PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2016 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

¨	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)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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, 2016, there were 15,000,000 shares of $1 par value common stock authorized, with 5,123,186 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, 2016 (unaudited)		December 31, 2015 (audited)
Assets
Cash and due from banks	$	71,609	$	31,396
Available for sale securities		217,884		202,807
Held to maturity securities, fair value of $22,046 at March 31, 2016; $19,220 at December 31, 2015		21,743		19,025
Other investments		2,713		2,744
Federal Home Loan Bank Stock, at cost		1,642		1,637
Loans		337,911		337,557
Less: Allowance for loan losses		7,564		8,070

Loans, net		330,347		329,487
Bank premises and equipment, net of accumulated depreciation		22,513		22,446
Other real estate		9,840		9,916
Accrued interest receivable		1,932		1,832
Cash surrender value of life insurance		18,884		18,735
Other assets		1,130		979

Total assets	$	700,237	$	641,004

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)


	March 31, 2016 (unaudited)		December 31, 2015 (audited)
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand, non-interest bearing	$	130,617	$	122,743
Savings and demand, interest bearing		375,041		315,141
Time, $100,000 or more		36,364		35,389
Other time deposits		39,213		39,434

Total deposits		581,235		512,707
Borrowings from Federal Home Loan Bank		8,333		18,409
Employee and director benefit plans liabilities		16,374		16,283
Other liabilities		1,139		1,766

Total liabilities		607,081		549,165
Shareholders’ Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 5,123,186 shares issued and outstanding at March 31, 2016 and December 31, 2015		5,123		5,123
Surplus		65,780		65,780
Undivided profits		19,227		19,151
Accumulated other comprehensive income, net of tax		3,026		1,785

Total shareholders’ equity		93,156		91,839

Total liabilities and shareholders’ equity	$	700,237	$	641,004

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands except per share data)(unaudited)


	Three Months Ended March 31,
	2016		2015
Interest income:
Interest and fees on loans	$	3,697	$	3,753
Interest and dividends on securities:
U.S. Treasuries		207		111
U.S. Government agencies		349		559
Mortgage-backed securities		143		154
States and political subdivisions		305		371
Corporate bonds		8
Other investments		8		4
Interest on balances due from depository institutions		63		13

Total interest income		4,780		4,965

Interest expense:
Deposits		200		164
Borrowings from Federal Home Loan Bank		42		46

Total interest expense		242		210

Net interest income		4,538		4,755
Provision for allowance for loan losses		113		986

Net interest income after provision for allowance for loan losses	$	4,425	$	3,769

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations (continued)

(in thousands except per share data)(unaudited)


	Three Months Ended March 31,
	2016			2015
Non-interest income:
Trust department income and fees	$	396		$	406
Service charges on deposit accounts		932			1,224
Gain on liquidation, sales and calls of securities		80
Loss from other investments		(31	)		(58	)
Increase in cash surrender value of life insurance		102			122
Other income		164			247

Total non-interest income		1,643			1,941

Non-interest expense:
Salaries and employee benefits		2,774			3,039
Net occupancy		647			667
Equipment rentals, depreciation and maintenance		714			717
FDIC and state banking assessments		226			246
Data processing		340			359
ATM expense		108			343
Other real estate expense		351			451
Other expense		832			1,039

Total non-interest expense		5,992			6,861

Net income (loss)	$	76		$	(1,151	)

Basic and diluted earnings (loss) per share	$	.01		$	(.22	)

Dividends declared per share	$			$

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)(unaudited)


	Three Months Ended March 31,
	2016			2015
Net income (loss)	$	76		$	(1,151	)
Other comprehensive income:
Net unrealized gain on available for sale securities		1,313			2,602
Reclassification adjustment for realized gains on available for sale securities called or sold		(72	)

Total other comprehensive income		1,241			2,602

Total comprehensive income	$	1,317		$	1,451

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(in thousands except share data)


	Number of Common Shares		Common Stock		Surplus		Undivided Profits		Accumulated Other Comprehensive Income		Total
Balance, January 1, 2016		5,123,186	$	5,123	$	65,780	$	19,151	$	1,785	$	91,839
Net income								76				76
Other comprehensive income										1,241		1,241

Balance, March 31, 2016		5,123,186	$	5,123	$	65,780	$	19,227	$	3,026	$	93,156

Note: Balances as of January 1, 2016 were audited.

