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PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2023 March (Form 10-Q)

pfbx20230331_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, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number

001-12103

 

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Mississippi

64-0709834

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

 

 

Lameuse and Howard Avenues, Biloxi, Mississippi

39533

(Address of principal executive offices)(Zip Code)

 

(228) 435-5511

(Registrant's telephone number, including area code)

 

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

 

Title of each class Trading  Symbol(s) Name of each exchange on which registered
None PFBXNone 

 

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 28, 2023, there were 15,000,000 shares of $1 par value common stock authorized, with 4,678,186 shares issued and outstanding.

 

1

    

Part 1 Financial Information

Item 1: Financial Statements

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

 

 
  

March 31, 2023

  

December 31, 2022

 
  

(unaudited)

  

(audited)

 
         

Assets

        

Cash and due from banks

 $69,955  $32,836 
         

Available for sale securities

  348,843   350,168 
         

Held to maturity securities, fair value of $269,446 at March 31, 2023; $180,050 at December 31, 2022

  283,037   195,217 
         

Other investments

  350   350 
         

Federal Home Loan Bank Stock, at cost

  2,197   2,175 
         

Loans

  236,698   237,878 
         

Less: Allowance for loan losses

  3,273   3,338 
         

Loans, net

  233,425   234,540 
         

Bank premises and equipment, net of accumulated depreciation

  19,130   18,499 
         

Other real estate

  259   259 
         

Accrued interest receivable

  3,446   3,274 
         

Cash surrender value of life insurance

  20,925   20,768 
         

Intangible asset

  585   600 
         

Other assets

  3,176   2,953 
         

Total assets

 $985,328  $861,639 

 

2

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

 

  

March 31, 2023

  

December 31, 2022

 
  

(unaudited)

  

(audited)

 

Liabilities and Shareholders' Equity

     

Liabilities:

        
         

Deposits:

        
         

Demand, non-interest bearing

 $218,437  $198,097 
         

Savings and demand, interest bearing

  645,417   546,565 
         

Time, $250,000 or more

  7,748   8,773 
         

Other time deposits

  30,841   32,345 
         

Total deposits

  902,443   785,780 
         

Borrowings from Federal Home Loan Bank

  -   - 
         

Employee and director benefit plans liabilities

  19,284   19,198 
         

Other liabilities

  814   1,467 
         

Total liabilities

  922,541   806,445 
         

Shareholders' Equity:

        

Common stock, $1 par value, 15,000,000 shares authorized, 4,678,186 shares issued and outstanding at March 31, 2023 and December 31, 2022

  4,678   4,678 
         

Surplus

  65,780   65,780 
         

Undivided profits

  33,696   31,154 
         

Accumulated other comprehensive loss

  (41,367)  (46,418)
         

Total shareholders' equity

  62,787   55,194 
         

Total liabilities and shareholders' equity

 $985,328  $861,639 

 

See Notes to Consolidated Financial Statements.

 

3

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data) (unaudited) (restated)

 

 
  

Three Months Ended March 31,

 
  

2023

  

2022

 

Interest income:

        
         

Interest and fees on loans

 $2,977  $2,694 
         

Interest and dividends on securities:

        
         

U.S. Treasuries

  1,661   231 
         

Mortgage-backed securities

  918   533 
         

Collateralized mortgage obligations

  840   274 
         

States and political subdivisions

  1,106   1,167 
         

Other investments

  28   1 
         

Interest on balances due from depository institutions

  907   39 
         

Total interest income

  8,437   4,939 
         

Interest expense:

        
         

Deposits

  1,378   153 
         

Borrowings from Federal Home Loan Bank

  9   6 
         

Total interest expense

  1,387   159 
         

Net interest income

  7,050   4,780 
         

Provision for credit losses

  15   25 
         

Net interest income after provision for allowance for credit losses

 $7,035  $4,755 

 

4

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data) (unaudited) (restated)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Non-interest income:

        
         

Trust department income and fees

 $590  $444 
         

Service charges on deposit accounts

  869   891 
         

Increase in cash surrender value of life insurance

  115   125 
         

Other income

  133   134 
         

Total non-interest income

  1,707   1,594 
         

Non-interest expense:

        
         

Salaries and employee benefits

  2,867   2,642 
         

Net occupancy

  463   482 
         

Equipment rentals, depreciation and maintenance

  663   734 
         

FDIC and state banking assessments

  116   108 
         

Data processing

  342   354 
         

ATM expense

  241   307 
         

Other real estate (income) expense

  (10)  (9)
         

Legal expense

  129   102 
         

Other expense

  861   705 
         

Total non-interest expense

  5,672   5,425 
         

Income before income taxes

  3,070   924 
         

Income tax expense

  447   - 
         

Net income

 $2,623  $924 
         

Basic and diluted earnings per share

 $.56  $.20 

Dividends declared per share

 $-  $.09 

 

See Notes to Consolidated Financial Statements.

 

5

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands) (unaudited) (restated)

 

 
  

Three Months Ended March 31,

 
  

2023

  

2022

 
         

Net income

 $2,623  $924 
         

Other comprehensive income (loss):

        
         

Net unrealized (loss) on available for sale securities

  5,051   (19,334)
         

Total other comprehensive income (loss)

  5,051   (19,334)
         

Total comprehensive income (loss)

 $7,674  $(18,410)

 

See Notes to Consolidated Financial Statements.

 

6

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity

(in thousands except share data) (unaudited) (restated)

 

 
                  

Accumulated

     
  

Number of

              

Other

     
  

Common

  

Common

      

Undivided

  

Comprehensive

     
  

Shares

  

Stock

  

Surplus

  

Profits

  

Income (loss)

  

Total

 
                         

Balance, January 1, 2022

  4,678,186  $4,678  $65,780  $23,102  $(1,831) $91,729 

Net income

            924      924 
                         

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  $23,605  $(21,165) $72,898 
                         

Balance, January 1, 2023

  4,678,186  $4,678  $65,780  $31,154  $(46,418) $55,194 
                         

Cumulative effect of accounting change

            (81)     (81)
                         

Total shareholders' equity at beginning of period, as adjusted

  4,678,186   4,678   65,780   31,073   (46,418)  55,113 
                         

Net income

            2,623      2,623 
                         

Other comprehensive loss

               5,051   5,051 
                         

Balance, March 31, 2023

  4,678,186  $4,678  $65,780  $33,696  $(41,367) $62,787 

 

Note: Balances as of January 1, 2022 and 2023 were audited.

 

 

See Notes to Consolidated Financial Statements.

 

7

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited) (restated)

 

 
  

Three Months Ended March 31,

 
  

2023

  

2022

 

Cash flows from operating activities:

        

Net income

 $2,623  $924 
         

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

        
         

Depreciation

  369   404 
         

Provision for allowance for credit losses

  15   25 
         

Gain on sales of other real estate

  -   (33)
         

Amortization of intangible asset

  15   - 
         

(Accretion) Amortization of available for sale securities

  (21)  210 
         

(Accretion) Amortization of held to maturity securities

  (731)  129 
         

Change in accrued interest receivable

  (172)  (151)
         

Increase in cash surrender value of life insurance

  (115)  (125)
         

Change in deferred tax expense

  315   - 
         

Change in other assets

  (539)  (91)
         

Change in employee and director benefit plan liabilities and other liabilities

  (567)  (633)

Net cash provided by operating activities

 $1,192  $659 

 

8

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited) (restated)

 

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Cash flows from investing activities:

        

Proceeds from maturities of available for sale securities

 $17,048  $6,057 
         

Purchases of available for sale securities

  (10,651)  (29,699)
         

Proceeds from maturities of held to maturity securities

  65,899   2,195 
         

Purchases of held to maturity securities

  (153,070)  - 
         

Purchases of Federal Home Loan Bank stock

  (22)  - 
         

Proceeds from sales of other real estate

  -   914 
         

Loans, net change

  1,100   (1,904)
         

Acquisition of bank premises and equipment

  (999)  (216)
         

Investment in cash surrender value of life insurance

  (41)  (42)

Net cash used in investing activities

  (80,736)  (22,695)

Cash flows from financing activities:

        

Demand and savings deposits, net change

  119,192   122,531 
         

Time deposits, net change

  (2,529)  19,578 
         

Borrowings from Federal Home Loan Bank

  25,600   - 
         

Repayments to Federal Home Loan Bank

  (25,600)  (15)
         

Cash dividends

  -   (421)
         

Net cash provided by financing activities

  116,663   141,673 

Net increase in cash and cash equivalents

  37,119   119,637 

Cash and cash equivalents, beginning of period

  32,836   49,991 

Cash and cash equivalents, end of period

 $69,955  $169,628 

 

 

See Notes to Consolidated Financial Statements.

