PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2020 September (Form 10-Q)

pfbx20200930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2020

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

Commission File Number

001-12103

PEOPLES FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Mississippi

64-0709834

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

Lameuse and Howard Avenues, Biloxi, Mississippi	39533
(Address of principal executive offices)	(Zip Code)

(228) 435-5511

(Registrant's telephone number, including area code)

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

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

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

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

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

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

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

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

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Peoples Financial Corporation has only one class of common stock authorized. At October 30, 2020 there were 15,000,000 shares of $1 par value common stock authorized, with 4,878,557 shares issued and outstanding.

Part 1 – Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

	September 30, 2020		December 31, 2019
	(unaudited)		(audited)

Assets
Cash and due from banks	$	110,602	$	29,424

Available for sale securities		184,218		196,311

Held to maturity securities, fair value of $65,974 at September 30, 2020; $53,130 at December 31, 2019		63,206		52,231

Other investments		2,574		2,643

Federal Home Loan Bank Stock, at cost		2,147		2,129

Loans		286,567		268,949

Less: Allowance for loan losses		4,401		4,207

Loans, net		282,166		264,742

Bank premises and equipment, net of accumulated depreciation		15,858		17,421

Other real estate		4,721		7,453

Accrued interest receivable		2,777		1,687

Cash surrender value of life insurance		19,456		19,381

Other assets		1,229		1,280

Total assets	$	688,954	$	594,702

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

	September 30, 2020		December 31, 2019
	(unaudited)		(audited)
Liabilities and Shareholders' Equity
Liabilities:

Deposits:

Demand, non-interest bearing	$	181,890	$	122,592

Savings and demand, interest bearing		325,566		263,153

Time, $100,000 or more		40,999		64,492

Other time deposits		23,263		25,906

Total deposits		571,718		476,143

Borrowings from Federal Home Loan Bank		983		3,526

Employee and director benefit plans liabilities		18,326		18,361

Other liabilities		3,114		1,549

Total liabilities		594,141		499,579

Shareholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,878,557 and 4,943,186 shares issued and outstanding at September 30, 2020 and December 31, 2019		4,879		4,943

Surplus		65,780		65,780

Undivided profits		17,670		21,855

Accumulated other comprehensive income, net of tax		6,484		2,545

Total shareholders' equity		94,813		95,123

Total liabilities and shareholders' equity	$	688,954	$	594,702

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands except per share data)(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020			2019		2020		2019
Interest income:
Interest and fees on loans	$	3,242		$	3,362	$	9,706	$	10,466

Interest and dividends on securities:

U.S. Treasuries		91			283		594		872

U.S. Government agencies		42			118		174		360

Mortgage-backed securities		564			801		2,058		2,419

States and political subdivisions		600			425		1,449		1,321

Collateralized mortgage obligations		104			50		319		100

Other investments		13			4		25		44

Interest on balances due from depository institutions		27			98		196		289

Total interest income		4,683			5,141		14,521		15,871

Interest expense:
Deposits		312			770		1,287		2,382

Borrowings from Federal Home Loan Bank		8			42		26		200

Total interest expense		320			812		1,313		2,582

Net interest income		4,363			4,329		13,208		13,289

Provision for allowance for loan losses		4,551			59		5,948		169

Net interest income (loss) after provision for allowance for loan losses	$	(188	)	$	4,270	$	7,260	$	13,120

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations (continued)

(in thousands except per share data)(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020			2019		2020			2019
Non-interest income:
Trust department income and fees	$	461		$	439	$	1,237		$	1,225

Service charges on deposit accounts		875			971		2,597			2,771

Gain on liquidation, sales and calls of securities		24			61		538			61

Increase in cash surrender value of life insurance		109			110		326			326

Other income		125			142		915			405

Total non-interest income		1,594			1,723		5,613			4,788
Non-interest expense:
Salaries and employee benefits		2,538			2,758		7,723			8,269

Net occupancy		479			530		1,388			1,546

Equipment rentals, depreciation and maintenance		829			790		2,363			2,462

FDIC and state banking assessments		102			104		278			294

Data processing		300			343		936			1,000

ATM expense		215			181		613			511

Other real estate expense		523			148		889			638

Loss from other investments		18			6		69			118

Other expense		664			657		2,030			2,517

Total non-interest expense		5,668			5,517		16,289			17,355

Income (loss) before income taxes		(4,262	)		476		(3,416	)		553
Income tax

Net income (loss)	$	(4,262	)	$	476	$	(3,416	)	$	553

Basic and diluted earnings (loss) per share	$	( .87	)	$	.09	$	( .70	)	$	.11
Dividends declared per share	$			$		$	.02		$	.01

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019

Net income (loss)	$	(4,262	)	$	476		$	(3,416	)	$	553

Other comprehensive income:

Net unrealized gain (loss) on available for sale securities		(37	)		1,043			4,477			6,951

Reclassification adjustment for realized gain on available for sale securities called or sold		(24	)		(61	)		(538	)		(61	)

Total other comprehensive income (loss)		(61	)		982			3,939			6,890

Total comprehensive income (loss)	$	(4,323	)	$	1,458		$	523		$	7,443

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(in thousands except share data)

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

Balance, January 1, 2019		4,943,186		$	4,943		$	65,780	$	20,324		$	(4,113	)	$	86,934
Net income										405						405
Other comprehensive income													3,346			3,346

Balance, March 31, 2019		4,943,186			4,943			65,780		20,729			(767	)		90,685
Net loss										(328	)					(328	)
Other comprehensive income													2,562			2,562
Dividends ($ .01 per share)										(50	)					(50	)

Balance, June 30, 2019		4,943,186			4,943			65,780		20,351			1,795			92,869
Net income										476						476
Other comprehensive income													982			982

