Peoples Financial Corp 10-Q for FY2023 Q3
Peoples Financial Corp /Ms/ (PFBX)
About this 10-Q
Peoples Financial Corp filed this 10-Q on November 8, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $1.91M
- up 6.9% from net income of $1.79M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended | |
or
EXCHANGE ACT OF 1934
| Commission File Number | |
| PEOPLES FINANCIAL CORPORATION |
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| (Address of principal executive offices) | (Zip Code) |
| ( |
| (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.
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.)
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. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company |
| 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
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 October 31, 2023 there were 15,000,000 shares of $1 par value common stock authorized, with
Part 1 – Financial Information
Item 1: Financial Statements
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Condition
(in thousands except share data)
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | (audited) | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Available for sale securities | ||||||||
| Held to maturity securities, fair value of $ at September 30, 2023; $ at December 31, 2022 | ||||||||
| Other investments | ||||||||
| Federal Home Loan Bank Stock, at cost | ||||||||
| Loans | ||||||||
| Less: Allowance for loan losses | ||||||||
| Loans, net | ||||||||
| Bank premises and equipment, net of accumulated depreciation | ||||||||
| Other real estate | ||||||||
| Accrued interest receivable | ||||||||
| Cash surrender value of life insurance | ||||||||
| Intangible asset | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Condition (continued)
(in thousands except share data)
| September 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | (audited) | |||||||
| Liabilities and Shareholders' Equity | ||||||||
| Liabilities: | ||||||||
| Deposits: | ||||||||
| Demand, non-interest bearing | $ | $ | ||||||
| Savings and demand, interest bearing | ||||||||
| Time, $250,000 or more | ||||||||
| Other time deposits | ||||||||
| Total deposits | ||||||||
| Employee and director benefit plans liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' Equity: | ||||||||
| Common stock, $ par value, shares authorized, and ,shares issued and outstanding at September 30, 2023 at December 31, 2022 | ||||||||
| Surplus | ||||||||
| Undivided profits | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
See Notes to Consolidated Financial Statements.
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands except per share data) (unaudited) (restated)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Interest income: |
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| Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
| Interest and dividends on securities: |
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| U.S. Treasuries |
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| Mortgage-backed securities |
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| States and political subdivisions |
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| Collateralized mortgage obligations |
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| Other investments |
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| Interest on balances due from depository institutions |
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| Total interest income |
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| Interest expense: |
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| Deposits |
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| Borrowings from Federal Home Loan Bank |
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| Total interest expense |
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| Net interest income |
||||||||||||||||
| Provision for credit losses |
( |
) | ||||||||||||||
| Net interest income after provision for allowance for credit losses |
$ | $ | $ | $ | ||||||||||||
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Income (continued)
(in thousands except per share data) (unaudited) (restated)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2023 |
2022 |
2023 |
2022 |
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| Non-interest income: |
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| Trust department income and fees |
$ | $ | $ | $ | ||||||||||||
| Service charges on deposit accounts |
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| Increase in cash surrender value of life insurance |
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| Other income |
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| Total non-interest income |
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| Non-interest expense: |
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| Salaries and employee benefits |
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| Net occupancy |
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| Equipment rentals, depreciation and maintenance |
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| FDIC and state banking assessments |
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| Data processing |
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| ATM expense |
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| Other real estate expense |
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| Legal expense |
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| Other expense |
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| Total non-interest expense |
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| Income before income taxes |
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| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Basic and diluted earnings per share |
$ | $ | $ | $ | ||||||||||||
| Dividends declared per share |
$ | $ | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements.
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) (unaudited) (restated)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): |
||||||||||||||||
| Net unrealized (loss) gain on available for sale securities |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total other comprehensive (loss) income |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total comprehensive (loss) income |
$ | ( |
) | $ | ( |
) | $ | $ | ( |
) | ||||||
See Notes to Consolidated Financial Statements.
Peoples Financial Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity
(in thousands except share data) (unaudited) (restated)
| Accumulated | ||||||||||||||||||||||||
| Number of | Other | |||||||||||||||||||||||
| Common | Common | Undivided | Comprehensive | |||||||||||||||||||||
| Shares | Stock | Surplus | Profits | Income (loss) | Total | |||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividend declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Cumulative effect of accounting change | ( | ) | ( | ) | ||||||||||||||||||||
| Total shareholders' equity at beginning of period, as adjusted | ( | ) | ||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividend declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive (loss) | ( | ) | ( | ) | ||||||||||||||||||||
| Stock repurchase | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
Note: Balances as of January 1, 2022 and 2023 were audited.
See Notes to Consolidated Financial Statements.
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands) (unaudited) (restated)
| Nine Months Ended September 30, |
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| 2023 |
2022 |
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| Cash flows from operating activities: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation |
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| (Reduction of) provision for allowance for credit losses |
( |
) | ||||||
| Writedown of other real estate |
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| Loss (gain) on sales of other real estate |
( |
) | ||||||
| Amortization of intangible asset |
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| (Accretion) amortization of available for sale securities |
( |
) | ||||||
| (Accretion) amortization of held to maturity securities |
( |
) | ||||||
| Change in accrued interest receivable |
( |
) | ( |
) | ||||
| Increase in cash surrender value of life insurance |
( |
) | ( |
) | ||||
| Change in other assets |
( |
) | ||||||
| Change in employee and director benefit plan liabilities and other liabilities |
( |
) | ||||||
| Net cash provided by operating activities |
$ | $ | ||||||
Peoples Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands) (unaudited) (restated)
| Nine Months Ended September 30, |
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| 2023 |
2022 |
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| Cash flows from investing activities: |
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| Proceeds from maturities of available for sale securities |
$ | $ | ||||||
| Purchases of available for sale securities |
( |
) | ( |
) | ||||
| Proceeds from maturities of held to maturity securities |
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| Purchases of held to maturity securities |
( |
) | ( |
) | ||||
| Purchases of Federal Home Loan Bank stock |
( |
) | ( |
) | ||||
| Proceeds from sales of other real estate |
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| Purchase of intangible asset |
( |
) | ||||||
| Loans, net change |
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| Acquisition of bank premises and equipment |
( |
) | ( |
) | ||||
| Investment in cash surrender value of life insurance |
( |
) | ( |
) | ||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| Cash flows from financing activities: |
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| Demand and savings deposits, net change |
( |
) | ||||||
| Time deposits, net change |
( |
) | ( |
) | ||||
| Cash dividends |
( |
) | ( |
) | ||||
| Stock repurchase |
( |
) | ||||||
| Borrowings from Federal Home Loan Bank |
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| Repayments to Federal Home Loan Bank |
( |
) | ( |
) | ||||
| Net cash (used in) provided by financing activities |
( |
) | ||||||
| Net change in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents, beginning of period |
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| Cash and cash equivalents, end of period |
$ | $ | ||||||
See Notes to Consolidated Financial Statements.
PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2023 and 2022
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation:
Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. The Company has two subsidiaries, PFC Service Corp., an inactive company, and The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Bank provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in those portions of Mississippi, Louisiana and Alabama which are within a fifty-mile radius of the Waveland, Wiggins and Gautier branches, the Bank’s three most outlying locations (the “trade area”).
The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of September 30, 2023 and September 30, 2022, the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2022 Annual Report and Form 10-K.
CRITICAL ACCOUNTING POLICIES
The results of operations for the quarter and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the full year.
Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.
Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry.
The Company’s loan portfolio segments as of September 30, 2023 and December 31, 2022 were as follows:
Real Estate Loans
Residential-Residential mortgage loans are susceptible to weakening general economic conditions, increases in unemployment rates, and declining real estate values.
Construction-Risk common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those associated with residential mortgage loans. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.
Nonresidential-Risks to this loan category include industry concentration and the inability to monitor the condition of collateral. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also, declines in real estate values and lack of suitable alternative use for the properties. These loans are also susceptible to declines in occupancy rates, business failure, and general economic conditions.
Commercial and Industrial-Risk to this loan category include industry concentration and the practical limitations associated with monitoring the condition of the collateral which often consists of inventory, accounts receivable, and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt.
Other-Risk common to these loans include regulatory risks, unemployment, and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.
Revision of Prior Period Financial Statements – During 2022, the Company recorded an error correction related to the Company’s accounting for bank premises and equipment. While reviewing the Company’s accruals for depreciation related to certain bank premises and equipment, the Company noticed that it had been over-accruing depreciation expenses beginning in 2006, causing expenses and the accumulation of depreciation in prior periods that were more than what should have been recorded under GAAP.
The error at each period end represented
Revised Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2022 (in thousands):
| Nine Months Ended September 30, 2022 | ||||||||||||
| As Reported | Adjustment | As Revised | ||||||||||
| Beginning balance undivided profits | $ | $ | $ | |||||||||
| Beginning balance total shareholders' equity | ||||||||||||
| Ending balance undivided profits | ||||||||||||
| Ending balance total shareholders' equity | ||||||||||||
Revised Consolidated Income Statements for the three and nine months ended September 30, 2022 (in thousands):
| Three Months Ended September 30, 2022 | ||||||||||||
| As Reported | Adjustment | As Revised | ||||||||||
| Non-Interest Expense | $ | $ | ( | ) | $ | |||||||
| Net Income | ||||||||||||
| Basic and diluted earnings (loss) per share | ||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||
| As Reported | Adjustment | As Revised | ||||||||||
| Non-Interest Expense | $ | $ | ( | ) | $ | |||||||
| Net Income | ||||||||||||
| Basic and diluted earnings (loss) per share | ||||||||||||
Accounting Standards Update –In August 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-05 (“ASU 2023-05”), Business Combinations-Joint Venture Formations (Subtopic 805-60), Recognition and Initial Measurement. ASU 2023-05 addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements. The objectives of the amendments are to (1) provide decision-useful information to investors and other allocators of capital (collectively, investors) in a joint venture’s financial statements and (2) reduce diversity in practice. The amendments in ASU 2023-05 are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025. Additionally, a joint venture that was formed before January 1, 2025, may elect to apply the amendments retrospectively if it has sufficient information. Early adoption is permitted for all entities in any interim or annual period in which financial statements have not yet been issued (or made available for issuance), either prospectively or retrospectively. 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 March 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-02 (“ASU 2023-02”), Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Reporting entities were previously permitted to apply the proportional amortization method only to qualifying tax equity investments in low-income housing tax credit (LIHTC) structures. The amendments in ASU 2023-02 apply to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). For public business entities, the amendments in ASU 2023-02 are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. If an entity adopts the amendments in an interim period, it should adopt them as of the beginning of the fiscal year that includes that interim period. Management has evaluated the impact of the adoption of this standard and determined there would be no impact to the Company’s consolidated financial position or results of operations.