 

9

 

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the three Months Ended March 31, 2023 and 2022

 

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

1. Basis of Presentation:

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

 

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of March 31, 2023 and March 31, 2022 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 2022 Annual Report and Form 10-K.

 

CRITICAL ACCOUNTING POLICIES

 

The results of operations for the quarter ended March 31, 2023, 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.

 

The Company’s loan portfolio segments as of March 31, 2023 and December 31, 2022 were as follows:

 

Real Estate Loans:

Residential-Residential mortgage loans are susceptible to weakening general economic conditions, increases in unemployment rates, and declining real estate values.

 

Construction-Risk common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.

 

10

 

Nonresidential-Risks to this loan category include industry concentration and the inability to monitor the condition of collateral. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative use for the properties. These loans are also susceptible to declines in occupancy rates, business failure, and general economic conditions.

 

Commercial and Industrial-Risk to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.

 

Other-Risk common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.

 

Revision of Prior Period Financial Statements – During 2022, the Company recorded an error correction related to the Company’s accounting for bank premises and equipment. While reviewing the Company’s accruals for depreciation related to certain bank premises and equipment, the Company noticed that it had been over-accruing depreciation expenses beginning in 2006, causing expenses and the accumulation of depreciation in prior periods that were more than what should have been recorded under GAAP.

 

The error at each period end represented 3% or less of our shareholders' equity in all prior periods, and the aggregate net effect of the error correction on shareholders’ equity was minimal. 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 error in the current period would have resulted in a material misstatement in the current period and, as such, the Company has revised its previously reported financial information contained in our quarterly report on Form 10-Q for the quarter ended March 31, 2022, to correct the immaterial error. The Company will also revise previously reported financial information for this immaterial error in future filings, as applicable.

 

11

 

Revised Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2022 (in thousands):

 

  

Three Months Ended March 31, 2022

 
  

As Reported

  

Adjustment

  

As Revised

 
             

Beginning balance undivided profits

 $20,911  $2,191  $23,102 

Beginning balance total shareholders' equity

  89,538   2,191   91,729 

Ending balance undivided profits

  21,377   2,228   23,605 

Ending balance total shareholders' equity

  70,670   2,228   72,898 

 

 Revised Consolidated Income Statements for the three months ended March 31, 2022 (in thousands):

 

  

Three Months Ended March 31, 2022

 
  

As Reported

  

Adjustment

  

As Revised

 
             

Non-Interest Expense

 $5,462  $(37) $5,425 

Net Income

  887   37   924 

Basic and diluted earnings (loss) per share

  0.19   0.01   0.20 

 

Accounting Standards Update –In March 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-02 (“ASU 2023-02”), Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures. The amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). For public business entities, the amendments in ASU 2023-02 are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the fiscal year that includes that interim period. Management has evaluated the impact of the adoption of this standard and determined there would be no impact to the Company’s consolidated financial position or results of operations.

 

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments: Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update cover two issues: (1) the elimination of TDR recognition and measurement guidance as prescribed by ASC 310-40 and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty; and, (2) for public business entities, the requirement that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.

 

12

 

The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For the elimination of recognition and measurement guidance on troubled debt restructurings by creditors in Subtopic 310-40, an entity may elect to apply a modified retrospective transition by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the fiscal year of adoption, or a prospective approach applied to modifications occurring after the date of adoption. The remainder of amendments should be applied prospectively. The Company adopted this standard effective January 1, 2023 on a prospective basis for all amendments. The adoption of this standard is not material to the Company’s consolidated financial position or results of operations.

 

On January 1, 2023, the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses,” more commonly referred to as CECL, on a modified retrospective basis. The provisions of this guidance require a material change to the manner in which the Company estimates and reports losses on financial instruments, including loans and unfunded lending commitments, select securities and other assets carried at amortized cost. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Changes to the Company’s accounting policies related to CECL are described below. There were no other material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022.

 

 

Reclassification-Certain items previously reported have been reclassified to conform to the current year’s reporting format due to the adoption of CECL.

 

The Company has adopted the CECL (Current Expected Credit Losses) methodology for estimating allowances for credit losses effective January 1, 2023. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets) including: financing receivables such as loans held for investment, held to maturity debt securities, off-balance-sheet credit exposures (unfunded commitments) including off-balance sheet loan commitments; standby letters of credit; and other similar instruments.

 

13

 

In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets. The following represents an overview of key factors regarding CECL: CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.

 

As stated above, CECL also applies to held to maturity debt securities since they are carried at amortized cost and are within the scope of the standard. Therefore, it is the responsibility of management to establish any required allowances for credit losses on the Bank’s held to maturity debt securities as of the date the Bank adopts CECL and to maintain such allowances thereafter. Because CECL requires the Bank to measure expected credit losses on a collective or pool basis when similar risk characteristics exist, held to maturity debt securities that share similar risk characteristics are collectively assessed for credit losses.

 

Estimation Methods for Expected Credit Losses-Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses,” does not require the use of a specific loss estimation method for purposes of determining ACLs. Various methods may be used to estimate the expected collectability of financial assets, with those methods generally applied consistently overtime. The same loss estimation method does not need to be applied to all financial assets. Loss-rate methods can involve a variety of approaches, and Management incorporates the methods below:

 

Open Pool or Snapshot Method

The starting point for the calculation consists of assets that are outstanding at the end of a given time frame and are made up of assets that were originated in various years. Additional assets may be added to pools of loans under an open pool method.

 

Weighted Average Remaining Maturity (WARM) Method

A loss-rate method that estimates expected credit losses over the remaining life of the financial assets and uses a weighted average of the assets’ contractual terms to estimate the pool’s remaining contractual term. The WARM method uses average annual net charge-off rates and the amortization adjusted remaining life plus qualitative adjustments to estimate the ACLs.

 

Qualitative Factor Adjustments

The estimation of ACLs is to reflect consideration of all significant factors relevant to the expected collectability of the Bank’s financial assets as of the reporting date. Management begins their expected credit loss estimation process by determining the Bank’s historical loss information or utilizing reliable and relevant peer group (UPBR, State, custom) historical loss proxy data for each segment of financial assets with similar risk characteristics.

 

Management is to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.

 

14

 

Historical loss experience generally provides a quantitative starting point for Management’s estimate of expected credit losses. Consistent with FASB ASU Topic 326, Management must consider relevant qualitative factors that may cause the CECL estimate of the financial asset portfolio as of the evaluation date to differ from the historical loss experience.

 

Management is to consider the qualitative factors that are relevant to the Bank as of the reporting date, which may include but are not limited to the:

 

1.

Nature and volume of the Bank’s financial assets.

 

2.

Existence, growth, and effect of any concentrations of credit.

 

3.

Volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Adversely classified or graded loans are loans rated “substandard” (or its equivalent) or worse under the institution’s loan classification system.

 

4.

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

 

5.

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

 

6.

Quality of the Bank’s credit review function.

 

7.

Experience, ability, and depth of the Bank’s lending, investment, collection, and other relevant management and staff.

 

8.

Effect of other external factors such as the regulatory, legal, and technological environments, competition, and events such as natural disasters.

 

9.

Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets. Changes in economic and business conditions and developments included in qualitative factor adjustments are limited to those that affect the collectability of the Bank’s financial assets and are relevant to the Bank’s financial asset portfolios. For example, an economic factor for current or forecasted unemployment at the national or state level may indicate a strong job market based on low national or state unemployment rates, but a local unemployment rate, which may be significantly higher because of the actual or forecasted loss of a major local employer, may be more relevant to the collectability of an institution’s financial assets.

 

 

For reporting periods beginning on or after January 1, 2023, the Allowance for Credit Losses (ACL) is comprised of the Allowance for Loan and Lease Losses (ALLL), a valuation account available to absorb losses on loans and leases held for investment, and the Reserve for Unfunded Lending Commitments, a liability established to absorb credit losses for the expected life of the contractual term of on and off-balance sheet exposures as of the date of the determination. As stated above, quarterly, management estimates losses in the portfolio and unfunded exposures based on a number of factors, including the Company’s and peer’s past loan loss experience, known and potential risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral, and current and forecasted economic conditions. The length of time in the economic forecast is up to two years. The analysis and methodology used for estimating the ACL includes two primary elements: a collective approach for pools of loans that have similar risk characteristics and a specific reserve analysis for credits individually evaluated for credit loss. The methodology used by the Company is the weighted average remaining maturity or (“WARM”) method. The method uses comparable historical lookback periods as proxies for projecting future trends, and employs a qualitative (“Q”) factor component in the projections which represents expected differences in current and forecasted conditions from historical loss information or conditions. The main methodology approach includes comparable risk pools which are segregated by call report loan category, unadjusted loss estimation which is a combination of open pool/snapshot and weighted average remaining maturity, comparable or “look back” periods of about six years, which the Company choses to best approximate the expected future loss environment for the WARM time period and also utilizes peer data loss experiences.

 

15

 

For the collective approach, the Company segments loans into real estate-residential, real estate-nonresidential, real estate-construction and land development, commercial and industrial, and consumer/other, with further segmentation by region and sub-portfolio, as deemed appropriate. Both quantitative and qualitative factors are applied at the portfolio segment levels. The Company applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables.

 

The Company applies the expected future loss rate for each loan portfolio segment to each of the bank’s segments to calculate the allowance for credit losses.

 

CECL also requires capturing estimated credit losses on unfunded commitments that meet certain criteria. Management starts with current gross unfunded commitment levels by category as reported on the call report and then subtracts any unconditionally cancellable amounts, which are not subject to CECL reserve requirements to produce net unfunded commitment levels, as well as consideration of the likelihood of funding. Any allowance for off balance sheet exposures is reported as an other liability on the Consolidated Statement of Condition and is increased or decreased via the provision for credit losses account on the Consolidated Statement of Income.

 

The initial default loss rates are then estimated by taking expected future lifetime loss rates of the loan categories that are included in each unfunded commitment segment and dividing the lifetime rate by their respective WARMs to derive an annual loss rate estimate.

 

The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if management believes the collection of interest is doubtful. Management believes this policy results in the timely reversal of uncollectible interest.

 

The Company establishes specific reserves using an individually evaluated approach for nonaccrual loans, loans modified in troubled debt restructures, loans for which a troubled debt restructure is reasonably expected, and other financial instruments that are deemed to not share risk characteristics with other collectively evaluated financial assets. For loans individually evaluated, a specific allowance is recognized for any shortfall between the loan’s value and its recorded investment. The loan’s value is measured by either the loan’s observable market price, the fair value of the collateral of the loan (less liquidation costs) if it is collateral dependent, or by the present value of expected future cash flows discounted at the loan’s effective interest rate. The Company applies the practical expedient and defines collateral dependent loans as those where the borrower is experiencing financial difficulty and on which repayment is expected to be provided substantially through the operation or sale of the collateral.

 

16

 

The CECL standard also requires an assessment of the Company’s held to maturity debt securities for expected credit losses and the available for sale debt securities for credit-related impairment. The Company applies the practical expedient to exclude the accrued interest receivable balance of $1,178,000 from the amortized cost basis of financing receivables and held to maturity debt securities. The allowance for credit losses on held to maturity debt securities is estimated at the individual security level when there is a more than inconsequential risk of default. A separate contra valuation account is available to absorb losses on securities. The allowance for credit loss is limited to the amount by which the fair value is less than the amortized cost basis. The Company evaluates credit impairment on available for sale debt securities at an individual security level. This evaluation is done for securities whose fair value is below amortized cost with a more than inconsequential risk of default and where the Company has assessed the decline in fair value is significant enough to suggest a credit event occurred. Credit events are generally assessed based on adverse conditions specifically related to the security, an industry, or geographic area, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, changes in the financial condition of the underlying loan obligors. The allowance for credit losses for such securities is measured using a discounted cash flow methodology, through which management compares the present value of expected cash flows with the amortized cost basis of the security. The allowance for credit loss is limited to the amount by which the fair value is less than the amortized cost basis. If the Company intends to sell the debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the security is charged down to fair value against the allowance for credit losses, with any incremental impairment reported in earnings.

 

The calculation of the allowance for credit losses under CECL is performed using two primary approaches: a collective approach for pools of loans that have similar risk characteristics using a loss rate analysis, and a specific reserve analysis for credits individually evaluated.

 

The Company reassess the credit losses at each reporting period and records subsequent changes in the allowance for credit losses on loans, unfunded commitments and securities with a corresponding adjustment recorded in the provision for credit loss expense.

 

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $81,000, as detailed in the table below. Operating results for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2022 Form 10-K.

 

17

 

The following table details the impact of the adoption of ASC 326 on the allowance for credit losses as of January 1, 2023 (in thousands).

 

  

January 1, 2023

 
  

Pre-Adoption

Allowance

  

Impact of Adoption

  

Post-Adoption

Allowance

  

Cumulative

Effect on

Retained

Earnings

 
                 

Securities held to maturity:

                

U.S. Treasuries

 $-  $-  $-  $- 

States and political subdivisions

  -   41   41   (32)

Total

 $-  $41  $41  $(32)

Loans:

                

Real Estate, residential

 $913  $396  $1,309  $(313)

Real Estate, construction

  392   (58)  334   46 

Real Estate, non-residential

  1,639   (215)  1,424   170 

Commerical & Industrial

  143   (84)  59   66 

Consumer/Other

  251   (49)  202   39 

Total

 $3,338  $(10) $3,328  $8 

Off-balance-sheet credit exposures

 $-  $72  $72  $(57)

  

 

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,678,186 for the three months ended March 31, 2023 and 2022, respectively.

 

 

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $1,358,101 and $158,300 for the three months ended March 31, 2023 and 2022, respectively, for interest on deposits and borrowings. No income tax payments were made during the three months ended March 31, 2023 and 2022. No loans were transferred to other real estate during the three months ended March 31, 2023 and 2022.

 

 

4.  Investments:

Effective January 1, 2023, in conjunction with the adoption of CECL, and again at March 31, 2023, the Company evaluated credit impairment for individual securities available for sale whose fair value was below amortized cost with a more than inconsequential risk of default and where the Company had assessed the decline in fair value significant enough to suggest a credit event occurred. There were no securities that met the criteria of a credit loss event and therefore, no allowance for credit loss was recorded for either period. The Company also evaluated impairment for individual securities held to maturity and determined an allowance for credit loss of $41,000 should be established as of January 1, 2023. No additional impairment was recorded as of March 31, 2023.

 

18

 

The amortized cost, fair value and allowance for credit losses related to securities at March 31, 2023 and December 31, 2022, are as follows (in thousands):

 

      

Gross

  

Gross

  

Allowance

     
  Amortized  

Unrealized

  

Unrealized

  

for Credit

  

Estimated

 

March 31, 2023

 

Cost

  

Gains

  

Losses

  

Losses

  

Fair Value

 

Available for sale securities:

                    

U.S. Treasuries

 $118,634  $22  $(8,991) $-  $109,665 
                     

Mortgage-backed securities

  58,393   31   (4,391)  -   54,033 
                     

Collateralized mortgage obligations

  112,199   -   (7,337)  -   104,862 
                     

States and political subdivisions

  102,325   1   (22,043)  -   80,283 

Total available for sale securities

 $391,551  $54  $(42,762) $-  $348,843 

 

      

Gross

  

Gross

      

Allowance

  

Net

 
  

Amortized

  

Unrealized

  

Unrealized

  

Estimated

  

for Credit

  

Carrying

 

March 31, 2023

 

Cost

  

Gains

  

Losses

  

Fair Value

  

Losses

  

Amount

 

Held to maturity securities:

                        

U.S. Treasuries

 $183,215  $230  $(958) $182,487  $-  $183,215 
                         

States and political subdivisions

  99,863   50   (12,954)  86,959   (41)  99,822 

Total held to maturity securities

 $283,078  $280  $(13,912) $269,446  $(41) $283,037 

 

      

Gross

  

Gross

  

Allowance

  

Net

 
  Amortized  

Unrealized

  

Unrealized

  

for Credit

  

Carrying

 

December 31, 2022

 

Cost

  

Gains

  

Losses

  

Losses

  

Amount

 

Available for sale securities:

                    
                     

U.S. Treasuries

 $118,782  $-  $(10,414) $-  $108,368 
                     

Mortgage-backed securities

  61,280   36   (4,877)  -   56,439 
                     

Collateralized mortgage obligations

  115,436   -   (8,059)  -   107,377 
                     

States and political subdivisions

  102,428   2   (24,446)  -   77,984 

Total available for sale securities

 $397,926  $38  $(47,796) $-  $350,168 

 

      

Gross

  

Gross

      

Allowance

  

Net

 
  Amortized  

Unrealized

  

Unrealized

  

Estimated

  

for Credit

  

Carrying

 

December 31, 2022

 

Cost

  

Gains

  

Losses

  

Fair Value

  

Losses

  

Amount

 

Held to maturity securities:

                        

U.S. Treasuries

 $94,339   -  $(1,288) $93,051   -  $94,339 
                         

States and political subdivisions

  100,878   52   (13,931)  86,999   -   100,878 

Total held to maturity securities

 $195,217  $52  $(15,219) $180,050  $-  $195,217 

 

19

 

The allowance for credit losses on held to maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held to maturity securities to present the net amount expected to be collected. With regard to U.S. Treasury securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. Management estimates the necessity of holding expected credit loss reserves for municipal holdings classified as held to maturity on a pooled basis. The company uses a standard probability of default/loss given default approach. The approach utilizes many inputs including enhanced and underlying ratings, maturity, issuer type/subtype, NAICS code, origination date, refunding status as well as state and region.

