PFBX 10-Q Quarterly Report June 30, 2024

PEOPLES FINANCIAL CORP /MS/

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pfbx20240630_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

June 30, 2024

☐ 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:

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

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

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

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

Large accelerated filer ☐	Accelerated filer ☐	Smaller reporting company ☒
Non-accelerated filer ☐		Emerging growth company ☐

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

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

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At July 31, 2024, there were 15,000,000 shares of $1 par value common stock authorized, with 4,661,686 shares issued and outstanding.

Part 1 – Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

	June 30, 2024		December 31, 2023
	(unaudited)		(audited)

Assets
Cash and due from banks	$	17,526	$	22,794

Available for sale securities, amortized cost of $ 446,256 at June 30, 2024; $ 379,195 at December 31, 2023		407,552		339,477

Held to maturity securities, fair value of $ 120,989 at June 30, 2024; $ 138,523 at December 31, 2023		134,060		150,941

Less: Allowance for credit losses on held to maturity securities		30		30

Held to maturity securities, net		134,030		150,911

Other investments		350		350

Federal Home Loan Bank Stock, at cost		3,180		2,334

Loans		238,740		238,339

Less: Allowance for credit losses on loans and leases		3,150		3,224

Loans, net		235,590		235,115

Bank premises and equipment, net of accumulated depreciation		19,376		19,470

Accrued interest receivable		3,839		3,520

Cash surrender value of life insurance		21,701		21,375

Intangible asset		507		538

Other assets		3,096		1,854

Total assets	$	846,747	$	797,738

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

	June 30, 2024			December 31, 2023
	(unaudited)			(audited)
Liabilities and Shareholders' Equity
Liabilities:

Deposits:

Demand, non-interest bearing	$	183,643		$	174,933

Savings and demand, interest bearing		464,170			483,662

Time, $250,000 or more		6,161			7,518

Other time deposits		20,940			22,377

Total deposits		674,914			688,490

Advances from Federal Home Loan Bank		46,500			18,500

Borrowings under Bank Term Funding Program		30,000			-

Employee and director benefit plans liabilities		19,335			19,581

Other liabilities		1,798			1,884

Total liabilities		772,547			728,455

Shareholders' Equity:
Common stock, $ 1 par value, 15,000,000 shares authorized, 4,661,686 shares issued and outstanding at June 30, 2024 and December 31, 2023		4,662			4,662

Surplus		65,780			65,780

Undivided profits		41,479			37,574

Accumulated other comprehensive loss		( 37,721	)		( 38,733	)

Total shareholders' equity		74,200			69,283

Total liabilities and shareholders' equity	$	846,747		$	797,738

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data) (unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2024		2023			2024		2023
Interest income:
Interest and fees on loans	$	3,465	$	3,295		$	7,027	$	6,272

Interest and dividends on securities:

U.S. Treasuries		2,510		2,205			4,188		3,866

Mortgage-backed securities		598		881			1,326		1,799

States and political subdivisions		967		1,074			2,004		2,180

Collateralized mortgage obligations		800		869			1,655		1,709

Other investments		36		29			75		57

Interest on balances due from depository institutions		319		297			1,349		1,204

Total interest income		8,695		8,650			17,624		17,087

Interest expense:
Deposits		2,155		1,447			4,193		2,825

Borrowings		637		1			835		10

Total interest expense		2,792		1,448			5,028		2,835

Net interest income		5,903		7,202			12,596		14,252


Provision for credit losses		-		( 312	)		-		( 297	)

Net interest income after provision for credit losses	$	5,903	$	7,514		$	12,596	$	14,549

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data) (unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024		2023
Non-interest income:
Trust department income and fees	$	617		$	634		$	1,235	$	1,224

Service charges on deposit accounts		858			884			1,676		1,753

Increase in cash surrender value of life insurance		120			117			240		232

Gain (loss) on sale of property, plant and equipment, net		-			-			42		-

Other income		166			168			311		301

Total non-interest income		1,761			1,803			3,504		3,510
Non-interest expense:
Salaries and employee benefits		2,670			2,948			5,170		5,815

Net occupancy		549			495			1,086		958

Equipment rentals, depreciation and maintenance		754			681			1,455		1,344

FDIC and state banking assessments		90			116			198		233

Data processing		330			306			644		648

ATM expense		149			( 72	)		403		169

Other real estate expense		-			46			-		37

Legal expense		208			180			320		309

Other expense		814			896			1,678		1,755

Total non-interest expense		5,564			5,596			10,954		11,268

Income before income taxes		2,100			3,721			5,146		6,791

Income tax expense		( 229	)		811			402		1,258

Net income	$	2,329		$	2,910		$	4,744	$	5,533

Basic and diluted earnings per share	$	0.50		$	0.62		$	1.02	$	1.18
Dividends declared per share	$	0.18		$	0.12		$	0.18	$	0.12

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2024		2023			2024		2023

Net income	$	2,329	$	2,910		$	4,744	$	5,533

Other comprehensive income (loss):

Net unrealized gain (loss) on available for sale securities		2,047		( 610	)		1,012		4,441


Total other comprehensive income (loss)		2,047		( 610	)		1,012		4,441

Total comprehensive income (loss)	$	4,376	$	2,300		$	5,756	$	9,974

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders ’ Equity

(in thousands except share data) (unaudited)

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

Balance, January 1, 2023		4,678,186	$	4,678	$	65,780	$	31,154		$	( 46,418	)	$	55,194
Cumulative effect of accounting change								( 81	)					( 81	)

Total shareholders' equity at beginning of period, as adjusted		4,678,186		4,678		65,780		31,073			( 46,418	)		55,113
Net income								2,623						2,623
Other comprehensive income											5,051			5,051
Balance, March 31, 2023		4,678,186	$	4,678	$	65,780	$	33,696		$	( 41,367	)	$	62,787
Net income								2,910						2,910
Other comprehensive (loss)											( 610	)		( 610	)
Dividend declared ($ 0.12 per share)								( 561	)					( 561	)
Balance, June 30, 2023		4,678,186	$	4,678	$	65,780	$	36,045		$	( 41,977	)	$	64,526

Balance, January 1, 2024		4,661,686	$	4,662	$	65,780	$	37,574		$	( 38,733	)	$	69,283
Net income								2,415						2,415
Other comprehensive income (loss)											( 1,035	)		( 1,035	)
Balance, March 31, 2024		4,661,686	$	4,662	$	65,780	$	39,989		$	( 39,768	)	$	70,663
Net income								2,329						2,329
Other comprehensive income											2,047			2,047
Dividend declared ($ 0.18 per share)								( 839	)					( 839	)
Balance, June 30, 2024		4,661,686	$	4,662	$	65,780	$	41,479		$	( 37,721	)	$	74,200

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

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

	Six Months Ended June 30,
	2024			2023
Cash flows from operating activities:
Net income	$	4,744		$	5,533

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

Depreciation		815			738

Provision for credit losses		-			( 297	)

Amortization of intangible asset		31			31

(Accretion) amortization of available for sale securities		( 1,780	)		( 56	)

Amortization (accretion) of held to maturity securities		168			( 1,819	)

Gain on sale of bank premises and equipment		( 42	)		-

Loss (gain) on sales of other real estate		-			62

Change in accrued interest receivable		( 319	)		( 49	)

Increase in cash surrender value of life insurance		( 240	)		( 232	)

Change in deferred tax		( 70	)		( 939	)

Change in other assets		( 1,171	)		837

Change in employee and director benefit plan liabilities and other liabilities		( 332	)		( 6	)
Net cash provided by operating activities	$	1,804		$	3,803

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

	Six Months Ended June 30,
	2024			2023
Cash flows from investing activities:
Proceeds from maturities of available for sale securities	$	97,786		$	35,914

Purchases of available for sale securities		( 163,069	)		( 10,651	)

Proceeds from maturities of held to maturity securities		16,713			137,087

Purchases of held to maturity securities		-			( 162,970	)

Purchases of Federal Home Loan Bank stock		( 846	)		( 46	)

Loans, net change		( 484	)		2,821

Proceeds from sales of other real estate		9			197

Acquisition of bank premises and equipment		( 741	)		( 1,642	)

Proceeds from sale of bank premises and equipment		61			-

Investment in cash surrender value of life insurance		( 86	)		( 90	)
Net cash (used in) provided by investing activities		( 50,657	)		620
Cash flows from financing activities:
Demand and savings deposits, net change		( 10,782	)		29,043

Time deposits, net change		( 2,794	)		( 4,325	)

Borrowings from Federal Home Loan Bank		444,050			27,100

Repayments to Federal Home Loan Bank		( 416,050	)		( 27,100	)

Borrowings under Bank Term Funding Program		30,000			-

Cash dividends		( 839	)		( 561	)

Net cash provided by financing activities		43,585			24,157
Net (decrease) increase in cash and cash equivalents		( 5,268	)		28,580
Cash and cash equivalents, beginning of period		22,794			32,836
Cash and cash equivalents, end of period	$	17,526		$	61,416

Supplemental disclosures of noncash investing activities
Transfer from loans to other real estate owned	$	9		$	952

See Notes to Consolidated Financial Statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2024 and 2023

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Presentation:

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

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the consolidated financial position of the Company and its subsidiaries as of June 30, 2024 and December 31, 2023 the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2023 Annual Report and Form 10-K.