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)(unaudited)


	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net income (loss)	$	76		$	(1,151	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		447			445
Provision for allowance for loan losses		113			986
Writedown of other real estate		355			411
Gain on sales of other real estate		(57	)		(24	)
Loss from other investments		31			58
Amortization of available for sale securities		18			61
Amortization of held to maturity securities		30			17
Gain on liquidation, sales and calls of securities		(80	)
Change in accrued interest receivable		(100	)		(56	)
Increase in cash surrender value of life insurance		(102	)		(122	)
Change in other assets		(151	)		190
Change in other liabilities		(536	)		(73	)

Net cash provided by operating activities	$	44		$	742

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)


	Three Months Ended March 31,
	2016			2015
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities	$	56,126		$	26,327
Purchases of available for sale securities		(69,900	)		(35,047	)
Proceeds from maturities and calls of held to maturity securities		280
Purchases of held to maturity securities		(3,028	)
Purchases of Federal Home Loan Bank stock		(5	)		(406	)
Proceeds from sales of other real estate		592			513
Loans, net change		(1,787	)		(14,942	)
Acquisition of bank premises and equipment		(514	)		(58	)
Investment in cash surrender value of life insurance		(47	)		(35	)

Net cash used in investing activities		(18,283	)		(23,648	)

Cash flows from financing activities:
Demand and savings deposits, net change		67,774			45,747
Time deposits, net change		754			(975	)
Borrowings from Federal Home Loan Bank		98,900			319,000
Repayments to Federal Home Loan Bank		(108,976	)		(309,074	)

Net cash provided by financing activities		58,452			54,698

Net increase in cash and cash equivalents		40,213			31,792
Cash and cash equivalents, beginning of period		31,396			23,556

Cash and cash equivalents, end of period	$	71,609		$	55,348

See Notes to Consolidated Financial Statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three Months Ended March 31, 2016 and 2015

1. Basis of Presentation:

Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. The Company has two operating 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, 2016 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2015 Annual Report and Form 10-K.

The results of operations for the quarter ended March 31, 2016, are not necessarily indicative of the results to be expected for the full year.

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

Summary of Significant Accounting Policies – The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2015.

New Accounting Pronouncements – In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 82). ASU 2016-02 provides certain targeted improvements to align lessor accounting with the lessee accounting model. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2019. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-03, Intangibles – Goodwill and Other (Topic 350); Business Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance. ASU 2016-03 amends the guidance in ASUs 2014-02, 2014-03, 2014-7 and 2014-18 to remove their effective dates and render them effective immediately. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In March 2016, FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step by step basis. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2016. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

2. Earnings (Loss) Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 5,123,186 for the three months ended March 31, 2016 and 2015.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $235,325 and $204,656 for the three months ended March 31, 2016 and 2015, respectively, for interest on deposits and borrowings. No income tax payments were made during the three months ended March 31, 2016 and 2015. Loans transferred to other real estate amounted to $813,589 and $5,551,393 during the three months ended March 31, 2016 and 2015, respectively.

4. Investments:

The amortized cost and fair value of securities at March 31, 2016 and December 31, 2015, are as follows (in thousands):


			Gross		Gross
			Unrealized		Unrealized
March 31, 2016	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:
Debt securities:
U.S. Treasuries	$	112,771	$	434	$	(3	)	$	113,202
U.S. Government agencies		52,887		319		(259	)		52,947
Mortgage-backed securities		28,981		412					29,393
States and political subdivisions		20,872		862					21,734

Total debt securities		215,511		2,027		(262	)		217,276
Equity securities		608							608

Total available for sale securities	$	216,119	$	2,027	$	(262	)	$	217,884

Held to maturity securities:
States and political subdivisions	$	20,238	$	323	$	(8	)	$	20,553
Corporate bonds		1,505				(12	)		1,493

Total held to maturity securities	$	21,743	$	323	$	(20	)	$	22,046


			Gross		Gross
			Unrealized		Unrealized
December 31, 2015	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:
Debt securities:
U.S. Treasuries	$	63,845	$	20	$	(111	)	$	63,754
U.S. Government agencies		84,849		176		(479	)		84,546
Mortgage-backed securities		30,106		155		(131	)		30,130
States and political subdivisions		22,833		894					23,727

Total debt securities		201,633		1,245		(721	)		202,157
Equity securities		650							650

Total available for sale securities	$	202,283	$	1,245	$	(721	)	$	202,807

Held to maturity securities:
States and political subdivisions	$	17,507	$	222	$	(16	)	$	17,713
Corporate bonds		1,518				(11	)		1,507

Total held to maturity securities	$	19,025	$	222	$	(27	)	$	19,220

The amortized cost and fair value of debt securities at March 31, 2016 (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	$	67,807	$	67,867
Due after one year through five years		81,725		82,627
Due after five years through ten years		25,980		26,295
Due after ten years		11,018		11,094
Mortgage-backed securities		28,981		29,393

Totals	$	215,511	$	217,276

Held to maturity securities:
Due in one year or less	$	621	$	622
Due after one year through five years		8,505		8,570
Due after five years through ten years		7,985		8,140
Due after ten years		4,632		4,714

Totals	$	21,743	$	22,046

Available for sale and held to maturity securities with gross unrealized losses at March 31, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):


	Less Than Twelve Months				Over Twelve Months				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2016:
U.S. Treasuries	$	24,996	$	3	$		$		$	24,996	$	3
U.S. Government agencies		12,825		159		4,887		100		17,712		259
States and political subdivisions		1,254		7		596		1		1,850		8
Corporate bonds		1,493		12						1,493		12

TOTAL	$	40,568	$	181	$	5,483	$	101	$	46,051	$	282

December 31, 2015:
U.S. Treasuries	$	39,889	$	111	$		$		$	39,889	$	111
U.S. Government agencies		14,894		87		12,581		392		27,475		479
Mortgage-backed securities		16,557		131						16,557		131
States and political subdivisions		2,225		8		1,362		8		3,587		16
Corporate bonds		1,507		11						1,507		11

TOTAL	$	75,072	$	348	$	13,943	$	400	$	89,015	$	748

At March 31, 2016, 5 of the 24 securities issued by the U.S. Treasury, 3 of the 10 securities issued by U.S. Government agencies, 8 of the 146 securities issued by states and political subdivisions and the corporate bonds contained unrealized losses.

Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell and it is not more likely than not that it will be required to sell these securities before maturity. While some available for sale securities have been sold for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of the evaluation of these securities, the Company has determined that the unrealized losses summarized in the tables above are not deemed to be other-than-temporary.

Proceeds from sales and calls of available for sale debt securities were $19,590,781 during the three months ended March 31, 2016. Available for sale debt securities were sold or called for a realized gain of $72,333 for the three months ended March 31, 2016. There were no sales or calls of available for sale debt securities for the three months ended March 31, 2015.

Securities with a fair value of $205,888,934 and $168,724,920 at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

5. Loans:

The composition of the loan portfolio at March 31, 2016 and December 31, 2015, is as follows (in thousands):


	March 31, 2016		December 31, 2015
Gaming	$	31,492	$	31,655
Residential and land development		919		933
Real estate, construction		35,449		35,414
Real estate, mortgage		220,878		219,925
Commercial and industrial		41,934		42,480
Other		7,239		7,150

Total	$	337,911	$	337,557

The age analysis of the loan portfolio, segregated by class of loans, as of March 31, 2016 and December 31, 2015, is as follows (in thousands):


													Loans Past Due Greater
	Number of Days Past Due												Than 90
					Greater		Total				Total		Days &
	30 - 59		60 - 89		Than 90		Past Due		Current		Loans		Still Accruing
March 31, 2016:
Gaming	$		$		$		$		$	31,492	$	31,492	$
Residential and land development						309		309		610		919
Real estate, construction		1,113				995		2,108		33,341		35,449
Real estate, mortgage		8,564		2,599		1,962		13,125		207,753		220,878		103
Commercial and industrial		1,555				743		2,298		39,636		41,934
Other		66		3		76		145		7,094		7,239		76

Total	$	11,298	$	2,602	$	4,085	$	17,985	$	319,926	$	337,911	$	179

December 31, 2015:
Gaming	$		$		$		$		$	31,655	$	31,655	$
Residential and land development						323		323		610		933
Real estate, construction		851		448		1,346		2,645		32,769		35,414
Real estate, mortgage		7,094		3,673		1,352		12,119		207,806		219,925		146
Commercial and industrial		1,206		31		237		1,474		41,006		42,480
Other		67						67		7,083		7,150

Total	$	9,218	$	4,152	$	3,258	$	16,628	$	320,929	$	337,557	$	146

The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A, B, C, S, D, E or F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. A grade of S will generally be applied to loans for customers who meet the criteria for a grade of C but who also warrant additional monitoring by placement on the watch list. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade of E will generally be applied to loans for customers with weaknesses inherent in the “D” classification and in which collection or liquidation in full is questionable. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. A grade of F is applied to loans which are considered uncollectible and of such little value that their continuance in an active bank is not warranted. Loans with this grade are charged off, even though partial or full recovery may be possible in the future.