In March 2022, the FASB issued ASU 2022-02, "Financial Instruments: Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures." The amendments in this update cover two issues: (1) the elimination of TDR recognition and measurement guidance as prescribed by ASC 310-40 and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty; and, (2) for public business entities, the requirement that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross write-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.
The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For the elimination of recognition and measurement guidance on troubled debt restructurings by creditors in Subtopic 310-40, an entity may elect to apply a modified retrospective transition by means of a cumulative-effect adjustment to the opening retained earnings as of the beginning of the fiscal year of adoption, or a prospective approach applied to modifications occurring after the date of adoption. The remainder of amendments should be applied prospectively. The Company adopted this standard effective January 1, 2023 on a prospective basis for all amendments. The adoption of this standard is not material to the Company’s consolidated financial position or results of operations.
On January 1, 2023, the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses,” more commonly referred to as CECL, on a modified retrospective basis. The provisions of this guidance require a material change to the manner in which the Company estimates and reports losses on financial instruments, including loans and unfunded lending commitments, select securities and other assets carried at amortized cost. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Changes to the Company’s accounting policies related to CECL are described below.
There were no other material changes or developments during the reporting period with respect to methodologies that the Company uses when applying what management believes are critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022.
Reclassification-Certain items previously reported have been reclassified to conform to the current year’s reporting format due to the adoption of CECL.
The Company has adopted the CECL (Current Expected Credit Losses) methodology for estimating allowances for credit losses effective January 1, 2023. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets) including: financing receivables such as loans held for investment, held to maturity debt securities, off-balance-sheet credit exposures (unfunded commitments) including off-balance sheet loan commitments; standby letters of credit; and other similar instruments.
In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets. The following represents an overview of key factors regarding CECL: CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.
As stated above, CECL also applies to held to maturity debt securities since they are carried at amortized cost and are within the scope of the standard. Therefore, it is the responsibility of management to establish any required allowances for credit losses on the Bank’s held to maturity debt securities as of the date the Bank adopts CECL and to maintain such allowances thereafter. Because CECL requires the Bank to measure expected credit losses on a collective or pool basis when similar risk characteristics exist, held to maturity debt securities that share similar risk characteristics are collectively assessed for credit losses.
Estimation Methods for Expected Credit Losses-Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses,” does not require the use of a specific loss estimation method for purposes of determining ACLs. Various methods may be used to estimate the expected collectability of financial assets, with those methods generally applied consistently overtime. The same loss estimation method does not need to be applied to all financial assets. Loss-rate methods can involve a variety of approaches, and Management incorporates the methods below:
Open Pool or Snapshot Method
The starting point for the calculation consists of assets that are outstanding at the end of a given time frame and are made up of assets that were originated in various years. Additional assets may be added to pools of loans under an open pool method.
Weighted Average Remaining Maturity (WARM) Method
A loss-rate method that estimates expected credit losses over the remaining life of the financial assets and uses a weighted average of the assets’ contractual terms to estimate the pool’s remaining contractual term. The WARM method uses average annual net charge-off rates and the amortization adjusted remaining life plus qualitative adjustments to estimate the ACLs.
Qualitative Factor Adjustments
The estimation of ACLs is to reflect consideration of all significant factors relevant to the expected collectability of the Bank’s financial assets as of the reporting date. Management begins their expected credit loss estimation process by determining the Bank’s historical loss information or utilizing reliable and relevant peer group (UPBR, State, custom) historical loss proxy data for each segment of financial assets with similar risk characteristics.
Management is to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.
Historical loss experience generally provides a quantitative starting point for Management’s estimate of expected credit losses. Consistent with FASB ASU Topic 326, Management must consider relevant qualitative factors that may cause the CECL estimate of the financial asset portfolio as of the evaluation date to differ from the historical loss experience.
Management is to consider the qualitative factors that are relevant to the Bank as of the reporting date, which may include but are not limited to the:
| 1. | Nature and volume of the Bank’s financial assets. |
| 2. | Existence, growth, and effect of any concentrations of credit. |
| 3. | Volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Adversely classified or graded loans are loans rated “substandard” (or its equivalent) or worse under the institution’s loan classification system. |
| 4. | Value of the underlying collateral for loans that are not collateral dependent. |
| 5. | Bank’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries. |
| 6. | Quality of the Bank’s credit review function. |
| 7. | Experience, ability, and depth of the Bank’s lending, investment, collection, and other relevant management and staff. |
| 8. | Effect of other external factors such as the regulatory, legal, and technological environments, competition, and events such as natural disasters. |
| 9. | Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets. Changes in economic and business conditions and developments included in qualitative factor adjustments are limited to those that affect the collectability of the Bank’s financial assets and are relevant to the Bank’s financial asset portfolios. For example, an economic factor for current or forecasted unemployment at the national or state level may indicate a strong job market based on low national or state unemployment rates, but a local unemployment rate, which may be significantly higher because of the actual or forecasted loss of a major local employer, may be more relevant to the collectability of an institution’s financial assets. |
For reporting periods beginning on or after January 1, 2023, the Allowance for Credit Losses (ACL) is comprised of the Allowance for Loan and Lease Losses (ALLL), a valuation account available to absorb losses on loans and leases held for investment, and the Reserve for Unfunded Lending Commitments, a liability established to absorb credit losses for the expected life of the contractual term of on and off-balance sheet exposures as of the date of the determination. As stated above, quarterly, management estimates losses in the portfolio and unfunded exposures based on a number of factors, including the Company’s and peer’s past loan loss experience, known and potential risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral, and current and forecasted economic conditions. The length of time in the economic forecast is up to two years. The analysis and methodology used for estimating the ACL includes two primary elements: a collective approach for pools of loans that have similar risk characteristics and a specific reserve analysis for credits individually evaluated for credit loss. The methodology used by the Company is the weighted average remaining maturity or (“WARM”) method. The method uses comparable historical lookback periods as proxies for projecting future trends, and employs a qualitative (“Q”) factor component in the projections which represents expected differences in current and forecasted conditions from historical loss information or conditions. The main methodology approach includes comparable risk pools which are segregated by call report loan category, unadjusted loss estimation which is a combination of open pool/snapshot and weighted average remaining maturity, comparable or “look back” periods of about six years, which the Company choses to best approximate the expected future loss environment for the WARM time period and also utilizes peer data loss experiences.
For the collective approach, the Company segments loans into real estate-residential, real estate-nonresidential, real estate-construction and land development, commercial and industrial, and consumer/other, with further segmentation by region and sub-portfolio, as deemed appropriate. Both quantitative and qualitative factors are applied at the portfolio segment levels. The Company applies the practical expedient that permits the exclusion of the accrued interest receivable balance from amortized cost basis of financing receivables.
The Company applies the expected future loss rate for each loan portfolio segment to each of the bank’s segments to calculate the allowance for credit losses.
CECL also requires capturing estimated credit losses on unfunded commitments that meet certain criteria. Management starts with current gross unfunded commitment levels by category as reported on the call report and then subtracts any unconditionally cancellable amounts, which are not subject to CECL reserve requirements to produce net unfunded commitment levels, as well as consideration of the likelihood of funding. Any allowance for off balance sheet exposures is reported as an other liability on the Consolidated Statement of Condition and is increased or decreased via the provision for credit losses account on the Consolidated Statement of Income.
The initial default loss rates are then estimated by taking expected future lifetime loss rates of the loan categories that are included in each unfunded commitment segment and dividing the lifetime rate by their respective WARMs to derive an annual loss rate estimate.
The Company elected not to measure an allowance for accrued interest receivable and instead elected to reverse interest income on loans that are placed on nonaccrual status, which is generally when the loan becomes 90 days past due, or earlier if management believes the collection of interest is doubtful. Management believes this policy results in the timely reversal of uncollectible interest.
The Company establishes specific reserves using an individually evaluated approach for nonaccrual loans, loans modified in troubled debt restructures, loans for which a troubled debt restructure is reasonably expected, and other financial instruments that are deemed to not share risk characteristics with other collectively evaluated financial assets. For loans individually evaluated, a specific allowance is recognized for any shortfall between the loan’s value and its recorded investment. The loan’s value is measured by either the loan’s observable market price, the fair value of the collateral of the loan (less liquidation costs) if it is collateral dependent, or by the present value of expected future cash flows discounted at the loan’s effective interest rate. The Company applies the practical expedient and defines collateral dependent loans as those where the borrower is experiencing financial difficulty and on which repayment is expected to be provided substantially through the operation or sale of the collateral.
The CECL standard also requires an assessment of the Company’s held to maturity debt securities for expected credit losses and the available for sale debt securities for credit-related impairment. The Company applies the practical expedient to exclude the accrued interest receivable balance of $
The Company 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.