CRITICAL ACCOUNTING POLICIES

The results of operations for the quarter and six months ended June 30, 2024, are not necessarily indicative of the results to be expected for the full year.

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

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 June 30, 2024 and December 31, 2023 were as follows:

Real Estate Loans

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

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

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

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

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

Accounting Standards Update –In March 2024, the Financial Accounting Standards Board issued Accounting Standards Update 2024-02 (“ASU 2024-02”), Codification Improvements-Amendments to Remove References to the Concepts Statements. ASU 2024-02 removes various references to the FASB’s Concepts Statements from the FASB’s Accounting Standards Codification (Codification or GAAP). The Concepts Statements are non-authoritative guidance issued by the FASB that provide the objectives, qualitative characteristics and other concepts that govern the development of accounting principles by the FASB. ASU 2024-02 applies to all reporting entities and updates the Codification by eliminating 16 discrete references to the Concepts Statements across a variety of defined terms and Topics within the Codification. Codification users should review the entirety of ASU 2024-02 to assess any effects that the amendments may have on entities that are within the ASU’s scope. The FASB does not expect these updates to have a significant effect on current accounting practice. That is because in most cases the amendments to the Codification remove references to Concept Statements that are extraneous and not required to understand or apply the guidance. However, the FASB has provided transition guidance if applying the updated guidance results in accounting changes for some entities. The amendments in ASU 2024-02 are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amended guidance is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. An entity can adopt ASU 2024-02 either on a prospective basis to all new transactions recognized on or after the date that the entity first applies the amendments, or retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. Management has evaluated the impact of the adoption of this standard and determined there would be no material impact to the Company’s consolidated financial position or results of operations.

Accounting Standards Update –In March 2024, the Financial Accounting Standards Board issued Accounting Standards Update 2024-01 (“ASU 2024-01”), Compensation-Stock Compensation (Topic 718): Scope of Application of Profits Interest and Similar Awards. ASU 2024-01 provides illustrative guidance to clarify the scope application of profits interest and similar awards. It clarifies how an entity determines where a profits interest or similar award is within the scope of ASC 718 or not a share-based payment arrangement and therefore within the scope of other guidance. For certain public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes that interim period. The amendments in this Update should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments. If the amendments are applied retrospectively, an entity is required to provide the disclosures in the period of adoption. If the amendments are applied prospectively, an entity is required to disclose the nature of and reason for the change in accounting principle. Management has evaluated the impact of the adoption of this standard and determined there would be no impact to the Company’s consolidated financial position or results of operations.

Accounting Standards Update –In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments of ASU 2023-09 relate to the rate reconciliation and income taxes paid disclosures to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. The other amendments in this update improve the effectiveness and comparability of disclosures by (1) adding disclosures of pretax income (or loss) and income tax expense (or benefit) to be consistent with U.S. Securities and Exchange Commission (SEC) Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense, and (2) removing disclosures that no longer are considered cost beneficial or relevant. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this update should be applied on a prospective basis. Retrospective application is permitted. Management has evaluated the impact of the adoption of this standard and determined there may be additional information required within the Company’s notes to consolidated financial statements on income taxes.

There were no 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, 2023.

On January 1, 2023, the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses,” more commonly referred to as CECL, on a modified retrospective basis. The provisions of this guidance required a material change to the manner in which the Company estimated and reported losses on financial instruments, including loans and unfunded lending commitments, select securities and other assets carried at amortized cost.

Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets) including: financing receivables such as loans held for investment, held to maturity debt securities, off-balance-sheet credit exposures (unfunded commitments) including off-balance sheet loan commitments; standby letters of credit; and other similar instruments. The ACL is comprised of the Allowance for Loan and Lease Losses (ALLL), a valuation account available to absorb losses on loans and leases held for investment, and the Reserve for Unfunded Lending Commitments, a liability established to absorb credit losses for the expected life of the contractual term of on and off-balance sheet exposures as of the date of the determination.

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

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

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

Open Pool or Snapshot Method

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

Weighted Average Remaining Maturity (WARM) Method

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

Qualitative Factor Adjustments

The estimation of ACLs is to reflect consideration of all significant factors relevant to the expected collectability of the Bank’s financial assets as of the reporting date. Management begins their expected credit loss estimation process by determining the Bank’s historical loss information.

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

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

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

Nature and volume of the Bank’s financial assets.

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

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.

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

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

Quality of the Bank’s credit review function.

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

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

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.

The analysis and methodology used for estimating the ACL includes two primary elements: a collective approach for pools of loans that have similar risk characteristics and a specific reserve analysis for credits individually evaluated for credit loss. The WARM method uses comparable historical lookback periods as proxies for projecting future trends and employs a qualitative (“Q”) factor component in the projections which represents expected differences in current and forecasted conditions from historical loss information or conditions. The main methodology approach includes comparable risk pools which are segregated by call report loan category, unadjusted loss estimation which is a combination of open pool/snapshot and weighted average remaining maturity, comparable or “look back” periods, which the Bank chooses to best approximate the expected future loss environment for the WARM time period. The WARM time period considers the average amortized remaining life adjusted by prepayment assumptions based on peer data.

For the collective approach, the Bank segments loans into real estate-residential, real estate-nonresidential, real estate-construction and land development, commercial and industrial, and consumer/other, with further segmentation by region and sub-portfolio, as deemed appropriate. Both quantitative and qualitative factors are applied at the portfolio segment levels. The Bank applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables. The Bank reverses interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if management believes the collection of interest is doubtful. Management believes this policy results in the timely reversal of uncollectible interest.

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

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

The Bank maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., the commitment cannot be canceled at any time). The initial default loss rates are then estimated by taking expected future lifetime loss rates of the loan categories that are included in each unfunded commitment segment and dividing the lifetime rate by their respective WARMs to derive an annual loss rate estimate. The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical study and empirical data calculated by the Federal Deposits Insurance Corporation, and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is classified on the Consolidated Statement of Condition within other liabilities.

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

The CECL standard also requires an assessment of the Bank’s held to maturity debt securities for expected credit losses and the available for sale debt securities for credit-related impairment. The Bank applies the practical expedient to exclude the accrued interest receivable balance of $ 1,055,503 from the amortized cost basis of held to maturity debt securities. The allowance for credit losses on held to maturity debt securities is estimated on a collective or pool basis when similar risk characteristics exist; held to maturity debt securities that share similar risk characteristics are collectively assessed for credit losses. A separate contra valuation account is available to absorb losses on securities. The allowance for credit loss is limited to the amount by which the fair value is less than the amortized cost basis. The Bank evaluates credit impairment on available for sale debt securities at an individual security level. This evaluation is done for securities whose fair value is below amortized cost with a more than inconsequential risk of default and where the Bank has assessed the decline in fair value is significant enough to suggest a credit event occurred. Credit events are generally assessed based on adverse conditions specifically related to the security, an industry, or geographic area, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, changes in the financial condition of the underlying loan obligors. The allowance for credit losses for such securities is measured using a discounted cash flow methodology, through which management compares the present value of expected cash flows with the amortized cost basis of the security. The allowance for credit loss is limited to the amount by which the fair value is less than the amortized cost basis. If the Bank intends to sell the debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the security is charged down to fair value against the allowance for credit losses, with any incremental impairment reported in earnings.

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

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,661,686 and 4,678,186 for the six months ended June 30, 2024 and 2023, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $ 5,039,127 and $ 2,834,955 for the six months ended June 30, 2024 and 2023, respectively, for interest on deposits and borrowings. The Company paid $ 835,000 and $ 255,000 in estimated income tax payments during the six months ended June 30, 2024 and 2023, respectively. Two loans were transferred to other real estate and the collateral sold during the six months ended June 30, 2024. One loan in the amount of $ 952,000 was transferred to other real estate during the six months ended June 30, 2023.

