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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

    

        September 30, 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:

Title of each class

    

Trading 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.

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 October 31, 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 (continued)

(in thousands except share data)

    

September 30, 2024

    

December 31, 2023

(unaudited)

(audited)

Assets

Cash and due from banks

$

42,253

$

22,794

Available for sale securities, amortized cost of $371,236 at September 30, 2024; $379,195 at December 31, 2023

 

341,878

 

339,477

Held to maturity securities, fair value of $123,414 at September 30, 2024; $138,523 at December 31, 2023

 

133,665

 

150,941

Less: Allowance for credit losses on held to maturity securities

 

30

 

30

Held to maturity securities, net

 

133,635

 

150,911

Other investments

 

350

 

350

Federal Home Loan Bank Stock, at cost

 

434

 

2,334

Loans

 

239,259

 

238,339

Less: Allowance for credit losses on loans and leases

 

3,091

 

3,224

Loans, net

 

236,168

 

235,115

Bank premises and equipment, net of accumulated depreciation

19,139

 

19,470

Accrued interest receivable

 

3,608

 

3,520

Cash surrender value of life insurance

 

21,850

 

21,375

Intangible asset

 

491

 

538

Other assets

 

14,346

 

1,854

Total assets

$

814,152

$

797,738

Liabilities and Shareholders' Equity

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Demand, non-interest bearing

$

187,866

$

174,933

Savings and demand, interest bearing

 

439,941

 

483,662

Time, $250,000 or more

 

14,922

 

7,518

Other time deposits

 

23,357

 

22,377

Total deposits

 

666,086

 

688,490

Advances from Federal Home Loan Bank

 

 

18,500

Borrowings under Bank Term Funding Program

30,000

Employee and director benefit plans liabilities

 

19,352

 

19,581

Other liabilities

 

2,321

 

1,884

Total liabilities

 

717,759

 

728,455

Shareholders' Equity:

 

  

 

  

Common stock, $1 par value, 15,000,000 shares authorized, 4,661,686 shares issued and outstanding at September 30, 2024 and December 31, 2023

 

4,662

 

4,662

Surplus

 

65,780

 

65,780

Undivided profits

 

56,910

 

37,574

Accumulated other comprehensive loss

 

(30,959)

 

(38,733)

Total shareholders' equity

 

96,393

 

69,283

Total liabilities and shareholders' equity

$

814,152

$

797,738

See Notes to Consolidated Financial Statements.

2

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data) (unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2024

    

2023

    

2024

    

2023

Interest income:

 

  

  

 

  

Interest and fees on loans

$

3,649

$

3,237

$

10,676

$

9,509

Interest and dividends on securities:

  

  

U. S. Treasuries

 

1,753

 

1,370

 

5,941

 

5,236

Mortgage-backed securities

 

561

 

927

 

1,887

 

2,726

States and political subdivisions

 

980

 

1,084

 

2,984

 

3,264

Collateralized mortgage obligations

 

749

 

887

 

2,404

 

2,596

Other investments

 

40

 

31

 

115

 

88

Interest on balances due from depository institutions

 

98

 

303

 

1,447

 

1,507

Total interest income

 

7,830

 

7,839

 

25,454

 

24,926

Interest expense:

  

  

  

  

Deposits

 

1,760

 

1,471

 

5,953

 

4,296

Borrowings

 

791

 

19

 

1,626

 

29

Total interest expense

 

2,551

 

1,490

 

7,579

 

4,325

Net interest income

 

5,279

 

6,349

 

17,875

 

20,601

Provision for credit losses

 

(48)

 

22

 

(48)

 

(275)

Net interest income after provision for credit losses

$

5,327

$

6,327

$

17,923

$

20,876

Non-interest income:

 

  

 

  

  

 

  

Trust department income and fees

$

628

$

613

$

1,863

$

1,837

Service charges on deposit accounts

 

780

 

781

 

2,360

 

2,437

Increase in cash surrender value of life insurance

 

123

 

120

 

363

 

352

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

 

4

 

30

 

46

 

30

Other income

 

215

 

201

 

622

 

599

Total non-interest income

1,750

1,745

5,254

5,255

Non-interest expense:

  

  

  

  

Salaries and employee benefits

 

2,768

 

2,889

 

7,938

 

8,704

Net occupancy

 

558

 

574

 

1,644

 

1,532

Equipment rentals, depreciation and maintenance

 

784

 

698

 

2,239

 

2,042

FDIC and state banking assessments

122

125

320

357

Data processing

311

289

955

937

ATM expense

265

265

668

434

Other real estate expense

1

1

1

37

Legal expense

29

125

349

434

Other expense

 

905

 

868

 

2,583

 

2,625

Total non-interest expense

 

5,743

 

5,834

 

16,697

 

17,102

Income before income taxes

 

1,334

 

2,238

 

6,480

 

9,029

Income tax (benefit) expense

 

(14,097)

 

328

 

(13,695)

 

1,586

Net income

$

15,431

$

1,910

$

20,175

$

7,443

Basic and diluted earnings per share

$

3.31

$

0.41

$

4.33

$

1.59

Dividends declared per share

$

$

$

0.18

$

0.12

See Notes to Consolidated Financial Statements.

