PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2017 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company ☐

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

☐	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 ☒ 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 ☒ 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):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At April 28, 2017, 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, 2017		December 31, 2016
	(unaudited)		(audited)
Assets
Cash and due from banks	$	101,939	$	41,116

Available for sale securities		223,345		233,578

Held to maturity securities, fair value of $46,975 at March 31, 2017; $46,935 at December 31, 2016		47,689		48,150

Other investments		2,705		2,693

Federal Home Loan Bank Stock, at cost		541		539

Loans		303,192		315,355

Less: Allowance for loan losses		5,482		5,466

Loans, net		297,710		309,889

Bank premises and equipment, net of accumulated depreciation		21,195		21,644

Other real estate		8,247		8,513

Accrued interest receivable		1,932		1,855

Cash surrender value of life insurance		19,388		19,249

Other assets		696		788

Total assets	$	725,387	$	688,014

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)


	March 31, 2017			December 31, 2016
	(unaudited)			(audited)
Liabilities and Shareholders’ Equity
Liabilities:

Deposits:

Demand, non-interest bearing	$	149,515		$	132,381

Savings and demand, interest bearing		383,609			364,975

Time, $100,000 or more		49,073			38,650

Other time deposits		34,146			39,010

Total deposits		616,343			575,016

Borrowings from Federal Home Loan Bank		1,243			6,257

Employee and director benefit plans liabilities		16,917			16,768

Other liabilities		1,255			1,512

Total liabilities		635,758			599,553

Shareholders’ Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 5,123,186 shares issued and outstanding at March 31, 2017 and December 31, 2016		5,123			5,123

Surplus		65,780			65,780

Undivided profits		19,392			19,318

Accumulated other comprehensive loss, net of tax		(666	)		(1,760	)

Total shareholders’ equity		89,629			88,461

Total liabilities and shareholders’ equity	$	725,387		$	688,014

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data)(unaudited)


	Three Months Ended March 31,
	2017		2016
Interest income:

Interest and fees on loans	$	3,274	$	3,697

Interest and dividends on securities:

U.S. Treasuries		415		207

U.S. Government agencies		142		349

Mortgage-backed securities		265		143

States and political subdivisions		393		305

Corporate bonds		8		8

Other investments		3		8

Interest on balances due from depository institutions		101		63

Total interest income		4,601		4,780

Interest expense:

Deposits		264		200

Borrowings from Federal Home Loan Bank		15		42

Total interest expense		279		242

Net interest income		4,322		4,538

Provision for allowance for loan losses		26		113

Net interest income after provision for allowance for loan losses	$	4,296	$	4,425

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data)(unaudited)


	Three Months Ended March 31,
	2017		2016
Non-interest income:

Trust department income and fees	$	366	$	396

Service charges on deposit accounts		922		932

Gain on liquidation, sales and calls of securities		17		80

Gain (loss) from other investments		12		(31	)

Increase in cash surrender value of life insurance		99		102

Other income		126		164

Total non-interest income		1,542		1,643

Non-interest expense:

Salaries and employee benefits		2,849		2,774

Net occupancy		535		647

Equipment rentals, depreciation and maintenance		794		714

FDIC and state banking assessments		98		226

Data processing		331		340

ATM expense		122		108

Other real estate expense		62		351

Other expense		973		832

Total non-interest expense		5,764		5,992

Net income	$	74	$	76

Basic and diluted earnings per share	$	.01	$	.01

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,
	2017			2016
Net income	$	74		$	76

Other comprehensive income:

Net unrealized gain on available for sale securities		1,111			1,321

Reclassification adjustment for realized gains on available for sale securities called or sold		(17	)		(80	)

Total other comprehensive income		1,094			1,241

Total comprehensive income	$	1,168		$	1,317

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(in thousands except share data)


									Accumulated
	Number of								Other
	Common		Common				Undivided		Comprehensive
	Shares		Stock		Surplus		Profits		Income			Total
Balance, January 1, 2017		5,123,186	$	5,123	$	65,780	$	19,318	$	(1,760	)	$	88,461

Net income								74					74

Other comprehensive income										1,094			1,094

Balance, March 31, 2017		5,123,186	$	5,123	$	65,780	$	19,392	$	(666	)	$	89,629

Note: Balances as of January 1, 2017 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,
	2017			2016
Cash flows from operating activities:
Net income	$	74		$	76