4. Investments:

Effective January 1, 2023, in conjunction with the adoption of CECL, and again at December 31, 2023 and June 30, 2024, the Company evaluated credit impairment for individual securities available for sale whose fair value was below amortized cost with a more than inconsequential risk of default and where the Company had assessed the decline in fair value significant enough to suggest a credit event occurred. There were no securities that met the criteria of a credit loss event and therefore, no allowance for credit loss was recorded for either period. The Company also evaluated impairment for individual securities held to maturity and determined an allowance for credit loss of $ 41,000 should be established as of January 1, 2023. A reversal of a portion of the impairment of $( 11,346 ) was recorded as of December 31, 2023. No additional impairment was recorded as of June 30, 2024.

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
June 30, 2024	Cost		Gains		Losses			Fair Value
Available for sale securities:
U.S. Treasuries	$	208,437	$	33	$	( 8,754	)	$	199,716

Mortgage-backed securities		49,476		27		( 4,559	)		44,944

Collateralized mortgage obligations		87,288		89		( 5,511	)		81,866

States and political subdivisions		101,055		-		( 20,029	)		81,026
Total available for sale securities	$	446,256	$	149	$	( 38,853	)	$	407,552

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
December 31, 2023	Cost		Gains		Losses			Fair Value
Available for sale securities:
U.S. Treasuries	$	123,945	$	55	$	( 8,542	)	$	115,458

Mortgage-backed securities		52,374		14		( 4,603	)		47,785

Collateralized mortgage obligations		101,316		17		( 6,327	)		95,006

States and political subdivisions		101,560		-		( 20,332	)		81,228
Total available for sale securities	$	379,195	$	86	$	( 39,804	)	$	339,477

There was no allowance for credit losses on available-for-sale securities as of June 30, 2024 or December 31, 2023.

			Gross		Gross					Allowance			Net
	Amortized		Unrealized		Unrealized			Estimated		for Credit			Carrying
June 30, 2024	Cost		Gains		Losses			Fair Value		Losses			Amount
Held to maturity securities:
U.S. Treasuries	$	44,965	$	-	$	( 865	)	$	44,100	$	-		$	44,965

States and political subdivisions		89,095		17		( 12,223	)		76,889		( 30	)		89,065
Total held to maturity securities	$	134,060	$	17	$	( 13,088	)	$	120,989	$	( 30	)	$	134,030

			Gross		Gross					Allowance			Net
	Amortized		Unrealized		Unrealized			Estimated		for Credit			Carrying
December 31, 2023	Cost		Gains		Losses			Fair Value		Losses			Amount
Held to maturity securities:
U.S. Treasuries	$	59,901	$	41	$	( 907	)	$	59,035	$	-		$	59,901

States and political subdivisions		91,040		23		( 11,575	)		79,488		( 30	)		91,010
Total held to maturity securities	$	150,941	$	64	$	( 12,482	)	$	138,523	$	( 30	)	$	150,911

Management analyzed financial data on the state and political subdivision held-to-maturity securities. For the securities that do not have ratings, management assigned a rating based on ratings for similar municipalities. 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, 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. Management utilized a model provided by a third-party vendor to calculate the potential reserve required on the specific securities. 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. At adoption of CECL, management determined there was a reserve required for the allowance for credit losses on held-to-maturity securities. At the end of the year an updated analysis was performed, and management determined a reduction of the provision for credit losses on held to maturity securities was appropriate as of December 31, 2023. No additional provision or reduction was required as of June 30, 2024.

The following table shows a rollforward of the allowance for credit losses on held-to-maturity securities for the six months ended June 30, 2024 and the year ended December 31, 2023 (in thousands):

	State and political
	subdivisions
Balance, December 31, 2023	$	30
Provision for credit losses		-
Charge-offs of securities		-
Recoveries		-
Balance, June 30, 2024	$	30

	State and political
	subdivisions
Balance, December 31, 2022	$	-
Adjustment for adoption of ASU 2016-13		41
Provision for credit losses		( 11	)
Charge-offs of securities		-
Recoveries		-
Balance, December 31, 2023	$	30

The Company monitors the credit quality of the debt securities held-to-maturity through the use of credit ratings. The Company monitors the credit ratings on a quarterly basis. The following table summarizes the amortized cost of debt securities held-to-maturity at June 30, 2024 and December 31, 2023, aggregated by credit quality indicators (in thousands):

	June 30, 2024
Aaa	$	44,965
Aa1/Aa2/Aa3		38,319
A1/A2		3,179
Baa1/Baa2		1,000
Not rated		46,597
Total	$	134,060

	December 31, 2023
Aaa	$	59,901
Aa1/Aa2/Aa3		38,496
A1/A2		3,195
Baa1/Baa2		1,003
Not rated		48,346
Total	$	150,941

At June 30, 2024 and December 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual for the six months ended June 30, 2024 and the year ended December 31, 2023.

The amortized cost and fair value of debt securities at June 30, 2024, (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	$	104,131	$	103,740
Due after one year through five years		111,973		102,829
Due after five years through ten years		47,737		39,422
Due after ten years		45,651		34,751
Mortgage-backed securities		49,476		44,944
Collaterized mortgage obligations		87,288		81,866
Total	$	446,256	$	407,552

Held to maturity securities:
Due in one year or less	$	28,725	$	28,403
Due after one year through five years		44,633		42,157
Due after five years through ten years		38,002		33,199
Due after ten years		22,700		17,230
Total	$	134,060	$	120,989

Available for sale securities with gross unrealized losses at June 30, 2024 and December 31, 2023, 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
Available for Sale	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
June 30, 2024:
U.S. Treasuries	$	103,996	$	155	$	80,698	$	8,599		184,694	$	8,754

Mortgage-backed securities		2,164		6		36,735		4,553		38,899		4,559

Collateralized mortgage obligations		4,560		17		65,032		5,494		69,592		5,511

States and political subdivisions		-		-		80,886		20,029		80,886		20,029
Total	$	110,720	$	178	$	263,351	$	38,675	$	374,071	$	38,853

	Less Than Twelve Months				Over Twelve Months				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
Available for Sale	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
December 31, 2023:
U.S. Treasuries	$	24,750	$	22	$	85,660	$	8,520		110,410	$	8,542

Mortgage-backed securities		2,811		20		38,521		4,583		41,332		4,603

Collateralized mortgage obligations		-		-		90,290		6,327		90,290		6,327

States and political subdivisions		-		-		81,088		20,332		81,088		20,332
Total	$	27,561	$	42	$	295,559	$	39,762	$	323,120	$	39,804

At June 30, 2024, 30 of the 33 Treasuries, 40 of the 46 mortgage-backed securities, 29 of the 33 collateralized mortgage obligations and 74 of the 75 securities issued by states and political subdivisions contained unrealized losses.

There were no sales of available for sale debt securities for the six months ended June 30, 2024 and June 30, 2023.

Securities with a fair value of $ 350,095,185 and $ 296,945,649 at June 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

5. Loans:

The composition of the loan portfolio at June 30, 2024 and December 31, 2023 is as follows (in thousands):

	June 30, 2024		December 31, 2023

Real estate, residential	$	78,889	$	74,296

Real estate, construction		25,162		27,353

Real estate, nonresidential		114,067		115,014

Commercial and industrial		11,626		12,496

Other		8,996		9,180

Total	$	238,740	$	238,339

The age analysis of the loan portfolio, segregated by class of loans, as of June 30, 2024, and December 31, 2023 is as follows (in thousands):

													Loans Past
													Due Greater
	Number of Days Past Due												Than 90
					Greater		Total				Total		Days and
	30 - 59		60 - 89		Than 90		Past Due		Current		Loans		Still Accruing
June 30, 2024:
Real estate, residential	$	444	$	93	$	245	$	782	$	78,107	$	78,889	$	-
Real estate, construction		86		123		-		209		24,953		25,162		-
Real estate, nonresidential		229		13		-		242		113,825		114,067		-
Commercial and industrial		12		-		-		12		11,614		11,626		-
Other		6		30		-		36		8,960		8,996		-

Total	$	777	$	259	$	245	$	1,281	$	237,459	$	238,740	$	-
December 31, 2023:
Real estate, residential	$	207	$	540	$	-	$	747	$	73,549	$	74,296	$	-
Real estate, construction		131		-		-		131		27,222		27,353		-
Real estate, nonresidential		58		-		-		58		114,956		115,014		-
Commercial and industrial		21		-		-		21		12,475		12,496		-
Other		75		30		-		105		9,075		9,180		-

Total	$	492	$	570	$	-	$	1,062	$	237,277	$	238,339	$	-

The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A, B, C, S, D, E or F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. A grade of S will generally be applied to loans for customers who meet the criteria for a grade of C but 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.

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 June 30, 2024 and December 31, 2023 (in thousands). The Company defines vintage as the later of origination, or restructure date.

