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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 

March 31, 2024

 

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
 NonePFBXNone


 

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.

 

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 April 30, 2024, there were 15,000,000 shares of $1 par value common stock authorized, with 4,661,686 shares issued and outstanding.

 

 

 

 

Part 1 Financial Information

Item 1: Financial Statements

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

 

  

March 31, 2024

  

December 31, 2023

 
  

(unaudited)

  

(audited)

 
         

Assets

        

Cash and due from banks

 $108,117  $22,794 
         

Available for sale securities, amortized cost of $436,911 at March 31, 2024; $379,195 at December 31, 2023

  396,160   339,477 
         

Held to maturity securities, fair value of $132,221 at March 31, 2024; $138,523 at December 31, 2023

  145,422   150,941 
         

Less: Allowance for credit losses on held to maturity securities

  30   30 
         

Held to maturity securities, net

  145,392   150,911 
         

Other investments

  350   350 
         

Federal Home Loan Bank Stock, at cost

  2,368   2,334 
         

Loans

  236,274   238,339 
         

Less: Allowance for credit losses on loans and leases

  3,087   3,224 
         

Loans, net

  233,187   235,115 
         

Bank premises and equipment, net of accumulated depreciation

  19,601   19,470 
         

Accrued interest receivable

  3,652   3,520 
         

Cash surrender value of life insurance

  21,539   21,375 
         

Intangible asset

  522   538 
         

Other assets

  1,714   1,854 
         

Total assets

 $932,602  $797,738 

 

See Notes to Consolidated Financial Statements.

 

 

2

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

 

  

March 31, 2024

  

December 31, 2023

 
  

(unaudited)

  

(audited)

 

Liabilities and Shareholders' Equity

        

Liabilities:

        
         

Deposits:

        
         

Demand, non-interest bearing

 $198,543  $174,933 
         

Savings and demand, interest bearing

  585,164   483,662 
         

Time, $250,000 or more

  6,369   7,518 
         

Other time deposits

  21,423   22,377 
         

Total deposits

  811,499   688,490 
         

Advances from Federal Home Loan Bank

  -   18,500 
         

Borrowings under Bank Term Funding Program

  30,000   - 
         

Employee and director benefit plans liabilities

  19,335   19,581 
         

Other liabilities

  1,105   1,884 
         

Total liabilities

  861,939   728,455 
         

Shareholders' Equity:

        

Common stock, $1 par value, 15,000,000 shares authorized, 4,661,686 shares issued and outstanding at March 31, 2024 and December 31, 2023

  4,662   4,662 
         

Surplus

  65,780   65,780 
         

Undivided profits

  39,989   37,574 
         

Accumulated other comprehensive loss

  (39,768)  (38,733)
         

Total shareholders' equity

  70,663   69,283 
         

Total liabilities and shareholders' equity

 $932,602  $797,738 

 

See Notes to Consolidated Financial Statements.

 

3

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data) (unaudited)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Interest income:

               
                 

Interest and fees on loans

  $ 3,562     $ 2,977  
                 

Interest and dividends on securities:

               
                 

U.S. Treasuries

    1,678       1,661  
                 

Mortgage-backed securities

    728       918  
                 

Collateralized mortgage obligations

    855       840  
                 

States and political subdivisions

    1,037       1,106  
                 

Other investments

    39       28  
                 

Interest on balances due from depository institutions

    1,030       907  
                 

Total interest income

    8,929       8,437  
                 

Interest expense:

               
                 

Deposits

    2,038       1,378  
                 

Borrowings from Federal Home Loan Bank

    198       9  
                 

Total interest expense

    2,236       1,387  
                 

Net interest income

    6,693       7,050  
                 

Provision for credit losses

    -       15  
                 

Net interest income after provision for credit losses

  $ 6,693     $ 7,035  

 

See Notes to Consolidated Financial Statements.