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $
The following table details the impact of the adoption of ASC 326 on the allowance for credit losses as of January 1, 2023 (in thousands).
| January 1, 2023 | ||||||||||||||||
| Pre-Adoption Allowance | Impact of Adoption | Post-Adoption Allowance | Cumulative Effect on Retained Earnings | |||||||||||||
| Securities held to maturity: | ||||||||||||||||
| U.S. Treasuries | $ | $ | $ | $ | ||||||||||||
| States and political subdivisions | ( | ) | ||||||||||||||
| Total | $ | $ | $ | $ | ( | ) | ||||||||||
| Loans: | ||||||||||||||||
| Real Estate, residential | $ | $ | $ | $ | ( | ) | ||||||||||
| Real Estate, construction | ( | ) | ||||||||||||||
| Real Estate, non-residential | ( | ) | ||||||||||||||
| Commerical & Industrial | ( | ) | ||||||||||||||
| Consumer/Other | ( | ) | ||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ||||||||||
| Off-balance-sheet credit exposures | $ | $ | $ | $ | ( | ) | ||||||||||
2. Earnings Per Share:
Per share data is based on the weighted average shares of common stock outstanding of
3. Statements of Cash Flows:
The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $
4. Investments:
Effective January 1, 2023, in conjunction with the adoption of CECL, and again at September 30, 2023, the Company evaluated credit impairment for individual securities available for sale whose fair value was below amortized cost with a more than inconsequential risk of default and where the Company had assessed the decline in fair value significant enough to suggest a credit event occurred. There were no securities that met the criteria of a credit loss event and therefore, no allowance for credit loss was recorded for either period. The Company also evaluated impairment for individual securities held to maturity and determined an allowance for credit loss of $
The amortized cost, fair value and allowance for credit losses related to securities at September 30, 2023 and December 31, 2022, are as follows (in thousands):
| Gross | Gross | Allowance | ||||||||||||||||||
| Amortized | Unrealized | Unrealized | for Credit | Estimated | ||||||||||||||||
| September 30, 2023 | Cost | Gains | Losses | Losses | Fair Value | |||||||||||||||
| Available for sale securities: | ||||||||||||||||||||
| U.S. Treasuries | $ | $ | $ | ( | ) | $ | - | $ | ||||||||||||
| Mortgage-backed securities | ( | ) | - | |||||||||||||||||
| Collateralized mortgage obligations | ( | ) | - | |||||||||||||||||
| States and political subdivisions | ( | ) | - | |||||||||||||||||
| Total available for sale securities | $ | $ | $ | ( | ) | $ | - | $ | ||||||||||||
| Gross | Gross | Allowance | Net | |||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | for Credit | Carrying | |||||||||||||||||||
| September 30, 2023 | Cost | Gains | Losses | Fair Value | Losses | Amount | ||||||||||||||||||
| Held to maturity securities: | ||||||||||||||||||||||||
| U.S. Treasuries | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| States and political subdivisions | ( | ) | ( | ) | ||||||||||||||||||||
| Total held to maturity securities | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||
| Gross | Gross | Allowance | Net | |||||||||||||||||
| Amortized | Unrealized | Unrealized | for Credit | Carrying | ||||||||||||||||
| December 31, 2022 | Cost | Gains | Losses | Losses | Amount | |||||||||||||||
| Available for sale securities: | ||||||||||||||||||||
| U.S. Treasuries | $ | $ | $ | ( | ) | $ | - | $ | ||||||||||||
| Mortgage-backed securities | ( | ) | - | |||||||||||||||||
| Collateralized mortgage obligations | ( | ) | - | |||||||||||||||||
| States and political subdivisions | ( | ) | - | |||||||||||||||||
| Total available for sale securities | $ | $ | $ | ( | ) | $ | - | $ | ||||||||||||
| Gross | Gross | Allowance | Net | |||||||||||||||||||||
| Amortzied | Unrealized | Unrealized | Estimated | for Credit | Carrying | |||||||||||||||||||
| December 31, 2022 | Cost | Gains | Losses | Fair Value | Losses | Amount | ||||||||||||||||||
| Held to maturity securities: | ||||||||||||||||||||||||
| U.S. Treasuries | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
| States and political subdivisions | ( | ) | ||||||||||||||||||||||
| Total held to maturity securities | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
The allowance for credit losses on held to maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held to maturity securities to present the net amount expected to be collected. With regard to U.S. Treasury securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost basis of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. Management estimates the necessity of holding expected credit loss reserves for municipal holdings classified as held to maturity on a pooled basis. The company uses a standard probability of default/loss given default approach. The approach utilizes many inputs including enhanced and underlying ratings, maturity, issuer type/subtype, NAICS code, origination date, refunding status as well as state and region.
The following table details activity in the allowance for credit losses on held to maturity securities in the state and political subdivision category during the nine months ended September 30,2023 (in thousands):
| Beginning balance, prior to adoption of ASC 326 | $ | |||
| Impact of adopting ASC 326 | ||||
| Credit loss expense (benefit) | ||||
| Ending balance | $ |
The amortized cost and fair value of debt securities at September 30, 2023 (in thousands), by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Amortized Cost | Fair Value | |||||||
| Available for sale securities: | ||||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Mortgage-backed securities | ||||||||
| Collateralized mortgage obligations | ||||||||
| Totals | $ | $ | ||||||
| Held to maturity securities: | ||||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Totals | $ | $ | ||||||
Available for sale securities with gross unrealized losses for which an allowance for credit losses has not been recorded and held to maturity debt securities with gross unrealized losses for which an allowance for credit losses was recorded at January 1, 2023 and no additional allowance for credit losses was recorded at September 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):
| Less Than Twelve Months | Over Twelve Months | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| September 30, 2023: | ||||||||||||||||||||||||
| U.S. Treasuries | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Collateralized mortgage obligations | ( | ) | ( | ) | ||||||||||||||||||||
| States and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| TOTAL | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2022: | ||||||||||||||||||||||||
| U.S. Treasuries | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Collateralized mortgage obligations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| States and political subdivisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| TOTAL | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
At September 30, 2023,
Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government Agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell, and it is not more likely than not that it will be required to sell these securities before maturity. While some available for sale securities have been sold in prior periods for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of the evaluation of these securities, the Company has determined that the unrealized losses summarized in the tables above are not deemed to be other-than-temporary.
There were
Securities with a fair value of $
5. Loans:
Certain items previously reported have been reclassified to conform to the current year’s reporting format due to the adoption of CECL.
The composition of the loan portfolio at September 30, 2023 and December 31, 2022, is as follows (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Real estate, residential | $ | $ | ||||||
| Real estate, construction | ||||||||
| Real estate, nonresidential | ||||||||
| Commercial and industrial | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
The age analysis of the loan portfolio, segregated by class of loans, as of September 30, 2023 and December 31, 2022, is as follows (in thousands):
| Loans Past | ||||||||||||||||||||||||||||
| Due Greater | ||||||||||||||||||||||||||||
| Number of Days Past Due | Than 90 | |||||||||||||||||||||||||||
| Greater | Total | Total | Days & | |||||||||||||||||||||||||
| 30 - 59 | 60 - 89 | Than 90 | Past Due | Current | Loans | Still Accruing | ||||||||||||||||||||||
| September 30, 2023: | ||||||||||||||||||||||||||||
| Real estate, residential | $ | $ | $ | $ | $ | $ | $ | - | ||||||||||||||||||||
| Real estate, construction | - | |||||||||||||||||||||||||||
| Real estate, nonresidential | - | |||||||||||||||||||||||||||
| Commercial and industrial | - | |||||||||||||||||||||||||||
| Other | - | |||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | ||||||||||||||||||||
| December 31, 2022: | ||||||||||||||||||||||||||||
| Real estate, residential | $ | $ | $ | $ | $ | $ | $ | - | ||||||||||||||||||||
| Real estate, construction | - | |||||||||||||||||||||||||||
| Real estate, nonresidential | - | |||||||||||||||||||||||||||
| Commercial and industrial | - | |||||||||||||||||||||||||||
| Other | - | |||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | - | ||||||||||||||||||||
The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A, B, C, S, D, E or F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. A grade of S will generally be applied to loans for customers who meet the criteria for a grade of C but who also warrant additional monitoring by placement on the watch list. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade of E will generally be applied to loans for customers with weaknesses inherent in the “D” classification and in which collection or liquidation in full is questionable. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. A grade of F is applied to loans which are considered uncollectible and of such little value that their continuance in an active bank is not warranted. Loans with this grade are charged off, even though partial or full recovery may be possible in the future.
An analysis of the loan portfolio by loan grade, segregated by class of loans, as of September 30, 2023 and December 31, 2022, is as follows (in thousands):
| Loans With A Grade Of: | ||||||||||||||||||||||||
| A, B or C | S | D | E | F | Total | |||||||||||||||||||
| September 30, 2023: | ||||||||||||||||||||||||
| Real estate, residential | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Real estate, construction | ||||||||||||||||||||||||
| Real estate, nonresidential | ||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2022: | ||||||||||||||||||||||||
| Real estate, residential | $ | $ | $ | $ | $ | |||||||||||||||||||
| Real estate, construction | ||||||||||||||||||||||||
| Real estate, nonresidential | ||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Prior to 2020, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2023 and 2022, the Company did not restructure any additional loans. There were no specific reserves allocated to troubled debt restructurings as of September 30, 2023 and December 31, 2022, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of September 30, 2023 and December 31, 2022.
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 September 30, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.
| Term Loans | Revolving | |||||||||||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year | Loans | |||||||||||||||||||||||||||||||||||
| Revolving | Converted to | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Loans | Term Loans | Total | ||||||||||||||||||||||||||||
| September 30, 2023: | ||||||||||||||||||||||||||||||||||||
| Real Estate, Residential Loans: | ||||||||||||||||||||||||||||||||||||
| A, B, or C | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| S | ||||||||||||||||||||||||||||||||||||
| D | ||||||||||||||||||||||||||||||||||||
| E | ||||||||||||||||||||||||||||||||||||
| F | ||||||||||||||||||||||||||||||||||||
| Total Real Estate Residential Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Real Estate, Construction Loans: | ||||||||||||||||||||||||||||||||||||
| A, B, or C | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| S | ||||||||||||||||||||||||||||||||||||
| D | ||||||||||||||||||||||||||||||||||||
| E | ||||||||||||||||||||||||||||||||||||
| F | ||||||||||||||||||||||||||||||||||||
| Total Real Estate, Construction Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Real Estate,Nonresidential Loans: | ||||||||||||||||||||||||||||||||||||
| A, B, or C | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| S | ||||||||||||||||||||||||||||||||||||
| D | ||||||||||||||||||||||||||||||||||||
| E | ||||||||||||||||||||||||||||||||||||
| F | ||||||||||||||||||||||||||||||||||||
| Total Real Estate, Nonresidential Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||
| A, B, or C | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| S | ||||||||||||||||||||||||||||||||||||
| D | ||||||||||||||||||||||||||||||||||||
| E | ||||||||||||||||||||||||||||||||||||
| F | ||||||||||||||||||||||||||||||||||||
| Total Commercial and Industrial Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer/Other Loans | ||||||||||||||||||||||||||||||||||||
| A, B, or C | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| S | ||||||||||||||||||||||||||||||||||||
| D | ||||||||||||||||||||||||||||||||||||
| E | ||||||||||||||||||||||||||||||||||||
| F | ||||||||||||||||||||||||||||||||||||
| Total Consumer/Other Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of September 30, 2023 and December 31, 2022, are as follows (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Real estate, residential | $ | $ | ||||||
| Real estate, nonresidential | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
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 September 30, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.