3

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2024

    

2023

    

2024

    

2023

Net income

$

15,431

$

1,910

$

20,175

$

7,443

Other comprehensive income (loss):

 

 

  

 

  

 

  

Net unrealized gain (loss) on available for sale securities, net of tax

 

6,762

 

(7,253)

 

7,774

 

(2,812)

Total other comprehensive income (loss)

 

6,762

 

(7,253)

 

7,774

 

(2,812)

Total comprehensive income (loss)

$

22,193

$

(5,343)

$

27,949

$

4,631

See Notes to Consolidated Financial Statements.

4

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

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

Net income

 

  

 

  

 

  

 

1,910

 

  

 

1,910

Other comprehensive (loss)

 

  

 

  

 

  

 

  

 

(7,253)

 

(7,253)

Stock repurchase

 

(5,500)

 

(5)

 

  

 

(65)

 

  

 

(70)

Balance, September 30, 2023

 

4,672,686

$

4,673

$

65,780

$

37,890

$

(49,230)

$

59,113

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 (loss)

 

  

 

  

 

  

 

  

 

(1,035)

 

(1,035)

Balance, March 31, 2024

 

4,661,686

$

4,662

$

65,780

$

39,989

$

(39,768)

$

70,663

Net income

 

  

 

  

 

  

 

2,329

 

  

 

2,329

Other comprehensive income

 

  

 

  

 

  

 

 

2,047

 

2,047

Dividend declared ($0.18 per share)

 

  

 

  

 

  

 

(839)

 

  

 

(839)

Balance, June 30, 2024

 

4,661,686

$

4,662

$

65,780

$

41,479

$

(37,721)

$

74,200

Net income

 

  

 

  

 

  

 

15,431

 

  

 

15,431

Other comprehensive income

 

  

 

  

 

  

 

  

 

6,762

 

6,762

Balance, September 30, 2024

 

4,661,686

$

4,662

$

65,780

$

56,910

$

(30,959)

$

96,393

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

See Notes to Consolidated Financial Statements.

5

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

Nine Months Ended September 30, 

    

2024

    

2023

Cash flows from operating activities:

 

  

 

  

Net income

$

20,175

$

7,443

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

 

 

  

Depreciation

 

1,252

 

1,128

Provision for credit losses

 

(48)

 

(275)

Amortization of intangible asset

 

47

 

46

(Accretion) amortization of available for sale securities

 

(2,231)

 

(27)

Amortization (accretion) of held to maturity securities

 

313

 

(2,141)

Gain on sale of bank premises and equipment

 

(46)

 

(30)

Loss (gain) on sales of other real estate

62

Increase in cash surrender value of life insurance

 

(363)

 

(352)

Change in accrued interest receivable

 

(88)

 

(83)

Change in deferred tax

 

(14,079)

 

(1,247)

Change in other assets

 

(996)

 

1,426

Change in employee and director benefit plan liabilities and other liabilities

 

156

 

366

Net cash provided by operating activities

$

4,092

$

6,316

Cash flows from investing activities:

 

  

 

  

Proceeds from maturities of available for sale securities

$

173,258

$

50,942

Purchases of available for sale securities

 

(163,069)

 

(30,161)

Proceeds from maturities of held to maturity securities

 

16,963

 

198,977

Purchases of held to maturity securities

 

 

(162,970)

Purchases of Federal Home Loan Bank stock

 

1,900

 

(74)

Loans, net change

 

(962)

 

7,382

Proceeds from sales of other real estate

9

197

Acquisition of bank premises and equipment

 

(942)

 

(2,106)

Proceeds from sale of bank premises and equipment

 

65

 

46

Investment in cash surrender value of life insurance

 

(112)

 

(105)

Net cash provided by investing activities

 

27,110

 

62,128

Cash flows from financing activities:

Demand and savings deposits, net change

 

(30,788)

 

(46,416)

Time deposits, net change

 

8,384

 

(9,130)

Stock repurchase

 

 

(70)

Borrowings from Federal Home Loan Bank

 

829,150

 

110,000

Repayments to Federal Home Loan Bank

 

(847,650)

 

(110,000)

Borrowings under Bank Term Funding Program

30,000

Cash dividends

(839)

(561)

Net cash (used in) financing activities

 

(11,743)

 

(56,177)

Net (decrease) increase in cash and cash equivalents

 

19,459

 

12,267

Cash and cash equivalents, beginning of period

 

22,794

 

32,836

Cash and cash equivalents, end of period

$

42,253

$

45,103

Supplemental disclosures of noncash investing activities

  

  

Transfer from loans to other real estate owned

$

9

$

952

See Notes to Consolidated Financial Statements.