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2024		2023		2022		2021		2020		Prior		Loans		Term Loans		Total
June 30, 2024:
Real Estate, Residential Loans:
A, B, or C	$	6,570	$	12,109	$	16,419	$	11,493	$	4,609	$	20,975	$	4,254	$	1,040	$	77,469
S		-		-		-		-		-		462		-		-		462
D		-		-		-		-		-		503		-		-		503
E		-		-		-		303		-		152		-		-		455
F		-		-		-		-		-		-		-		-		-
Total Real Estate Residential Loans	$	6,570	$	12,109	$	16,419	$	11,796	$	4,609	$	22,092	$	4,254	$	1,040	$	78,889

Real Estate, Construction Loans:
A, B, or C	$	477	$	619	$	1,538	$	2,031	$	1,282	$	3,613	$	11,662	$	-	$	21,222
S		-		-		-		-		-		-		3,734		-		3,734
D		-		123		-		-		83		-		-		-		206
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Real Estate, Construction Loans	$	477	$	742	$	1,538	$	2,031	$	1,365	$	3,613	$	15,396	$	-	$	25,162

Real Estate,Nonresidential Loans:
A, B, or C	$	996	$	12,205	$	21,254	$	10,613	$	14,148	$	37,272	$	14,799	$	2,688	$	113,975
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		92		-		-		92
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Real Estate, Nonresidential Loans	$	996	$	12,205	$	21,254	$	10,613	$	14,148	$	37,364	$	14,799	$	2,688	$	114,067

Commercial and industrial
A, B, or C	$	846	$	653	$	786	$	761	$	211	$	2,661	$	5,684	$	-	$	11,602
S		-		-		-		-		-		-		-		-		-
D		-		24		-		-		-		-		-		-		24
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Commercial and Industrial Loans	$	846	$	677	$	786	$	761	$	211	$	2,661	$	5,684	$	-	$	11,626

Consumer/Other Loans
A, B, or C	$	1,615	$	4,367	$	1,036	$	640	$	398	$	394	$	508	$	-	$	8,958
S		-		-		-		-		-		-		-		-		-
D		-		30		3		-		-		-		5		-		38
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Consumer/Other Loans	$	1,615	$	4,397	$	1,039	$	640	$	398	$	394	$	513	$	-	$	8,996

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Total
December 31, 2023:
Real Estate, Residential Loans:
A, B, or C	$	11,865	$	17,053	$	12,158	$	4,695	$	5,451	$	17,502	$	4,147	$	401	$	73,272
S		-		-		-		-		-		66		-		-		66
D		-		-		122		-		-		623		-		-		745
E		-		-		-		45		27		141		-		-		213
F		-		-		-		-		-		-		-		-		-
Total Real Estate Residential Loans	$	11,865	$	17,053	$	12,280	$	4,740	$	5,478	$	18,332	$	4,147	$	401	$	74,296

Real Estate, Construction Loans:
A, B, or C	$	1,069	$	2,119	$	2,133	$	1,379	$	38	$	3,966	$	12,827	$	-	$	23,531
S		-		-		-		-		-		-		3,735		-		3,735
D		-		-		-		87		-		-		-		-		87
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Real Estate, Construction Loans	$	1,069	$	2,119	$	2,133	$	1,466	$	38	$	3,966	$	16,562	$	-	$	27,353

Real Estate,Nonresidential Loans:
A, B, or C	$	12,387	$	20,951	$	11,056	$	15,008	$	5,497	$	34,330	$	14,959	$	728	$	114,916
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		98		-		-		98
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Real Estate, Nonresidential Loans	$	12,387	$	20,951	$	11,056	$	15,008	$	5,497	$	34,428	$	14,959	$	728	$	115,014

Commercial and industrial
A, B, or C	$	850	$	1,008	$	831	$	263	$	2,742	$	39	$	6,763	$	-	$	12,496
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		-		-		-		-
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Commercial and Industrial Loans	$	850	$	1,008	$	831	$	263	$	2,742	$	39	$	6,763	$	-	$	12,496

Consumer/Other Loans
A, B, or C	$	5,346	$	1,417	$	841	$	439	$	234	$	304	$	508	$	52	$	9,141
S		-		-		-		-		-		-		-		-		-
D		7		6		-		-		18		3		5		-		39
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Consumer/Other Loans	$	5,353	$	1,423	$	841	$	439	$	252	$	307	$	513	$	52	$	9,180

The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated (in thousands):

	June 30, 2024
	Nonaccrual Loans with		Nonaccrual Loans		Total Nonaccrual
	No Allowance		with an Allowance		Loans
Real estate, residential	$	455	$	-	$	455
Total	$	455	$	-	$	455

	December 31, 2023
	Nonaccrual Loans with		Nonaccrual Loans		Total Nonaccrual
	No Allowance		with an Allowance		Loans
Real estate, residential	$	168	$	45	$	213
Total	$	168	$	45	$	213

The Company recognized no interest income on nonaccrual loans during the six months ended June 30, 2024 or the year ended December 31, 2023.

The following table represents the accrued interest receivables written off by reversing interest income during the six months ended June 30, 2024 and the year ended December 31, 2023 (in thousands):

	June 30, 2024		December 31, 2023
Real estate, residential	$	3	$	1
Total loans	$	3	$	1

The Company designates individually evaluated loans on nonaccrual status as collateral-dependent loans, as well as other loans that management of the Company designates as having higher risk. Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The following table presents an analysis of collateral-dependent loans of the Company as of June 30, 2024 and December 31, 2023 (in thousands):

	June 30, 2024		December 31, 2023
	Residential		Residential
	Properties		Properties
Real estate, residential	$	462	$	222
Total loans	$	462	$	222

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 June 30, 2024 and December 31, 2023 (in thousands). The Company defines vintage as the later of origination or restructure date:

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2024		2023		2022		2021		2020		Prior		Loans		Term Loans		Total
June 30, 2024:
Real estate, residential	$	-	$	-	$	-	$	303	$	-	$	152	$	-	$	-	$	455
Real estate, construction		-		-		-		-		-		-		-		-		-
Real estate, nonresidential		-		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-		-
Consumer/Other		-		-		-		-		-		-		-		-		-
Total Loans on Nonaccrual	$	-	$	-	$	-	$	303	$	-	$	152	$	-	$	-	$	455

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Total
December 31, 2023:
Real estate, residential	$	-	$	-	$	-	$	45	$	27	$	141	$	-	$	-	$	213
Real estate, construction		-		-		-		-		-		-		-		-		-
Real estate, nonresidential		-		-		-		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-		-		-		-
Consumer/Other		-		-		-		-		-		-		-		-		-
Total Loans on Nonaccrual	$	-	$	-	$	-	$	45	$	27	$	141	$	-	$	-	$	213

The Company had one loan modification made to borrowers experiencing financial difficulty as of June 30, 2024 and no loan modifications as of December 31, 2023.

The following table shows the amortized cost basis as of June 30, 2024 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty (in thousands):

	Term Extension

	June 30, 2024
	Amortized Cost		% of Total Loan
	Basis		Type			Financial Effect
Real estate, residential	$	18		0.02	%	Added a weighted average 3 years to the life of loan, which reduced monthly payment amounts for the borrowers. Provided 3 month payment deferrals to borrowers through our standard deferral program. The 3 monthly payments were added to the end of the original loan terms of these.
Total	$	18

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months (in thousands):

	Payment Status (Amortized Cost Basis)

	June 30, 2024
			30-89 Days Past		90+ Days Past
	Current		Due		Due
Real estate, residential	$	18	$	-	$	-


Total	$	18	$	-	$	-

6. Allowance for Credit Losses:

The following tables show activity in the allowance for credit losses by portfolio class for the six months ended June 30, 2024 and 2023 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.

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.

