PEOPLES FINANCIAL CORP /MS/ - Annual Report: 2019 (Form 10-K)

pfbx20191231_10k.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 2019 Commission File Number 001-12103

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Mississippi	64-0709834
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Lameuse and Howard Avenues, Biloxi, Mississippi 39533	228-435-5511
(Address of principal executive offices) (Zip code)	(Registrant's telephone number, including area code)

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on

Which Registered

None

PFBX

None

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

Common, $1.00 Par Value

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 (§ 229.405 of this chapter) of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ☐

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 ☐ Non-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 ☐ NO ☒

At June 30, 2019, the aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $36,364,000.

On February 14, 2020, the registrant had outstanding 4,943,186 shares of common stock, par value of $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement issued in connection with the Annual Meeting of Shareholders to be held April 22, 2020, are incorporated by reference into Part III of this report.

Peoples Financial Corporation

Form 10-K

Index

PART I

Item 1.	DESCRIPTION OF BUSINESS	3
Item 1A.	RISK FACTORS	37
Item 1B.	UNRESOLVED STAFF COMMENTS	37
Item 2.	PROPERTIES	37
Item 3.	LEGAL PROCEEDINGS	37
Item 4.	MINE SAFETY DISCLOSURES	37

PART II

Item 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	38
Item 6.	SELECTED FINANCIAL DATA	39
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	53
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	53
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	105
Item 9A.	CONTROLS AND PROCEDURES	105
Item 9B.	OTHER INFORMATION	106

Part III

Item 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	106
Item 11.	EXECUTIVE COMPENSATION	106
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	106
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	107
Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	107

PART IV

Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	107
Item 16.	FORM 10-K SUMMARY	108

PART I

ITEM 1 - DESCRIPTION OF BUSINESS

BACKGROUND AND CURRENT OPERATIONS

General

Peoples Financial Corporation (the "Company") is a corporation that was organized as a one bank holding company in 1985. The Company is headquartered in Biloxi, Mississippi. At December 31, 2019, the Company operated in the state of Mississippi through its wholly owned subsidiary, The Peoples Bank, Biloxi, Mississippi (the “Bank”). The Company is engaged, through this subsidiary, in the banking business. The Bank is the Company's principal asset and primary source of revenue.

The Main Office, operations center and asset management and trust services of the Bank are located in downtown Biloxi, MS. At December 31, 2019, the Bank also had 17 branches located throughout Harrison, Hancock, Jackson and Stone Counties. The Bank has automated teller machines ("ATM") at its Main Office, all branch locations and at numerous non-proprietary locations.

The Bank Subsidiary

The Company’s wholly-owned bank subsidiary was originally chartered in 1896 in Biloxi, Mississippi, as The Peoples Bank of Biloxi. The Bank is a state chartered bank whose deposits are insured under the Federal Deposit Insurance Act. The Bank is not a member of the Federal Reserve System. The legal name of the Bank was changed to The Peoples Bank, Biloxi, Mississippi, during 1991.

Most of the Bank's business originates from Harrison, Hancock, Stone and Jackson Counties in Mississippi; however, some business is obtained from other counties in southern Mississippi, southern Louisiana and southern Alabama.

Nonbank Subsidiary

In 1985, PFC Service Corp. ("PFC") was chartered and began operations as the second wholly-owned subsidiary of Peoples Financial Corporation. The purpose of PFC was principally the leasing of automobiles and equipment. PFC is inactive at this time.

Products And Services

The Bank currently offers a variety of services to individuals and small to middle market businesses within its trade area. The Company’s trade area 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.

The Bank’s primary lending focus is to offer business, commercial, real estate, construction, personal and installment loans, with an emphasis on commercial lending. The Bank’s exposure for out of area, residential and land development, construction and commercial real estate loans as well as concentrations in the hotel/motel and gaming industries are monitored by the Company. Each loan officer has board approved lending limits on the principal amount of secured and unsecured loans that can be approved for a single borrower without prior approval of the senior credit committee. All loans, however, must meet the credit underwriting standards and loan policies of the Bank.

Deposit services include interest bearing and non-interest bearing checking accounts, savings accounts, certificates of deposit, and IRA accounts. The Bank generally provides depository accounts to individuals; small and middle market businesses; and state, county and local government entities in its trade area at interest rates consistent with market conditions.

The Bank's Asset Management and Trust Services Department (“Trust Department”) offers personal trust, agencies and estate services, including living and testamentary trusts, executorships, guardianships, and conservatorships. Benefit accounts maintained by the Trust Department primarily include self-directed individual retirement accounts. Escrow management, stock transfer and bond paying agency accounts are available to corporate customers.

The Bank also offers a variety of other services including safe deposit box rental, wire transfer services, night drop facilities, collection services, cash management and internet banking. The Bank has 30 ATMs at its branch locations and other off-site, non-proprietary locations, providing bank customers access to their depository accounts. The Bank is a member of the PULSE network.

There has been no significant change in the kind of services offered by the Bank during the last three fiscal years.

Customers

The Bank has a large number of customers acquired over a period of many years and is not dependent upon a single customer or upon a few customers. The Bank also provides services to customers representing a wide variety of industries including seafood, retail, hospitality, hotel/motel, gaming and construction. While the Company has pursued external growth strategies on a limited basis, its primary focus has been on internal growth by the Bank through the establishment of new branch locations and an emphasis on strong customer relationships.

Employees

At December 31, 2019, the Bank employed 154 total employees, with 148 full-time employees and 6 part-time employees. The Company has no employees who are not employees of the bank subsidiary. Through the Bank, employees receive salaries and benefits, which include 401(k) and ESOP plans, cafeteria plan, and life, health and disability insurance. The Company considers its relationship with its employees to be good.

Competition

The Bank is in direct competition with numerous local and regional commercial banks as well as other non-bank institutions. Interest rates paid and charged on deposits and loans are the primary competitive factors within the Bank’s trade area. The Bank also competes for deposits and loans with insurance companies, finance companies, brokerage houses and credit unions. The principal competitive factors in the markets for deposits and loans are interest rates paid and charged. The Company also competes through efficiency, quality of customer service, the range of services and products it provides, the convenience of its branch and ATM locations and the accessibility of its staff. The Bank intends to continue its strategy of being a local, community bank offering traditional bank services and providing quality service in its local trade area.

Miscellaneous

The Bank holds no patents, licenses (other than licenses required to be obtained from appropriate bank regulatory agencies), franchises or concessions.

The Bank has not engaged in any research activities relating to the development of new services or the improvement of existing services except in the normal course of its business activities. The Bank presently has no plans for any new line of business requiring the investment of a material amount of total assets.

Available Information

The Company maintains an internet website at www.thepeoples.com. The Company’s Annual Report to Shareholders is available on the Company’s website. Also available through the website is a link to the Company’s filings with the Securities and Exchange Commission (“SEC”). Information on the Company’s website is not incorporated into this Annual Report on Form 10-K or the Company’s other securities filings and is not part of them.

REGULATION AND SUPERVISION

General

The Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Atlanta (“Federal Reserve”). The Company is required to file semi-annual reports with the Federal Reserve and such other information as the Federal Reserve may require. The Federal Reserve also conducts examinations of the Company.

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

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it may acquire direct or indirect ownership or control of any voting shares of any other bank holding company if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the other bank holding company;

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it may acquire direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank;

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it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or

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it may merge or consolidate with any other bank holding company.

The Bank Holding Company Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the performance under the Community Reinvestment Act of 1977, both of which are discussed below in more detail.

Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

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the bank holding company has registered securities under Section 12 of the Exchange Act of 1934, as amended (“Exchange Act”); or

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no other person owns a greater percentage of that class of voting securities immediately after the transaction.

The Company’s common stock is registered under Section 12 of the Exchange Act. The regulations provide a procedure for challenging rebuttable presumptions of control.

The Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries and acquiring or retaining direct or indirect control of any company engaged in any activities other than activities closely related to banking or managing or controlling banks. In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

The Bank is incorporated under the laws of the State of Mississippi and is subject to the applicable provisions of Mississippi banking laws and the laws of the various states in which it operates, as well as federal law. The Bank is subject to the supervision of the Mississippi Department of Banking and Consumer Finance (“MDBCF”) and to regular examinations by that department. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) and, therefore, the Bank is subject to the provisions of the Federal Deposit Insurance Act and to examination by the FDIC.

Federal Reserve policy historically has required bank holding companies to act as a source of strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) codifies this policy as a statutory requirement. This support may be required by the Federal Reserve at times when the Company might otherwise determine not to provide it. In addition, if a bank holding company commits to a federal bank regulator that it will maintain the capital of its bank subsidiary, whether in response to the Federal Reserve’s invoking its source-of-strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee and the bank will be entitled to priority payment in respect of that commitment, ahead of other creditors of the bank holding company.

In addition, the Company is required to file certain reports with, and otherwise comply with the rules and regulations of, the SEC under federal securities laws. The common stock of the Company is listed on the OTCQX Best Market, such listing subjecting the Company to compliance with the market’s requirements with respect to reporting and other rules and regulations.

The Dodd-Frank Act

The Dodd-Frank Act, enacted in 2010, significantly restructured financial regulation in the United States, including through the creation of a new resolution authority, mandating higher capital and liquidity requirements, requiring banks to pay increased fees to regulatory agencies, and through numerous other provisions intended to strengthen the financial services sector.

The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has extensive regulatory and enforcement powers over consumer financial products and services, and the Financial Stability Oversight Council, which has oversight authority for monitoring and regulating systemic risk. In addition, the Dodd-Frank Act altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance requirements for all public companies, including financial institutions, with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions, and restricted certain proprietary trading and hedge fund and private equity activities of banks and their affiliates. The Dodd-Frank Act also required the issuance of numerous implementing regulations, many of which have not yet been issued.

In January 2013, the CFPB issued final regulations governing mainly consumer mortgage lending. One rule imposes additional requirements on lenders, including rules designed to require lenders to ensure borrowers’ ability to repay their mortgage. The CFPB also finalized a rule on escrow accounts for higher priced mortgage loans and a rule expanding the scope of the high-cost mortgage provision in the Truth in Lending Act. The CFPB also issued final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing. In November 2013, the CFPB issued a final rule on integrated mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, compliance with which was required by August 1, 2015.

The Dodd-Frank Act authorizes national and state banks to establish de novo branches in other states to the same extent as a bank chartered by that state would be so permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are now able to enter new markets more freely.

Recently, the CFPB and banking regulatory agencies have increasingly used a general consumer protection statute to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the “unfair or deceptive acts or practices” (“UDAP”) law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” which has been delegated to the CFPB for supervision.

Many aspects of the Dodd-Frank Act are subject to further rulemaking and will take effect over several years. Additionally, many provisions of the Dodd-Frank Act were amended by the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted in 2018, but like the Dodd-Frank Act, several of those provisions are subject to further rulemaking that has not yet been enacted. The overall financial impact on the Company and its subsidiaries or the financial services industry generally cannot be anticipated at this time.

Dividends

The Company is a legal entity that is separate and distinct from its subsidiaries. The primary source of funds for dividends paid to the Company’s shareholders are dividends paid to the Company by the Bank. Various federal and state laws limit the amount of dividends that the Bank may pay to the Company without regulatory approval. Under Mississippi law, the Bank must obtain non-objection of the Commissioner of the Mississippi Department of Banking and Consumer Finance (“MDBCF”) prior to paying any dividend on the Bank’s common stock. In addition, the Bank may not pay any dividends if, after paying the dividend, it would be undercapitalized under applicable capital requirements. The FDIC also has the authority to prohibit the Bank from engaging in business practices that the FDIC considers to be unsafe or unsound, which, depending on the financial condition of the Bank, could include the payment of dividends.

In addition, the Federal Reserve has the authority to prohibit the payment of dividends by a bank holding company if its actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement, Supervisory Release 09-4, on the payment of cash dividends by bank holding companies, which outlines the Federal Reserve’s view that a bank holding company that is experiencing earnings weaknesses or other financial pressures should not pay cash dividends that exceed its net income, that are inconsistent with its capital position, or that could only be funded in ways that weaken its financial health, such as by borrowing or selling assets. The Federal Reserve has indicated that, in some instances, it may be appropriate for a bank holding company to eliminate its dividends.

Capital

The Federal Reserve has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies. The risk-based capital ratio guidelines establish a systematic analytical framework that:

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makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations;

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takes off-balance sheet exposures into explicit account in assessing capital adequacy; and

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minimizes disincentives to holding liquid, low-risk assets.

Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weighting assigned to categories perceived as representing greater risk. The risk-based ratio represents capital divided by total risk-weighted assets. The leverage ratio is core capital divided by total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements promulgated by the FDIC.

Generally, under the applicable guidelines, a financial institution’s capital is divided into two tiers. “Total capital” is Tier 1 plus Tier 2 capital. These two tiers are:

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“Tier 1,” or core capital, that includes total equity plus qualifying capital securities and minority interests, excluding unrealized gains and losses accumulated in other comprehensive income, and non-qualifying intangible and servicing assets; and

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“Tier 2,” or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, mandatory convertible securities, qualifying subordinated debt, and the allowance for credit losses, up to 1.25% of risk-weighted assets.

The Federal Reserve and the other federal banking regulators require that all intangible assets (net of deferred tax), except originated or purchased mortgage-servicing rights, non-mortgage servicing assets, and purchased credit card relationships, be deducted from Tier 1 capital. However, the total amount of these items included in Total capital cannot exceed 100% of an institution’s Tier 1 capital.

The guidelines also provided that bank holding companies experiencing internal growth or making acquisitions would be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve indicated that it would consider a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.

Failure to meet applicable capital guidelines could subject the financial institution to a variety of enforcement remedies available to the federal regulatory authorities. These include limitations on the ability to pay dividends, the issuance of a capital directive to increase capital, and the termination of deposit insurance by the FDIC. In addition, the financial institution could be subject to the measures described below under “Prompt Corrective Action” as applicable to “under-capitalized” institutions. Certain provisions of the EGRRCPA have the potential to limit the application of the guidelines to the Company and the Bank if certain elections are made by the Company or Bank. For example, Section 201 of EGRRCPA contains a framework for capital rule simplification known as the Community Bank Leverage Ratio (“CBLR”). According to the Final Rule published by the OCC, Federal Reserve and FDIC in the Federal Register on November 13, 2019, to implement Section 201 of the EGRRCPA, a community banking organization may elect to use the CBLR as a single capital leverage ratio to measure capital adequacy. This CBLR is calculated by dividing tier 1 capital by the community banking organization’s average total consolidated assets. In order to qualify for use of the CBLR, a community banking organization must meet the following criteria: (i) a leverage ratio of greater than 9%, (ii) total consolidated assets of less than $10 billion, (iii) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidates assets and (iv) the sum of trading assets and trading liabilities of 5 percent or less of total consolidated assets. Community banking organizations that qualify may opt into and out of the framework by completing the associated reporting requirements in its Call Report or FR-Y-9C, beginning with the March 31, 2020, report. As of December 31, 2019, the Company and the Bank qualify to elect to use CBLR, and they do not plan to elect to use the CBLR.

New Capital Rules

On July 2, 2013, the Federal Reserve approved the final rule for BASEL III capital requirements for all bank holding companies chartered in the United States. The rule was subsequently approved by the FDIC on July 9, 2013, and made applicable to the Bank as well. The rule implements in the United States certain of the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The major provisions of the new rule applicable to the Company and the Bank are:

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The new rule implements higher minimum capital requirements, includes a new common equity Tier 1 capital requirement, and establishes criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. These enhancements both improve the quality and increase the quantity of capital required to be held by banking organizations, better equipping the United States banking system to deal with adverse economic conditions.

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The new minimum capital to risk-weighted assets requirements are a common equity Tier 1 capital ratio of 4.5% and a Tier 1 capital ratio of 6.0% which is an increase from 4.0%, and a total capital ratio that remains at 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%.

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The new rule improves the quality of capital by implementing changes to the definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments such as trust preferred securities in Tier 1 capital going forward, and new constraints on the inclusion of minority interests, mortgage-servicing assets, deferred tax assets, and certain investments in the capital of unconsolidated financial institutions. In addition, the new rule requires that most regulatory capital deductions be made from common equity Tier 1 capital.

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Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is measured relative to risk weighted assets. Phase-in of the capital conservation buffer requirements began on January 1, 2016. Subsequent to the completion of a “phase-in” period, a banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action well-capitalized thresholds.

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The new rule also increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

The transition period for implementation of Basel III is January 1, 2015, through December 31, 2018. Certain provisions of the EGRRCPA have the potential to limit the application of BASEL III to the Company and the Bank if certain elections are made by the Company or Bank. For example, Section 201 of EGRRCPA contains a framework for capital rule simplification known as the Community Bank Leverage Ratio (“CBLR”). According to the Final Rule published by the OCC, Federal Reserve and FDIC in the Federal Register on November 13, 2019, to implement Section 201 of the EGRRCPA, a community banking organization may elect to use the CBLR as a single capital leverage ratio to measure capital adequacy. This CBLR is calculated by dividing tier 1 capital by the community banking organization’s average total consolidated assets. In order to qualify for use of the CBLR, a community banking organization must meet the following criteria: (i) a leverage ratio of greater than 9%, (ii) total consolidated assets of less than $10 billion, (iii) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidates assets and (iv) the sum of trading assets and trading liabilities of 5 percent or less of total consolidated assets. Community banking organizations that qualify may opt into and out of the framework by completing the associated reporting requirements in its Call Report or FR-Y-9C, beginning with the March 31, 2020, report. As of December 31, 2019, the Company and the Bank qualify to elect to use CBLR, and they do not plan to elect to use the CBLR.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991, known as FDICIA, requires federal banking regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: “well-capitalized,” “adequately-capitalized,” “under-capitalized,” “significantly under-capitalized,” and “critically under-capitalized.”

