Federal Income Tax rate of 21% in 2018 and 34% in 2017 and 2016 on tax-exempt items (primarily interest on municipal securities).

Another significant statistic in the analysis of Net Interest Income is the net yield on earning assets. The net yield is the difference between the rate of interest earned on earning assets and the effective rate paid for all funds, non-interest bearing as well as interest bearing. Since a portion of the Bank’s deposits do not bear interest, such as demand deposits, the rate paid for all funds is lower than the rate on interest bearing liabilities alone.

Recognizing the importance of interest differential to total earnings, Management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional and local economic conditions, including the level of credit demand and interest rates, there are significant opportunities to influence interest differential through appropriate loan and investment policies which are designed to maximize the differential while maintaining sufficient liquidity and availability of incremental funds for purposes of meeting existing commitments and investment in lending and investment opportunities that may arise.

The information included in Schedule I-F presents the change in interest income and interest expense along with the reason(s) for these changes. The change attributable to volume is computed as the change in volume times the old rate. The change attributable to rate is computed as the change in rate times the old volume. The change in rate/volume is computed as the change in rate times the change in volume.

Credit Risk Management and Loan Loss Experience

In the normal course of business, the Bank assumes risks in extending credit. The Bank manages these risks through its lending policies, credit underwriting analysis, appraisal requirements, concentration and exposure limits, loan review procedures and the diversification of its loan portfolio. Although it is not possible to predict loan losses with complete accuracy, Management constantly reviews the characteristics of the loan portfolio to determine its overall risk profile and quality.

Constant attention to the quality of the loan portfolio is achieved by the loan review process. Throughout this ongoing process, Management is advised of the condition of individual loans and of the quality profile of the entire loan portfolio. Any loan or portion thereof which is classified

 

17


Table of Contents

“loss” by regulatory examiners or which is determined by Management to be uncollectible because of such factors as the borrower’s failure to pay interest or principal, the borrower’s financial condition, economic conditions in the borrower’s industry or the inadequacy of underlying collateral, is charged-off.

Provisions are charged to operating expense based upon historical loss experience, and additional amounts are provided when, in the opinion of Management, such provisions are not adequate based upon the current factors affecting loan collectability.

The allocation of the allowance for loan losses by loan category is based on the factors mentioned in the preceding paragraphs. Accordingly, since all of these factors are subject to change, the allocation is not necessarily indicative of the breakdown of future losses. In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-03, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a methodology that reflects all current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The Company intends to adopt ASU 2016-13 during the first quarter of 2020, and adoption of this ASU could materially affect its allowance for loan loss methodology, including the calculation of its provision for loan losses. For additional details regarding the pending adoption of this accounting pronouncement, see Note A – Business and Summary of Significant Accounting Policies included in Part II. Item 8. – Financial Statements and Supplementary Data of this report.

Further information concerning the provision for loan losses and the allowance for loan losses is presented in “Management’s Discussion and Analysis” in Item 7 of this Annual Report on Form 10-K and in “Note A – Business and Summary of Significant Accounting Policies” to the 2018 Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Return on Equity and Assets

The Company’s results and key ratios for 2014 – 2018 are summarized in the “Selected Financial Data” in Item 6 and “Management’s Discussion and Analysis” in Item 7 of this Annual Report on Form 10-K.

Dividends

The Company paid a cash dividend of $ .02 and $ .01 per share for the years ended December 31, 2018 and 2017, respectively. The Company did not pay a dividend during the year ended December 31, 2016.

 

18


Table of Contents

SCHEDULE I-A

Distribution of Average Assets, Liabilities and Shareholders’ Equity (1) (In thousands)

 

For the Years Ended December 31,    2018      2017      2016  

ASSETS:

        

Cash and due from banks

   $ 23,113      $ 32,457      $ 39,580   

Available for sale securities:

        

  Taxable securities

     220,076        217,059        188,512   

  Non-taxable securities

     13,055        15,677        20,902   

  Other securities

     1,519        1,014        1,732   

Held to maturity securities:

        

  Taxable securities

     33,864        29,389        8,562   

  Non-taxable securities

     18,208        19,082        19,596   

Other investments

     2,811        2,735        2,693   

Net loans (2)

     268,019        284,541        320,383   

Balances due from depository institutions

     9,498        27,819        31,559   

Other assets

     51,114        50,342        53,077   
  

 

 

 

TOTAL ASSETS

   $ 641,277      $ 680,115      $ 686,596   
  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY:

        

Non-interest bearing deposits

   $ 121,055      $ 132,748      $ 129,788   

Interest bearing deposits

     401,365        435,390        437,445   
  

 

 

 

  Total deposits

     522,420        568,138        567,233   

Other liabilities

     33,731        21,063        26,554   
  

 

 

 

  Total liabilities

     556,151        589,201        593,787   

Shareholders’ equity

     85,126        90,914        92,809   
  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $         641,277      $         680,115      $         686,596   
  

 

 

 

(1) All averages are computed on a daily basis.

(2) Gross loans and discounts, net of unearned income and allowance for loan losses.

 

19


Table of Contents

SCHEDULE I-B

Average (1) Amount Outstanding for Major Categories of Interest Earning Assets

And Interest Bearing Liabilities (In thousands)

 

For the Years Ended December 31,    2018      2017      2016  

INTEREST EARNING ASSETS:

        

Loans (2)

   $ 273,724      $ 290,329      $ 327,819   

Balances due from depository institutions

     9,498        27,819        31,559   

Available for sale securities:

        

  Taxable securities

     220,076        217,059        188,512   

  Non-taxable securities

     13,055        15,677        20,902   

  Other securities

     1,519        1,014        1,732   

Held to maturity securities:

        

  Taxable securities

     33,864        29,389        8,562   

  Non-taxable securities

     18,208        19,082        19,596   
  

 

 

 

TOTAL INTEREST EARNING ASSETS

   $ 569,944      $ 600,369      $ 598,682   
  

 

 

 

INTEREST BEARING LIABILITIES:

        

Savings and negotiable interest bearing deposits

   $ 317,197      $ 353,352      $ 359,801   

Time deposits

     84,168        82,038        77,644   

Federal funds purchased

     369        354     

Borrowings from FHLB

     13,044        1,883        8,240   
  

 

 

 

TOTAL INTEREST BEARING LIABILITIES

   $         414,778      $         437,627      $         445,685   
  

 

 

 

(1) All averages are computed on a daily basis.

(2) Net of unearned income. Includes nonaccrual loans

 

20


Table of Contents

SCHEDULE I-C

Interest Earned or Paid on Major Categories of Interest Earning Assets

And Interest Bearing Liabilities (In thousands)

 

For the Years Ended December 31,    2018      2017      2016  

INTEREST EARNED ON:

        

Loans

   $ 13,265      $ 12,970      $ 14,232   

Balances due from depository institutions

     205        420        277   

Available for sale securities:

        

  Taxable securities

     4,349        3,298        2,558   

  Non-taxable securities

     608        864        1,123   

  Other securities

     22        26        22   

Held to maturity securities:

        

  Taxable securities

     970        753        184   

  Non-taxable securities

     580        717        725   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EARNED (1)

   $             19,999      $             19,048      $             19,121   
  

 

 

    

 

 

    

 

 

 

INTEREST PAID ON:

        

Savings and negotiable interest bearing deposits

   $ 1,468      $ 736      $ 437   

Time deposits

     886        637        457   

Federal funds purchased

     10        3     

Other borrowed funds

     294        47        131   
  

 

 

    

 

 

    

 

 

 

TOTAL INTEREST PAID

   $ 2,658      $ 1,423      $ 1,025   
  

 

 

    

 

 

    

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2018 and 34% for 2017 and 2016. See disclosure of non-GAAP financial measures on pages 50 and 51.

 

21


Table of Contents

SCHEDULE I-D

Average Interest Rate Earned or Paid for Major Categories of

Interest Earning Assets And Interest Bearing Liabilities

 

For the Years Ended December 31,    2018      2017      2016  

AVERAGE RATE EARNED ON:

        

Loans

     4.85%        4.47%        4.34%  

Balances due from depository institutions

     2.16%        1.51%        .88%  

Available for sale securities:

        

  Taxable securities

     1.98%        1.52%        1.36%  

  Non-taxable securities

     4.66%        5.51%        5.37%  

  Other securities

     1.45%        2.56%        1.27%  

Held to maturity securities:

        

  Taxable securities

     2.86%        2.56%        2.15%  

  Non-taxable securities

     3.19%        3.76%        3.70%  
  

 

 

 

TOTAL (weighted average rate)(1)

     3.51%        3.17%        3.19%  
  

 

 

 

AVERAGE RATE PAID ON:

        

Savings and negotiable interest bearing deposits

     .46%        .21%        .12%  

Time deposits

     1.05%        .78%        .59%  

Federal funds purchased

     2.71%        .85%     

Other borrowed funds

     2.25%        2.50%        1.59%  
  

 

 

 

TOTAL (weighted average rate)

                     .64%                        .33%                        .23%  
  

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2018 and 34% for 2017 and 2016. See disclosure of non-GAAP financial measures on pages 50 and 51.

 

22


Table of Contents

SCHEDULE I-E

Net Interest Earnings and Net Yield on Interest Earning Assets

(In thousands, except percentages)

 

For the Years Ended December 31,    2018      2017      2016  

Total interest income (1)

   $             19,999      $             19,048      $             19,121  

Total interest expense

     2,658        1,423        1,025  
  

 

 

 

Net interest earnings

   $ 17,341      $ 17,625      $ 18,096  
  

 

 

 

Net yield on interest earning assets

     3.04%        2.94%        3.02%  
  

 

 

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2018 and 34% for 2017 and 2016. See disclosure of non-GAAP financial measures on pages 50 and 51.

 

23


Table of Contents

SCHEDULE I-F

Analysis of Changes in Interest Income and Interest Expense

(In thousands)

 

For the Years Ended December 31,    2018      2017      Increase
(Decrease)
     Volume      Rate      Rate/Volume  

INTEREST EARNED ON:

                 

Loans (1)

   $ 13,265       $ 12,970       $ 295       $ (742)      $ 1,100       $ (63)  

Balances due from depository institutions

     205         420         (215)        (277)        180         (118)  

Available for sale securities:

                 

  Taxable securities

     4,349         3,298         1,051         46         991         14   

  Non-taxable securities

     608         864         (256)        (145)        (134)        23   

  Other securities

     22         26         (4)        13         (11)        (6)  

Held to maturity securities:

                 

  Taxable securities

     970         753         217         115         89         13   

  Non-taxable securities

     580         717         (137)        (33)        (109)         
  

 

 

 

TOTAL INTEREST EARNED (2)

   $ 19,999       $ 19,048       $ 951       $ (1,023)      $ 2,106       $ (132)  
  

 

 

 

INTEREST PAID ON:

                 

Savings and negotiable interest bearing deposits

   $ 1,468       $ 736       $ 732       $ (75)      $ 899       $ (92)  

Time deposits

     886         637         249         17         227          

Federal funds purchased

     10                                  

Other borrowed funds

     294         47         247         279         (5)        (27)  
  

 

 

 

TOTAL INTEREST PAID

   $           2,658       $           1,423       $         1,235       $           222       $         1,127       $           (114)  
  

 

 

 

(1) Loan fees of $310 and $338 for 2018 and 2017, respectively, are included in these figures.

(2) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2018 and 34% for 2017. See disclosure of non-GAAP financial measures on pages 50 and 51.

 

24


Table of Contents

SCHEDULE I-F (continued)

Analysis of Changes in Interest Income and Interest Expense

(In thousands)

 

For the Years Ended December 31,    2017      2016      Increase
(Decrease)
     Volume      Rate      Rate/Volume  

INTEREST EARNED ON:

                 

Loans (1)

   $         12,970       $         14,232       $         (1,262)      $         (1,628)      $ 413       $           (47)  

Balances due from depository institutions

     420         277         143         (33)        199         (23)  

Available for sale securities:

                 

  Taxable securities

     3,298         2,558         740         387         306         47   

  Non-taxable securities

     864         1,123         (259)        (281)        29         (7)  

  Other securities

     26         22                (10)        23         (9)  

Held to maturity securities:

                 

  Taxable securities

     753         184         569         448         35         86   

  Non-taxable securities

     717         725         (8)        (19)        11      
  

 

 

 

TOTAL INTEREST EARNED (2)

   $ 19,048       $ 19,121       $ (73)      $ (1,136)      $         1,016       $ 47   
  

 

 

 

INTEREST PAID ON:

                 

Savings and negotiable interest bearing deposits

   $ 736       $ 437       $ 299       $ (8)      $ 312       $ (5)  

Time deposits

     637         457         180         26         146          

Federal funds purchased

                             

Other borrowed funds

     47         131         (84)        (95)        42         (31)  
  

 

 

 

TOTAL INTEREST PAID

   $ 1,423       $ 1,025       $ 398       $ (74)      $ 500       $ (28)  
  

 

 

 

(1) Loan fees of $338 and $389 for 2017 and 2016, respectively, are included in these figures.