| Term Loans | Revolving | |||||||||||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year | Loans | |||||||||||||||||||||||||||||||||||
| Revolving | Converted to | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Loans | Term Loans | Total | ||||||||||||||||||||||||||||
| September 30, 2023: | ||||||||||||||||||||||||||||||||||||
| Real estate, residential | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Real estate, construction | ||||||||||||||||||||||||||||||||||||
| Real estate, nonresidential | ||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||
| Consumer/Other | ||||||||||||||||||||||||||||||||||||
| Total Loans on Nonaccrual | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of September 30, 2023 and December 31, 2022, are as follows (in thousands):
| Unpaid Principal Balance | Recorded Investment | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||
| September 30, 2023: | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate, residential | $ | $ | $ | - | $ | $ | ||||||||||||||
| Real estate, construction | - | |||||||||||||||||||
| Real estate, nonresidential | - | |||||||||||||||||||
| Other | - | - | ||||||||||||||||||
| Total | - | |||||||||||||||||||
| With a related allowance recorded: | ||||||||||||||||||||
| Real estate, residential | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Total by class of loans: | ||||||||||||||||||||
| Real estate, residential | ||||||||||||||||||||
| Real estate, construction | ||||||||||||||||||||
| Real estate, nonresidential | ||||||||||||||||||||
| Other | - | |||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Unpaid | Average | Interest | ||||||||||||||||||
| Principal | Recorded | Related | Recorded | Income | ||||||||||||||||
| Balance | Investment | Allowance | Investment | Recognized | ||||||||||||||||
| December 31, 2022: | ||||||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||||||
| Real estate, residential | $ | $ | $ | - | $ | $ | ||||||||||||||
| Real estate, construction | - | |||||||||||||||||||
| Real estate, nonresidential | - | - | ||||||||||||||||||
| Other | - | - | ||||||||||||||||||
| Total | - | |||||||||||||||||||
| With a related allowance recorded: | ||||||||||||||||||||
| Real estate, residential | - | |||||||||||||||||||
| Real estate, nonresidential | ||||||||||||||||||||
| Total | - | |||||||||||||||||||
| Total by class of loans: | ||||||||||||||||||||
| Real estate, residential | - | |||||||||||||||||||
| Real estate, construction | ||||||||||||||||||||
| Real estate, nonresidential | - | |||||||||||||||||||
| Other | - | - | ||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The Company had
6. Allowance for Credit Losses:
The following tables show activity in the allowance for credit losses by portfolio class for the three and nine months ended September 30, 2023 and 2022, as well as the corresponding recorded investment in loans at the end of each period. Effective January 1, 2023, the Company adopted the provisions of ASC 326 (CECL) using a modified retrospective basis. The difference between the December 31, 2022 incurred allowance and the CECL allowance is reflected as a cumulative effect of change in accounting principle in the table below. For further discussion of the day one impact of the CECL adoption, refer to Note 1.
Transactions in the allowance for credit losses on loans and leases for the three and nine months ended September 30, 2023 and 2022, and the balances of loans, individually and collectively evaluated for impairment, as of September 30, 2023 and 2022, are as follows (in thousands):
| Allowance for credit losses |
Real Estate, Residential |
Real Estate, Construction |
Real Estate, Nonresidential |
Commercial and Industrial |
Other |
Total |
||||||||||||||||||
| For the Nine Months Ended September 30, 2023 |
||||||||||||||||||||||||
| Allowance for Loan Losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cumulative effect of change in accounting principle |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||
| Charge-offs |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Recoveries |
||||||||||||||||||||||||
| Net provision for loan losses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Ending Balance-allowance for loan losses |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the Nine Months Ended September 30, 2023 |
||||||||||||||||||||||||
| Reserve for unfunded lending commitments: |
||||||||||||||||||||||||
| Beginning balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cumulative effect of change in accounting principle |
||||||||||||||||||||||||
| Provision for losses on unfunded commitments |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Ending balance-reserve for unfunded commitments |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total allowance for credit losses September 30, 2023 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the Quarter Ended September 30, 2023 |
||||||||||||||||||||||||
| Allowance for Loan Losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs |
( |
) | ( |
) | ||||||||||||||||||||
| Recoveries |
||||||||||||||||||||||||
| Net provision for loan losses |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Ending Balance-allowance for loan losses |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the Quarter Ended September 30, 2023 |
||||||||||||||||||||||||
| Reserve for unfunded lending commitments: |
||||||||||||||||||||||||
| Beginning balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision for losses on unfunded commitments |
( |
) | ||||||||||||||||||||||
| Ending balance-reserve for unfunded commitments |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total allowance for credit losses September 30, 2023 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance for loan losses, September 30, 2023: |
||||||||||||||||||||||||
| Individually evaluated |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated |
||||||||||||||||||||||||
| Allowance for loan losses: |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Reserve for unfunded lending commitments: |
||||||||||||||||||||||||
| Individually evaluated |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Collectively evaluated |
||||||||||||||||||||||||
| Reserve for unfunded lending commitments: |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total allowance for credit losses, September 30, 2023 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Loans, September 30, 2023: |
||||||||||||||||||||||||
| Individually evaluated |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated |
||||||||||||||||||||||||
| Total loans, September 30, 2023: |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following table further disaggregates gross charge-off disclosures by amortized cost by credit quality indicator, class, and year of origination as of September 30, 2023 (in thousands). The Company defines vintage as the later of origination, renewal or restructure date.
| Term Loans |
Revolving |
|||||||||||||||||||||||||||||||||||
| Amortized Cost Basis by Origination Year |
Loans |
|||||||||||||||||||||||||||||||||||
| Revolving |
Converted to |
|||||||||||||||||||||||||||||||||||
| 2023 |
2022 |
2021 |
2020 |
2019 |
Prior |
Loans |
Term Loans |
Total |
||||||||||||||||||||||||||||
| September 30, 2023: |
||||||||||||||||||||||||||||||||||||
| Real estate, nonresidential |
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
| A,B, or C |
||||||||||||||||||||||||||||||||||||
| S |
||||||||||||||||||||||||||||||||||||
| D |
||||||||||||||||||||||||||||||||||||
| E |
||||||||||||||||||||||||||||||||||||
| F |
||||||||||||||||||||||||||||||||||||
| Total Real estate, nonresidential loans |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer/Other |
||||||||||||||||||||||||||||||||||||
| A,B, or C |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| S |
||||||||||||||||||||||||||||||||||||
| D |
||||||||||||||||||||||||||||||||||||
| E |
||||||||||||||||||||||||||||||||||||
| F |
||||||||||||||||||||||||||||||||||||
| Total Consumer/Other Loans |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total Gross Loan Chargeoffs: |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Real Estate, Residential |
Real Estate, Construction |
Real Estate, Nonresidential |
Commercial and Industrial |
Other |
Total |
|||||||||||||||||||
| For the Nine Months Ended September 30, 2022: |
||||||||||||||||||||||||
| Allowance for Loan Losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||
| Recoveries |
- | - | ||||||||||||||||||||||
| Provision |
( |
) | ( |
) | ||||||||||||||||||||
| Ending Balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the Quarter Ended September 30, 2022: |
||||||||||||||||||||||||
| Allowance for Loan Losses: |
||||||||||||||||||||||||
| Beginning Balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||
| Recoveries |
- | - | - | |||||||||||||||||||||
| Provision |
( |
) | ( |
) | ||||||||||||||||||||
| Ending Balance |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance for Loan Losses, September 30, 2022: |
||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment |
$ | $ | - | $ | $ | $ | $ | |||||||||||||||||
| Ending balance: collectively evaluated for impairment |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total Loans, September 30, 2022: |
||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending balance: collectively evaluated for impairment |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
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.
7. Deposits:
Time deposits of $250,000 or more totaled approximately $
8. Shareholders’ Equity:
On April 20, 2023, the Board declared a dividend of $
9. Fair Value Measurements and Disclosures:
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a non-recurring basis, such as impaired loans and ORE. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 - Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used to determine the fair value of financial assets and liabilities.
Cash and Due from Banks
The carrying amount shown as cash and due from banks approximates fair value.
Available for Sale Securities
The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.
Held to Maturity Debt Securities
The fair value of held to maturity debt securities is based on quoted market prices. The Company’s held to maturity debt securities are reported at their amortized cost, and their estimated fair value, which is determined utilizing several sources, is disclosed in the financial statements and footnotes. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s held to maturity debt securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.
Other Investments
The carrying amount shown as other investments approximates fair value.
Federal Home Loan Bank Stock
The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.
Loans
The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets.
Other Real Estate
In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $
Cash Surrender Value of Life Insurance
The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.
Deposits
The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately
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 September 30, 2023 and December 31, 2022 are as follows (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| September 30, 2023: | ||||||||||||||||
| U.S. Treasuries | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| States and political subdivisions | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2022: | ||||||||||||||||
| U.S. Treasuries | $ | $ | $ | $ | ||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Collateralized mortgage obligations | ||||||||||||||||
| States and political subdivisions | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| September 30, 2023 | $ | $ | - | $ | - | $ | ||||||||||
| December 31, 2022 | - | - | ||||||||||||||
Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| September 30, 2023 | $ | $ | - | $ | - | $ | ||||||||||
| December 31, 2022 | - | - | ||||||||||||||
The following table presents a summary of changes in the fair value of other real estate which is measured using level 3 inputs (in thousands):
| For the Nine | For the Year | |||||||
| Months Ended | Ended | |||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Loans transferred to ORE | ||||||||
| Sales | ( | ) | ( | ) | ||||
| Losses on sales | ( | ) | ||||||
| Writedowns | ( | ) | ||||||
| Balance, end of period | $ | $ | ||||||
The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at September 30, 2023 and December 31, 2022, are as follows (in thousands):
| Carrying | Fair Value Measurements Using | |||||||||||||||||||
| Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| September 30, 2023: | ||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | |||||||||||||||
| Available for sale securities | ||||||||||||||||||||
| Held to maturity securities | ||||||||||||||||||||
| Other investments | ||||||||||||||||||||
| Federal Home Loan Bank stock | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Cash surrender value of life insurance | ||||||||||||||||||||
| Intangible asset | ||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Non-interest bearing | ||||||||||||||||||||
| Interest bearing | ||||||||||||||||||||
| Time Deposits | ||||||||||||||||||||
| Borrowings from Federal Home Loan Bank | - | - | - | - | - | |||||||||||||||
| Carrying | Fair Value Measurements Using | |||||||||||||||||||
| Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| December 31, 2022: | ||||||||||||||||||||
| Financial Assets: | ||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | |||||||||||||||
| Available for sale securities | ||||||||||||||||||||
| Held to maturity securities | ||||||||||||||||||||
| Other investments | ||||||||||||||||||||
| Federal Home Loan Bank stock | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Cash surrender value of life insurance | ||||||||||||||||||||
| Intangible asset | ||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Non-interest bearing | ||||||||||||||||||||
| Interest bearing | ||||||||||||||||||||
| Time deposits | ||||||||||||||||||||
| Borrowings from Federal Home Loan Bank | - | - | - | - | - | |||||||||||||||
10. Income Taxes:
The income tax expense and effective tax rate included in the consolidated statements of income are shown in the table below for the periods presented (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| Tax | Rate | Tax | Rate | Tax | Rate | Tax | Rate | |||||||||||||||||||||||||
| Income Taxes: | ||||||||||||||||||||||||||||||||
| Current | $ | ( | ) | - | % | $ | % | $ | % | $ | % | |||||||||||||||||||||
| Deferred | % | % | % | % | ||||||||||||||||||||||||||||
| Total income tax expense | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
For the three and nine months ended September 30, 2023, the current effective tax rate differs from the statutory tax rate of
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, 2022.
Forward-Looking Information
Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, changes in the availability of funds resulting from reduced liquidity, changes in statutes, government regulations or regulatory policies or practices in general and specifically as a result of the COVID-19 pandemic and acts of terrorism, weather or other events beyond the Company’s control.
New Accounting Pronouncements
The Financial Accounting Standards Board issued several accounting standards updates during the nine months ended September 30, 2023. Further disclosure is included in Note 1.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.
Investments
Investments which are classified as available for sale are stated at fair value. A decline in the market value of an investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. The determination of the fair value of securities may require Management to develop estimates and assumptions regarding the amount and timing of cash flows. On January 1, 2023 the Company adopted the Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses”, more commonly referred to as CECL which requires an assessment of the Company’s held to maturity debt securities for expected credit losses.
Allowance for credit losses on loans and leases and unfunded lending commitments
The Company’s most critical accounting policy relates to its allowance for credit losses on loans and leases and unfunded lending commitments, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The allowance for credit losses on loans and leases and unfunded lending commitments is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of the financial statements. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for credit losses on loans and leases and unfunded commitments. On a quarterly basis, Management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. Management believes that the allowance for loans and leases and unfunded lending commitments is adequate and appropriate for all periods presented in these financial statements. All credit relationships with an outstanding balance of $100,000 or greater that are included in Management’s loan watch list are individually reviewed for impairment.
On January 1, 2023 the Company adopted Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses”, more commonly referred to as CECL. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses).
The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets).
In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets.
CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.
Estimating an appropriate ACL involves a high degree of Management judgment. As such, it is Management’s responsibility to record the Bank’s best estimate of expected credit losses and provide it to the Board of Directors.
The analysis will be prepared and reported to the Board of Directors on a quarterly basis. The option and decision to prepare the analysis more frequently will remain with Management.
Other Real Estate
Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. If Management determines that the fair value of a property has decreased subsequent to foreclosure, the Company records a write down which is included in non-interest expense.
Employee Benefit Plans
Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.
Income Taxes
GAAP requires the asset and liability approach for financial accounting and reporting for deferred income taxes. The Company uses the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. As part of the process of preparing the consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for credit losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in the consolidated statement of condition. The Company must also assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent Management believes that recovery is not likely, the Company must establish a valuation allowance. Significant Management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, the Company must include an expense or a benefit within the tax provisions in the consolidated statement of income.
GAAP Reconciliation and Explanation
This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures for the three months and nine months ended September 30, 2023 and 2022 is included in the table below.
RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (in thousands)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Interest income reconciliation: |
||||||||||||||||
| Interest income - taxable equivalent |
$ | 7,899 | $ | 6,530 | $ | 25,111 | $ | 17,053 | ||||||||
| Taxable equivalent adjustment |
(60 | ) | (66 | ) | (185 | ) | (191 | ) | ||||||||
| Interest income (GAAP) |
$ | 7,839 | $ | 6,464 | $ | 24,926 | $ | 16,862 | ||||||||
| Net interest income reconciliation: |
||||||||||||||||
| Net interest income - taxable equivalent |
$ | 6,409 | $ | 5,729 | $ | 20,786 | $ | 15,827 | ||||||||
| Taxable equivalent adjustment |
(60 | ) | (66 | ) | (185 | ) | (191 | ) | ||||||||
| Net interest income (GAAP) |
$ | 6,349 | $ | 5,663 | $ | 20,601 | $ | 15,636 | ||||||||
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 $1,910,000 for the third quarter of 2023 compared with net income of $1,786,000 for the third quarter of 2022. The Company reported net income of $7,443,000 for the first nine months of 2023 compared with net income of $3,802,000 for the first nine months of 2022. Results in the third quarter and first nine months of 2023 included an increase in net income attributable to higher interest income on securities, overnight fed funds and loans due to an increase in interest rates offset somewhat by a higher cost of funds.
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 increased again 50 basis points in the first quarter of 2023, 25 basis points in the second quarter of 2023 and another 25 basis points in the third quarter of 2023 in an effort to slow inflation. As a result, net interest income increased $686,000 in the third quarter of 2023 as compared with 2022 and increased $4,965,000 in the first nine months of the year of 2023 as compared to 2022. This increase was attributable to higher interest income on securities, overnight fed funds and loans somewhat offset by a higher cost of funds.
Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be a major focus of the Company. The provision for the allowance for credit losses on unfunded commitments of $22,000 was recorded in the third quarter of 2023 as compared with a provision of $27,000 for the third quarter of 2022. A reduction of the provision for the allowance for credit losses of $275,000 was recorded for the first three quarters of 2023 compared to a provision in the allowance for loan losses of $80,000 for the first three quarters of 2022. The Company is working diligently to address and reduce its non-performing assets. On June 30, 2023, following a foreclosure, a large loan was charged off in the amount of $186,000 and the related property was moved into other real estate. This increased the Bank’s other real estate balance to $952,000, which is the reported balance of the Bank’s other real estate as of September 30, 2023. The Bank decreased its balance in nonaccrual loans during the first nine months of 2023 by $1,253,000 to $188,000 as of September 30, 2023, compared to $1,441,000 as of December 31, 2022. In October 2023, funds were received to settle the sale of one property in other real estate reducing the balance to $1. 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 $52,000 for the third quarter of 2023 as compared with 2022 results. Results for the third quarter of 2023 included lower other income of $153,000 and lower service charges of $84,000 offset somewhat by higher trust department income of $193,000. Non-interest income increased $266,000 for the first three quarters of 2023 as compared with 2022 results. Results in 2023 included higher trust department income and fees of $557,000 offset somewhat by lower service fee income of $185,000 and lower other income of $96,000.
Non-interest expenses increased $187,000 for the quarter ended September 30, 2023, as compared with 2022 results. This net increase for the third quarter of 2023 was primarily the result of higher other expense of $294,000, which consisted of higher accounting expense of $128,000, compliance expense of $58,000 and various other expenses offset somewhat by lower data processing expense of $88,000. Non-interest expenses increased $359,000 for the three quarters ended September 30, 2023, as compared with 2022 results. This net increase for the three quarters ended September 30, 2023, was primarily the result of higher other expense of $601,000 which included higher accounting expense of $272,000, compliance expense of $168,000, and trust expense of $113,000, higher salary expense of $285,000 and net occupancy of $204,000 offset somewhat by lower ATM expense of $468,000 which was the result of credits received from a third-party vendor, lower equipment rentals and maintenance of $187,000 and lower data processing expense of $145,000 which was the result of a renegotiation of a contract .
Total assets at September 30, 2023 decreased $51,261,000 as compared with December 31, 2022. Total deposits decreased $55,546,000 primarily as several public fund account balances decreased due to placement with other financial institutions. This decrease in deposits caused a decrease in net securities of $57,513,000. The decrease in net securities was also affected by an increase in unrealized losses on available for sale securities. In order to remain liquid as securities have matured the funds have been placed in cash and due from banks to prevent a borrowing position.
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 September 30, 2023 as Compared with Quarter Ended September 30, 2022
The Company’s average interest-earning assets decreased approximately $95,226,000, or 10.99%, from approximately $866,403,000 for the third quarter of 2022 to approximately $771,177,000 for the third quarter of 2023.
The Company’s average balance sheet decreased primarily as average investments decreased approximately $88,971,000, along with a decrease in average balances due from financial institutions of approximately $4,985,000 along with a decrease in average loans of approximately $1,337,000 for the third quarter of 2023 as compared with the third quarter of 2022. Average loans decreased as principal payments, maturities, and charge-offs on existing loans exceeded new loans. Funds available from the decrease in average loans and the decrease in balances due from financial institutions and the decrease in investment in securities was due to a decrease in average deposits due to the runoff of some public fund deposits.
The average yield on interest-earning assets increased from 3.01% for the third quarter of 2022 to 4.10% for the third quarter of 2023. This increase is due to an increase in interest rates on overnight fed funds, loans, and securities in 2023.
Average interest-bearing liabilities decreased approximately $92,060,000 or 14%, from approximately $648,303,000 for the third quarter of 2022 to approximately $556,243,000 for the third quarter of 2023. Average savings and interest bearing DDA deposits decreased approximately $40,061,000 while time deposits decreased approximately $44,290,000 primarily as several large public fund customers moved funds from time deposits into non maturity deposits and maintained lower balances or moved accounts to other financial institutions. 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 third quarter of 2022 was 0.49% as compared with 1.07% for the third quarter of 2023. Since the Federal Reserve increased rates 425 basis points during 2022, the Federal Reserve has increased rates 50 basis points during the first quarter of 2023, 25 basis points in the second quarter of 2023 and another 25 basis points in the third quarter of 2023 which has caused the bank to experience a rising cost of funds.
The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.64% for the third quarter of 2022 as compared with 3.32% for the third quarter of 2023.
Nine Months Ended September 30, 2023 as Compared with Nine Months Ended September 30, 2022
The Company’s average interest-earning assets decreased approximately $25,114,000, or 3%, from approximately $864,352,000 for the first three quarters of 2022 to approximately $839,238,000 for the first three quarters of 2023. The Company’s average balance sheet decreased primarily as average federal funds sold decreased approximately $46,758,000. These decreases were caused by the decrease in savings, and interest-bearing DDA balances during the same period due to the runoff of several large public fund depositors.
The average yield on earning assets increased from 2.63% for the first three quarters of 2022 to 4.00% for the first three quarters of 2023. This increase is due to an increase in interest rates on overnight fed funds, loans, and securities in 2023.
Average interest-bearing liabilities increased approximately $16,280,000, or 3%, from approximately $615,811,000 for the first three quarters of 2022 to approximately $632,091,000 for the first three quarters of 2023. Average savings and interest bearing DDA balances increased approximately $72,065,000 while average time deposits decreased approximately $52,842,000 primarily as several large public fund customers moved funds from time deposits into non maturity deposits and maintained lower balances or moved to other financial institutions.
The average rate paid on interest-bearing liabilities for the first three quarters of 2022 was 0.27% compared with 0.91% for the first three quarters of 2023. The Federal Reserve has increased rates significantly during 2022 and 2023 which has caused the bank to experience a rising cost of funds.
The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.44% for the first three quarters of 2022 as compared with 3.30% for the first three quarters of 2023
The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and nine months ended September 30, 2023 and 2022.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
| Quarter Ended September 30, 2023 |
Quarter Ended September 30, 2022 |
|||||||||||||||||||||||
| Average Balance |
Interest Earned/Paid |
Rate |
Average Balance |
Interest Earned/Paid |
Rate |
|||||||||||||||||||
| Loans (2)(3) |
$ | 231,367 | $ | 3,237 | 5.60 | % | $ | 232,704 | $ | 2,786 | 4.79 | % | ||||||||||||
| Balances due from depository institutions |
26,607 | 303 | 4.56 | % | 31,592 | 162 | 2.05 | % | ||||||||||||||||
| HTM: |
||||||||||||||||||||||||
| Taxable |
152,324 | 1,282 | 3.37 | % | 128,180 | 844 | 2.63 | % | ||||||||||||||||
| Non taxable (1) |
36,037 | 259 | 2.87 | % | 37,864 | 275 | 2.91 | % | ||||||||||||||||
| AFS: |
||||||||||||||||||||||||
| Taxable |
318,780 | 2,759 | 3.46 | % | 429,534 | 2,421 | 2.25 | % | ||||||||||||||||
| Non taxable (1) |
3,840 | 28 | 2.92 | % | 4,374 | 35 | 3.20 | % | ||||||||||||||||
| Other |
2,222 | 31 | 5.58 | % | 2,155 | 7 | 1.30 | % | ||||||||||||||||
| Total |
$ | 771,177 | $ | 7,899 | 4.10 | % | $ | 866,403 | $ | 6,530 | 3.01 | % | ||||||||||||
| Savings & interest- bearing DDA |
$ | 519,731 | $ | 1,404 | 1.08 | % | $ | 559,792 | $ | 566 | 0.40 | % | ||||||||||||
| Time deposits |
35,205 | 67 | 0.76 | % | 79,495 | 176 | 0.89 | % | ||||||||||||||||
| Borrowings from |
||||||||||||||||||||||||
| FHLB |
1,307 | 19 | 5.81 | % | 9,016 | 59 | 2.62 | % | ||||||||||||||||
| Total |
$ | 556,243 | $ | 1,490 | 1.07 | % | $ | 648,303 | $ | 801 | 0.49 | % | ||||||||||||
| Net tax-equivalent spread |
3.03 | % | 2.52 | % | ||||||||||||||||||||
| Net tax-equivalent margin on earning assets |
3.32 | % | 2.64 | % | ||||||||||||||||||||
(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2023 and 2022. See disclosure of Non-GAAP financial measures on page 44.
(2) Loan fees of $92 and $156 for 2023 and 2022, respectively, are included in these figures. Of the loan fees recognized in 2022, $21 were related to PPP loans.
(3) Average balance includes nonaccrual loans.
Analysis of Average Balances, Interest Earned/Paid and Yield
(In Thousands)
| Nine Months Ended September 30, 2023 |
Nine Months Ended September 30, 2022 |
|||||||||||||||||||||||
| Average Balance |
Interest Earned/Paid |
Rate |
Average Balance |
Interest Earned/Paid |
Rate |
|||||||||||||||||||
| Loans (2)(3) |
$ | 234,519 | $ | 9,509 | 5.41 | % | $ | 236,105 | $ | 8,156 | 4.61 | % | ||||||||||||
| Balances due from depository institutions |
42,899 | 1,507 | 4.68 | % | 89,657 | 317 | 0.47 | % | ||||||||||||||||
| HTM: |
||||||||||||||||||||||||
| Taxable |
185,753 | 4,890 | 3.51 | % | 94,527 | 1,825 | 2.57 | % | ||||||||||||||||
| Non taxable (1) |
36,726 | 788 | 2.86 | % | 37,317 | 789 | 2.82 | % | ||||||||||||||||
| AFS: |
||||||||||||||||||||||||
| Taxable |
333,150 | 8,238 | 3.30 | % | 399,636 | 5,839 | 1.95 | % | ||||||||||||||||
| Non taxable (1) |
3,993 | 92 | 3.07 | % | 4,957 | 118 | 3.17 | % | ||||||||||||||||
| Other |
2,198 | 88 | 5.34 | % | 2,153 | 9 | 0.56 | % | ||||||||||||||||
| Total |
$ | 839,238 | $ | 25,112 | 3.99 | % | $ | 864,352 | $ | 17,053 | 2.63 | % | ||||||||||||
| Savings & interest- bearing DDA |
$ | 593,928 | $ | 4,138 | 0.93 | % | $ | 521,863 | $ | 848 | 0.22 | % | ||||||||||||
| Time deposits |
37,436 | 158 | 0.56 | % | 90,278 | 307 | 0.45 | % | ||||||||||||||||
| Borrowings from |
||||||||||||||||||||||||
| FHLB |
727 | 29 | 5.32 | % | 3,670 | 71 | 2.58 | % | ||||||||||||||||
| Total |
$ | 632,091 | $ | 4,325 | 0.91 | % | $ | 615,811 | $ | 1,226 | 0.27 | % | ||||||||||||
| Net tax-equivalent spread |
3.08 | % | 2.36 | % | ||||||||||||||||||||
| Net tax-equivalent margin on earning assets |
3.30 | % | 2.44 | % | ||||||||||||||||||||
(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2023 and 2022. See disclosure of Non-GAAP financial measures on page 45.
(2) Loan fees of $251 and $537 for 2023 and 2022, respectively, are included in these figures. Of the loan fees recognized in 2022, $110 were related to PPP loans.
(3) Average balance includes nonaccrual loans.
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
| For the Quarter Ended |
||||||||||||||||
| September 30, 2023 compared with September 30, 2022 |
||||||||||||||||
| Volume |
Rate |
Rate/Volume |
Total |
|||||||||||||
| Interest earned on: |
||||||||||||||||
| Loans |
$ | (16 | ) | $ | 470 | $ | (3 | ) | $ | 451 | ||||||
| Balances due from financial institutions |
(26 | ) | 198 | (31 | ) | 141 | ||||||||||
| Held to maturity securities: |
||||||||||||||||
| Taxable |
159 | 234 | 44 | 437 | ||||||||||||
| Non taxable |
(13 | ) | (3 | ) | - | (16 | ) | |||||||||
| Available for sale securities: |
||||||||||||||||
| Taxable |
(624 | ) | 1,297 | (334 | ) | 339 | ||||||||||
| Non taxable |
(4 | ) | (3 | ) | - | (7 | ) | |||||||||
| Other |
- | 24 | 1 | 25 | ||||||||||||
| Total |
$ | (524 | ) | $ | 2,217 | $ | (323 | ) | $ | 1,370 | ||||||
| Interest paid on: |
||||||||||||||||
| Savings & interest-bearing DDA |
$ | (41 | ) | $ | 946 | $ | (68 | ) | $ | 837 | ||||||
| Time deposits |
(98 | ) | (25 | ) | 14 | (109 | ) | |||||||||
| Borrowings from FHLB |
(50 | ) | 72 | (62 | ) | (40 | ) | |||||||||
| Total |
$ | (189 | ) | $ | 993 | $ | (116 | ) | $ | 688 | ||||||
Analysis of Changes in Interest Income and Interest Expense
(In Thousands)
| For the Nine Months Ended |
||||||||||||||||
| September 30, 2023 compared with September 30, 2022 |
||||||||||||||||
| Volume |
Rate |
Rate/Volume |
Total |
|||||||||||||
| Interest earned on: |
||||||||||||||||
| Loans |
$ | (55 | ) | $ | 1,417 | $ | (10 | ) | $ | 1,352 | ||||||
| Balances due from financial institutions |
(165 | ) | 2,833 | (1,477 | ) | 1,191 | ||||||||||
| Held to maturity securities: |
||||||||||||||||
| Taxable |
1,761 | 663 | 640 | 3,064 | ||||||||||||
| Non taxable |
(12 | ) | 12 | - | - | |||||||||||
| Available for sale securities: |
||||||||||||||||
| Taxable |
(971 | ) | 4,043 | (673 | ) | 2,399 | ||||||||||
| Non taxable |
(23 | ) | (4 | ) | 1 | (26 | ) | |||||||||
| Other |
- | 77 | 2 | 79 | ||||||||||||
| Total |
$ | 535 | $ | 9,041 | $ | (1,517 | ) | $ | 8,059 | |||||||
| Interest paid on: |
||||||||||||||||
| Savings & interest-bearing DDA |
$ | 117 | $ | 2,788 | $ | 385 | $ | 3,290 | ||||||||
| Time deposits |
(180 | ) | 74 | (43 | ) | (149 | ) | |||||||||
| Borrowings from FHLB |
(57 | ) | 76 | (61 | ) | (42 | ) | |||||||||
| Total |
$ | (120 | ) | $ | 2,938 | $ | 281 | $ | 3,099 | |||||||
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 collateral-dependent, requiring careful consideration of changes in the value of the collateral.