An institution is deemed to be:

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“well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater (6% before January 1, 2015), a Tier 1 leverage ratio of 5% or greater, and, after January 1, 2015, a common equity Tier 1 capital ratio of 6.5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure;

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“adequately-capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater (4% before January 1, 2015), generally, a Tier 1 leverage ratio of 4% or greater, and, after January 1, 2015, a common equity Tier 1 capital ratio of 4.5% or greater, and the institution does not meet the definition of a “well-capitalized” institution;

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“under-capitalized” if it does not meet one or more of the “adequately-capitalized” tests;

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“significantly under-capitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 4% (less than 3% before January 1, 2015), a Tier 1 leverage ratio that is less than 3%, and, after January 1, 2015, a common equity Tier 1 capital ratio that is less than 3%; and

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“critically under-capitalized” if it has a ratio of tangible equity, as defined in the regulations, to total assets that is equal to or less than 2%.

Throughout 2019, the Bank’s regulatory capital ratios were in excess of the levels established for “well-capitalized” institutions.

FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend or paying any management fee to its holding company, if the depository institution would be “under-capitalized” after such payment. “Under-capitalized” institutions are subject to growth limitations and are required by the appropriate federal banking agency to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan.

If an “under-capitalized” institution fails to submit an acceptable plan, it is treated as if it is “significantly under-capitalized.” “Significantly under-capitalized” institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately-capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

“Critically under-capitalized” institutions may not, beginning 60 days after becoming “critically under-capitalized,” make any payment of principal or interest on their subordinated debt. In addition, “critically under-capitalized” institutions are subject to appointment of a receiver or conservator within 90 days of becoming so classified.

Under FDICIA, a depository institution that is not “well-capitalized” is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. As previously stated, the Bank is “well-capitalized” and the FDICIA brokered deposit rule did not adversely affect its ability to accept brokered deposits. Certain provisions of the EGRRCPA have the potential to limit the application of FDICIA and prompt corrective action to the Company and the Bank if certain elections are made by the Company or Bank. For example, Section 201 of EGRRCPA contains a framework for capital rule simplification known as the Community Bank Leverage Ratio (“CBLR”). According to the Final Rule published by the OCC, Federal Reserve and FDIC in the Federal Register on November 13, 2019, to implement Section 201 of the EGRRCPA, a community banking organization may elect to use the CBLR as a single capital leverage ratio to measure capital adequacy. This CBLR is calculated by dividing tier 1 capital by the community banking organization’s average total consolidated assets. In order to qualify for use of the CBLR, a community banking organization must meet the following criteria: (i) a leverage ratio of greater than 9%, (ii) total consolidated assets of less than $10 billion, (iii) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25 percent or less of total consolidates assets and (iv) the sum of trading assets and trading liabilities of 5 percent or less of total consolidated assets. Community banking organizations that qualify may opt into and out of the framework by completing the associated reporting requirements in its Call Report or FR-Y-9C, beginning with the March 31, 2020, report. As of December 31, 2019, the Company and the Bank qualify to elect to use CBLR, and they do not plan to elect to use the CBLR.

Interstate Banking and Branching Legislation

Federal law allows banks to establish and operate a de novo branch in a state other than the bank’s home state if the law of the state where the branch is to be located would permit establishment of the branch if the bank were chartered by that state, subject to standard regulatory review and approval requirements. Federal law also allows the Bank to acquire an existing branch in a state in which the bank is not headquartered and does not maintain a branch if the FDIC and MDBCF approve the branch or acquisition, and if the law of the state in which the branch is located or to be located would permit the establishment of the branch if the bank were chartered by that state.

Once a bank has established branches in a state through an interstate merger transaction or through de novo branching, the bank may then establish and acquire additional branches within that state to the same extent that a state chartered bank is allowed to establish or acquire branches within the state.

Under the Bank Holding Company Act, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank holding company or bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states have opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years, and subject to certain deposit market-share limitations.

FDIC Insurance

The deposits of the Bank are insured by the Deposit Insurance Fund (the “DIF”), which the FDIC administers. The Dodd-Frank Act permanently increased deposit insurance on most accounts to $250,000. To fund the DIF, FDIC-insured banks are required to pay deposit insurance assessments to the FDIC. For institutions like the Bank with less than $10 billion in assets, the amount of the assessment is based on its risk classification. The higher an institution’s risk classification, the higher its rate of assessments (on the assumption that such institutions pose a greater risk of loss to the DIF). An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances.

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. If the FDIC terminates an institution’s deposit insurance, accounts insured at the time of the termination, less withdrawals, will continue to be insured for a period of six months to two years, as determined by the FDIC.

Affiliate Transactions

The Bank is subject to Regulation W, which comprehensively implements statutory restrictions on transactions between a bank and its affiliates. Regulation W combines the Federal Reserve’s interpretations and exemptions relating to Sections 23A and 23B of the Federal Reserve Act. Regulation W and Section 23A place limits on the amount of loans or extensions of credit to, investments in, or certain other transactions with affiliates, and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In general, the Bank’s “affiliates” are the Company and its non-bank subsidiary.

Regulation W and Section 23B prohibit, among other things, a bank from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with non-affiliated companies.

The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders and their related interests. Such extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features.

The Community Reinvestment Act

The Community Reinvestment Act of 1977 (“CRA”) and its implementing regulations provide an incentive for regulated financial institutions to meet the credit needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The regulations provide that the appropriate regulatory authority will assess reports under CRA in connection with applications for establishment of domestic branches, acquisitions of banks or mergers involving bank holding companies. An unsatisfactory rating under CRA may serve as a basis to deny an application to acquire or establish a new bank, to establish a new branch or to expand banking services. As of December 31, 2019, the Bank had a “satisfactory” rating under CRA.

Patriot Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as extended and revised by the PATRIOT Improvement and Reauthorization Act of 2005 (the “Patriot Act”), requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign financial institutions; and (iii) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign financial institutions that do not have a physical presence in any country. The Patriot Act also requires that financial institutions follow certain minimum standards to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants.

Consumer Privacy and Other Consumer Protection Laws

The Bank, like all other financial institutions, is required to maintain the privacy of its customers’ non-public, personal information. Such privacy requirements direct financial institutions to:

●

provide notice to customers regarding privacy policies and practices;

●

inform customers regarding the conditions under which their non-public personal information may be disclosed to non-affiliated third parties; and

●

give customers an option to prevent disclosure of such information to non-affiliated third parties.

Under the Fair and Accurate Credit Transactions Act of 2003, the Bank’s customers may also opt out of information sharing between and among the Bank and its affiliates.

The Bank is also subject, in connection with its deposit, lending and leasing activities, to numerous federal and state laws aimed at protecting consumers, including the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Truth-in-Savings Act, the Fair Housing Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, the Currency and Foreign Transactions Reporting Act, the National Flood Insurance Act, the Flood Protection Act, the Bank Secrecy Act, laws and regulations governing unfair, deceptive, and/or abuse acts and practices, the Servicemembers Civil Relief Act, the Housing and Economic Recovery Act, and the Credit Card Accountability Act, among others, as well as various state laws.

Incentive Compensation

In 2010, the Federal Reserve issued guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance also provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

The scope and content of banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.

Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002 is applicable to all companies with equity or debt securities registered under the Exchange Act. In particular, the Sarbanes-Oxley Act established: (i) requirements for audit committees, including independence, expertise and responsibilities; (ii) certification and related responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) civil and criminal penalties for violation of the securities laws.

Effect of Governmental Policies

The Company and the Bank are affected by the policies of regulatory authorities, including the Federal Reserve, the FDIC, and the MDBCF. An important function of the Federal Reserve is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve are: (i) purchases and sales of U.S. government and other securities in the marketplace; (ii) changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve; (iii) changes in the reserve requirements of depository institutions; and (iv) indirectly, changes in the federal funds rate, which is the rate at which depository institutions lend money to each other overnight. These instruments are intended to influence economic and monetary growth, interest rate levels, and inflation.

The monetary policies of the Federal Reserve and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and in the money markets, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels, loan demand, or the business and results of operations of the Company and the Bank, or whether changing economic conditions will have a positive or negative effect on operations and earnings.

Other Proposals

Bills occasionally are introduced in the United States Congress and the Mississippi State Legislature and other state legislatures, and regulations occasionally are proposed by the Company’s regulatory agencies, any of which could affect the businesses, financial results, and financial condition of the Company or the Bank. Generally it cannot be predicted whether or in what form any particular proposals will be adopted or the extent to which the Company and the Bank may be affected.

Summary

The foregoing discussion sets forth certain material elements of the regulatory framework applicable to the Company and the Bank. This discussion is a brief summary of the regulatory environment in which the Company and its subsidiaries operate and is not designed to be a complete discussion of all statutes and regulations affecting such operations. Regulation of financial institutions is intended primarily for the protection of depositors, the deposit insurance fund and the banking system, and generally is not intended for the protection of shareholders. Changes in applicable laws, and their application by regulatory agencies, cannot necessarily be predicted, but could have a material effect on the business and results of the Company and its subsidiaries.

SUPPLEMENTAL STATISTICAL INFORMATION

Schedules I-A through VII present certain statistical information regarding the Company. This information is not audited and should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements found in Item 8 of this Annual Report on Form 10-K.

Distribution of Assets, Liabilities and Shareholders' Equity and Interest Rates and Differentials

Net Interest Income, the difference between Interest Income and Interest Expense, is the most significant component of the Company's earnings. For interest analytical purposes, Management adjusts Net Interest Income to a "taxable equivalent" basis using a Federal Income Tax rate of 21% in 2019 and 2018 and 34% in 2017 on tax-exempt items (primarily interest on municipal securities).

Another significant statistic in the analysis of Net Interest Income is the net yield on earning assets. The net yield is the difference between the rate of interest earned on earning assets and the effective rate paid for all funds, non-interest bearing as well as interest bearing. Since a portion of the Bank's deposits do not bear interest, such as demand deposits, the rate paid for all funds is lower than the rate on interest bearing liabilities alone.

Recognizing the importance of interest differential to total earnings, Management places great emphasis on managing interest rate spreads. Although interest differential is affected by national, regional and local economic conditions, including the level of credit demand and interest rates, there are significant opportunities to influence interest differential through appropriate loan and investment policies which are designed to maximize the differential while maintaining sufficient liquidity and availability of incremental funds for purposes of meeting existing commitments and investment in lending and investment opportunities that may arise.

The information included in Schedule I-F presents the change in interest income and interest expense along with the reason(s) for these changes. The change attributable to volume is computed as the change in volume times the old rate. The change attributable to rate is computed as the change in rate times the old volume. The change in rate/volume is computed as the change in rate times the change in volume.

Credit Risk Management and Loan Loss Experience

In the normal course of business, the Bank assumes risks in extending credit. The Bank manages these risks through its lending policies, credit underwriting analysis, appraisal requirements, concentration and exposure limits, loan review procedures and the diversification of its loan portfolio. Although it is not possible to predict loan losses with complete accuracy, Management constantly reviews the characteristics of the loan portfolio to determine its overall risk profile and quality.

Constant attention to the quality of the loan portfolio is achieved by the loan review process. Throughout this ongoing process, Management is advised of the condition of individual loans and of the quality profile of the entire loan portfolio. Any loan or portion thereof which is classified "loss" by regulatory examiners or which is determined by Management to be uncollectible because of such factors as the borrower's failure to pay interest or principal, the borrower's financial condition, economic conditions in the borrower's industry or the inadequacy of underlying collateral, is charged-off.

Provisions are charged to operating expense based upon historical loss experience, and additional amounts are provided when, in the opinion of Management, such provisions are not adequate based upon the current factors affecting loan collectability.

The allocation of the allowance for loan losses by loan category is based on the factors mentioned in the preceding paragraphs. Accordingly, since all of these factors are subject to change, the allocation is not necessarily indicative of the breakdown of future losses. In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-03, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss impairment methodology with a methodology that reflects all current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 was originally to become effective for the Company for interim and annual periods beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates. ASU 2019-10 amends the effective date for certain entities, including the Company, for ASU 2016-13, which is now effective for the Company in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of this ASU could materially affect its allowance for loan loss methodology, including the calculation of its provision for loan losses. For additional details regarding the pending adoption of this accounting pronouncement, see Note A – Business and Summary of Significant Accounting Policies included in Part II. Item 8. – Financial Statements and Supplementary Data of this report.

Further information concerning the provision for loan losses and the allowance for loan losses is presented in "Management's Discussion and Analysis" in Item 7 of this Annual Report on Form 10-K and in “Note A - Business and Summary of Significant Accounting Policies” to the 2019 Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

Return on Equity and Assets

The Company’s results and key ratios for 2015 – 2019 are summarized in the "Selected Financial Data" in Item 6 and "Management's Discussion and Analysis" in Item 7 of this Annual Report on Form 10-K.

Dividends

The Company paid a cash dividend of $ .03, $ .02 and $ .01 per share for the years ended December 31, 2019, 2018 and 2017, respectively.

SCHEDULE I-A

Distribution of Average Assets, Liabilities and Shareholders’ Equity (1) (In thousands)

For the Years Ended December 31,	2019		2018		2017

ASSETS:

Cash and due from banks	$	21,571	$	23,113	$	32,457

Available for sale securities:
Taxable securities		206,231		220,076		217,059
Non-taxable securities		8,953		13,055		15,677
Other securities		2,096		1,519		1,014

Held to maturity securities:
Taxable securities		37,987		33,864		29,389
Non-taxable securities		16,460		18,208		19,082

Other investments		2,644		2,811		2,735

Net loans (2)		262,259		268,019		284,541

Balances due from depository institutions		15,404		9,498		27,819

Other assets		49,314		51,114		50,342

TOTAL ASSETS	$	622,919	$	641,277	$	680,115

LIABILITIES AND SHAREHOLDERS' EQUITY:

Non-interest bearing deposits	$	121,829	$	121,055	$	132,748
Interest bearing deposits		378,758		401,365		435,390
Total deposits		500,587		522,420		568,138

Other liabilities		30,778		33,731		21,063

Total liabilities		531,365		556,151		589,201

Shareholders' equity		91,554		85,126		90,914

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	622,919	$	641,277	$	680,115

(1) All averages are computed on a daily basis.

(2) Gross loans and discounts, net of unearned income and allowance for loan losses.

SCHEDULE I-B

Average (1) Amount Outstanding for Major Categories of Interest Earning Assets

And Interest Bearing Liabilities (In thousands)

For the Years Ended December 31,	2019		2018		2017

INTEREST EARNING ASSETS:

Loans (2)	$	267,263	$	273,724	$	290,329

Balances due from depository institutions		15,404		9,498		27,819

Available for sale securities:
Taxable securities		206,231		220,076		217,059
Non-taxable securities		8,953		13,055		15,677
Other securities		2,096		1,519		1,014

Held to maturity securities:
Taxable securities		37,987		33,864		29,389
Non-taxable securities		16,460		18,208		19,082

TOTAL INTEREST EARNING ASSETS	$	554,394	$	569,944	$	600,369

INTEREST BEARING LIABILITIES:

Savings and negotiable interest bearing deposits	$	291,152	$	317,197	$	353,352

Time deposits		87,606		84,168		82,038

Federal funds purchased				369		354

Borrowings from FHLB		10,242		13,044		1,883

TOTAL INTEREST BEARING LIABILITIES	$	389,000	$	414,778	$	437,627

(1) All averages are computed on a daily basis.

(2) Net of unearned income. Includes nonaccrual loans

SCHEDULE I-C

Interest Earned or Paid on Major Categories of Interest Earning Assets

And Interest Bearing Liabilities (In thousands)

For the Years Ended December 31,	2019		2018		2017

INTEREST EARNED ON:

Loans	$	13,812	$	13,265	$	12,970

Balances due from depository institutions		346		205		420

Available for sale securities:
Taxable securities		4,788		4,349		3,298
Non-taxable securities		422		608		864
Other securities		71		22		26

Held to maturity securities:
Taxable securities		1,141		970		753
Non-taxable securities		551		580		717

TOTAL INTEREST EARNED (1)	$	21,131	$	19,999	$	19,048

INTEREST PAID ON:

Savings and negotiable interest bearing deposits	$	1,662	$	1,468	$	736

Time deposits		1,336		886		637

Federal funds purchased				10		3

Other borrowed funds		248		294		47

TOTAL INTEREST PAID	$	3,246	$	2,658	$	1,423

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2019 and 2018 and 34% for 2017. See disclosure of non-GAAP financial measures on pages 42-43.