 

The following table details activity in the allowance for credit losses on held to maturity securities in the state and political subdivision category during the three months ended March 31,2023 (in thousands):

 

Beginning balance, prior to adoption of ASC 326

 $- 

Impact of adopting ASC 326

  41 

Credit loss expense (benefit)

  - 

Ending balance

 $41 

 

The amortized cost and fair value of debt securities at March 31, 2023 (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

 $30,082  $29,958 

Due after one year through five years

  56,698   51,889 

Due after five years through ten years

  69,621   58,864 

Due after ten years

  64,558   49,237 

Mortgage-backed securities

  58,393   54,033 

Collateralized mortgage obligations

  112,199   104,862 

Totals

 $391,551  $348,843 
         

Held to maturity securities:

        

Due in one year or less

 $135,542  $135,448 

Due after one year through five years

  68,764   67,609 

Due after five years through ten years

  40,270   35,573 

Due after ten years

  38,502   30,816 

Totals

 $283,078  $269,446 

 

20

 

Available for sale securities with gross unrealized losses for which an allowance for credit losses has not been recorded and held to maturity debt securities with gross unrealized losses for which an allowance for credit losses was recorded at January 31, 2023 and no additional allowance for credit losses was recorded at March 31, 2023 and December 31, 2022, 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, 2023:

                        

U.S. Treasuries

 $198,290  $9,949  $-  $-  $198,290  $9,949 

Mortgage-backed securities

  2,151   43   42,041   4,348   44,192   4,391 

Collateralized mortgage obligations

  101,390   7,252   3,472   85   104,862   7,337 

States and political subdivisions

  133,627   28,038   29,114   6,959   162,741   34,997 

TOTAL

 $435,458  $45,282  $74,627  $11,392  $510,085  $56,674 
                         

December 31, 2022:

                        

U.S. Treasuries

 $132,113  $2,158  $64,533  $9,544  $196,646  $11,702 

Mortgage-backed securities

  25,234   1,755   21,850   3,122   47,084   4,877 

Collateralized mortgage obligations

  48,188   1,610   59,189   6,449   107,377   8,059 

States and political subdivisions

  50,025   7,581   110,881   30,796   160,906   38,377 

TOTAL

 $255,560  $13,104  $256,453  $49,911  $512,013  $63,015 

 

At March 31, 2023, 33 of the 52 U.S. Treasury securities, 41 of the 47 mortgage-backed securities, 34 of the 34 collateralized mortgage obligations and 174 of the 193 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 in prior periods 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, 2023 and March 31, 2022.

 

Securities with a fair value of $434,994,716 and $398,673,043 at March 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

 

21

  
 

5. Loans:

 

Certain items previously reported have been reclassified to conform to the current year’s reporting format due to the adoption of CECL.

 

The composition of the loan portfolio at March 31, 2023 and December 31, 2022, is as follows (in thousands):

 

  

March 31, 2023

  

December 31, 2022

 
         

Real estate, residential

 $69,516  $67,512 
         

Real estate, construction

  26,827   30,146 
         

Real estate, nonresidential

  118,510   122,233 
         

Commercial and industrial

  14,303   10,497 
         

Other

  7,542   7,490 
         

Total

 $236,698  $237,878 

 

22

 

The age analysis of the loan portfolio, segregated by class of loans, as of March 31, 2023 and December 31, 2022, 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, 2023:

                            

Real estate, residential

 $285  $146  $-  $431  $69,085  $69,516  $- 

Real estate, construction

  390   -   -   390   26,437   26,827   - 

Real estate, nonresidential

  84   228   1,014   1,326   117,184   118,510   - 

Commercial and industrial

  -   -   -   -   14,303   14,303   - 

Other

  34   7   -   41   7,501   7,542   - 
                             

Total

 $793  $381  $1,014  $2,188  $234,510  $236,698  $- 

December 31, 2022:

                            

Real estate, residential

 $34  $49  $-  $83  $67,429  $67,512  $- 

Real estate, construction

  79   2   -   81   30,065   30,146   - 

Real estate, nonresidential

  -   -   1,101   1,101   121,132   122,233   - 

Commercial and industrial

  -   -   -   -   10,497   10,497   - 

Other

  14   -   -   14   7,476   7,490   - 
                             

Total

 $127  $51  $1,101  $1,279  $236,599  $237,878  $- 

 

The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 15 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.

 

23

 

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of March 31, 2023 and December 31, 2022, is as follows (in thousands):

 

  

Loans With A Grade Of:

     
  

A, B or C

  

S

  

D

  

E

  

F

  

Total

 

March 31, 2023:

                        

Real estate, residential

 $68,457  $74  $866  $119  $-  $69,516 
                         

Real estate, construction

  26,417   299   92   19   -   26,827 
                         

Real estate, nonresidential

  116,814   -   452   1,244   -   118,510 
                         

Commercial and industrial

  14,303   -   -   -   -   14,303 
                         

Other

  7,526   -   10   6   -   7,542 
                         

Total

 $233,517  $373  $1,420  $1,388  $-  $236,698 
                         

December 31, 2022:

                        

Real estate, residential

 $66,490  $77  $822  $123   -  $67,512 
                         

Real estate, construction

  30,115   -   2   29   -   30,146 
                         

Real estate, nonresidential

  120,423   -   466   1,344   -   122,233 
                         

Commercial and industrial

  10,497   -   -   -   -   10,497 
                         

Other

  7,476   -   7   7   -   7,490 
                         

Total

 $235,001  $77  $1,297  $1,503  $-  $237,878 

 

Prior to 2020, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2023 and 2022, the Company did not restructure any additional loans. There were no specific reserves allocated to troubled debt restructurings as of March 31, 2023 and December 31, 2022, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of March 31, 2023 and December 31, 2022.

 

24

 

The following tables further disaggregates credit quality disclosures by amortized cost by class and vintage for term loans and by revolving and revolving converted to amortizing as of March 31, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.

 

  

Term Loans

          

Revolving

     
  

Amortized Cost Basis by Origination Year

          

Loans

     
                          

Revolving

  

Converted to

     
  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Loans

  

Term Loans

  

Total

 

March 31, 2023:

                                    

Real Estate, Residential Loans:

                                    

A, B, or C

 $3,269  $16,309  $12,677  $5,522  $5,764  $19,905  $4,773  $238  $68,457 

S

  -   -   -   -   -   74   -   -   74 

D

  -   134   -   -   -   732   -   -   866 

E

  -   -   -   -   20   99   -   -   119 

F

  -   -   -   -   -   -   -   -   - 

Total Real Estate Residential Loans

 $3,269  $16,443  $12,677  $5,522  $5,784  $20,810  $4,773  $238  $69,516 
                                     

Real Estate, Construction Loans:

                                    

A, B, or C

 $54  $3,491  $2,246  $2,086  $41  $4,404  $14,095  $-  $26,417 

S

  -   -   -   -   -   -   299   -   299 

D

  -   -   -   92   -   -   -   -   92 

E

  -   -   -   -   -   19   -   -   19 

F

  -   -   -   -   -   -   -   -   - 

Total Real Estate, Construction Loans

 $54  $3,491  $2,246  $2,178  $41  $4,423  $14,394  $-  $26,827 
                                     

Real Estate,Nonresidential Loans:

                                    

A, B, or C

 $-  $21,788  $11,500  $23,403  $6,017  $40,361  $13,745  $-  $116,814 

S

  -   -   -   -   -   -   -   -   - 

D

  -   -   -   -   -   452   -   -   452 

E

  -   -   -   -   -   1,244   -   -   1,244 

F

  -   -   -   -   -   -   -   -   - 

Total Real Estate, Nonresidential Loans

 $-  $21,788  $11,500  $23,403  $6,017  $42,057  $13,745  $-  $118,510 
                                     

Commercial and industrial

                                    

A, B, or C

 $131  $1,115  $960  $365  $2,949  $86  $8,697  $-  $14,303 

S

  -   -   -   -   -   -   -   -   - 

D

  -   -   -   -   -   -   -   -   - 

E

  -   -   -   -   -   -   -   -   - 

F

  -   -   -   -   -   -   -   -   - 

Total Commercial and Industrial Loans

 $131  $1,115  $960  $365  $2,949  $86  $8,697  $-  $14,303 
                                     

Consumer/Other Loans

                                    

A, B, or C

 $979  $2,034  $1,334  $913  $336  $439  $1,491  $-  $7,526 

S

  -   -   -   -   -   -   -   -   - 

D

  -   10   -   -   -   -   -   -   10 

E

  -   -   -   6   -   -   -   -   6 

F

  -   -   -   -   -   -   -   -   - 

Total Consumer/Other Loans

 $979  $2,044  $1,334  $919  $336  $439  $1,491  $-  $7,542 

 

25

 

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, 2023 and December 31, 2022, are as follows (in thousands):

 

  

March 31, 2023

  

December 31, 2022

 
         

Real estate, residential

 $87  $90 
         

Real estate, nonresidential

  1,244   1,344 
         

Other

  6   7 
         

Total

 $1,337  $1,441 

 

The following tables further disaggregates nonaccrual disclosures by amortized cost by class and vintage for term loans and by revolving and revolving converted to amortizing as of March 31, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.

 

  

Term Loans

          

Revolving

     
  

Amortized Cost Basis by Origination Year

          

Loans

     
                          

Revolving

  

Converted to

     
  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Loans

  

Term Loans

  

Total

 

March 31, 2023:

                                    

Real estate, residential

 $-  $-  $-  $-  $20  $67  $-  $-  $87 

Real estate, construction

  -   -   -   -   -   -   -   -   - 

Real estate, nonresidential

  -   -   -   -   -   1,244   -   -   1,244 

Commercial and industrial

  -   -   -   -   -   -   -   -   - 

Consumer/Other

  -   -   -   6   -   -   -   -   6 

Total Loans on Nonaccrual

 $-  $-  $-  $6  $20  $1,311  $-  $-  $1,337 

 

26

 

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of March 31, 2023 and December 31, 2022, are as follows (in thousands):

 

  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Related

Allowance

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

March 31, 2023:

                    

With no related allowance recorded:

                    

Real estate, residential

 $169  $143  $-  $145  $2 

Real estate, construction

  95   19   -   23   2 

Real estate, nonresidential

  1,798   1,586   -   1,654   7 

Other

  6   6   -   6   - 
                     

Total

  2,068   1,754   -   1,828   11 
                     

With a related allowance recorded:

                    

Real estate, residential

  56   47   40   48   - 
                     

Total

  56   47   40   48   - 
                     

Total by class of loans:

                    

Real estate, residential

  225   190   40   193   2 

Real estate, construction

  95   19   -   23   2 

Real estate, nonresidential

  1,798   1,586   -   1,654   7 

Other

  6   6   -   6   - 
                     

Total

 $2,124  $1,801  $40  $1,876  $11 

 

27

 
  

Unpaid

          

Average

  

Interest

 
  

Principal

  

Recorded

  

Related

  

Recorded

  

Income

 
  

Balance

  

Investment

  

Allowance

  

Investment

  

Recognized

 

December 31, 2022:

                    

With no related allowance recorded:

                    

Real estate, residential

 $525  $500  $-  $533  $25 

Real estate, construction

  102   29   -   46   7 

Real estate, nonresidential

  363   243   -   273   - 

Other

  7   7   -   7   - 
                     

Total

  997   779   -   859   32 
                     

With a related allowance recorded:

                    

Real estate, residential

  57   49   40   50   - 

Real estate, nonresidential

  1,101   1,101   84   1,103   - 
                     

Total

  1,158   1,150   124   1,153   - 
                     

Total by class of loans:

                    

Real estate, residential

  525   500   -   533   25 

Real estate, construction

  159   78   40   96   7 

Real estate, nonresidential

  1,464   1,344   84   1,376   - 

Other

  7   7   -   7   - 
                     

Total

 $2,155  $1,929  $124  $2,012  $32 

 

The Company had no loan modifications made to borrowers experiencing financial difficulty as of March 31, 2023.

 

28

  
 

6. Allowance for Credit Losses:

The following tables show activity in the allowance for credit losses by portfolio class for the three months ended March 31, 2023 and 2022, as well as the corresponding recorded investment in loans at the end of each period. Effective January 1, 2023, the Company adopted the provisions of ASC 326 (CECL) using a modified retrospective basis. The difference between the December 31, 2022 incurred allowance and the CECL allowance is reflected as a cumulative effect of change in accounting principle in the table below. For further discussion of the day one impact of the CECL adoption, refer to Note 1.

 

Transactions in the allowance for credit losses on loans and leases for the three months ended March 31, 2023 and 2022, and the balances of loans, individually and collectively evaluated for impairment, as of March 31, 2023 and 2022, are as follows (in thousands):

 

 

Allowance for credit losses

 

Real Estate,

  

Real Estate,

  

Real Estate,

  

Commercial

  

 

  

 

 
For the Quarter Ended March 31, 2023: Residential  Construction  Nonresidential  and Industrial  Other  Total 

Allowance for Loan Losses:

                        

Beginning balance

 $913  $392  $1,639  $143  $251  $3,338 

Cumulative effect of change in accounting principle

  396   (58)  (215)  (84)  (49)  (10)

Charge-offs

  -   -   (84)  -   (72)  (156)

Recoveries

  -   -   20   -   51   71 

Net provision for loan losses

  (347)  (189)  566   27   (27)  30 

Ending Balance-allowance for loan losses

 $962  $145  $1,926  $86  $154  $3,273 

Reserve for unfunded lending commitments:

                        

Beginning balance

                        

Cumulative effect of change in accounting principle

 $4  $30  $5  $15  $18  $72 

Provision for losses on unfunded commitments

  -   (3)  (1)  (2)  (9)  (15)

Ending balance-reserve for unfunded commitments

 $4  $27  $4  $13  $9  $57 

Total allowance for credit losses

 $966  $172  $1,930  $99  $163  $3,330 

Allowance for loan losses:

                        

Individually evaluated

 $145  $-  $-  $-  $-  $145 

Collectively evaluated

  817   145   1,926   86   154   3,128 

Allowance for loan losses, March 31, 2023:

 $962  $145  $1,926  $86  $154  $3,273 

Reserve for unfunded lending commitments:

                        

Individually evaluated

 $-  $-  $-  $-  $-  $- 

Collectively evaluated

  4   27   4   13   9   57 

Reserve for unfunded lending commitments:

 $4  $27  $4  $13  $9  $57 

Total allowance for credit losses

 $966  $172  $1,930  $99  $163  $3,330 

Loans, March 31, 2023:

                        

Individually evaluated

 $985  $111  $1,696  $-  $16  $2,808 

Collectively evaluated

  68,531   26,716   116,814   14,303   7,526   233,890 

Total loans:

 $69,516  $26,827  $118,510  $14,303  $7,542  $236,698 

 

29

 

The following table further disaggregates gross charge-off disclosures by amortized cost by credit quality indicator, class, and year of origination as of March 31, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.

 

  

Term Loans

          

Revolving

     
  

Amortized Cost Basis by Origination Year

          

Loans

     
                          

Revolving

  

Converted to

     
  

2023

  2022  2021  2020  2019  

Prior

  

Loans

  

Term Loans

  

Total

 

For the Quarter Ended March 31, 2023:

                                    

Real estate, nonresidential

 $-  $-  $-  $-  $-  $-  $-  $-  $- 

A,B, or C

  -   -   -   -   -   -   -   -   - 

S

  -   -   -   -   -   -   -   -   - 

D

  -   -   -   -   -   -   -   -   - 

E

  -   -   -   -   -   84   -   -   84 

F

  -   -   -   -   -   -   -   -   - 

Total Real estate, nonresidential loans

 $-  $-  $-  $-  $-  $84  $-  $-  $84 

Consumer/Other

                                    

A,B, or C

 $72  $-  $-  $-  $-  $-  $-  $-  $72 

S

  -   -   -   -   -   -   -   -   - 

D

  -   -   -   -   -   -   -   -   - 

E

  -   -   -   -   -   -   -   -   - 

F

  -   -   -   -   -   -   -   -   - 

Total Consumer/Other Loans

 $72  $-  $-  $-  $-  $-  $-  $-  $72 

Total Gross Loan Chargeoffs:

 $72  $-  $-  $-  $-  $84  $-  $-  $156 

 

 

  

Real Estate,

Residential

  

Real Estate,

Construction

  

Real Estate,

Nonresidential

  

Commercial

and Industrial

  

Other

  

Total

 

For the Quarter Ended March 31, 2022:

                     

Allowance for Loan Losses:

                        

Beginning Balance

 $873  $351  $1,781  $228  $78  $3,311 

Charge-offs

  -   -   -   -   (76)  (76)

Recoveries

  -   -   48   9   51   108 

Provision

  7   1   (24)  20   21   25 

Ending Balance

 $880  $352  $1,805  $257  $74  $3,368 
                         

Allowance for loan losses, March 31, 2022:

                     

Ending balance: individually evaluated for impairment

 $25  $26  $84  $-  $-  $135 

Ending balance: collectively evaluated for impairment

 $855  $326  $1,721  $257  $74  $3,233 
                         

Total Loans, March 31, 2022:

                     

Ending balance: individually evaluated for impairment

 $1,141  $196  $1,944  $26  $8  $3,315 

Ending balance: collectively evaluated for impairment

 $58,301  $28,755  $125,561  $15,939  $9,227  $237,783 

 

30

  
 

7. Deposits:

Time deposits of $250,000 or more totaled approximately $7,748,000 and $8,773,000 at March 31, 2023 and December 31, 2022, respectively.

 

 

8. Shareholders’ Equity:

There were no dividends declared as of March 31, 2023. 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.

 

31

 

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 Debt Securities

The fair value of held to maturity debt securities is based on quoted market prices. The Company’s held to maturity debt 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 debt 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.

 

32

 

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.

 

33

 

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, 2023 and December 31, 2022 are as follows (in thousands):

 

      

Fair Value Measurements Using

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 

March 31, 2023:

                

U.S. Treasuries

 $109,665  $-  $109,665  $- 

Mortgage-backed securities

  54,033   -   54,033   - 

Collateralized mortgage obligations

  104,862   -   104,862   - 

States and political subdivisions

  80,283   -   80,283   - 

Total

 $348,843  $-  $348,843  $- 
                 

December 31, 2022:

                

U.S. Treasuries

 $108,368  $-  $108,368  $- 

Mortgage-backed securities

  56,439   -   56,439   - 

Collateralized mortgage obligations

  107,377   -   107,377   - 

States and political subdivisions

  77,984   -   77,984   - 

Total

 $350,168  $-  $350,168  $- 

 

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of March 31, 2023 and December 31, 2022 are as follows (in thousands):

 

      

Fair Value Measurements Using

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 

March 31, 2023

 $7  $-  $-  $7 

December 31, 2022

  1,026   -   -   1,026 

 

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, 2023 and December 31, 2022 are as follows (in thousands):

 

      

Fair Value Measurements Using

 
  

Total

  

Level 1

  

Level 2

  

Level 3

 

March 31, 2023

 $259  $-  $-  $259 

December 31, 2022

  259   -   -   259 

 

34

 

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, 2023

  

December 31, 2022

 

Balance, beginning of period

 $259  $1,891 
         

Loans transferred to ORE

  -   - 
         

Sales

  -   (1,477)
         

Writedowns

  -   (155)
         

Balance, end of period

 $259  $259 

 

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at March 31, 2023 and December 31, 2022, are as follows (in thousands):

 

  

Carrying

  

Fair Value Measurements Using

     
  

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 

March 31, 2023:

                    

Financial Assets:

                    

Cash and due from banks

 $69,955  $69,955  $-  $-  $69,955 

Available for sale securities

  348,843   -   348,843   -   348,843 

Held to maturity securities

  283,037   -   269,446   -   269,446 

Other investments

  350   350   -   -   350 

Federal Home Loan Bank stock

  2,197   -   2,197   -   2,197 

Loans, net

  233,425   -   -   222,399   222,399 

Cash surrender value of life insurance

  20,925   -   20,925   -   20,925 

Intangible asset

  585   -   -   585   585 

Financial Liabilities:

                    

Deposits:

                    

Non-interest bearing

  218,437   218,437   -   -   218,437 

Interest bearing

  645,417   -   -   564,312   564,312 
Time deposits  38,589         37,253   37,253 

Borrowings from Federal Home Loan Bank

  -   -   -   -   - 

 

35

 
  

Carrying

  

Fair Value Measurements Using

     
  

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 

December 31, 2022:

                    

Financial Assets:

                    

Cash and due from banks

 $32,836  $32,836  $-  $-  $32,836 

Available for sale securities

  350,168   -   350,168   -   350,168 

Held to maturity securities

  195,217   -   180,050   -   180,050 

Other investments

  350   350   -   -   350 

Federal Home Loan Bank stock

  2,175   -   2,175   -   2,175 

Loans, net

  234,540   -   -   223,494   223,494 

Cash surrender value of life insurance

  20,768   -   20,768   -   20,768 

Intangible asset

  600   -   -   600   600 

Financial Liabilities:

                    

Deposits:

                    

Non-interest bearing

  198,097   198,097   -   -   198,097 

Interest bearing

  546,565   -   -   458,433   458,433 
Time Deposits  41,118   -   -   39,517   39,517 

Borrowings from Federal Home Loan Bank

  -   -   -   -   - 

 

 

10. Income Taxes:

The income tax expense and effective tax rate included in the consolidated statements of income are shown in the table below for the periods presented (in thousands):

 

  

Three Months Ended March 31,

 
  

2023

      

2022

     
  

Tax

  

Rate

  

Tax

  

Rate

 

Income Taxes:

                

Current

 $132   4% $-   0%

Deferred

  315   10%  -   0%
                 

Total income tax expense

 $447   15% $-   0%

 

For the three months ended March 31, 2023, the effective tax rate differs from the statutory tax rate of 21% primarily due to the tax-exempt interest income earned on certain investment securities, bank owned life insurance, and federal tax credits. For the three months ended March 31, 2022, the effective tax rate differs from the statutory tax rate of 21% primarily due to tax exempt interest income earned on certain investment securities, bank owned life insurance, federal tax credits and a net operating loss carryforward that was completely utilized at the end of 2022.

 

36

  

Item 2: Managements 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, 2022.

 

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, 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 2023. 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.

 

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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. On January 1, 2023 the Company adopted the Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses”, more commonly referred to as CECL which requires an assessment of the Company’s held to maturity debt securities for expected credit losses.

 

Allowance for credit losses on loans and leases and unfunded lending commitments

The Company’s most critical accounting policy relates to its allowance for credit losses on loans and leases and unfunded lending commitments, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The allowance for credit losses on loans and leases and unfunded lending commitments 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 allowance for credit losses on loans and leases and unfunded commitments. 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 allowance for loans and leases and unfunded lending commitments is adequate and appropriate for all periods presented in these financial statements. 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.

 

On January 1, 2023 the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses”, more commonly referred to as CECL. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses).

 

The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets).

 

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In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets.

 

CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.

 

Estimating an appropriate ACL involves a high degree of Management judgment. As such, it is Management’s responsibility to record the Bank’s best estimate of expected credit losses and provide it to the Board of Directors.

 

The analysis will be prepared and reported to the Board of Directors on a quarterly basis. The option and decision to prepare the analysis more frequently will remain with Management.

 

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. The Company uses 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 the consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for credit losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in the consolidated statement of condition. The Company must also assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent Management believes that recovery is not likely, the Company must establish a valuation allowance. Significant Management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, the Company must include an expense or a benefit within the tax provisions in the consolidated statement of income.

 

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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, 2023 and 2022 is included in the table below (in thousands).

 

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES

 

For the Three Months Ended March 31,

 

2023

   

2022

 
                 

Interest income reconciliation:

               
                 

Interest income - taxable equivalent

  $ 8,498     $ 5,033  

Taxable equivalent adjustment

    (61 )     (94 )
                 

Interest income (GAAP)

  $ 8,437     $ 4,939  
                 

Net interest income reconciliation:

               
                 

Net interest income - taxable equivalent

  $ 7,111     $ 4,874  

Taxable equivalent adjustment

    (61 )     (94 )
                 

Net interest income (GAAP)

  $ 7,050     $ 4,780  

 

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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 $2,623,000 for the first quarter of 2023 compared with net income of $924,000 for the first quarter of 2022. Results in 2023 included an increase in net income attributable to higher interest income on securities along with higher interest income on overnight fed funds due to an increase in interest rates.

 

Managing the net interest margin is a key component of the Company’s earnings strategy. During 2022, the Federal Reserve increased rates by 200 basis points and increased again 50 basis points in the first quarter of 2023 in an effort to slow inflation. As a result, net interest income increased $2,270,000 in 2023 as compared with 2022. This increase was attributable to higher interest income on securities and loans along with higher interest income on overnight fed funds due to an increase in interest rates.

 

Monitoring asset quality, estimating potential losses in our loan portfolio, unfunded lending commitments and held to maturity debt securities and addressing non- performing loans continue to be a major focus of the Company. On January 1, 2023, the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses,” more commonly referred to as CECL, on a modified retrospective basis. Upon adoption, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $81,000, this adjustment included adjustments to the allowance for credit losses on loans, unfunded lending commitments and held to maturity debt securities. A net provision for credit losses on loans and unfunded lending commitments of $15,000 was recorded in the first quarter of 2023. The Company has worked diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $1,337,000 and $1,441,000 at March 31, 2023 and December 31, 2022, 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 $113,000 for the three months ended March 31, 2023 as compared with 2022 results. The increase was due to higher trust department income and fees.