Balance, September 30, 2019		4,943,186		$	4,943		$	65,780	$	20,827		$	2,777		$	94,327

Balance, January 1, 2020		4,943,186		$	4,943		$	65,780	$	21,855		$	2,545		$	95,123
Net income										1,123						1,123
Other comprehensive income													3,877			3,877
Stock repurchase		(50,125	)		(50	)				(530	)					(580	)

Balance, March 31, 2020		4,893,061			4,893			65,780		22,448			6,422			99,543
Net loss										(277	)					(277	)
Other comprehensive income													123			123
Stock repurchase		(9,400	)		(9	)				(85	)					(94	)
Dividends ($ .02 per share)										(98	)					(98	)

Balance, June 30, 2020		4,883,661			4,884			65,780		21,988			6,545			99,197
Net loss										(4,262	)					(4,262	)
Other comprehensive loss													(61	)		(61	)
Stock repurchase		(5,104	)		(5	)				(56	)					(61	)

Balance, September 30, 2020		4,878,557		$	4,879		$	65,780	$	17,670		$	6,484		$	94,813

Note: Balances as of January 1, 2019 and 2020 were audited.

See notes to consolidated financial statements.

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands) (unaudited)

	Nine Months Ended September 30,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(3,416	)	$	553

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation		1,469			1,426

Provision for allowance for loan losses		5,948			169

Writedown of other real estate		555			442

Gain on sales of other real estate		123			(387	)

Loss from other investments		69			118

Amortization of held to maturity securities		198			200

Amortization (accretion) of available for sale securities		(65	)		136

Gain on sales and calls of securities		(538	)		(61	)

Gain on sale of banking house		(318	)

Change in accrued interest receivable		(1,090	)		(271	)

Increase in cash surrender value of life insurance		(326	)		(326	)

Gain from death benefits from life insurance		(224	)

Change in other assets		51			(307	)

Change in employee and director benefit plan liabilities and other liabilities		1,530			471
Net cash provided by operating activities	$	3,966		$	2,163

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

	Nine Months Ended September 30,
	2020			2019
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities	$	171,795		$	42,626

Proceeds from maturities of held to maturity securities		7,390			1,740

Purchases of available for sale securities		(155,160	)		(33,631	)

Purchases of held to maturity securities		(18,563	)		(2,604	)

Purchases of Federal Home Loan Bank stock		(18	)		(34	)

Proceeds from sales of other real estate		1,977			2,940

Proceeds from insurance on other real estate		77

Loans, net change		(23,372	)		5,747

Acquisition of bank premises and equipment		(135	)		(367	)

Proceeds from sale of banking house		547

Proceeds from death benefits from life insurance		548

Investment in cash surrender value of life insurance		(73	)		(81	)

Net cash provided by (used in) investing activities		(14,987	)		16,336

Cash flows from financing activities:
Demand and savings deposits, net change		121,711			24,287

Time deposits, net change		(26,136	)		3,653

Borrowings from Federal Home Loan Bank		59,500			739,157

Repayments to Federal Home Loan Bank		(62,043	)		(774,258	)

Cash dividends paid		(98	)		(50	)

Stock repurchase		(735	)
Net cash provided by (used in) financing activities		92,199			(7,211	)
Net increase in cash and cash equivalents		81,178			11,288
Cash and cash equivalents, beginning of period		29,424			17,191
Cash and cash equivalents, end of period	$	110,602		$	28,479

See notes to consolidated financial statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 and 2019

1. Basis of Presentation:

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

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the financial position of the Company and its subsidiaries as of September 30, 2020 and the results of their operations and their cash flows for the periods presented. The interim financial information should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s 2019 Annual Report and Form 10-K.

The results of operations for the quarter or nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the full year.

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

Summary of Significant Accounting Policies - The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies as disclosed in our Form 10-K for the year ended December 31, 2019.

Accounting Standards Update – In January 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2020-01 (“ASU 2020-01”), Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323) and Derivatives and Hedging (Topic 815). The amendments in this update improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In February 2020, the FASB issued Accounting Standards Update 2020-02 (“ASU 2020-02”), Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 843) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Lease (Topic 842) . This update adds an SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 relating the credit losses and addresses the adoption of new lease guidance. ASU 2020-02 is effective upon issuance. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2020, the FASB issued Accounting Standards Update 2020-03 (“ASU 2020-03”), Codification Improvements to Financial Instruments. This update amends or clarifies specific issues relating to fair value option disclosures, alignment of certain disclosures for depository and lending institutions, and improvement of guidance for debt instruments and net asset value practical expedient, leases, transfers and servicing. ASU 2020-03 is effective for various fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 and beginning after December 15, 2022. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,898,051 and 4,943,186 for the nine months ended September 30, 2020 and 2019, respectively. Per share data is based on the weighted average shares of common stock outstanding of 4,882,940 and 4,943,186 for the quarters ended September 30, 2020 and 2019, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $1,331,012 and $2,565,020 for the nine months ended September 30, 2020 and 2019, respectively, for interest on deposits and borrowings. No income tax payments were made during the nine months ended September 30, 2020 and 2019. Loans transferred to other real estate amounted to $1,658,274 during the nine months ended September 30, 2019. No loans were transferred to other real estate during the nine months ended September 30, 2020.

