Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

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, 2025.

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 acts of terrorism, weather or other events beyond the Company's control.

New Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") did not issue any new accounting standard or updates during the three months ended March 31, 2026. The Company does not expect that the updates discussed in the Notes will have a material impact on its financial position, results of operations or cash flows. 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.

Cash and Due from Banks

For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, balances due from banks; which includes non-interest and interest bearing accounts, and federal funds sold, all of which mature within ninety days.

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Investments

Investments which are classified as available for sale are stated at fair value. The determination of the fair value of securities may require Management to develop estimates and assumptions regarding the amount and timing of cash flows.

Allowance for credit losses

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

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

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

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

The Company's most critical accounting policy relates to its allowance for credit losses, which reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The allowance for credit losses is established and maintained at an amount sufficient to absorb losses on loans and leases held for investment. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the allowance for credit losses.

Management believes that the allowance for credit losses on loans is adequate and appropriate for all periods presented in these financial statements. All credit relationships with an outstanding balance of $50,000 or greater that are included in Management's loan watch list are individually reviewed for credit losses.

Income Taxes

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

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GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures for the three months ended March 31, 2026 and 2025 is included in the table below (in thousands).

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES

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OVERVIEW

The Company is a community bank serving the financial and trust needs of its customers in our trade area, which is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary's three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.

The Company reported net income of $1,446,000 for the first quarter of 2026 compared with net income of $1,310,000 for the first quarter of 2025. Results in 2026 included an increase in net income attributable to higher interest income and fees on loans and a lower cost of funds compared to 2025.

Managing the net interest margin is a key component of the Company's earnings strategy. Concerns about inflation and its potential impact on the economy and individual households are among the issues being considered by the Federal Reserve. Raising the federal funds rate had been a strategy pursued in 2023 to address this issue. The Federal Reserve raised interest rates a total of 100 basis points during 2023 in an effort to promote maximum employment, keep prices stable and have moderate long-term interest rates. Due to a weakening labor market the Federal Reserve has changed its course of action and reduced interest rates by 100 basis points during 2024 and 75 basis points in 2025 and is projected to make additional rate cuts in 2026. During the first quarter of 2026, the Federal Reserve did not reduce the federal funds rate. The Federal Open Market Committee opted to hold rates steady amid ongoing inflation concerns and economic uncertainty.

Monitoring asset quality, estimating potential losses in our loan portfolio, unfunded lending commitments and held to maturity debt securities and addressing non-performing loans continue to be a major focus of the Company. A net provision reduction for credit losses of ($8,000) was recorded in the quarter ended March 31, 2026 and ($5,000) for the quarter ended March 31, 2025. The Company has worked diligently to address and reduce its non-performing assets. The Company's nonaccrual loans totaled $517,000 and $533,000 at March 31, 2026 and December 31, 2025, respectively.

Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

Non-interest income increased $78,000 for the first quarter of 2026 as compared with 2025 results. Results for the first quarter of 2026 included the sale of miscellaneous assets of $57,000, an increase in trust income and fees of $14,000 and an increase in cash surrender value of life insurance of $9,000.

Non-interest expenses increased $17,000 for the first quarter ended March 31, 2026, as compared with 2025 results. This net increase for the first quarter of 2026 was primarily the result of an increase in ATM and debit card expense of $80,000 and miscellaneous expense of $69,000 mostly offset by lower maintenance expense of $64,000 and lower salary and benefit expense of $51,000.

Total assets at March 31, 2026, increased $61,139,000 as compared with December 31, 2025. Total deposits increased $61,760,000 as governmental entities' balances increased due to tax collections in several public fund accounts. The increase in deposits caused an increase in cash and due from banks of $37,805,000 and increased new purchases of available for sale securities.

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 March 31, 2026 as Compared with Quarter Ended March 31, 2025

The Company's average interest-earning assets decreased approximately $21,218,000, or 2.76%, from approximately $768,764,000 for the first quarter of 2025 to approximately $747,546,000 for the first quarter of 2026. The Company's average balance sheet decreased primarily as average investments decreased approximately $56,601,000 which was somewhat offset by an increase in average loans of approximately $34,495,000 as compared with the first quarter of 2025. Average loans increased as new loans exceeded principal payments, maturities, and charge-offs.

The average yield on interest-earning assets increased from 3.97% for the first quarter of 2025 to 4.10% for the first quarter of 2026. This increase is due to an increase in volume and yields on average loans, and overnight fed funds in 2026.

Average interest-bearing liabilities decreased approximately $26,110,000 or 4.66%, from approximately $560,582,000 for the first quarter of 2025 to approximately $534,472,000 for the first quarter of 2026. Average savings and interest bearing DDA deposits decreased approximately $14,914,000 and time deposits decreased approximately $11,868,000. This decrease was mostly caused by the allocation of public fund tax deposits that increase as taxes are collected and slowly allocate out of the deposit accounts through the end of each year along with the loss of several public fund accounts. Although average deposits decreased the Company evaluates on an ongoing and continuous basis various moderate to severe economic scenarios and does not anticipate a liquidity issue.

The average rate paid on interest-bearing liabilities for the first quarter of 2026 was 1.38%, compared with 1.35% for the first quarter of 2025. Although the Federal Reserve implemented several rate cuts during 2025, the cumulative effect of significant rate increases during 2022 and 2023 continued to impact the Bank's cost of funds in 2025 and into 2026 as the Bank priced deposits competitively within its local market. As market interest rates trend downward, management expects funding cost pressures to moderate during 2026.