6

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 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, except for the recording of a one-time discrete reduction to income tax expense of $15,194,000 in the current quarter, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the consolidated financial position of the Company and its subsidiaries as of September 30, 2024 and December 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 and nine months ended September 30, 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 periods. 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 repossession or in satisfaction of loans, and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.  In the third quarter of 2024, the Company reassessed the valuation allowance based upon its projections of future sources of taxable income in accordance with applicable accounting guidance and determined it was appropriate to reverse substantially all the valuation allowance which resulted in a one-time discrete reduction to income tax expense of $15,194,000 in the current quarter.

Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry.

The Company’s loan portfolio segments as of September 30, 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.

7

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.

RECENT ACCOUNTING PRONOUNCEMENTS

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 Companys consolidated financial position or results of operations.

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.

8

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.

Accounting Standards Update-In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-07 (“ASU 2023-07”), Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.  The guidance issued in this update requires improvement to the disclosures about a public entity’s reportable segments and more detailed information about a reportable segment’s expenses and other segment items.  Even though the Company has a single reportable segment, all the disclosures required by this update are required.  Under this guidance, public entities are required to disclose segment expenses and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment that are currently required annually.  The goal of these disclosures is the enable investors to develop more decision-useful financial analyses.  This updated is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.  Early adoption is permitted.  The amendments in this update should be applied retrospectively to all previous periods presented.  The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

There was a material change or development 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.  In the third quarter of 2024, the Company reassessed the valuation allowance based upon its projections of future sources of taxable income in accordance with applicable accounting guidance and determined it was appropriate to reverse substantially all the valuation allowance which resulted in a one-time discrete reduction to income tax expense of $15,194,000 in the current quarter.

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

9

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 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 Banks 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 institutions loan classification system.

4.

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

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5.

Banks lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries.

6.

Quality of the Banks credit review function.

7.

Experience, ability, and depth of the Banks 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 Banks financial assets and are relevant to the Banks 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.

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

11

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 $1,222,789 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.

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 4,678,065 for the nine months ended September 30, 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 $7,571,786 and $4,316,512 for the nine months ended September 30, 2024 and 2023, respectively, for interest on deposits and borrowings. The Company paid $835,000 and $415,000 in estimated income tax payments during the nine months ended September 30, 2024 and 2023, respectively. Two loans were transferred to other real estate and the collateral sold during the nine months ended September 30, 2024. One loan in the amount of $952,000 was transferred to other real estate during the nine months ended September 30, 2023.

4.

Investments:

Effective January 1, 2023, in conjunction with the adoption of CECL, and again at December 31, 2023 and September 30, 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 September 30, 2024.

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The amortized cost, fair value and allowance for credit losses related to securities at September 30, 2024 and December 31, 2023, are as follows (in thousands):

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Estimated

September 30, 2024

    

Cost

    

Gains

    

Losses

    

Fair Value

Available for sale securities:

 

  

 

  

 

  

 

  

U.S. Treasuries

$

139,174

464

$

(5,846)

$

133,792

Mortgage-backed securities

 

47,970

 

46

 

(3,389)

 

44,627

Collateralized mortgage obligations

 

83,142

 

62

 

(4,429)

 

78,775

States and political subdivisions

 

100,950

 

 

(16,266)

 

84,684

Total available for sale securities

$

371,236

$

572

$

(29,930)

$

341,878

    

    

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 September 30, 2024 or December 31, 2023.

    

    

Gross

    

Gross

    

    

Allowance

    

Net

Amortized

Unrealized

Unrealized

Estimated

for Credit

Carrying

September 30, 2024

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Losses

    

Amount

Held to maturity securities:

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Treasuries

$

44,971

$

74

$

(315)

$

44,730

$

$

44,971

States and political subdivisions

 

88,694

 

16

 

(10,026)

 

78,684

 

(30)

 

88,664

Total held to maturity securities

$

133,665

$

90

$

(10,341)

$

123,414

$

(30)

$

133,635

    

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: