PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2022 March (Form 10-Q)

pfbx20220331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission File Number 001-12103

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Mississippi	64-0709834
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Lameuse and Howard Avenues, Biloxi, Mississippi	39533
(Address of principal executive offices)	(Zip Code)

(228) 435-5511

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

None

PFBX

None

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒ No ☐

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

Large accelerated filer ☐ Accelerated filer ☐ Smaller reporting company ☒

Non-accelerated filer ☐ Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At April 29, 2022, there were 15,000,000 shares of $1 par value common stock authorized, with 4,678,186 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, 2022		December 31, 2021
	(unaudited)		(audited)

Assets
Cash and due from banks	$	169,628	$	49,991

Available for sale securities		380,901		376,803

Held to maturity securities, fair value of
$102,717 at March 31, 2022;
$111,340 at December 31, 2021		107,884		110,208

Other investments		350		350

Federal Home Loan Bank Stock, at cost		2,153		2,153

Loans		241,098		239,162

Less: Allowance for loan losses		3,368		3,311

Loans, net		237,730		235,851

Bank premises and equipment, net of accumulated depreciation		15,574		15,799

Other real estate		1,010		1,891

Accrued interest receivable		2,992		2,841

Cash surrender value of life insurance		20,317		20,150

Other assets		813		722

Total assets	$	939,352	$	816,759

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

	March 31, 2022			December 31, 2021
	(unaudited)			(audited)
Liabilities and Shareholders' Equity
Liabilities:

Deposits:

Demand, non-interest bearing	$	214,732		$	193,473

Savings and demand, interest bearing		529,683			428,411

Time, $100,000 or more		82,250			62,040

Other time deposits		20,281			20,914

Total deposits		846,946			704,838

Borrowings from Federal Home Loan Bank		874			889

Employee and director benefit plans liabilities		19,311			19,332

Other liabilities		1,551			2,162

Total liabilities		868,682			727,221


Shareholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,678,186 shares issued and outstanding at March 31, 2022 and December 31, 2021		4,678			4,678

Surplus		65,780			65,780

Undivided profits		21,377			20,911

Accumulated other comprehensive loss		(21,165	)		(1,831	)

Total shareholders' equity		70,670			89,538

Total liabilities and shareholders' equity	$	939,352		$	816,759

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,
	2022		2021
Interest income:

Interest and fees on loans	$	2,694	$	3,254

Interest and dividends on securities:

U.S. Treasuries		231		62

U.S. Government agencies				26

Mortgage-backed securities		533		451

Collateralized mortgage obligations		274		170

States and political subdivisions		1,167		780

Other investments		1		2

Interest on balances due from depository institutions		39		36

Total interest income		4,939		4,781

Interest expense:

Deposits		153		260

Borrowings from Federal Home Loan Bank		6		6

Total interest expense		159		266

Net interest income		4,780		4,515

Provision for (reduction of) allowance for loan losses		25		(4,853	)

Net interest income after provision for (reduction of) allowance for loan losses	$	4,755	$	9,368

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data) (unaudited)

	Three Months Ended March 31,
	2022			2021
Non-interest income:

Trust department income and fees	$	444		$	437

Service charges on deposit accounts		891			836

Increase in cash surrender value of life insurance		125			108

Other income		134			129

Total non-interest income		1,594			1,510

Non-interest expense:

Salaries and employee benefits		2,642			2,516

Net occupancy		482			461

Equipment rentals, depreciation and maintenance		771			781

FDIC and state banking assessments		108			109

Data processing		354			350

ATM expense		307			295

Other real estate (income) expense		(9	)		129

Loss from other investments					32

Other expense		807			1,875

Total non-interest expense		5,462			6,548

Net income	$	887		$	4,330

Basic and diluted earnings per share	$	.19		$	.89
Dividends declared per share	$	.09		$	.10

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited)

	Three Months Ended March 31,
	2022			2021

Net income	$	887		$	4,330

Other comprehensive income (loss):

Net unrealized (loss) on available for sale securities		(19,334	)		(4,248	)


Total other comprehensive (loss)		(19,334	)		(4,248	)

Total comprehensive income (loss)	$	(18,447	)	$	82

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands except share data)

										Accumulated
	*Number of*									*Other*
	*Common*		*Common*				*Undivided*			*Comprehensive*
	*Shares*		*Stock*		*Surplus*		*Profits*			*Income (loss)*			*Total*

Balance, January 1, 2021		4,878,557	$	4,879	$	65,780	$	16,225		$	5,872		$	92,756
Net income								4,330						4,330

Other comprehensive loss											(4,248	)		(4,248	)

Dividend declared ($ .10 per share)								(488	)					(488	)

Balance, March 31, 2021		4,878,557	$	4,879	$	65,780	$	20,067		$	1,624		$	92,350

Balance, January 1, 2022		4,678,186	$	4,678	$	65,780	$	20,911		$	(1,831	)	$	89,538

Net income								887						887

Other comprehensive loss											(19,334	)		(19,334	)

Dividend declared ($ .09 per share)								(421	)					(421	)

Balance, March 31, 2022		4,678,186	$	4,678	$	65,780	$	21,377		$	(21,165	)	$	70,670

Note: Balances as of January 1, 2021 and 2022 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,
	2022			2021
Cash flows from operating activities:
Net income	$	887		$	4,330

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

Depreciation		441			450

Provision for (reduction of) allowance for loan losses		25			(4,853	)

Writedown of other real estate					58

Gain on sales of other real estate		(33	)		(3	)

Loss from other investments					32

Amortization of available for sale securities		210			88

Amortization of held to maturity securities		129			73

Change in accrued interest receivable		(151	)		(322	)

Increase in cash surrender value of life insurance		(125	)		(108	)

Change in other assets		(91	)		41

Change in employee and director benefit plan liabilities and other liabilities		(633	)		943
Net cash provided by operating activities	$	659		$	729

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

	Three Months Ended March 31,
	2022			2021
Cash flows from investing activities:
Proceeds from maturities of available for securities	$	6,057		$	9,591

Purchases of available for sale securities		(29,699	)		(72,913	)

Proceeds from maturities of held to maturity securities		2,195			1,980

Purchases of held to maturity securities					(19,586	)

Purchases of Federal Home Loan Bank stock					(2	)

Proceeds from sales of other real estate		914			277

Loans, net change		(1,904	)		10,647

Acquisition of bank premises and equipment		(216	)		(332	)

Investment in cash surrender value of life insurance		(42	)		(42	)
Net cash used in investing activities		(22,695	)		(70,380	)
Cash flows from financing activities:
Demand and savings deposits, net change		122,531			79,858

Time deposits, net change		19,578			3,403

Borrowings from Federal Home Loan Bank					22

Repayments to Federal Home Loan Bank		(15	)		(59	)

Cash dividends		(421	)

Net cash provided by financing activities		141,673			83,224
Net increase in cash and cash equivalents		119,637			13,573
Cash and cash equivalents, beginning of period		49,991			91,542
Cash and cash equivalents, end of period	$	169,628		$	105,115

See Notes to Consolidated Financial Statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three Months Ended March 31, 2022 and 2021

1. Basis of Presentation:

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

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of March 31, 2022 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 2021 Annual Report and Form 10-K.

The results of operations for the quarter ended March 31, 2022, 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, 2021.

Revision of Prior Period Financial Statements – Other investments includes a low income housing partnership in which the Company is a 99% limited partner (the “Investment”). After the Annual Report on Form 10-K was filed on March 25, 2022, the Company identified an error in the historical financial statements related to the accounting for the Investment. The Company accounted for the Investment under GAAP according to ASC 323, Equity Method and Joint Ventures, through the application of the equity method but should have also periodically evaluated the Investment for impairment. Management performed an impairment evaluation on the Investment with assistance from a third-party consultant, who is an expert in accounting for such investments. Based on the evaluation, management determined that the Investment had become impaired in prior years starting 2012 through 2018.

The aggregate amount of the errors at each period end represented 3% or less of our shareholders' equity in all prior periods. In accordance with the guidance set forth in SEC Staff Accounting Bulletin 99, Materiality, and SEC Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financials, the Company concluded that the error was not material, to any prior periods, the current period or the trend in earnings from a quantitative and qualitative perspective. However, correcting the cumulative effect of the errors in the current period would have resulted in a material misstatement in the current period and, as such, we have revised our previously reported financial information contained in our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 to correct the immaterial error. We will also revise previously reported financial information for these immaterial errors in our future filings, as applicable.

The income statements presented have not been affected by the revision.

A summary of revisions to certain previously reported financial information is presented below:

Revised Consolidated Statements of Condition as of December 31, 2021 (in thousands):

	As Reported		Adjustment			As Revised

Other investments	$	2,404	$	(2,054	)	$	350
Total assets		818,813		(2,054	)		816,759
Undivided profits		22,965		(2,054	)		20,911
Total shareholders' equity		91,592		(2,054	)		89,538

Revised Consolidated Statements of Shareholders’ Equity for the Three Months ended March 31, 2021 (in thousands):

	Three Months Ended March 31, 2021
	As Reported		Adjustment			As Revised

Beginning balance undivided profits	$	18,335	$	(2,110	)	$	16,225
Beginning balance total shareholders' equity		94,866		(2,110	)		92,756
Ending balance undivided profits		22,177		(2,110	)		20,067
Ending balance total shareholders' equity		94,460		(2,110	)		92,350

Accounting Standards Update –In March 2022, the Financial Accounting Standards Board issued Accounting Standards Update 2022-02 (“ASU 2022-02”), Financial Instruments-Credit Losses (Topic 326). ASU 2022-02 amends guidance relating to trouble debt restructurings for all entities after they have adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of this ASU is not expected to have a material impact 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 4,678,186 and 4,878,557 for the three months ended March 31, 2022 and 2021, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $158,300 and $258,500 for the three months ended March 31, 2022 and 2021, respectively, for interest on deposits and borrowings. No income tax payments were made during the three months ended March 31, 2022 and 2021. No loans were transferred to other real estate during the three months ended March 31, 2022 and 2021.

4. Investments:

The amortized cost and fair value of securities at March 31, 2022 and December 31, 2021, are as follows (in thousands):

			Gross		Gross
			Unrealized		Unrealized
March 31, 2022	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:

U.S. Treasuries	$	103,635	$	12	$	(5,041	)	$	98,606

Mortgage-backed securities		68,190		226		(1,748	)		66,668

Collateralized mortgage obligations		99,477		98		(2,820	)		96,755

Commercial mortgage obligations non-agency		27,490				(749	)		26,741

States and political subdivisions		103,602		3		(11,474	)		92,131

Total available for sale securities	$	402,394	$	339	$	(21,832	)	$	380,901

Held to maturity securities:
States and political subdivisions	$	107,884	$	275	$	(5,442	)	$	102,717

Total held to maturity securities	$	107,884	$	275	$	(5,442	)	$	102,717

			Gross		Gross
			Unrealized		Unrealized
December 31, 2021	Amortized Cost		Gains		Losses			Fair Value
Available for sale securities:

U.S. Treasuries	$	73,889	$		$	(735	)	$	73,154

Mortgage-backed securities		71,187		1,236		(441	)	$	71,982

Collateralized mortgage obligations		130,181		841		(1,035	)	$	129,987

States and political subdivisions		103,704		293		(2,317	)		101,680

Total available for sale securities	$	378,961	$	2,370	$	(4,528	)	$	376,803

Held to maturity securities:
States and political subdivisions	$	110,208	$	1,760	$	(628	)	$	111,340

Total held to maturity securities	$	110,208	$	1,760	$	(628	)	$	111,340

The amortized cost and fair value of debt securities at March 31, 2022 (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	$	15,637	$	15,640
Due after one year through five years		15,495		15,484
Due after five years through ten years		103,541		95,756
Due after ten years		72,564		63,857
Mortgage-backed securities		68,190		66,668
Collateralized mortgage obligations		99,477		96,755
Commercial mortgage obligations non-agency		27,490		26,741
Totals	$	402,394	$	380,901

Held to maturity securities:
Due in one year or less	$	4,666	$	4,681
Due after one year through five years		17,810		17,921
Due after five years through ten years		43,338		41,078
Due after ten years		42,070		39,037
Totals	$	107,884	$	102,717

Available for sale and held to maturity securities with gross unrealized losses at March 31, 2022 and December 31, 2021, 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, 2022:
U.S. Treasuries	$	78,806	$	5,041	$			$			$	78,806	$	5,041
Mortgage-backed securities		39,678		724			8,254			1,024		47,932		1,748
Collateralized mortgage obligations		104,092		3,569								104,092		3,569
States and political subdivisions		117,081		11,292			36,011			5,624		153,092		16,916
TOTAL	$	339,657	$	20,626		$	44,265		$	6,648	$	383,922	$	27,274
December 31, 2021:
U.S. Treasuries	$	73,154	$	735	$			$			$	73,154	$	735
Mortgage-backed securities		26,288		441								26,288		441
Collateralized mortgage obligations		66,369		1,035								66,369		1,035
States and political subdivisions		102,413		2,577			7,470			368		109,883		2,945
TOTAL	$	268,224	$	4,788		$	7,470		$	368	$	275,694	$	5,156

At March 31, 2022, 8 of the 12 U.S. Treasury securities, 32 of the 48 mortgage-backed securities, 28 of the 34 collateralized mortgage obligations and 118 of the 219 securities issued by states and political subdivisions contained unrealized losses.

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

There were no sales of available for sale debt securities for the three months ended March 31, 2022 and March 31, 2021.

Securities with a fair value of $386,206,596 and $229,092,900 at March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, is as follows (in thousands):

	March 31, 2022		December 31, 2021

Gaming	$	10,680	$	7,900

Hotel/Motel		48,326		50,765

Real estate, construction		28,951		27,191

Real estate, mortgage		127,941		128,352

Commercial and industrial		15,965		15,882

Other		9,235		9,072

Total	$	241,098	$	239,162

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of COVID-19, was signed into law. A provision in the CARES Act included funding for the creation of the Paycheck Protection Program (“PPP”). PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. At March 31, 2022, 27 loans with a balance of $1,606,105 were outstanding. At December 31, 2021, 40 loans with a balance of $2,819,944 were outstanding All PPP loans are reported in the commercial and industrial segment within the loan portfolio.

The age analysis of the loan portfolio, segregated by class of loans, as of March 31, 2022 and December 31, 2021, 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, 2022:
Gaming	$		$		$		$		$	10,680	$	10,680	$
Hotel/Motel										48,326		48,326
Real estate, construction		290		1,624				1,914		27,037		28,951
Real estate, mortgage		306		1,281		40		1,627		126,314		127,941		40
Commercial and industrial										15,965		15,965
Other		3		1				4		9,231		9,235

Total	$	599	$	2,906	$	40	$	3,545	$	237,553	$	241,098	$	40
December 31, 2021:
Gaming	$		$		$		$		$	7,900	$	7,900	$
Hotel/Motel										50,765		50,765
Real estate, construction		105						105		27,086		27,191
Real estate, mortgage		1,996		60		63		2,119		126,233		128,352
Commercial and industrial		21		320				341		15,541		15,882
Other		209						209		8,863		9,072

Total	$	2,331	$	380	$	63	$	2,774	$	236,388	$	239,162

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, 2022 and December 31, 2021, is as follows (in thousands):

	Loans With A Grade Of:
	A, B or C		S		D		E		F	Total
March 31, 2022:
Gaming	$	10,680	$		$		$		$	$	10,680

Hotel/Motel		48,326									48,326

Real estate, construction		28,755				5		191			28,951

Real estate, mortgage		124,772		84		2,576		509			127,941

Commercial and industrial		15,939				26					15,965

Other		9,227				8					9,235


Total	$	237,699	$	84	$	2,615	$	700		$	241,098

December 31, 2021:
Gaming	$	7,900	$		$		$		$	$	7,900

Hotel/Motel		50,765									50,765

Real estate, construction		26,980				6		205			27,191

Real estate, mortgage		124,289		87		3,344		632			128,352

Commercial and industrial		15,834				27		21			15,882

Other		9,060				12					9,072


Total	$	234,828	$	87	$	3,389	$	858		$	239,162

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, 2022 and December 31, 2021, are as follows (in thousands):

	March 31, 2022		December 31, 2021

Real estate, construction	$	133	$	138

Real estate, mortgage		441		563

Total	$	574	$	701

Prior to 2021, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2021 and 2022, the Company did not restructure any additional loans. Specific reserves of $0 and $50,000 were allocated to troubled debt restructurings as of March 31, 2022 and December 31, 2021. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of March 31, 2022 and December 31, 2021.

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of March 31, 2022 and December 31, 2021, are as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2022:
With no related allowance recorded:
Real estate, construction	$	133	$	133	$		$	135	$
Real estate, mortgage		950		950				966		6

Total		1,083		1,083				1,101		6

With a related allowance recorded:
Real estate, mortgage		50		50		20		50

Total		50		50		20		50

Total by class of loans:
Real estate, construction		133		133				135
Real estate, mortgage		1,000		1,000		20		1,016		6

Total	$	1,133	$	1,133	$	20	$	1,151	$	6

December 31, 2021:
With no related allowance recorded:
Real estate, construction	$	272	$	205	$		$	369	$	7
Real estate, mortgage		1,014		1,014				1,075		21

Total		1,286		1,219				1,444		28

With a related allowance recorded:
Real estate, mortgage		199		199		70		203		5
Total		199		199		70		203		5

Total by class of loans:
Real estate, construction		272		205				369		7
Real estate, mortgage		1,213		1,213		70		1,278		26

Total	$	1,485	$	1,418	$	70	$	1,647	$	33

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the three months ended March 31, 2022 and 2021, and the balances of loans, individually and collectively evaluated for impairment, as of March 31, 2022 and 2021, are as follows (in thousands):

	Gaming		Hotel/Motel			Real Estate, Construction		Real Estate, Mortgage			Commercial and Industrial		Other			Total
For the Quarter Ended March 31, 2022:
Allowance for Loan Losses:
Beginning Balance	$	102	$	691		$	139	$	2,049		$	252	$	78		$	3,311
Charge-offs														(76	)		(76	)
Recoveries									48			9		51			108
Provision		36		(31	)		35		(54	)		14		25			25
Ending Balance	$	138	$	660		$	174	$	2,043		$	275	$	78		$	3,368

Allowance for loan losses, March 31, 2022:
Ending balance: individually evaluated for impairment	$		$			$		$	109		$	26	$			$	135

Ending balance: collectively evaluated for impairment	$	138	$	660		$	174	$	1,934		$	249	$	78		$	3,233

Total Loans, March 31, 2022:
Ending balance: individually evaluated for impairment	$		$			$	196	$	3,085		$	26	$	8		$	3,315

Ending balance: collectively evaluated for impairment	$	10,680	$	48,326		$	28,755	$	124,856		$	15,939	$	9,227		$	237,783

	Gaming		Hotel/Motel		Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Quarter Ended March 31, 2021:
Allowance for Loan Losses:
Beginning Balance	$	186	$	754	$	111		$	2,849		$	417		$	109		$	4,426
Charge-offs						(2	)		(2	)					(81	)		(85	)
Recoveries						18			4,510			14			42			4,584
Provision		6		62		(1	)		(4,888	)		(82	)		50			(4,853	)
Ending Balance	$	192	$	816	$	126		$	2,469		$	349		$	120		$	4,072

Allowance for loan losses, March 31, 2021:
Ending balance: individually evaluated for impairment	$		$		$	20		$	181		$	39		$			$	240
Ending balance: collectively evaluated for impairment	$	192	$	816	$	106		$	2,288		$	310		$	120		$	3,832

Total Loans, March 31, 2021:
Ending balance: individually evaluated for impairment	$	2,638	$		$	440		$	6,250		$	88		$	18		$	9,434
Ending balance: collectively evaluated for impairment	$	15,157	$	46,943	$	24921		$	131,827		$	34,931		$	9060		$	262,839

7. Deposits:

Time deposits of $250,000 or more totaled approximately $64,260,000 and $43,613,000 at March 31, 2022 and December 31, 2021, respectively.