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of March 31, 2016 and December 31, 2015, is as follows (in thousands):


	Loans With A Grade Of:
	A, B or C		S		D		E		F	Total
March 31, 2016:
Gaming	$	31,492	$		$		$		$	$	31,492
Residential and land development		610						309			919
Real estate, construction		32,514				725		2,210			35,449
Real estate, mortgage		168,381		16,541		23,019		12,937			220,878
Commercial and industrial		24,469		15,007		1,326		1,132			41,934
Other		7,121		1		117					7,239

Total	$	264,587	$	31,549	$	25,187	$	16,588	$	$	337,911

December 31, 2015:
Gaming	$	31,655	$		$		$		$	$	31,655
Residential and land development		610						323			933
Real estate, construction		31,935				883		2,596			35,414
Real estate, mortgage		167,286		16,678		23,686		12,275			219,925
Commercial and industrial		24,466		15,007		2,368		639			42,480
Other		7,114		1		35					7,150

Total	$	263,066	$	31,686	$	26,972	$	15,833	$	$	337,557

A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of March 31, 2016 and December 31, 2015, are as follows (in thousands):


	March 31, 2016		December 31, 2015
Residential and land development	$	309	$	323
Real estate, construction		2,137		2,523
Real estate, mortgage		11,924		11,759
Commercial and industrial		1,078		581

Total	$	15,448	$	15,186

The Company has modified certain loans by granting interest rate concessions to these customers. These loans are in compliance with their modified terms, are currently accruing and the Company has classified them as troubled debt restructurings. Troubled debt restructurings as of March 31, 2016 and December 31, 2015 were as follows (in thousands except for number of contracts):


			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded		Related
	Contracts		Investment		Investment		Allowance
March 31, 2016:
Real estate, mortgage		3	$	1,216	$	1,216	$	107

Total		3	$	1,216	$	1,216	$	107

December 31, 2015:
Real estate, mortgage		3	$	1,232	$	1,232	$	107

Total		3	$	1,232	$	1,232	$	107

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of March 31, 2016 and December 31, 2015, are as follows (in thousands):


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2016:
With no related allowance recorded:
Real estate, construction	$	1,933	$	1,458	$		$	1,510	$
Real estate, mortgage		9,693		8,937				8,734		8
Commercial and industrial		1,116		1,078				742

Total		12,742		11,473				10,986		8

With a related allowance recorded:
Residential and land development		309		309		109		318
Real estate, construction		812		679		250		680
Real estate, mortgage		4,203		4,203		1,539		4,215		7

Total		5,324		5,191		1,898		5,213		7

Total by class of loans:
Residential and land development		309		309		109		318
Real estate, construction		2,745		2,137		250		2,190
Real estate, mortgage		13,896		13,140		1,539		12,949		15
Commercial and industrial		1,116		1,078				742

Total	$	18,066	$	16,664	$	1,898	$	16,199	$	15


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2015:
With no related allowance recorded:
Real estate, construction	$	2,228	$	1,842	$		$	1,878	$
Real estate, mortgage		9,771		9,014				9,175		21
Commercial and industrial		619		581				653

Total		12,618		11,437				11,706		21

With a related allowance recorded:
Residential and land development		323		323		109		343
Real estate, construction		814		681		252		780
Real estate, mortgage		3,977		3,977		1,443		3,920		18

Total		5,114		4,981		1,804		5,043		18

Total by class of loans:
Residential and land development		323		323		109		343
Real estate, construction		3,042		2,523		252		2,658
Real estate, mortgage		13,748		12,991		1,443		13,095		39
Commercial and industrial		619		581				653

Total	$	17,732	$	16,418	$	1,804	$	16,749	$	39

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the three months ended March 31, 2016 and 2015, and the balances of loans, individually and collectively evaluated for impairment, as of March 31, 2016 and 2015, are as follows (in thousands):


	Gaming			Residential and Land Development		Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Quarter Ended March 31, 2016:
Allowance for Loan Losses:
Beginning Balance	$	582		$	189	$	589		$	5,382		$	1,075		$	253		$	8,070
Charge-offs							(89	)		(15	)		(509	)		(50	)		(663	)
Recoveries							1			7			15			21			44
Provision		(15	)		6		(49	)		40			105			26			113

Ending Balance	$	567		$	195	$	452		$	5,414		$	686		$	250		$	7,564

Allowance for loan losses, March 31, 2016:
Ending balance: individually evaluated for impairment	$			$	109	$	391		$	1,829		$	130		$	3		$	2,462

Ending balance: collectively evaluated for impairment	$	567		$	86	$	61		$	3,585		$	556		$	247		$	5,102

Total Loans, March 31, 2016:
Ending balance: individually evaluated for impairment	$			$	309	$	2,935		$	35,956		$	2,458		$	117		$	41,775

Ending balance: collectively evaluated for impairment	$	31,492		$	610	$	32,514		$	184,922		$	39,476		$	7,122		$	296,136