 

Non-interest expense increased $247,000 for the three months ended March 31, 2023, as compared with 2022 results. This increase for the three months ended March 31, 2023 was primarily due to an increase in salary and benefits of $225,000, an increase in legal expense of $27,000 and an increase in other expense of $156,000.

 

Total assets at March 31, 2023 increased $123,689,000 as compared with December 31, 2022. Total deposits increased $116,663,000 as governmental entities’ balances increased due to tax collections. The increase in deposits was primarily used to fund the purchase of primarily held to maturity debt securities and interest-bearing and non-interest bearing cash, which increased $87,820,000 and $37,119,000, respectively as compared with December 31, 2022.

 

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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 $84,985,000, or 11%, from approximately $806,312,000 for the first quarter of 2022 to approximately $891,297,000 for the first quarter of 2023. The Company’s average balance sheet increased primarily as average investments increased approximately $91,607,000, slightly offset by a decrease in average loans of approximately $1,410,000 and average balances due from financial institutions decreased approximately $5,212,000 for the first quarter of 2023 as compared with the first quarter of 2022. Average loans decreased as principal payments, 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 held to maturity debt securities.

 

The average yield on interest-earning assets increased from 2.50% for the first quarter of 2022 to 3.81% for the first quarter of 2023. This increase is due to an increase in interest rates on overnight fed funds, loans, and securities in 2023.

 

Average interest-bearing liabilities increased approximately $112,502,000, or 19%, from approximately $580,027,000 for the first quarter of 2022 to approximately $692,529,000 for the first quarter of 2023. Average interest-bearing deposit balances increased approximately $112,566,000 as several large public fund customers maintained higher balances with the Bank in 2023.

 

The average rate paid on interest bearing liabilities for the first quarter of 2022 was .11% as compared with .80% for the first quarter of 2023. Since the Federal Reserve increased rates 425 basis points since 2022, the Federal Reserve has increased rates 50 basis points during the first quarter of 2023 which has caused the bank to experience a rising cost of funds.

 

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.42% for the quarter ended March 31, 2022 and 3.19% for the quarter ended March 31, 2023.

 

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters ended March 31, 2023 and 2022.

 

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

 

   

Three Months Ended March 31, 2023

   

Three Months Ended March 31, 2022

 
   

Average Balance

   

Interest Earned/Paid

   

Rate

   

Average Balance

   

Interest Earned/Paid

   

Rate

 

Loans (2)(3)

  $ 235,131     $ 2,977       5.06 %   $ 236,541     $ 2,694       4.56 %
                                                 

Balances due from financial institutions

    83,597       907       4.34 %     88,809       39       0.18 %
                                                 

HTM:

                                               

Taxable

    183,977       1,554       3.38 %     71,302       452       2.54 %
                                                 

Non taxable (1)

    37,396       267       2.86 %     37,694       262       2.78 %
                                                 

AFS:

                                               

Taxable

    344,907       2,735       3.17 %     364,326       1,543       1.69 %
                                                 

Non taxable (1)

    4,114       31       3.11 %     5,487       42       3.06 %
                                                 

Other

    2,175       28       4.97 %     2,153       1       0.19 %
                                                 

Total

  $ 891,297     $ 8,498       3.81 %   $ 806,312     $ 5,033       2.50 %

Savings & interest- bearing DDA

  $ 651,713     $ 1,337       0.82 %   $ 491,784     $ 104       0.08 %
                                                 

Time deposits

    39,998       41       0.41 %     87,361       49       0.22 %
                                                 

Borrowings from FHLB

    818       9       4.40 %     882       6       2.72 %
                                                 

Total

  $ 692,529     $ 1,387       0.80 %   $ 580,027     $ 159       0.11 %
                                                 

Net tax-equivalent spread

                    3.01 %                     2.39 %

Net tax-equivalent margin on earning assets

                    3.19 %                     2.42 %

 

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2023 and 2022. See disclosure of Non-GAAP financial measures on page 40.

(2) Loan fees of $76 and $230 for 2023 and 2022, respectively, are included in these figures. Of the loan fees recognized in 2022, $59 were related to PPP loans.

(3) Includes nonaccrual loans.

 

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

 

   

For the Three Months Ended

 
   

March 31, 2023 compared with March 31, 2022

 
   

Volume

   

Rate

   

Rate/Volume

   

Total

 

Interest earned on:

                               
                                 

Loans

  $ (16 )   $ 300     $ (2 )   $ 282  
                                 

Balances due from financial institutions

    (2 )     925       (54 )     869  
                                 

Held to maturity securities:

                               

Taxable

    714       150       237       1,101  

Non taxable

    (2 )     7       -       5  
                                 

Available for sale securities:

                               

Taxable

    (82 )     1,346       (72 )     1,192  

Non taxable

    (11 )     1       -       (10 )
                                 

Other

    -       26       -       26  
                                 

Total

  $ 601     $ 2,755     $ 109     $ 3,465  
                                 

Interest paid on:

                               
                                 

Savings & interest-bearing DDA

  $ 34     $ 905     $ 294     $ 1,233  
                                 

Time deposits

    (27 )     41       (22 )     (8 )
                                 

Borrowings from FHLB

    -       3       -       3  
                                 

Total

  $ 7     $ 949     $ 272     $ 1,228  

 

Provision for Credit 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 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 credit losses on loans computation.

 

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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 has adopted the CECL (Current Expected Credit Losses) methodology for estimating allowances for credit losses effective January 1, 2023. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets) including: financing receivables such as loans held for investment, held to maturity debt securities, off-balance-sheet credit exposures (unfunded commitments) including off-balance sheet loan commitments; standby letters of credit; and other similar instruments.

 

In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets. The following represents an overview of key factors regarding CECL: CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.

 

As stated above, CECL also applies to held to maturity debt securities since they are carried at amortized cost and are within the scope of the standard. Therefore, it is the responsibility of management to establish any required allowances for credit losses on the Bank’s held to maturity debt securities as of the date the Bank adopts CECL and to maintain such allowances thereafter. Because CECL requires the Bank to measure expected credit losses on a collective or pool basis when similar risk characteristics exist, held to maturity debt securities that share similar risk characteristics are collectively assessed for credit losses.

 

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Estimating an appropriate ACL involves a high degree of management judgment. As such, it is Management’s responsibility to record the Bank’s best estimate of expected credit losses and provide it to the Board of Directors. The analysis will be prepared and reported to the Board of Directors on a quarterly basis. The option and decision to prepare the analysis more frequently will remain with management.

 

Estimation Methods for Expected Credit Losses-Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses,” does not require the use of a specific loss estimation method for purposes of determining ACLs. Various methods may be used to estimate the expected collectability of financial assets, with those methods generally applied consistently overtime. The same loss estimation method does not need to be applied to all financial assets. Loss-rate methods can involve a variety of approaches, and Management incorporates the methods below:

 

Open Pool or Snapshot Method

The starting point for the calculation consists of assets that are outstanding at the end of a given time frame and are made up of assets that were originated in various years. Additional assets may be added to pools of loans under an open pool method.

 

Weighted Average Remaining Maturity (WARM) Method

A loss-rate method that estimates expected credit losses over the remaining life of the financial assets and uses a weighted average of the assets’ contractual terms to estimate the pool’s remaining contractual term. The WARM method uses average annual net charge-off rates and the amortization adjusted remaining life plus qualitative adjustments to estimate the ACLs.

 

Qualitative Factor Adjustments

The estimation of ACLs is to reflect consideration of all significant factors relevant to the expected collectability of the Bank’s financial assets as of the reporting date. Management begins their expected credit loss estimation process by determining the Bank’s historical loss information or utilizing reliable and relevant peer group (UPBR, State, custom) historical loss proxy data for each segment of financial assets with similar risk characteristics.

 

Senior Management is to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.

 

Historical loss experience generally provides a quantitative starting point for Management’s estimate of expected credit losses. Consistent with FASB ASU Topic 326, Management must consider relevant qualitative factors that may cause the CECL estimate of the financial asset portfolio as of the evaluation date to differ from the historical loss experience.

 

46

 

Management is to consider the qualitative factors that are relevant to the Bank as of the reporting date, which may include but are not limited to the:

 

1.

Nature and volume of the Bank’s financial assets.

 

2.

Existence, growth, and effect of any concentrations of credit.

 

3.

Volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Adversely classified or graded loans are loans rated “substandard” (or its equivalent) or worse under the institution’s loan classification system.

 

4.

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

 

5.

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

 

6.

Quality of the Bank’s credit review function.

 

7.

Experience, ability, and depth of the Bank’s lending, investment, collection, and other relevant management and staff.

 

8.