The Company's net interest margin on a nontax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.09% for the first quarter of 2026 as compared with 2.95% for the first quarter of 2025.

The Company's net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.12% for the first quarter of 2026 as compared with 2.98% for the first quarter of 2025.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the three months ended March 31, 2026 and March 31, 2025.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

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Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

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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 computation.

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

The provision for credit losses is the amount necessary to maintain the ACL and the reserve for unfunded commitments at a level considered appropriate by management. Factors impacting the provision include loan portfolio growth, changes in the quality and composition of the loan portfolio, the level of nonperforming loans, delinquency and charge-off trends, the level of unfunded commitments and current economic conditions.

The Bank's on-going, systematic evaluation resulted in the Bank recording a net provision of (reduction of) credit losses of ($8,000) and ($5,000) for the first quarter of 2026 and 2025, respectively.

The Bank's analysis includes evaluating the current values of collateral securing all nonaccrual loans. Nonaccrual loans totaled $517,000 and $533,000 with $89,000 and $100,000 in specific reserves on these loans as of March 31, 2026 and

December 31, 2025, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover credit losses, or the loan balances have been charged down to their realizable value.

The allowance for credit losses as a percentage of loans was 1.15% and 1.11% at March 31, 2026 and December 31, 2025. Although the Company experienced loan growth in the first quarter of 2026 there was no additional credit loss provision required due to a recovery of a previously charged off loan in the amount of $150,000. The Company believes that its allowance for credit losses is appropriate as of March 31, 2026.

The allowance for credit losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in future quarters on loan performance, which may require an adjustment to the allowance for credit losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations.

Non-interest income

Three Months Ended March 31, 2026 as Compared with Three Months Ended March 31, 2025

Non-interest income increased $78,000 for the first quarter of 2026 as compared with 2025 results. Results for the first quarter of 2026 included the sale of miscellaneous assets of $57,000, an increase in trust income and fees of $14,000 and an increase in cash surrender value of life insurance of $9,000. The income increases described are not necessarily recurring and can fluctuate in the normal course of business.

Non-interest expense

Three Months Ended March 31, 2026 as Compared with Three Months Ended March 31, 2025

Non-interest expenses increased $17,000 for the first quarter ended March 31, 2026, as compared with 2025 results. This net increase for the first quarter of 2026 was primarily the result of an increase in ATM and debit card expense of $80,000 and miscellaneous expense of $69,000 mostly offset by lower maintenance expense of $64,000 and lower salary and benefit expense of $51,000. The expense increases described are not necessarily recurring and can fluctuate in the normal course of business.

Income Taxes

Quarter Ended March 31, 2026 as Compared with Quarter Ended March 31, 2025

The Company has recorded deferred and current income tax expenses in the first quarters of 2026 and 2025, respectively. Income tax expense increased $27,000 for the first quarter of 2026 as compared with tax expense of $375,000 for the first quarter of 2025. This increase was due to higher pretax income recorded for the first quarter of 2026 which was $163,000 less than the same period in 2025. The effective tax rate for quarter ended March 31, 2026 and 2025 was 22%, respectively.

Financial Condition

Cash and due from banks increased $37,805,000 at March 31, 2026, compared with December 31, 2025. This increase was due to a significant increase in total deposits.

Available for sale securities increased $25,427,000 and held to maturity securities decreased $7,060,000, respectively at March 31, 2026 compared with December 31, 2025 as the Company decreased its held to maturity securities and increased its available for sale investment purchases. As securities mature the proceeds are used to pay down borrowings first and then reinvest in available for sale securities and loans.

Gross loans increased $5,108,000 at March 31, 2026 compared with December 31, 2025, as new loans outpaced principal payments, maturities, and charge-offs.

Total deposits increased $61,760,000 at March 31, 2026, compared with December 31, 2025. 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 are slowly allocated out of the tax collection accounts over the course of the year.

SHAREHOLDERS' EQUITY AND CAPITAL ADEQUACY

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

As of December 31, 2025, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

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

Currently, qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9.00% are considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rule. In addition, these institutions are considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Effective July 1, 2026, the required leverage ratio under the CBLR will be reduced from 9.00% to 8.00% pursuant to a final rule jointly issued by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System on April 26, 2026.

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

As of March 31, 2026 and December 31, 2025, the Bank's community bank leverage ratio was 14.15% and 15.76%, respectively, both of which exceed the current CBLR minimum of 9.00% and the future CBLR minimum of 8.00% effective July 1, 2026.

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 of March 31, 2026, the Company was able to borrow up to $7,263,636 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 $127,421,217 available under a line of credit with the Federal Home Loan Bank of Dallas with $127,421,217 available. The Company has additional contingency funding capacity with various other financial institutions in the amount of $28,000,000.

The Company maintains a well-capitalized balance sheet which includes strong capital and liquidity. The Bank provides a full range of banking, financial and trust services in our local markets. The majority of the Bank's deposits are fully FDIC insured and the Company evaluates on an ongoing and continuous basis 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. Management considers fluctuations in public fund and municipal deposit balances, including seasonal runoff following first quarter tax collections, to represent a known trend that could affect the Company's liquidity profile. Management continues to actively monitor deposit concentrations and available contingency funding sources to mitigate potential liquidity risks.

The Company also uses other sources of funds, including borrowings from the FHLB. The Company generally anticipates relying on deposits, purchases of federal funds and borrowings from the Federal Reserve Bank of Atlanta and FHLB for its liquidity needs in 2026.

The Board of Directors requires management to implement and administer appropriate internal controls commensurate with the 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.