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

Depreciation		473			447

Provision for allowance for loan losses		26			113

Writedown of other real estate		20			355

(Gain) loss on sales of other real estate		15			(57	)

(Gain) loss from other investments		(12	)		31

Amortization of available for sale securities		(5	)		18

Amortization of held to maturity securities		71			30

Gain on liquidation, sales and calls of securities		(17	)		(80	)

Change in accrued interest receivable		(77	)		(100	)

Increase in cash surrender value of life insurance		(99	)		(102	)

Change in other assets		92			(151	)

Change in other liabilities		(108	)		(536	)

Net cash provided by operating activities	$	453		$	44

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)


	Three Months Ended March 31,
	2017			2016
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities	$	20,123		$	56,126

Purchases of available for sale securities		(8,774	)		(69,900	)

Proceeds from maturities and calls of held to maturity securities		390			280

Purchases of held to maturity securities					(3,028	)

Purchases of Federal Home Loan Bank stock		(2	)		(5	)

Proceeds from sales of other real estate		276			592

Loans, net change		12,108			(1,787	)

Acquisition of bank premises and equipment		(24	)		(514	)

Investment in cash surrender value of life insurance		(40	)		(47	)

Net cash provided by (used in) investing activities		24,057			(18,283	)

Cash flows from financing activities:
Demand and savings deposits, net change		35,768			67,774

Time deposits, net change		5,559			754

Borrowings from Federal Home Loan Bank					98,900

Repayments to Federal Home Loan Bank		(5,014	)		(108,976	)

Net cash provided by financing activities		36,313			58,452

Net increase in cash and cash equivalents		60,823			40,213
Cash and cash equivalents, beginning of period		41,116			31,396

Cash and cash equivalents, end of period	$	101,939		$	71,609

See Notes to Consolidated Financial Statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three Months Ended March 31, 2017 and 2016

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, 2017 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 2016 Annual Report and Form 10-K.

The results of operations for the quarter ended March 31, 2017, 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, 2016.

New Accounting Pronouncements – In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and

November 17, 2017 EITF Meetings. ASU 2017-03 incorporates into the Accounting Standards Codification recent SEC guidance about disclosing the effect on financial statements of adopting the revenue, leases and credit losses standards. This update is effective upon issuance. 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 February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 conforms the derecognition guidance on nonfinancial assets with the model for transactions the new revenue standard. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. 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 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 amends the requirements related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. 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 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU 2017-08 shortens the amortization period for the premium on such securities to the earliest call date. This update will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. 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 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, 2017 and 2016.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $259,953 and $235,325 for the three months ended March 31, 2017 and 2016, respectively, for interest on deposits and borrowings. No income tax payments were made during the three months ended March 31, 2017 and 2016. Loans transferred to other real estate amounted to $44,391 and $813,589 during the three months ended March 31, 2017 and 2016, respectively.

4. Investments:

The amortized cost and fair value of securities at March 31, 2017 and December 31, 2016, are as follows (in thousands):


			Gross		Gross
			Unrealized		Unrealized
March 31, 2017	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:

Debt securities:

U.S. Treasuries	$	137,208	$	35	$	(1,595	)	$	135,648

U.S. Government agencies		24,975		107		(177	)		24,905

Mortgage-backed securities		46,704		135		(831	)		46,008

States and political subdivisions		15,887		439					16,326

Total debt securities		224,774		716		(2,603	)		222,887

Equity securities		458							458

Total available for sale securities	$	225,232	$	716	$	(2,603	)	$	223,345

Held to maturity securities:

U.S. Government agencies	$	10,004	$		$	(271	)	$	9,733

States and political subdivisions		36,235		191		(634	)		35,792

Corporate bonds		1,450							1,450

Total held to maturity securities	$	47,689	$	191	$	(905	)	$	46,975


			Gross		Gross
			Unrealized		Unrealized
December 31, 2016	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:

Debt securities:

U.S. Treasuries	$	149,676	$	39	$	(2,091	)	$	147,624

U.S. Government agencies		24,973		58		(206	)		24,825

Mortgage-backed securities		43,939		74		(1,305	)		42,708

States and political subdivisions		17,513		450					17,963

Total debt securities		236,101		621		(3,602	)		233,120

Equity securities		458							458

Total available for sale securities	$	236,559	$	621	$	(3,602	)	$	233,578

Held to maturity securities:
U.S. Government agencies	$	10,009	$		$	(315	)	$	9,694