Effect of other external factors such as the regulatory, legal, and technological environments, competition, and events such as natural disasters.

 

9.

Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets. Changes in economic and business conditions and developments included in qualitative factor adjustments are limited to those that affect the collectability of the Bank’s financial assets and are relevant to the Bank’s financial asset portfolios. For example, an economic factor for current or forecasted unemployment at the national or state level may indicate a strong job market based on low national or state unemployment rates, but a local unemployment rate, which may be significantly higher because of the actual or forecasted loss of a major local employer, may be more relevant to the collectability of an institution’s financial assets.

 

The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Nonaccrual loans totaled $1,337,000 and $1,441,000 there were $40,000 and $124,000 specific reserves on these loans, at March 31, 2023 and December 31, 2022, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover credit losses on loans or the loan balances have been charged down to their realizable value.

 

The allowance for credit losses on loans and leases as a percentage of loans was 1.38% at March 31, 2023 and 1.40% at December 31, 2022, respectively. The Company believes that its allowance of credit losses on loans and leases is appropriate as of March 31, 2023.

 

The allowance for credit losses on loans and leases 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 on loan performance, which may require an adjustment to the allowance for credit losses on loans and leases. 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 $113,000 for the first quarter of 2023 as compared with the first quarter of 2022. Trust department income and fees increased $146,000 due to a recent acquisition offset slightly by a decrease in service charge fees.

 

Non-interest expense

Total non-interest expense increased $247,000 for the first quarter of 2023 as compared with the first quarter of 2022. Salary and employee benefit expense increased by $225,000 in 2023 as compared to 2022.

 

47

 

Income Taxes

During the fourth quarter of 2022, the Company determined that it was more likely than not that it would realize a certain amount of its deferred tax assets. Prior to that time, the Company had recorded a valuation allowance against its net deferred tax asset. As of December 31, 2022, the Company no longer had a net operating loss carryforward and its projections of future income indicate that reversal of a portion of the valuation allowance was appropriate.

 

The Company has started to record deferred and current income tax expense in the first quarter of 2023. Income tax expense for the three months ended March 31, 2023 and 2022 was $477,000 and $0, respectively. The effective tax rate for the three months ended March 31, 2023 and 2022 was 15% and 0%, respectively.

 

 

FINANCIAL CONDITION

 

Cash and due from banks increased $37,119,000 at March 31, 2023, compared with December 31, 2022 in the management of the Bank’s liquidity position.

 

Available for sale securities decreased $1,325,000 at March 31, 2023, compared with December 31, 2022. During the first quarter of 2023, there were $10,651,000 in purchases that combined with an increase in market value for available for sale securities acquired in prior periods of $5,051,000 that helped offset maturities of $17,048,000. As discussed in Note 4, the Company evaluates the change in the market value of its available for sale securities on a monthly basis. This evaluation considers a number of factors including the cause of a decline or increase in value. Any unrealized losses identified through this analysis during the quarter ended March 31, 2023, 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 the unrealized losses recorded during 2022 and 2023 were significant, management does not anticipate these losses to be other than temporary.

 

Held to maturity debt securities increased $87,820,000 at March 31, 2023, compared with December 31, 2022. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $32,000 specifically as a provision on held to maturity debt securities. There was no additional provision recorded on held to maturity debt securities as of March 31, 2023.

 

Total deposits increased $116,663,000 at March 31, 2023, compared with December 31, 2022. 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.

 

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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, 2023, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank 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 actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of March 31, 2023 and December 31, 2022, are as follows (in thousands):

 

                   

For Capital Adequacy

                 
   

Actual

   

Purposes

   

To Be Well Capitalized

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

March 31, 2023:

                                               

Total Capital (to Risk Weighted Assets)

  $ 104,156       22.26 %   $ 37,428       8.00 %   $ 46,785       10.00 %

Common Equity Tier 1 Capital (to Risk Weighted Assets)

    100,785       21.54 %     21,053       4.50 %     30,410       6.50 %

Tier 1 Capital (to Risk Weighted Assets)

    100,785       21.54 %     28,071       6.00 %     37,428       8.00 %

Tier 1 Capital (to Average Assets)

    100,785       10.01 %     40,260       4.00 %     50,324       5.00 %
                                                 

December 31, 2022:

                                               

Total Capital (to Risk Weighted Assets)

  $ 101,221       21.18 %   $ 38,239       8.00 %   $ 47,799       10.00 %

Common Equity Tier 1 Capital (to Risk Weighted Assets)

    97,883       20.48 %     21,510       4.50 %     31,069       6.50 %

Tier 1 Capital (to Risk Weighted Assets)

    97,883       20.48 %     28,680       6.00 %     38,239       8.00 %

Tier 1 Capital (to Average Assets)

    97,883       10.78 %     36,328       4.00 %     45,410       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.

 

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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 maintains a well-capitalized balance sheet which includes strong capital and liquidity. The Bank provides a full range of banking, financial and trust services in our local markets. The majority of the Bank’s deposits are fully FDIC insured and the Company evaluates on an ongoing and continuous basis it’s financial health by preparing for various moderate to severe economic scenarios.

 

Item 4: Controls and Procedures

As of March 31, 2023, 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) and 15d-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 SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting
An evaluation was performed with respect to the first quarter of 2023, 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 Rule 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, because a previously reported material weakness in the Company’s internal control over financial reporting related to a low-income housing partnership had not been fully remediated by March 31, 2022, the Company’s disclosure controls and procedures were not considered to be fully effective as of that date. The material weakness in the Company’s internal control over financial reporting and the Company’s remediation measures are described under Item 4 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, which is incorporated herein by reference. We believe the actions described in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, were sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting for low- income housing partnerships and that the material weakness in the Company’s internal controls over financial reporting for low-income housing partnerships was fully remediated prior to December 31, 2022.

 

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Material Weakness in 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’s management, including our Chief Executive Officer and Chief Financial Officer, identified prior to December 31, 2022, a material weakness related to the Company’s internal control over financial reporting for deprecation related to bank premises and equipment and recorded a related error correction in previously issued financial statements.

 

Even though the Company has concluded that this 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, had it not been corrected, could have resulted in a future failure to estimate deprecation for bank premises and equipment that could create 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) reasonable estimates are used for depreciation on bank premises and equipment (ii) sub-ledger calculations of deprecation on bank premises and equipment are reconciled each period to general ledger amounts, and (iii) in-house accounting personnel have training to ensure they have the relevant expertise related to such estimates to the extent necessary to account for any similar estimates made or used in the future.

 

We believe the actions described above were sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting for depreciation of bank premises and equipment, and that the material weakness in the Company’s internal controls over financial reporting for deprecation of bank premises and equipment was fully remediated prior to December 31, 2022.

 

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 are expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company. However, a Complaint has been filed by Stilwell Activist Investments, L.P., against the Company in the Chancery Court of Harrison County, Mississippi, requesting that the Company be compelled to allow the plaintiff to inspect and copy certain corporate records of the Company. The plaintiff, Stilwell Activist Investments, L.P., is a shareholder of record of the Company and is controlled by Joseph Stilwell, an individual who beneficially owns 11.7% of the issued and outstanding common stock of the Company according to an Amended Schedule 13D filed by Mr. Stilwell and his related entities with the SEC on April 19, 2023, disclosing Company stock beneficially owned by Mr. Stilwell’s group. Mr. Stilwell and his related entities, including Stilwell Activist Investments, L.P., have nominated an individual for election to the Board of Directors of the Company at its last three annual meetings, but each individual nominated was not elected to the Board of Directors of the Company. The Complaint filed by Stilwell Activist Investments, L.P., alleges that it is entitled to inspect and copy certain Company records under the Mississippi Business Corporations Act based upon a request previously made and refused by the Company for non-compliance with state law; however, the plaintiff does not seek damages. The Company disputes the allegations in the Complaint. The Company filed on August 26, 2022, an answer to the Complaint disputing the allegations therein.

 

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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, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Condition at March 31, 2023 and December 31, 2022, (ii) Consolidated Statements of Income for the quarters ended March 31, 2023 and 2022, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2023 and 2022, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended March 31, 2023 and 2022, (v) Consolidated Statements of Cash Flows for the quarters ended March 31, 2023 and 2022 and (vi) Notes to the Unaudited Consolidated Financial Statements for the quarters ended March 31, 2023 and 2022.

  Exhibit 104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

 

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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 15, 2023          

 

 

By:   /s/ Chevis C. Swetman   

Chevis C. Swetman

Chairman, President and Chief Executive Officer

(principal executive officer)

 

 

Date:          May 15, 2023     

 

 

By:       /s/ Leslie B. Fulton       

Leslie B. Fulton

Chief Financial Officer and Controller

(principal financial and accounting officer)

 

 

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