The Company has adopted the CECL (Current Expected Credit Losses) methodology for estimating allowances for credit losses effective January 1, 2023. Under CECL, the allowance for credit losses (ACL) is a valuation account, measured as the difference between the Bank’s amortized cost basis and the net amount expected to be collected on the financial assets (i.e., lifetime credit losses). The CECL methodology described in FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326), applies to financial assets measured at amortized cost, and off-balance-sheet credit exposures (collectively, financial assets) including: financing receivables such as loans held for investment, held to maturity debt securities, off-balance-sheet credit exposures (unfunded commitments) including off-balance sheet loan commitments; standby letters of credit; and other similar instruments.
In general, the Bank uses a broad range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of financial assets. The following represents an overview of key factors regarding CECL: CECL requires the Bank to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risk characteristics exist. The Bank has determined that Call Report categories will be utilized, and Management will maintain the option to further segment the portfolio if we deem it beneficial to the analysis.
As stated above, CECL also applies to held to maturity debt securities since they are carried at amortized cost and are within the scope of the standard. Therefore, it is the responsibility of management to establish any required allowances for credit losses on the Bank’s held to maturity debt securities as of the date the Bank adopts CECL and to maintain such allowances thereafter. Because CECL requires the Bank to measure expected credit losses on a collective or pool basis when similar risk characteristics exist, held to maturity debt securities that share similar risk characteristics are collectively assessed for credit losses.
Estimating an appropriate ACL involves a high degree of management judgment. As such, it is Management’s responsibility to record the Bank’s best estimate of expected credit losses and provide it to the Board of Directors. The analysis will be prepared and reported to the Board of Directors on a quarterly basis. The option and decision to prepare the analysis more frequently will remain with management.
Estimation Methods for Expected Credit Losses-Accounting Standards Codification (“ASC”) 326, “Financial Instruments-Credit Losses,” does not require the use of a specific loss estimation method for purposes of determining ACLs. Various methods may be used to estimate the expected collectability of financial assets, with those methods generally applied consistently overtime. The same loss estimation method does not need to be applied to all financial assets. Loss-rate methods can involve a variety of approaches, and Management incorporates the methods below:
Open Pool or Snapshot Method
The starting point for the calculation consists of assets that are outstanding at the end of a given time frame and are made up of assets that were originated in various years. Additional assets may be added to pools of loans under an open pool method.
Weighted Average Remaining Maturity (WARM) Method
A loss-rate method that estimates expected credit losses over the remaining life of the financial assets and uses a weighted average of the assets’ contractual terms to estimate the pool’s remaining contractual term. The WARM method uses average annual net charge-off rates and the amortization adjusted remaining life plus qualitative adjustments to estimate the ACLs.
Qualitative Factor Adjustments
The estimation of ACLs is to reflect consideration of all significant factors relevant to the expected collectability of the Bank’s financial assets as of the reporting date. Management begins their expected credit loss estimation process by determining the Bank’s historical loss information or utilizing reliable and relevant peer group (UPBR, State, custom) historical loss proxy data for each segment of financial assets with similar risk characteristics.
Senior Management is to consider the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses.
Historical loss experience generally provides a quantitative starting point for Management’s estimate of expected credit losses. Consistent with FASB ASU Topic 326, Management must consider relevant qualitative factors that may cause the CECL estimate of the financial asset portfolio as of the evaluation date to differ from the historical loss experience.
Management is to consider the qualitative factors that are relevant to the Bank as of the reporting date, which may include but are not limited to the:
| 1. |
Nature and volume of the Bank’s financial assets. |
| 2. |
Existence, growth, and effect of any concentrations of credit. |
| 3. |
Volume and severity of past due financial assets, the volume of nonaccrual assets, and the volume and severity of adversely classified or graded assets. Adversely classified or graded loans are loans rated “substandard” (or its equivalent) or worse under the institution’s loan classification system. |
| 4. |
Value of the underlying collateral for loans that are not collateral dependent. |
| 5. |
Bank’s lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries. |
| 6. |
Quality of the Bank’s credit review function. |
| 7. |
Experience, ability, and depth of the Bank’s lending, investment, collection, and other relevant management and staff. |
| 8. |
Effect of other external factors such as the regulatory, legal, and technological environments, competition, and events such as natural disasters. |
| 9. |
Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets. Changes in economic and business conditions and developments included in qualitative factor adjustments are limited to those that affect the collectability of the Bank’s financial assets and are relevant to the Bank’s financial asset portfolios. For example, an economic factor for current or forecasted unemployment at the national or state level may indicate a strong job market based on low national or state unemployment rates, but a local unemployment rate, which may be significantly higher because of the actual or forecasted loss of a major local employer, may be more relevant to the collectability of an institution’s financial assets. |
The Company’s on-going, systematic evaluation resulted in the Company recording a provision for the allowance for credit losses on unfunded commitment of $22,000 and a provision $27,000 for the third quarters of 2023 and 2022, respectively, and a negative provision of $275,000 and a provision of $80,000 for the first three quarters of 2023 and 2022, respectively. During the first nine months of 2023 one large loan on nonaccrual prior to foreclosure was moved to other real estate during the quarter along with a recovery of another loan in the amount of $468,000. The Company’s analysis includes evaluating the current values of collateral and securing all nonaccrual loans. Nonaccrual loans totaled $188,000 and $1,441,000 at September 30, 2023 and December 31, 2022. Specific reserves totaled $40,000 and $124,000 at September 30, 2023 and December 31, 2022, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover credit losses on loans or the loan balances have been charged down to their realizable value.
The allowance for credit losses on loans and leases as a percentage of loans was 1.39% at September 30, 2023 and 1.40% at December 31, 2022, respectively. The Company believes that its allowance of credit losses on loans and leases is appropriate as of September 30, 2023.
The allowance for credit losses on loans and leases is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in future quarters on loan performance, which may require an adjustment to the allowance for credit losses on loans and leases. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations.
Non-interest income
Quarter Ended September 30, 2023 as Compared with Quarter Ended September 30, 2022
Non-interest income decreased $52,000 for the third quarter of 2023 as compared with the third quarter of 2022. Results in 2023 included lower other income of $153,000, which consisted of several nonrecurring income items along with lower service charge income of $84,000 offset somewhat by higher trust department income and fees of $193,000 as a result of the Trustmark acquisition that occurred in August of 2022.
Nine Months Ended September 30, 2023 as Compared with Nine Months Ended September 30, 2022
Non-interest income increased $266,000 for the first three quarters of 2023 as compared with the first three quarters of 2022. Results in 2023 included an increase in trust department income and fees of $557,000, which increased due to the increase in accounts as a result of the acquisition in August of 2022 offset somewhat by lower service charge income of $185,000 which can fluctuate in the normal course of business.
Non-interest expense
Quarter Ended September 30, 2023 as Compared with Quarter Ended September 30, 2022
Total non-interest expense increased $187,000 for the third quarter of 2023 as compared with the third quarter of 2022. In 2023, other expenses increased $294,000, which was the result of increased accounting fees of $128,000, compliance expense of $58,000 along with an increase in net occupancy expense of $191,000 and legal expense of $64,000 and trust expense of $68,000 offset somewhat by a decrease in salaries and benefits of $128,000, data processing expense of $88,000, other real estate expense of $60,000, maintenance expenses of $51,000, and assessment costs of $44,000 compared to 2022.
Nine Months Ended September 30, 2023 as Compared with Nine Months Ended September 30, 2022
Total non-interest expense increased $359,000 for the first three quarters of 2023 as compared with the first three quarters of 2022. In 2023, other expenses increased $601,000 which included accounting fees of $272,000, compliance expense of $169,000 and trust expense of $113,000 along with an increase in salaries and benefits of $285,000, net occupancy of $204,000 and legal expense of $165,000 offset somewhat by ATM expense decreased $468,000, which was the result of credits received from a third-party vendor, equipment and maintenance expenses decreased $187,000, data processing expense decreased $145,000, due to the renegotiation of a contract and other real estate expense decreased $85,000.
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 a reversal of a portion of the valuation allowance was appropriate.
The Company has started to record deferred and current income tax expenses in the first, second and third quarters of 2023. Income tax expense for the quarter ended September 30, 2023, and 2022 was $328,000 and $0, respectively. Income tax expenses for the nine months ended September 30, 2023, and 2022 was $1,586,000 and $0, respectively. The effective tax rate for the three months and nine months ended September 30, 2023, was 15% and 18%, respectively.
FINANCIAL CONDITION
Cash and due from banks increased $12,267,000 at September 30, 2023, compared with December 31, 2022 in the management of the Bank’s liquidity position.
Available for sale securities decreased $23,566,000 at September 30, 2023, compared with December 31, 2022. During the first nine months of 2023, there were $30,161,000 in purchases that combined with a decrease in market value for available for sale securities acquired in prior periods of $2,812,000 that helped offset maturities of $50,942,000. As discussed in Note 4, the Company evaluates the change in the market value of its available for sale securities on a monthly basis. This evaluation considers a number of factors including the cause of a decline or increase in value. Any unrealized losses identified through this analysis during the nine months ended September 30, 2023, relate to changes in interest rates rather than credit quality of the investments. Even though these securities have been classified as available for sale, the Company has traditionally held these securities until maturity. Although the unrealized losses recorded during 2022 and 2023 were significant, management does not anticipate these losses to be other than temporary.
Held to maturity debt securities decreased $33,947,000 at September 30, 2023, compared with December 31, 2022. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, the Company recognized an after-tax cumulative effect reduction to retained earnings totaling $32,000 specifically as a provision on held to maturity debt securities. There was no additional provision recorded on held to maturity debt securities as of September 30, 2023.
Total deposits decreased $55,546,000 at September 30, 2023, compared with December 31, 2022. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. Deposits from county and municipal entities increase significantly during the first quarter of each year based on property tax collections and start to decrease over the second and third quarters of each year. During the third quarter and through the end of 2023 the Bank expects that as interest rates have increased several larger public fund accounts have moved or will move to other financial institutions offering a more competitive interest rate on deposits.
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 September 30, 2023, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must have a Total risk-based capital ratio of 10.00% or greater, a Common Equity Tier 1 Capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater and a Leverage capital ratio of 5.00% or greater. The Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.