States and political subdivisions		36,677		29		(927	)		35,779

Corporate bonds		1,464				(2	)		1,462

Total held to maturity securities	$	48,150	$	29	$	(1,244	)	$	46,935

The amortized cost and fair value of debt securities at March 31, 2017 (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	$	34,635	$	34,626
Due after one year through five years		114,277		113,833
Due after five years through ten years		28,824		28,068
Due after ten years		333		352
Mortgage-backed securities		46,704		46,008

Totals	$	224,773	$	222,887

Held to maturity securities:
Due in one year or less	$	2,498	$	2,498
Due after one year through five years		8,134		8,182
Due after five years through ten years		19,599		19,322
Due after ten years		17,458		16,973

Totals	$	47,689	$	46,975

Available for sale and held to maturity securities with gross unrealized losses at March 31, 2017 and December 31, 2016, 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, 2017:
U.S. Treasuries	$	110,634	$	1,595	$		$		$	110,634	$	1,595
U.S. Government agencies		19,546		448						19,546		448
States and political subdivisions		17,113		634						17,113		634
Mortgage-backed securities		36,837		831						36,837		831

TOTAL	$	184,130	$	3,508	$		$		$	184,130	$	3,508

December 31, 2016:
U.S. Treasuries	$	97,634	$	2,091	$		$		$	97,634	$	2,091
U.S. Government agencies		24,478		521						24,478		521
Mortgage-backed securities		37,663		1,305						37,663		1,305
States and political subdivisions		24,627		926		589		1		25,216		927
Corporate bonds						1,462		2		1,462		2

TOTAL	$	184,402	$	4,843	$	2,051	$	3	$	186,453	$	4,846

At March 31, 2017, 23 of the 28 securities issued by the U.S. Treasury, 4 of the 7 securities issued by U.S. Government agencies, 45 of the 139 securities issued by states and political subdivisions and 16 of the 21 mortgage-backed securities 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 $1,227,141 and $19,590,781

during the three months ended March 31, 2017 and 2016, respectively. Available for sale debt securities were sold or called for a realized gain of $16,729 and $72,333 for the three months ended March 31, 2017 and 2016, respectively.

Securities with a fair value of $220,966,149 and $180,659,168 at March 31, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, is as follows (in thousands):


	March 31, 2017		December 31, 2016
Gaming	$	20,379	$	31,311
Residential and land development		282		291
Real estate, construction		31,448		32,503
Real estate, mortgage		204,402		206,172
Commercial and industrial		38,508		37,035
Other		8,173		8,043

Total	$	303,192	$	315,355

The age analysis of the loan portfolio, segregated by class of loans, as of March 31, 2017 and December 31, 2016, is as follows (in thousands):


	Number of Days Past Due												Loans Past Due Greater Than 90
	30 - 59		60 - 89		Greater Than 90		Total Past Due		Current		Total Loans		Days & Still Accruing
March 31, 2017:
Gaming	$		$		$		$		$	20,379	$	20,379	$
Residential and land development						282		282				282
Real estate, construction		1,243		123		854		2,220		29,228		31,448
Real estate, mortgage		3,691		4,333		4,484		12,508		191,894		204,402
Commercial and industrial		680				47		727		37,781		38,508
Other		41		15				56		8,117		8,173

Total	$	5,655	$	4,471	$	5,667	$	15,793	$	287,399	$	303,192	$

December 31, 2016:
Gaming	$		$		$		$		$	31,311	$	31,311	$
Residential and land development						291		291				291
Real estate, construction		902		216		1,082		2,200		30,303		32,503
Real estate, mortgage		4,608		1,923		4,471		11,002		195,170		206,172
Commercial and industrial		867				8		875		36,160		37,035
Other		44		36		80		160		7,883		8,043

Total	$	6,421	$	2,175	$	5,932	$	14,528	$	300,827	$	315,355	$

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, 2017 and December 31, 2016, is as follows (in thousands):


	Loans With A Grade Of:
	A, B or C		S		D		E		F	Total
March 31, 2017:
Gaming	$	20,379	$		$		$		$	$	20,379

Residential and land development								282			282

Real estate, construction		28,961		420		383		1,684			31,448

Real estate, mortgage		154,684		17,228		21,622		10,868			204,402

Commercial and industrial		15,479		21,680		366		983			38,508

Other		8,141				27		5			8,173

Total	$	227,644	$	39,328	$	22,398	$	13,822	$	$	303,192

December 31, 2016:
Gaming	$	31,311	$		$		$		$	$	31,311

Residential and land development								291			291

Real estate, construction		29,954		435		517		1,597			32,503

Real estate, mortgage		155,671		17,651		22,901		9,949			206,172

Commercial and industrial		13,926		21,680		867		562			37,035

Other		7,996				42		5			8,043

Total	$	238,858	$	39,766	$	24,327	$	12,404	$	$	315,355

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, 2017 and December 31, 2016, are as follows (in thousands):


	March 31, 2017		December 31, 2016
Residential and land development	$	282	$	291
Real estate, construction		1,731		1,598
Real estate, mortgage		10,412		9,445
Commercial and industrial		889		515
Other		5		5

Total	$	13,319	$	11,854

Prior to 2016, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2016 and 2017, the Company did not restructure any additional loans. Specific reserves of $97,000 and $100,000 were allocated to troubled debt restructurings as of March 31, 2017 and December 31, 2016, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of March 31, 2017 and December 31, 2016.

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of March 31, 2017 and December 31, 2016, are as follows (in thousands):


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2017:
With no related allowance recorded:
Real estate, construction	$	1,641	$	1,167	$		$	1,065	$
Real estate, mortgage		10,711		9,750				9,060		6
Commercial and industrial		927		889				630

Total		13,279		11,806				10,755		6

With a related allowance recorded:
Residential and land development		282		282		66		282
Real estate, construction		782		564		141		568
Real estate, mortgage		2,728		1,834		206		1,840		7
Other		5		5		1		5

Total		3,797		2,685		414		2,695		7

Total by class of loans:
Residential and land development		282		282		66		282
Real estate, construction		2,423		1,731		141		1,633
Real estate, mortgage		13,439		11,584		206		10,900		13
Commercial and industrial		927		889				630
Other		5		5		1		5

Total	$	17,076	$	14,491	$	414	$	13,450	$	13


	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2016:
With no related allowance recorded:
Real estate, construction	$	2,023	$	1,331	$		$	1,395	$
Real estate, mortgage		11,811		9,282				10,582		23
Commercial and industrial		553		515				538

Total		14,387		11,128				12,515		23

With a related allowance recorded:
Residential and land development		291		291		66		304
Real estate, construction		267		267		141		283
Real estate, mortgage		1,347		1,347		195		1,080		30
Other		5		5		1		1

Total		1,910		1,910		403		1,668		30

Total by class of loans:
Residential and land development		291		291		66		304
Real estate, construction		2,290		1,598		141		1,678
Real estate, mortgage		13,158		10,629		195		11,662		53
Commercial and industrial		553		515				538
Other		5		5		1		1

Total	$	16,297	$	13,038	$	403	$	14,183	$	53

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the three months ended March 31, 2017 and 2016, and the balances of loans, individually and collectively evaluated for impairment, as of March 31, 2017 and 2016, 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, 2017:
Allowance for Loan Losses:
Beginning Balance	$	545		$	66	$	199	$	3,800	$	651	$	205		$	5,466
Charge-offs													(59	)		(59	)
Recoveries							10		8		11		20			49
Provision		(168	)				2		128		21		43			26

Ending Balance	$	377		$	66	$	211	$	3,936	$	683	$	209		$	5,482

Allowance for loan losses, March 31, 2017:
Ending balance: individually evaluated for impairment	$			$	66	$	141	$	485	$	210	$	18		$	920

Ending balance: collectively evaluated for impairment	$	377		$		$	70	$	3,451	$	473	$	191		$	4,562

Total Loans, March 31, 2017:
Ending balance: individually evaluated for impairment	$			$	282	$	2,067	$	32,489	$	1,349	$	32		$	36,219

Ending balance: collectively evaluated for impairment	$	20,379		$		$	29,381	$	171,913	$	37,159	$	8,141		$	266,973


	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

7. Deposits:

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

Time deposits of $250,000 or more totaled approximately $29,907,000 and $25,143,000 at March 31, 2017 and December 31, 2016, 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, 2017 and December 31, 2016 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
March 31, 2017:
U.S. Treasuries	$	135,648	$	$	135,648	$
U.S. Government agencies		24,905			24,905
Mortgage-backed securities		46,008			46,008
States and political subdivisions		16,326			16,326
Equity securities		458			458