SCHEDULE I-D

Average Interest Rate Earned or Paid for Major Categories of

Interest Earning Assets And Interest Bearing Liabilities

For the Years Ended December 31,	2019			2018			2017

AVERAGE RATE EARNED ON:

Loans		5.17	%		4.85	%		4.47	%

Balances due from depository institutions		2.25	%		2.16	%		1.51	%

Available for sale securities:
Taxable securities		2.32	%		1.98	%		1.52	%
Non-taxable securities		4.71	%		4.66	%		5.51	%
Other securities		3.39	%		1.45	%		2.56	%

Held to maturity securities:
Taxable securities		3.00	%		2.86	%		2.56	%
Non-taxable securities		3.35	%		3.19	%		3.76	%

TOTAL (weighted average rate)(1)		3.81	%		3.51	%		3.17	%

AVERAGE RATE PAID ON:

Savings and negotiable interest bearing deposits		.57	%		.46	%		.21	%

Time deposits		1.53	%		1.05	%		.78	%

Federal funds purchased					2.71	%		.85	%

Other borrowed funds		2.42	%		2.25	%		2.50	%

TOTAL (weighted average rate)		.83	%		.64	%		.33	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2019 and 2018 and 34% for 2017. See disclosure of non-GAAP financial measures on pages 42 and 43.

SCHEDULE I-E

Net Interest Earnings and Net Yield on Interest Earning Assets

(In thousands, except percentages)

For the Years Ended December 31,	2019			2018			2017

Total interest income (1)	$	21,131		$	19,999		$	19,048

Total interest expense		3,246			2,658			1,423

Net interest earnings	$	17,885		$	17,341		$	17,625

Net yield on interest earning assets		3.23	%		3.04	%		2.94	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2019 and 2018 and 34% for 2017. See disclosure of non-GAAP financial measures on pages 42 and 43.

SCHEDULE I-F

Analysis of Changes in Interest Income and Interest Expense

(In thousands)

					Increase
For the Years Ended December 31,	2019		2018		(Decrease)			Volume			Rate		Rate/Volume

INTEREST EARNED ON:

Loans (1)	$	13,812	$	13,265	$	547		$	(313	)	$	881	$	(21	)

Balances due from depository institutions		346		205		141			128			8		5

Available for sale securities:
Taxable securities		4,788		4,349		439			(273	)		760		(48	)
Non-taxable securities		422		608		(186	)		(191	)		7		(2	)
Other securities		71		22		49			8			30		11

Held to maturity securities:
Taxable securities		1,141		970		171			118			47		6
Non-taxable securities		551		580		(29	)		(56	)		30		(3	)

TOTAL INTEREST EARNED (2)	$	21,131	$	19,999	$	1,132		$	(579	)	$	1,763	$	(52	)

INTEREST PAID ON:

Savings and negotiable interest bearing deposits	$	1,662	$	1,468	$	194		$	(121	)	$	343	$	(28	)

Time deposits		1,336		886		450			36			398		16

Federal funds purchased				10		(10	)		(10	)

Other borrowed funds		248		294		(46	)		(63	)		22		(5	)

TOTAL INTEREST PAID	$	3,246	$	2,658	$	588		$	(158	)	$	763	$	(17	)

(1) Loan fees of $304 and $310 for 2019 and 2018, respectively, are included in these figures.

(2) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2019 and 2018. See disclosure of non-GAAP financial measures on pages 42 and 43.

SCHEDULE I-F (continued)

Analysis of Changes in Interest Income and Interest Expense

(In thousands)

					Increase
For the Years Ended December 31,	2018		2017		(Decrease)			Volume			Rate			Rate/Volume

INTEREST EARNED ON:

Loans (1)	$	13,265	$	12,970	$	295		$	(742	)	$	1,100		$	(63	)

Balances due from depository institutions		205		420		(215	)		(277	)		180			(118	)

Available for sale securities:
Taxable securities		4,349		3,298		1,051			46			991			14
Non-taxable securities		608		864		(256	)		(145	)		(134	)		23
Other securities		22		26		(4	)		13			(11	)		(6	)

Held to maturity securities:
Taxable securities		970		753		217			115			89			13
Non-taxable securities		580		717		(137	)		(33	)		(109	)		5

TOTAL INTEREST EARNED (2)	$	19,999	$	19,048	$	951		$	(1,023	)	$	2,106		$	(132	)

INTEREST PAID ON:

Savings and negotiable interest bearing deposits	$	1,468	$	736	$	732		$	(75	)	$	899		$	(92	)

Time deposits		886		637		249			17			227			5

Federal funds purchased		10		3		7			1			6

Other borrowed funds		294		47		247			279			(5	)		(27	)

TOTAL INTEREST PAID	$	2,658	$	1,423	$	1,235		$	222		$	1,127		$	(114	)

(1) Loan fees of $310 and $338 for 2018 and 2017, respectively, are included in these figures.

(2) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% for 2018 and 34% for 2017. See disclosure of non-GAAP financial measures on pages 42 and 43.

SCHEDULE II-A

Book Value of Securities Portfolio

(In thousands)

December 31,	2019		2018		2017

Available for sale securities:
U.S. Treasuries, U.S. Government agencies and Mortgage-backed securities	$	189,864	$	211,014	$	230,736

States and political subdivisions		6,447		11,096		14,470

Total	$	196,311	$	222,110	$	245,206

Held to maturity securities:
U.S. Government Agencies	$	5,000	$	8,185	$	8,185

States and political subdivisions		47,231		46,413		42,978

Total	$	52,231	$	54,598	$	51,163

SCHEDULE II-B

Maturity of Securities Portfolio at December 31, 2019

And Weighted Average Yields of Such Securities

(In thousands, except percentage data)

	Maturity
						After one year but					After five years but
	Within one year					within five years					within ten years					After ten years
December 31, 2019	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

Available for sale securities:

U.S. Treasuries, U.S. Government agencies and Mortgage-backed securities	$	26,023		1.78	%	$	38,068		1.50	%	$	42,950		2.30	%	$	82,823		3.26	%

States and political subdivisions		2,483		3.65	%		3,824		3.73	%		140		3.50	%


Total	$	28,506		2.08	%	$	41,892		1.95	%	$	43,090		2.30	%	$	82,823		3.26	%

Held to maturity securities:

U.S. Government agencies	$					$					$	5,000		2.04	%	$

States and political subdivisions		2,718		2.62	%		17,036		3.15	%		19,209		3.08	%		8,268		3.51	%

Total	$	2,718		2.62	%	$	17,036		3.15	%	$	24,209		2.93	%	$	8,268		3.51	%

Note: The weighted average yields are calculated on the basis of cost. Average yields on investments in states and political subdivisions are based on their contractual yield. Available for sale securities are stated at fair value and held to maturity securities are stated at amortized cost.

SCHEDULE III-A

Loan Portfolio

Loans by Type Outstanding (1) (In thousands)

December 31,	2019		2018		2017		2016		2015

Real estate, construction	$	26,188	$	34,229	$	32,211	$	32,794	$	36,347

Real estate, mortgage		198,907		197,113		206,528		226,157		243,540

Loans to finance agricultural production		92								30

Commercial and industrial		37,340		35,076		35,174		48,361		50,520

Loans to individuals for household, family and other consumer expenditures		5,254		5,694		5,310		6,264		6,548

Obligations of states and political subdivisions		1,006		956		839		1,646		428

All other loans		162		278		387		133		144

Total	$	268,949	$	273,346	$	280,449	$	315,355	$	337,557

(1) No foreign debt outstanding.

SCHEDULE III-B

Maturities and Sensitivity to Changes in

Interest Rates of the Loan Portfolio as of December 31, 2019

(In thousands)

	Maturity
			Over one year
December 31, 2019	One year or less		through 5 years		Over 5 years		Total

Real estate, construction	$	6,573	$	11,452	$	8,163	$	26,188

Real estate, mortgage		12,302		70,928		115,677		198,907

Agricultural						92		92

Commercial and industrial		18,021		13,623		5,696		37,340

Loans to individuals for household, family and other consumer expenditures		1,918		2,877		459		5,254

Obligations of states and political subdivisions				746		260		1,006

All other loans		88		74				162

Total	$	38,902	$	99,700	$	130,347	$	268,949


Loans with pre-determined interest rates	$	17,599	$	89,160	$	90,013	$	196,772

Loans with floating interest rates		21,303		10,540		40,334		72,177

Total	$	38,902	$	99,700	$	130,347	$	268,949

SCHEDULE III-C

Non-Performing Loans (In thousands)

December 31,	2019		2018		2017		2016		2015

Loans accounted for on a nonaccrual basis (1)	$	9,266	$	8,250	$	13,810	$	11,854	$	15,186

Loans which are contractually past due 90 or more days as to interest or principal payment, but are not included above				55						146

(1) The Bank places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. See “Note A – Business and Summary of Significant Accounting Policies” and “Note C – Loans” to the 2019 Consolidated Financial Statements in Item 8 in this Annual Report on Form 10-K for discussion of impaired loans.

SCHEDULE IV-A

Summary of Loan Loss Expenses

(In thousands, except percentage data)

December 31,	2019			2018			2017			2016			2015

Average amount of loans outstanding (1)(2)	$	267,263		$	273,724		$	290,329		$	327,819		$	356,294

Balance of allowance for loan losses at beginning of period	$	5,340		$	6,153		$	5,466		$	8,070		$	9,206

Loans charged-off:

Commercial, financial and agricultural					372			36			509			275
Consumer and other		1,328			1,038			243			3,013			3,833

Total loans charged-off		1,328			1,410			279			3,522			4,108

Recoveries of loans:

Commercial, financial and agricultural		55			112			11			62			19
Consumer and other		140			363			839			288			371

Total recoveries		195			475			850			350			390

Net loans charged-off (recovered)		1,133			935			(571	)		3,172			3,718

Provision for loan losses charged to operating expense					122			116			568			2,582

Balance of allowance for loan losses at end of period	$	4,207		$	5,340		$	6,153		$	5,466		$	8,070

Ratio of net charge-offs during period to average loans outstanding		0.42	%		0.34	%		(.20%	)		0.97	%		1.04	%

(1) Net of unearned income.

(2) Includes nonaccrual loans.

SCHEDULE IV-B

Allocation of the Allowance for Loan Losses

(In thousands except percentage data)

	2019				2018				2017				2016				2015
			% of				% of				% of				% of				% of
			Loans to				Loans to				Loans to				Loans to				Loans to
			Total				Total				Total				Total				Total
December 31,	Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans		Amount		Loans

Real estate, construction	$	102		9	$	428		12	$	242		11	$	262		10	$	778		11

Real estate, mortgage		3,457		73		4,181		72		4,574		73		4,150		71		5,964		70

Loans to finance agricultural production				1														1		1

Commercial and industrial		553		13		599		12		1,161		12		850		15		1,075		14

Loans to individuals for household, family and other consumer expenditures		91		2		128		2		174		2		200		2		247		2

Obligations of states and political subdivisions		1		1		1		1		1		1				1				1

All other loans		3		1		3		1		1		1		4		1		5		1

Total	$	4,207		100	$	5,340		100	$	6,153		100	$	5,466		100	$	8,070		100

SCHEDULE V

Summary of Average Deposits and Their Yields

(In thousands, except percentage data)

	2019					2018					2017
Years Ended December 31,	Amount		Rate			Amount		Rate			Amount		Rate

Demand deposits in domestic offices	$	121,829		N/A		$	121,055		N/A		$	132,748		N/A

Negotiable interest bearing deposits in domestic offices		230,492		.69	%		257,750		.55	%		295,413		.24	%

Savings deposits in domestic offices		60,660		.13	%		59,447		.09	%		57,939		.05	%

Time deposits in domestic offices		87,606		1.53	%		84,168		1.05	%		82,038		.78	%

Total	$	500,587		1.05	%	$	522,420		.73	%	$	568,138		.49	%

Certificates of deposit in amounts of $100,000 or more by the amount of time remaining until maturity as of December 31, 2019, are as follows (in thousands):

Remaining maturity:

3 months or less	$	35,717
Over 3 months through 6 months		7,586
Over 6 months through 12 months		10,586
Over 12 months		10,603

Total	$	64,492

SCHEDULE VI

Short Term Borrowings

(In thousands, except percentage data)

	2019			2018			2017

Balance, December 31,	$	2,500		$	35,000		$	10,000

Weighted average interest rate at December 31,		2.07	%		2.65	%		1.45	%

Maximum outstanding at any month- end during year	$	26,064		$	35,000		$	11,198

Average amount outstanding during year	$	10,242		$	13,044		$	1,883

Weighted average interest rate		2.42	%		2.27	%		2.44	%

Note: Short term borrowings include federal funds purchased from other banks and short term borrowings from the Federal Home Loan Bank.

SCHEDULE VII

Interest Sensitivity/Gap Analysis

(In thousands)

December 31, 2019:	0 - 3 Months			4 - 12 Months			1 - 5 Years			Over 5 Years			Total

ASSETS:

Loans (1)	$	77,413		$	11,532		$	83,110		$	87,628		$	259,683

Available for sale securities		5,261			23,245			41,892			125,913			196,311

Held to maturity securities		950			1,768			17,036			32,477			52,231

Totals	$	83,624		$	36,545		$	142,038		$	246,018		$	508,225


FUNDING SOURCES:

Interest bearing deposits	$	304,732		$	29,094		$	19,725		$			$	353,551

Borrowings from FHLB		2,515			44			252			715			3,526

Totals	$	307,247		$	29,138		$	19,977		$	715		$	357,077

REPRICING/MATURITY GAP:

Period	$	(223,623	)	$	7,407		$	122,061		$	245,303

Cumulative		(223,623	)		(216,216	)		(94,155	)		151,148

Cumulative Gap/Total Assets		(37.60%	)		(36.36%	)		(15.83%	)		25.42	%

(1) Amounts stated include fixed and variable rate loans that are still accruing interest. Variable rate loans are included in the next period in which they are subject to a change in rate. The principal portions of scheduled payments on fixed instruments are included in the period in which they become due or mature.

Capital Resources

Information about the Company’s capital resources is included in “Note J – Shareholders’ Equity” to the 2019 Consolidated Financial Statements in this Annual Report on Form 10-K.

ITEM 1A - RISK FACTORS

As a smaller reporting company, the Company is not required to provide this information.

ITEM 1B - UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

The principal properties of the Company are its 18 business locations, including the Main Office, which is located at 152 Lameuse Street in Biloxi, MS, 39530. The Armed Forces Retirement Home (“AFRH”) Branch located at 1800 Beach Drive, Gulfport, MS 39507, is located in space provided by the AFRH. The Keesler Branch located at 1507 Meadows Drive, Keesler AFB, MS 39534, is rented from the Department of Defense. All other branch locations are owned by the Company. The addresses of the other branch locations are:

Bay St. Louis Office	408 Highway 90 East, Bay St. Louis, MS 39520
Cedar Lake Office	1740 Popps Ferry Road, Biloxi, MS 39532
Diamondhead Office	5429 West Aloha Drive, Diamondhead, MS 39525
D’Iberville-St. Martin Office	10491 Lemoyne Boulevard, D’Iberville, MS 39540
Downtown Gulfport Office	1105 30th Avenue, Gulfport, MS 39501
Gautier Office	2609 Highway 90, Gautier, MS 39553
Handsboro Office	0412 E. Pass Road, Gulfport, MS 39507
Long Beach Office	298 Jeff Davis Avenue, Long Beach, MS 39560
Ocean Springs Office	2015 Bienville Boulevard, Ocean Springs, MS 39564
Orange Grove Office	12020 Highway 49 North, Gulfport, MS 39503
Pass Christian Office	301 East Second Street, Pass Christian, MS 39571
Saucier Office	17689 Second Street, Saucier, MS 39574
Waveland Office	470 Highway 90, Waveland, MS 39576
West Biloxi Office	2560 Pass Road, Biloxi, MS 39531
Wiggins Office	1312 S. Magnolia Drive, Wiggins, MS 39577

ITEM 3 - 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.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Dividends to the Company’s shareholders can generally be paid only from dividends paid to the Company by its bank subsidiary. Consequently, dividends are dependent upon the earnings, capital needs, regulatory policies and statutory limitations affecting the bank subsidiary. The Company and the bank subsidiary may not declare or pay any cash dividends without prior written approval of their regulators.

At February 14, 2020, there were 409 holders of the common stock of the Company, which does not reflect persons or entities that hold the common stock in nominee or “street” name through various brokerage firms. At February 14, 2020, there were 4,943,186 shares issued and outstanding.

On November 8, 2019, the Board approved the repurchase of up to 65,000 of the outstanding shares of the Company’s common stock. No shares were repurchased under the plan in 2019.

The Company’s stock is traded under the symbol PFBX on the OTCQX Best Market (“OTCQX”).