4. Investments:
The amortized cost and fair value of securities at September 30, 2020 and December 31, 2019, are as follows (in thousands):

			Gross		Gross
			Unrealized		Unrealized
September 30, 2020	Amortized Cost		Gains		Losses			Fair Value

Available for sale securities:

U.S. Treasuries	$	19,999	$	177	$			$	20,176

U.S. Government agencies		2,500		118					2,618

Mortgage-backed securities		79,739		3,643		(38	)		83,344

Collateralized mortgage obligations		40,897		1,085		(24	)		41,958

States and political subdivisions		35,514		608					36,122


Total available for sale securities	$	178,649	$	5,631	$	(62	)	$	184,218

Held to maturity securities:

States and political subdivisions	$	63,206	$	2,784	$	(16	)	$	65,974

Total held to maturity securities	$	63,206	$	2,784	$	(16	)	$	65,974

			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

The amortized cost and fair value of debt securities at September 30, 2020 (in thousands), by contractual maturity, are shown on the following page. 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	$	20,744	$	20,921
Due after one year through five years		1,559		1,571
Due after five years through ten years		29,604		30,792
Due after ten years		47,003		47,590
Mortgage-backed securities		79,739		83,344
Totals	$	178,649	$	184,218

Held to maturity securities:
Due in one year or less	$	2,304	$	2,315
Due after one year through five years		18,275		18,923
Due after five years through ten years		21,999		23,267
Due after ten years		20,628		21,469
Totals	$	63,206	$	65,974

Available for sale and held to maturity securities with gross unrealized losses at September 30, 2020 and December 31, 2019, 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
September 30, 2020:	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Mortgage-backed securities	$	6,347	$	22	$	1,636	$	16	$	7,983	$	38

Collateralized mortgage obligations		4,721		24						4,721		24

States and political subdivisions		2,661		16						2,661		16

TOTAL	$	13,729	$	62	$	1,636	$	16	$	15,365	$	78

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

At September 30, 2020, 3 of the 46 mortgage-backed securities, 1 of the 9 collateralized mortgage obligations and 12 of the 143 securities issued by states and political subdivisions contained unrealized losses.

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

Proceeds from sales and calls of available for sale securities were $28,457,360 and $5,051,884 during the nine months ended September 30, 2020 and 2019, respectively. Available for sale debt securities were sold or called for a realized gain of $538,907 and $61,103 for the nine months ended September 30, 2020 and 2019, respectively.

Securities with a fair value of $229,424,753 and $230,065,621 at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law.

5. Loans:

The composition of the loan portfolio at September 30, 2020 and December 31, 2019, is as follows (in thousands):

	September 30, 2020		December 31, 2019

Gaming	$	19,860	$	19,899

Hotel/motel		45,735		47,294

Real estate, construction		25,611		23,209

Real estate, mortgage		144,839		141,406

Commercial and industrial		45,360		30,626

Other		5,162		6,515

Total	$	286,567	$	268,949

The age analysis of the loan portfolio, segregated by class of loans, as of September 30, 2020 and December 31, 2019, is as follows (in thousands):

													Loans Past
													Due Greater
	Number of Days Past Due												Than 90
					Greater		Total				Total		Days &
		30 - 59		60 - 89	Than 90		Past Due		Current		Loans		Still Accruing
September 30, 2020:
Gaming	$		$		$		$		$	19,860	$	19,860	$
Hotel/motel										45,735		45,735
Real estate, construction		222				349		571		25,040		25,611
Real estate, mortgage		1,320		683		818		2,821		142,018		144,839
Commercial and industrial		416		22				438		44,922		45,360
Other		24						24		5,138		5,162

Total	$	1,982	$	705	$	1,167	$	3,854	$	282,713	$	286,567	$
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	$

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 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 September 30, 2020 and December 31, 2019, is as follows (in thousands):

	Loans With A Grade Of:
	A, B or C		S		D		E		F	Total
September 30, 2020:
Gaming	$	17,033	$		$	2,827	$		$	$	19,860

Hotel/motel		45,735									45,735

Real estate, construction		25,084				66		461			25,611

Real estate, mortgage		129,134		8,044		3,963		3,698			144,839

Commercial and industrial		39,600		5,685		22		53			45,360

Other		5,146				15		1			5,162


Total	$	261,732	$	13,729	$	6,893	$	4,213	$	$	286,567

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

A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of September 30, 2020 and December 31, 2019, are as follows (in thousands):

	September 30, 2020		December 31, 2019

Real estate, construction	$	349	$	515

Real estate, mortgage		3,579		8,495

Commercial and industrial		27		256

Total	$	3,955	$	9,266

During 2020, the Company modified 249 loans with a total balance of $95,010,325 for certain customers by extending payments for 90 days or granting interest only payments for 3 – 6 months as a result of the impact of COVID-19. Accordingly, such loans were not classified as troubled debt restructurings. As of September 30, 2020, the extension period for 178 of these loans with a total balance of $66,777,568 had expired with those customers resuming their regular payment schedule. As of September 30, 2020, 53 loans still under modified terms had a remaining balance of $26,777,711. Loans whose modifications had not expired as of September 30, 2020, had a balance of $9,533,881. As of September 30, 2020, the Company renewed the modification for 14 loans, primarily in its hotel/motel portfolio, with a balance of $15,690,301.

Prior to 2019, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2019 and 2020, the Company did not restructure any additional loans. Specific reserves of $50,000 and $63,000 were allocated to troubled debt restructurings as of September 30, 2020 and December 31, 2019, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of September 30, 2020 and December 31, 2019.

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of September 30, 2020 and December 31, 2019, are as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2020:
With no related allowance recorded:
Real estate, construction	$	136	$	136	$		$	136	$
Real estate, mortgage		4,305		4,305				4,401		15
Total		4,441		4,441				4,537		15

With a related allowance recorded:
Real estate, construction		213		213		20		214
Real estate, mortgage		258		258		78		250		19
Commercial and industrial		27		27		4		33
Total		498		498		102		497		19

Total by class of loans:
Real estate, construction		349		349		20		350
Real estate, mortgage		4,563		4,563		78		4,651		34
Commercial and industrial		27		27		4		33

Total	$	4,939	$	4,939	$	102	$	5,034	$	34

	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

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the quarters and nine months ended September 30, 2020 and 2019, and the balances of loans, individually and collectively evaluated for impairment, as of September 30, 2020 and 2019, are as follows (in thousands):

	Gaming			Hotel/Motel			Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Nine Months Ended September 30, 2020:
Allowance for Loan Losses:
Beginning balance	$	223		$	779		$	102		$	2,454		$	553		$	96		$	4,207
Charge-offs								(17	)		(5,472	)		(261	)		(188	)		(5,938	)
Recoveries								24						28			132			184
Provision		(34	)		(38	)		(15	)		5,845			120			70			5,948
Ending Balance	$	189		$	741		$	94		$	2,827		$	440		$	110		$	4,401

For the Quarter Ended September 30, 2020:
Allowance for Loan Losses:
Beginning Balance	$	208		$	739		$	83		$	3,748		$	448		$	103		$	5,329
Charge-offs								(17	)		(5,464	)		(13	)		(48	)		(5,542	)
Recoveries								24						5			34			63
Provision		(19	)		2			4			4,543						21			4,551
Ending Balance	$	189		$	741		$	94		$	2,827		$	440		$	110		$	4,401

Allowance for Loan Losses, September 30, 2020:
Ending balance: individually evaluated for impairment	$			$			$	20		$	249		$	15		$	5		$	289
Ending balance: collectively evaluated for impairment	$	189		$	741		$	74		$	2,578		$	425		$	105		$	4,112

Total Loans, September 30, 2020:
Ending balance: individually evaluated for impairment	$	2,827		$			$	527		$	7,661		$	75		$	16		$	11,106
Ending balance: collectively evaluated for impairment	$	17,033		$	45,735		$	25,084		$	137,178		$	45,285		$	5,146		$	275,461

	Gaming			Hotel/Motel			Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Nine Months Ended September 30, 2019:
Allowance for Loan Losses:
Beginning balance	$	416		$	1,443		$	429		$	2,443		$	476		$	133		$	5,340
Charge-offs								(403	)		(46	)		(591	)		(208	)		(1,248	)
Recoveries								6			2			24			90			122
Provision		(200	)		127			33			(392	)		524			77			169
Ending Balance	$	216		$	1,570		$	65		$	2,007		$	433		$	92		$	4,383

For the Quarter Ended September 30, 2019:
Allowance for Loan Losses:
Beginning Balance	$	289		$	1,666		$	221		$	2,224		$	440		$	106		$	4,946
Charge-offs														(591	)		(69	)		(660	)
Recoveries								4						3			31			38
Provision		(73	)		(96	)		(160	)		(217	)		581			24			59
Ending Balance	$	216		$	1,570		$	65		$	2,007		$	433		$	92		$	4,383

Allowance for Loan Losses, September 30, 2019:
Ending balance: individually evaluated for impairment	$			$			$	20		$	187		$	67		$	7		$	281
Ending balance: collectively evaluated for impairment	$	216		$	1,570		$	45		$	1,820		$	366		$	85		$	4,102

Total Loans, September 30, 2019:
Ending balance: individually evaluated for impairment	$			$			$	763		$	14,002		$	458		$	18		$	15,241
Ending balance: collectively evaluated for impairment	$	18,262		$	47,587		$	23,270		$	128,818		$	25,226		$	6,411		$	249,574

7. Deposits:

Time deposits of $250,000 or more totaled approximately $22,791,000 and $46,618,000 at September 30, 2020 and December 31, 2019, respectively.

8. Shareholders’ Equity:

On April 22, 2020, the Board of Directors declared a dividend of $.02 per share, which was payable on May 8, 2020, to shareholders of record as of May 4, 2020.

9. Fair Value Measurements and Disclosures:

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

Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets. 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 of time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.

Borrowings from Federal Home Loan Bank

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

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
September 30, 2020:
U.S. Treasuries	$	20,176	$	$	20,176	$
U.S. Government agencies		2,618			2,618
Mortgage-backed securities		83,344			83,344
Collateralized mortgage obligations		41,958			41,958
States and political subdivisions		36,122			36,122
Total	$	184,218	$	$	184,218	$

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	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
September 30, 2020	$	397	$	$	$	397
December 31, 2019		764				764

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
September 30, 2020	$	4,721	$	$	$	4,721
December 31, 2019		7,453				7,453

The following table presents a summary of changes in the fair value of other real estate which is measured using level 3 inputs (in thousands):

	For the Nine			For the Year
	Months Ended			Ended
	September 30, 2020			December 31, 2019
Balance, beginning of period	$	7,453		$	8,943

Loans transferred to ORE					1,707

Sales		(2,177	)		(2,755	)

Writedowns		(555	)		(442	)

Balance, end of period	$	4,721		$	7,453

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at September 30, 2020 and December 31, 2019, are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
September 30, 2020:
Financial Assets:
Cash and due from banks	$	110,602	$	110,602	$		$		$	110,602
Available for sale securities		184,218				184,218				184,218
Held to maturity securities		63,206				65,974				65,974
Other investments		2,574		2,574						2,574
Federal Home Loan Bank stock		2,147				2,147				2,147
Loans, net		286,567						285,267		285,267
Other real estate		4,721						4,721		4,721
Cash surrender value of life insurance		19,456				19,456				19,456
Financial Liabilities:
Deposits:
Non-interest bearing		181,890		181,890						181,890
Interest bearing		389,828						390,373		390,373
Borrowings from Federal Home Loan
Bank		983				1,423				1,423

	Carrying		Fair value Measuremeents 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

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

GENERAL

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

The following presents Management's discussion and analysis of the consolidated financial condition and results of operations of Peoples Financial Corporation and Subsidiaries. These comments should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report on Form 10-Q and the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis included in the Company’s Form 10-K for the year ended December 31, 2019.