(2) All interest earned is reported on a taxable equivalent basis using a tax rate of 34% for 2017 and 2016. See disclosure of non-GAAP financial measures on pages 50 and 51.

 

25


Table of Contents

SCHEDULE II-A

Book Value of Securities Portfolio

(In thousands)

 

December 31,    2018      2017      2016  

Available for sale securities:

        

U.S. Treasuries, U.S. Government agencies and Mortgage-backed securities

   $ 211,014       $ 230,736       $ 215,157   

States and political subdivisions

     11,096         14,470         17,963   
  

 

 

 

Total

   $         222,110       $         245,206       $         233,120   
  

 

 

 

Held to maturity securities:

        

U.S. Government Agencies

   $ 8,185       $ 8,185       $ 10,009   

States and political subdivisions

     46,413         42,978         36,677   

Corporate bonds

           1,464   
  

 

 

 

Total

   $ 54,598       $ 51,163       $ 48,150   
  

 

 

 

 

26


Table of Contents

SCHEDULE II-B

Maturity of Securities Portfolio at December 31, 2018

And Weighted Average Yields of Such Securities

(In thousands, except percentage data)

 

     Maturity  
     Within one year     After one year but
within five years
    After five years but
within ten years
    After ten years  
  

 

 

 
December 31,    Amount      Yield     Amount      Yield     Amount      Yield     Amount      Yield  

Available for sale securities:

                    

U.S. Treasuries, U.S. Government agencies and Mortgage-backed securities

   $ 24,770        1.29   $ 72,059        1.61   $ 31,165        2.23   $ 83,020        3.37%  

States and political subdivisions

     3,205        4.11     6,907        3.76     639        3.61     345        4.20%  
  

 

 

 

Total

   $     27,975        2.13   $ 78,966        2.00   $ 31,804        2.23   $ 83,365        3.37%  
  

 

 

 

Held to maturity securities:

                    

U.S. Government agencies

   $          $ 3,185        2.00   $ 5,000        2.04   $       

States and political subdivisions

     2,523        3.27     16,584        2.43     13,316        2.94     13,990        3.37%  
  

 

 

 

Total

   $ 2,523        3.27   $ 19,769        2.37   $ 18,316        2.76   $ 13,990        3.37%  
  

 

 

 

Note: The weighted average yields are calculated on the basis of cost. Average yields on investments in states and political subdivisions are based on their contractual yield. Available for sale securities are stated at fair value and held to maturity securities are stated at amortized cost.

 

27


Table of Contents

SCHEDULE III-A

Loan Portfolio

Loans by Type Outstanding (1) (In thousands)

 

December 31,    2018      2017      2016      2015      2014  

Real estate, construction

   $ 34,229        $ 32,211        $ 32,794        $ 36,347        $ 44,129    

Real estate, mortgage

     197,113          206,528          226,157          243,540          266,158    

Loans to finance agricultural production

              30          1,230    

Commercial and industrial

     35,076          35,174          48,361          50,520          37,441    

Loans to individuals for household, family and other consumer expenditures

     5,694          5,310          6,264          6,548          7,538    

Obligations of states and political subdivisions

     956          839          1,646          428          5,462    

All other loans

     278          387          133          144          449    
  

 

 

 

Total

   $       273,346        $       280,449        $       315,355        $       337,557        $       362,407    
  

 

 

 

(1) No foreign debt outstanding.

 

28


Table of Contents

SCHEDULE III-B

Maturities and Sensitivity to Changes in

Interest Rates of the Loan Portfolio as of December 31, 2018

(In thousands)

 

     Maturity  
December 31,    One year or less      Over one year
through 5 years
     Over 5 years      Total  

Real estate, construction

     $ 2,650          $ 14,565        $ 17,014        $ 34,229    

Real estate, mortgage

     3,450          82,964          110,699          197,113    

Commercial and industrial

     93          32,580          2,403          35,076    

Loans to individuals for household, family and other consumer expenditures

     56          5,215          423          5,694    

Obligations of states and political subdivisions

        226          730          956    

All other loans

        191          87          278    
  

 

 

 

Total

     $ 6,249          $ 135,741          $ 131,356          $ 273,346    
  

 

 

 

Loans with pre-determined interest rates

     $ 1,657          $ 100,771          $ 81,671          $ 184,099    

Loans with floating interest rates

     4,592          34,970          49,685          89,247    
  

 

 

 

Total

     $       6,249          $       135,741          $       131,356          $       273,346    
  

 

 

 

 

29


Table of Contents

SCHEDULE III-C

Non-Performing Loans (In thousands)

 

December 31,    2018      2017      2016      2015      2014  

Loans accounted for on a nonaccrual basis (1)

     $     8,250          $     13,810          $     11,854          $     15,186          $     33,298    

Loans which are contractually past due 90 or more days as to interest or principal payment, but are not included above

     55                146          763    

(1) The Bank places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. See “Note A – Business and Summary of Significant Accounting Policies” and “Note C – Loans” to the 2018 Consolidated Financial Statements in Item 8 in this Annual Report on Form 10-K for discussion of impaired loans.

 

30


Table of Contents

SCHEDULE IV-A

Summary of Loan Loss Expenses

(In thousands, except percentage data)

 

December 31,    2018     2017     2016     2015     2014      

Average amount of loans outstanding (1)(2)

     $       273,724       $       290,329       $       327,819     $       356,294     $       362,649      
  

 

 

 

Balance of allowance for loan losses at beginning of period

     $ 6,153       $ 5,466       $ 8,070     $ 9,206     $ 8,934      

Loans charged-off:

          

Commercial, financial and agricultural

     372       36       509       275       4,930      

Consumer and other

     1,038       243       3,013       3,833       2,800      
  

 

 

 

Total loans charged-off

     1,410       279       3,522       4,108       7,730      
  

 

 

 

Recoveries of loans:

          

Commercial, financial and agricultural

     112       11       62       19       277      

Consumer and other

     363       839       288       371       321      
  

 

 

 

Total recoveries

     475       850       350       390       598      
  

 

 

 

Net loans charged-off (recovered)

     935       (571     3,172       3,718       7,132      
  

 

 

 

Provision for loan losses charged to operating expense

     122       116       568       2,582       7,404      
  

 

 

 

Balance of allowance for loan losses at end of period

     $ 5,340       $ 6,153       $ 5,466     $ 8,070     $ 9,206      
  

 

 

 

Ratio of net charge-offs during period to average loans outstanding

     0.34     (.20 %)      0.97     1.04     1.97%  
  

 

 

 

 

(1)

  Net of unearned income.

(2)

  Includes nonaccrual loans.

 

31


Table of Contents

SCHEDULE IV-B

Allocation of the Allowance for Loan Losses

(In thousands except percentage data)

 

     2018      2017      2016      2015      2014  
December 31,    Amount      % of
Loans to
Total
Loans
     Amount      % of
Loans to
Total
Loans
     Amount      % of
Loans to
Total
Loans
     Amount      % of
Loans to
Total
Loans
     Amount      % of  
Loans to  
Total  
Loans  
 

Real estate, construction

   $ 428        12      $ 242        11      $ 262        10      $ 778        11      $ 1,110        12    

Real estate, mortgage

     4,181        72        4,574        73        4,150        71        5,964        70        7,182        73    

Loans to finance agricultural production

                       1        1        2        1    

Commercial and industrial

     599        12        1,161        12        850        15        1,075        14        587        10    

Loans to individuals for household, family and other consumer expenditures

     128        2        174        2        200        2        247        2        282        2    

Obligations of states and political subdivisions

     1        1        1        1           1           1           1    

All other loans

     3        1        1        1        4        1        5        1        43        1    
  

 

 

 

Total

     $       5,340        100      $       6,153        100      $       5,466        100      $       8,070        100      $       9,206        100    
  

 

 

 

 

32


Table of Contents

SCHEDULE V

Summary of Average Deposits and Their Yields

(In thousands, except percentage data)

 

     2018     2017     2016  
Years Ended December 31,    Amount      Rate     Amount      Rate     Amount      Rate  

Demand deposits in domestic offices

     $       121,055        N/A     $     132,748        N/A     $     129,788        N/A       

Negotiable interest bearing deposits in domestic offices

     257,750        .55     295,413        .24     300,306        .14%   

Savings deposits in domestic offices

     59,447        .09     57,939        .05     59,495        .05%   

Time deposits in domestic offices

     84,168        1.05     82,038        .78     77,644        .59%   
  

 

 

 

Total

     $       522,420        .73   $ 568,138        .49   $ 567,233        .36%   
  

 

 

 

Certificates of deposit in amounts of $100,000 or more by the amount of time remaining until maturity as of December 31, 2018, are as follows (in thousands):

 

Remaining maturity:

  

3 months or less

     $         19,350  

Over 3 months through 6 months

     10,800  

Over 6 months through 12 months

     8,000  

Over 12 months

     14,637  
  

 

 

 

Total

     $ 52,787  
  

 

 

 

 

33


Table of Contents

SCHEDULE VI

Short Term Borrowings

(In thousands, except percentage data)

 

     2018     2017     2016  

Balance, December 31,

   $ 35,000     $ 10,000     $ 5,000      

Weighted average interest rate at December 31,

     2.65     1.45     1.11%  

Maximum outstanding at any month-end during year

   $       35,000     $       11,198     $       8,383      

Average amount outstanding during year

   $ 13,044     $ 1,883     $ 8,240      

Weighted average interest rate

     2.27     2.44     1.59%  

Note: Short term borrowings include federal funds purchased from other banks and short term borrowings from the Federal Home Loan Bank.

 

34


Table of Contents

SCHEDULE VII

Interest Sensitivity/Gap Analysis

(In thousands)

 

December 31, 2018:    0 - 3 Months      4 - 12 Months      1 - 5 Years      Over 5 Years      Total  

ASSETS:

              

Loans (1)

     $ 91,599      $ 12,229      $ 82,223      $ 79,045      $       265,096    

Available for sale securities

     4,996        22,979        78,966        115,169        222,110    

Held to maturity securities

     520        2,003        19,769        32,306        54,598    
  

 

 

 

Totals

     $ 97,115      $ 37,211      $ 180,958      $ 226,520      $ 541,804    
  

 

 

 

FUNDING SOURCES:

              

Interest bearing deposits

     $ 304,367      $ 29,307      $ 25,320      $        $ 358,994    

Borrowings from FHLB

     35,013        49        261        819        36,142    
  

 

 

 

Totals

     $ 339,380      $ 29,356      $ 25,581      $ 819      $ 395,136    
  

 

 

 

REPRICING/MATURITY GAP:

              

Period

     $       (242,265)      $ 7,855      $ 155,377      $ 225,701     

Cumulative

     (242,265)        (234,410)        (79,033)        146,668     

Cumulative Gap/Total Assets

     (39%)        (38%)        (13%)        24%     

 

 

(1) Amounts stated include fixed and variable rate loans that are still accruing interest. Variable rate loans are included in the next period in which they are subject to a change in rate. The principal portions of scheduled payments on fixed instruments are included in the period in which they become due or mature.

Capital Resources

Information about the Company’s capital resources is included in “Note J – Shareholders’ Equity” to the 2018 Consolidated Financial Statements in this Annual Report on Form 10-K.

 

35


Table of Contents

ITEM 1a - RISK FACTORS

An investment in the Company’s stock involves a number of risks. Investors should carefully consider the following risks as well as the other information in this Annual Report on Form 10-K and the documents incorporated by reference before making an investment decision. The realization of any of the risks described below could have a material adverse effect on the Company and the price of its common stock.

RISKS RELATING TO THE COMPANY’S BUSINESS

Greater than expected loan losses may adversely affect the Company’s earnings.

The Company’s investment and loan portfolio subject the Company to credit risk. Credit losses are always inherent in the banking business but the continuing challenging economic environment in the Company’s trade area presents even more exposure to loss. The Company makes various assumptions and judgments about the collectibility of its loan portfolio and provides an allowance for loan losses based on a number of factors. The Company believes that its current allowance for loan losses is adequate and appropriate. However, if the Company’s assumptions or judgments prove to be incorrect, the allowance for loan losses may not be sufficient to cover actual loan losses. In the event that our loan customers do not repay their loans according to the terms of the loans, and the collateral securing the repayment of these loans is insufficient to cover any remaining loan balances, the Company could experience significant loan losses or increase the provision for loan losses or both, which could have a material adverse effect on its operating results. In fact, these conditions were a significant cause of the net losses experienced by the Company in prior years. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.

The Company has a high concentration of loans secured by real estate, and a downturn in the real estate market could materially and adversely affect earnings.

A significant portion of the Company’s loan portfolio is dependent on real estate. At December 31, 2018, approximately 85% of the Company’s loans had real estate as a primary or secondary component of collateral. The collateral in each case provides an alternate source of repayment if the borrower defaults and may deteriorate in value during the time the credit is extended. Further deterioration in the value of real estate generally or in the Company’s trade area specifically could significantly impair the value of the collateral and restrict the ability to sell the collateral upon foreclosure. Furthermore, it is likely that the Company would be required to increase the provision for loan losses. If the Company were required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate value or to increase the allowance for loan losses, the Company’s profitability and financial condition could be adversely impacted.

The Company has a high concentration of exposure to a number of industries.

The Company has concentrations of loan exposure to the hotel/motel and gaming industries. At December 31, 2018, these exposures were approximately $44,112,000 and $25,767,000 or 16% and 9%, respectively, of the total loan portfolio. Economic conditions have negatively impacted tourism, which is one of the major factors for success in these industries. Given the size of these relationships, a significant loss in either of these portfolios could materially and adversely affect the Company’s earnings.

 

36


Table of Contents

The continuing economic downturn or a natural disaster, especially one affecting the Company’s trade area, could adversely affect the Company.

The Company’s trade area includes the Mississippi Gulf Coast and portions of southeast Louisiana and southwest Alabama. With the exception of a number of credits that are considered out of area, the Company’s credit exposure is generally limited to the Mississippi Gulf Coast. Although the national economy has shown signs of improvement, local conditions appear to be lagging this trend. As a result, the Company is at risk from continuing adverse business developments in its trade area, including declining real estate value, increasing loan delinquencies, personal and business bankruptcies and unemployment rates. The recent decline in oil prices has effected the economy in southeast Louisiana and may negatively impact the entire trade area. The Company is also at risk to weather-related disasters including hurricanes, floods and tornadoes. If the economy in the Company’s trade area experiences a natural disaster or worsening economic conditions, our operating results could be negatively impacted.

Economic factors could negatively impact the Company’s liquidity.

In addition to funds provided by its banking activities such as deposits, loan payments and proceeds from the maturity of investment securities, the Company’s liquidity needs have traditionally been met through the purchase of federal funds, often on an unsecured basis, and advances from the Federal Home Loan Bank (“FHLB”). Disruption in the financial markets in previous years negatively impacted the availability of these unsecured funds. As a result, the Company increased its borrowing lines with the FHLB and secured approval to participate in the Federal Reserve’s Discount Window Primary Credit Program.

The Company is subject to industry competition which may have an impact on its success.

The profitability of the Company depends on its ability to compete successfully. The Company operates in a highly competitive financial services environment. Certain competitors are larger and may have more resources than the Company. The Company faces competition in its trade area from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, insurance companies, brokerage and investment banking firms and other financial intermediaries. Some of these non-bank competitors are not subject to the same extensive regulations that govern the Company or the Bank and may have greater flexibility in competing for business. Increased competition could require the Company to increase the rates paid on deposits or lower the rates offered on loans, which could adversely affect and also limit future growth and earnings prospects.

The Company’s profitability is vulnerable to interest rate fluctuations.

The Company’s profitability is dependent to a large extent on net interest income, which is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company is asset sensitive to market interest rates, as its assets reprice more quickly to changes in interest rates than do its liabilities. Interest rates dropped by the unprecedented amount of 400 basis points during 2008 as the Federal Reserve, through its Federal Open Market

 

37


Table of Contents

Committee, attempted to stabilize the financial markets, reduce the effects of the recession and stimulate the economy. In 2016, 2017 and 2018, the Federal Reserve increased the discount rate 125 basis points with the fed funds and prime interest rates increasing as a result. Discount or fed funds rate changes that occur in 2019 may affect the Company’s earnings in the current year and/or in the future.

Changes in the policies of monetary authorities and other government action could adversely affect the Company’s profitability.

Many factors affect the demand for loans and the ability to attract deposits, including changes in government economic and monetary policies, particularly by the Federal Reserve, modifications to tax, banking and credit laws and regulations, national, state and local economic growth rates and employment rates. Previous legislation such as Emergency Economic Stabilization Act of 2008 (“EESA”) and American Recovery and Reinvestment Act of 2009 (“ARRA”) were passed to address issues facing certain financial institutions, improve the general availability of credit for consumers and businesses, stimulate the national economy and promote long-term growth and stability. Further regulation impacting the Company and its operations include The Dodd-Frank Act, which was passed to increase transparency, accountability and oversight over financial firms and products as well as to provide protection to consumers. The new capital requirements under BASEL III raise minimum capital requirements, change the definition of capital, create a capital conservation buffer and increase risk weights for certain assets and exposures. There can be no assurance that EESA, ARRA, Dodd-Frank or BASEL III will achieve their intended purposes. Furthermore, their failure could result in continuing or worsening economic and market conditions, and this could adversely affect our operations.

The Company is subject to regulation by various federal and state entities.

The Company is subject to the regulations of the SEC, the Federal Reserve Board, the FDIC and the MDBCF. New regulations issued by these agencies, including but not limited to those relating to the Patriot Act, the Bank Secrecy Act, The Dodd-Frank Act and the Consumer Financial Protection Bureau, may adversely affect the Company’s ability to carry on its business activities. The Company is also subject to various other federal and state laws and certain changes in these laws and regulations may adversely affect the Company’s operations. Noncompliance with certain of these regulations may impact the Company’s business plans or result in sanctions by regulatory agencies and/or civil money penalties, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, it cannot assure that such violations will be prevented.

The Company is also subject to laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, as well as the accounting rules and regulations of the SEC and the Financial Accounting Standards Board. Changes in accounting rules could adversely affect the reported financial statements or results of operations of the Company and may also require additional effort or cost to implement.

 

38


Table of Contents

There may be risks resulting from extensive use of models in the Company’s business.

The Company relies on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, developing presentations made to market analysts and others, creating loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, calculating regulatory capital levels and estimating the fair value of financial instruments and balance sheet items. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If models for determining interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If models for determining probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If models to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the company could realize upon sale or settlement of such financial instruments. Any such failure in the analytical or forecasting models could have a material adverse effect on the Company’s financial condition or results of operations.

Also, information the Company provides to its regulators based on poorly designed or implemented models could be inaccurate or misleading. Certain decisions that the regulators make, including those related to capital distributions and dividends to the Company’s shareholders, could be adversely affected due to the regulator’s perception that the quality of the Company’s models used to generate the relevant information is insufficient.

The use of third-party service providers by the Company and the Bank and other ongoing third-party business relationships are subject to increasing regulatory requirements and attention.

The Company and the Bank regularly use third-party service providers and subcontractors as part of their businesses. The Company also has substantial ongoing business relationships with partners and other third-parties, and relies on certain third-parties to provide products and services necessary to maintain day-to-day operations. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by regulators, including the FRB, OCC, CFPB and FDIC. Under regulatory guidance, the Company and the Bank are required to apply stringent due diligence, conduct ongoing monitoring and maintain effective control over third-party service providers and subcontractors and other ongoing third-party business relationships. The Company expects that the regulators will hold it responsible for deficiencies in its oversight and control of its third-party relationships and in the performance of the parties with which the Company or the Bank has these relationships. The Company and the Bank maintain a system of policies and procedures designed to ensure adequate due diligence is performed and to monitor vendor risks. While the Company believes these policies and procedures effectively mitigate risk, if the regulators conclude that the Company or the Bank has not exercised adequate oversight and control over third-party service providers and subcontractors or other ongoing third-party business relationships or that such third-parties have not performed appropriately, the Company and the Bank could be subject to enforcement actions, including civil monetary penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation.

 

39


Table of Contents

The Company’s controls and procedures may fail or be circumvented.

The Company’s internal controls, disclosures controls and procedures, and corporate governance policies and procedures are based in part on assumptions, and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with the regulations related to controls and procedures could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Dodd-Frank Act and other legislative and regulatory initiatives relating to the financial services industry could materially affect the Company’s results of operations, financial condition, liquidity or the market price of the Company’s Common Stock.

The Dodd-Frank Act, as implemented by the regulations currently being promulgated by various federal regulatory agencies, along with other regulatory initiatives relating to the financial services industry, could materially affect the Company’s results of operations, financial condition, liquidity or the market price of the Company’s common stock. The Company is unable to completely evaluate these potential effects at this time. It is also possible that these measures could adversely affect the creditworthiness of counterparties, which could increase the Company’s risk profile.

The Company may be subject to more stringent capital and liquidity requirements which would adversely affect its net income and future growth.

The Dodd-Frank Act applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will change the way in which hybrid securities, such as trust preferred securities, are treated for purposes of determining a bank holding company’s regulatory capital. On June 14, 2011, the federal banking agencies published a final rule regarding minimum leverage and risk-based capital requirements for banks and bank holding companies consistent with the requirements of Section 171 of the Dodd-Frank Act. For a more detailed description of the minimum capital requirements see “Supervision and Regulation – Capital Standards”. The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. These requirements, and any other new regulations, could adversely affect the Company’s ability to pay dividends, or could require the Company to reduce business levels or to raise capital, including in ways that may adversely affect the Company’s results of operations or financial condition.

In addition, on September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III. In 2013, regulators adopted enhancements to U.S. capital standards based on Basel III. The revised standards create a new emphasis on Tier 1 common equity, modify eligibility criteria for regulatory capital instruments, and modify the methodology for calculating risk-weighted assets. The revised standards require the following:

 

40


Table of Contents
 

Tier 1 Common Equity. For all supervised financial institutions, including the Company and the Bank, the ratio of Tier 1 common equity to risk-weighted assets (“Tier 1 Common Equity Capital ratio”) must be at least 4.5%. To be “well capitalized” the Tier 1 Common Equity Capital ratio must be at least 6.5%. If a capital conservation buffer of an additional 2.5% above the minimum 4.5% (or 7% overall) is not maintained, special restrictions would apply to capital distributions, such as dividends and stock repurchases, and on certain compensatory bonuses. Tier 1 common equity capital consists of core components of Tier 1 capital: common stock plus retained earnings net of goodwill, other intangible assets, and certain other required deduction items.

 

 

Tier 1 Capital Ratio. For all banking organizations, including the Bank, the ratio of Tier 1 capital to risk-weighted assets must be at least 6%. The threshold is raised from the current 4%, and the risk-weighting method is changed as mentioned above. To be “well capitalized” the Tier 1 capital ratio must be at least 8%.

 

 

Total Capital Ratio. For all supervised financial institutions, including the Company and the Bank, the ratio of total capital to risk-weighted assets must be at least 8%. Although this threshold is unchanged from current requirements, as mentioned above the method for risk-weighting assets has been changed. As a result of that method change, many banks could have experienced a reduction in this ratio if the change had been effective immediately when the rules were adopted.

 

 

Leverage Ratio – Base. For all banking organizations, including the Bank, the leverage ratio must be at least 4%. To be “well capitalized” the leverage ratio must be at least 5%.

 

 

Leverage Ratio – Supplemental. For the largest internationally active banking organizations, not including the Bank, a minimum supplementary leverage ratio must be maintained that takes into account certain off-balance sheet exposures.

The revised standards took effect on January 1, 2014 for the larger, so-called advanced-approaches institutions, and on January 1, 2015 for all other institutions, including the Company and the Bank. The capital conservation buffer requirement is subject to a phase-in period.

Additionally, ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which implements CECL as a new impairment model based on expected credit losses, will require the Company and the Bank to recognize all expected credit losses over the life of a loan based on historical experience, current conditions and reasonable and supportable forecasts. CECL generally is expected to result in earlier recognition of credit losses, which would increase reserves and decrease capital. The Company cannot predict the impact of CECL on its reserves and capital; however, the impact could be material.

The regulatory capital rules applicable to the Company and the Bank may continue to evolve. Additionally, certain provisions of the EGRRCPA have the potential to limit the application of current capital rules to the Company and the Bank if certain elections are made by the Company or Bank, subject to further rulemaking that has not yet been enacted. Management cannot predict the effect that any changes to current capital requirements would have on the Company and the Bank.

 

41


Table of Contents

Future increases in minimum capital requirements could adversely affect the Company’s net income. Furthermore, the Company’s failure to comply with the minimum capital requirements could result in regulators taking formal or informal actions against the Company which could restrict future growth or operations.

The Company relies heavily on technology and computer systems, and disruptions of, failures of, advances in and changes in technology could significantly affect business.

As is customary in the banking industry, the Company is dependent upon automated and non-automated systems to record and process our transaction volume. This poses the risk that technical system flaws, employee errors or tampering or manipulation of those systems by employees, customers or outsiders will result in losses. Any such losses, which may be difficult to detect, could adversely affect the Company’s financial condition or results of operations. In addition, the occurrence of such a loss could expose the Company to reputational risk, the loss of customer business, additional regulatory scrutiny or civil litigation and possible financial liability. The Company may also be subject to disruptions of operating systems arising from events that are beyond our control, such as computer viruses, communication and energy disruption and unethical individuals with technological ability to cause disruptions or failures of data processing systems. The Company’s ability to compete depends on the ability to continue to adapt to changes in technology on a timely and cost-effective basis to meet customers’ demands. The ability of the Company and the Bank to effectively utilize new technologies to address customer needs and create operating efficiencies could materially affect future prospects. Management cannot provide any assurances that the Company will be successful in utilizing such new technologies. Incorporation of new products and services, such as internet and mobile banking services, may require significant resources and expose the Company and the Bank to additional risks, including cybersecurity risk.