The following table sets forth the high and low bid prices of the Company’s common stock for the periods indicated by the OTCQX. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

						Dividend
Year	Quarter	High		Low		Per share

2019	1st	$	11.65	$	11.22	$
	2nd		12.75		11.36		.01
	3rd		11.95		10.75
	4th		11.00		10.40		.02

2018	1st	$	14.70	$	12.60	$
	2nd		14.25		13.65		.01
	3rd		14.08		12.95
	4th		13.50		11.20		.01

ITEM 6 - SELECTED FINANCIAL DATA (In thousands except per share data)

	2019			2018			2017			2016			2015
Balance Sheet Summary

Total assets	$	594,702		$	616,786		$	650,424		$	688,014		$	641,004
Available for sale securities		196,311			222,110			245,664			233,578			202,807
Held to maturity securities		52,231			54,598			51,163			48,150			19,025
Loans, net of unearned discount		268,949			273,346			280,449			315,355			337,557
Deposits		476,143			473,506			529,570			575,016			512,707
Borrowings from FHLB		3,526			36,142			11,198			6,257			18,409
Shareholders' equity		95,123			86,934			89,499			88,461			91,839

Summary of Operations
Interest income	$	20,928		$	19,750		$	18,503		$	18,493		$	19,311
Interest expense		3,246			2,658			1,423			1,025			875
Net interest income		17,682			17,092			17,080			17,468			18,436
Provision for loan losses					122			116			568			2,582
Net interest income after provision for loan losses		17,682			16,970			16,964			16,900			15,854
Non-interest income		6,367			6,103			6,965			6,549			6,898
Non-interest expense		22,370			22,480			22,251			23,204			28,106
Income (loss) before taxes		1,679			593			1,678			245			(5,354	)
Income tax expense (benefit)					(36	)		(1,080	)		78			(762	)
Net income (loss)	$	1,679		$	629		$	2,758		$	167		$	(4,592	)

Per Share Data
Basic and diluted earnings (loss) per share	$	.34		$	.13		$	.54		$	.03		$	( .90	)
Dividends per share		.03			.02			.01
Book value		19.24			17.59			17.84			17.27			17.93
Weighted average number of shares		4,943,186			5,031,778			5,123,076			5,123,186			5,123,186

Selected Ratios
Return on average assets		0.28	%		0.10	%		0.41	%		0.02	%		(.69%	)
Return on average equity		1.84	%		0.73	%		3.08	%		0.19	%		(4.92%	)
Primary capital to average assets		16.27	%		14.43	%		14.34	%		13.99	%		15.06	%
Risk-based capital ratios:
Tier 1		25.08	%		24.05	%		23.87	%		21.69	%		20.58	%
Total		26.22	%		25.30	%		25.12	%		22.94	%		21.83	%

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2019, 2018 and 2017. These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report.

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, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (“FASB”) issued new accounting standards updates in 2019, which have been disclosed in Note A to the Consolidated Financial Statements. The Company does not expect that these updates discussed in the Notes will have a material impact on its financial position, results of operations or cash flows. The Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) and Accounting Standards Update 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that Clarifies the Guidance in ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10), effective January1, 2018, neither of which had a material effect on its financial position, results of operations or cash flows. The Company is currently working on the implementation of Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Further disclosure relating to these efforts is included in Note A.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

Investments

Investments which are classified as available for sale are stated at fair value. A decline in the market value of an investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. The determination of the fair value of securities may require Management to develop estimates and assumptions regarding the amount and timing of cash flows.

Allowance for Loan Losses

The Company’s allowance for loan losses (“ALL”) reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of the financial statements. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. Management believes that the ALL is adequate and appropriate for all periods presented in these financial statements. If there was a deterioration of any of the factors considered by Management in evaluating the ALL, the estimate of loss would be updated, and additional provisions for loan losses may be required. The analysis divides the portfolio into two segments: a pool analysis of loans based upon a five year average loss history which is updated on a quarterly basis and which may be adjusted by qualitative factors by loan type and a specific reserve analysis for those loans considered impaired under GAAP. All credit relationships with an outstanding balance of $100,000 or greater that are included in Management’s loan watch list are individually reviewed for impairment. All losses are charged to the ALL when the loss actually occurs or when a determination is made that a loss is likely to occur; recoveries are credited to the ALL at the time of receipt.

Other Real Estate

Employee Benefit Plans

Employee benefit plan liabilities and pension costs are determined utilizing actuarially determined present value calculations. The valuation of the benefit obligation and net periodic expense is considered critical, as it requires Management and its actuaries to make estimates regarding the amount and timing of expected cash outflows including assumptions about mortality, expected service periods and the rate of compensation increases.

Income Taxes

GAAP requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. See Note I to the Consolidated Financial Statements for additional details. As part of the process of preparing our consolidated financial statements, the Company is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for the allowance for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated statement of condition. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, we must include an expense within the tax provision in the consolidated statement of income.

GAAP Reconciliation and Explanation

This report 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 years ended December 31, 2019, 2018 and 2017 is included in the table below.

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES

(in thousands)

Years Ended December 31,	2019			2018			2017

Interest income reconciliation:
Interest income - taxable equivalent	$	21,131		$	19,999		$	19,048
Taxable equivalent adjustment		(203	)		(249	)		(545	)

Interest income (GAAP)	$	20,928		$	19,750		$	18,503

Net interest income reconciliation:
Net interest income - taxable equivalent	$	17,885		$	17,341		$	17,625
Taxable equivalent adjustment		(203	)		(249	)		(545	)

Net interest income (GAAP)	$	17,682		$	17,092		$	17,080

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 recorded net income of $1,679,000 for 2019 compared with net income of $629,000 and $2,758,000 for 2018 and 2017, respectively. Results in 2019 included an increase in net interest income, a reduction in the provision for loan losses, an increase in non-interest income and a decrease in non-interest expense as compared with 2018. Results in 2018 included a significant loss from other investments and increased expenses related to other real estate as compared with 2017.

Managing the net interest margin is a key component of the Company’s earnings strategy. In 2019, interest income increased as interest and fees on loans increased $547,000 and interest on mortgage-backed securities improved $575,000 as compared to 2018. This increase was somewhat offset by the increase in interest expense in the current year. In 2018, interest income increased as interest and fees on loans increased $295,000 and interest on mortgage-backed securities improved $1,313,000 as compared with 2017. This increase however was almost entirely offset by the increase in interest expense in 2018.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be emphasized. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $9,266,000 and $8,250,000 at December 31, 2019 and 2018, respectively. Most of these loans are collateral-dependent, and the Company has carefully evaluated the value of its collateral to determine potential losses.

No provision was recorded in 2019, while the provision for the allowance for loan losses was $122,000 and $116,000 for 2018 and 2017, respectively.

Non-interest income increased $264,000 for 2019 as compared with 2018 and decreased $862,000 for 2018 as compared with 2017. Results for 2019 included an increase in service charges on deposit accounts of $65,000 and a gain from the sale of securities of $147,000. Results for 2018 included a $274,000 loss from other investments. Results for 2017 included a non-recurring gain of $429,000 from the redemption of death benefits on bank owned life insurance.

Non-interest expense decreased $110,000 for 2019 as compared with 2018 and increased $229,000 for 2018 as compared with 2017. The decrease in 2019 was primarily the result of reduced costs of employee benefits. The increase in 2018 was primarily the result of increased write-downs of other real estate of $304,000.

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.

2019 as compared with 2018

The Company’s average interest-earning assets decreased approximately $15,550,000, or 3%, from approximately $569,944,000 for 2018 to approximately $554,394,000 for 2019. Average loans decreased approximately $6,461,000 due to principal payments, maturities, charge-offs and foreclosures on existing loans significantly exceeding new loans. Average taxable available for sale securities decreased approximately $13,845,000 and average nontaxable available for sale securities decreased approximately $4,102,000 as maturities of these securities funded the decrease in average savings and interest bearing DDA deposits. The average yield on interest-earning assets was 3.51% for 2018 compared with 3.81% for 2019. The yield on average loans increased from 4.85% for 2018 to 5.17% for 2019 as a result of the increase in prime rate during 2018 on the Company’s floating rate loans as well as the recovery of previously charged-off interest on loans. The yield on taxable available for sale securities increased from 1.98% for 2018 to 2.32% for 2019 as the Company changed its investment strategy to improve yield while not compromising duration and credit risk.

Average interest-bearing liabilities decreased approximately $25,778,000, or 6%, from approximately $414,778,000 for 2018 to approximately $389,000,000 for 2019. Average savings and interest-bearing DDA balances decreased approximately $26,045,000 primarily as several large commercial customers relocated their funds to other institutions in the current year. The average rate paid on interest-bearing liabilities increased 19 basis points, from .64% for 2018 to .83% for 2019. This increase was the result of increased rates in 2018 and 2019.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.04% for 2018 as compared with 3.23% for 2019.

2018 as compared with 2017

The Company’s average interest-earning assets decreased approximately $30,425,000, or 5%, from approximately $600,369,000 for 2017 to approximately $569,944,000 for 2018. Average loans decreased approximately $16,605,000 due to principal payments, maturities, charge-offs and foreclosures on existing loans significantly exceeding new loans. Average balances due from depository institutions decreased approximately $18,321,000 based on the liquidity needs of the bank subsidiary. The average yield on interest-earning assets was 3.17% for 2017 compared with 3.51% for 2018. The yield on average loans increased from 4.47% for 2017 to 4.85% for 2018 as a result of the increase in prime rate during 2017 and 2018. The yield on taxable available for sale securities increased from 1.52% for 2017 to 1.98% for 2018 as the Company changed its investment strategy to improve yield while not compromising duration and credit risk.

Average interest-bearing liabilities decreased approximately $22,849,000, or 5%, from approximately $437,627,000 for 2017 to approximately $414,778,000 for 2018. Average savings and interest-bearing DDA balances decreased approximately $36,155,000 primarily as several large commercial customers relocated their funds to other institutions in the current year. Average borrowings from the Federal Home Loan Bank (“FHLB”) increased approximately $11,161,000 due to the liquidity needs of the bank subsidiary. The average rate paid on interest-bearing liabilities increased 31 basis points, from .33% for 2017 to .64% for 2018. This increase was the result of increased rates.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 2.94% for 2017 as compared with 3.04% for 2018.

The tables below analyze the changes in tax-equivalent net interest income for the years ended December 31, 2019, 2018 and 2017.

ANALYSIS OF AVERAGE BALANCES, INTEREST EARNED/PAID AND YIELD

(in thousands)

	2019							2018							2017
	Average		Interest					Average		Interest					Average		Interest
	Balance		Earned/Paid		Rate			Balance		Earned/Paid		Rate			Balance		Earned/Paid		Rate
Loans (1)(2)	$	267,263	$	13,812		5.17	%	$	273,724	$	13,265		4.85	%	$	290,329	$	12,970		4.47	%
Balances due from depository institutions		15,404		346		2.25	%		9,498		205		2.16	%		27,819		420		1.51	%
Held to maturity:
Taxable		37,987		1,141		3.00	%		33,864		970		2.86	%		29,389		753		2.56	%
Non taxable (3)		16,460		551		3.35	%		18,208		580		3.19	%		19,082		717		3.76	%
Available for sale:
Taxable		206,231		4,788		2.32	%		220,076		4,349		1.98	%		217,059		3,298		1.52	%
Non taxable (3)		8,953		422		4.71	%		13,055		608		4.66	%		15,677		864		5.51	%
Other		2,096		71		3.39	%		1,519		22		1.45	%		1,014		26		2.56	%

Total	$	554,394	$	21,131		3.81	%	$	569,944	$	19,999		3.51	%	$	600,369	$	19,048		3.17	%

Savings and interest- bearing DDA	$	291,152	$	1,662		0.57	%	$	317,197	$	1,468		0.46	%	$	353,352	$	736		0.21	%
Time deposits		87,606		1,336		1.53	%		84,168		886		1.05	%		82,038		637		0.78	%
Federal funds purchased and securities sold under agreements to repurchase									369		10		2.71	%		354		3		0.85	%
Borrowings from FHLB		10,242		248		2.42	%		13,044		294		2.25	%		1,883		47		2.50	%

Total	$	389,000	$	3,246		0.83	%	$	414,778	$	2,658		0.64	%	$	437,627	$	1,423		0.33	%
Net tax-equivalent spread						2.98	%						2.87	%						2.84	%
Net tax-equivalent margin on earning assets						3.23	%						3.04	%						2.94	%

(1) Loan fees of $304, $310 and $338 for 2019, 2018 and 2017, respectively, are included in these figures.

(2) Includes nonaccrual loans.

(3) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2019 and 2018 and 34% in 2017. See disclosure of Non-GAAP financial measures on pages 42 and 43.

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

(in thousands)

	For the Year Ended
	December 31, 2019 Compared With December 31, 2018
	Volume			Rate		Rate/Volume			Total
Interest earned on:
Loans	$	(313	)	$	881	$	(21	)	$	547

Balances due from depository institutions		128			8		5			141

Held to maturity securities:
Taxable		118			47		6			171
Non taxable		(56	)		30		(3	)		(29	)

Available for sale securities:
Taxable		(273	)		760		(48	)		439
Non taxable		(191	)		7		(2	)		(186	)
Other		8			30		11			49

Total	$	(579	)	$	1,763	$	(52	)	$	1,132

Interest paid on:
Savings and interest-bearing DDA	$	(121	)	$	343	$	(28	)	$	194

Time deposits		36			398		16			450

Federal funds purchased		(10	)							(10	)

Borrowings from FHLB		(63	)		22		(5	)		(46	)

Total	$	(158	)	$	763	$	(17	)	$	588

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

(in thousands)

	For the Year Ended
	December 31, 2018 Compared With December 31, 2017
	Volume			Rate			Rate/Volume			Total
Interest earned on:
Loans	$	(742	)	$	1,100		$	(63	)	$	295

Balances due from depository institutions		(277	)		180			(118	)		(215	)

Held to maturity securities:
Taxable		115			89			13			217
Non taxable		(33	)		(109	)		5			(137	)

Available for sale securities:
Taxable		46			991			14			1,051
Non taxable		(145	)		(134	)		23			(256	)
Other		13			(11	)		(6	)		(4	)

Total	$	(1,023	)	$	2,106		$	(132	)	$	951

Interest paid on:
Savings and interest-bearing DDA	$	(75	)	$	899		$	(92	)	$	732

Time deposits		17			227			5			249

Federal funds purchased		1			6						7

Borrowings from FHLB		279			(5	)		(27	)		247

Total	$	222		$	1,127		$	(114	)	$	1,235

Provision for Allowance for Loan Losses

In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. The Company’s Loan Review and Special Assets Departments play key roles in monitoring the loan portfolio and managing problem loans. New loans and, on a periodic basis, existing loans are reviewed to evaluate compliance with the loan policy. Loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area; residential and land development; construction and commercial real estate loans, and their direct and indirect impact on the Company’s operations are evaluated on a monthly basis. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. Lenders experienced in workout scenarios consult with loan officers and customers to address non-performing loans. A monthly watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation.

Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and to 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. Note A to the Consolidated Financial Statements discloses a summary of the accounting principles applicable to impaired and nonaccrual loans as well as the allowance for loan losses. Note C to the Consolidated Financial Statements presents additional analyses of the composition, aging, credit quality and performance of the loan portfolio as well as the transactions in the allowance for loan losses.

The Company’s analysis includes evaluating the current value of collateral securing all nonaccrual loans. Nonaccrual loans totaled $9,266,000 and $8,250,000 with specific reserves on these loans of $59,000 and $315,000 as of December 31, 2019 and 2018, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value.

The Company’s on-going, systematic evaluation resulted in the Company not recording a provision for the allowance for loan losses in 2019 and recording a total provision for the allowance for loan losses of $122,000 and $116,000 in 2018 and 2017, respectively. As a result of receiving new information and updated appraisals on several collateral-dependent loans, the Company increased the specific provision for several loans in its real estate, mortgage portfolio in 2017. This increase was partially offset by a large recovery in its real estate, construction portfolio during the year. The allowance for loan losses as a percentage of loans was 1.56%, 1.95% and 2.19% at December 31, 2019, 2018 and 2017, respectively. The Company believes that its allowance for loan losses is appropriate as of December 31, 2019.

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

Non-interest Income

2019 as compared with 2018

Total non-interest income increased $264,000 in 2019 as compared with 2018. Trust Department Income and Fees decreased $94,000 due to the decrease in account relationships in the current year. Gains on liquidation, sales and calls of securities increased $147,000 as the Company had opportunities to sell securities which generated gains in 2019. Income (loss) from other investments increased $106,000 in 2019 as compared with 2018 as operations of an investment in a low-income housing partnership improved slightly as a result of increased occupancy. Other income increased $72,000 as rental income increased $83,000 as previously vacant properties were leased in the current year.

2018 as compared with 2017

Total non-interest income decreased $862,000 in 2018 as compared with 2017. Gains on liquidation, sales and calls of securities decreased $117,000 as the Company had opportunities to sell securities which generated gains in 2017. Income from other investments decreased $316,000 in 2018 as compared with 2017 as operations of an investment in a low-income housing partnership declined as a result of decreased occupancy. Prior year’s results included a gain of $429,000 from the redemption of death benefits on bank owned life insurance.

Non-interest Expense

2019 as compared with 2018

Total non-interest expense decreased $110,000 in 2019 as compared with 2018. Salaries and employee benefits decreased $190,000 primarily as a result of decreased costs for the retiree health plan. Net occupancy costs increased $183,000 as telecommunications costs increased $205,000 as the Company incurred redundant costs in the process of reconfiguring its resources for reduced costs and increased functionality in subsequent years. Equipment rentals, depreciation and maintenance decreased $50,000 primarily as a result of depreciable assets, primarily technology-related, purchased in prior years completing their depreciable life in the current year. Other expense decreased $53,000 in 2019 as compared with 2018. Included in this fluctuation is the decrease in other real estate expenses of $701,000, largely due to write-downs of ORE to new appraised values in 2018, which did not occur in 2019. Also impacting other expense were the increase in FDIC and state banking assessments of $126,000 as a result of the reduced assessment rate in 2018, an increase in non-recurring legal fees of $201,000 from the settlement of a lawsuit, an increase in ATM expense of $112,000 as a result of processing conversion costs and an increase in consulting fees of $135,000 primarily due to non-recurring services relating to strategic planning, operational assessments and revenue enhancement projects during 2019.