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: the effects of the COVID-19 pandemic on the Company’s business, customers, employees and third-party service providers, 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 including the potential impact of the COVID-19 pandemic used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in statutes, government regulations or regulatory policies or practices in general and specifically as a result of the COVID-19 pandemic and acts of terrorism, weather or other events beyond the Company’s control.

New Accounting Pronouncements

The Financial Accounting Standards Board issues several accounting standards updates during the first three quarters of 2020, which have been disclosed in Note 1 to the Unaudited 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.

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

Other real estate (“ORE”) includes real estate acquired through foreclosure. Each ORE property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. If Management determines that the fair value of a property has decreased subsequent to foreclosure, the Company records a write down which is included in non-interest expense.

Employee Benefit Plans

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

Income Taxes

GAAP requires the asset and liability approach for financial accounting and reporting for deferred income taxes. 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. 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 or benefit within the tax provision in the consolidated statement of income.

GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures for the three months and nine months ended September 30, 2020 and 2019 is included on the following page.

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019

Interest income reconciliation:
Interest income - taxable equivalent	$	4,786		$	5,182		$	14,703		$	16,026
Taxable equivalent adjustment		(103	)		(41	)		(182	)		(155	)

Interest income (GAAP)	$	4,683		$	5,141		$	14,521		$	15,871

Net interest income reconciliation:
Net interest income - taxable equivalent	$	4,466		$	4,370		$	13,390		$	13,444
Taxable equivalent adjustment		(103	)		(41	)		(182	)		(155	)

Net interest income (GAAP)	$	4,363		$	4,329		$	13,208		$	13,289

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 World Health Organization declared the coronavirus COVID-19 (“COVID-19”) a pandemic in March 2020. The pandemic has resulted in, among other things, a significant stock and global markets decline, disruption in business, leisure and tourism activities as nation-wide stay-at-home orders were mandated, significant strain on the health care industry as it addressed the severity of the health crisis and significant impact on the general economy including high unemployment, a 150 basis point decline in Federal funds rates and unprecedented government stimulus programs.

The Company has been proactive in ensuring the safety and health of its employees and customers during the pandemic. These steps include limiting access to branch lobbies as appropriate, installing germ shields in branch lobbies, allowing staff to work remotely, limiting in person meetings and endorsing the usage of face coverings by staff and customers. The Company is following guidance from the Centers for Disease Control and state and local orders.

Assisting our customers during the pandemic is a priority. The Company has granted modifications by extending payments 90 days to certain customers as a result of the economic challenges of business closures and unemployment resulting from COVID-19. We have also actively participated in the Paycheck Protection Program (“PPP”), a specific stimulus resource designed to provide assistance to small businesses.

The Company reported a net loss of $4,262,000 for the third quarter of 2020 compared with net income of $476,000 for the third quarter of 2019. The Company reported a net loss of $3,416,000 for the first three quarters of 2020 compared with net income of $553,000 for the first three quarters of 2019. Results in 2020 included an increase in the provision for loan losses which was partially offset by an increase in non-interest income and a decrease in non-interest expense as compared with 2019.

Managing the net interest margin is a key component of the Company’s earnings strategy. The Federal Reserve reduced rates by 75 basis points during the second half of 2019 as a result of global issues and slowing growth. In March 2020, the Federal Reserve reduced rates by 150 basis points in two emergency moves to respond to the unprecedented economic disruptions of the COVID-19 pandemic. This material reduction in rates decreased total interest income and total interest expense.

Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be a major focus of the Company. A provision for the allowance for loan losses of $4,551,00 was recorded in the third quarter of 2020 as compared with $59,000 for the third quarter of 2019. A provision for the allowance for loan losses of $5,948,000 was recorded for the first three quarters of 2020 as compared with $169,000 for the first three quarters of 2019. The increase in 2020, which is non-COVID-19 related, is primarily the result of specific events impacting one credit. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans totaled $3,955,000 and $9,266,000 at September 30, 2020 and December 31, 2019, respectively. Most of these loans are collateral-dependent, and the Company has rigorously evaluated the value of its collateral to determine potential losses.

Non-interest income decreased $129,000 for the third quarter of 2020 as compared with 2019 results. Current year results included a decrease in service charges on deposit accounts of $96,000. Non-interest income increased $825,000 for the first three quarters of 2020 as compared with 2019 results. Current year results included non-recurring gains on sales and calls of securities of $538,000, a gain from the sale of banking house of $318,000 and a gain from the redemption of death benefits on bank owned life insurance of $224,000.

Non-interest expense increased $151,000 for the quarter ended September 30, 2020 as compared with 2019 results. This increase for the third quarter of 2020 was primarily the result of the increase in other real estate expense of $375,000, which was partially offset be a decrease in salaries and employee benefits of $220,000 as compared with 2019. Non-interest expense decreased $1,066,000 for the three quarters of 2020 as compared with 2019 results. This decrease for the three quarters of 2020 was primarily the result of the decrease in salaries and employee benefits of $546,000 and other expense of $487,000 as compared with 2019.

Total assets at September 30, 2020 increased $94,252,000 as compared with December 31, 2019. Total deposits increased $95,575,000 primarily as governmental entities’ balances increased due to tax collections and some customers maintaining their PPP loan proceeds in their deposit accounts. This increase in deposits funded an increase in cash and due from banks of $81,178,000 and the $17,618,000 increase in loans.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the amount by which interest income on loans, investments and other interest- earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company's income. Management's objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income.