	Gaming			Residential and Land Development		Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Quarter Ended March 31, 2015:
Allowance for Loan Losses:
Beginning Balance	$	573		$	251	$	860		$	6,609		$	587		$	326		$	9,206
Charge-offs							(97	)		(83	)		(24	)		(60	)		(264	)
Recoveries										7			10			40			57
Provision		(36	)		817		(17	)		134			68			20			986

Ending Balance	$	537		$	1,068	$	746		$	6,667		$	641		$	326		$	9,985

Allowance for loan losses, March 31, 2015:
Ending balance: individually evaluated for impairment	$			$	894	$	687		$	2,922		$	264		$	12		$	4,779

Ending balance: collectively evaluated for impairment	$	537		$	174	$	59		$	3,745		$	377		$	314		$	5,206

Total Loans, March 31, 2015:
Ending balance: individually evaluated for impairment	$			$	5,436	$	5,546		$	38,574		$	1,852		$	31		$	51,439

Ending balance: collectively evaluated for impairment	$	29,760		$	650	$	32,130		$	200,921		$	43,251		$	13,440		$	320,152

7. Deposits:

Time deposits of $100,000 or more at March 31, 2016 and December 31, 2015 include brokered deposits of $5,000,000, which mature in 2017.

Time deposits of $250,000 or more totaled approximately $24,938,000 and $24,090,000 at March 31, 2016 and December 31, 2015, respectively.

8. Fair Value Measurements and Disclosures:

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

Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets. If the fair value of available for sale securities is generated through model-based techniques, including the discounting of estimated cash flows, such securities are classified as Level 3 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

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

Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the

Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets.

Other Real Estate

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

Cash Surrender Value of Life Insurance

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

Deposits

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

Borrowings from Federal Home Loan Bank

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

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of March 31, 2016 and December 31, 2015 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
March 31, 2016:
U.S. Treasuries	$	113,202	$	$	113,202	$
U.S. Government agencies		52,947			52,947
Mortgage-backed securities		29,393			29,393
States and political subdivisions		21,734			21,554		180
Equity securities		608			608

Total	$	217,884	$	$	217,704	$	180

December 31, 2015:
U.S. Treasuries	$	63,754	$	$	63,754	$
U.S. Government agencies		84,546			84,546
Mortgage-backed securities		30,130			30,130
States and political subdivisions		23,727			23,547		180
Equity securities		650			650

Total	$	202,807	$	$	202,627	$	180

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of March 31, 2016 and December 31, 2015 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2016	$	7,752	$	$	$	7,752
December 31, 2015		7,811				7,811

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of March 31, 2016 and December 31, 2015 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2016	$	9,840	$	$	$	9,840
December 31, 2015		9,916				9,916

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


	For the Three			For the Year
	Months Ended			Ended
	March 31, 2016			December 31, 2015
Balance, beginning of period	$	9,916		$	7,646
Loans transferred to ORE		814			7,502
Sales		(535	)		(4,295	)
Writedowns		(355	)		(937	)

Balance, end of period	$	9,840		$	9,916

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at March 31, 2016 and December 31, 2015, are as follows (in thousands):


	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
March 31, 2016:
Financial Assets:
Cash and due from banks	$	71,609	$	71,609	$		$		$	71,609
Available for sale securities		217,884				217,704		180		217,884
Held to maturity securities		21,743				22,046				22,046
Other investments		2,713		2,713						2,713
Federal Home Loan Bank stock		1,642				1,642				1,642
Loans, net		330,347						333,880		333,880
Other real estate		9,840						9,840		9,840
Cash surrender value of life insurance		18,884				18,884				18,884
Financial Liabilities:
Deposits:
Non-interest bearing		130,617		130,617						130,617
Interest bearing		450,618						450,891		450,891
Borrowings from Federal Home Loan
Bank		8,333				9,857				9,857


December 31, 2015:
Financial Assets:
Cash and due from banks	$	31,396	$	31,396	$		$		$	31,396
Available for sale securities		202,807				202,627		180		202,807
Held to maturity securities		19,025				19,220				19,220
Other investments		2,744		2,744						2,744
Federal Home Loan Bank stock		1,637				1,637				1,637
Loans, net		329,487						331,026		331,026
Other real estate		9,916						9,916		9,916
Cash surrender value of life insurance		18,735				18,735				18,735
Financial Liabilities:
Deposits:
Non-interest bearing		122,743		122,743						122,743
Interest bearing		389,964						390,205		390,205
Borrowings from Federal Home Loan
Bank		18,409				19,731				19,731

9. Reclassifications:

Certain reclassifications, which had no effect on prior year net income, have been made to prior period statements to conform to current year presentation.