 

4

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data) (unaudited)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Non-interest income:

               
                 

Trust department income and fees

  $ 618     $ 590  
                 

Service charges on deposit accounts

    818       869  
                 

Increase in cash surrender value of life insurance

    120       115  
                 

Gain (loss) on sale of property, plant and equipment, net

    42       -  
                 

Other income

    145       133  
                 

Total non-interest income

    1,743       1,707  
                 

Non-interest expense:

               
                 

Salaries and employee benefits

    2,500       2,867  
                 

Net occupancy

    537       463  
                 

Equipment rentals, depreciation and maintenance

    701       663  
                 

FDIC and state banking assessments

    108       116  
                 

Data processing

    314       342  
                 

ATM expense

    254       241  
                 

Other real estate (income) expense

    -       (10 )
                 

Legal expense

    112       129  
                 

Other expense

    864       861  
                 

Total non-interest expense

    5,390       5,672  
                 

Income before income taxes

    3,046       3,070  
                 

Income tax expense

    631       447  
                 

Net income

  $ 2,415     $ 2,623  
                 

Basic and diluted earnings per share

  $ 0.52     $ 0.56  

Dividends declared per share

  $ -     $ -  

 

See Notes to Consolidated Financial Statements.

 

5

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 
                 

Net income

  $ 2,415     $ 2,623  
                 

Other comprehensive income (loss):

               
                 

Net unrealized (loss) gain on available for sale securities

    (1,035 )     5,051  
                 
                 

Total other comprehensive income (loss)

    (1,035 )     5,051  
                 

Total comprehensive income

  $ 1,380     $ 7,674  

 

See Notes to Consolidated Financial Statements.

 

6

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity

(in thousands except share data) (unaudited)

 

                                   

Accumulated

         
   

Number of

                           

Other

         
   

Common

   

Common

           

Undivided

   

Comprehensive

         
   

Shares

   

Stock

   

Surplus

   

Profits

   

Income (loss)

   

Total

 
                                                 

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  
                                                 

Balance, January 1, 2024

    4,661,686     $ 4,662     $ 65,780     $ 37,574     $ (38,733 )   $ 69,283  
                                                 

Net income

                            2,415               2,415  
                                                 

Other comprehensive income

                              (1,035 )     (1,035 )
                                                 

Balance, March 31, 2024

    4,661,686     $ 4,662     $ 65,780     $ 39,989     $ (39,768 )   $ 70,663  

 

Note: Balances as of January 1, 2023 and 2024 were audited.

 

See Notes to Consolidated Financial Statements.

 

7

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Cash flows from operating activities:

               

Net income

  $ 2,415     $ 2,623  
                 

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

               
                 

Depreciation

    402       369  
                 

Provision for credit losses

    -       15  
                 

Amortization of intangible asset

    16       15  
                 

(Accretion) amortization of available for sale securities

    (570 )     (21 )
                 

Amortization (accretion) of held to maturity securities

    51       (731 )
                 

Gain on sale of bank premises and equipment

    (42 )     -  
                 

Change in accrued interest receivable

    (132 )     (172 )
                 

Increase in cash surrender value of life insurance

    (121 )     (115 )
                 

Change in deferred tax expense

    686       315  
                 

Change in other assets

    (545 )     (539 )
                 

Change in employee and director benefit plan liabilities and other liabilities

    (1,025 )     (567 )

Net cash provided by operating activities

  $ 1,135     $ 1,192  

 

See Notes to Consolidated Financial Statements.