8. Shareholders’ Equity:

On March 11, 2022, the Board declared a dividend of $ .09 per share payable March 30, 2022 to shareholders of record on March 23, 2022.

9. Fair Value Measurements and Disclosures:

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

Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices. The Company’s held to maturity securities are reported at their amortized cost, and their estimated fair value, which is determined utilizing several sources, is disclosed in the financial statements and footnotes. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s held to maturity securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

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

Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets.

Other Real Estate

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

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, 2022 and December 31, 2021 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
March 31, 2022:
U.S. Treasuries	$	98,606	$	$	98,606	$
Mortgage-backed securities		66,668			66,668
Collateralized mortgage obligations		96,755			96,755
Commercial Mortgage Obligations non-agency		26,741			26,741
States and political subdivisions		92,131			92,131
Total	$	380,901	$	$	380,901	$

December 31, 2021:
U.S. Treasuries	$	73,154	$	$	73,154	$
Mortgage-backed securities		71,982			71,982
Collateralized mortgage obligations		129,987			129,987
States and political subdivisions		101,680			101,680
Total	$	376,803	$	$	376,803	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of March 31, 2022 and December 31, 2021 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2022	$	30	$	$	$	30
December 31, 2021		129				129

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, 2022 and December 31, 2021 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
March 31, 2022	$	1,010	$	$	$	1,010
December 31, 2021		1,891				1,891

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, 2022			December 31, 2021
Balance, beginning of period	$	1,891		$	3,475

Loans transferred to ORE					14

Sales		(881	)		(1,299	)

Writedowns					(299	)

Balance, end of period	$	1,010		$	1,891

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at March 31, 2022 and December 31, 2021, are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
March 31, 2022:
Financial Assets:
Cash and due from banks	$	169,628	$	169,628	$		$		$	169,628
Available for sale securities		380,901				380,901				380,901
Held to maturity securities		107,884				102,717				102,717
Other investments		350		350						350
Federal Home Loan Bank stock		2,153				2,153				2,153
Loans, net		237,730						237,445		237,445
Cash surrender value of life insurance		20,317				20,317				20,317
Financial Liabilities:
Deposits:
Non-interest bearing		214,732		214,732						214,732
Interest bearing		632,214						632,659		632,659
Borrowings from Federal Home Loan
Bank		874				952				952

December 31, 2021:
Financial Assets:
Cash and due from banks	$	49,991	$	49,991	$		$		$	49,991
Available for sale securities		376,803				376,803				376,803
Held to maturity securities		110,208				111,340				111,340
Other investments		350		350						350
Federal Home Loan Bank stock		2,153				2,153				2,153
Loans, net		235,851						238,305		238,305
Cash surrender value of life insurance		20,150				20,150				20,150
Financial Liabilities:
Deposits:
Non-interest bearing		193,473		193,473						193,473
Interest bearing		511,365						512,034		512,034
Borrowings from Federal Home Loan
Bank		889				1,072				1,072

10. Aquisition of Corporate Trust Business:

On March 17, 2022, the bank subsidiary signed a definitive agreement with Trustmark National Bank (“Trustmark”) to acquire substantially all of the Trustmark’s corporate trust business for a purchase price of $650,000. This book of business will be added to the bank subsidiary’s existing corporate trust portfolio in its Asset Management and Trust Services Department. The purchase is subject to approval by the Federal Deposit Insurance Corporation.

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

GENERAL

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

The following presents Management's discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2021.

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: the effects of the COVID-19 pandemic on the Company’s business, customers, employees and third-party service providers, 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 including the potential impact of the COVID-19 pandemic used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in statutes, government regulations or regulatory policies or practices in general and specifically as a result of the COVID-19 pandemic and acts of terrorism, weather or other events beyond the Company’s control.

New Accounting Pronouncements

The Financial Accounting Standards Board issued several accounting standards updates during the first quarter of 2022. Further disclosure is included in Note 1.

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, 2022 and 2021 is included in the table on the following page.

RECONCILATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)

For the Three Months Ended March 31,	2022			2021

Interest income reconciliation:

Interest income - taxable equivalent	$	5,033		$	4,835
Taxable equivalent adjustment		(94	)		(54	)

Interest income (GAAP)	$	4,939		$	4,781

Net interest income reconciliation:

Net interest income - taxable equivalent	$	4,874		$	4,569
Taxable equivalent adjustment		(94	)		(54	)

Net interest income (GAAP)	$	4,780		$	4,515

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 World Health Organization declared the coronavirus COVID-19 (“COVID-19”) a pandemic in March 2020. The pandemic has resulted in, among other things, a significant stock and global markets volatility, disruption in business, leisure and tourism activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis and significant impact on the general economy including high unemployment, a 150-basis point decline in Federal funds rates and unprecedented government stimulus programs.

The Company has been proactive in ensuring the safety and health of its employees and customers during the pandemic. These steps include limiting access to branch lobbies as appropriate, installing germ shields in branch lobbies, allowing staff to work remotely, limiting in person meetings and endorsing the usage of face coverings by staff and customers. The Company is following guidance from the Centers for Disease Control and state and local orders. During 2021, the Company implemented certain vaccine incentives and mandates for the protection of its employees and customers.

Assisting our customers during the pandemic is a priority. The Company granted modifications by extending payments 90 days to certain customers as a result of the economic challenges of business closures and growing unemployment resulting from COVID-19. We have also actively participated in the Paycheck Protection Program (“PPP”), a specific stimulus resource designed to provide assistance to small businesses.

The Company reported net income of $887,000 for the first quarter of 2022 compared with net income of $4,330,000 for the first quarter of 2021. Results in 2021 included a reduction of the allowance for loan losses of $4,853,000 and the accrual for the anticipated settlement of a lawsuit of $1,125,000 which is included in non-interest expense.

Managing the net interest margin is a key component of the Company’s earnings strategy. Although in March 2022, the Federal Reserve increased rates by 25 basis points the current interest rate environment remains low. The Company adopted new investment strategies in 2021 to improve yields on its securities while not compromising duration or credit risk. As a result, total interest income increased $158,000 in 2022 as compared with 2021. The reduction in rates partially offset by an increase in volume decreased total interest expense $107,000 in 2022 as compared with 2021.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be a major focus of the Company. A provision of $25,000 was recorded in the first quarter of 2022 as compared to a reduction of the allowance for loan losses of $4,853,000 recorded in the first quarter of 2021. The reduction in the allowance for loan losses in 2021 was mainly the result of a significant recovery of a loan balance that was previously charged off. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $574,000 and $701,000 at March 31, 2022 and December 31, 2021, 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 increased $84,000 for the three months ended March 31, 2022 as compared with 2021 results. The increase was mainly due to higher service charge income on deposit accounts.

Non-interest expense decreased $1,086,000 for the three months ended March 31, 2022, as compared with 2021 results. This decrease for the three months ended March 31, 2022 was primarily due to a decrease in other expense of $1,068,000. Included in other expense in 2021 was the accrual for the anticipated settlement of a lawsuit of $1,125,000 which settled later in 2021.

Total assets at March 31, 2022 increased $122,593,000 as compared with December 31, 2021. Total deposits increased $142,108,000 as governmental entities’ balances increased due to tax collections and some customers maintained their PPP loan proceeds in their deposit accounts. This increase in funds was primarily held in interest bearing cash, which increased $119,637,000 as compared with December 31, 2021.

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 $117,323,000, or 17%, from approximately $688,989,000 for the first quarter of 2021 to approximately $806,312,000 for the first quarter of 2022. The Company’s average balance sheet increased primarily as average investments increased approximately $194,440,000, partially offset by a decrease in average loans of approximately $39,083,000 and average balances due from financial institutions decreased approximately $38,034,000 for the first quarter of 2022 as compared with the first quarter of 2021. Average loans decreased as principal payments, particularly on PPP loans, maturities, and charge-offs on existing loans exceeded new loans. Funds available from the decrease in average loans and the decrease in balances due from financial institutions and the increase in average deposits were used to increase the investment in securities.

The average yield on interest-earning assets decreased from 2.81% for the first quarter of 2021 to 2.50% for the first quarter of 2022. This decrease is primarily due to a decrease in loan volume along with a decrease in PPP loan fee income recognized in 2022.

Average interest-bearing liabilities increased approximately $120,559,000, or 26%, from approximately $459,468,000 for the first quarter of 2021 to approximately $580,027,000 for the first quarter of 2022. Average interest-bearing deposit balances increased approximately $120,631,000 as several large public fund customers maintained higher balances with the bank subsidiary in 2022 and some of the PPP loan proceeds were deposited and maintained in customers’ accounts.

The average rate paid on interest bearing liabilities for the first quarter of 2021 was .23% as compared with .11% for the first quarter of 2022. Although in March 2022 the Federal Reserve increased rates by 25 basis points, the current interst rate environment remains low.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.65% for the quarter ended March 31, 2021 and 2.42% for the quarter ended March 31, 2022.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended March 31, 2022 and 2021.

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

	Three Months Ended March 31, 2022							Three Months Ended March 31, 2021
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	236,541	$	2,694		4.56	%	$	275,624	$	3,254		4.72	%

Balances due from financial institutions		88,809		39		0.18	%		126,843		36		0.11	%

HTM:
Taxable		71,302		452		2.54	%		51,960		349		2.69	%

Non taxable (1)		37,694		262		2.78	%		26,914		211		3.14	%

AFS:
Taxable		364,326		1,543		1.69	%		199,489		937		1.88	%

Non taxable (1)		5,487		42		3.06	%		6,009		47		3.13	%

Other		2,153		1		0.19	%		2,150		1		0.19	%

Total	$	806,312	$	5,033		2.50	%	$	688,989	$	4,835		2.81	%
Savings & interest- bearing DDA	$	491,784	$	104		0.08	%	$	396,610	$	173		0.17	%

Time deposits		87,361		49		0.22	%		61,904		86		0.56	%

Borrowings from FHLB		882		6		2.72	%		954		7		2.94	%

Total	$	580,027	$	159		0.11	%	$	459,468	$	266		0.23	%

Net tax-equivalent spread						2.39	%						2.58	%
Net tax-equivalent margin on earning assets						2.42	%						2.65	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2022 and 2021. See disclosure of Non-GAAP financial measures on pages 29 and 30.

(2) Loan fees of $230 and $396 for 2022 and 2021, respectively, are included in these figures. Of the loan fees recognized in 2022, $59 were related to PPP loans.

(3) Includes nonaccrual loans.

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Three Months Ended
	March 31, 2022 compared with March 31, 2021
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	(461	)	$	(115	)	$	16		$	(560	)

Balances due from financial institutions		(11	)		20			(6	)		3

Held to maturity securities:
Taxable		130			(20	)		(7	)		103
Non taxable		85			(24	)		(10	)		51

Available for sale securities:
Taxable		774			(92	)		(76	)		606
Non taxable		(4	)		(1	)					(5	)


Total	$	513		$	(232	)	$	(83	)	$	198

Interest paid on:

Savings & interest-bearing
DDA	$	42		$	(89	)	$	(21	)	$	(68	)

Time deposits		35			(51	)		(21	)		(37	)

Borrowings from FHLB		(1	)		(1	)					(2	)

Total	$	76		$	(141	)	$	(42	)	$	(107	)

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 declines in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral.

The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Nonaccrual loans totaled $574,000 and $701,000 with specific reserves on these loans of $20,000 and $20,000, at March 31, 2022 and December 31, 2021, respectively. These specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value.

In addition to the factors considered when assessing risk in the loan portfolio which are identified in the Notes to the Consolidated Financial Statements included in the Company’s 2021 Annual Report, the Company included the potential negative impact of COVID-19 on its loan portfolio, particularly the gaming and hotel/motel concentrations, in performing this risk assessment as of March 31, 2022. As of March 31, 2022, a general reserve of approximately $287,000 was allocated to non-classified loans as a result of COVID-19. As of March 31, 2022, no specific reserves were allocated to classified loans as a result of COVID-19, as customers in potentially vulnerable industries have resources through business interruption insurance, proceeds from PPP or other loan programs and/or have been able to begin to return to normal operations.

The Company’s on-going, systematic evaluation resulted in the Company recording a provision of $25,000 for the first quarter of 2022 and a reduction of allowance for loan losses of $4,853,000 for the first quarter of 2021. The reduction of provision in 2021 is primarily the result of $4,510,000 recovery realized during the first quarter on one loan in the real estate, mortgage segment. The allowance for loan losses as a percentage of loans was 1.40% and 1.38% at March 31, 2022 and December 31, 2021, respectively. The Company believes that its allowance for loan losses is appropriate as of March 31, 2022.

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, particularly the potential effect of COVID-19 on loan performance, 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 increased $84,000 for the first quarter of 2022 as compared with the first quarter of 2021. Service charges on deposit accounts increased $55,000 as customer transactions have begun to return to pre-COVID -19 activity.

Non-interest expense

Total non-interest expense decreased $1,086,000 for the first quarter of 2022 as compared with the first quarter of 2021. Other expense decreased $1,068,000 due to the settlement of a lawsuit for $1,125,000 during 2021. Other real estate costs decreased $138,000 as a result of decreased write-downs and other expense of holding and selling ORE in 2022 as compared to 2021.

Income Taxes

During 2014, Management established a valuation allowance against its net deferred tax asset, which is still in place. As a result, the Company has no income tax benefit or expense.

FINANCIAL CONDITION

Cash and due from banks increased $119,637,000 at March 31, 2022, compared with December 31, 2021 in the management of the bank subsidiary’s liquidity position.

Available for sale securities increased $4,098,000 at March 31, 2022, compared with December 31, 2021. During the first quarter of 2022, there was $29,699,000 in purchases offset by an unrealized loss recorded of $19,334,000 and maturities of $6,057,000. As discussed in Note 4, the Company evaluates securities for impairment on a monthly basis. This evaluation considers a number of factors including the cause of a decline in value. These unrealized losses relate to changes in interest rates rather than credit quality of the investments. Even though these securities have been classified as available for sale, the Company has traditionally held these securities until maturity. Although these unrealized losses recorded in the first quarter of 2022 were significant, management does not anticipate these losses to be other than temporary.

Held to maturity securities decreased $2,324,000 at March 31, 2022, compared with December 31, 2021. The decrease was due to maturities and normal paydowns during the first quarter of 2022.

Total deposits increased $142,108,000 at March 31, 2022, compared with December 31, 2021. 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 increased 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, 2022, 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. The Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios as of March 31, 2022 and December 31, 2021, are as follows (in thousands):

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
March 31, 2022:
Total Capital (to Risk Weighted Assets)	$	95,051		21.21	%	$	35,849		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		91,683		20.46	%		20,165		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		91,683		20.46	%		26,887		6.00	%
Tier 1 Capital (to Average Assets)		91,683		10.44	%		35,122		4.00	%

December 31, 2021:
Total Capital (to Risk Weighted Assets)	$	94,528		21.08	%	$	35,869		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		91,217		20.34	%		20,176		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		91,217		20.34	%		26,902		6.00	%
Tier 1 Capital (to Average Assets)		91,217		12.30	%		29,654		4.00	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of March 31, 2022 and December 31, 2021, are as follows (in thousands):

						For Capital Adequacy
	Actual					Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2022:
Total Capital (to Risk Weighted Assets)	$	94,481		21.10	%	$	35,820		8.00	%	$	44,774		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		91,112		20.35	%		20,148		4.50	%		29,103		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		91,112		20.35	%		26,865		6.00	%		35,820		8.00	%
Tier 1 Capital (to Average Assets)		91,112		10.50	%		34,696		4.00	%		43,370		5.00	%

December 31, 2021:
Total Capital (to Risk Weighted Assets)	$	93,988		20.98	%	$	35,839		8.00	%	$	44,799		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		90,677		20.24	%		20,160		4.50	%		29,119		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		90,677		20.24	%		26,879		6.00	%		35,839		8.00	%
Tier 1 Capital (to Average Assets)		90,677		11.13	%		32,599		4.00	%		40,749		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.

The Company has actively participated in the PPP, facilitating approximately $20 million in funding. As an additional liquidity resource for this funding, the Company was approved to participate in the Federal Reserve Bank’s PPP Liquidity Facility.

Item 4: Controls and Procedures

As of March 31, 2022, 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, because a material weakness in the Company’s internal control over financial reporting existed at March 31, 2022 and had not been remediated by the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q. This material weakness in the Company’s internal control over financial reporting and the Company’s remediation efforts are described below.

Material Weakness in Internal Control over Financial Reporting

The Company’s management, including our Chief Executive Officer and Chief Financial Officer, identified a material weakness related to the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company failed to design controls upon the adoption of ASC 323, Equity Method and Joint Ventures (“Accounting Guidance”), to assess periodically whether a limited partnership investment (the “Investment”) in a Low Income Housing Tax Credit entity (a “LIHTC Entity”) that is held by the Company separate from its investment in its wholly owned bank subsidiary, The Peoples Bank, Biloxi, Mississippi, was Impaired as required by the Accounting Guidance. As a result, the Company’s financial statements for prior periods contained an error (“Error”) that totaled $2,110,000 cumulatively, and should have been recorded in years ending December 31, 2018 and earlier.

Even though the Company has concluded that the Error did not create any material misstatement to previously issued financial statements for any prior periods, the current period or the trend in earnings, the material weakness that caused the Error could result in a failure to evaluate similar investments for impairment that could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Measures

To address the material weakness described above the Company has designed and implemented new and enhanced controls to ensure that: (i) any investments in a LIHTC Entity are evaluated for impairment each period in accordance with the Accounting Guidance, and (ii) that in-house accounting personnel have training to ensure they have the relevant expertise related to such investments to the extent necessary to account for any similar investments made in the future.

We believe the actions described above will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. However, the new and enhanced controls have not operated for a sufficient amount of time to conclude that the material weakness has been remediated. We will continue to monitor the effectiveness of these controls and will make any further changes management determines appropriate.

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. However, as discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company reached an agreement to settle a lawsuit during 2021. This decision was made by Management after consulting with legal counsel in the long-term best interest of the Company.

Item 5: Other Information

None.

Item 6 - 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, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Condition at March 31, 2022 and December 31, 2021, (ii) Consolidated Statements of Income for the quarters ended March 31, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2022 and 2021, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended March 31, 2022 and 2021, (v) Consolidated Statements of Cash Flows for the quarters ended March 31, 2022 and 2021 and (vi) Notes to the Unaudited Consolidated Financial Statements for the quarters ended March 31, 2022 and 2021.

Exhibit 104

Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

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 13, 2022

By: /s/ Chevis C. Swetman

Chevis C. Swetman

Chairman, President and Chief Executive Officer

(principal executive officer)

Date: May 13, 2022

By: /s/ Leslie B. Fulton

Leslie B. Fulton

Chief Financial Officer and Controller

(principal financial and accounting officer)