Transactions in the allowance for credit losses on loans and leases for the three and six months ended June 30, 2024 and 2023, and the balances of loans, individually and collectively evaluated for impairment, as of June 30, 2024 and 2023, are as follows (in thousands):

	Real Estate, Residential			Real Estate, Construction			Real Estate, Nonresidential			Commercial and Industrial		Other			Total
Six months ended June 30, 2024
Allowance for credit losses on loans and leases
Beginning balance	$	971		$	173		$	1,807		$	54	$	219		$	3,224
Charge-offs		( 45	)		-			-			-		( 132	)		( 177	)
Recoveries		55			19			2			-		87			163
Net provision for loan losses		( 200	)		11			48			20		61			( 60	)
Ending Balance	$	781		$	203		$	1,857		$	74	$	235		$	3,150

Reserve for unfunded lending commitments
Beginning balance	$	2		$	34		$	5		$	10	$	4		$	55
Provision for losses on unfunded commitments		-			10			7			1		42			60
Ending balance-reserve for unfunded commitments	$	2		$	44		$	12		$	11	$	46		$	115
Total allowance for credit losses on loans and unfunded commitments	$	783		$	247		$	1,869		$	85	$	281		$	3,265

Quarter ended June 30, 2024
Allowance for credit losses on loans and leases
Beginning balance	$	720		$	212		$	1,882		$	57	$	216		$	3,087
Charge-offs		-			-			-			-		( 42	)		( 42	)
Recoveries		55			11			1			-		38			105
Net provision for loan losses		6			( 20	)		( 26	)		17		23			-
Ending Balance	$	781		$	203		$	1,857		$	74	$	235		$	3,150

Reserve for unfunded lending commitments
Beginning balance	$	2		$	44		$	12		$	11	$	46		$	115
Provision for losses on unfunded commitments		-			-			-			-		-			-
Ending balance-reserve for unfunded commitments	$	2		$	44		$	12		$	11	$	46		$	115
Total allowance for credit losses on loans and unfunded commitments	$	783		$	247		$	1,869		$	85	$	281		$	3,265

Allowance for credit losses on loans and leases
Individually evaluated	$	-		$	-		$	-		$	-	$	8		$	8
Collectively evaluated		781			203			1,857			74		227			3,142
Total allowance for credit losses on loans:	$	781		$	203		$	1,857		$	74	$	235		$	3,150

Reserve for unfunded lending commitments
Individually evaluated	$	-		$	-		$	-		$	-	$	-		$	-
Collectively evaluated		2			44			12			11		46			115
Reserve for unfunded lending commitments:		2			44			12			11		46			115
Total allowance for credit losses, June 30, 2024	$	783		$	247		$	1,869		$	85	$	281		$	3,265

Loans, Quarter ended June 30, 2024
Individually evaluated	$	958		$	206		$	92		$	24	$	38		$	1,318
Collectively evaluated		77,931			24,956			113,975			11,602		8,958			237,422
Total loans, June 30, 2024	$	78,889		$	25,162		$	114,067		$	11,626	$	8,996		$	238,740

	Real Estate, Residential			Real Estate, Construction			Real Estate, Nonresidential			Commercial and Industrial			Other			Total
Six months ended June 30, 2023
Allowance for credit losses on loans and leases
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		-			-			( 270	)		-			( 117	)		( 387	)
Recoveries		-			-			487			-			76			563
Net provision for loan losses		( 660	)		( 117	)		503			8			( 14	)		( 280	)
Ending Balance	$	649		$	217		$	2,144		$	67		$	147		$	3,224

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		2			8			( 1	)		( 15	)		( 11	)		( 17	)
Ending balance-reserve for unfunded commitments	$	6		$	38		$	4		$	-		$	7		$	55
Total allowance for credit losses on loans and unfunded commitments	$	655		$	255		$	2,148		$	67		$	154		$	3,279

Quarter ended June 30, 2023
Allowance for credit losses on loans and leases
Beginning balance	$	962		$	145		$	1,926		$	86		$	154		$	3,273
Charge-offs		-			-			( 186	)		-			( 45	)		( 231	)
Recoveries		-			-			467			-			25			492
Net provision for loan losses		( 313	)		72			( 63	)		( 19	)		13			( 310	)
Ending Balance	$	649		$	217		$	2,144		$	67		$	147		$	3,224

Reserve for unfunded lending commitments
Beginning balance	$	4		$	27		$	4		$	13		$	9		$	57
Provision for losses on unfunded commitments		2			11			-			( 13	)		( 2	)		( 2	)
Ending balance-reserve for unfunded commitments	$	6		$	38		$	4		$	-		$	7		$	55
Total allowance for credit losses on loans and unfunded commitments	$	655		$	255		$	2,148		$	67		$	154		$	3,279

Allowance for credit losses on loans and leases
Individually evaluated	$	45		$	-		$	-		$	-		$	2		$	47
Collectively evaluated		604			217			2,144			67			145			3,177
Total allowance for credit losses on loans:	$	649		$	217		$	2,144		$	67		$	147		$	3,224

Reserve for unfunded lending commitments
Individually evaluated	$	-		$	-		$	-		$	-		$	-		$	-
Collectively evaluated		6			38			4			-			7			55
Reserve for unfunded lending commitments:		6			38			4			-			7			55
Total allowance for credit losses, June 30, 2023	$	655		$	255		$	2,148		$	67		$	154		$	3,279

Loans, Quarter ended June 30, 2023
Individually evaluated	$	838		$	101		$	431		$	-		$	13		$	1,383
Collectively evaluated		69,431			27,073			117,510			11,118			7,765			232,897
Total loans, June 30, 2023	$	70,269		$	27,174		$	117,941		$	11,118		$	7,778		$	234,280

The following table further disaggregates gross charge-off disclosures by amortized cost by credit quality indicator, class, and year of origination for the six month periods ended June 30, 2024 and June 30, 2023 (in thousands). The Company defines vintage as the later of origination or restructure date.

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2024		2023		2022		2021		2020		Prior		Loans		Term Loans		Total
June 30, 2024:
Real estate, residential	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
A,B, or C		-		-		-		-		-		-		-		-		-
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		-		-		-		-
E		-		-		-		-		-		45		-		-		45
F		-		-		-		-		-		-		-		-		-
Total Real estate, nonresidential loans	$	-	$	-	$	-	$	-	$	-	$	45	$	-	$	-	$	45
Consumer/Other
A,B, or C	$	91	$	1	$	-	$	-	$	-	$	-	$	-	$	-	$	92
S		-		-		-		-		-		-		-		-		-
D		-		9		-		-		-		8		-		-		17
E		-		-		20		-		-		3		-		-		23
F		-		-		-		-		-		-		-		-		-
Total Consumer/Other Loans	$	91	$	10	$	20	$	-	$	-	$	11	$	-	$	-	$	132
Total Gross Loan Chargeoffs:	$	91	$	10	$	20	$	-	$	-	$	56	$	-	$	-	$	177

	Term Loans														Revolving
	Amortized Cost Basis by Origination Year														Loans
													Revolving		Converted to
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Total
June 30, 2023:
Real estate, nonresidential	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
A,B, or C		-		-		-		-		-		-		-		-		-
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		-		-		-		-
E		-		-		-		-		-		270		-		-		270
F		-		-		-		-		-		-		-		-		-
Total Real estate, nonresidential loans	$	-	$	-	$	-	$	-	$	-	$	270	$	-	$	-	$	270
Consumer/Other
A,B, or C	$	117	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	117
S		-		-		-		-		-		-		-		-		-
D		-		-		-		-		-		-		-		-		-
E		-		-		-		-		-		-		-		-		-
F		-		-		-		-		-		-		-		-		-
Total Consumer/Other Loans	$	117	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	117
Total Gross Loan Chargeoffs:	$	117	$	-	$	-	$	-	$	-	$	270	$	-	$	-	$	387

7. Shareholders’ Equity:

On May 22, 2024, the Board declared a dividend of $ 0.18 per share payable June 10, 2024, to shareholders of record on June 05, 2024. On April 20, 2023, the Board declared a dividend of $ 0.12 per share payable May 05, 2023, to shareholders of record on May 02, 2023.

8. Fair Value Measurements and Disclosures:

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

Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Investments

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

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

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

Loans

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

Other Real Estate

In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure or repossession 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 or internally prepared valuations. Other real estate is a non-recurring Level 3 asset.

Deposits

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

Borrowings from Federal Home Loan Bank

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

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of June 30, 2024 and December 31, 2023, were as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
June 30, 2024:
U.S. Treasuries	$	199,716	$	-	$	199,716	$	-
Mortgage-backed securities		44,944		-		44,944		-
Collateralized mortgage obligations		81,866		-		81,866		-
States and political subdivisions		81,026		-		81,026		-
Total	$	407,552	$	-	$	407,552	$	-

December 31, 2023:
U.S. Treasuries	$	115,458	$	-	$	115,458	$	-
Mortgage-backed securities		47,785		-		47,785		-
Collateralized mortgage obligations		95,006		-		95,006		-
States and political subdivisions		81,228		-		81,228		-
Total	$	339,477	$	-	$	339,477	$	-

Collateral dependent loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2024 and December 31, 2023 were as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
June 30, 2024	$	-	$	-	$	-	$	-
December 31, 2023	$	6	$	-	$	-	$	6

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of June 30, 2024 and December 31, 2023 were zero, respectively.