Quarter Ended September 30, 2020 as Compared with Quarter Ended September 30, 2019

The Company’s average interest-earning assets increased approximately $55,559,000, or 10%, from approximately $552,471,000 for the third quarter of 2019 to approximately $608,030,000 for the third quarter of 2020. The Company’s average balance sheet increased primarily as average loans increased approximately $26,345,000 and average balances due from depository institutions increased approximately $53,382,000 while average available for sale taxable securities decreased approximately $31,578,000. The Company’s average loans increased as new loans, primarily as part of the PPP, outpaced principal payments, maturities and charge-offs relating to existing loans. Average balances due from financial institutions increased as an increase in deposits and proceeds from sales and maturity of these securities were held in balances due to depository institutions as the Company managed its liquidity position.

The average yield on interest-earning assets decreased by 60 basis points, from 3.75% for the third quarter of 2019 to 3.15% for the third quarter of 2020. The yield on average loans decreased from 5.10% for the third quarter of 2019 to 4.47% for the third quarter of 2020 primarily as a result of the decrease in rates during 2019 and 2020 discussed in the Overview.

Average interest-bearing liabilities increased approximately $13,951,000, or 4%, from approximately $383,763,000 for the third quarter of 2019 to approximately $397,714,000 for the third quarter of 2020. Average savings and interest bearing DDA deposits increased approximately $37,175,000 primarily as several large public fund customers maintained higher balances with our bank subsidiary in the current year and some of the PPP loan proceeds were deposited into customers’ accounts. Average time deposits decreased approximately $17,777,000 as some customers invested their matured time deposit proceeds in savings and interest bearing DDA deposit. Average borrowings from FHLB decreased $5,447,000 as the funds from the increase in deposits reduced the need to borrow.

The average rate paid on interest-bearing liabilities for the third quarter of 2019 was .85% as compared with .32% for the third quarter of 2020. This decrease is primarily due to decreased rates in 2019 and 2020.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.16% for the third quarter of 2019 as compared with 2.94% for the third quarter of 2020.

Nine Months Ended September 30, 2020 as Compared with Nine Months Ended September 30, 2019

The Company’s average interest-earning assets increased approximately $32,192,000, or 6%, from approximately $558,773,000 for the first three quarters of 2019 to approximately $590,965,000 for the first three quarters of 2020. The Company’s average balance sheet increased primarily as average loans increased approximately $14,018000 and average balances due from depository institutions increased approximately $31,657,000, while average available for sale taxable securities decreased approximately $10,675,000. The Company’s average loans increased as new loans, primarily as part of the PPP, outpaced principal payments, maturities and charge-offs relating to existing loans. Average balances due from financial institutions increased as an increase in deposits and proceeds from sales and maturity of these securities were held in balances due from depository institutions as the Company managed its liquidity position.

The average yield on earning assets decreased from 3.82% for the first three quarters of 2019 to 3.32% for the first three quarters of 2020. The yield on average loans decreased from 5.23% for the first three quarters of 2019 to 4.61% for the first three quarters of 2020 primarily as a result of the decrease in rates during 2019 and 2020 discussed in the Overview.

Average interest-bearing liabilities increased approximately $1,381,000, or 1%, from approximately $396,201,000 for the first three quarters of 2019 to approximately $397,582,000 for the first three quarters of 2020. Average savings and interest bearing DDA balances increased approximately $21,356,000 primarily as several large public fund customers maintained higher balances with our bank subsidiary in the current year and some of the PPP loan proceeds were deposited into customers’ accounts. Average borrowings from FHLB decreased $8,384,000 as the funds from the increase in deposits reduced the need to borrow.

The average rate paid on interest-bearing liabilities for the first three quarters of 2019 was .87% compared with .44% for the first three quarters of 2020. This decrease is primarily due to the decreased rates in 2019 and 2020.

The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.20% for the first three quarters of 2019 as compared with 3.02% for the first three quarters of 2020.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and nine months ended September 30, 2020 and 2019.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Quarter Ended September 30, 2020							Quarter Ended September 30, 2019
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	289,878	$	3,242		4.47	%	$	263,533	$	3,362		5.10	%

Balances due from depository institutions		68,844		27		0.16	%		15,462		98		2.54	%

HTM:
Taxable		46,526		332		2.85	%		38,168		290		3.04	%
Non taxable (1)		15,252		123		3.23	%		16,132		130		3.22	%

AFS:
Taxable		177,574		986		2.22	%		209,152		1,207		2.31	%
Non taxable (1)		7,763		63		3.25	%		7,921		91		4.60	%
Other		2,193		13		2.37	%		2,103		4		0.76	%

Total	$	608,030	$	4,786		3.15	%	$	552,471	$	5,182		3.75	%
Savings & interest- bearing DDA	$	328,876	$	173		0.21	%	$	291,701	$	410		0.56	%

Time deposits		67,846		139		0.82	%		85,623		360		1.68	%

Borrowings from FHLB		992		8		3.23	%		6,439		42		2.61	%

Total	$	397,714	$	320		0.32	%	$	383,763	$	812		0.85	%

Net tax-equivalent spread						2.83	%						2.90	%

Net tax-equivalent margin on earning assets						2.94	%						3.16	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2020 and 2019. See disclosure of Non-GAAP financial measures on pages 31 and 32.

(2) Loan fees of $219 and $78 for 2020 and 2019, respectively, are included in these figures.

(3) Average balance includes nonaccrual loans.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Nine Months Ended September 30, 2020							Nine Months Ended September 30, 2019
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	280,672	$	9,706		4.61	%	$	266,654	$	10,466		5.23	%

Balances due from depository institutions		47,970		196		0.54	%		16,313		289		2.36	%

HTM:
Taxable		39,452		883		2.98	%		37,552		845		3.00	%
Non taxable (1)		14,849		367		3.30	%		16,643		419		3.36	%

AFS:
Taxable		199,298		3,333		2.23	%		209,973		3,624		2.30	%
Non taxable (1)		6,570		193		3.92	%		9,548		339		4.73	%
Other		2,154		25		1.55	%		2,090		44		2.81	%

Total	$	590,965	$	14,703		3.32	%	$	558,773	$	16,026		3.82	%
Savings & interest- bearing DDA	$	319,734	$	679		0.28	%	$	298,378	$	1,367		0.61	%

Time deposits		75,959		608		1.07	%		87,550		1,015		1.55	%

Borrowings from FHLB		1,889		26		1.84	%		10,273		200		2.60	%

Total	$	397,582	$	1,313		0.44	%	$	396,201	$	2,582		0.87	%

Net tax-equivalent spread						2.88	%						2.95	%

Net tax-equivalent margin on earning assets						3.02	%						3.20	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2020 and 2019. See disclosure of Non-GAAP financial measures on pages 31 and 32.

(2) Loan fees of $497 and $227 for 2020 and 2019, respectively, are included in these figures.

(3) Average balance includes nonaccrual loans.

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Quarter Ended
	September 30, 2020 compared with September 30, 2019
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	336		$	(415	)	$	(41	)	$	(120	)

Balances due from financial institutions		338			(92	)		(317	)		(71	)

Held to maturity securities:
Taxable		64			(18	)		(4	)		42
Non taxable		(7	)								(7	)

Available for sale securities:
Taxable		(182	)		(46	)		7			(221	)
Non taxable		(2	)		(27	)		1			(28	)
Other		1			8						9

Total	$	548		$	(590	)	$	(354	)	$	(396	)

Interest paid on:

Savings & interest-bearing
DDA	$	52		$	(257	)	$	(32	)	$	(237	)

Time deposits		(75	)		(185	)		39			(221	)

Borrowings from FHLB		(36	)		10			(8	)		(34	)

Total	$	(59	)	$	(432	)	$	(1	)	$	(492	)

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Nine Months Ended
	September 30, 2020 compared with September 30, 2019
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	550		$	(1,245	)	$	(65	)	$	(760	)

Balances due from financial institutions		561			(222	)		(432	)		(93	)

Held to maturity securities:
Taxable		43			(5	)					38
Non taxable		(85	)		42			(9	)		(52	)

Available for sale securities:
Taxable		(184	)		(112	)		5			(291	)
Non taxable		(106	)		(59	)		19			(146	)
Other		1			(20	)					(19	)

Total	$	780		$	(1,621	)	$	(482	)	$	(1,323	)

Interest paid on:

Savings & interest-bearing
DDA	$	98		$	(733	)	$	(53	)	$	(688	)

Time deposits		(134	)		(314	)		41			(407	)

Borrowings from FHLB		(163	)		(59	)		48			(174	)

Total	$	(199	)	$	(1,106	)	$	36		$	(1,269	)

Provision for the 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 its 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 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 identify and estimate potential losses based on the best available information. The potential effect of the continuing decline in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral.

The Company’s analysis includes evaluating the current values of collateral securing all nonaccrual loans. Even though nonaccrual loans were $3,955,000 and $9,266,000 at September 30, 2020 and December 31, 2019, respectively, specific reserves of only $52,000 and $59,000, respectively, have been allocated to these loans as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value.

Additional consideration was given to the impact of COVID-19 on the loan portfolio. The Company granted modifications by extending payments 90 days or granting interest only payments for 3 – 6 months for certain customers as a result of the economic challenges of business closures and unemployment resulting from COVID-19. These credits were generally current at the time they were modified. In compliance with guidance from the regulatory and accounting authorities, these modifications have not been classified as troubled debt restructurings at September 30, 2020. The Company continues its policy of closely monitoring past due loans and deposit overdrafts which may serve as indicators of performance issues. Proactive outreach to our loan customers has also been emphasized.

In addition to the factors considered when assessing risk in the loan portfolio which are identified in the Notes to the Consolidated Financial Statements included in the Company’s 2019 Annual Report, the Company included the potential negative impact of COVID-19 on its loan portfolio in performing this risk assessment as of September 30, 2020. As of September 30, 2020, a general reserve of approximately $320,000 was allocated to non-classified loans as a result of COVID-19. As of September 30, 2020, no specific reserves were allocated to classified loans as a result of COVID-19.

The Company’s on-going, systematic evaluation resulted in the Company recording a provision for the allowance for loan losses of $4,551,000 and $59,000 for the third quarters of 2020 and 2019, respectively, and $5,948,000 and $169,000 for the first three quarters of 2020 and 2019, respectively. The increase in the third quarter of 2020 is the direct result of a charge-off of $5,429,000 of one credit that was on nonaccrual and in bankruptcy. This loss is the result of specific events impacting this specific customer and was not related to COVID-19. The allowance for loan losses as a percentage of loans was 1.54% and 1.56% at September 30, 2020 and December 31, 2019, respectively. The Company believes that its allowance for loan losses is appropriate as of September 30, 2020.

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 future quarters 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

Quarter Ended September 30, 2020 as Compared with Quarter Ended September 30, 2019

Non-interest income decreased $129,000 for the third quarter of 2020 as compared with the third quarter of 2019. Results in the third quarter of 2020 included the decrease in service charges on deposit accounts of $96,000 due the impact of COVID-19 on the local economy and consumer spending in 2020.

Nine Months Ended September 30, 2020 as Compared with Nine Months Ended September 30, 2019

Non-interest income increased $825,000 for the first three quarters of 2020 as compared with the first three quarters of 2019. Results for the first three quarters of 2020 included an increase in gains from the sale of securities of $477,000 and an increase in other income of $510,000 as the Company realized a gain from death benefits from life insurance of $224,000 and a gain from the sale of banking house of $318,000. This increase was partially offset by the decrease in service charges on deposit accounts of $174,000 primarily due the impact of COVID-19 on the local economy and consumer spending in 2020.

Non-interest expense

Quarter Ended September 30, 2020 as Compared with Quarter Ended September 30, 2019

Total non-interest expense increased $151,000 for the third quarter of 2020 as compared with the third quarter of 2019. In 2020, other real estate expenses increased $375,000, which was partially offset by the decrease in salaries and employee benefits of $220,000 and net occupancy of $51,000.

Salaries and employee benefits decreased as a result of attrition and a reduction in costs associated with the retiree health plan.

Net occupancy expense decreased as the Company was able to eliminate some redundant telecommunication costs.

ORE expense increased as write-downs in the value of ORE were higher in 2020.

Nine Months Ended September 30, 2020 as Compared with Nine Months Ended September 30, 2019

Total non-interest expense decreased $1,066,000 for the first three quarters of 2020 as compared with the first three quarters of 2019. In 2020, salaries and employee benefits decreased $546,000, net occupancy decreased $158,000, equipment rentals, depreciation and maintenance expenses decreased $99,000 and other expense decreased $487,000. These decreases were partially offset by other real estate expense, which increased $251,000

Salaries and employee benefits decreased as a result of attrition and a reduction in costs associates with the retiree health plan.

Net occupancy expense decreased as the Company was able to eliminate some redundant telecommunication costs.

Equipment rentals, depreciation and maintenance decreased as the Company was able to reduce inefficient costs.

ORE expense increased as write-downs in the value of ORE were higher in 2020.

Other expense primarily decreased as advertising costs were reduced by $137,000 and legal fees were reduced by $166,000. Advertising expenditures have been curtailed as a result of COVID-19. Prior year results included expense of $201,000 in settlement of a lawsuit.

Income Taxes

At December 31, 2014, the Company established a full valuation allowance on its deferred tax assets. Until such time as the Company returns to sustained earnings, and it is determined that it is more likely than not that the deferred tax asset will be realized, no income tax benefit or expense will generally be recorded.

FINANCIAL CONDITION

Cash and due from banks increased $81,178,000 at September 30, 2020, as compared with December 31, 2019 in the management of the bank subsidiary’s liquidity position.

Loan increased $17,618,000 at September 30, 2020, as compared with December 31, 2019 as new loans, particularly relating to the PPP program, outpaced principal payments, maturities and charge-offs relating to existing loans.

Total deposits increased $95,575,000 at September 30, 2020, as compared with December 31, 2019. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from quarter to quarter are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. In addition, some of the PPP loan proceeds were deposited into customers’ accounts.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

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

As of September 30, 2020, the most recent notification from the Federal Deposit Insurance Corporation 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 as of September 30, 2020 and December 31, 2019, are as follows (in thousands):

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
September 30, 2020:
Total Capital (to Risk Weighted Assets)	$	92,577		22.98	%	$	32,233		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		88,176		21.88	%		18,131		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		88,176		21.88	%		24,174		6.00	%
Tier 1 Capital (to Average Assets)		88,176		13.74	%		25,673		4.00	%

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	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of September 30, 2020 and December 31, 2019, are as follows (in thousands):

						For Capital Adequacy
	Actual					Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2020:
Total Capital (to Risk Weighted Assets)	$	89,874		22.45	%	$	32,026		8.00	%	$	40,033		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		85,474		21.35	%		18,015		4.50	%		26,021		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		85,474		21.35	%		24,020		6.00	%		32,026		8.00	%
Tier 1 Capital (to Average Assets)		85,474		12.43	%		27,506		4.00	%		34,382		5.00	%

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	%

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

LIQUIDITY

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

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. Borrowings from the FHLB, federal funds sold and federal funds purchased are utilized by the Company to manage its daily liquidity position. The Company has also been approved to participate in the Federal Reserve Bank’s Discount Window Primary Credit Program, which it intends to use only as a contingency.

The Company actively participated in the PPP, facilitating approximately $23 million in funding. As an additional liquidity resource for this funding, the Company was approved to participate in the Federal Reserve Bank’s PPP Liquidity Facility.

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 had 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.

Item 4: Controls and Procedures

As of September 30, 2020, 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 Securities and Exchange Commission’s rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the period ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1: Legal Proceedings

The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters is expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company.

Item 5: Other Information

None.

Item 6 - Exhibits and Reports on Form 8-K

(a) Exhibits

	Exhibit 31.1:	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
	Exhibit 31.2:	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
	Exhibit 32.1:	Certification of Chief Executive Officer Pursuant to 18 U.S.C. ss. 1350
	Exhibit 32.2:	Certification of Chief Financial Officer Pursuant to 18 U.S.C. ss. 1350
	Exhibit 101	The following materials from the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the quarters and nine months ended September 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income (Loss)for the quarters and nine months ended September 30, 2020 and 2019, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the quarters ended September ended March 31, 2019, June 30, 2019 and September 30, 219 and March 31, 2020, June 30, 2020 and September 30, 2020, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 and (vi) Notes to the Unaudited Consolidated Financial Statements for the nine months ended September 30, 2020 and 2019.

SIGNATURES

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

PEOPLES FINANCIAL CORPORATION

(Registrant)

Date:

November 10, 2020

By:

/s/ Chevis C. Swetman

Chevis C. Swetman

Chairman, President and Chief Executive Officer

(principal executive officer)

Date:

November 10, 2020

By:

/s/ Lauri A. Wood

Lauri A. Wood

Chief Financial Officer and Controller

(principal financial and accounting officer)