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

GENERAL

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

The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2015.

Forward-Looking Information

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

New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) issued several new accounting standards updates during the first quarter of 2016, which have been disclosed in the Notes to Unaudited Consolidated Financial Statements. The Company does not expect that these updates will have a material effect on its financial position, or results of operations.

Critical Accounting Policies

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

Investments

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

Allowance for loan losses

The Company’s most critical accounting policy relates to its allowance for loan losses (“ALL”), which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of the financial statements. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. Management believes that the ALL is adequate and appropriate for all periods presented in these financial statements. If there was a deterioration of any of the factors considered by Management in evaluating the ALL, the estimate of loss would be updated, and additional provisions for loan losses may be required. The analysis divides the portfolio into two segments: a pool analysis of loans based upon a five year average loss history which is updated on a quarterly basis and which may be adjusted by qualitative factors by loan type and a specific reserve analysis for those loans considered impaired under GAAP. All credit relationships with an outstanding balance of $100,000 or greater that are included in Management’s loan watch list are individually reviewed for impairment. All losses are charged to the ALL when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the ALL at the time of receipt.

Other Real Estate

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

Employee Benefit Plans

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

Income Taxes

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

OVERVIEW

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

The Company reported net income of $76,000 for the first quarter of 2016 compared with a net loss of $1,151,000 for the first quarter of 2015. Results in 2016 included decreases in the provision for the allowance for loan losses and non-interest expense which was partially offset by a decrease in net interest income and non-interest income as compared with 2015.

Managing the net interest margin in the Company’s highly competitive market and in context of larger economic conditions has been very challenging and will continue to be so, for the foreseeable future. Net interest income was impacted primarily by the decrease in interest income on loans of $56,000. This decrease was the result of the decrease in average loans and the yield on average loans. The decrease in average loans was a result of principal payments, maturities, charge-offs and foreclosures on existing loans exceeding new loans.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be emphasized during these difficult economic times, as the local economy continues to negatively impact collateral values and borrowers’ ability to repay their loans. A provision for the allowance for loan losses of $113,000 was recorded in 2016 as compared with $986,000 in 2015. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $15,448,000 and $15,186,000 at March 31, 2016 and December 31, 2015, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

Non-interest income decreased $298,000 for the three months ended March 31, 2016 as compared with 2015 results. Service charges on deposit accounts decreased $292,000 for 2016 as compared with 2015 primarily as a result of decreased ATM fee income.

Non-interest expense decreased $869,000 for the three months ended March 31, 2016 as compared with 2015 results. This decrease for the three months ended March 31, 2016 was the result of decreases in salaries and employee benefits of $265,000, ATM expense of $235,000 and other expense of $207,000 as compared with 2015. Other expenses includes legal fees which decreased $159,000 for the three months ended March 31, 2016 as compared with the same period for 2015.

Total assets at March 31, 2016 increased $59,233,000 as compared with December 31, 2015. Cash and due from banks increased $40,213,000 in the management of the Company’s liquidity position. Available for sale securities increased $15,077,000 primarily as a result of increased purchases of these investments at March 31, 2016.

RESULTS OF OPERATIONS

Net Interest Income

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

The Company’s average interest earning assets decreased approximately $16,133,000 or 3%, from approximately $618,670,000 for the first quarter of 2015 to approximately $602,537,000 for the first quarter of 2016. The Company’s average balance sheet decreased primarily as average loans decreased approximately $24,493,000 and average nontaxable available for sale securities decreased approximately $12,839,000 and balances due from financial institutions increased approximately $16,059,000 and taxable available for sale securities increased approximately $3,223,000 for the

first quarter of 2016 as compared with the first quarter of 2015. Average loans decreased as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. Average nontaxable available for sale securities decreased as some of the proceeds of the maturities of these securities were reinvested in taxable available for sale securities. Balances due from financial institutions increased from the proceeds of maturities of nontaxable available for sale securities and the management of the Company’s liquidity position.

The average yield on interest-earning assets decreased from 3.33% for the first quarter of 2015 to 3.28% for the first quarter of 2016. This decrease is primarily the result of the yield on taxable available for sale securities decreasing from 1.78% for 2015 to 1.48% for 2016 as recent purchases have shorter durations, and therefore lower yields, in anticipation of rising rates.

Average interest bearing liabilities decreased approximately $28,189,000, or 6%, from approximately $478,294,000 for the first quarter of 2015 to approximately $450,105,000 for the first quarter of 2016. Average savings and interest bearing DDA decreased $18,186,000 primarily as several large customers reallocated their funds in the current year. Average borrowings from the Federal Home Loan Bank decreased $10,075,000 due to the liquidity needs of the bank subsidiary.

