UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE

SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended              June 30, 2022

or

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

Commission File Number                      001-12103

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Mississippi	64-0709834
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(228) 435-5511

(Registrant's telephone number, including area code)

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

Title of each class	Trading Symbols	Name of each exchange on which registered
None	PFBX	None

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  ☒ 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 ☒ No ☐

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  ☐	Smaller reporting company ☒
Non-accelerated filer  ☐		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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At July 29, 2022 there were 15,000,000 shares of $1 par value common stock authorized, with 4,678,186 shares issued and outstanding.

1

Part 1 – Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

	June 30, 2022		December 31, 2021
	(unaudited)		(audited)
Assets
Cash and due from banks	$	21,834	$	49,991
Available for sale securities		432,608		376,803
Held to maturity securities, fair value of $124,130 at June 30, 2022; $111,340 at December 31, 2021		134,750		110,208
Other investments		350		350
Federal Home Loan Bank Stock, at cost		2,155		2,153
Loans		234,731		239,162
Less: Allowance for loan losses		3,379		3,311
Loans, net		231,352		235,851
Bank premises and equipment, net of accumulated depreciation		16,038		15,799
Other real estate		417		1,891
Accrued interest receivable		2,968		2,841
Cash surrender value of life insurance		20,485		20,150
Other assets		1,279		722
Total assets	$	864,236	$	816,759

See notes to consolidated financial statements.

2

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

	June 30, 2022			December 31, 2021
	(unaudited)			(audited)
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, non-interest bearing	$	204,005		$	193,473
Savings and demand, interest bearing		495,728			428,411
Time, $250,000 or more		42,389			43,613
Other time deposits		37,348			39,341
Total deposits		779,470			704,838
Borrowings from Federal Home Loan Bank		7,864			889
Employee and director benefit plans liabilities		19,457			19,332
Other liabilities		1,485			2,162
Total liabilities		808,276			727,221
Shareholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,678,186 shares issued and outstanding at June 30, 2022 and December 31, 2021		4,678			4,678
Surplus		65,780			65,780
Undivided profits		22,432			20,911
Accumulated other comprehensive loss, net of tax		(36,930	)		(1,831	)
Total shareholders' equity		55,960			89,538
Total liabilities and shareholders' equity	$	864,236		$	816,759

See notes to consolidated financial statements.

3

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data)(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Interest income:
Interest and fees on loans	$	2,675	$	3,075	$	5,370	$	6,329
Interest and dividends on securities:
U.S. Treasuries		608		175		838		237
U.S. Government agencies				25				51
Mortgage-backed securities		550		576		1,084		1,027
States and political subdivisions		1,147		934		2,314		1,714
Collateralized mortgage obligations		360		190		634		360
Other investments		2				3		2
Interest on balances due from depository institutions		116		20		155		56
Total interest income		5,458		4,995		10,398		9,776
Interest expense:
Deposits		259		261		413		521
Borrowings from Federal Home Loan Bank		6		6		12		12
Total interest expense		265		267		425		533
Net interest income		5,193		4,728		9,973		9,243
Provision for (reduction of) allowance for loan losses		28		22		53		(4,831	)
Net interest income after provision for (reduction of) allowance for loan losses	$	5,165	$	4,706	$	9,920	$	14,074

4

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data)(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Non-interest income:
Trust department income and fees	$	416	$	463	$	860	$	900
Service charges on deposit accounts		964		939		1,854		1,775
Gain on liquidation, sales and calls of securities				5				5
Increase in cash surrender value of life insurance		109		107		234		215
Other income		109		161		244		290
Total non-interest income		1,598		1,675		3,192		3,185
Non-interest expense:
Salaries and employee benefits		2,761		2,620		5,402		5,136
Net occupancy		463		442		945		903
Equipment rentals, depreciation and maintenance		783		754		1,554		1,535
FDIC and state banking assessments		91		87		199		196
Data processing		351		358		705		708
ATM expense		338		256		646		551
Other real estate expense		70		154		61		283
Loss from other investments				54				86
Other expense		851		867		1,658		2,742
Total non-interest expense		5,708		5,592		11,170		12,140
Income before income taxes		1,055		789		1,942		5,119
Net income	$	1,055	$	789	$	1,942	$	5,119
Basic and diluted earnings per share	$	.23	$	.16	$	0.42	$	1.05
Dividends declared per share	$				$	.09	$	.10

See notes to consolidated financial statements.

5

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net income	$	1,055		$	789		$	1,942		$	5,119
Other comprehensive income (loss):
Net unrealized (loss) gain on available for  sale securities		(15,765	)		938			(35,099	)		(3,310	)
Reclassification adjustment for realized gain on available for sale securities called or sold					(5	)					(5	)
Total other comprehensive (loss) income		(15,765	)		933			(35,099	)		(3,315	)
Total comprehensive (loss) income	$	(14,710	)	$	1,722		$	(33,157	)	$	1,804

See notes to consolidated financial statements.

6

Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(in thousands except share data)

										Accumulated
	Number of									Other
	Common		Common				Undivided			Comprehensive
	Shares		Stock		Surplus		Profits			Income (Loss)			Total
Balance, January 1, 2021		4,878,557	$	4,879	$	65,780	$	16,225		$	5,872		$	92,756
Net income								4,330						4,330
Other comprehensive (loss)											(4,248	)		(4,248	)
Dividend declared ($.10 per share)								(488	)					(488	)
Balance, March 31, 2021		4,878,557		4,879		65,780		20,067			1,624			92,350
Net income								789						789
Other comprehensive income											933			933
Balance, June 30, 2021		4,878,557	$	4,879	$	65,780	$	20,856		$	2,557		$	94,072
Balance, January 1, 2022		4,678,186	$	4,678	$	65,780	$	20,911		$	(1,831	)		89,538
Net income								887						887
Other comprehensive (loss)											(19,334	)		(19,334	)
Dividend ($ .09 per share)								(421	)					(421	)
Balance, March 31, 2022		4,678,186		4,678		65,780		21,377			(21,165	)		70,670
Net income								1,055						1,055
Other comprehensive (loss)											(15,765	)		(15,765	)
Balance, June 30, 2022		4,678,186	$	4,678	$	65,780	$	22,432		$	(36,930	)	$	55,960

Note: Balances as of January 1, 2021 and 2022 were audited.