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):

	June 30, 2024			December 31, 2023
Balance, beginning of year	$	-		$	259

Loans transferred to ORE		9			952

Sales		( 9	)		( 1,114	)

Write-downs		-			( 97	)

Balance, end of year	$	-		$	-

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at June 30, 2024 and December 31, 2023 are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2024:
Financial Assets:
Cash and due from banks	$	17,526	$	17,526	$	-	$	-	$	17,526
Available for sale securities		407,552		-		407,552		-		407,552
Held to maturity securities, net		134,030		-		120,989		-		120,989
Other investments		350		350		-		-		350
Federal Home Loan Bank stock		3,180		-		3,180		-		3,180
Loans, net		235,590		-		-		224,000		224,000
Financial Liabilities:
Deposits:
Non-interest bearing		183,643		183,643		-		-		183,643
Interest bearing		464,170		-		-		406,565		406,565
Time deposits		27,101		-		-		26,226		26,226
Borrowings Federal Home Loan Bank		46,500		-		46,500		-		46,500
Borrowings under Bank Term Funding Program		30,000		-		30,000		-		30,000

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2023:
Financial Assets:
Cash and due from banks	$	22,794	$	22,794	$	-	$	-	$	22,794
Available for sale securities		339,477		-		339,477		-		339,477
Held to maturity securities, net		150,911		-		138,523		-		138,523
Other investments		350		350		-		-		350
Federal Home Loan Bank stock		2,334		-		2,334		-		2,334
Loans, net		235,115		-		-		221,896		221,896
Financial Liabilities:
Deposits:
Non-interest bearing		174,933		174,933		-		-		174,933
Interest bearing		483,662		-		-		424,398		424,398
Time deposits		29,895		-		-		28,939		28,939
Borrowings from Federal Home Loan Bank		18,500		-		18,500		-		18,500

9. Income Taxes:

The income tax (benefit) 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 June 30,											Six Months Ended June 30,
	2024						2023					2024					2023
	Tax			Rate			Tax		Rate			Tax		Rate			Tax		Rate
Income Taxes (Benefit):
Current	$	( 229	)		- 11	%	$	560		15	%	$	332		6	%	$	692		10	%
Deferred		-			0	%		251		7	%		70		2	%		566		9	%

Total income tax (benefit) expense	$	( 229	)		- 11	%	$	811		22	%	$	402		8	%	$	1,258		19	%

For the three and six months ended June 30, 2024 and June 2023, the current effective tax rate differs from the statutory tax rate of 21 %, which is primarily due to the tax-exempt interest income earned on certain investment securities, bank owned life insurance, and federal tax credits.

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

GENERAL

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

The following presents Management's discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2023.

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 six months of 2024. Further disclosure is included in Note 1.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions

on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Investments

Investments which are classified as available for sale are stated at fair value. 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 available for sale and held to maturity debt securities for expected credit losses.

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

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 Company’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).

In general, the Company 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 is 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.

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 absorb losses on loans and leases held for investment. 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.

Management believes that the allowance for credit losses on loans 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 credit losses.

Other Real Estate

Other real estate (“ORE”) includes real estate acquired through foreclosure or repossession. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals or other valuations 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

The Company uses the asset and liability method of accounting for deferred income taxes and provides 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.

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 and six months ended June 30, 2024 and 2023 is included in the table below (in thousands).

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023

Interest income reconciliation:
Interest income - taxable equivalent	$	8,752		$	8,712		$	17,738		$	17,212
Taxable equivalent adjustment		(57	)		(62	)		(114	)		(125	)

Interest income (GAAP)	$	8,695		$	8,650		$	17,624		$	17,087

Net interest income reconciliation:
Net interest income - taxable equivalent	$	5,960		$	7,264		$	12,710		$	14,377
Taxable equivalent adjustment		(57	)		(62	)		(114	)		(125	)

Net interest income (GAAP)	$	5,903		$	7,202		$	12,596		$	14,252

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 $2,329,000 for the second quarter of 2024 compared with net income of $2,910,000 for the second quarter of 2023. The Company reported net income of $4,744,000 for the first half of 2024 compared with net income of $5,533,000 for the first half of 2023. Results in the second quarter and first half of 2024 included a decrease in net income attributable to higher interest expense on deposits and borrowings, 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 425 basis points and again in 2023 increased rates by 100 basis points in an effort to slow inflation. As a result, total interest income increased $45,000 in the second quarter of 2024 as compared with 2023 and increased $537,000 in the first half of the year of 2024 as compared to 2023. This increase was attributable to higher interest income on loans along with higher interest income on overnight fed funds due to an increase in interest rates. Along with an increase in total interest income there was a more significant increase in total interest expense of $1,344,000 in the second quarter of 2024 as compared with 2023 and an increase of $2,193,000 in the first half of the year of 2024 as compared to 2023 as the cost of funds and borrowings in 2024 were significantly higher due to higher 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. A provision for the allowance for credit losses of $0 was recorded in the second quarter of 2024 as compared with a negative provision of $312,000 for the second quarter of 2023. A reduction for credit losses on loans of $60,000 while a provision on unfunded commitments of $60,000 was recorded during the first two quarters of 2024 for a net effect of $0 compared to a reduction of the provision on loans and unfunded commitments of $297,000 for the first two quarters of 2023. 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. The Company has worked diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $455,000 and $213,000 at June 30, 2024 and December 31, 2023, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

Non-interest income decreased $42,000 for the second quarter of 2024 as compared with 2023 results. Results for the second quarter of 2024 included lower service charge income of $26,000 along with lower trust department income and fees of $17,000. Non-interest income decreased $6,000 for the first two quarters of 2024 as compared with 2023 results. Results for the first two quarters of 2024 included lower service charge income of $77,000 which was somewhat offset by higher trust income of $11,000 along with a gain on the sale of bank property of $42,000.

Non-interest expenses decreased $32,000 for the quarter ended June 30, 2024, as compared with 2023 results. This net decrease for the second quarter of 2024 was primarily the result of a decrease in salary and employee benefits of $278,000 which was the result of an increase in the discount rate which decreased the liability on deferred compensation expense. This was somewhat offset mostly by an increase in ATM expenses of $221,000 as compared with 2023. The lower ATM expense in 2023 resulted because of credits received from a third-party vendor. Non-interest expenses decreased $314,000 for the two quarters ended June 30, 2024, as compared with 2023 results. This net decrease for the two quarters ended June 30, 2024, was primarily the result of lower salary expenses of $645,000 due to an increase in the discount rate which decreased deferred compensation expense somewhat offset by higher ATM expenses of $234,000 and net occupancy expense of $128,000 and maintenance expense of $111,000.

Total assets at June 30, 2024 increased $49,009,000 as compared with December 31, 2023. Total deposits decreased $13,576,000. This decrease was mostly caused by the loss of several large public fund deposits in 2024 following competitive bid processes held in 2023 whereby the public fund deposit accounts were awarded to other local banks. The Company did not experience any additional losses of large public fund deposit accounts for the six months ended June 30, 2024. The decrease in deposits was offset by maturing securities along with borrowings from both the Bank Term Funding Program and the Federal Home Loan Bank. Borrowings increased $58,000,000 as compared with December 31, 2023.

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.

Quarter Ended June 30, 2024 as Compared with Quarter Ended June 30, 2023

The Company’s average interest-earning assets decreased approximately $88,565,000, or 9.70%, from approximately $913,511,000 for the second quarter of 2023 to approximately $824,946,000 for the second quarter of 2024. The Company’s average balance sheet decreased primarily as average investments decreased approximately $34,299,000 along with a decrease in average balances due from financial institutions of approximately $54,123,000, along with a decrease in average loans of approximately $464,000 for the second quarter of 2024 as compared with the second quarter of 2023. Average loans decreased as principal payments, maturities, and charge-offs on existing loans exceeded new loans. Decreases in average deposits resulted in the decrease in balances due from financial institutions and investments in securities which resulted in an increase in average borrowings.

The average yield on interest-earning assets increased from 3.81% for the second quarter of 2023 to 4.24% for the second quarter of 2024. This increase is due to an increase in interest rates on overnight fed funds, loans, and securities in 2024.

Average interest-bearing liabilities decreased approximately $32,279,000 or 5%, from approximately $649,700,000 for the second quarter of 2023 to approximately $617,421,000 for the second quarter of 2024. Average savings and interest bearing DDA deposits decreased approximately $68,904,000 while time deposits decreased approximately $9,734,000. This decrease was mostly caused by the loss of several large public fund deposits in 2024 following competitive bid processes held in 2023 whereby the public fund deposit accounts were awarded to other local banks. Although average deposits decreased the Company evaluates on an ongoing and continuous basis various moderate to severe economic scenarios and does not anticipate a liquidity issue.

The average rate paid on interest-bearing liabilities for the second quarter of 2023 was 0.89% as compared with 1.81% for the second quarter of 2024. The Federal Reserve has increased rates significantly throughout 2022 and 2023 which has caused the bank in 2023 and 2024 to experience a rising cost of funds to stay competitive with other local banks.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.18% for the second quarter of 2023 as compared with 2.89% for the second quarter of 2024.

Six Months Ended June 30, 2024 as Compared with Six Months Ended June 30, 2023

The Company’s average interest-earning assets decreased approximately $45,656,000, or 5.23%, from approximately $873,188,000 for the first two quarters of 2023 to approximately $827,532,000 for the first two quarters of 2024. The Company’s average balance sheet decreased primarily as average investments decreased approximately $45,134,000 along with a decrease in average balances due from financial institutions of approximately $1,225,000, slightly offset with an increase in average loans of approximately $462,000 for the first two quarters of 2024 as compared with the first two quarters of 2023. Average loans increased as new loans exceeded principal payments, maturities, and charge-offs on existing loans. Decreases in average deposits resulted in the decrease in balances due from financial institutions and investments in securities which resulted in an increase in average borrowings.

The average yield on earning assets increased from 3.94% for the first two quarters of 2023 to 4.29% for the first two quarters of 2024. This increase is due to an increase in interest rates on overnight fed funds, loans, and securities in 2024.

Average interest-bearing liabilities decreased approximately $37,311,000, or 5.56%, from approximately $670,970,000 for the first two quarters of 2023 to approximately $633,659,000 for the first two quarters of 2024. Average savings and interest bearing DDA balances decreased approximately $64,776,000 while average time deposits decreased approximately $10,219,000. This decrease was mostly caused by the loss of several large public fund deposits in 2024 following competitive bid processes held in 2023 whereby the public fund deposit accounts were awarded to other local banks. Although average deposits decreased the Company evaluates on an ongoing and continuous basis various moderate to severe economic scenarios and does not anticipate a liquidity issue.

The average rate paid on interest-bearing liabilities for the first two quarters of 2023 was 0.85% compared with 1.59% for the first two quarters of 2024. The Federal Reserve has increased rates significantly throughout 2022 and 2023 which has caused the bank in 2023 and 2024 to experience a rising cost of funds to stay competitive with other local banks.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.29% for the first two quarters of 2023 as compared with 3.07% for the first two quarters of 2024.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarter and six months ended June 30, 2024 and 2023.

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

	Quarter Ended June 30, 2024							Quarter Ended June 30, 2023
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	236,637	$	3,465		5.86	%	$	237,101	$	3,295		5.56	%

Balances due from financial institutions		21,906		319		5.82	%		76,029		297		1.56	%

HTM:
Taxable		106,052		762		2.87	%		221,386		2,055		3.71	%
Non taxable (1)		33,335		243		2.92	%		36,759		262		2.85	%

AFS:
Taxable		420,805		3,902		3.71	%		336,011		2,743		3.27	%
Non taxable (1)		3,693		25		2.71	%		4,028		31		3.08	%
Other		2,518		36		5.72	%		2,197		29		5.28	%

Total	$	824,946	$	8,752		4.24	%	$	913,511	$	8,712		3.81	%
Savings & interest-bearing DDA	$	543,589	$	2,060		1.52	%	$	612,493	$	1,397		0.91	%
Time deposits		27,424		95		1.39	%		37,158		50		0.54	%
Borrowings under Term Funding Program		30,000		439		5.85	%		-		-		0.00	%
Borrowings from FHLB		16,408		198		4.83	%		49		1		8.16	%

Total	$	617,421	$	2,792		1.81	%	$	649,700	$	1,448		0.89	%

Net tax-equivalent spread						2.43	%						2.92	%
Net tax-equivalent margin on earning assets						2.89	%						3.18	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2024 and 2023. See disclosure of Non-GAAP financial measures on page 40.

(2) Loan fees of $76 and $81 for 2024 and 2023, respectively, are included in these figures.

(3) Includes nonaccrual loans.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Six Months Ended June 30, 2024							Six Months Ended June 30, 2023
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	236,584	$	7,027		5.94	%	$	236,122	$	6,272		5.31	%

Balances due from depository institutions		49,310		1,349		5.47	%		50,535		1,204		4.77	%

HTM:
Taxable		111,202		1,629		2.93	%		202,785		3,608		3.56	%
Non taxable (1)		33,556		485		2.89	%		37,076		530		2.86	%

AFS:
Taxable		390,737		7,122		3.65	%		340,414		5,478		3.22	%
Non taxable (1)		3,716		51		2.74	%		4,070		63		3.10	%
Other		2,427		75		6.18	%		2,186		57		5.22	%

Total	$	827,532	$	17,738		4.29	%	$	873,188	$	17,212		3.94	%
Savings & interest-bearing DDA	$	567,193	$	4,008		1.41	%	$	631,969	$	2,734		0.87	%
Time deposits		28,351		185		1.31	%		38,570		91		0.47	%
Borrowings under Term Funding Program		28,352		584		4.12	%		-		-		0.00	%
Borrowings from FHLB		9,763		251		5.14	%		431		10		4.64	%

Total	$	633,659	$	5,028		1.59	%	$	670,970	$	2,835		0.85	%

Net tax-equivalent spread						2.70	%						3.10	%

Net tax-equivalent margin on earning assets						3.07	%						3.29	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2024 and 2023. See disclosure of Non-GAAP financial measures on page 40.

(2) Loan fees of $267 and $157 for 2024 and 2023, respectively, are included in these figures.

(3) Includes nonaccrual loans.

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Quarter Ended
	June 30, 2024 compared with June 30, 2023
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	(7	)	$	177		$	-		$	170

Balances due from financial institutions		(211	)		810			(577	)		22

Held to maturity securities:
Taxable		(1,071	)		(464	)		242			(1,293	)
Non taxable		(24	)		5			-			(19	)

Available for sale securities:
Taxable		693			372			94			1,159
Non taxable		(2	)		(4	)		-			(6	)
Other		5			2			-			7

Total	$	(617	)	$	898		$	(241	)	$	40

Interest paid on:

Savings & interest-bearing DDA	$	(157	)	$	924		$	(104	)	$	663
Time deposits		(13	)		79			(21	)		45
Borrowings under Term Fund		-			-			439			439
Borrowings from FHLB		333			-			(136	)		197

Total	$	163		$	1,003		$	178		$	1,344

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Six Months Ended
	June 30, 2024 compared with June 30, 2023
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	12		$	741		$	2		$	755

Balances due from financial institutions		(29	)		178			(4	)		145

Held to maturity securities:
Taxable		(1,629	)		(638	)		288			(1,979	)
Non taxable		(50	)		6			(1	)		(45	)

Available for sale securities:
Taxable		810			726			108			1,644
Non taxable		(6	)		(7	)		1			(12	)
Other		6			11			1			18

Total	$	(886	)	$	1,017		$	395		$	526

Interest paid on:

Savings & interest-bearing DDA	$	(280	)	$	1,732		$	(178	)	$	1,274
Time deposits		(24	)		161			(43	)		94
Borrowings under Term Fund		-			-			584			584
Borrowings from FHLB		217			1			23			241

Total	$	(87	)	$	1,894		$	386		$	2,193

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 loss on loans computation.

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

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.

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 is 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.

Open Pool or Snapshot Method

Weighted Average Remaining Maturity (WARM) Method

Qualitative Factor Adjustments

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:

Nature and volume of the Bank’s financial assets.

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

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

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

Quality of the Bank’s credit review function.

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

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

The Bank’s on-going, systematic evaluation resulted in the Bank recording a provision of $0 and a negative provision for the allowance for credit losses of $312,000 for the second quarter of 2024 and 2023, respectively. The Bank recorded a negative provision for the allowance for credit losses on loans and leases of $60,000 and a provision on unfunded commitments of $60,000 which net to zero, no provision was needed for the allowance for credit losses on held to maturity securities for the first six months ended June 30, 2024. The Bank recorded a negative provision of $297,000 for the first six months ended June 30, 2023.

The Bank’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Nonaccrual loans totaled $455,000 and $213,000 with $0 and $39,500 in specific reserves on these loans as of June 30, 2024 and December 31, 2023, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover loan losses, or the loan balances have been charged down to their realizable value.

The allowance for credit losses on loans and leases as a percentage of loans was 1.32% and 1.35% at June 30, 2024 and December 31, 2023, respectively. The Company believes that its allowance for credit losses on loans and leases is appropriate as of June 30, 2024.

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

Quarter Ended June 30, 2024 as Compared with Quarter Ended June 30, 2023

Non-interest income decreased $42,000 for the second quarter of 2024 as compared with the second quarter of 2023. Results in 2024 included lower service charge income of $26,000 and lower trust department income and fees of $17,000 which can fluctuate in the normal course of business.

Six Months Ended June 30, 2024 as Compared with Six Months Ended June 30, 2023

Non-interest income decreased $6,000 for the first two quarters of 2024 as compared with the first two quarters of 2023. Results in 2024 included lower service charge income of $77,000 offset mostly by a gain on the sale of bank property of $42,000 along with higher trust department income and fees of $11,000, both service charge income and trust income can fluctuate in the normal course of business.