The average rate paid on interest bearing liabilities for the first quarter of 2015 was .18% as compared with .22% for the first quarter of 2016. This increase is primarily due to the increased rates in the current year.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.20% for the quarter ended March 31, 2015 and 3.12% for the quarter ended March 31, 2016.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended March 31, 2016 and 2015.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)


	Three Months Ended March 31, 2016							Three Months Ended March 31, 2015
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	337,950	$	3,697		4.38	%	$	362,443	$	3,753		4.14	%
Balances due from financial institutions		31,247		63		0.81	%		15,188		13		0.34	%
HTM:
Taxable		1,513		8		2.12	%
Non taxable (1)		18,257		162		3.55	%		17,777		151		3.40	%
AFS:
Taxable		188,735		699		1.48	%		185,512		824		1.78	%
Non taxable (1)		22,589		300		5.31	%		35,428		411		4.64	%
Other		2,246		8		1.42	%		2,322		4		0.69	%

Total	$	602,537	$	4,937		3.28	%	$	618,670	$	5,156		3.33	%

Savings & interest- bearing DDA	$	363,656	$	99		0.11	%	$	381,842	$	70		0.07	%
Time deposits		74,923		101		0.54	%		74,851		94		0.50	%
Borrowings from FHLB		11,526		42		1.46	%		21,601		46		0.85	%

Total	$	450,105	$	242		0.22	%	$	478,294	$	210		0.18	%

Net tax-equivalent spread						3.06	%						3.15	%

Net tax-equivalent margin on earning assets						3.12	%						3.20	%

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2016 and 2015.

(2)	Loan fees of $112 and $90 for 2016 and 2015, respectively, are included in these figures.

(3)	Includes nonaccrual loans.

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)


	For the Three Months Ended
	March 31, 2016 compared with March 31, 2015
	Volume			Rate			Rate/Volume			Total
Interest earned on:
Loans	$	(254	)	$	212		$	(14	)	$	(56	)
Balances due from finanicial institutions		14			17			19			50
Held to maturity securities:
Taxable		8									8
Non taxable		4			7						11
Available for sale securities:
Taxable		14			(137	)		(2	)		(125	)
Non taxable		(149	)		60			(22	)		(111	)
Other		(1	)		5						4

Total	$	(364	)	$	164		$	(19	)	$	(219	)

Interest paid on:
Savings & interest-bearing DDA	$	(3	)	$	34		$	(2	)	$	29
Time deposits		1			6						7
Borrowings from FHLB		(21	)		33			(16	)		(4	)

Total	$	(23	)	$	73		$	(18	)	$	32

Provision for Loan Losses

In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. The Company’s Loan Review and Special Assets Departments play key roles in monitoring the loan portfolio and managing problem loans. New loans and, on a periodic basis, existing loans are reviewed to evaluate compliance with the loan policy. Loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area; residential and land development; construction and commercial real estate loans, and their direct and indirect impact on its operations are evaluated on a monthly basis. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. Lenders experienced in workout scenarios consult with loan officers and customers to address non-performing loans. A watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation.

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

The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans were $15,448,000 and $15,186,000 at March 31, 2016 and December 31, 2015, respectively, specific reserves of only $1,791,000 and $1,697,000, respectively, have been allocated to these loans as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value.

The Company’s on-going, systematic evaluation resulted in the Company recording a provision for loan losses of $113,000 and $986,000 for the first quarters of 2016 and 2015, respectively. The allowance for loan losses as a percentage of loans was 2.24% and 2.69% at March 31, 2016 and December 31, 2015, respectively. The Company believes that its allowance for loan losses is appropriate as of March 31, 2016.

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

Non-interest income

Non-interest income decreased $298,000 for the first quarter of 2016 as compared with the first quarter of 2015 as service charges on deposit accounts decreased by $292,000 during the first quarter of 2016 as compared with the first quarter of 2015. ATM fee income decreased $271,000 as the Company’s off-site ATMs at a casino transferred to another vendor during 2015.

Non-interest expense

Total non-interest expense decreased $869,000 for the first quarter of 2016 as compared with the first quarter of 2015. Salaries and employee benefits decreased $265,000, ATM expense decreased $235,000 and other expenses decreased $207,000 for the first quarter of 2016 as compared with the first quarter of 2015.

Salaries and employee benefits decreased in 2016 as the Company updated the estimates of costs associated with its deferred compensation plans in 2015.

ATM expenses decreased in 2016 as a result of decreased ATM activity in the current year as a result of off-site ATMs at a casino transferring to another vendor.

Other expense decreased in 2016 primarily as 2015’s results included increased legal fees associated with non-performing loans of $159,000.