 

8

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Cash flows from investing activities:

               

Proceeds from maturities of available for sale securities

  $ 51,011     $ 17,048  
                 

Purchases of available for sale securities

    (108,159 )     (10,651 )
                 

Proceeds from maturities of held to maturity securities

    5,467       65,899  
                 

Purchases of held to maturity securities

    -       (153,070 )
                 

Purchases of Federal Home Loan Bank stock

    (34 )     (22 )
                 

Loans, net change

    1,928       1,100  
                 

Acquisition of bank premises and equipment

    (552 )     (999 )
                 

Proceeds from sale of bank premises and equipment

    61       -  
                 

Investment in cash surrender value of life insurance

    (43 )     (41 )

Net cash used in investing activities

    (50,321 )     (80,736 )

Cash flows from financing activities:

               

Demand and savings deposits, net change

    125,112       119,192  
                 

Time deposits, net change

    (2,103 )     (2,529 )
                 

Borrowings from Federal Home Loan Bank

    58,200       25,600  
                 

Repayments to Federal Home Loan Bank

    (76,700 )     (25,600 )
                 

Borrowings under Bank Term Funding Program

    30,000       -  
                 

Net cash provided by financing activities

    134,509       116,663  

Net increase in cash and cash equivalents

    85,323       37,119  

Cash and cash equivalents, beginning of period

    22,794       32,836  

Cash and cash equivalents, end of period

  $ 108,117     $ 69,955  

 

See Notes to Consolidated Financial Statements.

 

9

 

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2024 and 2023

 

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 March 31, 2024, December 31, 2023 and March 31, 2023 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 2023 Annual Report and Form 10-K.

 

CRITICAL ACCOUNTING POLICIES

 

The results of operations for the quarter ended March 31, 2024, 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 credit 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 March 31, 2024 and December 31, 2023 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, declines in real estate values, and lack of suitable alternative use for 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, changes in local economic conditions, and the inability to monitor collateral consisting of personal property.

 

Accounting Standards Update –In March 2024, the Financial Accounting Standards Board issued Accounting Standards Update 2024-02 (“ASU 2024-02”), Codification Improvements-Amendments to Remove References to the Concepts Statements. ASU 2024-02 removes various references to the FASB’s Concepts Statements from the FASB’s Accounting Standards Codification (Codification or GAAP). The Concepts Statements are non-authoritative guidance issued by the FASB that provide the objectives, qualitative characteristics and other concepts that govern the development of accounting principles by the FASB. ASU 2024-02 applies to all reporting entities and updates the Codification by eliminating 16 discrete references to the Concepts Statements across a variety of defined terms and Topics within the Codification. Codification users should review the entirety of ASU 2024-02 to assess any effects that the amendments may have on entities that are within the ASU’s scope. The FASB does not expect these updates to have a significant effect on current accounting practice. That is because in most cases the amendments to the Codification remove references to Concept Statements that are extraneous and not required to understand or apply the guidance. However, the FASB has provided transition guidance if applying the updated guidance results in accounting changes for some entities. The amendments in ASU 2024-02 are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amended guidance is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. An entity can adopt ASU 2024-02 either on a prospective basis to all new transactions recognized on or after the date that the entity first applies the amendments, or retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. Management has evaluated the impact of the adoption of this standard and determined there would be no material impact to the Company’s consolidated financial position or results of operations.

 

11

 

Accounting Standards Update –In March 2024, the Financial Accounting Standards Board issued Accounting Standards Update 2024-01 (“ASU 2024-01”), Compensation-Stock Compensation (Topic 718): Scope of Application of Profits Interest and Similar Awards. ASU 2024-01 provides illustrative guidance to clarify the scope application of profits interest and similar awards. It clarifies how an entity determines where a profits interest or similar award is within the scope of ASC 718 or not a share-based payment arrangement and therefore within the scope of other guidance. For certain public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes that interim period. The amendments in this Update should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments. If the amendments are applied retrospectively, an entity is required to provide the disclosures in the period of adoption. If the amendments are applied prospectively, an entity is required to disclose the nature of and reason for the change in accounting principle. 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.

 

Accounting Standards Update –In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments of ASU 2023-09 relate to the rate reconciliation and income taxes paid disclosures to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. The other amendments in this update improve the effectiveness and comparability of disclosures by (1) adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with U.S. Securities and Exchange Commission (SEC) Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and (2) removing disclosures that no longer are considered cost beneficial or relevant. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this update should be applied on a prospective basis. Retrospective application is permitted. Management has evaluated the impact of the adoption of this standard and determined there may be additional information required within the Company’s notes to consolidated financial statements on income taxes.

 

12

 

There were no 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, 2023.

 

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 required a material change to the manner in which the Company estimated and reported losses on financial instruments, including loans and unfunded lending commitments, select securities and other assets carried at amortized cost.

 

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. The 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.

 

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.

 

13

 

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 considering prepayments 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.

 

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.

 

14

 
 

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.

 

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 WARM 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, which the Bank chooses to best approximate the expected future loss environment for the WARM time period. The WARM time period considers the average amortized remaining life adjusted by prepayment assumptions based on peer data.

 

For the collective approach, the Bank 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 Bank applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables. The Bank reverses 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 Bank 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.

 

15

 

The Bank maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., the commitment cannot be canceled at any time). 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. The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical study and empirical data calculated by the Federal Deposits Insurance Corporation, and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is classified on the Consolidated Statement of Condition within other liabilities.

 

The Bank establishes specific reserves using an individually evaluated approach for nonaccrual loans, modified loans, 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 Bank 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 Bank’s held to maturity debt securities for expected credit losses and the available for sale debt securities for credit-related impairment. The Bank applies the practical expedient to exclude the accrued interest receivable balance of $1,362,000 from the amortized cost basis of held to maturity debt securities. The allowance for credit losses on held to maturity debt securities is estimated 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. 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 Bank 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 Bank 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 Bank 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.

 

16

 

The Bank 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.

 

 

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,661,686 and 4,678,186 for the three months ended March 31, 2024 and 2023, respectively.

 

 

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $2,225,558 and $1,384,849 for the three months ended March 31, 2024 and 2023, respectively, for interest on deposits and borrowings. No income tax payments were made during the three months ended March 31, 2024 and 2023. No loans were transferred to other real estate during the three months ended March 31, 2024 and 2023.

 

 

4.  Investments:

Effective January 1, 2023, in conjunction with the adoption of CECL, and again at December 31, 2023 and March 31, 2024, 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. A reversal of a portion of the impairment of $(11,346) was recorded as of December 31, 2023. No additional impairment was recorded as of March 31, 2024.

 

The amortized cost, fair value and allowance for credit losses related to securities at March 31, 2024 and December 31, 2023, are as follows (in thousands):

 

      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 

March 31, 2024

 

Cost

  

Gains

  

Losses

  

Fair Value

 

Available for sale securities:

                

U.S. Treasuries

 $192,864  $27  $(9,079) $183,812 
                 

Mortgage-backed securities

  50,733   14   (4,830)  45,917 
                 

Collateralized mortgage obligations

  91,859   42   (5,959)  85,942 
                 

States and political subdivisions

  101,455   -   (20,966)  80,489 

Total available for sale securities

 $436,911  $83  $(40,834) $396,160 

 

17

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 

December 31, 2023

 

Cost

  

Gains

  

Losses

  

Fair Value

 

Available for sale securities:

                

U.S. Treasuries

 $123,945  $55  $(8,542) $115,458 
                 

Mortgage-backed securities

  52,374   14   (4,603)  47,785 
                 

Collateralized mortgage obligations

  101,316   17   (6,327)  95,006 
                 

States and political subdivisions

  101,560   -   (20,332)  81,228 

Total available for sale securities

 $379,195  $86  $(39,804) $339,477 

 

There was no allowance for credit losses on available-for-sale securities as of March 31, 2024 or December 31, 2023.