Changes in accounting standards may affect how the Company reports its financial condition and results of operations.

The Company’s accounting policies and methods are fundamental to how it records and reports its financial condition and results of operations. From time to time, the Financial Accounting Standards Board (the “FASB”) changes the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. The most recent economic recession resulted in increased scrutiny of accounting standards by regulators and legislators, particularly as they relate to fair value accounting principles. In addition, ongoing efforts to achieve convergence between U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards may result in changes to GAAP. Any such changes can be difficult to predict and can materially affect how the Company records and reports its financial condition or results of operations. For example, in June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a methodology that reflects all current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information

 

42


Table of Contents

to determine credit loss estimates. The Company intends to adopt ASU 2016-13 during the first quarter of 2020, and adoption of this ASU could materially affect its allowance for loan loss methodology, financial condition, capital levels and results of operations, including expenses the Company may incur in implementing this ASU. For additional details regarding recently adopted and pending accounting pronouncements, see Note A – Business and Summary of Significant Accounting Policies included in Part II. Item 8. – Financial Statements and Supplementary Data of this report.

RISKS RELATING TO AN INVESTMENT IN THE COMPANY’S COMMON STOCK

Securities issued by the Company are not FDIC insured.

The Company’s common stock is not a savings or deposit account or other obligation of the Bank and is not insured by the FDIC, the Bank Insurance Fund or any other government agency or instrumentality, or any private insurer and is subject to investment risk, including the possible loss of principal.

The directors of the Company and executive management own a significant number of shares of stock, allowing further control over business and corporate affairs.

The Company’s directors and executive officers beneficially own approximately 10% of the outstanding common stock of Peoples Financial Corporation. As a result, in addition to their day-to-day management roles, they will be able to exercise significant influence on the Company’s business as shareholders, including influence over election of the Board and the authorization of other corporate actions requiring shareholder approval.

The Company’s stock price can be volatile.

Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things:

 

 

actual or anticipated variations in quarterly results of operations;

 

 

recommendations by securities analysts;

 

 

operating and stock price performance of other companies that investors deem comparable to the Company;

 

 

news reports relating to trends, concerns and other issues in the banking and financial services industry;

 

 

perceptions in the marketplace regarding the Company or its competitors;

 

 

new technology used, or services offered, by competitors;

 

43


Table of Contents
 

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or its competitors;

 

 

failure to integrate acquisitions or realize anticipated benefits from acquisitions;

 

 

changes in government regulations; and

 

 

geopolitical conditions such as acts or threats of terrorism or military conflicts.

Additionally, general market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results.

The trading volume in the Company’s common stock is less than that of other larger bank holding companies.

The Company’s common stock is listed for trading on The OTCQX Best Market. The average daily trading volume in the Company’s common stock is low, generally less than that of many of its competitors and other larger bank holding companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause volatility in the price of the Company’s common stock.

Provisions of the Company’s articles of incorporation and bylaws, Mississippi law and state and federal banking regulations could delay or prevent a takeover by a third party.

Certain provisions of the Company’s articles of incorporation and bylaws and of state and federal law may make it more difficult for someone to acquire control of the Company. Under federal law, subject to certain exemptions, a person, entity or group must notify the federal banking agencies before acquiring 10% or more of the outstanding voting stock of a bank holding company, including the Company’s shares. Banking agencies review the acquisition to determine if it will result in a change of control. The banking agencies have 60 days to act on the notice, and take into account several factors, including the resources of the acquirer and the antitrust effects of the acquisition. There are also Mississippi statutory provisions and provisions in the Company’s articles of incorporation and bylaws that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in the Company’s articles and bylaws could result in the Company being less attractive to a potential acquirer.

The Company’s future ability to pay dividends is subject to restrictions.

Since the Company is a holding company with no significant assets other than the Bank, the Company has no material source of funds other than dividends received from the Bank. Therefore, the ability to pay dividends to the shareholders will depend on the Bank’s ability to pay dividends to the Company. Moreover, banks and bank holding companies are both subject to certain federal and state regulatory restrictions on cash dividends. Currently, the Federal Reserve, the FDIC and the MDBCF must approve the declaration and payment of dividends by the Company and the Bank, respectively.

 

44


Table of Contents

ITEM 1b - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

The principal properties of the Company are its 18 business locations, including the Main Office, which is located at 152 Lameuse Street in Biloxi, MS, 39530. The Armed Forces Retirement Home (“AFRH”) Branch located at 1800 Beach Drive, Gulfport, MS 39507, is located in space provided by the AFRH. The Keesler Branch located at 1507 Meadows Drive, Keesler AFB, MS 39534, is rented from the Department of Defense. All other branch locations are owned by the Company. The addresses of the other branch locations are:

 

Bay St. Louis Office

  

408 Highway 90 East, Bay St. Louis, MS 39520

Cedar Lake Office

  

1740 Popps Ferry Road, Biloxi, MS 39532

Diamondhead Office

  

5429 West Aloha Drive, Diamondhead, MS 39525

D’Iberville-St. Martin Office        

  

10491 Lemoyne Boulevard, D’Iberville, MS 39540

Downtown Gulfport Office

  

1105 30th Avenue, Gulfport, MS 39501

Gautier Office

  

2609 Highway 90, Gautier, MS 39553

Handsboro Office

  

0412 E. Pass Road, Gulfport, MS 39507

Long Beach Office

  

298 Jeff Davis Avenue, Long Beach, MS 39560

Ocean Springs Office

  

2015 Bienville Boulevard, Ocean Springs, MS 39564

Orange Grove Office

  

12020 Highway 49 North, Gulfport, MS 39503

Pass Christian Office

  

301 East Second Street, Pass Christian, MS 39571

Saucier Office

  

17689 Second Street, Saucier, MS 39574

Waveland Office

  

470 Highway 90, Waveland, MS 39576

West Biloxi Office

  

2560 Pass Road, Biloxi, MS 39531

Wiggins Office

  

1312 S. Magnolia Drive, Wiggins, MS 39577

ITEM 3 - LEGAL PROCEEDINGS

Information relating to legal proceedings is included in “Note M – Contingencies” to the 2018 Consolidated Financial Statements which is in Item 8 in this Annual Report on Form 10-K.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

 

45


Table of Contents

PART II

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Dividends to the Company’s shareholders can generally be paid only from dividends paid to the Company by its bank subsidiary. Consequently, dividends are dependent upon the earnings, capital needs, regulatory policies and statutory limitations affecting the bank subsidiary. The Company and the bank subsidiary may not declare or pay any cash dividends without prior written approval of their regulators.

At December 31, 2018, there were 433 holders of the common stock of the Company, which does not reflect persons or entities that hold the common stock in nominee or “street” name through various brokerage firms. At December 31, 2018, there were 4,943,186 shares issued and outstanding.

The Company’s stock is traded under the symbol PFBX. Until December 15, 2017, the stock was traded on the NASDAQ Capital Market (“NASDAQ”). To reduce costs, the Company delisted from NASDAQ and began trading on the OTCQX Best Market (“OTCQX”) on December 18, 2017.

The following table sets forth the high and low bid prices of the Company’s common stock for the periods indicated by NASDAQ for all quarters in 2017 and by OTCQX for the fourth quarter of 2017 and all quarters in 2018. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

Year

  

Quarter

    

High

    

Low

    

Dividend

Per share

 

2018

     1st      $             14.70      $             12.60      $                        
     2nd        14.25        13.65        .01  
     3rd        14.08        12.95     
     4th        13.50        11.20        .01  

2017

     1st      $ 16.35      $ 13.80      $    
     2nd        15.27        12.60     
     3rd        14.95        12.85        .01  
     4th - NASDAQ        15.30        12.05     
     4th - OTCQX        13.25        12.21     

 

46


Table of Contents

ITEM 6 - SELECTED FINANCIAL DATA (In thousands except per share data)

 

      2018      2017      2016      2015      2014  

Balance Sheet Summary

              

Total assets

     $ 616,786      $ 650,424      $ 688,014      $ 641,004      $ 668,895    

Available for sale securities

     222,110        245,664        233,578        202,807        215,122    

Held to maturity securities

     54,598        51,163        48,150        19,025        17,784    

Loans, net of unearned discount

     273,346        280,449        315,355        337,557        362,407    

Deposits

     473,506        529,570        575,016        512,707        516,920    

Borrowings from FHLB

     36,142        11,198        6,257        18,409        38,708    

Shareholders’ equity

     86,934        89,499        88,461        91,839        94,951    

Summary of Operations

              

Interest income

     $ 19,750      $ 18,503      $ 18,493      $ 19,311      $ 22,156    

Interest expense

     2,658        1,423        1,025        875        1,441    
  

 

 

 

Net interest income

     17,092        17,080        17,468        18,436        20,715    

Provision for loan losses

     122        116        568        2,582        7,404    
  

 

 

 

Net interest income after provision for loan losses

     16,970        16,964        16,900        15,854        13,311    

Non-interest income

     6,103        6,965        6,549        6,898        8,619    

Non-interest expense

     22,480        22,251        23,204        28,106        27,208    
  

 

 

 

Income (loss) before taxes

     593        1,678        245        (5,354)        (5,278)    

Income tax expense (benefit)

     (36)        (1,080)        78        (762)        4,726    
  

 

 

 

Net income (loss)

     $ 629      $ 2,758      $ 167      $ (4,592)      $ (10,004)    
  

 

 

 

Per Share Data

              

Basic and diluted earnings (loss) per share

     $ .13      $ .54      $ .03      ($ .90)      ($ 1.95)    

Dividends per share

     .02        .01              .10    

Book value

     17.59        17.84        17.27        17.93        18.53    

Weighted average number of shares

     5,031,778        5,123,076        5,123,186        5,123,186        5,123,186    

Selected Ratios

              

Return on average assets

     0.10%        0.41%        0.02%        (.69%)        (1.38%)    

Return on average equity

     0.73%        3.08%        0.19%        (4.92%)        (10.31%)    

Primary capital to average assets

     14.43%        14.34%        13.99%        15.06%        14.38%    

Risk-based capital ratios:

              

Tier 1

     24.05%        23.87%        21.69%        20.58%        20.70%    

Total

     25.30%        25.12%        22.94%        21.83%        21.95%    

 

47


Table of Contents

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

Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2018, 2017 and 2016. These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report.

FORWARD-LOOKING INFORMATION

Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (“FASB”) issued new accounting standards updates in 2018, which have been disclosed in Note A to the Consolidated Financial Statements. The Company does not expect that these updates discussed in the Notes will have a material impact on its financial position, results of operations or cash flows. The Company adopted Accounting Standards Update 2014-09, Revenue from Contract with Customers (Topic 606) and Accounting Standards Update 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that Clarifies the Guidance in ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10), effective January 1, 2018, neither of which had a material effect on its financial position, results of operations or cash flows. The Company is currently working on the implementation of Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Further disclosure relating to these efforts in included in Note A.

 

48


Table of Contents

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Investments

Investments which are classified as available for sale are stated at fair value. A decline in the market value of an investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. The determination of the fair value of securities may require Management to develop estimates and assumptions regarding the amount and timing of cash flows.

Allowance for Loan Losses

The Company’s allowance for loan losses (“ALL”) reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of the financial statements. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect 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 GAAP. All credit relationships with an outstanding balance of $100,000 or greater that are included in Management’s loan watch list are individually reviewed for impairment. All losses are charged to the ALL when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the ALL at the time of receipt.

 

49


Table of Contents

Other Real Estate

Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. If Management determines that the fair value of a property has decreased subsequent to foreclosure, the Company records a write down which is included in non-interest expense.

Employee Benefit Plans

Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.

Income Taxes

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

GAAP Reconciliation and Explanation

This report contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies.

 

50


Table of Contents

A reconciliation of these operating performance measures to GAAP performance measures for the years ended December 31, 2018, 2017 and 2016 is below.

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES

(in thousands)

 

Years Ended December 31,    2018      2017      2016  

Interest income reconciliation:

        

Interest income - taxable equivalent

    $ 19,999      $ 19,048      $ 19,121    

Taxable equivalent adjustment

     (249)        (545)        (628)   
  

 

 

 

Interest income (GAAP)

    $ 19,750      $ 18,503      $ 18,493    
  

 

 

 

Net interest income reconciliation:

        

Net interest income - taxable equivalent

    $ 17,341      $ 17,625      $ 18,096    

Taxable equivalent adjustment

     (249)        (545)        (628)   
  

 

 

 

Net interest income (GAAP)

    $             17,092      $             17,080      $             17,468    
  

 

 

 

OVERVIEW

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

The Company recorded net income of $629,000 for 2018 compared with net income of $2,758,000 and $167,000 for 2017 and 2016, respectively. Results in 2018 included a significant loss from other investments and increased expenses related to other real estate as compared with 2017. Results in 2017 were significantly impacted by the continuing decrease in the provision for the allowance for loan losses, a non-recurring gain from the redemption of death benefits on bank owned life insurance and a tax benefit as compared with 2016.

Managing the net interest margin in the Company’s highly competitive market continues to be very challenging. In 2018, interest income increased as interest and fees on loans increased $295,000 and interest on mortgage-backed securities improved $1,313,000 as compared with 2017. This increase however was almost entirely offset by the increase in interest expense in the current year. While the decrease in interest and fees on loans of $1,262,000 was offset by an increase on interest and dividends on securities of $1,130,000, net interest income was also impacted by the increase in interest expense of $398,000 for 2017 as compared with 2016. The increase in interest expense on deposits resulted from the increase in cost of funds during 2017.

 

51


Table of Contents

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be emphasized as the local economy has negatively impacted collateral values and borrowers’ ability to repay their loans. The Company’s nonaccrual loans totaled $8,250,000 and $13,810,000 at December 31, 2018 and 2017, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses. The Company is working diligently to address and reduce its non-performing assets, and some stability in collateral values has occurred. The provision for the allowance for loan losses was $122,000, $116,000 and $568,000 for 2018, 2017 and 2016, respectively.

Non-interest income decreased $862,000 for 2018 as compared with 2017 and increased $416,000 for 2017 as compared with 2016. Results for 2018 included a $274,000 loss from other investments. Results for 2017 included a non-recurring gain of $429,000 from the redemption of death benefits on bank owned life insurance.

Non-interest expense increased $229,000 for 2018 as compared with 2017 and decreased $953,000 for 2017 as compared with 2016. The increase in 2018 was primarily the result of increased writedowns of other real estate of $304,000. The decrease for 2017 was primarily the result of a decrease in net occupancy of $202,000 and the decrease in FDIC and state banking assessments of $477,000.

In 2018 and 2017, the Company recorded an income tax benefit as a result of the release of a part of its valuation allowance on deferred assets and the correction of refunds for prior years. Income tax expense in 2016 related to the resolution of an examination by the Internal Revenue Service.

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.

2018 as compared with 2017

The Company’s average interest-earning assets decreased approximately $30,425,000, or 5%, from approximately $600,369,000 for 2017 to approximately $569,944,000 for 2018. Average loans decreased approximately $16,605,000 due to principal payments, maturities, charge-offs and foreclosures on existing loans significantly exceeding new loans. Average balances due from depository institutions decreased approximately $18,321,000 based on the liquidity needs of the bank subsidiary. The average yield on interest-earning assets was 3.17% for 2017 compared with

 

52


Table of Contents

3.51% for 2018. The yield on average loans increased from 4.47% for 2017 to 4.85% for 2018 as a result of the increase in prime rate during 2017 and 2018. The yield on taxable available for sale securities increased from 1.52% for 2017 to 1.98% for 2018 as the Company changed its investment strategy to improve yield while not compromising duration and credit risk.

Average interest-bearing liabilities decreased approximately $22,849,000, or 5%, from approximately $437,627,000 for 2017 to approximately $414,778,000 for 2018. Average savings and interest-bearing DDA balances decreased approximately $36,155,000 primarily as several large commercial customers relocated their funds to other institutions in the current year. Average borrowings from the Federal Home Loan Bank (“FHLB”) increased approximately $11,161,000 due to the liquidity needs of the bank subsidiary. The average rate paid on interest-bearing liabilities increased 31 basis points, from .33% for 2017 to .64% for 2018. This increase was the result of increased rates.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.94% for 2017 as compared with 3.04% for 2018.

2017 as compared with 2016

The Company’s average interest-earning assets increased approximately $1,687,000, or .28%, from approximately $598,682,000 for 2016 to approximately $600,369,000 for 2017. Average loans decreased approximately $37,490,000 due to principal payments, maturities, charge-offs and foreclosures on existing loans significantly exceeding new loans. Average taxable held to maturity securities increased approximately $20,827,000 and average taxable available for sale securities increased approximately $28,547,000 as funds not needed for liquidity and lending needs were invested in securities. The average yield on interest-earning assets was 3.19% for 2016 compared with 3.17% for 2017. The yield on average loans increased from 4.34% for 2016 to 4.47% for 2017 as a result of the increase in prime rate during 2016 and 2017. The yield on taxable held to maturity securities increased from 2.15% for 2016 to 2.56% for 2017 and taxable available for sale securities increased from 1.36% for 2016 to 1.52% for 2017 as the Company changed its investment strategy to improve yield while not compromising duration and credit risk.

Average interest-bearing liabilities decreased approximately $8,058,000, or 2%, from approximately $445,685,000 for 2016 to approximately $437,627,000 for 2017. Average borrowings from the FHLB decreased due to the reduced liquidity needs of the bank subsidiary. The average rate paid on interest-bearing liabilities increased 10 basis points, from .23% for 2016 to .33% for 2017. This increase was the result of time deposit rates increasing in our trade area and the Company paying off lower rate borrowings from the FHLB.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.02% for 2016 as compared with 2.94% for 2017.

The following tables analyze the changes in tax-equivalent net interest income for the years ended December 31, 2018, 2017 and 2016.

 

53


Table of Contents

ANALYSIS OF AVERAGE BALANCES, INTEREST EARNED/PAID AND YIELD

(in thousands)

 

     2018     2017     2016  
  

 

 

   

 

 

   

 

 

 
    

Average

Balance

    

Interest

Earned/Paid

    

Rate

   

Average

Balance

    

Interest

Earned/Paid

    

Rate

   

Average

Balance

    

Interest

Earned/Paid

    

Rate

 
  

 

 

   

 

 

   

 

 

 

Loans (1)(2)

     $ 273,724         $ 13,265         4.85%        $ 290,329         $ 12,970         4.47%        $ 327,819         $     14,232         4.34%   

Balances due from depository institutions

     9,498         205         2.16%        27,819         420         1.51%        31,559         277         0.88%   

Held to maturity:

                        

Taxable

     33,864         970         2.86%        29,389         753         2.56%        8,562         184         2.15%   

Non taxable (3)

     18,208         580         3.19%        19,082         717         3.76%        19,596         725         3.70%   

Available for sale:

                        

Taxable

     220,076         4,349         1.98%        217,059         3,298         1.52%        188,512         2,558         1.36%   

Non taxable (3)

     13,055         608         4.66%        15,677         864         5.51%        20,902         1,123         5.37%   

Other

     1,519         22         1.45%        1,014         26         2.56%        1,732         22         1.27%   
  

 

 

      

 

 

      

 

 

    

Total

     $     569,944         $     19,999         3.51%        $     600,369         $     19,048         3.17%        $     598,682         $ 19,121         3.19%   
  

 

 

      

 

 

      

 

 

    

Savings and interest-bearing DDA

     $ 317,197         $ 1,468         0.46%        $ 353,352         $ 736         0.21%        $ 359,801         $ 437         0.12%   

Time deposits

     84,168         886         1.05%        82,038         637         0.78%        77,644         457         0.59%   

Federal funds purchased and securities sold under agreements to repurchase

     369         10         2.71%        354                0.85%           

Borrowings from FHLB

     13,044         294         2.25%        1,883         47         2.50%        8,240         131         1.59%   
  

 

 

      

 

 

      

 

 

    

Total

     $ 414,778         $ 2,658         0.64%        $ 437,627         $ 1,423         0.33%        $ 445,685         $ 1,025         0.23%   
  

 

 

      

 

 

      

 

 

    

Net tax-equivalent spread

           2.87%              2.84%              2.97%   
        

 

 

         

 

 

         

 

 

 

Net tax-equivalent margin on earning assets

                 3.04%                    2.94%                    3.02%   
        

 

 

         

 

 

         

 

 

 

 

(1)

Loan fees of $310, $338 and $389 for 2018, 2017 and 2016, respectively, are included in these figures.

(2)

Includes nonaccrual loans.

(3)

All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2018 and 34% in 2017 and 2016. See disclosure of Non-GAAP financial measures on pages 50 and 51.

 

54


Table of Contents

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

(in thousands)

 

    

For the Year Ended

December 31, 2018 Compared With December 31, 2017

 
     Volume        Rate        Rate/Volume        Total    

Interest earned on:

           

Loans

     $ (742)       $ 1,100        $ (63)       $ 295    

Balances due from depository institutions

     (277)         180          (118)         (215)   

Held to maturity securities:

           

Taxable

     115          89          13          217    

Non taxable

     (33)         (109)         5          (137)   

Available for sale securities:

           

Taxable

     46          991          14          1,051    

Non taxable

     (145)         (134)         23          (256)   

Other

     13          (11)         (6)         (4)   
  

 

 

 

Total

     $             (1,023)       $             2,106        $             (132)       $             951    
  

 

 

 

Interest paid on:

           

Savings and interest-bearing DDA

     $ (75)       $ 899        $ (92)       $ 732    

Time deposits

     17          227          5          249    

Federal funds purchased

     1          6             7    

Borrowings from FHLB

     279          (5)         (27)         247    
  

 

 

 

Total

     $ 222        $ 1,127        $ (114)       $ 1,235    
  

 

 

 

 

55


Table of Contents

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

(in thousands)

 

     For the Year Ended
December 31, 2017 Compared With December 31, 2016
 
     Volume        Rate        Rate/Volume        Total    

Interest earned on:

           

Loans

     $ (1,628)       $ 413        $ (47)       $ (1,262)   

Balances due from depository institutions

     (33)         199          (23)         143    

Held to maturity securities:

           

Taxable

     448          35          86          569    

Non taxable

     (19)         11             (8)   

Available for sale securities:

           

Taxable

     387          306          47          740    

Non taxable

     (281)         29          (7)         (259)   

Other

     (10)         23          (9)         4    
  

 

 

 

Total

     $             (1,136)       $             1,016        $         47        $             (73)   
  

 

 

 

Interest paid on:

           

Savings and interest-bearing DDA

     $ (8)       $ 312        $ (5)       $ 299    

Time deposits

     26          146          8          180    

Federal funds purchased

     3                3    

Borrowings from FHLB

     (95)         42          (31)         (84)   
  

 

 

 

Total

     $ (74)       $ 500        $ (28)       $ 398    
  

 

 

 

Provision for Allowance 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. The Company’s Loan Review and Special Assets Departments play key roles in monitoring the loan portfolio and managing problem loans. New loans and, on a periodic basis, existing loans are reviewed to evaluate compliance with the loan policy. Loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area; residential and land development; construction and commercial real estate loans, and their direct

 

56


Table of Contents

and indirect impact on the Company’s operations are evaluated on a monthly basis. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. Lenders experienced in workout scenarios consult with loan officers and customers to address non-performing loans. A monthly 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.

Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and to identify and estimate potential losses based on the best available information. The potential effect of declines 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. Note A to the Consolidated Financial Statements discloses a summary of the accounting principles applicable to impaired and nonaccrual loans as well as the allowance for loan losses. Note C to the Consolidated Financial Statements presents additional analyses of the composition, aging, credit quality and performance of the loan portfolio as well as the transactions in the allowance for loan losses.

The Company’s analysis includes evaluating the current value of collateral securing all nonaccrual loans. Nonaccrual loans totaled $8,250,000 and $13,810,000 with specific reserves on these loans of $315,000 and $1,125,000 as of December 31, 2018 and 2017, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value.

The Company’s on-going, systematic evaluation resulted in the Company recording a total provision for the allowance for loan losses of $122,000, $116,000 and $568,000 in 2018, 2017 and 2016, respectively. As a result of receiving new information and updated appraisals on several collateral-dependent loans, the Company increased the specific provision for several loans in its real estate, mortgage portfolio in 2017. This increase was partially offset by a large recovery in its residential and land development portfolio during the year. As a result of receiving new information and updated appraisals on several collateral-dependent loans, the Company increased its provision for loan losses during 2016. The new appraisals caused Management to update the evaluation of these loans and increase the loan loss provision for several non-performing loans in its residential development and commercial real estate segments. The allowance for loan losses as a percentage of loans was 1.95%, 2.19% and 1.73% at December 31, 2018, 2017 and 2016, respectively. The Company believes that its allowance for loan losses is appropriate as of December 31, 2018.

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 the future 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.

 

57


Table of Contents

Non-interest Income

2018 as compared with 2017

Total non-interest income decreased $862,000 in 2018 as compared with 2017. Gains on liquidation, sales and calls of securities decreased $134,000 as the Company had opportunities to sell securities which generated gains in 2017. Income from other investments decreased $316,000 in 2018 as compared with 2017 as operations of an investment in a low-income housing partnership declined as a result of decreased occupancy. Prior year’s results included a gain of $429,000 from the redemption of death benefits on bank owned life insurance.

2017 as compared with 2016

Total non-interest income increased $416,000 in 2017 as compared with 2016. This increase was primarily a result of the gain of $429,000 from the redemption of death benefits on bank owned life insurance in 2017. Income from other investments increased $93,000 in 2017 as compared with 2016 as operations of an investment in a low income housing partnership improved as a result of increased occupancy. These increases were partially offset by a decrease in other income as 2016 results included a gain of $88,000 from the sale of bank premises.

Non-interest Expense

2018 as compared with 2017

Total non-interest expense increased $229,000 in 2018 as compared with 2017. Net occupancy costs decreased $117,000 as liability insurance premiums decreased $71,000 as the Company reduced some of its coverage and telecommunications costs decreased $88,000 as the Company eliminated some redundant resources. Equipment rentals, depreciation and maintenance increased $128,000 primarily as a result of purchases of depreciable assets, primarily technology-related, and an increase in maintenance contracts related to technology services. Other expense increased $276,000 as a result of the decrease in non-recurring consulting fees of $164,000, the decrease in FDIC and state banking assessments of $176,000 as a result of reduced assessment rate and the increase in other real estate expenses of $514,000, largely due to writedowns of ORE to new appraised values.

2017 as compared with 2016

Total non-interest expense decreased $953,000 in 2017 as compared with 2016. Salaries and employee benefits decreased $139,000 primarily as a result of decreased health insurance costs due to decreased claims. Net occupancy costs decreased $202,000 as liability insurance premiums decreased $125,000 as the Company reduced some of its coverage and as telecommunications costs decreased $81,000 as the Company eliminated some redundant resources. FDIC and state banking assessments decreased $477,000 as the regulators decreased the premiums for deposit insurance in 2018.

 

58


Table of Contents

Income Taxes

The Company recognized an income tax benefit of $36,000 and $1,080,000 in 2018 and 2017, respectively, and income tax expense of $78,000 in 2016. During 2014, Management established a valuation allowance against its net deferred tax asset of approximately $8,140,000. As of December 31, 2018, the valuation allowance is still in place. The 2018 and 2017 benefits were the result of the impact of the elimination of the alternative minimum tax credit carryforwards from new tax legislation and the correction of refunds for prior years. Note I to the Consolidated Financial Statements presents a reconciliation of income taxes for these three years and further analysis of the valuation allowance.

FINANCIAL CONDITION

Cash and due from banks decreased $8,090,000 at December 31, 2018 compared with December 31, 2017 due to the bank subsidiary’s liquidity position.

Available for sale securities decreased $23,096,000 at December 31, 2018 compared with December 31, 2017 as the maturities and unrealized losses exceeded investment purchases.

Loans decreased $7,103,000 at December 31, 2018 compared with December 31, 2017, as principal payments, maturities, charge-offs and foreclosures on existing loans exceeded new loans.

Total deposits decreased $56,064,000 at December 31, 2018, as compared with December 31, 2017. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from year to year are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. Savings and demand, interest bearing balances specifically decreased $39,506,000 at December 31, 2018 as compared with December 31, 2017 as one public customer transferred a large balance to another financial institution.

Borrowings from the FHLB increased $24,944,000 at December 31, 2018 as compared with December 31, 2017 based on the liquidity needs of the bank subsidiary.

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 primary and risk-based capital ratios are important indicators of the strength of a Company’s capital. These figures are presented in the Five-Year Comparative Summary of Selected Financial Information. The Company has established the goal of being classified as “well-capitalized” by the banking regulatory authorities.

 

59


Table of Contents

Significant transactions affecting shareholders’ equity during 2018 are described in Note J to the Consolidated Financial Statements. The Statement of Changes in Shareholders’ Equity also presents all activity in the Company’s equity accounts.

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. Note L to the Consolidated Financial Statements discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Management monitors these funding requirements in such a manner as to satisfy these demands and to provide the maximum return on its earning assets.

The Company monitors and manages its liquidity position diligently 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 continuous basis in the management of its liquidity needs and also conducts contingency testing on its liquidity plan. The Company has also been approved to participate in the Federal Reserve’s Discount Window Primary Credit Program, which it intends to use only as a contingency. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits, and the Company has encountered no problems with meeting its liquidity needs.

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. The Company also uses other sources of funds, including borrowings from the FHLB. The Company generally anticipates relying on deposits, purchases of federal funds and borrowings from the FHLB for its liquidity needs in 2019.

REGULATORY MATTERS

During 2016, Management identified opportunities for improving information technology operations and security, risk management and earnings, addressing asset quality concerns, analyzing and assessing the Bank’s management and staffing needs, and managing concentrations of credit risk as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company has identified specific corrective steps and actions to enhance its information technology operations and security, risk management, earnings, asset quality and staffing. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators.

 

60


Table of Contents

OFF-BALANCE SHEET ARRANGEMENTS

The Company is a party to off-balance-sheet arrangements in the normal course of business to meet the financing needs of its customers. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet arrangements. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amount does not necessarily represent future cash requirements. As discussed previously, the Company carefully monitors its liquidity needs and considers its cash requirements, especially for loan commitments, in making decisions on investments and obtaining funds from its other sources. Further information relating to off-balance-sheet instruments can be found in Note L to the Consolidated Financial Statements.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a smaller reporting company, the Company is not required to provide this information.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Consolidated Statements of Condition as of December  31, 2018 and 2017

     62  

Consolidated Statements of Income for the years ended December  31, 2018, 2017 and 2016

     64  

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016

     66  

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018 and 2017

     67  

Consolidated Statements of Cash Flows for the years ended December  31, 2018, 2017 and 2016

     68  

Notes to the Consolidated Financial Statements

     70  

Report of Independent Registered Public Accounting Firm

     111  

 

61


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

 

December 31,    2018      2017  

Assets

     

Cash and due from banks

     $ 17,191       $ 25,281   

Available for sale securities

     222,110         245,206   

Held to maturity securities, fair value of $53,459 - 2018; $50,538 - 2017

     54,598         51,163   

Other investments

     2,811         3,193   

Federal Home Loan Bank Stock, at cost

     2,069         1,370   

Loans

     273,346         280,449   

Less: Allowance for loan losses

     5,340         6,153   
  

 

 

 

Loans, net

     268,006         274,296   

Bank premises and equipment, net of accumulated depreciation

     18,879         20,153   

Other real estate

     8,943         8,232   

Accrued interest receivable

     1,956         1,904   

Cash surrender value of life insurance

     18,841         18,301   

Other assets

     1,382         1,325   
  

 

 

 

Total assets

     $         616,786       $         650,424   
  

 

 

 

 

62


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

 

December 31,    2018      2017  

Liabilities and Shareholders’ Equity

     

Liabilities:

     

Deposits:

     

Demand, non-interest bearing

     $ 114,512       $ 127,274   

Savings and demand, interest bearing

     278,772         318,278   

Time, $100,000 or more

     52,787         43,991   

Other time deposits

     27,435         40,027   
  

 

 

 

Total deposits

     473,506         529,570   

Borrowings from Federal Home Loan Bank

     36,142         11,198   

Employee and director benefit plans liabilities

     18,415         18,370   

Other liabilities

     1,789         1,787   
  

 

 

 

Total liabilities

     529,852         560,925   

Shareholders’ Equity:

     

Common stock, $1 par value, 15,000,000 shares authorized, 4,943,186 shares issued and outstanding at December 31, 2018 and 5,083,186 shares issued and outstanding at December 31, 2017

     4,943         5,083   

Surplus

     65,780         65,780   

Undivided profits

     20,324         21,563   

Accumulated other comprehensive loss

     (4,113)        (2,927)  
  

 

 

 

Total shareholders’ equity

     86,934         89,499   
  

 

 

 

Total liabilities and shareholders’ equity

     $         616,786       $         650,424   
  

 

 

 

See Notes to Consolidated Financial Statements.

 

63


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data)

 

Years Ended December 31,    2018      2017      2016  

Interest income:

        

Interest and fees on loans

   $ 13,265       $ 12,970      $ 14,232   

Interest and dividends on securities:

              

U. S. Treasuries

     1,410         1,602         1,133   

U.S. Government agencies

     471         531         872   

Mortgage-backed securities

     2,633         1,320         600   

States and political subdivisions

     1,744         1,634         1,325   

Other investments

     22         26         53   

Interest on balances due from depository institutions

     205         420         278   
  

 

 

 

Total interest income

     19,750         18,503         18,493   
  

 

 

 

Interest expense:

        

Deposits

     2,354         1,373         894   

Federal funds purchased and securities sold under agreements to repurchase

     10             

Borrowings from Federal Home Loan Bank

     294         47         131   
  

 

 

 

Total interest expense

     2,658         1,423         1,025   
  

 

 

 

Net interest income

     17,092         17,080         17,468   

Provision for allowance for loan losses

     122         116         568   
  

 

 

 

Net interest income after provision for allowance for loan losses

   $          16,970       $          16,964       $          16,900   
  

 

 

 

 

64


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data)

 

Years Ended December 31,    2018     2017     2016  

Non-interest income:

      

Trust department income and fees

     1,708       1,689       1,614   

Service charges on deposit accounts

     3,737       3,732       3,763   

Gain on liquidation, sales and calls of securities

       134       158   

Gain on sales of other investments

     17      

Income (loss) from other investments

     (274     42       (51)  

Increase in cash surrender value of life insurance

     455       458       406   

Gain from death benefits from life insurance

       429    

Other income

     460       481       659   
  

 

 

 

Total non-interest income

     6,103       6,965       6,549   
  

 

 

 

Non-interest expense:

      

Salaries and employee benefits

     10,891       10,949       11,088   

Net occupancy

     2,004       2,121       2,323   

Equipment rentals, depreciation and maintenance

     3,134       3,006       2,954   

Other expense

     6,451       6,175       6,839   
  

 

 

 

Total non-interest expense

             22,480               22,251               23,204   
  

 

 

 

Income before income taxes

     593       1,678       245   

Income tax (benefit) expense

     (36     (1,080     78   
  

 

 

 

Net income

     $ 629        $ 2,758      $ 167   
  

 

 

 

Basic and diluted earnings per share

     $ .13        $ .54      $ .03   
  

 

 

 

Dividends declared per share

     $ .02        $ .01      $        
  

 

 

 

See Notes to Consolidated Financial Statements.

 

65


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

Years Ended December 31,

     2018        2017        2016  

Net income

     $ 629      $ 2,758      $ 167  

Other comprehensive income (loss):

        

Net unrealized gain (loss) on available for sale securities

     (1,645)        127        (3,345)  

Reclassification adjustment for realized gains on available for sale securities called or sold in current year

        (134)        (158)  

Gain (loss) from unfunded post-retirement benefit obligation

     459        (1,160)        (42)  
  

 

 

 

Total other comprehensive loss

     (1,186)        (1,167)        (3,545)  
  

 

 

 

Total comprehensive income (loss)

     $             (557)        $          1,591        $          (3,378)  
  

 

 

 

See Notes to Consolidated Financial Statements.

 

66


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands except share and per share data)

 

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

 

 

 

Balance, January 1, 2017

     5,123,186     $ 5,123     $ 65,780      $ 19,318     $ (1,760   $ 88,461    

Net income

            2,758         2,758    

Retirement of stock

     (40,000     (40        (462       (502)   

Cash dividend ($.01 per share)

            (51       (51)   

Other comprehensive loss

              (1,167     (1,167)   
  

 

 

 

Balance, December 31, 2017

     5,083,186       5,083       65,780        21,563       (2,927     89,499    

Net income

            629         629    

Retirement of stock

     (140,000     (140        (1,767       (1,907)   

Cash dividend ($.02 per share)

            (101       (101)   

Other comprehensive loss

              (1,186     (1,186)   
  

 

 

 

Balance, December 31, 2018

     4,943,186     $ 4,943     $ 65,780      $ 20,324     $ (4,113   $ 86,934    
  

 

 

 

See Notes to Consolidated Financial Statements.

 

67


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

Years Ended December 31,    2018      2017     2016  

Cash flows from operating activities:

       

Net income

   $       629      $     2,758     $       167    

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

       

Depreciation

     1,964        1,914       1,823    

Provision for allowance for loan losses

     122        116       568    

Writedown of other real estate

     764        460       782    

(Gain) loss on sales of other real estate

     21        101       (251)   

(Income) loss from other investments

     274        (42)       51    

Gain on death benefits from life insurance

        (429)    

Amortization of available for sale securities

     315        287       30    

Amortization of held to maturity securities

     260        253       181    

Gain on liquidation, sales and calls of securities

        (134)       (158)   

Gain on sales of other investments

     (17)       

Increase in cash surrender value of life insurance

     (455)        (458)       (406)   

Change in accrued interest receivable

     (52)        (49)       (23)   

Change in other assets

     (57)        (537     191    

Change in other liabilities

     506        717       189    
  

 

 

 

Net cash provided by operating activities

   $ 4,274      $ 4,957     $ 3,144    
  

 

 

 

 

68


Table of Contents

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands)

 

Years Ended December 31,    2018      2017      2016  

Cash flows from investing activities:

        

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

   $ 60,222      $ 71,315      $ 149,715  

Purchases of available for sale securities

     (39,086)        (83,561)        (183,861)  

Proceeds from maturities of held to maturity securities

     760        7,725        510  

Purchases of held to maturity securities

     (4,455)        (10,991)        (29,816)  

(Purchase) redemption of Federal Home Loan Bank Stock

     (699)        (831)        1,098  

Proceeds from sales of other investments

     125        

Proceeds from sales of other real estate

     3,211        1,666        2,775  

Loans, net change

     1,461        33,531        17,127  

Acquisition of premises and equipment

     (690)        (423)        (1,021)  

Investment in cash surrender value of life insurance

     (109)        (94)        (108)  

Redemption of life insurance

     24        

Proceeds from death benefits from life insurance

        1,929     
  

 

 

 

Net cash provided by (used in) investing activities

     20,764        20,266        (43,581)  
  

 

 

 

Cash flows from financing activities:

        

Demand and savings deposits, net change

     (52,268)        (51,804)        59,472  

Time deposits, net change

     (3,796)        6,358        2,837  

Cash dividends

     (101)        (51)     

Retirement of stock

     (1,907)        (502)     

Borrowings from Federal Home Loan Bank

     1,428,700        131,500        98,920  

Repayments to Federal Home Loan Bank

     (1,403,756)        (126,559)        (111,072)  
  

 

 

 

Net cash provided by (used in) financing activities

     (33,128)        (41,058)        50,157  
  

 

 

 

Net increase (decrease) in cash and cash equivalents

     (8,090)        (15,835)        9,720  

Cash and cash equivalents, beginning of year

     25,281        41,116        31,396  
  

 

 

 

Cash and cash equivalents, end of year

   $           17,191      $           25,281      $           41,116  
  

 

 

 

See Notes to Consolidated Financial Statements.

 

69


Table of Contents

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Business of The Company

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 Bank, 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”).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Basis of Accounting

The Company and its subsidiaries recognize assets and liabilities, and income and expense, on the accrual basis of accounting. 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. Actual results could differ from these 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, assumptions relating to employee and director benefit plan liabilities and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

Revenue Recognition

As of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. Disclosures of revenue from contracts with customers for periods beginning after January 1, 2018 are presented under ASC Topic 606 and have not materially changed from the prior year amounts. This update prescribes the process related to the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 excludes revenue streams relating to loans and investment securities, which are the major source of revenue

 

70


Table of Contents

for the Company, from its scope. As a result, the adoption of the guidance had no material impact on the measurement or recognition of revenue. Consistent with this guidance, the Company recognizes noninterest income within the scope of this guidance as services are transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those services. Other types of revenue contracts, the income from which is included in non-interest income, that are within the scope of ASU 2014-09 are:

Trust department income and fees: A contract for fiduciary and/or investment administration services on personal trust accounts and corporate trust services. Personal trust fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust is serviced. Corporate trust fee income is recognized over the period the Company provides service to the entity.

Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services for which the Company earns a fee, including NSF and analysis charges, related to the deposit account. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

ATM fee income: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. These fees are earned as the service is provided (i.e., when the customer uses a debit or ATM card).

Other non-interest income: Other non-interest income includes several items, such as wire transfer income, check cashing fees, the increase in cash surrender value of life insurance, rental income from bank properties and safe deposit box rental fees. This income is generally recognized at the time the service is provided and/or the income is earned.

New Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that Clarifies the Guidance in ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10). ASU 2018-03 clarifies guidance in ASU No. 2016-01 relating to equity securities without a readily determinable fair value, forward contracts and purchased options and fair value option liabilities. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after June 15, 2018. The Company adopted the amendments in this ASU effective January 1, 2018. The adoption of this ASU did not have a material effect on the Company’s financial position, result of operations or cash flows.

 

71


Table of Contents

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. ASU 2018-05 adds SEC guidance to the accounting standards codification regarding the Tax Cuts and Jobs Act. This update became effective upon addition to the FASB Codification. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

In May 2018, the FASB issued ASU 2018-06, Codification Improvements to Topic 942, Financial Services – Depository and Lending. ASU 2018-06 removes outdated guidance related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency. The amendments in this update are effective upon issuance. The adoption of this ASU did not have a material effect on the Company’s financial position, result of operations or cash flows.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. ASU 2018-09 amends topics that clarify, correct errors in or make minor improvements to the Codification. Topics affected include reporting comprehensive income, debt modifications and extinguishments, distinguishing liabilities from equity, income taxes on stock compensation, income taxes relating to business combinations, derivatives and hedging, fair value measurement, financial services and defined contribution plan accounting. The transition and effective date guidance is based on the facts and circumstances of each amendment. The adoption of this ASU did not have a material effect on the Company’s financial position, result of operations or cash flows.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 changes the fair value measurement disclosure requirements. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. ASU 2018-19 amends existing guidance to align the implementation date for nonpublic entities and clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. The effective date and transition requirements of these amendments are the same as those in the credit losses standard, as amended by the new ASU. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, is intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the

 

72


Table of Contents

amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a writedown. ASU 2016-13 is effective for the Company for interim and annual periods beginning after December 15, 2019 and the Company intends to adopt ASU 2016-13 during the first quarter of 2020. The Company has established a Current Expected Credit Loss (CECL) Committee which include the appropriate members of management, credit administration and accounting to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing this ASU. The Company selected a third-party vendor to provide allowance for loan loss software as well as advisory services in developing a new methodology that would be compliant with ASU 2016-13, and is working with the approved third-party vendor to develop the CECL model and evaluate its impact. Management will continue to evaluate the impact this ASU will have on the Company’s consolidated financial statements through its effective date.

Cash and Due from Banks

The Company is required to maintain average reserve balances in its vault or on deposit with the Federal Reserve Bank. The average amount of these reserve requirements was approximately $527,000 and $564,000 for the years ending December 31, 2018 and 2017, respectively.

Securities

The classification of securities is determined by Management at the time of purchase. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the security until maturity. Securities held to maturity are stated at amortized cost. Securities not classified as held to maturity are classified as available for sale and are stated at fair value. Unrealized gains and losses, net of tax, on these securities are recorded in shareholders’ equity as accumulated other comprehensive income. The amortized cost of available for sale securities and held to maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, determined using the interest method. Such amortization and accretion is included in interest income on securities. A decline in the market value of any investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. In estimating other-than-temporary losses, Management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and nature of the issuer, the cause of the decline, especially if related to a change in interest rates, and the intent and ability of the Company to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as gain (loss) on sales and calls of securities in non-interest income.

Other Investments

Other investments include a low income housing partnership in which the Company is a 99% limited partner. The partnership has qualified to receive annual low income housing federal tax credits that are recognized as a reduction of the current tax expense. The investment is accounted for using the equity method.

 

73


Table of Contents

Federal Home Loan Bank Stock

The Company is a member of the Federal Home Loan Bank of Dallas (“FHLB”) and as such is required to maintain a minimum investment in its stock that varies with the level of FHLB advances outstanding. The stock is bought from and sold to the FHLB based on its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment in accordance with GAAP.

Loans

The loan portfolio consists of commercial and industrial and real estate loans within the Company’s trade area that we have the intent and ability to hold for the foreseeable future or until maturity. The loan policy establishes guidelines relating to pricing; repayment terms; collateral standards including loan to value limits, appraisal and environmental standards; lending authority; lending limits and documentation requirements.

Loans are stated at the amount of unpaid principal, reduced by unearned income and the allowance for loan losses. Interest on loans is recognized on a daily basis over the terms of each loan based on the unpaid principal balance. Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements.

The Company continuously monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area, land development, construction and commercial real estate loans, and their direct and indirect impact on its operations. Loan delinquencies and deposit overdrafts are monitored on a weekly basis in order to identify developing problems as early as possible. On a monthly basis, a watch list of credits based on our loan grading system is prepared. Grades are applied to individual loans based on factors including repayment ability, financial condition of the borrower and payment performance. Loans with lower grades are placed on the watch list of credits. The watch list is the primary tool for monitoring the credit quality of the loan portfolio. Once loans are determined to be past due, the loan officer and the special assets department work vigorously to return the loans to a current status.

The Company places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. Accrued interest on loans classified as nonaccrual is reversed at the time the loans are placed on nonaccrual. Interest received on nonaccrual loans is applied against principal. Loans are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The placement of loans on and removal of loans from nonaccrual status must be approved by Management.

 

74


Table of Contents

Loans which become 90 days delinquent are reviewed relative to collectability. Unless such loans are in the process of terms revision to bring them to a current status or foreclosure or in the process of collection, these loans are placed on nonaccrual and, if deemed uncollectible, are charged off against the allowance for loan losses. That portion of a loan which is deemed uncollectible will be charged off against the allowance as a partial charge off. All charge offs must be approved by Management and are reported to the Board of Directors.

Allowance for Loan Losses

The allowance for loan losses (“ALL”) is a valuation account available to absorb losses on loans. The ALL is established through provisions for loan losses charged against earnings. Loans deemed to be uncollectible are charged against the ALL, and subsequent recoveries, if any, are credited to the allowance.

The ALL is based on Management’s evaluation of the loan portfolio under current economic conditions and is an amount that Management believes will be adequate to absorb probable losses on loans existing at the reporting date. On a quarterly basis, the Company’s problem asset committee meets to review the watch list of credits, which is formulated from the loan grading system. Members of this committee include loan officers, collection officers, the special assets director, the chief lending officer, the chief credit officer, the chief financial officer and the chief executive officer. The evaluation includes Management’s assessment of several factors: review and evaluation of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic conditions and the related impact on specific borrowers and industry groups, a study of loss experience, a review of classified, nonperforming and delinquent loans, the estimated value of any underlying collateral, an estimate of the possibility of loss based on the risk characteristics of the portfolio, adverse situations that may affect the borrower’s ability to repay and the results of regulatory examinations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The ALL consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component of the allowance relates to loans that are not impaired. Changes to the components of the ALL are recorded as a component of the provision for the allowance for loan losses. Management must approve changes to the ALL and must report its actions to the Board of Directors. The Company believes that its allowance for loan losses is appropriate at December 31, 2018.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructurings and performing and non-performing major loans for which full payment of principal or interest is not expected. Payments received for impaired loans not on nonaccrual status are applied to principal and interest.

 

75


Table of Contents

All impaired loans are reviewed, at a minimum, on a quarterly basis. The Company calculates the specific allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. Most of the Company’s impaired loans are collateral-dependent.

The fair value of the collateral for collateral-dependent loans is based on appraisals performed by third-party valuation specialists, comparable sales and other estimates of fair value obtained principally from independent sources such as the Multiple Listing Service or county tax assessment valuations, adjusted for estimated selling costs. The Company has a Real Estate Appraisal Policy (the “Policy”) which is in compliance with the guidelines set forth in the “Interagency Appraisal and Evaluation Guidelines” which implement Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and the revised “Interagency Appraisal and Evaluation Guidelines” issued in 2010. The Policy further requires that appraisals be in writing and conform to the Uniform Standards of Professional Appraisal Practice (“USPAP”). An appraisal prepared by a state-licensed or state-certified appraiser is required on all new loans secured by real estate in excess of $500,000. Loans secured by real estate in an amount of $500,000 or less, or that qualify for an exemption under FIRREA, must have a summary appraisal report or in-house evaluation, depending on the facts and circumstances. Factors including the assumptions and techniques utilized by the appraiser, which could result in a downward adjustment to the collateral value estimates indicated in the appraisal, are considered by the Company.

When Management determines that a loan is impaired and the loan is collateral-dependent, an evaluation of the fair value of the collateral is performed. The Company maintains established criteria for assessing whether an existing appraisal continues to reflect the fair value of the property for collateral-dependent loans. Appraisals are generally considered to be valid for a period of at least twelve months. However, appraisals that are less than 12 months old may need to be adjusted. Management considers such factors as the property type, property condition, current use of the property, current market conditions and the passage of time when determining the relevance and validity of the most recent appraisal of the property. If Management determines that the most recent appraisal is no longer valid, a new appraisal is ordered from an independent and qualified appraiser.

During the interim period between ordering and receipt of the new appraisal, Management considers if the existing appraisal should be discounted to determine the estimated fair value of collateral. Discounts are applied to the existing appraisal and take into consideration the property type, condition of the property, external market data, internal data, reviews of recently obtained appraisals and evaluations of similar properties, comparable sales of similar properties and tax assessment valuations. When the new appraisal is received and approved by Management, the valuation stated in the appraisal is used as the fair value of the collateral in determining impairment, if any. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a specific component of the allowance for loan losses. Any specific reserves recorded in the interim are adjusted accordingly.

 

76


Table of Contents

The general component of the ALL is the loss estimated by applying historical loss percentages to non-classified loans which have been divided into segments. These segments include gaming; residential and land development; real estate, construction; real estate, mortgage; commercial and industrial and all other. The loss percentages are based on each segment’s historical five year average loss experience which may be adjusted by qualitative factors such as changes in the general economy, or economy or real estate market in a particular geographic area or industry.

Bank Premises and Equipment

Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of the related assets.

Other Real Estate

Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the ALL. Any expense incurred in connection with holding such real estate or resulting from any writedowns in value subsequent to foreclosure is included in non-interest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference, if any, between the sales proceeds and the carrying amount of the property. If the fair value of the ORE, less estimated costs to sell at the time of foreclosure, decreases during the holding period, the ORE is written down with a charge to non-interest expense. Generally, ORE properties are actively marketed for sale and Management is continuously monitoring these properties in order to minimize any losses.

Trust Department Income and Fees

Corporate trust fees are accounted for on an accrual basis and personal trust fees are recorded when the underlying trust is serviced.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carry forwards, is required to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the

 

77


Table of Contents

realizability of the deferred tax assets, Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if it is probable that the tax position will be challenged, it is probable that the future resolution of the challenge will confirm that a loss has been incurred and the amount of such loss can be reasonably estimated.

Post-Retirement Benefit Plan

The Company accounts for its post-retirement benefit plan under Accounting Standards Codification (“Codification” or “ASC”) Topic 715, Retirement Benefits (“ASC 715”). The under or over funded status of the Company’s post-retirement benefit plan is recognized as a liability or asset in the statement of condition. Changes in the plan’s funded status are reflected in other comprehensive income. Net actuarial gains and losses and adjustments to prior service costs that are not recorded as components of the net periodic benefit cost are charged to other comprehensive income.

Earnings Per Share

Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding of 5,031,778 for 2018, 5,123,076 for 2017 and 5,123,186 for 2016.

Accumulated Other Comprehensive Income (Loss)

At December 31, 2018, 2017 and 2016, accumulated other comprehensive loss consisted of net unrealized gains (losses) on available for sale securities and over (under) funded liabilities related to the Company’s post-retirement benefit plan.

Statements of Cash Flows

The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $2,657,616, $1,420,399 and $1,020,177 in 2018, 2017 and 2016, respectively, for interest on deposits and borrowings. Income tax payments totaled $78,435 in 2016. Loans transferred to other real estate amounted to $4,706,732, $1,946,045 and $1,903,427 in 2018, 2017 and 2016, respectively.

Fair Value Measurement

The Company reports certain assets and liabilities at their estimated fair value. These assets and liabilities are classified and disclosed in one of three categories based on the inputs used to develop the measurements. The categories establish a hierarchy for ranking the quality and reliability of the information used to determine fair value.

Reclassifications

Certain reclassifications have been made to the prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income.

 

78


Table of Contents

NOTE B – SECURITIES:

The amortized cost and fair value of securities at December 31, 2018 and 2017, respectively, are as follows (in thousands):

 

December 31, 2018    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
   

Fair

Value

 

Available for sale securities:

          

U.S. Treasuries

   $ 85,866      $        $ (2,443   $ 83,423    

U.S. Government agencies

     17,492        14        (259     17,247    

Mortgage-backed securities

     112,391        231        (2,278     110,344    

States and political subdivisions

     10,994        102          11,096    
  

 

 

 

Total available for sale securities

   $         226,743      $         347        $        (4,980   $         222,110    
  

 

 

 

Held to maturity securities:

          

U.S. Government agencies

   $ 8,185      $        $ (371   $ 7,814    

States and political subdivisions

     46,413        89        (857   $ 45,645    
  

 

 

 

Total held to maturity securities

   $ 54,598      $ 89      $ (1,228   $ 53,459    
  

 

 

 

 

79


Table of Contents
December 31, 2017    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
   

Fair

Value

 

Available for sale securities:

          

U.S. Treasuries

   $ 124,820      $        $ (2,176   $ 122,644    

U.S. Government agencies

     19,989           (158     19,831    

Mortgage-backed securities

     89,207        96        (1,042     88,261    

States and political subdivisions

     14,178        292          14,470    
  

 

 

 

Total available for sale securities

   $         248,194      $         388      $         (3,376   $         245,206    
  

 

 

 

Held to maturity securities:

          

U.S. Government agencies

   $ 8,185      $        $ (302   $ 7,883    

States and political subdivisions

     42,978        227        (550     42,655    
  

 

 

 

Total held to maturity securities

   $ 51,163      $ 227      $ (852   $ 50,538    
  

 

 

 

The amortized cost and fair value of debt securities at December 31, 2018, (in thousands) by contractual maturity, are shown below. 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.

 

80


Table of Contents
     Amortized Cost      Fair Value  

Available for sale securities:

     

Due in one year or less

     $ 28,177      $ 27,975    

Due after one year through five years

     77,778        75,719    

Due after five years through ten years

     5,563        5,213    

Due after ten years

     2,834        2,859    

Mortgage-backed securities

     112,391        110,344    
  

 

 

 

Total

     $ 226,743      $ 222,110    
  

 

 

 

Held to maturity securities:

     

Due in one year or less

     $ 2,523      $ 2,522    

Due after one year through five years

     19,769        19,569    

Due after five years through ten years

     18,316        17,895    

Due after ten years

     13,990        13,473    
  

 

 

 

Total

     $ 54,598      $ 53,459    
  

 

 

 

Available for sale and held to maturity securities with gross unrealized losses at December 31, 2018 and 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):

 

81


Table of Contents
     Less Than Twelve Months      Over Twelve Months      Total  
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
     Fair Value      Gross
Unrealized
Losses
 

December 31, 2018:

                 

U.S. Treasuries

     $ 999      $ 1      $ 82,424      $ 2,442      $ 83,423      $ 2,443  

U.S. Government agencies

     4,939        61        17,608        569        22,547        630  

Mortgage-backed securities

     24,834        293        55,649        1,985        80,483        2,278  

States and political subdivisions

     8,470        122        19,678        735        28,148        857  
  

 

 

 

Total

     $ 39,242      $ 477      $ 175,359      $ 5,731      $ 214,601      $ 6,208  
  

 

 

 

December 31, 2017:

                 

U.S. Treasuries

     $ 49,586      $ 364      $ 73,058      $ 1,812      $ 122,644      $ 2,176  

U.S. Government agencies

     8,145        37        14,567        423        22,712        460  

Mortgage-backed securities

     60,230        415        13,492        627        73,722        1,042  

States and political subdivisions

     11,552        168        7,010        382        18,562        550  
  

 

 

 

Total

     $       129,513      $       984      $       108,127      $       3,244      $       237,640      $       4,228  
  

 

 

 

At December 31, 2018, 18 of the 18 securities issued by the U.S. Treasury, 5 of the 6 securities issued by U.S. Government agencies, 35 of the 45 mortgage-backed securities and 61 of the 146 securities issued by states and political subdivisions contained unrealized losses.

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 we 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 this evaluation, the Company has determined that the declines summarized in the tables above are not deemed to be other-than-temporary.

 

82


Table of Contents

Proceeds from sales of available for sale debt securities were $30,748,797 and $29,641,206 during 2017 and 2016, respectively. Available for sale debt securities were sold and called for realized gains of $133,986 and $157,925 during 2017 and 2016, respectively. There were no sales or calls of available for sale securities in 2018. Proceeds from sales of other investments were $125,145 for a realized gain of $16,995 during 2018.

Securities with a fair value of $206,017,056 and $196,702,218 at December 31, 2018 and 2017, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

NOTE C – LOANS:

The composition of the loan portfolio at December 31, 2018 and 2017 is as follows (in thousands):

 

December 31,    2018      2017  

Gaming

     $ 25,767      $ 26,142    

Residential and land development

     298        263    

Real estate, construction

     33,931        31,947    

Real estate, mortgage

     178,917        189,201    

Commercial and industrial

     27,505        26,360    

Other

     6,928        6,536    
  

 

 

 

Total

     $         273,346      $         280,449    
  

 

 

 

In the ordinary course of business, the Company’s bank subsidiary extends loans to certain officers and directors and their personal business interests at, in the opinion of Management, the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of similar credit risk with persons not related to the Company or its subsidiaries. These loans do not involve more than normal risk of collectability and do not include other unfavorable features. An analysis of the activity with respect to such loans to related parties is as follows (in thousands):

 

     2018      2017  

Balance, January 1

   $ 6,543        $ 6,658    

January 1 balances, loans of directors appointed during the year

     2,142       

New loans and advances

     2,272          907    

Repayments

     (1,800)         (1,022)   
  

 

 

 

Balance, December 31

   $         9,157        $         6,543    
  

 

 

 

 

83


Table of Contents

As part of its evaluation of the quality of the loan portfolio, Management monitors the Company’s credit concentrations on a monthly basis. Total outstanding concentrations were as follows (in thousands):

 

December 31,    2018      2017  

Gaming

   $         25,767      $         26,142  

Hotel/motel

     44,112        34,882  

Out of area

     15,244        14,597  

The age analysis of the loan portfolio, segregated by class of loans, as of December 31, 2018 and 2017 is as follows (in thousands):

 

     Number of Days Past Due                          

Loans Past
Due Greater
Than 90
Days and
Still Accruing

 
     30 -59      60 -89      Greater
Than 90
     Total
Past Due
     Current     

Total

Loans

 

December 31, 2018:

                    

Gaming

   $        $        $        $        $ 25,767      $ 25,767      $    

Residential and land development

                 298        298     

Real estate, construction

     1,987        340        860        3,187        30,744        33,931     

Real estate, mortgage

     2,866        7,129        1,730        11,725        167,192        178,917        51  

Commercial and industrial

     9        110        1,661        1,780        25,725        27,505        4  

Other

     107        3           110        6,818        6,928     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,969      $ 7,582      $ 4,251      $ 16,802      $ 256,544      $ 273,346      $ 55  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2017:

                    

Gaming

   $        $        $        $        $ 26,142      $ 26,142      $    

Residential and land development

                 263        263     

Real estate, construction

     747        121        522        1,390        30,557        31,947     

Real estate, mortgage

     5,321        790        4,884        10,995        178,206        189,201     

Commercial and industrial

     375        2        2,344        2,721        23,639        26,360     

Other

     26        3           29        6,507        6,536     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $         6,469      $         916      $         7,750      $         15,135      $         265,314      $         280,449      $                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 based 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, B, C, S, D, E or 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

 

84


Table of Contents

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. A grade of S will generally be applied to loans for customers who meet the criteria for a grade of C but also warrant additional monitoring by placement on the watch list. 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. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. 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 recovery may be possible in the future.

 

85


Table of Contents

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of December 31, 2018 and 2017 is as follows (in thousands):

 

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

December 31, 2018:

                 

Gaming

   $ 21,080      $        $ 4,687      $        $        $ 25,767  

Residential and land development

     65              233           298  

Real estate, construction

     32,497           217        1,217           33,931  

Real estate, mortgage

     150,365        10,430        12,992        5,130           178,917  

Commercial and industrial

     25,335           218        1,952           27,505  

Other

     6,904           20        4           6,928  
  

 

 

 

Total

   $ 236,246      $ 10,430      $ 18,134      $ 8,536      $        $ 273,346  
  

 

 

 

December 31, 2017:

                 

Gaming

   $ 26,142      $        $        $        $        $ 26,142  

Residential and land development

              263           263  

Real estate, construction

     30,412           358        1,177           31,947  

Real estate, mortgage

     148,284        11,550        19,606        9,761           189,201  

Commercial and industrial

     23,133           265        2,962           26,360  

Other

     6,516           16        4           6,536  
  

 

 

 

Total

   $         234,487      $         11,550      $         20,245      $         14,167      $                        $         280,449  
  

 

 

 

 

86


Table of Contents

A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of December 31, 2018 and 2017 are as follows (in thousands):

 

December 31,    2018      2017  

Residential and land development

   $ 233      $ 263  

Real estate, construction

     1,206        1,177  

Real estate, mortgage

     4,954        9,548  

Commercial and industrial

     1,855        2,818  

Other

     2        4  
  

 

 

 

Total

   $         8,250      $         13,810  
  

 

 

 

Prior to 2017, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2018 and 2017, the Company did not restructure any additional loans. Specific reserves of $69,000 and $86,000 have been allocated to troubled debt restructurings as of December 31, 2018 and 2017, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of December 31, 2018 and 2017.

 

87


Table of Contents

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of December 31, 2018 and 2017 were as follows (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

December 31, 2018:

              

With no related allowance recorded:

              

Real estate, construction

     $ 1,171      $ 784      $        $ 785      $    

Real estate, mortgage

     5,508        5,474           5,826        29    

Commercial and industrial

     2,083        1,855           2,204     

Other

     2        2           3     
  

 

 

 

Total

     8,764        8,115           8,818        29    
  

 

 

 

With a related allowance recorded:

              

Residential and land development

     233        233        20        246     

Real estate, construction

     509        422        263        387     

Real estate, mortgage

     574        574        101        589        25    
  

 

 

 

Total

     1,316        1,229        384        1,222        25    
  

 

 

 

Total by class of loans:

              

Residential and land development

     233        233        20        246     

Real estate, construction

     1,680        1,206        263        1,172     

Real estate, mortgage

     6,082        6,048