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 percent 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:
Community Bank Leverage Ratio (CBLR) Framework
| Qualifying Community Banking Organization | ● | Leverage ratio greater than 9 percent |
| ● | Less than $10 billion in average total consolidated assets | |
| ● | Off-balance-sheet exposures of 25 percent or less of total consolidated assets | |
| ● | Trading assets plus trading liabilities of 5 percent or less of total consolidated assets | |
| ● | Not an advances approaches banking organization | |
| Calculation of the Leverage Ratio | Tier 1 capital/Average total consolidated assets | |
| Leverage Ratio Requirement | Greater than 9 percent | |
| Grace Period | A two-quarter grace period (which begins at the end of the calendar quarter in which the electing banking organization ceases to satisfy any of the qualifying criteria) to either meet the qualifying criteria again or to comply with the generally applicable capital rule. | |
| ● | Grace period applies with a banking organization’s leverage ratio is 9 percent or less but greater than 8 percent. | |
| ● | A banking organization that fails to maintain a leverage ratio greater than 8 percent would not be permitted to use the grace period and must comply with the generally applicable capital rule, and file the appropriate regulatory reports. | |
| ● | Grace period does not apply in the case of a merger or acquisition. | |
The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of September 30, 2023 and December 31, 2022, are as follows (in thousands):
| For Capital Adequacy |
||||||||||||||||||||||||
| Actual |
Purposes |
To Be Well Capitalized |
||||||||||||||||||||||
| Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
| September 30, 2023: |
||||||||||||||||||||||||
| Leverage Ratio: |
||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) |
105,599 | 11.99 | % | 35,224 | 4.00 | % | 44,030 | 5.00 | % | |||||||||||||||
| December 31, 2022: |
||||||||||||||||||||||||
| Total Capital (to Risk Weighted Assets) |
$ | 101,221 | 21.18 | % | $ | 38,239 | 8.00 | % | $ | 47,799 | 10.00 | % | ||||||||||||
| Common Equity Tier 1 Capital (to Risk Weighted Assets) | 97,883 | 20.48 | % | 21,510 | 4.50 | % | 31,069 | 6.50 | % | |||||||||||||||
| Tier 1 Capital (to Risk Weighted Assets) |
97,883 | 20.48 | % | 28,680 | 6.00 | % | 38,239 | 8.00 | % | |||||||||||||||
| Leverage Ratio: |
||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets) |
97,883 | 10.78 | % | 36,328 | 4.00 | % | 45,410 | 5.00 | % | |||||||||||||||
Management continues to emphasize the importance of maintaining the appropriate capital levels of the Company and has established the goal of being “well-capitalized” by the banking regulatory authorities.
LIQUIDITY
Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Management monitors these funds requirements in such a manner as to satisfy these demands and provide the maximum earnings on its earning assets. The Company manages and monitors its liquidity position through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a monthly basis in the management of its liquidity needs and also conducts periodic contingency testing on its liquidity plan.
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, which it intends to use only as a contingency. As of September 30, 2023, the Company was able to borrow up to $8,175,150 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 $115,412,951 available under a line of credit with the Federal Home Loan Bank of Dallas. The Company has additional contingency funding capacity with various other financial institutions in the amount of $29,577,518.
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. Approximately half of the Bank’s deposits are fully FDIC insured, and the vast majority of uninsured deposits are public funds deposits secured by Bank securities pledged at fair value. The Company evaluates on an ongoing and continuous basis its 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 was advised during the second quarter that the Bank would not be retaining certain public funds deposits following competitive bid processes whereby those accounts were awarded to other local banks. While the majority of those deposits were withdrawn during the third quarter, approximately $31 million remained on the Company’s balance sheet at the end of the third quarter, the Company expects the funds to be withdrawn from the Bank during the fourth quarter of this year.
Funding obtained to replace the withdrawn deposits may be at a higher cost than the interest rate paid on the deposits to be withdrawn and therefore may impact the Bank’s net interest margin going forward. However, the Company anticipates that the Bank will be able to fund those deposit withdrawals through growth in other deposit accounts, proceeds from maturities of investment securities and earnings on investment securities, and through other borrowings with the FHLB or other counterparties, without having to liquidate any securities within its existing portfolio at a loss.
The Company also anticipates that a similar competitive bid will be held in December of this year for other public deposits currently placed with the Bank. If the Bank fails to win that bid, any withdrawal of those funds, which totaled approximately $47 million at the end of the third quarter, would not be withdrawn until next year.
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 September 30, 2023, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
An evaluation was performed with respect to the first, second and third quarters of 2023, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, because a previously reported material weakness in the Company’s internal control over financial reporting related to a low-income housing partnership had not been fully remediated by March 31, 2022, the Company’s disclosure controls and procedures were not considered to be fully effective as of that date. The material weakness in the Company’s internal control over financial reporting and the Company’s remediation measures are described under Item 4 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, which is incorporated herein by reference. We believe the actions described in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, were sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting for low- income housing partnerships and that the material weakness in the Company’s internal controls over financial reporting for low-income housing partnerships was fully remediated prior to December 31, 2022.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company’s management, including our Chief Executive Officer and Chief Financial Officer, identified prior to December 31, 2022, a material weakness related to the Company’s internal control over financial reporting for depreciation related to bank premises and equipment and recorded a related error correction in previously issued financial statements.
Even though the Company has concluded that this error did not create any material misstatement to previously issued financial statements for any prior periods, the current period or the trend in earnings, the material weakness that caused the error, had it not been corrected, could have resulted in a future failure to estimate depreciation for bank premises and equipment that could create a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Measures
To address the material weakness described above the Company has designed and implemented new and enhanced controls to ensure that: (i) reasonable estimates are used for depreciation on bank premises and equipment (ii) sub-ledger calculations of depreciation on bank premises and equipment are reconciled each period to general ledger amounts, and (iii) in-house accounting personnel have training to ensure they have the relevant expertise related to such estimates to the extent necessary to account for any similar estimates made or used in the future.
We believe the actions described above were sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting for depreciation of bank premises and equipment, and that the material weakness in the Company’s internal controls over financial reporting for depreciation of bank premises and equipment was fully remediated prior to December 31, 2022.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters are expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company. However, a Complaint has been filed by Stilwell Activist Investments, L.P., against the Company in the Chancery Court of Harrison County, Mississippi, requesting that the Company be compelled to allow the plaintiff to inspect and copy certain corporate records of the Company. The plaintiff, Stilwell Activist Investments, L.P., is a shareholder of record of the Company and is controlled by Joseph Stilwell, an individual who beneficially owns 12.2% 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 October 03, 2023, disclosing Company stock beneficially owned by Mr. Stilwell’s group. Mr. Stilwell and his related entities, including Stilwell Activist Investments, L.P., have nominated an individual for election to the Board of Directors of the Company at its last three annual meetings, but each individual nominated was not elected to the Board of Directors of the Company. The Complaint filed by Stilwell Activist Investments, L.P., alleges that it is entitled to inspect and copy certain Company records under the Mississippi Business Corporations Act based upon a request previously made and refused by the Company for non-compliance with state law; however, the plaintiff does not seek damages. The Company disputes the allegations in the Complaint. On June 30, 2023, Stilwell Activist Investments, L.P., also 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 Silman, III, making the same allegations that appear in the demand letter. The Company cannot comment on the allegations of the Complaint until the Special Litigation Committee has concluded its inquiry.
Item 5: Other Information
None.
Item 6 - Exhibits
| Exhibit 31.1: | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 |
|
| Exhibit 31.2: | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 | |
| Exhibit 32.1: | Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350 | |
| Exhibit 32.2: | Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350 | |
| Exhibit 101 | The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Condition at September 30, 2023 and December 31, 2022, (ii) Consolidated Statements of Income for the quarters and nine months ended September 30, 2023 and 2022, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters and nine months ended September 30, 2023 and 2022, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the quarters ended March 31, 2022, June 30, 2022 and September 30, 2022 and March 31, 2023, June 30, 2023 and September 30, 2023, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 and (vi) Notes to the Unaudited Consolidated Financial Statements for the nine months ended September 30, 2023 and 2022. | |
| 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: |
November 08, 2023 |
|
| By: |
/s/ Chevis C. Swetman |
| Chevis C. Swetman | ||
| Chairman, President and Chief Executive Officer | ||
| (principal executive officer) |
| Date: |
November 08, 2023 |
|
| By: |
/s/ Leslie B. Fulton |
| Leslie B. Fulton | ||
| Chief Financial Officer and Controller | ||
| (principal financial and accounting officer) |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO SECTION 302 OF THE
SARBANES - OXLEY ACT OF 2002
I, Chevis C. Swetman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Financial Corporation.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: November 08, 2023
| /s/ Chevis C. Swetman | |||
| Chevis C. Swetman, | |||
| President and Chief Executive Officer | |||
| (principal executive officer) |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO SECTION 302 OF THE
SARBANES - OXLEY ACT OF 2002
I, Leslie B. Fulton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples Financial Corporation.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusion about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
Dated: November 08, 2023
| /s/ Leslie B. Fulton | |||
| Leslie B. Fulton, | |||
| Chief Financial Officer | |||
| (principal financial and accounting officer) |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C. ss. 1350
I, Chevis C. Swetman, Chairman, President and Chief Executive Officer of Peoples Financial Corporation (the “Company”), hereby certify that the accompanying report on Form 10-Q for the period ending September 30, 2023 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the requirements of that section.
I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
By: |
/s/ Chevis C. Swetman |
||
|
Chevis C. Swetman, Chairman, President and Chief Executive Officer (principal executive officer) |
|||
|
Date: |
November 08, 2023 |
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PEOPLES FINANCIAL CORPORATION
PURSUANT TO 18 U.S.C. ss. 1350
I, Leslie B. Fulton, Chief Financial Officer and Controller of Peoples Financial Corporation (the “Company”), hereby certify that the accompanying report on Form 10-Q for the period ending September 30, 2023 and filed with the Securities and Exchange Commission on the date hereof pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Report”) by the Company fully complies with the requirements of that section.
I further certify that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
By: |
/s/ Leslie B. Fulton |
||
|
Leslie B. Fulton Chief Financial Officer and Controller (principal financial and accounting officer) |
|||
|
Date: |
November 08, 2023 |