 

      

Gross

  

Gross

      

Allowance

  

Net

 
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

  

for Credit

  

Carrying

 

March 31, 2024

 

Cost

  

Gains

  

Losses

  

Fair Value

  

Losses

  

Amount

 

Held to maturity securities:

                        

U.S. Treasuries

 $54,958  $-  $(946) $54,012  $-  $54,958 
                         

States and political subdivisions

  90,464   23   (12,278)  78,209   (30)  90,434 

Total held to maturity securities

 $145,422  $23  $(13,224) $132,221  $(30) $145,392 

 

      

Gross

  

Gross

      

Allowance

  

Net

 
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

  

for Credit

  

Carrying

 

December 31, 2023

 

Cost

  

Gains

  

Losses

  

Fair Value

  

Losses

  

Amount

 

Held to maturity securities:

                        

U.S. Treasuries

 $59,901  $41  $(907) $59,035  $-  $59,901 
                         

States and political subdivisions

  91,040   23   (11,575)  79,488   (30)  91,010 

Total held to maturity securities

 $150,941  $64  $(12,482) $138,523  $(30) $150,911 

 

Management analyzed financial data on the state and political subdivision held-to-maturity securities. For the securities that do not have ratings, management assigned a rating based on ratings for similar municipalities. 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, 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. Management utilized a model provided by a third-party vendor to calculate the potential reserve required on the specific securities. 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. At adoption of CECL, management determined there was a reserve required for the allowance for credit losses on held-to-maturity securities. At the end of the year an updated analysis was performed, and management determined a reduction of the provision for credit losses on held to maturity securities was appropriate as of December 31, 2023. No additional provision or reduction was required as of March 31, 2024.

 

18

 

The following table shows a rollforward of the allowance for credit losses on held-to-maturity securities for the three months ended March 31, 2024 and the year ended December 31, 2023 (in thousands):

 

  

State and political

 
  

subdivisions

 

Balance, December 31, 2023

 $30 

Provision for credit losses

  - 

Charge-offs of securities

  - 

Recoveries

  - 

Balance, March 31, 2024

 $30 

 

 

  

State and political

 
  

subdivisions

 

Balance, December 31, 2022

 $- 

Adjustment for adoption of ASU 2016-13

  41 

Provision for credit losses

  (11)

Charge-offs of securities

  - 

Recoveries

  - 

Balance, December 31, 2023

 $30 

 

The Company monitors the credit quality of the debt securities held-to-maturity through the use of credit ratings. The Company monitors the credit ratings on a quarterly basis. The following table summarizes the amortized cost of debt securities held-to-maturity at March 31, 2024 and December 31, 2023, aggregated by credit quality indicators (in thousands):

 

  

March 31, 2024

 

Aaa

 $54,958 

Aa1/Aa2/Aa3

  38,408 

A1/A2

  3,187 

Baa1/Baa2

  1,000 

Not rated

  47,869 

Total

 $145,422 

 

19

 
  

December 31, 2023

 

Aaa

 $59,901 

Aa1/Aa2/Aa3

  38,496 

A1/A2

  3,195 

Baa1/Baa2

  1,003 

Not rated

  48,346 

Total

 $150,941 

 

At March 31, 2024 and December 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual for the three months ended March 31, 2024 and the year ended December 31, 2023.

 

The amortized cost and fair value of debt securities at March 31, 2024, (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

 $98,596  $98,264 

Due after one year through five years

  101,950   92,375 

Due after five years through ten years

  48,083   39,275 

Due after ten years

  45,689   34,387 

Mortgage-backed securities

  50,733   45,917 

Collaterized mortgage obligations

  91,860   85,942 

Total

 $436,911  $396,160 
         

Held to maturity securities:

        

Due in one year or less

 $28,366  $28,202 

Due after one year through five years

  54,242   51,704 

Due after five years through ten years

  40,091   34,952 

Due after ten years

  22,723   17,363 

Total

 $145,422  $132,221 

 

20

 

Available for sale securities with gross unrealized losses at March 31, 2024 and December 31, 2023, 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

 

Available for Sale

 

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses