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, 2023

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:

	Trading
Title of each class	Symbol(s)	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 28, 2023 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, 2023		December 31, 2022
	(unaudited)		(audited)
Assets
Cash and due from banks	$	61,416	$	32,836
Available for sale securities		329,402		350,168
Held to maturity securities, fair value of $208,513 at June 30, 2023; $180,050 at December 31, 2022		222,838		195,217
Other investments		350		350
Federal Home Loan Bank Stock, at cost		2,221		2,175
Loans		234,280		237,878
Less: Allowance for loan losses		3,224		3,338
Loans, net		231,056		234,540
Bank premises and equipment, net of accumulated depreciation		19,404		18,499
Other real estate		952		259
Accrued interest receivable		3,323		3,274
Cash surrender value of life insurance		21,090		20,768
Intangible asset		569		600
Other assets		3,055		2,953
Total assets	$	895,676	$	861,639

2

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

	June 30, 2023			December 31, 2022
	(unaudited)			(audited)
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, non-interest bearing	$	213,703		$	198,097
Savings and demand, interest bearing		560,002			546,565
Time, $250,000 or more		7,636			8,773
Other time deposits		29,157			32,345
Total deposits		810,498			785,780
Employee and director benefit plans liabilities		19,467			19,198
Other liabilities		1,185			1,467
Total liabilities		831,150			806,445
Shareholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,678,186 shares issued and outstanding at June 30, 2023 and December 31, 2022		4,678			4,678
Surplus		65,780			65,780
Undivided profits		36,045			31,154
Accumulated other comprehensive loss		(41,977	)		(46,418	)
Total shareholders' equity		64,526			55,194
Total liabilities and shareholders' equity	$	895,676		$	861,639

See Notes to Consolidated Financial Statements.

3

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data) (unaudited) (restated)

	Three Months Ended June 30,					Six Months Ended June 30,
	2023			2022		2023			2022
Interest income:
Interest and fees on loans	$	3,295		$	2,675	$	6,272		$	5,370
Interest and dividends on securities:
U.S. Treasuries		2,205			608		3,866			838
Mortgage-backed securities		881			550		1,799			1,084
States and political subdivisions		1,074			1,147		2,180			2,314
Collateralized mortgage obligations		869			360		1,709			634
Other investments		29			2		57			3
Interest on balances due from depository institutions		297			116		1,204			155
Total interest income		8,650			5,458		17,087			10,398
Interest expense:
Deposits		1,447			259		2,825			413
Borrowings from Federal Home Loan Bank		1			6		10			12
Total interest expense		1,448			265		2,835			425
Net interest income		7,202			5,193		14,252			9,973
Provision for credit losses		(312	)		28		(297	)		53
Net interest income after provision for allowance for credit losses	$	7,514		$	5,165	$	14,549		$	9,920

4

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data) (unaudited) (restated)

	Three Months Ended June 30,					Six Months Ended June 30,
	2023			2022		2023		2022
Non-interest income:
Trust department income and fees	$	634		$	416	$	1,224	$	860
Service charges on deposit accounts		884			964		1,753		1,854
Increase in cash surrender value of life insurance		117			109		232		234
Other income		168			109		301		244
Total non-interest income		1,803			1,598		3,510		3,192
Non-interest expense:
Salaries and employee benefits		2,948			2,761		5,815		5,402
Net occupancy		495			463		958		945
Equipment rentals, depreciation and maintenance		681			746		1,344		1,480
FDIC and state banking assessments		116			91		233		199
Data processing		306			351		648		705
ATM expense		(72	)		338		169		646
Other real estate expense		46			70		37		61
Legal expense		180			106		309		208
Other expense		896			745		1,755		1,450
Total non-interest expense		5,596			5,671		11,268		11,096
Income before income taxes		3,721			1,092		6,791		2,016
Income tax expense		811			-		1,258		-
Net income	$	2,910		$	1,092	$	5,533	$	2,016
Basic and diluted earnings per share	$	0.62		$	0.23	$	1.18	$	0.43
Dividends declared per share	$	0.12		$	-	$	0.12	$	0.09

See Notes to Consolidated Financial Statements.

5

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited) (restated)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023		2022
Net income	$	2,910		$	1,092		$	5,533	$	2,016
Other comprehensive income (loss):
Net unrealized (loss) gain on available for sale securities		(610	)		(15,765	)		4,441		(35,099	)
Total other comprehensive (loss) income		(610	)		(15,765	)		4,441		(35,099	)
Total comprehensive (loss) income	$	2,300		$	(14,673	)	$	9,974	$	(33,083	)

See Notes to Consolidated Financial Statements.

6

Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(in thousands except share data) (unaudited) (restated)

										Accumulated
	Number of									Other
	Common		Common				Undivided			Comprehensive
	Shares		Stock		Surplus		Profits			Income (loss)			Total
Balance, January 1, 2022		4,678,186	$	4,678	$	65,780	$	23,102		$	(1,831	)	$	91,729
Net income								924						924
Other comprehensive (loss)											(19,334	)		(19,334	)
Dividend declared ($ 0.09 per share)								(421	)					(421	)
Balance, March 31, 2022		4,678,186	$	4,678	$	65,780	$	23,605		$	(21,165	)	$	72,898
Net income								1,092						1,092
Other comprehensive (loss)											(15,765	)		(15,765	)
Balance, June 30, 2022		4,678,186	$	4,678	$	65,780	$	24,697		$	(36,930	)	$	58,225
Balance, January 1, 2023		4,678,186	$	4,678	$	65,780	$	31,154		$	(46,418	)	$	55,194
Cumulative effect of accounting change								(81	)					(81	)
Total shareholders' equity at beginning of period, as adjusted		4,678,186		4,678		65,780		31,073			(46,418	)		55,113
Net income								2,623						2,623
Other comprehensive income											5,051			5,051
Balance, March 31, 2023		4,678,186	$	4,678	$	65,780	$	33,696		$	(41,367	)	$	62,787
Net income								2,910						2,910
Other comprehensive (loss)											(610	)		(610	)
Dividend declared ($ 0.12 per share)								(561	)					(561	)
Balance, June 30, 2023		4,678,186	$	4,678	$	65,780	$	36,045		$	(41,977	)	$	64,526

Note: Balances as of January 1, 2022 and 2023 were audited.

See Notes to Consolidated Financial Statements.

7

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited) (restated)

	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities:
Net income	$	5,533		$	2,016
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		738			815
Provision for allowance for credit losses		(297	)		53
Writedown of other real estate		-			72
Loss (Gain) on sales of other real estate		62			(87	)
Amortization of intangible asset		31			-
(Accretion) Amortization of available for sale securities		(56	)		235
(Accretion) Amortization of held to maturity securities		(1,819	)		256
Change in accrued interest receivable		(49	)		(127	)
Increase in cash surrender value of life insurance		(232	)		(234	)
Change in other assets		(102	)		(557	)
Change in employee and director benefit plan liabilities and other liabilities		(6	)		(552	)
Net cash provided by operating activities	$	3,803		$	1,890

8

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited) (restated)

	Six Months Ended June 30,
	2023			2022
Cash flows from investing activities:
Proceeds from maturities of available for sale securities	$	35,914		$	12,761
Purchases of available for sale securities		(10,651	)		(103,900	)
Proceeds from maturities of held to maturity securities		137,087			5,142
Purchases of held to maturity securities		(162,970	)		(29,940	)
Purchases of Federal Home Loan Bank stock		(46	)		(2	)
Proceeds from sales of other real estate		197			1,489
Loans, net change		2,821			4,446
Acquisition of bank premises and equipment		(1,642	)		(1,128	)
Investment in cash surrender value of life insurance		(90	)		(101	)
Net cash provided by (used in) investing activities		620			(111,233	)
Cash flows from financing activities:
Demand and savings deposits, net change		29,043			77,849
Time deposits, net change		(4,325	)		(3,217	)
Borrowings from Federal Home Loan Bank		27,100			14,000
Repayments to Federal Home Loan Bank		(27,100	)		(7,025	)
Cash dividends		(561	)		(421	)
Net cash provided by financing activities		24,157			81,186
Net change in cash and cash equivalents		28,580			(28,157	)
Cash and cash equivalents, beginning of period		32,836			49,991
Cash and cash equivalents, end of period	$	61,416		$	21,834

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, 2023 and 2022

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2023 and June 30, 2022 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 2022 Annual Report and Form 10-K.

CRITICAL ACCOUNTING POLICIES

The results of operations for the quarter and six months ended June 30, 2023, 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.

10

 

The Company’s loan portfolio segments as of June 30, 2023 and December 31, 2022 were as follows:

Real Estate Loans

Residential-Residential mortgage loans are susceptible to weakening general economic conditions, increases in unemployment rates, and declining real estate values.

Construction-Risk common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.

Nonresidential-Risks to this loan category include industry concentration and the inability to monitor the condition of collateral. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative use for the properties. These loans are also susceptible to declines in occupancy rates, business failure, and general economic conditions.

Commercial and Industrial-Risk to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

Other-Risk common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.

Revision of Prior Period Financial Statements – During 2022, the Company recorded an error correction related to the Company’s accounting for bank premises and equipment. While reviewing the Company’s accruals for depreciation related to certain bank premises and equipment, the Company noticed that it had been over-accruing depreciation expenses beginning in 2006, causing expenses and the accumulation of depreciation in prior periods that were more than what should have been recorded under GAAP.

The error at each period end represented 3% or less of our shareholders' equity in all prior periods, and the aggregate net effect of the error correction on shareholders’ equity was minimal. 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 error in the current period would have resulted in a material misstatement in the current period and, as such, the Company has revised its previously reported financial information contained in our quarterly report on Form 10-Q for the quarter ended June 30, 2022, to correct the immaterial error. The Company will also revise previously reported financial information for this immaterial error in future filings, as applicable.

11

 

Revised Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2022 (in thousands):

	Six Months Ended June 30, 2022
	As Reported		Adjustment		As Revised
Beginning balance undivided profits	$	20,911	$	2,191	$	23,102
Beginning balance total shareholders' equity		89,538		2,191		91,729
Ending balance undivided profits		22,432		2,265		24,697
Ending balance total shareholders' equity		55,960		2,265		58,225

Revised Consolidated Income Statements for the three and six months ended June 30, 2022 (in thousands):

	Three Months Ended June 30, 2022
	As Reported		Adjustment			As Revised
Non-Interest Expense	$	5,708	$	(37	)	$	5,671
Net Income		1,055		37			1,092
Basic and diluted earnings (loss) per share		0.23		-			0.23

	Six Months Ended June 30, 2022
	As Reported		Adjustment			As Revised
Non-Interest Expense	$	11,170	$	(74	)	$	11,096
Net Income		1,942		74			2,016
Basic and diluted earnings (loss) per share		0.42		0.01			0.43

Accounting Standards Update –In March 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-02 (“ASU 2023-02”), Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures. The amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). For public business entities, the amendments in ASU 2023-02 are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the fiscal year that includes that interim period. Management has evaluated the impact of the adoption of this standard and determined there would be no impact to the Company’s consolidated financial position or results of operations.

12

 

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments: Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update cover two issues: (1) the elimination of TDR recognition and measurement guidance as prescribed by ASC 310-40 and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty; and, (2) for public business entities, the requirement that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.

The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For the elimination of recognition and measurement guidance on troubled debt restructurings by creditors in Subtopic 310-40, an entity may elect to apply a modified retrospective transition by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the fiscal year of adoption, or a prospective approach applied to modifications occurring after the date of adoption. The remainder of amendments should be applied prospectively. The Company adopted this standard effective January 1, 2023 on a prospective basis for all amendments. The adoption of this standard is not material to the Company’s consolidated financial position or results of operations.

On January 1, 2023, the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses,” more commonly referred to as CECL, on a modified retrospective basis. The provisions of this guidance require a material change to the manner in which the Company estimates and reports losses on financial instruments, including loans and unfunded lending commitments, select securities and other assets carried at amortized cost. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Changes to the Company’s accounting policies related to CECL are described below.

There were no other material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022.

Reclassification-Certain items previously reported have been reclassified to conform to the current year’s reporting format due to the adoption of CECL.

13

 

The Company has adopted the CECL (Current Expected Credit Losses) methodology for estimating allowances for credit losses effective January 1, 2023. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets) including: financing receivables such as loans held for investment, held to maturity debt securities, off-balance-sheet credit exposures (unfunded commitments) including off-balance sheet loan commitments; standby letters of credit; and other similar instruments.

In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets. The following represents an overview of key factors regarding CECL: CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.

As stated above, CECL also applies to held to maturity debt securities since they are carried at amortized cost and are within the scope of the standard. Therefore, it is the responsibility of management to establish any required allowances for credit losses on the Bank’s held to maturity debt securities as of the date the Bank adopts CECL and to maintain such allowances thereafter. Because CECL requires the Bank to measure expected credit losses on a collective or pool basis when similar risk characteristics exist, held to maturity debt securities that share similar risk characteristics are collectively assessed for credit losses.

Estimation Methods for Expected Credit Losses-Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses,” does not require the use of a specific loss estimation method for purposes of determining ACLs. Various methods may be used to estimate the expected collectability of financial assets, with those methods generally applied consistently overtime. The same loss estimation method does not need to be applied to all financial assets. Loss-rate methods can involve a variety of approaches, and Management incorporates the methods below:

Open Pool or Snapshot Method

The starting point for the calculation consists of assets that are outstanding at the end of a given time frame and are made up of assets that were originated in various years. Additional assets may be added to pools of loans under an open pool method.

Weighted Average Remaining Maturity (WARM) Method

A loss-rate method that estimates expected credit losses over the remaining life of the financial assets and uses a weighted average of the assets’ contractual terms to estimate the pool’s remaining contractual term. The WARM method uses average annual net charge-off rates and the amortization adjusted remaining life plus qualitative adjustments to estimate the ACLs.

14

 

Qualitative Factor Adjustments

The estimation of ACLs is to reflect consideration of all significant factors relevant to the expected collectability of the Bank’s financial assets as of the reporting date. Management begins their expected credit loss estimation process by determining the Bank’s historical loss information or utilizing reliable and relevant peer group (UPBR, State, custom) historical loss proxy data for each segment of financial assets with similar risk characteristics.

Management is to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.

Historical loss experience generally provides a quantitative starting point for Management’s estimate of expected credit losses. Consistent with FASB ASU Topic 326, Management must consider relevant qualitative factors that may cause the CECL estimate of the financial asset portfolio as of the evaluation date to differ from the historical loss experience.

Management is to consider the qualitative factors that are relevant to the Bank as of the reporting date, which may include but are not limited to the:

1. Nature and volume of the Bank’s financial assets.

2. Existence, growth, and effect of any concentrations of credit.

3. Volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Adversely classified or graded loans are loans rated “substandard” (or its equivalent) or worse under the institution’s loan classification system.

4. Value of the underlying collateral for loans that are not collateral dependent.

5. Bank’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries.

6. Quality of the Bank’s credit review function.

7. Experience, ability, and depth of the Bank’s lending, investment, collection, and other relevant management and staff.

8. Effect of other external factors such as the regulatory, legal, and technological environments, competition, and events such as natural disasters.

9. Actual and expected changes in international, national, regional, and local economic and
business conditions and developments in which the institution operates that affect the collectability of financial assets. Changes in economic and business conditions and developments included in qualitative factor adjustments are limited to those that affect the collectability of the Bank’s financial assets and are relevant to the Bank’s financial asset portfolios. For example, an economic factor for current or forecasted unemployment at the national or state level may indicate a strong job market based on low national or state unemployment rates, but a local unemployment rate, which may be significantly higher because of the actual or forecasted loss of a major local employer, may be more relevant to the collectability of an institution’s financial assets.

15

 

For reporting periods beginning on or after January 1, 2023, the Allowance for Credit Losses (ACL) is comprised of the Allowance for Loan and Lease Losses (ALLL), a valuation account available to absorb losses on loans and leases held for investment, and the Reserve for Unfunded Lending Commitments, a liability established to absorb credit losses for the expected life of the contractual term of on and off-balance sheet exposures as of the date of the determination. As stated above, quarterly, management estimates losses in the portfolio and unfunded exposures based on a number of factors, including the Company’s and peer’s past loan loss experience, known and potential risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral, and current and forecasted economic conditions. The length of time in the economic forecast is up to two years. The analysis and methodology used for estimating the ACL includes two primary elements: a collective approach for pools of loans that have similar risk characteristics and a specific reserve analysis for credits individually evaluated for credit loss. The methodology used by the Company is the weighted average remaining maturity or (“WARM”) method. The method uses comparable historical lookback periods as proxies for projecting future trends, and employs a qualitative (“Q”) factor component in the projections which represents expected differences in current and forecasted conditions from historical loss information or conditions. The main methodology approach includes comparable risk pools which are segregated by call report loan category, unadjusted loss estimation which is a combination of open pool/snapshot and weighted average remaining maturity, comparable or “look back” periods of about six years, which the Company choses to best approximate the expected future loss environment for the WARM time period and also utilizes peer data loss experiences.

For the collective approach, the Company segments loans into real estate-residential, real estate-nonresidential, real estate-construction and land development, commercial and industrial, and consumer/other, with further segmentation by region and sub-portfolio, as deemed appropriate. Both quantitative and qualitative factors are applied at the portfolio segment levels. The Company applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables.

The Company applies the expected future loss rate for each loan portfolio segment to each of the bank’s segments to calculate the allowance for credit losses.

CECL also requires capturing estimated credit losses on unfunded commitments that meet certain criteria. Management starts with current gross unfunded commitment levels by category as reported on the call report and then subtracts any unconditionally cancellable amounts, which are not subject to CECL reserve requirements to produce net unfunded commitment levels, as well as consideration of the likelihood of funding. Any allowance for off balance sheet exposures is reported as an other liability on the Consolidated Statement of Condition and is increased or decreased via the provision for credit losses account on the Consolidated Statement of Income.

The initial default loss rates are then estimated by taking expected future lifetime loss rates of the loan categories that are included in each unfunded commitment segment and dividing the lifetime rate by their respective WARMs to derive an annual loss rate estimate.

16

 

The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if management believes the collection of interest is doubtful. Management believes this policy results in the timely reversal of uncollectible interest.

The Company establishes specific reserves using an individually evaluated approach for nonaccrual loans, loans modified in troubled debt restructures, loans for which a troubled debt restructure is reasonably expected, and other financial instruments that are deemed to not share risk characteristics with other collectively evaluated financial assets. For loans individually evaluated, a specific allowance is recognized for any shortfall between the loan’s value and its recorded investment. The loan’s value is measured by either the loan’s observable market price, the fair value of the collateral of the loan (less liquidation costs) if it is collateral dependent, or by the present value of expected future cash flows discounted at the loan’s effective interest rate. The Company applies the practical expedient and defines collateral dependent loans as those where the borrower is experiencing financial difficulty and on which repayment is expected to be provided substantially through the operation or sale of the collateral.

The CECL standard also requires an assessment of the Company’s held to maturity debt securities for expected credit losses and the available for sale debt securities for credit-related impairment. The Company applies the practical expedient to exclude the accrued interest receivable balance of $1,148,000 from the amortized cost basis of financing receivables and held to maturity debt securities. The allowance for credit losses on held to maturity debt securities is estimated at the individual security level when there is a more than inconsequential risk of default. A separate contra valuation account is available to absorb losses on securities. The allowance for credit loss is limited to the amount by which the fair value is less than the amortized cost basis. The Company evaluates credit impairment on available for sale debt securities at an individual security level. This evaluation is done for securities whose fair value is below amortized cost with a more than inconsequential risk of default and where the Company has assessed the decline in fair value is significant enough to suggest a credit event occurred. Credit events are generally assessed based on adverse conditions specifically related to the security, an industry, or geographic area, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, changes in the financial condition of the underlying loan obligors. The allowance for credit losses for such securities is measured using a discounted cash flow methodology, through which management compares the present value of expected cash flows with the amortized cost basis of the security. The allowance for credit loss is limited to the amount by which the fair value is less than the amortized cost basis. If the Company intends to sell the debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the security is charged down to fair value against the allowance for credit losses, with any incremental impairment reported in earnings.

The Company reassesses the credit losses at each reporting period and records subsequent changes in the allowance for credit losses on loans, unfunded commitments and securities with a corresponding adjustment recorded in the provision for credit loss expense.

17

 

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $81,000, as detailed in the table below. Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2022 Form 10-K.

The following table details the impact of the adoption of ASC 326 on the allowance for credit losses as of January 1, 2023 (in thousands).

	January 1, 2023
	Pre-Adoption Allowance		Impact of Adoption			Post-Adoption Allowance		Cumulative Effect on Retained Earnings
Securities held to maturity:
U.S. Treasuries	$	-	$	-		$	-	$	-
States and political subdivisions		-		41			41		(32	)
Total	$	-	$	41		$	41	$	(32	)
Loans:
Real Estate, residential	$	913	$	396		$	1,309	$	(313	)
Real Estate, construction		392		(58	)		334		46
Real Estate, non-residential		1,639		(215	)		1,424		170
Commerical & Industrial		143		(84	)		59		66
Consumer/Other		251		(49	)		202		39
Total	$	3,338	$	(10	)	$	3,328	$	8
Off-balance-sheet credit exposures	$	-	$	72		$	72	$	(57	)

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,678,186 for the three and six months ended June 30, 2023 and 2022, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $2,806,137 and $426,419 for the six months ended June 30, 2023 and 2022, respectively, for interest on deposits and borrowings. The Company paid $255,000 and $0 in estimated income tax payments during the six months ended June 30, 2023 and 2022. One loan in the amount of $952,000 was transferred to other real estate during the six months ended June 30, 2023. No loans were transferred to other real estate during the six months ended June 30, 2022.

4. Investments:

Effective January 1, 2023, in conjunction with the adoption of CECL, and again at June 30, 2023, the Company evaluated credit impairment for individual securities available for sale whose fair value was below amortized cost with a more than inconsequential risk of default and where the Company had assessed the decline in fair value significant enough to suggest a credit event occurred. There were no securities that met the criteria of a credit loss event and therefore, no allowance for credit loss was recorded for either period. The Company also evaluated impairment for individual securities held to maturity and determined an allowance for credit loss of $41,000 should be established as of January 1, 2023. No additional impairment was recorded as of June 30, 2023.

18

 

The amortized cost, fair value and allowance for credit losses related to securities at June 30, 2023 and December 31, 2022, are as follows (in thousands):

			Gross		Gross			Allowance
	Amortized		Unrealized		Unrealized			for Credit		Estimated
June 30, 2023	Cost		Gains		Losses			Losses		Fair Value
Available for sale securities:
U.S. Treasuries	$	103,867	$	-	$	(9,832	)	$	-	$	94,035
Mortgage-backed securities		56,594		23		(4,788	)		-		51,829
Collateralized mortgage obligations		110,307		-		(7,217	)		-		103,090
States and political subdivisions		101,952		-		(21,504	)		-		80,448
Total available for sale securities	$	372,720	$	23	$	(43,341	)	$	-	$	329,402

			Gross		Gross					Allowance			Net
	Amortized		Unrealized		Unrealized			Estimated		for Credit			Carrying
June 30, 2023	Cost		Gains		Losses			Fair Value		Losses			Amount
Held to maturity securities:
U.S. Treasuries	$	124,344	$	31	$	(1,481	)	$	122,894	$	-		$	124,344
States and political subdivisions		98,535		35		(12,951	)		85,619		(41	)		98,494
Total held to maturity securities	$	222,879	$	66	$	(14,432	)	$	208,513	$	(41	)	$	222,838

			Gross		Gross			Allowance		Net
	Amortized		Unrealized		Unrealized			for Credit		Carrying
December 31, 2022	Cost		Gains		Losses			Losses		Amount
Available for sale securities:
U.S. Treasuries	$	118,782	$	-	$	(10,414	)	$	-	$	108,368
Mortgage-backed securities		61,280		36		(4,877	)		-		56,439
Collateralized mortgage obligations		115,436		-		(8,059	)		-		107,377
States and political subdivisions		102,428		2		(24,446	)		-		77,984
Total available for sale securities	$	397,926	$	38	$	(47,796	)	$	-	$	350,168

19

 

			Gross		Gross					Allowance		Net
	Amortzied		Unrealized		Unrealized			Estimated		for Credit		Carrying
December 31, 2022	Cost		Gains		Losses			Fair Value		Losses		Amount
Held to maturity securities:
U.S. Treasuries	$	94,339		-	$	(1,288	)	$	93,051		-	$	94,339
States and political subdivisions		100,878		52		(13,931	)		86,999		-		100,878
Total held to maturity securities	$	195,217	$	52	$	(15,219	)	$	180,050	$	-	$	195,217

The allowance for credit losses on held to maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held to maturity securities to present the net amount expected to be collected. With regard to U.S. Treasury securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. Management estimates the necessity of holding expected credit loss reserves for municipal holdings classified as held to maturity on a pooled basis. The company uses a standard probability of default/loss given default approach. The approach utilizes many inputs including enhanced and underlying ratings, maturity, issuer type/subtype, NAICS code, origination date, refunding status as well as state and region.

The following table details activity in the allowance for credit losses on held to maturity securities in the state and political subdivision category during the six months ended June 30,2023 (in thousands):

Beginning balance, prior to adoption of ASC 326	$	-
Impact of adopting ASC 326		41
Credit loss expense (benefit)		-
Ending balance	$	41

20

 

The amortized cost and fair value of debt securities at June 30, 2023 (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	$	14,987	$	14,864
Due after one year through five years		58,882		53,216
Due after five years through ten years		76,924		64,549
Due after ten years		55,026		41,854
Mortgage-backed securities		56,594		51,829
Collateralized mortgage obligations		110,307		103,090
Totals	$	372,720	$	329,402
Held to maturity securities:
Due in one year or less	$	86,686	$	86,289
Due after one year through five years		67,109		64,531
Due after five years through ten years		32,854		29,060
Due after ten years		36,230		28,633
Totals	$	222,879	$	208,513

21

 

Available for sale securities with gross unrealized losses for which an allowance for credit losses has not been recorded and held to maturity debt securities with gross unrealized losses for which an allowance for credit losses was recorded at January 31, 2023 and no additional allowance for credit losses was recorded at June 30, 2023 and December 31, 2022, 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, 2023:
U.S. Treasuries	$	93,792	$	(406	)	$	118,108	$	(10,907	)	$	211,900	$	(11,313	)
Mortgage-backed securities		3,595		(28	)		41,181		(4,760	)		44,776		(4,788	)
Collateralized mortgage obligations		-		-			103,089		(7,217	)		103,089		(7,217	)
States and political subdivisions		8,118		(342	)		155,759		(34,113	)		163,877		(34,455	)
TOTAL	$	105,505	$	(776	)	$	418,137	$	(56,997	)	$	523,642	$	(57,773	)
December 31, 2022:
U.S. Treasuries	$	132,113	$	(2,158	)	$	64,533	$	(9,544	)	$	196,646	$	(11,702	)
Mortgage-backed securities		25,234		(1,755	)		21,850		(3,122	)		47,084		(4,877	)
Collateralized mortgage obligations		48,188		(1,610	)		59,189		(6,449	)		107,377		(8,059	)
States and political subdivisions		50,025		(7,581	)		110,881		(30,796	)		160,906		(38,377	)
TOTAL	$	255,560	$	(13,104	)	$	256,453	$	(49,911	)	$	512,013	$	(63,015	)

At June 30, 2023, 36 of the 37 U.S. Treasury securities, 44 of the 47 mortgage-backed securities, 34 of the 34 collateralized mortgage obligations and 174 of the 190 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 it will be required to sell these securities before maturity. While some available for sale securities have been sold in prior periods 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, 2023 and June 30, 2022.

Securities with a fair value of $377,680,931 and $398,673,043 at June 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

22

 

5. Loans:

Certain items previously reported have been reclassified to conform to the current year’s reporting format due to the adoption of CECL.

The composition of the loan portfolio at June 30, 2023 and December 31, 2022, is as follows (in thousands):

	June 30, 2023		December 31, 2022
Real estate, residential	$	70,269	$	67,512
Real estate, construction		27,174		30,146
Real estate, nonresidential		117,941		122,233
Commercial and industrial		11,118		10,497
Other		7,778		7,490
Total	$	234,280	$	237,878

23

 

The age analysis of the loan portfolio, segregated by class of loans, as of June 30, 2023 and December 31, 2022, is as follows (in thousands):

													Loans Past
													Due Greater
	Number of Day Past Due												Than 90
					Greater		Total				Total		Days &
	30 - 59		60 - 89		Than 90		Past Due		Current		Loans		Still Accruing
June 30, 2023:
Real estate, residential	$	127	$	202	$	-	$	329	$	69,940	$	70,269	$	-
Real estate, construction		-		92		-		92		27,082		27,174		-
Real estate, nonresidential		282		-		-		282		117,659		117,941		-
Commercial and industrial		15		-		-		15		11,103		11,118		-
Other		20		4		-		24		7,754		7,778		-
Total	$	444	$	298	$	-	$	742	$	233,538	$	234,280	$	-
December 31, 2022:
Real estate, residential	$	34	$	49	$	-	$	83	$	67,429	$	67,512	$	-
Real estate, construction		79		2		-		81		30,065		30,146		-
Real estate, nonresidential		-		-		1,101		1,101		121,132		122,233		-
Commercial and industrial		-		-		-		-		10,497		10,497		-
Other		14		-		-		14		7,476		7,490		-
Total	$	127	$	51	$	1,101	$	1,279	$	236,599	$	237,878	$	-

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 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 who 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.

24

 

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of June 30, 2023 and December 31, 2022, is as follows (in thousands):

	Loans With A Grade Of:
	A, B or C		S		D		E		F		Total
June 30, 2023:
Real estate, residential	$	69,359	$	72	$	724	$	114	$	-	$	70,269
Real estate, construction		26,769		303		92		10		-		27,174
Real estate, nonresidential		117,511		-		430		-		-		117,941
Commercial and industrial		11,118		-		-		-		-		11,118
Other		7,766		-		8		4		-		7,778
Total	$	232,523	$	375	$	1,254	$	128	$	-	$	234,280
December 31, 2022:
Real estate, residential	$	66,490	$	77	$	822	$	123		-	$	67,512
Real estate, construction		30,115		-		2		29		-		30,146
Real estate, nonresidential		120,423		-		466		1,344		-		122,233
Commercial and industrial		10,497		-		-		-		-		10,497
Other		7,476		-		7		7		-		7,490
Total	$	235,001	$	77	$	1,297	$	1,503	$	-	$	237,878

Prior to 2020, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2023 and 2022, the Company did not restructure any additional loans. There were no specific reserves allocated to troubled debt restructurings as of June 30, 2023 and December 31, 2022, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of June 30, 2023 and December 31, 2022.

25

 

The following tables further disaggregates credit quality disclosures by amortized cost by class and vintage for term loans and by revolving and revolving converted to amortizing as of June 30, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Total
June 30, 2023:
Real Estate, Residential Loans:
A, B, or C	$	5,883	$	16,538	$	12,525	$	5,339	$	5,704	$	18,612	$	3,764	$	994	$	69,359
S		-		-		-		-		-		72		-		-		72
D		-		-		-		-		-		724		-		-		724
E		-		-		-		-		19		95		-		-		114
F		-		-		-		-		-		-		-		-		-
Total Real Estate Residential Loans	$	5,883	$	16,538	$	12,525	$	5,339	$	5,723	$	19,503	$	3,764	$	994	$	70,269
Real Estate, Construction Loans:
A, B, or C	$	628	$	2,822	$	1,909	$	1,579	$	41	$	4,240	$	15,550	$	-	$	26,769
S		-		-		303		-		-		-		-		-		303
D		-		-		-		92		-		-		-		-		92
E		-		-		-		-		-		10		-		-		10
F		-		-		-		-		-		-		-		-		-
Total Real Estate, Construction Loans	$	628	$	2,822	$	2,212	$	1,671	$	41	$	4,250	$	15,550	$	-	$	27,174
Real Estate,Nonresidential Loans:
A, B, or C	$	5,209	$	21,508	$	11,350	$	19,332	$	5,657	$	39,608	$	14,847	$	-	$	117,511
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		430		-		-		430
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Real Estate, Nonresidential Loans	$	5,209	$	21,508	$	11,350	$	19,332	$	5,657	$	40,038	$	14,847	$	-	$	117,941
Commercial and industrial
A, B, or C	$	492	$	869	$	899	$	333	$	2,881	$	61	$	5,583	$	-	$	11,118
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		-		-		-		-
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Commercial and Industrial Loans	$	492	$	869	$	899	$	333	$	2,881	$	61	$	5,583	$	-	$	11,118
Consumer/Other Loans
A, B, or C	$	2,129	$	1,808	$	1,180	$	860	$	306	$	420	$	1,063	$	-	$	7,766
S		-		-		-		-		-		-		-		-		-
D		-		8		-		-		-		-		-		-		8
E		-		-		-		4		-		-		-		-		4
F		-		-		-		-		-		-		-		-		-
Total Consumer/Other Loans	$	2,129	$	1,816	$	1,180	$	864	$	306	$	420	$	1,063	$	-	$	7,778

26

 

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, 2023 and December 31, 2022, are as follows (in thousands):

	June 30, 2023		December 31, 2022
Real estate, residential	$	83	$	90
Real estate, nonresidential		-		1,344
Other		4		7
Total	$	87	$	1,441

The following tables further disaggregates nonaccrual disclosures by amortized cost by class and vintage for term loans and by revolving and revolving converted to amortizing as of June 30, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Total
June 30, 2023:
Real estate, residential	$	-	$	-	$	-	$	-	$	20	$	63	$	-	$	-	$	83
Real estate, construction		-		-		-		-		-		-		-		-		-
Real estate, nonresidential		-		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-		-
Consumer/Other		-		-		-		4		-		-		-		-		4
Total Loans on Nonaccrual	$	-	$	-	$	-	$	4	$	20	$	63	$	-	$	-	$	87

27

 

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of June 30, 2023 and December 31, 2022, are as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2023:
With no related allowance recorded:
Real estate, residential	$	73	$	46	$	-	$	112	$	3
Real estate, construction		86		10		-		18		4
Real estate, nonresidential		325		325		-		339		14
Other		5		4		-		6		-
Total		489		385		-		475		21
With a related allowance recorded:
Real estate, residential		55		46		40		47		-
Total		55		46		40		47		-
Total by class of loans:
Real estate, residential		128		92		40		159		3
Real estate, construction		86		10		-		18		4
Real estate, nonresidential		325		325		-		339		14
Other		5		4		-		6		-
Total	$	544	$	431	$	40	$	522	$	21

28

 

	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized
December 31, 2022:
With no related allowance recorded:
Real estate, residential	$	525	$	500	$	-	$	533	$	25
Real estate, construction		102		29		-		46		7
Real estate, nonresidential		363		243		-		273		-
Other		7		7		-		7		-
Total		997		779		-		859		32
With a related allowance recorded:
Real estate, residential		57		49		40		50		-
Real estate, nonresidential		1,101		1,101		84		1,103		-
Total		1,158		1,150		124		1,153		-
Total by class of loans:
Real estate, residential		525		500		-		533		25
Real estate, construction		159		78		40		96		7
Real estate, nonresidential		1,464		1,344		84		1,376		-
Other		7		7		-		7		-
Total	$	2,155	$	1,929	$	124	$	2,012	$	32

The Company had no loan modifications made to borrowers experiencing financial difficulty as of June 30, 2023.

29

6. Allowance for Credit Losses:

The following tables show activity in the allowance for credit losses by portfolio class for the three and six months ended June 30, 2023 and 2022, as well as the corresponding recorded investment in loans at the end of each period. Effective January 1, 2023, the Company adopted the provisions of ASC 326 (CECL) using a modified retrospective basis. The difference between the December 31, 2022 incurred allowance and the CECL allowance is reflected as a cumulative effect of change in accounting principle in the table below. For further discussion of the day one impact of the CECL adoption, refer to Note 1.

Transactions in the allowance for credit losses on loans and leases for the three and six months ended June 30, 2023 and 2022, and the balances of loans, individually and collectively evaluated for impairment, as of June 30, 2023 and 2022, are as follows (in thousands):

Allowance for credit losses	Real Estate, Residential			Real Estate, Construction			Real Estate, Nonresidential			Commercial and Industrial			Other			Total
For the Six Months Ended June 30, 2023
Allowance for Loan Losses:
Beginning balance	$	913		$	392		$	1,639		$	143		$	251		$	3,338
Cumulative effect of change in accounting principle		396			(58	)		(215	)		(84	)		(49	)		(10	)
Charge-offs		-			-			(270	)		-			(117	)		(387	)
Recoveries		-			-			487			-			76			563
Net provision for loan losses		(660	)		(117	)		503			8			(14	)		(280	)
Ending Balance-allowance for loan losses	$	649		$	217		$	2,144		$	67		$	147		$	3,224
For the Six Months Ended June 30, 2023
Reserve for unfunded lending commitments:
Beginning balance	$	-		$	-		$	-		$	-		$	-		$	-
Cumulative effect of change in accounting principle		4			30			5			15			18			72
Provision for losses on unfunded commitments		2			8			(1	)		(15	)		(11	)		(17	)
Ending balance-reserve for unfunded commitments	$	6		$	38		$	4		$	-		$	7		$	55
Total allowance for credit losses June 30, 2023	$	655		$	255		$	2,148		$	67		$	154		$	3,279
For the Quarter Ended June 30, 2023
Allowance for Loan Losses:
Beginning balance	$	962		$	145		$	1,926		$	86		$	154		$	3,273
Charge-offs		-			-			(186	)		-			(45	)		(231	)
Recoveries		-			-			467			-			25			492
Net provision for loan losses		(313	)		72			(63	)		(19	)		13			(310	)
Ending Balance-allowance for loan losses	$	649		$	217		$	2,144		$	67		$	147		$	3,224
For the Quarter Ended June 30, 2023
Reserve for unfunded lending commitments:
Beginning balance	$	4		$	27		$	4		$	13		$	9		$	57
Provision for losses on unfunded commitments		2			11			-			(13	)		(2	)		(2	)
Ending balance-reserve for unfunded commitments	$	6		$	38		$	4		$	-		$	7		$	55
Total allowance for credit losses June 30, 2023	$	655		$	255		$	2,148		$	67		$	154		$	3,279
Allowance for loan losses, June 30, 2023:
Individually evaluated	$	45		$	-		$	-		$	-		$	2		$	47
Collectively evaluated		604			217			2,144			67			145			3,177
Allowance for loan losses:	$	649		$	217		$	2,144		$	67		$	147		$	3,224
Reserve for unfunded lending commitments:
Individually evaluated
Collectively evaluated		6			38			4			-			7			55
Reserve for unfunded lending commitments:	$	6		$	38		$	4		$	-		$	7		$	55
Total allowance for credit losses, June 30, 2023	$	655		$	255		$	2,148		$	67		$	154		$	3,279
Loans, June 30, 2023:
Individually evaluated	$	838		$	101		$	431		$	-		$	13		$	1,383
Collectively evaluated		69,431			27,073			117,510			11,118			7,765			232,897
Total loans, June 30, 2023:	$	70,269		$	27,174		$	117,941		$	11,118		$	7,778		$	234,280

30

 

The following table further disaggregates gross charge-off disclosures by amortized cost by credit quality indicator, class, and year of origination as of June 30, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Total
June 30, 2023:
Real estate, nonresidential	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
A,B, or C		-		-		-		-		-		-		-		-		-
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		-		-		-		-
E		-		-		-		-		-		270		-		-		270
F		-		-		-		-		-		-		-		-		-
Total Real estate, nonresidential loans	$	-	$	-	$	-	$	-	$	-	$	270	$	-	$	-	$	270
Consumer/Other
A,B, or C	$	117	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	117
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		-		-		-		-
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Consumer/Other Loans	$	117	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	117
Total Gross Loan Chargeoffs:	$	117	$	-	$	-	$	-	$	-	$	270	$	-	$	-	$	387

31

 

	Real Estate, Residential		Real Estate, Construction		Real Estate, Nonresidential			Commercial and Industrial			Other			Total
For the Six Months Ended June 30, 2022:
Allowance for Loan Losses:
Beginning balance	$	873	$	351	$	1,781		$	228		$	78		$	3,311
Charge-offs												(129	)		(129	)
Recoveries						48			22			74			144
Provision		107		18		(125	)		-			53			53
Ending Balance	$	980	$	369	$	1,704		$	250		$	76		$	3,379
For the Quarter Ended June 30, 2022:
Allowance for Loan Losses:
Beginning Balance	$	880	$	352	$	1,805		$	257		$	74		$	3,368
Charge-offs												(53	)		(53	)
Recoveries									13			23			36
Provision		100		17		(101	)		(20	)		32			28
Ending Balance	$	980	$	369	$	1,704		$	250		$	76		$	3,379
Allowance for Loan Losses, June 30, 2022:
Ending balance: individually evaluated for impairment	$	40	$		$	84		$	21		$			$	145
Ending balance: collectively evaluated for impairment	$	940	$	369	$	1,620		$	229		$	76		$	3,234
Total Loans, June 30, 2022:
Ending balance: individually evaluated for impairment	$	1,051	$	966	$	1,884		$	21		$	8		$	3,930
Ending balance: collectively evaluated for impairment	$	63,474	$	29,776	$	116,114		$	13,075		$	8,362		$	230,801

The calculation of the allowance for credit losses under CECL is performed using two primary approaches: a collective approach for pools of loans that have similar risk characteristics using a loss rate analysis, and a specific reserve analysis for credits individually evaluated.

7. Deposits:

Time deposits of $250,000 or more totaled approximately $7,636,000 and $8,773,000 at June 30, 2023 and December 31, 2022, respectively.

8. Shareholders’ Equity:

On April 20, 2023, the Board declared a dividend of $0.12 per share payable May 05, 2023 to shareholders of record on May 02, 2023. On March 11, 2022, the Board declared a dividend of $0.09 per share payable March 30, 2022 to shareholders of record on March 23, 2022.

32

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.

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.

33

 

Held to Maturity Debt Securities

The fair value of held to maturity debt securities is based on quoted market prices. The Company’s held to maturity debt 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 debt securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

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 uses a third-party desk top appraisal service to 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.

34

 

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.

35

 

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, 2023 and December 31, 2022 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
June 30, 2023:
U.S. Treasuries	$	94,035	$	-	$	94,035	$	-
Mortgage-backed securities		51,829		-		51,829		-
Collateralized mortgage obligations		103,090		-		103,090		-
States and political subdivisions		80,448		-		80,448		-
Total	$	329,402	$	-	$	329,402	$	-
December 31, 2022:
U.S. Treasuries	$	108,368	$	-	$	108,368	$	-
Mortgage-backed securities		56,439		-		56,439		-
Collateralized mortgage obligations		107,377		-		107,377		-
States and political subdivisions		77,984		-		77,984		-
Total	$	350,168	$	-	$	350,168	$	-

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2023 and December 31, 2022 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
June 30, 2023	$	7	$	-	$	-	$	7
December 31, 2022		1,026		-		-		1,026

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, 2023 and December 31, 2022 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
June 30, 2023	$	952	$	-	$	-	$	952
December 31, 2022		259		-		-		259

36

 

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, 2023			December 31, 2022
Balance, beginning of period	$	259		$	1,891
Loans transferred to ORE		952			-
Sales		(197	)		(1,477	)
Losses on sales		(62	)		-
Writedowns		-			(155	)
Balance, end of period	$	952		$	259

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at June 30, 2023 and December 31, 2022, are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2023:
Financial Assets:
Cash and due from banks	$	61,416	$	61,416	$	-	$	-	$	61,416
Available for sale securities		329,402		-		329,402		-		329,402
Held to maturity securities		222,838		-		208,513		-		208,513
Other investments		350		350		-		-		350
Federal Home Loan Bank stock		2,221		-		2,221		-		2,221
Loans, net		231,056		-		-		216,986		216,986
Cash surrender value of life insurance		21,090		-		21,090		-		21,090
Intangible asset		569		-		-		569		569
Financial Liabilities:
Deposits:
Non-interest bearing		213,703		213,703		-		-		213,703
Interest bearing		560,002		-		-		483,033		483,033
Time Deposits		36,793		-		-		35,251		35,251
Borrowings from Federal Home Loan Bank		-		-		-		-		-

37

 

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2022:
Financial Assets:
Cash and due from banks	$	32,836	$	32,836	$	-	$	-	$	32,836
Available for sale securities		350,168		-		350,168		-		350,168
Held to maturity securities		195,217		-		180,050		-		180,050
Other investments		350		350		-		-		350
Federal Home Loan Bank stock		2,175		-		2,175		-		2,175
Loans, net		234,540		-		-		223,494		223,494
Cash surrender value of life insurance		20,768		-		20,768		-		20,768
Intangible asset		600		-		-		600		600
Financial Liabilities:
Deposits:
Non-interest bearing		198,097		198,097		-		-		198,097
Interest bearing		546,565		-		-		458,433		458,433
Time deposits		41,118		-		-		39,517		39,517
Borrowings from Federal Home Loan Bank		-		-		-		-		-

10. Income Taxes:

The income tax expense and effective tax rate included in the consolidated statements of income are shown in the table below for the periods presented (in thousands):

	Three Months Ended June 30,										Six Months Ended June 30,
	2023					2022					2023					2022
	Tax		Rate			Tax		Rate			Tax		Rate			Tax		Rate
Income Taxes:
Current	$	560		15	%	$	-		0	%	$	692		10	%	$	-		0	%
Deferred		251		7	%		-		0	%		566		8	%		-		0	%
Total income tax expense	$	811		22	%	$	-		0	%	$	1,258		19	%	$	-		0	%

For the three and six months ended June 30, 2023, the current effective tax rate differs from the statutory tax rate of 21% primarily due to the tax-exempt interest income earned on certain investment securities, bank owned life insurance, and federal tax credits. For the three and six months ended June 30, 2022, the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities, bank owned life insurance, federal tax credits and a net operating loss carryforward that was completely utilized at the end of 2022.

38

 

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, 2022.

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, 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.

New Accounting Pronouncements

The Financial Accounting Standards Board issued several accounting standards updates during the first quarter of 2023. There were no new accounting standards issued during the second quarter of 2023. Further disclosure is included in Note 1.

39

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. On January 1, 2023 the Company adopted the Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses”, more commonly referred to as CECL which requires an assessment of the Company’s held to maturity debt securities for expected credit losses.

Allowance for credit losses on loans and leases and unfunded lending commitments

The Company’s most critical accounting policy relates to its allowance for credit losses on loans and leases and unfunded lending commitments, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The allowance for credit losses on loans and leases and unfunded lending commitments 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 allowance for credit losses on loans and leases and unfunded commitments. 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 allowance for loans and leases and unfunded lending commitments is adequate and appropriate for all periods presented in these financial statements. 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.

On January 1, 2023 the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses”, more commonly referred to as CECL. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses).

The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets).

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In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets.

CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.

Estimating an appropriate ACL involves a high degree of Management judgment. As such, it is Management’s responsibility to record the Bank’s best estimate of expected credit losses and provide it to the Board of Directors.

The analysis will be prepared and reported to the Board of Directors on a quarterly basis. The option and decision to prepare the analysis more frequently will remain with Management.

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. The Company uses the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. As part of the process of preparing the consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for credit losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in the consolidated statement of condition. The Company must also assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent Management believes that recovery is not likely, the Company must establish a valuation allowance. Significant Management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, the Company must include an expense or a benefit within the tax provisions in the consolidated statement of income.

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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, 2023 and 2022 is included in the table below.

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Interest income reconciliation:
Interest income - taxable equivalent	$	8,712		$	5,520		$	17,212		$	10,525
Taxable equivalent adjustment		(62	)		(62	)		(125	)		(127	)
Interest income (GAAP)	$	8,650		$	5,458		$	17,087		$	10,398
Net interest income reconciliation:
Net interest income - taxable equivalent	$	7,264		$	5,255		$	14,377		$	10,100
Taxable equivalent adjustment		(62	)		(62	)		(125	)		(127	)
Net interest income (GAAP)	$	7,202		$	5,193		$	14,252		$	9,973

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 $2,910,000 for the second quarter of 2023 compared with net income of $1,092,000 for the second quarter of 2022. The Company reported net income of $5,533,000 for the first half of 2023 compared with net income of $2,016,000 for the first half of 2022. Results in the second quarter and first half of 2023 included an increase in net income attributable to higher interest income on securities, overnight fed funds and loans due to an increase in interest rates.

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Managing the net interest margin is a key component of the Company’s earnings strategy. During 2022, the Federal Reserve increased rates by 425 basis points and increased again 50 basis points in the first quarter of 2023 and another 25 basis points in the second quarter of 2023 in an effort to slow inflation. As a result, net interest income increased $2,009,000 in the second quarter of 2023 as compared with 2022 and increased $4,279,000 in the first half of the year of 2023 as compared to 2022. This increase was attributable to higher interest income on securities, overnight fed funds and loans.

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 reduction of the provision for the allowance for credit losses of $312,000 was recorded in the second quarter of 2023 as compared with a provision of $28,000 for the second quarter of 2022. A reduction of the provision for the allowance for credit losses of $297,000 was recorded for the first two quarters of 2023 compared to a provision in the allowance for loan losses of $53,000 for the first two quarters of 2022. The Company is working diligently to address and reduce its non-performing assets. During the first six months of 2023 one property in other real estate was sold which resulted in a loss of $62,000 and the balance in other real estate reached an all-time low of $1. On June 30, 2023, one large loan was charged off in the amount of $186,000, a foreclosure occurred, and the property was moved into other real estate as of June 30, 2023, which resulted in a balance of $952,000. This large loan had previously been on nonaccrual therefore the balance in nonaccrual loans decreased $1,354,000 to $87,000 as of June 30, 2023, compared to $1,441,000 as of December 31, 2022. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

Non-interest income increased $205,000 for the second quarter of 2023 as compared with 2022 results. Non-interest income increased $318,000 for the first two quarters of 2023 as compared with 2022 results. Results in 2023 included higher trust department income and fees of $364,000, and higher other income of $57,000 offset somewhat by lower service fee income of $101,000.

Non-interest expenses decreased $75,000 for the quarter ended June 30, 2023, as compared with 2022 results. This net decrease for the second quarter of 2023 was primarily the result of a decrease in ATM expense of $410,000 which was the result of credits received from a third-party vendor along with decreases in equipment rentals and maintenance of $65,000, and data processing of $45,000 which was the result of a renegotiation of a contract offset somewhat by an increase in salaries and employee benefits of $187,000, other expenses of $151,000, and legal expense of $74,000 in 2023 as compared with 2022. Non-interest expenses increased $172,000 for the two quarters ended June 30, 2023, as compared with 2022 results. This net increase for the two quarters ended June 30, 2023, was primarily the result of higher salary expenses of $413,000, other expenses of $305,000 and higher legal expense of $101,000 offset somewhat by lower ATM expense of $477,000 which was the result of credits received from a third-party vendor and lower equipment rentals and maintenance of $136,000.

Total assets at June 30, 2023 increased $34,037,000 as compared with December 31, 2022. Total deposits increased $24,718,000 primarily as governmental entities’ balances increased due to tax collections. This increase in deposits funded an increase in cash and due from banks of $28,580,000 and an increase in securities of $6,855,000.

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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, 2023 as Compared with Quarter Ended June 30, 2022

The Company’s average interest-earning assets increased approximately $54,427,000, or 6.34%, from approximately $859,084,000 for the second quarter of 2022 to approximately $913,511,000 for the second quarter of 2023.

The Company’s average balance sheet increased primarily as average investments increased approximately $68,963,000, slightly offset by a decrease in average balances due from financial institutions of approximately $12,570,000 along with a decrease in average loans of approximately $2,010,000 for the second quarter of 2023 as compared with the second quarter of 2022. Average loans decreased as principal payments, maturities, and charge-offs on existing loans exceeded new loans. Funds available from the decrease in average loans and the decrease in balances due from financial institutions and the increase in average deposits were used to increase the investment in securities.

The average yield on interest-earning assets increased from 2.57% for the second quarter of 2022 to 3.81% for the second quarter of 2023. This increase is due to an increase in interest rates on overnight fed funds, loans, and securities in 2023.

Average interest-bearing liabilities increased approximately $31,312,000 or 5%, from approximately $618,388,000 for the second quarter of 2022 to approximately $649,700,000 for the second quarter of 2023. Average savings and interest bearing DDA deposits increased approximately $99,191,000 while time deposits decreased approximately $66,906,000 primarily as several large public fund customers moved funds from time deposits into non maturity deposits and maintained higher balances. Although average time deposits decreased the Company evaluates on an ongoing and continuous basis various moderate to severe economic scenarios and does not anticipate a liquidity issue.

The average rate paid on interest-bearing liabilities for the second quarter of 2022 was 0.17% as compared with 0.89% for the second quarter of 2023. Since the Federal Reserve increased rates 425 basis points during 2022, the Federal Reserve has increased rates 50 basis points during the first quarter of 2023 and another 25 basis points in the second quarter of 2023 which has caused the bank to experience a rising cost of funds.

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The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.45% for the second quarter of 2022 as compared with 3.18% for the second quarter of 2023.

Six Months Ended June 30, 2023 as Compared with Six Months Ended June 30, 2022

The Company’s average interest-earning assets increased approximately $49,913,000, or 6%, from approximately $823,275,000 for the first two quarters of 2022 to approximately $873,188,000 for the first two quarters of 2023. The Company’s average balance sheet increased primarily as average investment securities increased approximately $80,191,000. These increases were funded by the increase in savings, and interest-bearing DDA balances during the same period.

The average yield on earning assets increased from 2.56% for the first two quarters of 2022 to 3.94% for the first two quarters of 2023. This increase is due to an increase in interest rates on overnight fed funds, loans, and securities in 2023.

Average interest-bearing liabilities increased approximately $71,696,000, or 12%, from approximately $599,274,000 for the first two quarters of 2022 to approximately $670,970,000 for the first two quarters of 2023. Average savings and interest bearing DDA balances increased approximately $129,406,000 while average time deposits decreased approximately $57,188,000 primarily as several large public fund customers moved funds from time deposits into non maturity deposits and maintained higher balances.

The average rate paid on interest-bearing liabilities for the first two quarters of 2022 was 0.14% compared with 0.85% for the first two quarters of 2023. The Federal Reserve has increased rates significantly during 2022 and 2023 which has caused the bank to experience a rising cost of funds.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.45% for the first two quarters of 2022 as compared with 3.29% for the first two quarters of 2023

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The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and six months ended June 30, 2023 and 2022.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Quarter Ended June 30, 2023							Quarter Ended June 30, 2022
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	237,101	$	3,295		5.56	%	$	239,111	$	2,675		4.47	%
Balances due from depository institutions		76,029		297		1.56	%		88,599		116		0.52	%
HTM:
Taxable		221,386		2,055		3.71	%		83,474		530		2.54	%
Non taxable (1)		36,759		262		2.85	%		36,393		252		2.77	%
AFS:
Taxable		336,011		2,743		3.27	%		404,331		1,904		1.88	%
Non taxable (1)		4,028		31		3.08	%		5,023		41		3.26	%
Other		2,197		29		5.28	%		2,153		2		0.37	%
Total	$	913,511	$	8,712		3.81	%	$	859,084	$	5,520		2.57	%
Savings & interest- bearing DDA	$	612,493	$	1,397		0.91	%	$	513,302	$	178		0.14	%
Time deposits		37,158		50		0.54	%		104,064		81		0.31	%
Borrowings from FHLB		49		1		8.16	%		1,022		6		2.35	%
Total	$	649,700	$	1,448		0.89	%	$	618,388	$	265		0.17	%
Net tax-equivalent spread						2.92	%						2.40	%
Net tax-equivalent margin on earning assets						3.18	%						2.45	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2023 and 2022. See disclosure of Non-GAAP financial measures on page 42.

(2) Loan fees of $81 and $152 for 2023 and 2022, respectively, are included in these figures. Of the loan fees recognized in 2022, $30 were related to PPP loans.

(3) Includes nonaccrual loans.

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Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Six Months Ended June 30, 2023							Six Months Ended June 30, 2022
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	236,122	$	6,272		5.31	%	$	237,833	$	5,370		4.52	%
Balances due from depository institutions		50,535		1,204		4.77	%		79,135		155		0.39	%
HTM:
Taxable		202,785		3,608		3.56	%		77,421		981		2.53	%
Non taxable (1)		37,076		530		2.86	%		37,040		515		2.78	%
AFS:
Taxable		340,414		5,478		3.22	%		384,439		3,418		1.78	%
Non taxable (1)		4,070		63		3.10	%		5,254		83		3.16	%
Other		2,186		57		5.22	%		2,153		3		0.28	%
Total	$	873,188	$	17,212		3.94	%	$	823,275	$	10,525		2.56	%
Savings & interest- bearing DDA	$	631,969	$	2,734		0.87	%	$	502,563	$	281		0.11	%
Time deposits		38,570		91		0.47	%		95,758		131		0.27	%
Borrowings from FHLB		431		10		4.64	%		953		12		2.52	%
Total	$	670,970	$	2,835		0.85	%	$	599,274	$	424		0.14	%
Net tax-equivalent spread						3.10	%						2.42	%
Net tax-equivalent margin on earning assets						3.29	%						2.45	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2023 and 2022. See disclosure of Non-GAAP financial measures on page 42.

(2) Loan fees of $157 and $382 for 2023 and 2022, respectively, are included in these figures. Of the loan fees recognized in 2022, $89 were related to PPP loans.

(3) Includes nonaccrual loans.

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Quarter Ended
	June 30, 2023 compared with June 30, 2022
	Volume			Rate			Rate/Volume			Total
Interest earned on:
Loans	$	(22	)	$	648		$	(5	)	$	621
Balances due from financial institutions		(16	)		230			(33	)		181
Held to maturity securities:
Taxable		876			245			404			1,525
Non taxable		3			8			-			11
Available for sale securities:
Taxable		(322	)		1,397			(236	)		839
Non taxable		(8	)		(2	)		-			(10	)
Other		-			24			1			25
Total	$	511		$	2,550		$	131		$	3,192
Interest paid on:
Savings & interest-bearing DDA	$	34		$	993		$	192		$	1,219
Time deposits		(52	)		59			(38	)		(31	)
Borrowings from FHLB		(6	)		15			(15	)		(6	)
Total	$	(24	)	$	1,067		$	139		$	1,182

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Six Months Ended
	June 30, 2023 compared with June 30, 2022
	Volume			Rate			Rate/Volume			Total
Interest earned on:
Loans	$	(39	)	$	947		$	(7	)	$	901
Balances due from financial institutions		(56	)		1,730			(625	)		1,049
Held to maturity securities:
Taxable		1,588			397			642			2,627
Non taxable		1			15			-			16
Available for sale securities:
Taxable		(391	)		2,769			(317	)		2,061
Non taxable		(19	)		(1	)		-			(20	)
Other		-			54			1			55
Total	$	1,084		$	5,911		$	(306	)	$	6,689
Interest paid on:
Savings & interest-bearing DDA	$	72		$	1,893		$	487		$	2,452
Time deposits		(78	)		95			(57	)		(40	)
Borrowings from FHLB		(7	)		10			(5	)		(2	)
Total	$	(13	)	$	1,998		$	425		$	2,410

Provision for Credit 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 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 credit loss on loans 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 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.

The Company has adopted the CECL (Current Expected Credit Losses) methodology for estimating allowances for credit losses effective January 1, 2023. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets) including: financing receivables such as loans held for investment, held to maturity debt securities, off-balance-sheet credit exposures (unfunded commitments) including off-balance sheet loan commitments; standby letters of credit; and other similar instruments.

In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets. The following represents an overview of key factors regarding CECL: CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.

As stated above, CECL also applies to held to maturity debt securities since they are carried at amortized cost and are within the scope of the standard. Therefore, it is the responsibility of management to establish any required allowances for credit losses on the Bank’s held to maturity debt securities as of the date the Bank adopts CECL and to maintain such allowances thereafter. Because CECL requires the Bank to measure expected credit losses on a collective or pool basis when similar risk characteristics exist, held to maturity debt securities that share similar risk characteristics are collectively assessed for credit losses.

Estimating an appropriate ACL involves a high degree of management judgment. As such, it is Management’s responsibility to record the Bank’s best estimate of expected credit losses and provide it to the Board of Directors. The analysis will be prepared and reported to the Board of Directors on a quarterly basis. The option and decision to prepare the analysis more frequently will remain with management.

Estimation Methods for Expected Credit Losses-Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses,” does not require the use of a specific loss estimation method for purposes of determining ACLs. Various methods may be used to estimate the expected collectability of financial assets, with those methods generally applied consistently overtime. The same loss estimation method does not need to be applied to all financial assets. Loss-rate methods can involve a variety of approaches, and Management incorporates the methods below:

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Open Pool or Snapshot Method

The starting point for the calculation consists of assets that are outstanding at the end of a given time frame and are made up of assets that were originated in various years. Additional assets may be added to pools of loans under an open pool method.

Weighted Average Remaining Maturity (WARM) Method

A loss-rate method that estimates expected credit losses over the remaining life of the financial assets and uses a weighted average of the assets’ contractual terms to estimate the pool’s remaining contractual term. The WARM method uses average annual net charge-off rates and the amortization adjusted remaining life plus qualitative adjustments to estimate the ACLs.

Qualitative Factor Adjustments

The estimation of ACLs is to reflect consideration of all significant factors relevant to the expected collectability of the Bank’s financial assets as of the reporting date. Management begins their expected credit loss estimation process by determining the Bank’s historical loss information or utilizing reliable and relevant peer group (UPBR, State, custom) historical loss proxy data for each segment of financial assets with similar risk characteristics.

Senior Management is to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.

Historical loss experience generally provides a quantitative starting point for Management’s estimate of expected credit losses. Consistent with FASB ASU Topic 326, Management must consider relevant qualitative factors that may cause the CECL estimate of the financial asset portfolio as of the evaluation date to differ from the historical loss experience.

Management is to consider the qualitative factors that are relevant to the Bank as of the reporting date, which may include but are not limited to the:

1. Nature and volume of the Bank’s financial assets.

2. Existence, growth, and effect of any concentrations of credit.

3. Volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Adversely classified or graded loans are loans rated “substandard” (or its equivalent) or worse under the institution’s loan classification system.

4. Value of the underlying collateral for loans that are not collateral dependent.

5. Bank’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries.

6. Quality of the Bank’s credit review function.

7. Experience, ability, and depth of the Bank’s lending, investment, collection, and other relevant management and staff.

8. Effect of other external factors such as the regulatory, legal, and technological environments, competition, and events such as natural disasters.

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9. Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets. Changes in economic and business conditions and developments included in qualitative factor adjustments are limited to those that affect the collectability of the Bank’s financial assets and are relevant to the Bank’s financial asset portfolios. For example, an economic factor for current or forecasted unemployment at the national or state level may indicate a strong job market based on low national or state unemployment rates, but a local unemployment rate, which may be significantly higher because of the actual or forecasted loss of a major local employer, may be more relevant to the collectability of an institution’s financial assets.

The Company’s on-going, systematic evaluation resulted in the Company recording a negative provision for the allowance for credit losses of $312,000 and a provision $28,000 for the second quarters of 2023 and 2022, respectively, and a negative provision of $297,000 and a provision of $53,000 for the first two quarters of 2023 and 2022, respectively. During the first six months of 2023 one large loan on nonaccrual prior to foreclosure was moved to other real estate during the quarter along with a recovery of another loan in the amount of $468,000. The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Nonaccrual loans totaled $87,000 and $1,441,000 at June 30, 2023 and December 31, 2022. Specific reserves totaled $40,000 and $124,000 at June 30, 2023 and December 31, 2022, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover credit losses on loans or the loan balances have been charged down to their realizable value.

The allowance for credit losses on loans and leases as a percentage of loans was 1.38% at June 30, 2023 and 1.40% at December 31, 2022, respectively. The Company believes that its allowance of credit losses on loans and leases is appropriate as of June 30, 2023.

The allowance for credit losses on loans and leases 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 on loan performance, which may require an adjustment to the allowance for credit losses on loans and leases. 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, 2023 as Compared with Quarter Ended June 30, 2022

Non-interest income increased $205,000 for the second quarter of 2023 as compared with the second quarter of 2022. Results in 2023 included higher trust department income and fees of $218,000 as a result of the Trustmark acquisition that occurred in August of 2022 and higher other income of $59,000 due to an increase in rental income offset somewhat by lower service charge income of $80,000 which can fluctuate in the normal course of business.

Six Months Ended June 30, 2023 as Compared with Six Months Ended June 30, 2022

Non-interest income increased $318,000 for the first two quarters of 2023 as compared with the first two quarters of 2022. Results in 2023 included trust department income and fees of $364,000, which increased due to the increase in accounts as a result of the acquisition in August of 2022, along with an increase in other income of $57,000, which was the result of increases in rental income offset somewhat by lower service charge income of $101,000 which can fluctuate in the normal course of business.

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Non-interest expense

Quarter Ended June 30, 2023 as Compared with Quarter Ended June 30, 2022

Total non-interest expense decreased $75,000 for the second quarter of 2023 as compared with the second quarter of 2022. In 2023, ATM expenses decreased $410,000, which was the result of credits received from a third-party vendor, equipment and maintenance expense decreased $65,000, data processing expenses decreased $45,000 and other real estate expenses decreased $24,000 offset somewhat by an increase in salaries and benefits of $187,000, other expenses of $151,000, legal expenses of $74,000 and occupancy expense of $32,000 compared to 2022.

Six Months Ended June 30, 2023 as Compared with Six Months Ended June 30, 2022

Total non-interest expense increased $172,000 for the first two quarters of 2023 as compared with the first two quarters of 2022. In 2023, salaries and benefits increased $413,000, other expenses increased $305,000, legal expense increased $101,000 and FDIC assessment expense increased $34,000 offset somewhat by ATM expense decreased $477,000, which was the result of credits received from a third-party vendor, equipment and maintenance expenses decreased $136,000, data processing expense decreased $57,000 and other real estate expense decreased $24,000.

Income Taxes

During the fourth quarter of 2022, the Company determined that it was more likely than not that it would realize a certain amount of its deferred tax assets. Prior to that time, the Company had recorded a valuation allowance against its net deferred tax asset. As of December 31, 2022, the Company no longer had a net operating loss carryforward and its projections of future income indicate that reversal of a portion of the valuation allowance was appropriate.

The Company has started to record deferred and current income tax expenses in the first and second quarters of 2023. Income tax expense for the quarter ended June 30, 2023, and 2022 was $811,000 and $0, respectively. Income tax expenses for the six months ended June 30, 2023, and 2022 was $1,258,000 and $0, respectively. The effective tax rate for the three months and six months ended June 30, 2023, was 22% and 19%, respectively.

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FINANCIAL CONDITION

Cash and due from banks decreased $28,580,000 at June 30, 2023, compared with December 31, 2022 in the management of the Bank’s liquidity position.

Available for sale securities decreased $20,766,000 at June 30, 2023, compared with December 31, 2022. During the first six months of 2023, there were $10,651,000 in purchases that combined with an increase in market value for available for sale securities acquired in prior periods of $4,441,000 that helped offset maturities of $35,914,000. As discussed in Note 4, the Company evaluates the change in the market value of its available for sale securities on a monthly basis. This evaluation considers a number of factors including the cause of a decline or increase in value. Any unrealized losses identified through this analysis during the six months ended June 30, 2023, relate to changes in interest rates rather than credit quality of the investments. Even though these securities have been classified as available for sale, the Company has traditionally held these securities until maturity. Although the unrealized losses recorded during 2022 and 2023 were significant, management does not anticipate these losses to be other than temporary.

Held to maturity debt securities increased $27,621,000 at June 30, 2023, compared with December 31, 2022. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $32,000 specifically as a provision on held to maturity debt securities. There was no additional provision recorded on held to maturity debt securities as of June 30, 2023.

Total deposits increased $24,718,000 at June 30, 2023, compared with December 31, 2022. 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 quarter of each year based on property tax collections and start to decrease over the second and third quarters of each year.

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, 2023, 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, 2023 and December 31, 2022, are as follows (in thousands):

						For Capital Adequacy
	Actual					Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2023:
Total Capital (to Risk Weighted Assets)	$	107,076		29.69	%	$	28,852		8.00	%	$	36,065		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		103,756		28.77	%		16,229		4.50	%		23,442		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		103,756		28.77	%		21,639		6.00	%		28,852		8.00	%
Tier 1 Capital (to Average Assets)		103,756		10.69	%		38,839		4.00	%		48,549		5.00	%
December 31, 2022:
Total Capital (to Risk Weighted Assets)	$	101,221		21.18	%	$	38,239		8.00	%	$	47,799		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		97,883		20.48	%		21,510		4.50	%		31,069		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		97,883		20.48	%		28,680		6.00	%		38,239		8.00	%
Tier 1 Capital (to Average Assets)		97,883		10.78	%		36,328		4.00	%		45,410		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 as well as its Bank Term Funding Program, which it intends to use only as a contingency. As of June 30, 2023, the Company was able to borrow up to $8,312,625 from the Federal Reserve Bank Discount Window Primary Credit Program. The borrowing limit is based on the amount of collateral pledged, with certain loans from the Bank’s portfolio serving as collateral. The Company has $115,053,181 available under a line of credit with the Federal Home Loan Bank of Dallas. The Company has additional contingency funding capacity with various other financial institutions in the amount of $18,691,131.

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The Company maintains a well-capitalized balance sheet which includes strong capital and liquidity. The Bank provides a full range of banking, financial and trust services in our local markets. Approximately half of the Bank’s deposits are fully FDIC insured, and the vast majority of uninsured deposits are public funds deposits secured by Bank securities pledged at fair value. The Company evaluates on an ongoing and continuous basis its financial health by preparing for various moderate to severe economic scenarios.

Determining liquidity adequacy requires an ongoing analysis of the Company’s current and expected liquidity position, including historical funding obligations and anticipated funding needs, as well as an understanding of retention prospects for all Bank deposits. In particular, consideration is given to public funds and other large depositors for potential runoffs due to expected uses or other withdrawals from Bank accounts.

Most recently, the Company was advised during the second quarter that the Bank would not be retaining certain public funds deposits following competitive bid processes whereby those accounts were awarded to other local banks. While the majority of those deposits remained on the Company’s balance sheet at the end of the second quarter, the Company has been advised that approximately $60 million of deposits related to those accounts will be withdrawn from the Bank during the third quarter of this year.

Funding obtained to replace the withdrawn deposits may be at a higher cost than the interest rate paid on the deposits to be withdrawn and therefore may impact the Bank’s net interest margin going forward. However, the Company anticipates that the Bank will be able to fund those deposit withdrawals through growth in other deposit accounts, proceeds from maturities of investment securities and earnings on investment securities, and through other borrowings with the FHLB or other counterparties, without having to liquidate any securities within its existing portfolio at a loss.

The Company also anticipates that a similar competitive bid will be held in December of this year for other public deposits currently placed with the Bank. If the Bank fails to win that bid, any withdrawal of those funds, which totaled approximately $50 million at the end of the second quarter, would not be withdrawn until next year.

The Board of Directors requires management to implement and administer appropriate internal controls commensurate with Company’s risk profile. Management carefully monitors the Company’s liquidity risk, particularly with respect to volatile and large deposits. The Company has not encountered, and does not anticipate problems with meeting its liquidity needs.

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Item 4: Controls and Procedures

As of June 30, 2023, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting
An evaluation was performed with respect to the first and second quarters of 2023, 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 related to a low-income housing partnership 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, which 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, were sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting for low- income housing partnerships and that the material weakness in the Company’s internal controls over financial reporting for low-income housing partnerships was fully remediated prior to December 31, 2022.

Material Weakness in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.  The Company’s management, including our Chief Executive Officer and Chief Financial Officer, identified prior to December 31, 2022, a material weakness related to the Company’s internal control over financial reporting for depreciation related to bank premises and equipment and recorded a related error correction in previously issued financial statements.

Even though the Company has concluded that this error did not create any material misstatement to previously issued financial statements for any prior periods, the current period or the trend in earnings, the material weakness that caused the error, had it not been corrected, could have resulted in a future failure to estimate depreciation for bank premises and equipment that could create a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Measures

To address the material weakness described above the Company has designed and implemented new and enhanced controls to ensure that: (i) reasonable estimates are used for depreciation on bank premises and equipment (ii) sub-ledger calculations of depreciation on bank premises and equipment are reconciled each period to general ledger amounts, and (iii) in-house accounting personnel have training to ensure they have the relevant expertise related to such estimates to the extent necessary to account for any similar estimates made or used in the future.

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We believe the actions described above were sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting for depreciation of bank premises and equipment, and that the material weakness in the Company’s internal controls over financial reporting for depreciation of bank premises and equipment was fully remediated prior to December 31, 2022.

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 are expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company. However, 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 11.7% 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 April 19, 2023, disclosing Company stock beneficially owned by Mr. Stilwell’s group. Mr. Stilwell and his related entities, including Stilwell Activist Investments, L.P., have nominated an individual for election to the Board of Directors of the Company at its last three annual meetings, but each individual nominated was not elected to the Board of Directors of the Company. 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 cross motions for summary judgment from both parties have been filed and heard by the Court, and a final order from the Court on those motions is currently pending.

Finally, on June 30, 2023, Stilwell Activist Investments, L.P., also issued a letter to the Company and each of the directors of the Company demanding that they immediately commence litigation on behalf of the Company for an alleged breach by the Company’s Board of Directors of its fiduciary duties in allegedly failing to properly oversee and supervise Chevis and Tanner Swetman’s management of the Company. At its July meeting, the Board of Directors of the Company established a Special Litigation Committee made up of the independent directors to investigate the allegations made in the letter.

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Item 5: Other Information

None.

Item 6 - Exhibits

Exhibit 31.1:	Certification of Chief Executive Officer Pursuant to to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 31.2:	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 32.1:	Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2:	Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 101	The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Condition at June 30, 2023 and December 31, 2022, (ii) Consolidated Statements of Income for the quarters and six months ended June 30, 2023 and 2022, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended June 30, 2023 and 2022, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended March 31, 2022 and June 30, 2022 and March 31, 2023 and June 30, 2023, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 and (vi) Notes to the Unaudited Consolidated Financial Statements for the six months ended June 30, 2023 and 2022.
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 08, 2023
By:	/s/ Chevis C. Swetman
Chevis C. Swetman Chairman, President and Chief Executive Officer (principal executive officer)

Date:	August 08, 2023
By:	/s/ Leslie B. Fulton
Leslie B. Fulton Chief Financial Officer and Controller (principal financial and accounting officer)

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