See notes to consolidated financial statements.

7

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

	Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	1,942		$	5,119
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		889			918
Provision for (reduction of) allowance for loan losses		53			(4,831	)
Writedown of other real estate		72			212
(Gain) loss on sales of other real estate		(87	)		1
Loss from other investments					86
Amortization of held to maturity securities		256			187
Amortization of available for sale securities		235			125
Gain on sales and calls of securities					(5	)
Change in accrued interest receivable		(127	)		(359	)
Increase in cash surrender value of life insurance		(234	)		(215	)
Change in other assets		(557	)		5
Change in employee and director benefit plan liabilities and other liabilities		(552	)		(22	)
Net cash provided by operating activities	$	1,890		$	1,221

8

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

	Six Months Ended June 30,
	2022			2021
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities	$	12,761		$	29,594
Proceeds from maturities of held to maturity securities		5,142			3,540
Purchases of available for sale securities		(103,900	)		(117,678	)
Purchases of held to maturity securities		(29,940	)		(30,745	)
Purchases of Federal Home Loan Bank stock		(2	)		(2	)
Proceeds from sales of other real estate		1,489			655
Loans, net change		4,446			13,007
Acquisition of bank premises and equipment		(1,128	)		(853	)
Investment in cash surrender value of life insurance		(101	)		(89	)
Net cash used in investing activities		(111,233	)		(102,571	)
Cash flows from financing activities:
Demand and savings deposits, net change		77,849			75,775
Time deposits, net change		(3,217	)		22,696
Borrowings from Federal Home Loan Bank		14,000			22
Repayments to Federal Home Loan Bank		(7,025	)		(73	)
Cash dividends paid		(421	)		(488	)
Net cash provided by financing activities		81,186			97,932
Net (decrease) in cash and cash equivalents		(28,157	)		(3,418	)
Cash and cash equivalents, beginning of period		49,991			91,542
Cash and cash equivalents, end of period	$	21,834		$	88,124

See notes to consolidated financial statements.

9

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2022 and 2021

1. Basis of Presentation:

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

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of June 30, 2022 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2021 Annual Report and Form 10-K.

The results of operations for the periods ended June 30, 2022, are not necessarily indicative of the results to be expected for the full year.

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

Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2021.

Revision of Prior Period Financial Statements – Other investments includes a low income housing partnership in which the Company is a 99% limited partner (the “Investment”). After the Annual Report on Form 10-K was filed on March 25, 2022, the Company identified an error in the historical financial statements related to the accounting for the Investment. The Company accounted for the Investment under GAAP according to ASC 323, Equity Method and Joint Ventures, through the application of the equity method but should have also periodically evaluated the Investment for impairment. Management performed an impairment evaluation on the Investment with assistance from a third-party consultant, who is an expert in accounting for such investments. Based on the evaluation, management determined that the Investment had become impaired in prior years starting in 2012 through 2018.

10

 

The aggregate amount of the errors at each period end represented 3% or less of our shareholders' equity in all prior periods. In accordance with the guidance set forth in SEC Staff Accounting Bulletin 99, Materiality, and SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financials, the Company concluded that the error was not material, to any prior periods, the current period or the trend in earnings from a quantitative and qualitative perspective. However, correcting the cumulative effect of the errors in the current period would have resulted in a material misstatement in the current period and, as such, we have revised our previously reported financial information contained in our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2022 to correct the immaterial error. We will also revise previously reported financial information for these immaterial errors in our future filings, as applicable.

The Income Statements presented have not been affected by the revision.

A summary of revisions to certain previously reported financial information is presented below:

Revised Consolidated Statements of Condition as of December 31, 2021 (in thousands):

	As Reported		Adjustment			As Revised
Other investments	$	2,404	$	(2,054	)	$	350
Total assets		818,813		(2,054	)		816,759
Undivided profits		22,965		(2,054	)		20,911
Total shareholders' equity		91,592		(2,054	)		89,538

Revised Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2021 (in thousands):

	Six Months Ended June 30, 2021
	As Reported		Adjustment			As Revised
Beginning balance undivided profits	$	18,335	$	(2,110	)	$	16,225
Beginning balance total shareholders' equity		94,866		(2,110	)		92,756
Ending balance undivided profits		22,966		(2,110	)		20,856
Ending balance total shareholders' equity		96,182		(2,110	)		94,072

11

 

Accounting Standards Update –In March 2022, the Financial Accounting Standards Board issued Accounting Standards Update 2022-02 (“ASU 2022-02”), Financial Instruments-Credit Losses (Topic 326). ASU 2022-02 amends guidance relating to trouble debt restructurings for all entities after they have adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,678,186 and 4,878,557 for the six months ended June 30, 2022 and 2021, respectively. Per share data is based on the weighted average shares of common stock outstanding of 4,678,186 and 4,878,557 for the quarters ended June 30, 2022 and 2021, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $426,419 and $541,574 for the six months ended June 30, 2022 and 2021, respectively, for interest on deposits and borrowings. No income tax payments were made during the six months ended June 30, 2022 and 2021. No loans were transferred to other real estate during the six months ended June 30, 2022 and 2021.

12

 

4.  Investments:

The amortized cost and fair value of securities at June 30, 2022 and December 31, 2021, are as follows (in thousands):

			Gross		Gross
			Unrealized		Unrealized
June 30, 2022	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:
Debt securities:
U.S. Treasuries	$	178,072	$	16	$	(8,261	)	$	169,827
Mortgage-backed securities		65,776		195		(3,616	)		62,355
Collateralized mortgage obligations		122,771				(6,240	)		116,531
States and political subdivisions		103,246		2		(19,353	)		83,895
Total available for sale securities	$	469,865	$	213	$	(37,470	)	$	432,608
Held to maturity securities:
U.S. Treasuries	$	29,941	$		$	(326	)	$	29,615
States and political subdivisions		104,809		9		(10,303	)		94,515
Total held to maturity securities	$	134,750	$	9	$	(10,629	)	$	124,130

			Gross		Gross
			Unrealized		Unrealized
December 31, 2021	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:
U.S. Treasuries	$	73,889	$		$	(735	)	$	73,154
Mortgage-backed securities		71,187		1,236		(441	)		71,982
Collateralized mortgage obligations		130,181		841		(1,035	)		129,987
States and political subdivisions		103,704		293		(2,317	)		101,680
Total available for sale securities	$	378,961	$	2,370	$	(4,528	)	$	376,803
Held to maturity securities:
States and political subdivisions	$	110,208	$	1,760	$	(628	)	$	111,340
Total held to maturity securities	$	110,208	$	1,760	$	(628	)	$	111,340

13

 

The amortized cost and fair value of debt securities at June 30, 2022 (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.

	Amortized Cost		Fair Value
Available for sale securities:
Due in one year or less	$	85,046	$	84,858
Due after one year through five years		20,225		19,909
Due after five years through ten years		105,570		93,056
Due after ten years		70,477		55,899
Mortgage-backed securities		65,776		62,355
Collaterized mortgage obligations		122,771		116,531
Totals	$	469,865	$	432,608
Held to maturity securities:
Due in one year or less	$	3,761	$	3,764
Due after one year through five years		47,375		46,976
Due after five years through ten years		42,276		38,501
Due after ten years		41,338		34,889
Totals	$	134,750	$	124,130

14

 

Available for sale and held to maturity securities with gross unrealized losses at June 30, 2022 and December 31, 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):

		Less Than Twelve Months			Over Twelve Months				Total
				Gross				Gross				Gross
				Unrealized				Unrealized				Unrealized
		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
June 30, 2022:
U.S. Treasuries	$	194,574	$	8,587	$		$		$	194,574	$	8,587
Mortgage-backed securities		40,428		1,852		7,379		1,764		47,807		3,616
Collateralized mortgage obligations		113,813		6,093		2,718		147		116,531		6,240
States and political subdivisions		121,831		20,216		35,514		9,440		157,345		29,656
TOTAL	$	470,646	$	36,748	$	45,611	$	11,351	$	516,257	$	48,099
December 31, 2021:
U.S. Treasuries	$	73,154	$	735	$		$		$	73,154	$	735
Mortgage-backed securities		26,288		441						26,288		441
Collateralized mortgage obligations		66,369		1,035						66,369		1,035
States and political subdivisions		102,413		2,577		7,470		368		109,883		2,945
TOTAL	$	268,224	$	4,788	$	7,470	$	368	$	275,694	$	5,156

At June 30, 2022, 39 of the 48 mortgage-backed securities, 34 of the 34 collateralized mortgage obligations, 142 of the 209 securities issued by states and political subdivisions, and 32 of the 33 U.S. treasuries 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 it will be required to sell these securities before maturity. While some available for sale securities have been sold for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of the evaluation of these securities, the Company has determined that the unrealized losses summarized in the tables above are not deemed to be other-than-temporary.

There were no sales of available for sale debt securities for the six months ended June 30, 2022 and June 30, 2021.

15

 

Securities with a fair value of $303,930,500 and $229,092,900 at June 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

5. Loans:

The composition of the loan portfolio at June 30, 2022 and December 31, 2021, is as follows (in thousands):

	June 30, 2022		December 31, 2021
Gaming	$	11,791	$	7,900
Hotel/motel		40,485		50,765
Real estate, construction		30,742		27,191
Real estate, mortgage		130,247		128,352
Commercial and industrial		13,096		15,882
Other		8,370		9,072
Total	$	234,731	$	239,162

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of COVID-19, was signed into law. A provision in the CARES Act included funding for the creation of the Paycheck Protection Program (“PPP”). PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. At June 30, 2022, 10 loans with a balance of $819,668 were outstanding. At December 31, 2021, 40 loans with a balance of $2,819,944 were outstanding. All PPP loans are reported in the commercial and industrial segment within the loan portfolio.

16

 

The age analysis of the loan portfolio, segregated by class of loans, as of June 30, 2022 and December 31, 2021, is as follows (in thousands):

														Loans Past
														Due Greater
	Number of Days Past Due													Than 90
						Greater		Total				Total		Days &
		30 - 59		60 - 89		Than 90		Past Due		Current		Loans		Still Accruing
June 30, 2022:
Gaming	$		$		$		$		$	11,791	$	11,791	$
Hotel/motel										40,485		40,485
Real estate, construction		535		1,618				2,153		28,589		30,742
Real estate, mortgage		289		1,352				1,641		128,606		130,247
Commercial and industrial										13,096		13,096
Other		10		9				19		8,351		8,370
Total	$	834	$	2,979	$		$	3,813	$	230,918	$	234,731	$
December 31, 2021:
Gaming	$		$		$		$		$	7,900	$	7,900	$
Hotel/motel										50,765		50,765
Real estate, construction		105						105		27,086		27,191
Real estate, mortgage		1,996		60		63		2,119		126,233		128,352
Commercial and industrial		21		320				341		15,541		15,882
Other		209						209		8,863		9,072
Total	$	2,331	$	380	$	63	$	2,774	$	236,388	$	239,162	$

The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A, 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 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.

17

 

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of June 30, 2022 and December 31, 2021, is as follows (in thousands):

	Loans With A Grade Of:
	A, B or C		S		D		E			F	Total
June 30, 2022:
Gaming	$	11,791	$		$		$		$		$	11,791
Hotel/motel		40,485										40,485
Real estate, construction		29,776				785		181				30,742
Real estate, mortgage		127,231		81		2,467		468				130,247
Commercial and industrial		13,075				21						13,096
Other		8,362				8						8,370
Total	$	230,720	$	81	$	3,281	$	649	$		$	234,731
December 31, 2021:
Gaming	$	7,900	$		$		$		$		$	7,900
Hotel/motel		50,765										50,765
Real estate, construction		26,980				6		205				27,191
Real estate, mortgage		124,289		87		3,344		632				128,352
Commercial and industrial		15,834				27		21				15,882
Other		9,060				12						9,072
Total	$	234,828	$	87	$	3,389	$	858	$		$	239,162

18

 

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 June 30, 2022 and December 31, 2021, are as follows (in thousands):

	June 30, 2022		December 31, 2021
Real estate, construction	$	133	$	138
Real estate, mortgage		429		563
Total	$	562	$	701

Prior to 2021, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2021 and 2022, the Company did not restructure any additional loans. Specific reserves of $0 and $50,000 were allocated to troubled debt restructurings as of June 30, 2022 and December 31, 2021, respectively. The Company had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of June 30, 2022 and December 31, 2021.

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of June 30, 2022 and December 31, 2021, are as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2022:
With no related allowance recorded:
Real estate, construction	$	184	$	181	$		$	190	$	3
Real estate, mortgage		1,006		866				888		11
Total		1,190		1,047				1,078		14
With a related allowance recorded:
Real estate, construction		57		50		35		50
Total		57		50		35		50
Total by class of loans:
Real estate, construction		241		231		35		240		3
Real estate, mortgage		1,006		866				888		11
Total	$	1,247	$	1,097	$	35	$	1,128	$	14

19

 

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2021:
With no related allowance recorded:
Real estate, construction	$	272	$	205	$		$	369	$	7
Real estate, mortgage		1,014		1,014				1,075		21
Total		1,286		1,219				1,444		28
With a related allowance recorded:
Real estate, mortgage		199		199		70		203		5
Total		199		199		70		203		5
Total by class of loans:
Real estate, construction		272		205				369		7
Real estate, mortgage		1,213		1,213		70		1,278		26
Total	$	1,485	$	1,418	$	70	$	1,647	$	33

20

 

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the quarters and six months ended June 30, 2022 and 2021, and the balances of loans, individually and collectively evaluated for impairment, as of June 30, 2022 and 2021, are as follows (in thousands):

	Gaming		Hotel/Motel			Real Estate, Construction		Real Estate, Mortgage		Commercial and Industrial			Other			Total
For the Six Months Ended June 30, 2022:
Allowance for Loan Losses:
Beginning balance	$	102	$	691		$	139	$	2,049	$	252		$	78		$	3,311
Charge-offs														(129	)		(129	)
Recoveries									48		22			74			144
Provision		56		(120	)		68		29		(34	)		54			53
Ending Balance	$	158	$	571		$	207	$	2,126	$	240		$	77		$	3,379
For the Quarter Ended June 30, 2022:
Allowance for Loan Losses:
Beginning Balance	$	137	$	661		$	175	$	2,042	$	275		$	78		$	3,368
Charge-offs														(53	)		(53	)
Recoveries											14			22			36
Provision		21		(90	)		32		84		(49	)		30			28
Ending Balance	$	158	$	571		$	207	$	2,126	$	240		$	77		$	3,379
Allowance for Loan Losses, June 30, 2022:
Ending balance: individually evaluated for impairment	$		$			$		$	124	$	21		$			$	145
Ending balance: collectively evaluated for impairment	$	158	$	571		$	208	$	2,002	$	219		$	77		$	3,235
Total Loans, June 30, 2022:
Ending balance: individually evaluated for impairment	$		$			$	966	$	2,935	$	21		$	8		$	3,930
Ending balance: collectively evaluated for impairment	$	11,791	$	40,485		$	29,776	$	127,312	$	13,075		$	8,362		$	230,801

21

 

	Gaming			Hotel/Motel		Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Six Months Ended June 30, 2021:
Allowance for Loan Losses:
Beginning balance	$	186		$	754	$	111		$	2,849		$	417		$	109		$	4,426
Charge-offs							(2	)		(2	)					(135	)		(139	)
Recoveries							18			4,510			75			69			4,672
Provision		4			185		50			(5,021	)		(135	)		86			(4,831	)
Ending Balance	$	190		$	939	$	177		$	2,336		$	357		$	129		$	4,128
For the Quarter Ended June 30, 2021:
Allowance for Loan Losses:
Beginning Balance	$	192		$	816	$	126		$	2,469		$	349		$	120		$	4,072
Charge-offs																(54	)		(54	)
Recoveries													61			27			88
Provision		(2	)		123		51			(133	)		(53	)		36			22
Ending Balance	$	190		$	939	$	177		$	2,336		$	357		$	129		$	4,128
Allowance for Loan Losses, June 30, 2021:
Ending balance: individually evaluated for impairment	$			$		$	20		$	173		$	38		$			$	231
Ending balance: collectively evaluated for impairment	$	190		$	939	$	157		$	2,163		$	319		$	129		$	3,897
Total Loans, June 30, 2021:
Ending balance: individually evaluated for impairment	$			$		$	422		$	5,710		$	80		$	16		$	6,228
Ending balance: collectively evaluated for impairment	$	14,788		$	52,465	$	27,942		$	126,506		$	31,833		$	10,171		$	263,705

7. Deposits:

Time deposits of $250,000 or more totaled approximately $42,389,000 and $43,613,000 at June 30, 2022 and December 31, 2021, respectively.

8. Shareholders’ Equity:

On March 11, 2022, the Board declared a dividend of $ .09 per share payable March 30, 2022 to shareholders of record on March 23, 2022.

9. Fair Value Measurements and Disclosures:

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

22

 

Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices. The Company’s held to maturity securities are reported at their amortized cost, and their estimated fair value, which is determined utilizing several sources, is disclosed in the financial statements and footnotes. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s held to maturity securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

23

 

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

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

Loans

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

Other Real Estate

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

24

 

Cash Surrender Value of Life Insurance

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

Deposits

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

Borrowings from Federal Home Loan Bank

The fair value of Federal Home Loan Bank (“FHLB”) fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of FHLB variable rate borrowings is estimated to be its carrying value.