Non-interest expense

Quarter Ended June 30, 2024 as Compared with Quarter Ended June 30, 2023

Total non-interest expense decreased $32,000 for the second quarter of 2024 as compared with the second quarter of 2023. In 2024, salary and employee benefits decreased by $278,000 due to the increase in the discount rate which decreased the liabilities associated with deferred compensation expense offset somewhat by an increase in ATM expenses of $221,000 which was lower in 2023 due to the result of credits received from a third-party vendor.

Six Months Ended June 30, 2024 as Compared with Six Months Ended June 30, 2023

Total non-interest expense decreased $314,000 for the first two quarters of 2024 as compared with the first two quarters of 2023. In 2024, salary and employee benefits decreased by $645,000 due to a decrease in the liabilities associated with deferred compensation expense. This decrease was somewhat offset by an increase in ATM expense of $234,000, which was lower in 2023 due to the result of credits received from a third-party vendor. Net occupancy expense increased $128,000 along with an increase in maintenance expense of $111,000.

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.

Quarter Ended June 30, 2024 as Compared with Quarter Ended June 30, 2023

The Company has started to record deferred and current income tax expenses in the first and second quarters of 2024 and 2023, respectively. Income tax expense decreased $1,040,000 due to a tax (benefit) of $229,000 for the second quarter of 2024 as compared with tax expense of $811,000 for the second quarter of 2023. This decrease was primarily due to a release of the Company’s tax valuation allowance against deferred tax assets related to federal tax credits expected to be utilized in 2024. Additionally, second quarter 2024 pretax income was $1,621,000 less than the same period in 2023.

Six Months Ended June 30, 2024 as Compared with Six Months Ended June 30, 2023

Income tax expense decreased $856,000 to $402,000 for the first six months of 2024 as compared with $1,258,000 for the first six months of 2023. This decrease was due to a decrease in pretax income of $1,645,000 year over year and a release of the Company’s tax valuation allowance against deferred tax assets related to federal tax credits expected to be utilized in 2024.

The federal tax credits include a rehabilitation tax credit for the recent renovation of the trust and asset area as well as the Ellzey building along with a low-income housing tax credit. The Company plans to use these credits of $1,033,090 in 2024 for up to 75% of its taxable liability, with any remaining amount carried forward to future periods.

The effective tax rate for the three months and six months ended June 30, 2024, was (11)% and 8%, respectively.

FINANCIAL CONDITION

Cash and due from banks decreased $5,268,000 at June 30, 2024, compared with December 31, 2023. This decrease was due to a decrease in total deposits.

Available for sale securities increased $68,075,000 and held to maturity securities decreased $16,881,000, respectively at June 30, 2024 compared with December 31, 2023 as the Company decreased its held to maturity securities and increased its available for sale investment purchases. As securities mature the proceeds are used to pay down borrowings.

Gross loans increased $401,000 at June 30, 2024 compared with December 31, 2023, as new loans outpaced principal payments, maturities, and charge-offs on existing loans.

Total deposits decreased $13,576,000 at June 30, 2024, compared with December 31, 2023. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. Deposits from county and municipal entities increase significantly during the first quarter of each year based on property tax collections.

As interest rates have increased and the cost of attracting new deposits and replacing deposit run-off has increased, the Bank experienced a decrease in deposit balances during the six months ended June 30, 2024. This decrease was mostly caused by the loss of several large public fund deposits during 2023 that ran off in 2024 following competitive bid processes whereby the public fund deposit accounts were awarded to other local banks. The Company did not experience any additional losses of large public fund deposit accounts for the six months ended June 30, 2024.

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 December 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.

During the third quarter of 2023, the community bank leverage ratio (CBLR) framework was elected. The CBLR framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. The framework provides a simple measure of capital adequacy for qualifying community banking organizations, consistent with section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act.

Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9.00% are considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rule. In addition, these institutions are considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.

The main components and requirements of the CBLR framework are as follows:

As of June 30, 2024 and December 31, 2023, the Bank’s community bank leverage ratio was 11.84% and 12.59%, respectively, both of which exceed the CBLR minimum of 9.00%.

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

LIQUIDITY

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

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. Borrowings from the FHLB, federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position. The Company has also been approved to participate in the Federal Reserve Bank’s Discount Window Primary Credit Program, as well as its Bank Term Funding Program. The Company was able to borrow under the Bank Term Funding Program $30,000,000 at a rate of 4.87% which matures in January 2025. As of June 30, 2024, the Company was able to borrow up to $6,636,000 from the Federal Reserve Bank Discount Window Primary Credit Program. The borrowing limit is based on the amount of collateral pledged, with certain loans from the Bank’s portfolio serving as collateral. The Company has $114,186,000 available under a line of credit with the Federal Home Loan Bank of Dallas with $67,686,000 available. The Company has additional contingency funding capacity with various other financial institutions in the amount of $30,500,000.

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.

Determining liquidity adequacy requires an ongoing analysis of the Company’s current and expected liquidity position, including historical funding obligations and anticipated funding needs, as well as an understanding of retention prospects for all bank deposits. In particular, consideration is given to public funds and other large depositors for potential runoffs due to expected uses or other withdrawals from bank accounts.

The Company also uses other sources of funds, including borrowings from the FHLB. The Company generally anticipates relying on deposits, purchases of federal funds and borrowings from the Federal Reserve Bank of Atlanta and FHLB for its liquidity needs in 2024.

The Board of Directors requires management to implement and administer appropriate internal controls commensurate with Company’s risk profile. Management carefully monitors the Company’s liquidity risk, particularly with respect to volatile and large deposits. The Company has not encountered, and does not anticipate problems with meeting its liquidity needs.

Item 4: Controls and Procedures

As of June 30, 2024, 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
There were no changes in the Company’s internal control over financial reporting that occurred during the six month period ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters 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, the Company reached a confidential, preliminary agreement on July 31, 2024, to settle a lawsuit that was filed in 2023. While this matter has not been previously disclosed since Management did not believe in prior periods that this lawsuit would have a material adverse effect upon the financial position or results of operations of the Company, the decision to settle the litigation was made after consulting with legal counsel and considering the long-term best interest of the Company. Although the preliminary agreement is not yet finalized, the Company records accruals in the normal course of business for legal expenses and contingencies and believes that there are adequate accruals to absorb the payment of this settlement at the time the payment is made which is estimated to be in the fourth quarter of 2024.

Additionally, on June 30, 2023, Stilwell Activist Investments, L.P., issued a letter to the Company and each of the directors of the Company demanding that they immediately commence litigation on behalf of the Company for an alleged breach by the Company’s Board of Directors of its fiduciary duties in allegedly failing to properly oversee and supervise Chevis and Tanner Swetman’s management of the Company. At its July meeting, the Board of Directors of the Company established a Special Litigation Committee made up of the independent directors to investigate the allegations made in the letter. Rather than wait for the Special Litigation Committee to conclude its inquiry, Stilwell Activist Investments, L.P., filed a Complaint against the Company and Directors Chevis Swetman, Padrick D. Dennis, Jeffrey H. O’Keefe, Paige Reed Riley, Ronald Barnes, and George Sliman, III, making the same allegations that appear in the demand letter. The Court stayed the lawsuit pending the Special Litigation Committee’s inquiry. The Special Litigation Committee concluded that pursuing the claims is not in the Company’s best interest, and on March 22, 2024, the Company filed a motion to dismiss. The court has scheduled a hearing on the motion to dismiss for September 11, 2024.

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 12.7% 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 January 19, 2024, 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 four annual meetings, but each individual nominated was not elected to the Board of Directors of the Company.

Item 5: Other Information

None .

Item 6 - Exhibits

Exhibit 31.1:	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 31.2:	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
Exhibit 32.1:	Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 32.2:	Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350
Exhibit 101	The following materials from the Company’s quarterly report on Form 10-Q for the three and six months ended June 30, 2024, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Condition at June 30, 2024 and December 31, 2023, (ii) Consolidated Statements of Income for the three and six ended June 30, 2024 and 2023, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2024 and 2023, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2024 and 2023, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 and (vi) Notes to the Unaudited Consolidated Financial Statements for three and six months ended June 30, 2024 and 2023.
Exhibit 104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

SIGNATURES

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

PEOPLES FINANCIAL CORPORATION

(Registrant)

Date:		August 12, 2024


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

Date:		August 12, 2024


By:		/s/ Leslie B. Fulton
		Leslie B. Fulton Chief Financial Officer and Controller (principal financial and accounting officer)

TABLE OF CONTENTS

Part 1 Item 1: Financial Statements Item 2: Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 2: Management Item 4: Controls and Procedures Part II - Other Information Item 1: Legal Proceedings Item 5: Other Information Item 6 - Exhibits

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

PFBX 10-Q Quarter ended June 30, 2024

Exhibits