2018 as compared with 2017

Total non-interest expense increased $229,000 in 2018 as compared with 2017. Net occupancy costs decreased $117,000 as liability insurance premiums decreased $71,000 as the Company reduced some of its coverage and telecommunications costs decreased $88,000 as the Company eliminated some redundant resources. Equipment rentals, depreciation and maintenance increased $128,000 primarily as a result of purchases of depreciable assets, primarily technology-related, and an increase in maintenance contracts related to technology services. Other expense increased $276,000 as a result of the decrease in non-recurring consulting fees of $164,000, the decrease in FDIC and state banking assessments of $176,000 as a result of reduced assessment rate and the increase in other real estate expenses of $514,000, largely due to write-downs of ORE to new appraised values.

Income Taxes

The Company recognized an income tax benefit of $36,000 and $1,080,000 in 2018 and 2017, respectively. During 2014, Management established a valuation allowance against its net deferred tax asset of approximately $8,140,000. As of December 31, 2019, the valuation allowance is still in place. The 2018 and 2017 benefits were the result of the impact of the elimination of the alternative minimum tax credit carryforwards from new tax legislation and the correction of refunds for prior years. Note I to the Consolidated Financial Statements presents a reconciliation of income taxes for these three years and further analysis of the valuation allowance.

FINANCIAL CONDITION

Cash and due from banks increased $12,233,000 at December 31, 2019 compared with December 31, 2018 due to the bank subsidiary’s liquidity position.

Available for sale securities decreased $25,799,000 at December 31, 2019 compared with December 31, 2018 as the maturities exceeded investment purchases.

Held to maturity securities decreased $2,367,000 at December 31, 2019 compared with December 31, 2018 as the maturities exceeded investment purchases.

Loans decreased $4,397,000 at December 31, 2019 compared with December 31, 2018, as principal payments, maturities, charge-offs and foreclosures on existing loans exceeded new loans.

Total deposits increased $2,637,000 at December 31, 2019, as compared with December 31, 2018. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from year to year are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically.

Borrowings from the FHLB decreased $32,616,000 at December 31, 2019 as compared with December 31, 2018 based on the liquidity needs of the bank subsidiary.

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. The primary and risk-based capital ratios are important indicators of the strength of a Company’s capital. These figures are presented in the Five-Year Comparative Summary of Selected Financial Information. The Company has established the goal of being classified as “well-capitalized” by the banking regulatory authorities.

Significant transactions affecting shareholders’ equity during 2019 are described in Note J to the Consolidated Financial Statements. The Statement of Changes in Shareholders’ Equity also presents all activity in the Company’s equity accounts.

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. Note L to the Consolidated Financial Statements discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Management monitors these funding requirements in such a manner as to satisfy these demands and to provide the maximum return on its earning assets.

The Company monitors and manages its liquidity position diligently 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 continuous basis in the management of its liquidity needs and also conducts contingency testing on its liquidity plan. The Company has also been approved to participate in the Federal Reserve’s Discount Window Primary Credit Program, which it intends to use only as a contingency. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits, and the Company has encountered no problems with meeting its liquidity needs.

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.

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 FHLB for its liquidity needs in 2020.

REGULATORY MATTERS

During 2016, Management identified opportunities for improving information technology operations and security, risk management and earnings, addressing asset quality concerns, analyzing and assessing the Bank’s management and staffing needs, and managing concentrations of credit risk as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company has identified specific corrective steps and actions to enhance its information technology operations and security, risk management, earnings, asset quality and staffing. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators.

OFF-BALANCE SHEET ARRANGEMENTS

The Company is a party to off-balance-sheet arrangements in the normal course of business to meet the financing needs of its customers. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet arrangements. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amount does not necessarily represent future cash requirements. As discussed previously, the Company carefully monitors its liquidity needs and considers its cash requirements, especially for loan commitments, in making decisions on investments and obtaining funds from its other sources. Further information relating to off-balance-sheet instruments can be found in Note L to the Consolidated Financial Statements.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a smaller reporting company, the Company is not required to provide this information.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statements of Condition as of December 31, 2019 and 2018

Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019 and 2018

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

Notes to the Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

December 31,	2019		2018

Assets
Cash and due from banks	$	29,424	$	17,191

Available for sale securities		196,311		222,110

Held to maturity securities, fair value of $53,130 - 2019; $53,459 - 2018		52,231		54,598

Other investments		2,643		2,811

Federal Home Loan Bank Stock, at cost		2,129		2,069

Loans		268,949		273,346

Less: Allowance for loan losses		4,207		5,340

Loans, net		264,742		268,006

Bank premises and equipment, net of accumulated depreciation		17,421		18,879

Other real estate		7,453		8,943

Accrued interest receivable		1,687		1,956

Cash surrender value of life insurance		19,381		18,841

Other assets		1,280		1,382

Total assets	$	594,702	$	616,786

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

December 31,	2019		2018

Liabilities and Shareholders' Equity
Liabilities:

Deposits:

Demand, non-interest bearing	$	122,592	$	114,512

Savings and demand, interest bearing		263,153		278,772

Time, $100,000 or more		64,492		52,787

Other time deposits		25,906		27,435

Total deposits		476,143		473,506

Borrowings from Federal Home Loan Bank		3,526		36,142

Employee and director benefit plans liabilities		18,361		18,415

Other liabilities		1,549		1,789

Total liabilities		499,579		529,852

Shareholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,943,186 shares issued and outstanding at December 31, 2019 and 2018		4,943		4,943

Surplus		65,780		65,780

Undivided profits		21,855		20,324

Accumulated other comprehensive income (loss)		2,545		(4,113	)

Total shareholders' equity		95,123		86,934

Total liabilities and shareholders' equity	$	594,702	$	616,786

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data)

Years Ended December 31,	2019		2018		2017

Interest income:

Interest and fees on loans	$	13,812	$	13,265	$	12,970

Interest and dividends on securities:

U. S. Treasuries		1,077		1,410		1,602

U.S. Government agencies		477		471		531

Mortgage-backed securities		3,208		2,633		1,320

Collateralized mortgage obligations		192

States and political subdivisions		1,745		1,744		1,634

Other investments		71		22		26

Interest on balances due from depository institutions		346		205		420

Total interest income		20,928		19,750		18,503

Interest expense:

Deposits		2,998		2,354		1,373

Federal funds purchased and securities sold under agreements to repurchase				10		3

Borrowings from Federal Home Loan Bank		248		294		47

Total interest expense		3,246		2,658		1,423

Net interest income		17,682		17,092		17,080

Provision for allowance for loan losses				122		116

Net interest income after provision for allowance for loan losses	$	17,682	$	16,970	$	16,964

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data)

Years Ended December 31,	2019			2018			2017
Non-interest income:

Trust department income and fees		1,614			1,708			1,689

Service charges on deposit accounts		3,802			3,737			3,732

Gain on liquidation, sales and calls of securities		147						134

Gain on sale of other investments					17

Income (loss) from other investments		(168	)		(274	)		42

Increase in cash surrender value of life insurance		440			455			458

Gain from death benefits from life insurance								429

Other income		532			460			481

Total non-interest income		6,367			6,103			6,965

Non-interest expense:

Salaries and employee benefits		10,701			10,891			10,949

Net occupancy		2,187			2,004			2,121

Equipment rentals, depreciation and maintenance		3,084			3,134			3,006

Other expense		6,398			6,451			6,175

Total non-interest expense		22,370			22,480			22,251

Income before income taxes		1,679			593			1,678

Income tax benefit					(36	)		(1,080	)

Net income	$	1,679		$	629		$	2,758

Basic and diluted earnings per share	$	.34		$	.13		$	.54
Dividends declared per share	$	.03		$	.02		$	.01

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

Years Ended December 31,	2019			2018			2017

Net income	$	1,679		$	629		$	2,758

Other comprehensive income (loss):

Net unrealized gain (loss) on available for sale securities		6,411			(1,645	)		127

Reclassification adjustment for realized gains on available for sale securities called or sold in current year		(147	)					(134	)

Gain (loss) from unfunded post-retirement benefit obligation		394			459			(1,160	)

Total other comprehensive income (loss)		6,658			(1,186	)		(1,167	)

Total comprehensive income (loss)	$	8,337		$	(557	)	$	1,591

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands except share and per share data)

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

Balance, January 1, 2018		5,083,186		$	5,083		$	65,780	$	21,563		$	(2,927	)	$	89,499

Net income										629						629

Retirement of stock		(140,000	)		(140	)				(1,767	)					(1,907	)

Cash dividend ($.02 per share)										(101	)					(101	)

Other comprehensive loss													(1,186	)		(1,186	)


Balance, December 31, 2018		4,943,186			4,943			65,780		20,324			(4,113	)		86,934

Net income										1,679						1,679

Cash dividend ($.03 per share)										(148	)					(148	)

Other comprehensive income													6,658			6,658


Balance, December 31, 2019		4,943,186		$	4,943		$	65,780	$	21,855		$	2,545		$	95,123

See Notes to Consolidated Financial Statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

Years Ended December 31,	2019			2018			2017

Cash flows from operating activities:
Net income	$	1,679		$	629		$	2,758
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,914			1,964			1,914
Provision for allowance for loan losses					122			116
Write-down of other real estate		442			764			460
(Gain) loss on sales of other real estate		(387	)		21			101
(Income) loss from other investments		168			274			(42	)
Gain from death benefits from life insurance								(429	)
Amortization of available for sale securities		182			315			287
Amortization of held to maturity securities		266			260			253
Gain on liquidation, sales and calls of securities		(147	)					(134	)
Gain on sales of other investments					(17	)
Increase in cash surrender value of life insurance		(440	)		(455	)		(458	)
Change in accrued interest receivable		269			(52	)		(49	)
Change in other assets		102			(57	)		(537	)
Change in other liabilities		101			506			717

Net cash provided by operating activities	$	4,149		$	4,274		$	4,957

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

Years Ended December 31,	2019			2018			2017
Cash flows from investing activities:
Proceeds from maturities, liquidation, sales and calls of available for sale securities	$	65,658		$	60,222		$	71,315
Purchases of available for sale securities		(33,631	)		(39,086	)		(83,561	)
Proceeds from maturities of held to maturity securities		5,705			760			7,725
Purchases of held to maturity securities		(3,604	)		(4,455	)		(10,991	)
Purchase of Federal Home Loan Bank Stock		(60	)		(699	)		(831	)
Proceeds from sales of other investments					125
Proceeds from sales of other real estate		3,142			3,211			1,666
Loans, net change		1,557			1,461			33,531
Acquisition of premises and equipment		(456	)		(690	)		(423	)
Investment in cash surrender value of life insurance		(100	)		(85	)		(94	)
Proceeds from death benefits from life insurance								1,929

Net cash provided by investing activities		38,211			20,764			20,266

Cash flows from financing activities:
Demand and savings deposits, net change		(7,539	)		(52,268	)		(51,804	)
Time deposits, net change		10,176			(3,796	)		6,358
Cash dividends		(148	)		(101	)		(51	)
Retirement of stock					(1,907	)		(502	)
Borrowings from Federal Home Loan Bank		984,856			1,428,700			131,500
Repayments to Federal Home Loan Bank		(1,017,472	)		(1,403,756	)		(126,559	)

Net cash used in financing activities		(30,127	)		(33,128	)		(41,058	)

Net increase (decrease) in cash and cash equivalents		12,233			(8,090	)		(15,835	)
Cash and cash equivalents, beginning of year		17,191			25,281			41,116

Cash and cash equivalents, end of year	$	29,424		$	17,191		$	25,281

See Notes to Consolidated Financial Statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Business of The Company

Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. Its two subsidiaries are The Peoples Bank, Biloxi, Mississippi (the “Bank”), and PFC Service Corp. Its principal subsidiary is the Bank, which 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”).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Basis of Accounting

The Company and its subsidiaries recognize assets and liabilities, and income and expense, on the accrual basis of accounting. 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. Actual results could differ from these 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, assumptions relating to employee and director benefit plan liabilities and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income.

Revenue Recognition

As of January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. Disclosures of revenue from contracts with customers for periods beginning after January 1, 2018 are presented under ASC Topic 606 and have not materially changed from the prior year amounts. This update prescribes the process related to the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 excludes revenue streams relating to loans and investment securities, which are the major source of revenue for the Company, from its scope. As a result, the adoption of the guidance had no material impact on the measurement or recognition of revenue. Consistent with this guidance, the Company recognizes non-interest income within the scope of this guidance as services are transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those services. Other types of revenue contracts, the income from which is included in non-interest income, that are within the scope of ASU 2014-09 are:

Trust department income and fees: A contract for fiduciary and/or investment administration services on personal trust accounts and corporate trust services. Personal trust fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust is serviced. Corporate trust fee income is recognized over the period the Company provides service to the entity.

Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services for which the Company earns a fee, including NSF and analysis charges, related to the deposit account. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested.

ATM fee income: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. These fees are earned as the service is provided (i.e., when the customer uses a debit or ATM card).

Other non-interest income: Other non-interest income includes several items, such as wire transfer income, check cashing fees, the increase in cash surrender value of life insurance, rental income from bank properties and safe deposit box rental fees. This income is generally recognized at the time the service is provided and/or the income is earned.

New Accounting Pronouncements

In April 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2019-04 (“ASU 2019-04”), Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 includes technical corrections relating to scope, held to maturity disclosures, measurement alternative and remeasurement of equity securities. The effective date is for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), is intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down. The Company has established a Current Expected Credit Loss (CECL) Committee which includes the appropriate members of management, credit administration and accounting to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing this ASU. The Company selected a third-party vendor to provide allowance for loan loss software as well as advisory services in developing a new methodology that would be compliant with ASU 2016-13, and is working with the approved third-party vendor to develop the CECL model and evaluate its impact. ASU 2016-13 was originally to become effective for the Company for interim and annual periods beginning after December 15, 2019. In November 2019, the FASB issued Accounting Standards Update 2019 – 10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates (“ASU 2019–10”). ASU 2019-10 amends the effective date for certain entities, including the Company, for ASU 2016-13, Financial Instruments – Credit Losses. Because the Company is a smaller reporting company, ASU 2016-13 is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 enhances and simplifies certain aspects of income tax accounting guidance related to hybrid tax regimes, interim period accounting for enacted changes in tax law, ownership changes in investments, intraperiod tax allocations and tax basis step-up in goodwill. It is effective for the Company for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of this ASU is not expected to have a material effect on the Company’s financial position, result of operations or cash flows.

Cash and Due from Banks

The Company is required to maintain average reserve balances in its vault or on deposit with the Federal Reserve Bank. The average amount of these reserve requirements was approximately $383,000 and $527,000 for the years ending December 31, 2019 and 2018, respectively.

Securities

The classification of securities is determined by Management at the time of purchase. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the security until maturity. Securities held to maturity are stated at amortized cost. Securities not classified as held to maturity are classified as available for sale and are stated at fair value. Unrealized gains and losses, net of tax, on these securities are recorded in shareholders’ equity as accumulated other comprehensive income. The amortized cost of available for sale securities and held to maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, determined using the interest method. Such amortization and accretion is included in interest income on securities. A decline in the market value of any 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. In estimating other-than-temporary losses, Management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and nature of the issuer, the cause of the decline, especially if related to a change in interest rates, and the intent and ability of the Company to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as gain (loss) on sales and calls of securities in non-interest income.

Other Investments

Other investments include a low income housing partnership in which the Company is a 99% limited partner. The partnership has qualified to receive annual low income housing federal tax credits that are recognized as a reduction of the current tax expense. The investment is accounted for using the equity method.

Federal Home Loan Bank Stock

The Company is a member of the Federal Home Loan Bank of Dallas (“FHLB”) and as such is required to maintain a minimum investment in its stock that varies with the level of FHLB advances outstanding. The stock is bought from and sold to the FHLB based on its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment in accordance with GAAP.

Loans

The loan portfolio consists of commercial and industrial and real estate loans within the Company’s trade area that we have the intent and ability to hold for the foreseeable future or until maturity. The loan policy establishes guidelines relating to pricing; repayment terms; collateral standards including loan to value limits, appraisal and environmental standards; lending authority; lending limits and documentation requirements.

Loans are stated at the amount of unpaid principal, reduced by unearned income and the allowance for loan losses. Interest on loans is recognized on a daily basis over the terms of each loan based on the unpaid principal balance. Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements.

The Company continuously monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area, land development, construction and commercial real estate loans, and their direct and indirect impact on its operations. Loan delinquencies and deposit overdrafts are monitored on a weekly basis in order to identify developing problems as early as possible. On a monthly basis, a watch list of credits based on our loan grading system is prepared. Grades are applied to individual loans based on factors including repayment ability, financial condition of the borrower and payment performance. Loans with lower grades are placed on the watch list of credits. The watch list is the primary tool for monitoring the credit quality of the loan portfolio. Once loans are determined to be past due, the loan officer and the special assets department work vigorously to return the loans to a current status.

The Company places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. Accrued interest on loans classified as nonaccrual is reversed at the time the loans are placed on nonaccrual. Interest received on nonaccrual loans is applied against principal. Loans are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. The placement of loans on and removal of loans from nonaccrual status must be approved by Management.

Loans which become 90 days delinquent are reviewed relative to collectibility. Unless such loans are in the process of terms revision to bring them to a current status or foreclosure or in the process of collection, these loans are placed on nonaccrual and, if deemed uncollectible, are charged off against the allowance for loan losses. That portion of a loan which is deemed uncollectible will be charged off against the allowance as a partial charge off. All charge offs must be approved by Management and are reported to the Board of Directors.

Allowance for Loan Losses

The allowance for loan losses (“ALL”) is a valuation account available to absorb losses on loans. The ALL is established through provisions for loan losses charged against earnings. Loans deemed to be uncollectible are charged against the ALL, and subsequent recoveries, if any, are credited to the allowance.

The ALL is based on Management's evaluation of the loan portfolio under current economic conditions and is an amount that Management believes will be adequate to absorb probable losses on loans existing at the reporting date. On a quarterly basis, the Company’s problem asset committee meets to review the watch list of credits, which is formulated from the loan grading system. Members of this committee include loan officers, collection officers, the special assets director, the chief lending officer, the chief credit officer, the chief financial officer and the chief executive officer. The evaluation includes Management’s assessment of several factors: review and evaluation of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic conditions and the related impact on specific borrowers and industry groups, a study of loss experience, a review of classified, non-performing and delinquent loans, the estimated value of any underlying collateral, an estimate of the possibility of loss based on the risk characteristics of the portfolio, adverse situations that may affect the borrower’s ability to repay and the results of regulatory examinations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The ALL consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component of the allowance relates to loans that are not impaired. Changes to the components of the ALL are recorded as a component of the provision for the allowance for loan losses. Management must approve changes to the ALL and must report its actions to the Board of Directors. The Company believes that its allowance for loan losses is appropriate at December 31, 2019.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructurings and performing and non-performing major loans for which full payment of principal or interest is not expected. Payments received for impaired loans not on nonaccrual status are applied to principal and interest.

All impaired loans are reviewed, at a minimum, on a quarterly basis. The Company calculates the specific allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. Most of the Company’s impaired loans are collateral-dependent.

The fair value of the collateral for collateral-dependent loans is based on appraisals performed by third-party valuation specialists, comparable sales and other estimates of fair value obtained principally from independent sources such as the Multiple Listing Service or county tax assessment valuations, adjusted for estimated selling costs. The Company has a Real Estate Appraisal Policy (the “Policy”) which is in compliance with the guidelines set forth in the “Interagency Appraisal and Evaluation Guidelines” which implement Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and the revised “Interagency Appraisal and Evaluation Guidelines” issued in 2010. The Policy further requires that appraisals be in writing and conform to the Uniform Standards of Professional Appraisal Practice (“USPAP”). An appraisal prepared by a state-licensed or state-certified appraiser is required on all new loans secured by real estate in excess of $500,000. Loans secured by real estate in an amount of $500,000 or less, or that qualify for an exemption under FIRREA, must have a summary appraisal report or in-house evaluation, depending on the facts and circumstances. Factors including the assumptions and techniques utilized by the appraiser, which could result in a downward adjustment to the collateral value estimates indicated in the appraisal, are considered by the Company.

When Management determines that a loan is impaired and the loan is collateral-dependent, an evaluation of the fair value of the collateral is performed. The Company maintains established criteria for assessing whether an existing appraisal continues to reflect the fair value of the property for collateral-dependent loans. Appraisals are generally considered to be valid for a period of at least twelve months. However, appraisals that are less than 12 months old may need to be adjusted. Management considers such factors as the property type, property condition, current use of the property, current market conditions and the passage of time when determining the relevance and validity of the most recent appraisal of the property. If Management determines that the most recent appraisal is no longer valid, a new appraisal is ordered from an independent and qualified appraiser.

During the interim period between ordering and receipt of the new appraisal, Management considers if the existing appraisal should be discounted to determine the estimated fair value of collateral. Discounts are applied to the existing appraisal and take into consideration the property type, condition of the property, external market data, internal data, reviews of recently obtained appraisals and evaluations of similar properties, comparable sales of similar properties and tax assessment valuations. When the new appraisal is received and approved by Management, the valuation stated in the appraisal is used as the fair value of the collateral in determining impairment, if any. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance is required as a specific component of the allowance for loan losses. Any specific reserves recorded in the interim are adjusted accordingly.

The general component of the ALL is the loss estimated by applying historical loss percentages to non-classified loans which have been divided into segments. These segments include gaming; hotel/motel; real estate, construction; real estate, mortgage; commercial and industrial and all other. The loss percentages are based on each segment’s historical five year average loss experience which may be adjusted by qualitative factors such as changes in the general economy, or economy or real estate market in a particular geographic area or industry. Management considers the following when assessing risk in the Company's loan portfolio segments: gaming- loans in this segment are primarily susceptible to declines in tourism and general economic conditions; hotel/motel - loans in this segment are primarily susceptible to tourism, declines in occupancy rates, business failure, industry concentrations and general economic conditions; real estate, construction - loans in this segment are primarily susceptible to cost overruns, changes in market demand for property, delay in completion of construction and declining real estate values; real estate, mortgage - loans in this segment are primarily susceptible to general economic conditions, declining real estate values, industry concentrations and business failure; commercial and industrial - loans in this segment are primarily susceptible to general economic conditions, declining real estate values, industry concentrations and business failure; and other - loans in this segment, most of which are consumer loans, are primarily susceptible to regulatory risks, unemployment and general economic conditions.

Bank Premises and Equipment

Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of the related assets.

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. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the ALL. Any expense incurred in connection with holding such real estate or resulting from any write-downs in value subsequent to foreclosure is included in non-interest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference, if any, between the sales proceeds and the carrying amount of the property. If the fair value of the ORE, less estimated costs to sell at the time of foreclosure, decreases during the holding period, the ORE is written down with a charge to non-interest expense. Generally, ORE properties are actively marketed for sale and Management is continuously monitoring these properties in order to minimize any losses.

Trust Department Income and Fees

Corporate trust fees are accounted for on an accrual basis and personal trust fees are recorded when the underlying trust is serviced.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carry forwards, is required to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if it is probable that the tax position will be challenged, it is probable that the future resolution of the challenge will confirm that a loss has been incurred and the amount of such loss can be reasonably estimated.

Post-Retirement Benefit Plan

The Company accounts for its post-retirement benefit plan under Accounting Standards Codification (“Codification” or “ASC”) Topic 715, Retirement Benefits (“ASC 715”). The under or over funded status of the Company’s post-retirement benefit plan is recognized as a liability or asset in the statement of condition. Changes in the plan’s funded status are reflected in other comprehensive income. Net actuarial gains and losses and adjustments to prior service costs that are not recorded as components of the net periodic benefit cost are charged to other comprehensive income.

Earnings Per Share

Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding of 4,943,186 for 2019, 5,031,778 for 2018, and 5,123,076 for 2017.

Accumulated Other Comprehensive Income (Loss)

At December 31, 2019, 2018 and 2017, accumulated other comprehensive income (loss) consisted of net unrealized gains (losses) on available for sale securities and over (under) funded liabilities related to the Company’s post-retirement benefit plan.

Statements of Cash Flows

The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $3,231,710, $2,657,616, and $1,420,399 in 2019, 2018 and 2017, respectively, for interest on deposits and borrowings. No income tax payments were paid in 2019, 2018 and 2017. Loans transferred to other real estate amounted to $1,707,389, $4,706,732 and $1,946,045 in 2019, 2018 and 2017, respectively.

Fair Value Measurement

The Company reports certain assets and liabilities at their estimated fair value. These assets and liabilities are classified and disclosed in one of three categories based on the inputs used to develop the measurements. The categories establish a hierarchy for ranking the quality and reliability of the information used to determine fair value.

Reclassifications

Certain reclassifications have been made to the prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income.

NOTE B – SECURITIES:

The amortized cost and fair value of securities at December 31, 2019 and 2018, respectively, are as follows (in thousands):

			Gross		Gross
			Unrealized		Unrealized
December 31, 2019	Amortized Cost		Gains		Losses			Fair Value

Available for sale securities:
U.S. Treasuries	$	55,922	$	6	$	(275	)	$	55,653

U.S. Government agencies		12,493		93		(16	)		12,570

Mortgage-backed securities		104,414		1,832		(93	)		106,153

Collateralized mortgage obligations		15,440		251		(203	)		15,488

States and political subdivisions		6,412		35					6,447

Total available for sale securities	$	194,681	$	2,217	$	(587	)	$	196,311

Held to maturity securities:

U.S. Government agencies	$	5,000	$		$	(20	)	$	4,980

States and political subdivisions		47,231		985		(66	)		48,150

Total held to maturity securities	$	52,231	$	985	$	(86	)	$	53,130

			Gross		Gross
			Unrealized		Unrealized
December 31, 2018	Amortized Cost		Gains		Losses			Fair Value

Available for sale securities:
U.S. Treasuries	$	85,866	$		$	(2,443	)	$	83,423

U.S. Government agencies		17,492		14		(259	)		17,247

Mortgage-backed securities		112,391		231		(2,278	)		110,344

States and political subdivisions		10,994		102					11,096

Total available for sale securities	$	226,743	$	347	$	(4,980	)	$	222,110

Held to maturity securities:

U.S. Government agencies	$	8,185	$		$	(371	)	$	7,814

States and political subdivisions		46,413		89		(857	)		45,645

Total held to maturity securities	$	54,598	$	89	$	(1,228	)	$	53,459

The amortized cost and fair value of debt securities at December 31, 2019, (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	$	28,468	$	28,485
Due after one year through five years		38,782		38,569
Due after five years through ten years		20,517		20,522
Due after ten years		2,500		2,582
Mortgage-backed securities		104,414		106,153
Total	$	194,681	$	196,311

Held to maturity securities:
Due in one year or less	$	2,718	$	2,722
Due after one year through five years		17,036		17,342
Due after five years through ten years		24,209		24,407
Due after ten years		8,268		8,659
Total	$	52,231	$	53,130

Available for sale and held to maturity securities with gross unrealized losses at December 31, 2019 and 2018, 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
December 31, 2019:
U.S. Treasuries	$	4,894	$	44	$	49,753	$	231	$	54,647	$	275

U.S. Government agencies		4,978		16		4,979		20		9,957		36

Mortgage-backed securities		10,941		93						10,941		93

Collateralized mortgage obligations		10,398		203						10,398		203

States and political
subdivisions		4,602		61		608		5		5,210		66
Total	$	35,813	$	417	$	55,340	$	256	$	91,153	$	673

December 31, 2018:
U.S. Treasuries	$	999	$	1	$	82,424	$	2,442	$	83,423	$	2,443

U.S. Government agencies		4,939		61		17,608		569		22,547		630

Mortgage-backed securities		24,834		293		55,649		1,985		80,483		2,278

States and political subdivisions		8,470		122		19,678		735		28,148		857

Total	$	39,242	$	477	$	175,359	$	5,731	$	214,601	$	6,208

At December 31, 2019, 11 of the 12 securities issued by the U.S. Treasury, 2 of the 4 securities issued by U.S. Government agencies, 6 of the 47 mortgage-backed securities, 2 of the 3 collateralized mortgage obligations and 16 of the 131 securities issued by states and political subdivisions contained unrealized losses.

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

Proceeds from sales of available for sale debt securities were $15,123,868 and $30,748,797 during 2019 and 2017, respectively. Available for sale debt securities were sold and called for realized gains of $146,675 and $133,986 during 2019 and 2017, respectively. There were no sales or calls of available for sale securities in 2018. Proceeds from sales of other investments were $125,145 for a realized gain of $16,995 during 2018.

Securities with a fair value of $230,065,621 and $208,781,426 at December 31, 2019 and 2018, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

NOTE C - LOANS:

The composition of the loan portfolio at December 31, 2019 and 2018 is as follows (in thousands):

December 31,	2019		2018

Gaming	$	19,899	$	25,767

Hotel/motel		47,294		44,112

Real estate, construction		23,209		28,763

Real estate, mortgage		141,406		140,271

Commercial and industrial		30,626		27,505

Other		6,515		6,928

Total	$	268,949	$	273,346

In the ordinary course of business, the Company’s bank subsidiary extends loans to certain officers and directors and their personal business interests at, in the opinion of Management, the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of similar credit risk with persons not related to the Company or its subsidiaries. These loans do not involve more than normal risk of collectability and do not include other unfavorable features.

An analysis of the activity with respect to such loans to related parties is as follows (in thousands):

	2019			2018
Balance, January 1	$	9,157		$	6,543
January 1 balances, loans of directors appointed during the year					2,142
New loans and advances		1,174			2,272
Repayments		(1,141	)		(1,800	)

Balance, December 31	$	9,190		$	9,157

As part of its evaluation of the quality of the loan portfolio, Management monitors the Company’s credit concentrations on a monthly basis. Total outstanding concentrations were as follows (in thousands):

December 31,	2019		2018

Gaming	$	19,899	$	25,767
Hotel/motel		47,294		44,112
Out of area		13,423		15,244

The age analysis of the loan portfolio, segregated by class of loans, as of December 31, 2019 and 2018 is as follows (in thousands):

													Loans Past
													Due Greater
	Number of Days Past Due												Than 90
					Greater		Total				Total		Days and
	30 - 59		60 - 89		Than 90		Past Due		Current		Loans		Still Accruing
December 31, 2019:
Gaming	$		$		$		$		$	19,899	$	19,899	$
Hotel/motel										47,294		47,294
Real estate, construction		303		69		14		386		22,823		23,209
Real estate, mortgage		4,150		343		5,580		10,073		131,333		141,406
Commercial and industrial		92		58		218		368		30,258		30,626
Other		50		12				62		6,453		6,515

Total	$	4,595	$	482	$	5,812	$	10,889	$	258,060	$	268,949	$
December 31, 2018:
Gaming	$		$		$		$		$	25,767	$	25,767	$
Hotel/motel										44,112		44,112
Real estate, construction		1,987		340		860		3,187		25,576		28,763
Real estate, mortgage		2,866		7,129		1,730		11,725		128,546		140,271		51
Commercial and industrial		9		110		1,661		1,780		25,725		27,505		4
Other		107		3				110		6,818		6,928

Total	$	4,969	$	7,582	$	4,251	$	16,802	$	256,544	$	273,346	$	55

The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A, B, C, S, D, E or F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. A grade of S will generally be applied to loans for customers who meet the criteria for a grade of C but also warrant additional monitoring by placement on the watch list. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade of E will generally be applied to loans for customers with weaknesses inherent in the D classification and in which collection or liquidation in full is questionable. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. A grade of F is applied to loans which are considered uncollectible and of such little value that their continuance in an active bank is not warranted. Loans with this grade are charged off, even though partial or full recovery may be possible in the future.

An analysis of the loan portfolio by loan grade, segregated by class of loans, as of December 31, 2019 and 2018 is as follows (in thousands):

	Loans With A Grade Of:
	A, B or C		S		D		E		F	Total
December 31, 2019:
Gaming	$	19,899	$		$		$		$	$	19,899

Hotel/motel		47,294									47,294

Real estate, construction		22,611				83		515			23,209

Real estate, mortgage		123,841		5,338		3,608		8,619			141,406

Commercial and industrial		21,609		8,627		59		331			30,626

Other		6,501				12		2			6,515


Total	$	241,755	$	13,965	$	3,762	$	9,467	$	$	268,949

December 31, 2018:
Gaming	$	21,080	$		$	4,687	$		$	$	25,767

Hotel/motel		44,112									44,112

Real estate, construction		27,096				217		1,450			28,763

Real estate, mortgage		111,719		10,430		12,992		5,130			140,271

Commercial and industrial		25,335				218		1,952			27,505

Other		6,904				20		4			6,928


Total	$	236,246	$	10,430	$	18,134	$	8,536	$	$	273,346

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 December 31, 2019 and 2018 are as follows (in thousands):

December 31,	2019		2018

Real estate, construction	$	515	$	1,439

Real estate, mortgage		8,495		4,954

Commercial and industrial		256		1,855

Other				2

Total	$	9,266	$	8,250

Prior to 2018, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2019 and 2018 the Company did not restructure any additional loans. Specific reserves of $63,106 and $69,000 have been allocated to troubled debt restructurings as of December 31, 2019 and 2018, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of December 31, 2019 and 2018.

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of December 31, 2019 and 2018 were as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2019:
With no related allowance recorded:
Real estate, construction	$	292	$	292	$		$	312	$
Real estate, mortgage		8,906		8,906				9,075		29
Commercial and industrial		217		217				217

Total		9,415		9,415				9,604		29

With a related allowance recorded:
Real estate, construction		223		223		20		230
Real estate, mortgage		624		624		98		614		27
Commercial and industrial		39		39		4		41

Total		886		886		122		885		27

Total by class of loans:
Real estate, construction		515		515		20		542
Real estate, mortgage		9,530		9,530		98		9,689		56
Commercial and industrial		256		256		4		258

Total	$	10,301	$	10,301	$	122	$	10,489	$	56

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2018:
With no related allowance recorded:
Real estate, construction	$	1,171	$	784	$		$	785	$
Real estate, mortgage		5,508		5,474				5,826		29
Commercial and industrial		2,083		1,855				2,204
Other		2		2				3

Total		8,764		8,115				8,818		29

With a related allowance recorded:
Real estate, construction		742		655		283		633
Real estate, mortgage		574		574		101		589		25

Total		1,316		1,229		384		1,222		25

Total by class of loans:
Real estate, construction		1,913		1,439		283		1,418
Real estate, mortgage		6,082		6,048		101		6,415		54
Commercial and industrial		2,083		1,855				2,204
Other		2		2				3

Total	$	10,080	$	9,344	$	384	$	10,040	$	54

Transactions in the allowance for loan losses for the years ended December 31, 2019, 2018 and 2017, and the balances of loans, individually and collectively evaluated for impairment, as of December 31, 2019, 2018 and 2017 are as follows (in thousands):

	Gaming			Hotel/Motel			Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
December 31, 2019:
Allowance for Loan Losses:
Beginning Balance	$	416		$	1,442		$	429		$	2,444		$	476		$	133		$	5,340
Charge-offs								(404	)		(63	)		(591	)		(270	)		(1,328	)
Recoveries								25			4			55			111			195
Provision		(193	)		(663	)		52			69			613			122
Ending Balance	$	223		$	779		$	102		$	2,454		$	553		$	96		$	4,207

Allowance for Loan Losses:
Ending balance: individually evaluated for impairment	$			$			$	20		$	180		$	57		$	4		$	261
Ending balance: collectively evaluated for impairment	$	223		$	779		$	82		$	2,274		$	496		$	92		$	3,946

Total Loans:
Ending balance: individually evaluated for impairment	$			$			$	597		$	12,228		$	390		$	15		$	13,230
Ending balance: collectively evaluated for impairment	$	19,899		$	47,294		$	22,612		$	129,178		$	30,236		$	6,500		$	255,719

	Gaming			Hotel/Motel		Real Estate, Construction		Real Estate, Mortgage			Commercial and Industrial			Other			Total
December 31, 2018:
Allowance for Loan Losses:
Beginning Balance	$	536		$	936	$	242	$	3,369		$	892		$	178		$	6,153
Charge-offs									(715	)		(372	)		(323	)		(1,410	)
Recoveries							17		188			112			158			475
Provision		(120	)		506		170		(398	)		(156	)		120			122
Ending Balance	$	416		$	1,442	$	429	$	2,444		$	476		$	133		$	5,340

Allowance for Loan Losses:
Ending balance: individually evaluated for impairment	$			$		$	283	$	322		$	120		$	3		$	728
Ending balance: collectively evaluated for impairment	$	416		$	1,442	$	146	$	2,122		$	356		$	130		$	4,612

Total Loans:
Ending balance: individually evaluated for impairment	$	4,687		$		$	1,667	$	18,122		$	2,170		$	24		$	26,670
Ending balance: collectively evaluated for impairment	$	21,080		$	44,112	$	27,096	$	122,149		$	25,335		$	6,904		$	246,676

	Gaming			Hotel/Motel			Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
December 31, 2017:
Allowance for Loan Losses:
Beginning Balance	$	545		$	957		$	265		$	2,843		$	651		$	205		$	5,466
Charge-offs											(8	)		(36	)		(235	)		(279	)
Recoveries								718			29			11			92			850
Provision		(9	)		(21	)		(741	)		505			266			116			116
Ending Balance	$	536		$	936		$	242		$	3,369		$	892		$	178		$	6,153

Allowance for Loan Losses:
Ending balance: individually evaluated for impairment	$			$			$	145		$	1,082		$	636		$	6		$	1,869
Ending balance: collectively evaluated for impairment	$	536		$	936		$	97		$	2,287		$	256		$	172		$	4,284

Total Loans:
Ending balance: individually evaluated for impairment	$			$	4,207		$	1,799		$	25,160		$	3,228		$	18		$	34,412
Ending balance: collectively evaluated for impairment	$	26,142		$	30,675		$	26,061		$	133,509		$	23,132		$	6,518		$	246,037

NOTE D - BANK PREMISES AND EQUIPMENT:

Bank premises and equipment are shown as follows (in thousands):

December 31,	Estimated Useful Lives (in years)			2019		2018

Land				$	5,783	$	5,783
Building	5	-	40		30,688		30,681
Furniture, fixtures and equipment	30	-	10		17,283		17,430
Totals, at cost					53,754		53,894
Less: Accumulated depreciation					36,333		35,015
Totals				$	17,421	$	18,879

NOTE E – OTHER REAL ESTATE:

The Company’s other real estate consisted of the following as of December 31, 2019 and 2018, respectively (in thousands except number of properties):

December 31,	2019				2018
	Number of				Number of
	Properties		Balance		Properties		Balance
Construction, land development and other land		12	$	4,828		12	$	6,007
1 - 4 family residential properties		3		370		3		859
Nonfarm nonresidential		4		1,902		5		1,725
Other		1		353		1		352
Total		20	$	7,453		21	$	8,943

NOTE F - DEPOSITS:

At December 31, 2019, the scheduled maturities of time deposits are as follows (in thousands):

2020	$	70,673
2021		13,775
2022		2,615
2023		2,001
2024		1,334

Total	$	90,398

Time deposits of $250,000 or more totaled approximately $46,618,000 and $39,805,000 at December 31, 2019 and 2018, respectively.

Deposits held for related parties amounted to $2,259,360 and $3,676,971 at December 31, 2019 and 2018, respectively.

Overdrafts totaling $422,304 and $1,044,409 were reclassified as loans at December 31, 2019 and 2018, respectively.

NOTE G – FEDERAL FUNDS PURCHASED:

At December 31, 2019, the Company had facilities in place to purchase federal funds up to $40,000,000 under established credit arrangements.

NOTE H - BORROWINGS:

At December 31, 2019, the Company was able to borrow up to $14,647,619 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. Borrowings bear interest at the primary credit rate, which is established periodically by the Federal Reserve Board, and have a maturity of one day. The primary credit rate was 2.25% at December 31, 2019. There was no outstanding balance at December 31, 2019.

At December 31, 2019, the Company had $3,526,319 outstanding in advances under a $59,008,622 line of credit with the FHLB. One advance in the amount of $2,500,000 bears interest at 1.45% at December 31, 2019 and matures in 2020. New advances may subsequently be obtained based on the liquidity needs of the bank subsidiary. The remaining balance consists of smaller advances bearing interest from 2.604% to 7.00% with maturity dates from 2030 – 2040. The advances are collateralized by specific loans, for which certain documents are held in custody by the FHLB, and, if needed, specific investment securities that are held in safekeeping at the FHLB.

NOTE I - INCOME TAXES:

Deferred taxes (or deferred charges) as of December 31, 2019 and 2018, included in other assets, were as follows (in thousands):

December 31,	2019			2018

Deferred tax assets:
Allowance for loan losses	$	883		$	1,121
Employee benefit plans' liabilities		3,189			3,117
Unrealized loss on available for sale securities, charged from equity					973
Loss on credit impairment of securities		356			356
Earned retiree health benefits plan liability		1,049			1,048
General business and AMT credits		1,707			1,750
Tax net operating loss carryforward		2,048			2,118
Other		863			943
Valuation allowance		(7,099	)		(8,642	)
Deferred tax assets		2,996			2,784
Deferred tax liabilities:
Unrealized gain on available for sale securities, charged from equity		342
Unearned retiree health benefits plan asset		381			298
Bank premises and equipment		2,047			2,235
Other		226			251
Deferred tax liabilities		2,996			2,784
Net deferred taxes	$			$

Income taxes consist of the following components (in thousands):

Years Ended December 31,	2019			2018			2017

Current	$			$	(36	)	$	(1,080	)
Deferred:
Federal		166			(425	)		4,023
Change in valuation allowance		(166	)		425			(4,023	)
Total deferred
Totals	$			$	(36	)	$	(1,080	)

Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 21.0% for 2019 and 2018 and 34.0% for 2017 to income before income taxes. The reasons for these differences are shown below (in thousands):

	2019						2018						2017
	Tax			Rate			Tax			Rate			Tax			Rate
Taxes computed at statutory rate	$	321			21		$	125			21		$	571			34
Increase (decrease) resulting from:
Tax-exempt interest income		(172	)		(11	)		(206	)		(35	)		(362	)		(22	)
Income from BOLI		(92	)		(6	)		(96	)		(16	)		(302	)		(18	)
Federal tax credits		(20	)		(1	)		(298	)		(50	)		(298	)		(18	)
Other		129			8			50			8			(656	)		(39	)
Impact of tax rate change														3,990			238
Change in valuation allowance for enacted change in tax rates														(3,990	)		(238	)
Realization of AMT credit								(36	)		(6	)		(742	)		(44	)
Other changes in valuation allowance		(166	)		(11	)		425			72			709			42

Total income tax (benefit) expense	$						$	(36	)		(6	)	$	(1,080	)		(65	)

During 2019, the Company recorded no income tax benefit or expense. During 2018 and 2017, the Company recorded an income tax benefit of $36,000 and $1,080,000, respectively. On December 22, 2017, the President signed into law The Tax Cuts and Jobs Act (the “Act”). In addition to reducing U.S. corporate income tax rates from 34% to 21%, the Act repealed the alternative minimum tax (“AMT”) regime for tax years beginning after December 31, 2017. For tax years beginning in 2018, 2019 and 2020, the AMT credit carryforward can be utilized to offset regular tax with any remaining AMT carryforwards eligible for a refund of 50%. Any remaining AMT credit carryforwards will become fully refundable beginning in the 2021 tax year. As a result, during 2018 and 2017, the Company reclassified the AMT credit carryforward to a tax receivable resulting in a deferred tax benefit of $36,000 and $742,000, respectively. In 2017, the Company also recorded a current tax benefit of $338,000 to account for the carryback of general business tax credits to open tax years.

In 2017, the Company also remeasured the net deferred tax asset and corresponding valuation allowance as a result of the Act. The impact was to reduce the deferred tax asset and corresponding valuation allowance by $3,990,000.

A valuation allowance is recognized against deferred tax assets when, based on the consideration of all available positive and negative evidence using a more likely than not criteria, it is determined that all or a portion of these tax benefits may not be realized. This assessment requires consideration of all sources of taxable income available to realize the deferred tax asset including taxable income in prior carry-back years, future reversals of existing temporary differences, tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. The Company incurred losses on a cumulative basis for the three-year period ended December 31, 2014, which is considered to be significant negative evidence. The positive evidence considered in support was insufficient to overcome this negative evidence. As a result, the Company established a full valuation allowance for its net deferred tax asset in the amount of $8,140,000 as of December 31, 2014.

The Company intends to maintain this valuation allowance until it determines it is more likely than not that the asset can be realized through current and future taxable income. If not utilized, the Company’s federal net operating loss of $9,753,000 will begin to expire in 2035.

The Company has reviewed its income tax positions and specifically considered the recognition and measurement requirements of the benefits recorded in its financial statements for tax positions taken or expected to be taken in its tax returns. The Company currently has no unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods.

NOTE J - SHAREHOLDERS' EQUITY:

Shareholders’ equity of the Company includes the undistributed earnings of the bank subsidiary. Dividends to the Company’s shareholders can generally be paid only from dividends paid to the Company by its bank subsidiary. Consequently, dividends are dependent upon the earnings, capital needs, regulatory policies and statutory limitations affecting the bank subsidiary. Dividends paid by the bank subsidiary are subject to the written approval of the Commissioner of Banking and Consumer Finance of the State of Mississippi and the Federal Deposit Insurance Corporation (the “FDIC”). At December 31, 2019, $13,703,377 of undistributed earnings of the bank subsidiary included in consolidated surplus and retained earnings was available for future distribution to the Company as dividends with regulatory approval. Dividends paid by the Company are subject to the written approval of the Federal Reserve Bank (“FRB”).

On December 8, 2017, the Board approved the repurchase of up to 110,000 of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, 110,000 shares have been repurchased for approximately $1,477,000 and retired through December 31, 2018.

On September 26, 2018, the Board approved the repurchase of up to 70,000 of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, 70,000 shares have been repurchased for approximately $933,000 and retired through December 31, 2018.

On November 8, 2019, the Board approved the repurchase of up to 65,000 of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, no shares have been repurchased and retired through December 31, 2019.

On April 25, 2018, the Board declared a dividend of $.01 per share payable May 10, 2018 to shareholders of record as of May 7, 2018. On September 26, 2018, the Board declared a dividend of $.01 per share payable on October 15, 2018 to shareholders of record as of October 9, 2018.

On April 24, 2019, the Board declared a dividend of $.01 per share payable May 10, 2019 to shareholders of record as of May 6, 2019. On November 8, 2019, the Board declared a dividend of $.02 per share payable on November 25, 2019 to shareholders of record as of November 20, 2019.

The Company and the bank subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the bank subsidiary and the Company are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

As of December 31, 2019, the most recent notification from the FDIC categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Common equity tier 1 capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater and a Leverage capital ratio of 5.00% or greater. As of January 1, 2019, the Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category.

The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2019 and 2018, are as follows (in thousands):

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
December 31, 2019:
Total Capital (to Risk Weighted Assets)	$	96,632		26.22	%	$	29,487		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		92,425		25.08	%		16,586		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		92,425		25.08	%		22,115		6.00	%
Tier 1 Capital (to Average Assets)		92,425		15.26	%		24,230		4.00	%

December 31, 2018:
Total Capital (to Risk Weighted Assets)	$	95,627		25.30	%	$	30,240		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		90,894		24.05	%		17,010		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		90,894		24.05	%		22,680		6.00	%
Tier 1 Capital (to Average Assets)		90,894		14.35	%		25,344		4.00	%

The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios and capital amounts and ratios to be well capitalized for 2019 and 2018, are as follows (in thousands):

						For Capital					To Be Well
	Actual					Adequacy Purposes					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2019:
Total Capital (to Risk Weighted Assets)	$	93,228		25.48	%	$	29,274		8.00	%	$	36,592		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		89,021		24.33	%		16,466		4.50	%		23,785		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		89,021		24.33	%		21,955		6.00	%		29,274		8.00	%
Tier 1 Capital (to Average Assets)		89,021		14.72	%		24,198		4.00	%		30,248		5.00	%

December 31, 2018:
Total Capital (to Risk Weighted Assets)	$	92,485		24.61	%	$	30,062		8.00	%	$	37,577		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		87,780		23.36	%		16,910		4.50	%		24,425		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		87,780		23.36	%		22,546		6.00	%		30,062		8.00	%
Tier 1 Capital (to Average Assets)		87,780		14.11	%		24,884		4.00	%		31,105		5.00	%

NOTE K - OTHER INCOME AND EXPENSES:

Other income consisted of the following (in thousands):

Years Ended December 31,	2019		2018		2017

Other service charges, commissions and fees	$	91	$	93	$	99
Rentals		329		246		298
Other		112		121		84
Totals	$	532	$	460	$	481

Other expenses consisted of the following (in thousands):

Years Ended December 31,	2019		2018		2017

Advertising	$	529	$	557	$	538
Data processing		1,356		1,355		1,289
FDIC and state banking assessments		374		248		424
Legal and accounting		714		449		422
Other real estate		553		1,254		740
ATM expense		697		585		582
Trust expense		368		304		307
Other		1,807		1,699		1,873
Totals	$	6,398	$	6,451	$	6,175

NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and irrevocable letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the bank subsidiary has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and irrevocable letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the agreement. Irrevocable letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.

Commitments and irrevocable letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluated each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on Management's credit evaluation of the customer. Collateral obtained varies but may include equipment, real property and inventory.

The Company generally grants loans to customers in its trade area.

At December 31, 2019 and 2018, the Company had outstanding irrevocable letters of credit aggregating $89,097 and $235,141, respectively. At December 31, 2019 and 2018, the Company had outstanding unused loan commitments aggregating $28,596,286 and $31,885,422, respectively. Approximately $15,082,587 and $15,539,762 of outstanding commitments were at fixed rates and the remainder were at variable rates at December 31, 2019 and 2018, respectively.

NOTE M - CONTINGENCIES:

NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION:

Peoples Financial Corporation began its operations September 30, 1985, when it acquired all the outstanding stock of The Peoples Bank, Biloxi, Mississippi. A condensed summary of its financial information is shown below.

CONDENSED BALANCE SHEETS (IN THOUSANDS):

December 31,	2019		2018

Assets
Investments in subsidiaries, at underlying equity:
Bank subsidiary	$	91,718	$	83,820
Nonbank subsidiary		1		1

Cash in bank subsidiary		740		283

Other assets		2,664		2,830

Total assets	$	95,123	$	86,934

Liabilities and Shareholders' Equity:
Other liabilities	$		$

Total liabilities

Shareholders' equity		95,123		86,934

Total liabilities and shareholders' equity	$	95,123	$	86,934

CONDENSED STATEMENTS OF INCOME (IN THOUSANDS):

Years Ended December 31,	2019			2018			2017

Income
Distributed income of bank subsidiary	$	700		$	901		$	1,900
Undistributed income of bank subsidiary		1,240			112			942
Other income (loss)		(164	)		(252	)		47

Total income		1,776			761			2,889

Expenses
Other		97			132			131

Total expenses		97			132			131

Income before income taxes		1,679			629			2,758

Income tax

Net income	$	1,679		$	629		$	2,758

CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS):

Years Ended December 31,	2019			2018			2017

Cash flows from operating activities:
Net income	$	1,679		$	629		$	2,758
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Income) loss from other investments		166			274			(42	)
Undistributed income of subsidiaries		(1,240	)		(112	)		(942	)
Gain from sale of securities					(17	)
Other assets								(20	)

Net cash provided by operating activities		605			774			1,754

Cash flows from investing activities:
Redemption of equity securities					125

Net cash provided by investing activities					125

Cash flows from financing activities:
Retirement of common stock					(1,907	)		(502	)
Dividends paid		(148	)		(101	)		(51	)

Net cash used in financing activities		(148	)		(2,008	)		(553	)

Net increase (decrease) in cash		457			(1,109	)		1,201
Cash, beginning of year		283			1,392			191

Cash, end of year	$	740		$	283		$	1,392

NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS:

The Company sponsors the Peoples Financial Corporation Employee Stock Ownership Plan (“ESOP”). Employees who are in a position requiring at least 1,000 hours of service during a plan year and who are 21 years of age are eligible to participate in the ESOP. The Plan included 401(k) provisions and the former Gulf National Bank Profit Sharing Plan. Effective January 1, 2001, the ESOP was amended to separate the 401(k) funds into the Peoples Financial Corporation 401(k) Profit Sharing Plan. The separation had no impact on the eligibility or benefits provided to participants of either plan. The 401(k) provides for a matching contribution of 75% of the amounts contributed by the employee (up to 6% of compensation). Contributions are determined by the Board of Directors and may be paid either in cash or Peoples Financial Corporation common stock. Total contributions to the plans charged to operating expense were $260,000, $260,000 and $260,000 in 2019, 2018 and 2017, respectively.

The ESOP was frozen to further contributions and eligibility effective January 1, 2019. Compensation expense of $7,285,390 and $7,106,959 was the basis for determining the ESOP contribution allocation to participants for 2018 and 2017, respectively. The ESOP held 237,923, 247,627 and 270,455 allocated shares at December 31, 2019, 2018 and 2017, respectively.

The Company established an Executive Supplemental Income Plan and a Directors' Deferred Income Plan, which provide for pre-retirement and post-retirement benefits to certain key executives and directors. Benefits under the Executive Supplemental Income Plan are based upon the position and salary of the officer at retirement or death. Normal retirement benefits under the plan are equal to 67% of salary for the president and chief executive officer, 58% of salary for the executive vice president and 50% of salary for all other executive officers and are payable monthly over a period of fifteen years. Under the Directors’ Deferred Income Plan, the directors are given an opportunity to defer receipt of their annual directors’ fees until retirement from the board. For those who choose to participate, benefits are payable monthly for ten years beginning the first day of the month following the director’s normal retirement date. The normal retirement date is the later of the normal retirement age (65) or separation of service. Interest on deferred fees accrues at an annual rate of ten percent, compounded annually. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $17,024,779 and $16,620,943 at December 31, 2019 and 2018, respectively. The present value of accumulated benefits under these plans, using an interest rate of 4.00% and the interest ramp-up method has been accrued. The accrual amounted to $13,229,501 and $12,919,127 at December 31, 2019 and 2018, respectively, and is included in Employee and director benefit plans liabilities.

The Company also has additional plans for post-retirement benefits for certain key executives. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $1,850,592 and $1,729,904 at December 31, 2019 and 2018, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.00% and the projected unit cost method has been accrued. The accrual amounted to $1,622,840 and $1,613,326 at December 31, 2019 and 2018, respectively, and is included in Employee and director benefit plans liabilities.

Additionally, there are two endorsement split dollar policies, with the bank subsidiary as owner and beneficiary, which provide a guaranteed death benefit to the participants’ beneficiaries. These contracts are carried at their cash surrender value, which amounted to $311,088 and $306,146 at December 31, 2019 and 2018, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.00% and the projected unit cost method has been accrued. The accrual amounted to $101,613 and $97,587 at December 31, 2019 and 2018, respectively, and is included in Employee and director benefit plans liabilities.

The Company has additional plans for post-retirement benefits for directors. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $194,270 and $184,070 at December 31, 2019 and 2018, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.00% and the projected unit cost method has been accrued. The accrual amounted to $229,392 and $213,661 at December 31, 2019 and 2018, respectively, and is included in Employee and director benefit plans liabilities.

The Company provides post-retirement health insurance to certain of its retired employees. Employees are eligible to participate in the retiree health plan if they retire from active service no earlier than age 60. In addition, the employee must have at least 25 continuous years of service with the Company immediately preceding retirement. However, any active employee who was at least age 65 as of January 1, 1995, does not have to meet the 25 years of service requirement. The Company reserves the right to modify, reduce or eliminate these health benefits. The Company has chosen to not offer this post-retirement benefit to individuals entering the employ of the Company after December 31, 2006. Employees who are eligible and enroll in the bank subsidiary’s group medical and dental health care plans upon their retirement must enroll in Medicare Parts A, B and D when first eligible upon their retirement from the bank subsidiary. This results in the bank subsidiary’s programs being secondary insurance coverage for retired employees and any dependent(s), if applicable, while Medicare Parts A and B will be their primary coverage, and Medicare Part D will be the sole and exclusive prescription drug benefit plan for retired employees.

The following is a summary of the components of the net periodic post-retirement benefit cost (credit)(in thousands):

Years Ended December 31,	2019			2018			2017

Service cost	$	88		$	171		$	153

Interest cost		107			136			135

Amortization of net gain		(129	)

Amortization of prior service credit		(81	)		(81	)		(81	)

Net periodic post-retirement benefit cost (credit)	$	(15	)	$	226		$	207

The discount rate used in determining the accumulated post-retirement benefit obligation was 3.20% in 2019 and 4.30% in 2018. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation was 6.25% in 2019. The rate was assumed to decrease gradually to 4.50% for 2026 and remain at that level thereafter. If the health care cost trend rate assumptions were increased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2019, would be increased by 16.78%, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have increased by 17.46%. If the health care cost trend rate assumptions were decreased 1.00%, the accumulated post-retirement benefit obligation as of December 31, 2019, would be decreased by 13.51%, and the aggregate of the service and interest cost components of the net periodic post-retirement benefit cost for the year then ended would have decreased by 13.98%.

The following table presents the estimated benefit payments for each of the next five years and in the aggregate for the next five years (in thousands):

2020	$	73
2021		91
2022		108
2023		128
2024		164
2025-2029		1,025

The following is a reconciliation of the accumulated post-retirement benefit obligation, which is included in Employee and director benefit plans liabilities (in thousands):

Accumulated post-retirement benefit obligation as of December 31, 2018	$	3,571
Service cost		88
Interest cost		107
Actuarial gain		(604	)
Employer contributions		20
Accumulated post-retirement benefit obligation as of December 31, 2019	$	3,182

The following is a summary of the change in plan assets (in thousands):

	2019			2018			2017
Fair value of plan assets at beginning of year	$			$			$
Actual return on assets
Employer contribution		20			28			48
Benefits paid, net		(20	)		(28	)		(48	)
Fair value of plan assets at end of year	$			$			$

Amounts recognized in the Accumulated Other Comprehensive Income (Loss), net of tax, were (in thousands):

For the year ended December 31,	2019		2018		2017
Net gain	$	816	$	440	$	11
Prior service charge		616		680		622

Total other comprehensive income	$	1,432	$	1,120	$	633

Amounts recognized in the accumulated post-retirement benefit obligation and other comprehensive income (loss) were (in thousands):

For the year ended December 31,	2019
Unrecognized actuarial gain	$	475
Amortization of prior service cost		(81	)
Total accumulated other comprehensive income	$	394

The prior service credit and amortization of net gain that will be recognized in accumulated other comprehensive income during 2020 is $81,381 and $74,600, respectively.

NOTE P - 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 the 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 Interactive Data Corporation, which utilizes pricing models that vary based by 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. If the fair value of available for sale securities is generated through model-based techniques including the discounting of estimated cash flows, such securities are classified as Level 3 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

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

Loans

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

Other Real Estate

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

Cash Surrender Value of Life Insurance

The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.

Deposits

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

Borrowings from Federal Home Loan Bank

The fair value of 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 December 31, 2019 and 2018, were as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
December 31, 2019:
U.S. Treasuries	$	55,653	$	$	55,653	$
U.S. Government agencies		12,570			12,570
Mortgage-backed securities		106,153			106,153
Collateralized mortgage obligations		15,488			15,488
States and political subdivisions		6,447			6,447
Total	$	196,311	$	$	196,311	$

December 31, 2018:
U.S. Treasuries	$	83,423	$	$	83,423	$
U.S. Government agencies		17,247			17,247
Mortgage-backed securities		110,344			110,344
States and political subdivisions		11,096			11,096
Total	$	222,110	$	$	222,110	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2019 and 2018 were as follows (in thousands):

			Fair Value Measurements Using
December 31:	Total		Level 1	Level 2	Level 3
2019	$	764	$	$	$	764
2018		2,927				2,927

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2019 and 2018 are as follows (in thousands):

			Fair Value Measurements Using
December 31:	Total		Level 1	Level 2	Level 3
2019	$	7,453	$	$	$	7,453
2018		8,943				8,943

100

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):

	2019			2018
Balance, beginning of year	$	8,943		$	8,232

Loans transferred to ORE		1,707			4,707

Sales		(2,755	)		(3,232	)

Write-downs		(442	)		(764	)

Balance, end of year	$	7,453		$	8,943

101

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at December 31, 2019 and 2018 are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2019:
Financial Assets:
Cash and due from banks	$	29,424	$	29,424	$		$		$	29,424
Available for sale securities		196,311				196,311				196,311
Held to maturity securities		52,231				53,130				53,130
Other investments		2,643		2,643						2,643
Federal Home Loan Bank stock		2,129				2,129				2,129
Loans, net		264,742						261,710		261,710
Other real estate		7,453						7,453		7,453
Cash surrender value of life insurance		19,381				19,381				19,381
Financial Liabilities:
Deposits:
Non-interest bearing		122,592		122,592						122,592
Interest bearing		353,551						354,141		354,141
Borrowings from Federal Home Loan
Bank		3,526				3,730				3,730

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2018:
Financial Assets:
Cash and due from banks	$	17,191	$	17,191	$		$		$	17,191
Available for sale securities		222,110				222,110				222,110
Held to maturity securities		54,598				53,459				53,459
Other investments		2,811		2,811						2,811
Federal Home Loan Bank stock		2,069				2,069				2,069
Loans, net		268,006						260,560		260,560
Other real estate		8,943						8,943		8,943
Cash surrender value of life insurance		18,841				18,841				18,841
Financial Liabilities:
Deposits:
Non-interest bearing		114,512		114,512						114,512
Interest bearing		358,994						359,386		359,386
Borrowings from Federal Home Loan
Bank		36,142				36,211				36,211

102

235 Peachtree Street NE

Suite 1800

Atlanta, GA 30303

404 588 4200

wipfli.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Peoples Financial Corporation

Biloxi, Mississippi

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of condition of Peoples Financial Corporation and subsidiaries (the Company) as of December 31, 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ WIPFLI LLP

We have served as the Company’s auditor since 2019.

Atlanta, Georgia

March 13, 2020

103

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Peoples Financial Corporation

Biloxi, Mississippi

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of condition of Peoples Financial Corporation and subsidiaries (the Company) as of December 31, 2018, the related consolidated statements of income, comprehensive income (loss), and cash flows for each of the two years in the period ended December 31, 2018, and changes in shareholder’s equity for each of the two years in the period ended December 31, 2018, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PORTER KEADLE MOORE, LLC

We have served as the Company’s auditor since 2006.

Atlanta, Georgia

March 13, 2019

104

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2019, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that 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.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Controls Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13(a) - 15(f) of the Securities Exchange Act of 1934. In meeting its responsibility, management relies on its accounting and other related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misappropriation.

Management of the Company, including its Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal control over financial reporting as of December 31, 2019, using the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our assessment included a review of the documentation of controls, evaluations of the design of the internal control system and tests of operating effectiveness of the internal controls. Based on the assessment, management has concluded that the Company had effective internal control over financial reporting as of December 31, 2019.

Chevis C. Swetman	Lauri A. Wood
Chairman, President and Chief Executive Officer	Chief Financial Officer
March 13, 2020	March 13, 2020

105

ITEM 9B - OTHER INFORMATION

None.

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information in Sections II, III, VIII and IX contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 22, 2020, which was filed by the Company in definitive form with the Commission on March 13, 2020, is incorporated herein by reference.

The Company’s Board of Directors has adopted a Code of Conduct that applies to not only the chief executive officer and the chief financial officer, but also all of the officers, directors and employees of the Company and its subsidiaries. A copy of this Code of Conduct can be found at the Company’s internet website at www.thepeoples.com. The Company intends to disclose any amendments to its Code of Conduct, and any waiver from a provision of the Code of Conduct granted to the Company’s Chief Executive Officer or Chief Financial Officer on the Company’s internet website within five business days following such amendment or waiver. The information contained on or connected to the Company’s internet website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report that the Company may file with or furnish to the SEC.

ITEM 11 - EXECUTIVE COMPENSATION

The information in Section VI contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 22, 2020 which was filed by the Company in definitive form with the Commission on March 13, 2020, is incorporated herein by reference.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information in Sections IV and V contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 22, 2020, which was filed by the Company in definitive form with the Commission on March 13, 2020, is incorporated herein by reference.

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ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information in Sections III and VII contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 22, 2020, which was filed by the Company in definitive form with the Commission on March 13, 2020, is incorporated herein by reference.

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

The information in Section XI contained in the Proxy Statement in connection with the Annual Meeting of Shareholders to be held April 22, 2020, which was filed by the Company in definitive form with the Commission on March 13, 2020, is incorporated herein by reference.

PART IV

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Index of Financial Statements:

See Item 8.

(a) 2. Index of Financial Statement Schedules:

All other schedules have been omitted as not applicable or not required or because the information has been included in the financial statements or applicable notes.

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(a) 3. Index of Exhibits:

Description		Incorporated by Reference to Registration or File Number	Form of Report	Date of Report	Exhibit Number in Report
(3.1)	Articles of Incorporation	0-30050	10/a	6/21/1999	3.1
(3.2)	By-Laws	0-30050	10/a	6/21/1999	3.2
(10.1)	Description of Automobile Plan	0-30050	10-K	12/31/2003	10.1
(10.2)	Directors' Deferred Income Plan Agreements	0-30050	10-K	12/31/2003	10.2
(10.3)	Executive Supplemental Income Plan Agreement - Chevis C. Swetman	001-12103	10-Q	9/30/2007	10.2
(10.4)	Executive Supplemental Income Plan Agreement - A. Wes Fulmer	001-12103	10-Q	9/30/2007	10.3
(10.5)	Executive Supplemental Income Plan Agreement - Lauri A. Wood	001-12103	10-Q	9/30/2007	10.4
(10.6)	Split Dollar Agreements	0-30050	10-K	12/31/2003	10.4
(10.7)	Deferred Compensation Plan	001-12103	10-Q	9/30/2007	10.1
(10.8)	Description of Stock Incentive Plan	33-15595	10-K	12/31/2001	10.6
(10.9)	Description of Bonus Plan	001-12103	10-Q	9/30/2010	10.1
(21)	Subsidiaries of the registrant (P)	33-15595	10-K	12/31/1988	22
(23.1)	Consent of Independent Registered Public Accounting Firm - Wipfli LLP*
(23.2)	Consent of Independent Registered Public Accounting Firm – Porter Keadle Moore, LLC*
(31.1)	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 *
(31.2)	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 *
(32.1)	Certification of Principal Executive Officer Pursuant to 18 U.S.C. ss. 1350*
(32.2)	Certification of Principal Financial Officer Pursuant to 18 U.S.C. ss. 1350*
(101)	The following materials from the Company’s 2019 Annual Report to Shareholders, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at December 31, 2019 and 2018, (ii) Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017, (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 and (vi) Notes to the Consolidated Financial Statements for the year ended December 31, 2019, 2018 and 2017 *

	* Filed Herewith. (P) Paper filing.

ITEM 16 – Form 10-K SUMMARY

None

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SIGNATURES

Pursuant to the requirements 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:	March 13, 2020

	BY:	/s/ Chevis C. Swetman
		Chevis C. Swetman, Chairman of the Board
		(principal executive officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

	BY:	/s/ Chevis C. Swetman

	Date:	March 13, 2020

		Chevis C. Swetman, Chairman of the Board
		(principal executive officer)


BY:		BY:	/s/ Dan Magruder

Date:		Date:	March 13, 2020

	Drew Allen, Director		Dan Magruder, Director

		BY:	/s/ Jeffrey H. O’Keefe
BY:	/s/ Rex E. Kelly
		Date:	March 13, 2020
Date:	March 13, 2020
			Jeffrey H. O’Keefe, Director
	Rex E. Kelly, Director


BY:	/s/ George J. Sliman, III	BY:	/s/ Lauri A. Wood

Date:	March 13, 2020	Date:	March 13, 2020

	George J. Sliman, III, Director		Lauri A. Wood, Chief Financial Officer (principal financial and accounting officer)

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