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of June 30, 2022 and December 31, 2021 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
June 30, 2022:
U.S. Treasuries	$	169,827	$	$	169,827	$
Mortgage-backed securities		62,355			62,355
Collateralized mortgage obligations		116,531			116,531
States and political subdivisions		83,895			83,895
Total	$	432,608	$	$	432,608	$
December 31, 2021:
U.S. Treasuries	$	73,154	$	$	73,154	$
Mortgage-backed securities		71,982			71,982
Collateralized mortgage obligations		129,987			129,987
States and political subdivisions		101,680			101,680
Total	$	376,803	$	$	376,803	$

25

 

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2022 and December 31, 2021 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
June 30, 2022	$	15	$	$	$	15
December 31, 2021		129				129

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2022 and December 31, 2021 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
June 30, 2022	$	417	$	$	$	417
December 31, 2021		1,891				1,891

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

	For the Six			For the Year
	Months Ended			Ended
	June 30, 2022			December 31, 2021
Balance, beginning of period	$	1,891		$	3,475
Loans transferred to ORE					14
Sales		(1,402	)		(1,299	)
Writedowns		(72	)		(299	)
Balance, end of period	$	417		$	1,891

26

 

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at June 30, 2022 and December 31, 2021, are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2022:
Financial Assets:
Cash and due from banks	$	21,834	$	21,834	$		$		$	21,834
Available for sale securities		432,608				432,608				432,608
Held to maturity securities		134,750				124,130				124,130
Other investments		350		350						350
Federal Home Loan Bank stock		2,155				2,155				2,155
Loans, net		231,352						221,126		221,126
Cash surrender value of life insurance		20,485				20,485				20,485
Financial Liabilities:
Deposits:
Non-interest bearing		204,005		204,005						204,005
Interest bearing		575,465						575,986		575,986
Borrowings from Federal Home Loan
Bank		7,864				7,886				7,886

	Carrying		Fair value Measuremeents Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2021:
Financial Assets:
Cash and due from banks	$	49,991	$	49,991	$		$		$	49,991
Available for sale securities		376,803				376,803				376,803
Held to maturity securities		110,208				111,340				111,340
Other investments		350		350						350
Federal Home Loan Bank stock		2,153				2,153				2,153
Loans, net		235,851						238,305		238,305
Cash surrender value of life insurance		20,150				20,150				20,150
Financial Liabilities:
Deposits:
Non-interest bearing		193,473		193,473						193,473
Interest bearing		511,365						512,034		512,034
Borrowings from Federal Home Loan
Bank		889				1,072				1,072

10. Acquisition of Corporate Trust Business

On March 17, 2022, the bank subsidiary signed a definitive agreement with Trustmark National Bank (“Trustmark”) to acquire substantially all of the Trustmark’s corporate trust business for a purchase price of $650,000. This book of business will be added to the bank subsidiary’s existing corporate trust portfolio in its Asset Management and Trust Services Department. The purchase was approved by the Federal Deposit Insurance Corporation and is expected to close during the third quarter of 2022.

27

 

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

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

The following presents Management's discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2021.

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: the effects of the COVID-19 pandemic on the Company’s business, customers, employees and third-party service providers, 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 including the potential impact of the COVID-19 pandemic used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in statutes, government regulations or regulatory policies or practices in general and specifically as a result of the COVID-19 pandemic and acts of terrorism, weather or other events beyond the Company’s control.

28

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.

For a description of the Company's critical accounting estimates, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in the Company's 2021 Annual Report. The Company considers its most significant accounting estimates to be those applied to the Allowance for Loan Losses and Income Taxes. There have been no material changes to the Company's critical accounting estimates since December 31, 2021.

GAAP Reconciliation and Explanation

This Form 10-Q 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. A reconciliation of these operating performance measures to GAAP performance measures for the three months and six months ended June 30, 2022 and 2021 is included on the following page.

29

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Interest income reconciliation:
Interest income - taxable equivalent	$	5,496		$	5,053		$	10,525		$	9,888
Taxable equivalent adjustment		(38	)		(58	)		(127	)		(112	)
Interest income (GAAP)	$	5,458		$	4,995		$	10,398		$	9,776
Net interest income reconciliation:
Net interest income - taxable equivalent	$	5,231		$	4,786		$	10,100		$	9,355
Taxable equivalent adjustment		(38	)		(58	)		(127	)		(112	)
Net interest income (GAAP)	$	5,193		$	4,728		$	9,973		$	9,243

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 reported net income of $1,055,000 for the second quarter of 2022 compared with net income of $789,000 for the second quarter of 2021. The Company reported net income of $1,942,000 for the first half of 2022 compared with net income of $5,119,000 for the first half of 2021. Results in the second quarter of 2022 included an increase in interest income on securities which was slightly offset by a decrease in non-interest income and an increase in non-interest expense as compared with the second quarter of 2021. Results for the first two quarters of 2021 were significantly more than the first two quarters of 2022 due to a large reduction in the provision for loan losses which was partially offset by an increase in non-interest income and a decrease in non-interest expense due to the settlement of a lawsuit.

Managing the net interest margin is a key component of the Company’s earnings strategy. Although in 2022 the Federal Reserve has increased rates, the current interest rate environment remains low. The Company adopted new investment strategies in 2021 to improve yields on its securities while not compromising duration or credit risk. As a result, total year to date interest income increased $622,000 in 2022 as compared with 2021.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be a major focus of the Company. A provision for the allowance for loan losses of $28,000 was recorded in the second quarter of 2022 as compared with $22,000 for the second quarter of 2021. A provision for the allowance for loan losses of $53,000 was recorded for the first two quarters of 2022 compared to a reduction in the allowance for losses of $4,831,000 for the first two quarters of 2021. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $562,000 and $701,000 at June 30, 2022 and December 31, 2021, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

30

Non-interest income decreased $77,000 for the second quarter of 2022 as compared with 2021 results. Non-interest income increased $7,000 for the first two quarters of 2022 as compared with 2021 results. Results in 2022 included higher service charge income of $79,000 along with an increase of $19,000 in the cash surrender value on life insurance offset somewhat by lower trust department income and fees of $40,000 and lower other income of $46,000.

Non-interest expense increased $116,000 for the quarter ended June 30, 2022 as compared with 2021 results. This increase for the second quarter of 2022 was primarily the result of the increase in salaries and employee benefits of $141,000 and ATM expense of $82,000 in 2022 as compared with 2021. Non-interest expense decreased $970,000 for the two quarters ended June 30, 2022 as compared with 2021 results. This decrease for the two quarters ended June 30, 2022 was primarily the result of the settlement of a lawsuit in other expense of $1,125,000 in 2021 offset somewhat by higher ATM expenses and higher salary expenses.

Total assets at June 30, 2022 increased $47,477,000 as compared with December 31, 2021. Total deposits increased $74,632,000 primarily as governmental entities’ balances increased due to tax collections. This increase in deposits funded an increase in available for sale securities of $55,805,000 and held to maturity securities of $24,542,000.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the amount by which interest income on loans, investments and other interest- earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company's income. Management's objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income.

Quarter Ended June 30, 2022 as Compared with Quarter Ended June 30, 2021

The Company’s average interest-earning assets increased approximately $161,428,000, or 23%, from approximately $697,656,000 for the second quarter of 2021 to approximately $859,084,000 for the second quarter of 2022.

The Company’s average balance sheet increased primarily as average investments increased approximately $164,869,000, average balances due from financial institutions increased approximately $28,498,000, partially offset by a decrease in average loans of approximately $31,941,000 for the second quarter of 2022 as compared with the second quarter of 2021. Average loans decreased as principal payments, particularly on PPP loans, maturities, and charge-offs on existing loans exceeded new loans. Funds available from the decrease in average loans and the increase in balances due from financial institutions and the increase in average deposits were used to increase the investments in securities.

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The average yield on interest-earning assets decreased by 34 basis points, from 2.90% for the second quarter of 2021 to 2.56% for the second quarter of 2022. This decrease is primarily due to a decrease in loan volume along with a decrease in PPP loan fee income recognized in 2022.

Average interest-bearing liabilities increased approximately $164,547,000 or 36%, from approximately $453,841,000 for the second quarter of 2021 to approximately $618,388,000 for the second quarter of 2022. Average savings and interest bearing DDA deposits increased approximately $124,385,000 primarily as several large public fund customers maintained higher balances with our bank subsidiary in 2022 and some of the PPP loan proceeds were deposited into and maintained in customers’ accounts. Average time deposits increased approximately $40,066,000 as some public fund customers invested in time deposits.

The average rate paid on interest-bearing liabilities for the second quarter of 2021 was .24% as compared with .17% for the second quarter of 2022. Although in the first and second quarters of 2022 the Federal Reserve increased rates, the current interest rate environment remains low.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.74% for the second quarter of 2021 as compared with 2.44% for the second quarter of 2022.

Six Months Ended June 30, 2022 as Compared with Six Months Ended June 30, 2021

The Company’s average interest-earning assets increased approximately $129,744,000, or 19%, from approximately $693,531,000 for the first two quarters of 2021 to approximately $823,275,000 for the first two quarters of 2022. The Company’s average balance sheet increased primarily as average held to maturity securities increased approximately $26,356,000 and average available for sale securities increased approximately $153,216,000. These increases were funded by the increase in savings, interest-bearing DDA balances and time deposits during the same period.

The average yield on earning assets decreased from 2.85% for the first two quarters of 2021 to 2.56% for the first two quarters of 2022. This decrease is primarily due to a decrease in loan volume along with a decrease in PPP loan fee income recognized in 2022.

Average interest-bearing liabilities increased approximately $144,025,000, or 32%, from approximately $455,249,000 for the first two quarters of 2021 to approximately $599,274,000 for the first two quarters of 2022. Average savings and interest bearing DDA balances increased approximately $111,211,000 primarily as several large public fund customers maintained higher balances with our bank subsidiary in the current year and some of the PPP loan proceeds were deposited into and maintained in customers’ accounts. Average time deposits increased approximately $32,801,000 as some larger public fund customers invested their balances in large time deposits.

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The average rate paid on interest-bearing liabilities for the first two quarters of 2021 was .23% compared with .14% for the first two quarters of 2022. Although in the first and second quarters of 2022 the Federal Reserve increased rates, the current interest rate environment remains low.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.70% for the first two quarters of 2021 as compared with 2.45% for the first two quarters of 2022.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and six months ended June 30, 2022 and 2021.

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Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Quarter Ended June 30, 2022							Quarter Ended June 30, 2021
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	239,111	$	2,675		4.47	%	$	271,052	$	3,075		4.54	%
Balances due from depository institutions		88,599		92		0.42	%		60,101		21		0.14	%
HTM:
Taxable		83,474		530		2.54	%		67,736		434		2.56	%
Non taxable (1)		36,393		252		2.77	%		29,497		222		3.01	%
AFS:
Taxable		404,331		1,904		1.88	%		261,247		1,254		1.92	%
Non taxable (1)		5,023		41		3.26	%		5,872		46		3.13	%
Other		2,153		2		0.37	%		2,151		1		0.19	%
Total	$	859,084	$	5,496		2.56	%	$	697,656	$	5,053		2.90	%
Savings & interest-bearing DDA	$	513,302	$	178		0.14	%	$	388,917	$	189		0.19	%
Time deposits		104,064		81		0.31	%		63,998		72		0.45	%
Borrowings from
FHLB		1,022		6		2.35	%		926		6		2.59	%
Total	$	618,388	$	265		0.17	%	$	453,841	$	267		0.24	%
Net tax-equivalent spread						2.39	%						2.66	%
Net tax-equivalent margin on earning assets						2.44	%						2.74	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2022 and 2021. See disclosure of Non-GAAP financial measures on pages 30 and 31.

(2) Loan fees of $152 and $301 for 2022 and 2021, respectively, are included in these figures. Loan fees related to PPP loans of $30 and $115 were recognized in 2022 and 2021, respectively.

(3) Average balance includes nonaccrual loans.

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Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Six Months Ended June 30, 2022							Six Months Ended June 30, 2021
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	237,833	$	5,370		4.52	%	$	273,326	$	6,329		4.63	%
Balances due from depository institutions		79,135		155		0.39	%		93,472		57		0.12	%
HTM:
Taxable		77,421		981		2.53	%		59,892		783		2.61	%
Non taxable (1)		37,040		515		2.78	%		28,213		433		3.07	%
AFS:
Taxable		384,439		3,418		1.78	%		230,538		2,191		1.90	%
Non taxable (1)		5,254		83		3.16	%		5,939		93		3.13	%
Other		2,153		3		0.28	%		2,151		2		0.19	%
Total	$	823,275	$	10,525		2.56	%	$	693,531	$	9,888		2.85	%
Savings & interest- bearing DDA	$	502,563	$	281		0.11	%	$	391,352	$	362		0.18	%
Time deposits		95,758		131		0.27	%		62,957		158		0.50	%
Borrowings from
FHLB		953		12		2.52	%		940		13		2.77	%
Total	$	599,274	$	424		0.14	%	$	455,249	$	533		0.23	%
Net tax-equivalent spread						2.42	%						2.62	%
Net tax-equivalent margin on earning assets						2.45	%						2.70	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2022 and 2021. See disclosure of Non-GAAP financial measures on pages 29 and 30.

(2) Loan fees of $382 and $697 for 2022 and 2021, respectively, are included in these figures. Loan fees related to PPP loans of $89 and $484 were recognized in 2022 and 2021, respectively.

(3) Average balance includes nonaccrual loans.

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Quarter Ended
	June 30, 2022 compared with June 30, 2021
	Volume			Rate			Rate/Volume			Total
Interest earned on:
Loans	$	(362	)	$	(43	)	$	5		$	(400	)
Balances due from financial institutions		10			41			20			71
Held to maturity securities:
Taxable		101			(4	)		(1	)		96
Non taxable		52			(18	)		(4	)		30
Available for sale securities:
Taxable		687			(24	)		(13	)		650
Non taxable		(7	)		2						(5	)
Other					1						1
Total	$	481		$	(45	)	$	7		$	443
Interest paid on:
Savings & interest-bearing
DDA	$	60		$	(54	)	$	(17	)	$	(11	)
Time deposits		45			(22	)		(14	)		9
Borrowings from FHLB		1			(1	)
Total	$	106		$	(77	)	$	(31	)	$	(2	)

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Six Months Ended
	June 30, 2022 compared with June 30, 2021
	Volume			Rate			Rate/Volume			Total
Interest earned on:
Loans	$	(822	)	$	(158	)	$	20		$	(960	)
Balances due from financial institutions		(9	)		126			(19	)		98
Held to maturity securities:
Taxable		229			(24	)		(7	)		198
Non taxable		135			(41	)		(13	)		81
Available for sale securities:
Taxable		1,463			(142	)		(94	)		1,227
Non taxable		(11	)		1						(10	)
Other					1						1
Total	$	985		$	(237	)	$	(113	)	$	635
Interest paid on:
Savings & interest-bearing
DDA	$	103		$	(143	)	$	(41	)	$	(81	)
Time deposits		82			(72	)		(37	)		(27	)
Borrowings from FHLB					(1	)					(1	)
Total	$	185		$	(216	)	$	(78	)	$	(109	)

Provision for the 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 and indirect impact on its 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 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.

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

The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Nonaccrual loans totaled $562,000 and $701,000 with specific reserves on these loans of $35,000 and $20,000, at June 30, 2022 and December 31, 2021, respectively. These 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 provision for the allowance for loan losses of $28,000 and $22,000 for the second quarters of 2022 and 2021, respectively, and $53,000 for the first two quarters of 2022. The Company recorded a reduction of the allowance for loan losses of $4,831,000 for the first two quarters of 2021. The negative provision in 2021 is primarily the result of a $4,510,000 recovery realized during the first quarter on a loan in the real estate, mortgage segment. The allowance for loan losses as a percentage of loans was 1.44% and 1.38% at June 30, 2022 and December 31, 2021, respectively. The Company believes that its allowance for loan losses is appropriate as of June 30, 2022.

The allowance for loan losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in future quarters, particularly the potential effect of COVID-19 on loan performance, which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations.

Non-interest income

Quarter Ended June 30, 2022 as Compared with Quarter Ended June 30, 2021

Non-interest income decreased $77,000 for the second quarter of 2022 as compared with the second quarter of 2021. Results in 2022 included lower trust department income and fees of $47,000 and lower other income of $52,000 offset somewhat by higher service charge income of $25,000.

Six Months Ended June 30, 2022 as Compared with Six Months Ended June 30, 2021

Non-interest income increased $7,000 for the first two quarters of 2022 as compared with the first two quarters of 2021. Results in 2022 included higher service charge income of $79,000 along with an increase of $19,000 in the cash surrender value on life insurance offset somewhat by lower trust department income and fees of $40,000 and lower other income of $46,000.

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Non-interest expense

Quarter Ended June 30, 2022 as Compared with Quarter Ended June 30, 2021

Total non-interest expense increased $116,000 for the second quarter of 2022 as compared with the second quarter of 2021. In 2022, salaries and employee benefits increased $141,000 and ATM expenses increased $82,000. Other real estate costs decreased $84,000 as a result of selling ORE in 2022 compared to 2021.

Six Months Ended June 30, 2022 as Compared with Six Months Ended June 30, 2021

Total non-interest expense decreased $970,000 for the first two quarters of 2022 as compared with the first two quarters of 2021. In 2022, ATM expenses increased $95,000 and other expense decreased $1,084,000.

ATM expense increased as costs associated with debit card processing increased since conversion to a new provider.

Other expenses primarily decreased due to the settlement of a lawsuit for $1,125,000 and an increase in non-recurring legal and consulting costs relating to the contested 2021 annual shareholders’ meeting.

Income Taxes

At December 31, 2014, the Company established a full valuation allowance on its deferred tax assets. Until such time as the Company returns to sustained earnings, and it is determined that it is more likely than not that the deferred tax asset will be realized, no income tax benefit or expense will generally be recorded.

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FINANCIAL CONDITION

Cash and due from banks decreased $28,157,000 at June 30, 2022, compared with December 31, 2021 in the management of the Bank’s liquidity position.

Available for sale securities increased $55,805,000 at June 30, 2022, compared with December 31, 2021. During the first two quarters of 2022, there were $103,900,000 in purchases offset by an unrealized loss recorded of $35,099,000 and maturities of $12,761,000. As discussed in Note 4, the Company evaluates securities for impairment on a monthly basis. This evaluation considers a number of factors including the cause of a decline in value. These unrealized losses resulted primarily from higher interest rates that have impacted the current market value of available for sale securities but they do not currently appear related to any credit deterioration within the portfolio. Even though these securities have been classified as available for sale, the Company has traditionally held these securities until maturity. Although these unrealized losses recorded in the first two quarters of 2022 were significant, management does not anticipate these losses to be other than temporary.

Held to maturity securities increased $24,542,000 at June 30, 2022, compared with December 31, 2021. These increases were funded by the increase in savings, interest-bearing DDA balances and time deposits during the same period.

Total deposits increased $74,632,000 at June 30, 2022, compared with December 31, 2021. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. Deposits from county and municipal entities increase significantly during the first two quarters of each year based on property tax collections and PPP loans.

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.

As of June 30, 2022, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must have a Total risk-based capital ratio of 10.00% or greater, a Common Equity Tier 1 Capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater and a Leverage capital ratio of 5.00% or greater. The Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

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The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of June 30, 2022 and December 31, 2021, are as follows (in thousands):

						For Capital Adequacy
	Actual					Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2022:
Total Capital (to Risk Weighted Assets)	$	95,676		20.53	%	$	37,279		8.00	%	$	46,599		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		92,297		19.81	%		20,970		4.50	%		30,289		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		92,297		19.81	%		27,959		6.00	%		37,279		8.00	%
Tier 1 Capital (to Average Assets)		92,297		9.92	%		37,227		4.00	%		46,534		5.00	%
December 31, 2021:
Total Capital (to Risk Weighted Assets)	$	93,988		20.98	%	$	35,839		8.00	%	$	44,799		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		90,677		20.24	%		20,160		4.50	%		29,119		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		90,677		20.24	%		26,879		6.00	%		35,839		8.00	%
Tier 1 Capital (to Average Assets)		90,677		11.13	%		32,599		4.00	%		40,749		5.00	%

Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of being “well-capitalized” by the banking regulatory authorities.

LIQUIDITY

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

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

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Item 4: Controls and Procedures

An evaluation was performed in the first quarter of this year, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, because a previously reported material weakness in the Company’s internal control over financial reporting had not been fully remediated by March 31, 2022, the Company’s disclosure controls and procedures were not considered to be fully effective as of that date. The material weakness in the Company’s internal control over financial reporting and the Company’s remediation measures are described under Item 4 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022. Such disclosure is filed as Exhibit 99.1 to this Current Report on Form 10-Q and is incorporated herein by reference.

We believe the actions described in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting.  However, we do not believe that the new and enhanced controls and procedures have been implemented for a sufficient amount of time for management to conclude that the material weakness in the Company’s internal controls over financial reporting has been fully remediated, and we are still in the process of improving those internal controls. We will continue to work on and monitor the effectiveness of these controls and will make any further changes that management determines to be appropriate.

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

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

Additionally, a Complaint has been filed by Stilwell Activist Investments, L.P., against the Company in the Chancery Court of Harrison County, Mississippi, requesting that the Company be compelled to allow the plaintiff to inspect and copy certain corporate records of the Company. The plaintiff, Stilwell Activist Investments, L.P., is a shareholder of record of the Company and is controlled by Joseph Stilwell, an individual who beneficially owns 11.2% of the issued and outstanding common stock of the Company according to an Amended Schedule 13D filed by Mr. Stilwell and his related entities with the SEC on July 12, 2022, disclosing Company stock beneficially owned by Mr. Stilwell’s group. Mr. Stilwell and his related entities, including Stilwell Activist Investments, L.P., have nominated individuals for election to the Board of Directors of the Company at its 2021 and 2022 annual meetings, but those individuals were not elected. The Complaint filed by Stilwell Activist Investments, L.P., alleges that it is entitled to inspect and copy certain Company records under the Mississippi Business Corporations Act based upon a request previously made and refused by the Company for non-compliance with state law; however, the plaintiff does not seek damages. The Company disputes the allegations in the Complaint. As of the date of this report, the Company has not responded to the Complaint.

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Item 5: Other Information

None.

Item 6 - Exhibits

Exhibit 31.1:	Certification of Chief Executive Officer Pursuant toSection 302 of the Sarbanes - Oxley Act of 2002
Exhibit 31.2:	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 32.1:	Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2:	Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 99.1:	Item 4: Controls and Procedures as filed on Form 10-Q for the quarter ended March 31, 2022.
Exhibit 101	The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Condition at June 30, 2022 and December 31, 2021, (ii) Consolidated Statements of Income for the quarters and six months ended June 30, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended June 30, 2022 and 2021, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended March 31, 2021 and June 30, 2021 and March 31, 2022 and June 30, 2022, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 and (vi) Notes to the Unaudited Consolidated Financial Statements for the six months ended June 30, 2022 and 2021.
Exhibit 104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

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SIGNATURES

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

	PEOPLES FINANCIAL CORPORATION
	(Registrant)
Date:	August 10, 2022
By:	/s/ Chevis C. Swetman
	Chevis C. Swetman
	Chairman, President and Chief Executive Officer
	(principal executive officer)
Date:	August 10, 2022
By:	/s/ Leslie B. Fulton
	Leslie B. Fulton
	Chief Financial Officer and Controller
	(principal financial and accounting officer)

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