Total	$	223,345	$	$	223,345	$

December 31, 2016:
U.S. Treasuries	$	147,624	$	$	147,624	$
U.S. Government agencies		24,825			24,825
Mortgage-backed securities		42,708			42,708
States and political subdivisions		17,963			17,963
Equity securities		458			458

Total	$	233,578	$	$	233,578	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of March 31, 2017 and December 31, 2016 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2017	$	4,920	$	$	$	4,920
December 31, 2016		5,006				5,006

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, 2017 and December 31, 2016 are as follows (in thousands):


			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2017	$	8,247	$	$	$	8,247
December 31, 2016		8,513				8,513

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, 2017			December 31, 2016
Balance, beginning of period	$	8,513		$	9,916
Loans transferred to ORE		44			1,903
Sales		(290	)		(2,524	)
Writedowns		(20	)		(782	)

Balance, end of period	$	8,247		$	8,513

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at March 31, 2017 and December 31, 2016, are as follows (in thousands):


	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
March 31, 2017:
Financial Assets:
Cash and due from banks	$	101,939	$	101,939	$		$		$	101,939
Available for sale securities		223,345				223,345				223,345
Held to maturity securities		47,689				46,975				46,975
Other investments		2,705		2,705						2,705
Federal Home Loan Bank stock		541				541				541
Loans, net		297,710						291,437		291,437
Other real estate		8,247						8,247		8,247
Cash surrender value of life insurance		19,388				19,388				19,388
Financial Liabilities:
Deposits:
Non-interest bearing		149,515		149,515						149,515
Interest bearing		466,828						467,162		467,162
Borrowings from Federal Home Loan Bank		1,243				1,515				1,515


December 31, 2016:
Financial Assets:
Cash and due from banks	$	41,116	$	41,116	$		$		$	41,116
Available for sale securities		233,578				233,578				233,578
Held to maturity securities		48,150				46,935				46,935
Other investments		2,693		2,693						2,693
Federal Home Loan Bank stock		539				539				539
Loans, net		309,889						313,613		313,613
Other real estate		8,513						8,513		8,513
Cash surrender value of life insurance		19,249				19,249				19,249
Financial Liabilities:
Deposits:
Non-interest bearing		132,381		132,381						132,381
Interest bearing		442,635						442,937		442,937
Borrowings from Federal Home Loan Bank		6,257				6,491				6,491

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, 2016.

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 2017, 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.

GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures for the three months ended March 31, 2017 and 2016 is included in the table on the following page.

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)


For the Three Months Ended March 31,	2017			2016

Interest income reconciliation:

Interest income - taxable equivalent	$	4,742		$	4,937
Taxable equivalent adjustment		(141	)		(157	)


Interest income (GAAP)	$	4,601		$	4,780


Net interest income reconciliation:

Net interest income - taxable equivalent	$	4,463		$	4,695
Taxable equivalent adjustment		(141	)		(157	)


Net interest income (GAAP)	$	4,322		$	4,538

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 $74,000 for the first quarter of 2017 compared with net income of $76,000 for the first quarter of 2016. Results in 2017 included decreases in the provision for the allowance for loan losses and non-interest expense which was offset by a decrease in net interest income and non-interest income as compared with 2016.

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 $423,000. This decrease was primarily the result of the decrease in 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 $26,000 was recorded in 2017 as compared with $113,000 in 2016. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $13,319,000 and $11,854,000 at March 31, 2017 and December 31, 2016, 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 $101,000 for the three months ended March 31, 2017 as compared with 2016 results. Trust department income and fees decreased $30,000 for 2017 as compared with 2016. Gains from liquidation, sales and calls of securities were $63,000 less in 2017 as compared with 2016 results.

Non-interest expense decreased $228,000 for the three months ended March 31, 2017 as compared with 2016 results. This decrease for the three months ended March 31, 2017 was primarily the result of decreases in net occupancy expense of $112,000, FDIC and state banking assessment expense of $128,000 and other real estate expense of $289,000 as compared with 2016.

Total assets at March 31, 2017 increased $37,373,000 as compared with December 31, 2016. Cash and due from banks increased $60,823,000 in the management of the Company’s liquidity position. Available for sale securities decreased $10,233,000 and loans decreased $12,163,000 at March 31, 2017 as compared with December 31, 2016. Proceeds from maturities, sales and calls of available for sale securities funded liquidity needs. Loans decreased as principal payments, maturities, charge-offs and foreclosures on existing loans exceeding new loans.

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 increased approximately $23,831,000 or 4%, from approximately $602,537,000 for the first quarter of 2016 to approximately $626,368,000 for the first quarter of 2017. The Company’s average balance sheet increased primarily as average loans decreased approximately $30,706,000 while average taxable available for sale securities increased approximately $29,752,000 and taxable held to maturity securities increased approximately $26,660,000 for the first quarter of 2017 as compared with the first quarter of 2016. Average loans decreased as principal payments, maturities, charge-offs and foreclosures relating to existing loans outpaced new loans. Average taxable available for sale securities and average taxable held to maturity securities increased as excess funds were invested to increase interest income.

The average yield on interest-earning assets decreased from 3.28% for the first quarter of 2016 to 3.03% for the first quarter of 2017. This decrease is primarily the result of the yield on average loans decreasing.

Average interest bearing liabilities increased approximately $15,765,000, or 3%, from approximately $450,105,000 for the first quarter of 2016 to approximately $465,870,000 for the first quarter of 2017. Average savings and interest bearing DDA increased $21,883,000 primarily as several large customers reallocated their funds in the current year. Average borrowings from the Federal Home Loan Bank decreased $9,611,000 due to the liquidity needs of the bank subsidiary.

The average rate paid on interest bearing liabilities for the first quarter of 2016 was .22% as compared with .24% for the first quarter of 2017. 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 3.12% for the quarter ended March 31, 2016 and 2.85% for the quarter ended March 31, 2017.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended March 31, 2017 and 2016.

Analysis of Average Balances, Interest Earned/Paid and Yield (In Thousands)


	Three Months Ended March 31, 2017							Three Months Ended March 31, 2016
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	307,244	$	3,274		4.26	%	$	337,950	$	3,697		4.38	%

Balances due from financial institutions		34,636		101		1.17	%		31,247		63		0.81	%

HTM:
Taxable		28,173		160		2.27	%		1,513		8		2.12	%

Non taxable (1)		19,667		182		3.70	%		18,257		162		3.55	%

AFS:
Taxable		218,487		786		1.44	%		188,735		699		1.48	%

Non taxable (1)		17,162		236		5.50	%		22,589		300		5.31	%

Other		999		3		1.20	%		2,246		8		1.42	%

Total	$	626,368	$	4,742		3.03	%	$	602,537	$	4,937		3.28	%

Savings & interest-bearing DDA	$	385,539	$	136		0.14	%	$	363,656	$	99		0.11	%

Time deposits		78,309		128		0.65	%		74,923		101		0.54	%

Federal funds purchased		107		1		0.35	%

Borrowings from FHLB		1,915		14		2.92	%		11,526		42		1.46	%

Total	$	465,870	$	279		0.24	%	$	450,105	$	242		0.22	%

Net tax-equivalent spread						2.79	%						3.06	%

Net tax-equivalent margin on earning assets						2.85	%						3.12	%

(1)	All interest earned is reported on a taxable equivalent basis using a tax rate of 34% in 2017 and 2016. See disclosure of Non-GAAP financial measures on pages 31 and 32.

(2)	Loan fees of $66 and $112 for 2017 and 2016, 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, 2017 compared with March 31, 2016
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	(336	)	$	(96	)	$	9		$	(423	)

Balances due from finanicial institutions		7			28			3			38

Held to maturity securities:
Taxable		141			1			10			152
Non taxable		13			7						20

Available for sale securities:
Taxable		110			(20	)		(3	)		87
Non taxable		(72	)		11			(3	)		(64	)
Other		(5	)		(1	)		1			(5	)

Total	$	(142	)	$	(70	)	$	17		$	(195	)

Interest paid on:

Savings & interest-bearing
DDA	$	6		$	29		$	2		$	37

Time deposits		5			21			1			27

Federal funds purchased		1									1

Borrowings from FHLB		(35	)		42			(35	)		(28	)

Total	$	(23	)	$	92		$	(32	)	$	37

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 $13,319,000 and $11,854,000 at March 31, 2017 and December 31, 2016, respectively, specific reserves of only $317,000 and $303,000, 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 $26,000 and $113,000 for the first quarters of 2017 and 2016, respectively. The allowance for loan losses as a percentage of loans was 1.81% and 1.73% at March 31, 2017 and December 31, 2016, respectively. The Company believes that its allowance for loan losses is appropriate as of March 31, 2017.

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 $101,000 for the first quarter of 2017 as compared with the first quarter of 2016 as Trust department income and fees decreased $30,000 and gains on sales and calls of securities decreased $63,000. Trust income decreased as 2016 included fees from several estates which are now closed. The Company made fewer sales in 2017 which resulted in decreased gains.

Non-interest expense

Total non-interest expense decreased $228,000 for the first quarter of 2017 as compared with the first quarter of 2016. Salaries and employee benefits increased $75,000, net occupancy decreased $112,000, FDIC and state assessments decreased $128,000, other real estate expense decreased $289,000 and other expenses increased $141,000 for the first quarter of 2017 as compared with the first quarter of 2016.

Salaries and employee benefits increased in 2017 as merit pay raises went into effect in the second quarter of 2016 and the Company updated the estimates of costs associated with its deferred compensation plans in 2017.

Net occupancy expense decreased as a result of the Company’s efforts to decrease its telecommunication and insurance costs.

FDIC and state banking assessments decreased as the regulators decreased the premiums for deposit insurance.

Other real estate expense decreased as the fair value of such property has stabilized, resulting in fewer write downs and less loss on sales.

Other expense increased in 2017 as the Company engaged consultants to assist with several projects relating to improve I/T security and operations.

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 $60,823,000 at March 31, 2017, compared with December 31, 2016 in the management of the bank subsidiary’s liquidity position.

Available for sale securities decreased $10,233,000 at March 31, 2017, compared with December 31, 2016 as the Company invested excess funds in correspondent banks for liquidity.

Loans decreased $12,163,000 at March 31, 2017 as compared with December 31, 2016 as principal payments, maturities, charge-offs and foreclosures on existing loans exceeded new loans.

Total deposits increased $41,327,000 at March 31, 2017, as compared with December 31, 2016. 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.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

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

As of March 31, 2017, 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. As of January1, 2017, the Company must have a capital conservation buffer above these requirements of 1.25% for 2017. 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, 2017 and December 31, 2016, are as follows (in thousands):


	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
March 31, 2017:
Total Capital (to Risk Weighted Assets)	$	95,174		23.67	%	$	32,170		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		90,142		22.42	%		18,095		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		90,142		22.42	%		24,127		6.00	%
Tier 1 Capital (to Average Assets)		90,142		12.68	%		28,447		4.00	%

December 31, 2016:
Total Capital (to Risk Weighted Assets)	$	95,262		22.94	%	$	33,220		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		90,068		21.69	%		18,687		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		90,068		21.69	%		24,915		6.00	%
Tier 1 Capital (to Average Assets)		90,068		13.12	%		27,464		4.00	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of March 31, 2017 and December 31, 2016, are as follows (in thousands):


	For Capital Adequacy
	Actual					Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017:
Total Capital (to Risk Weighted Assets)	$	91,842		23.01	%	$	31,937		8.00	%	$	39,922		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		86,846		21.75	%		17,965		4.50	%		25,949		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		86,846		21.75	%		23,953		6.00	%		31,937		8.00	%
Tier 1 Capital (to Average Assets)		86,846		12.26	%		28,342		4.00	%		35,428		5.00	%

December 31, 2016:
Total Capital (to Risk Weighted Assets)	$	91,882		22.29	%	$	32,975		8.00	%	$	41,219		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		86,726		21.04	%		18,548		4.50	%		26,792		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		86,726		21.04	%		24,731		6.00	%		32,975		8.00	%
Tier 1 Capital (to Average Assets)		86,726		12.47	%		27,820		4.00	%		34,775		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 2016, Management identified opportunities for improving information technology operations and security, 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 information technology operations and security, 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, 2017, 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, 2017 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, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at March 31, 2017 and December 31, 2016, (ii) Consolidated Statements of Income for the quarters ended March 31, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2017 and 2016, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the quarter ended March 31, 2017, (v) Consolidated Statements of Cash Flows for the quarters ended March 31, 2017 and 2016 and (vi) Notes to the Unaudited Consolidated Financial Statements for the quarters ended March 31, 2017 and 2016.

(b) Reports on Form 8-K

A Form 8-K was filed on January 25, 2017, April 26, 2017 and April 28, 2017.

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 10, 2017

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

Date:		May 10, 2017

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