Income Taxes

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

FINANCIAL CONDITION

Cash and due from banks increased $40,213,000 at March 31, 2016, compared with December 31, 2015 in the management of the bank subsidiary’s liquidity position.

Available for sale securities increased $15,077,000 at March 31, 2016, compared with December 31, 2015 as the Company invested excess funds from increased deposits.

Other real estate (“ORE”) decreased $76,000 at March 31, 2016 as compared with December 31, 2015. Loans totaling $814,000 were transferred into ORE while $592,000 was sold for a gain of $57,000 and writedowns of ORE to fair value were $355,000 during the first three months of 2016.

Total deposits increased $68,528,000 at March 31, 2016, as compared with December 31, 2015. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. Deposits from county and municipal entities increase significantly during the first quarter of each year based on property tax collections.

Borrowings from the Federal Home Loan Bank decreased $10,076,000 at March 31, 2016 as compared with December 31, 2015 based on the liquidity needs of the bank subsidiary.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders.

New rules relating to risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act became effective for the Company January 1, 2015. The rules establish a new common equity Tier 1 minimum capital requirement, increase the minimum capital ratios and assign a higher risk weight to certain assets based on the risk associated with these assets.

As of March 31, 2016, the most recent notification from the Federal Deposit Insurance Corporation categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Common Equity Tier 1 Capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater and a Leverage capital ratio of 5.00% or greater. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios as of March 31, 2016 and December 31, 2015, are as follows (in thousands):


	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
March 31, 2016:
Total Capital (to Risk Weighted Assets)	$	95,480		21.79	%	$	35,055		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		89,977		20.53	%		19,718		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		89,977		20.53	%		26,291		6.00	%
Tier 1 Capital (to Average Assets)		89,977		12.70	%		27,291		4.00	%
December 31, 2015:
Total Capital (to Risk Weighted Assets)	$	95,395		21.83	%	$	34,954		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		89,901		20.58	%		19,662		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		89,901		20.58	%		26,215		6.00	%
Tier 1 Capital (to Average Assets)		89,901		13.18	%		27,291		4.00	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of March 31, 2016 and December 31, 2015, are as follows (in thousands):


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2016:
Total Capital (to Risk Weighted Assets)	$	92,090		21.20	%	$	34,746		8.00	%	$	43,432		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		86,635		19.95	%		19,544		4.50	%		28,231		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		86,635		19.95	%		26,059		6.00	%		34,746		8.00	%
Tier 1 Capital (to Average Assets)		86,635		12.73	%		27,232		4.00	%		34,041		5.00	%
December 31, 2015:
Total Capital (to Risk Weighted Assets)	$	91,963		21.09	%	$	34,889		8.00	%	$	43,611		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		86,479		19.83	%		19,625		4.50	%		28,347		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		86,479		19.83	%		26,166		6.00	%		34,889		8.00	%
Tier 1 Capital (to Average Assets)		86,479		13.47	%		25,680		4.00	%		32,100		5.00	%

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

LIQUIDITY

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

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

REGULATORY MATTERS

During 2014, Management identified opportunities for improving risk management and earnings, addressing asset quality concerns, analyzing and assessing the Bank’s management and staffing needs, and managing concentrations of credit risk as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company had identified specific corrective steps and actions to enhance its risk management, earnings, asset quality and staffing. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators.

Item 4: Controls and Procedures

As of March 31, 2016, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1: Legal Proceedings

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

Item 5: Other Information

None.

Item 6—Exhibits and Reports on Form 8-K

(a) Exhibits



Exhibit 31.1:		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes—Oxley Act of 2002

Exhibit 31.2:		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes—Oxley Act of 2002

Exhibit 32.1:		Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350

Exhibit 32.2:		Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350

Exhibit 101		The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the quarters ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2016 and 2015, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the quarter ended March 31, 2016, (v) Consolidated Statements of Cash Flows for the quarters ended March 31, 2016 and 2015 and (vi) Notes to the Unaudited Consolidated Financial Statements for the quarters ended March 31, 2016 and 2015.

(b) Reports on Form 8-K

A Form 8-K was filed on January 27, 2016, April 27, 2016 and April 28, 2016.

SIGNATURES

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


PEOPLES FINANCIAL CORPORATION (Registrant)

Date:		May 11, 2016

By:		/s/ Chevis C. Swetman
		Chevis C. Swetman
Chairman, President and Chief Executive Officer (principal executive officer)

Date:		May 11, 2016

By:		/s/ Lauri A. Wood
		Lauri A. Wood
Chief Financial Officer and Controller (principal financial and accounting officer)