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

pfbx20200630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended	June 30, 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 ☒ 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 July 31, 2020 there were 15,000,000 shares of $1 par value common stock authorized, with 4,883,661 shares issued and outstanding.

Part 1 – Financial Information

Item 1: Financial Statements

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

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

Assets
Cash and due from banks	$	72,716	$	29,424

Available for sale securities		187,366		196,311

Held to maturity securities, fair value of $63,018 at June 30, 2020; $53,130 at December 31, 2019		60,858		52,231

Other investments		2,592		2,643

Federal Home Loan Bank Stock, at cost		2,140		2,129

Loans		290,538		268,949

Less: Allowance for loan losses		5,329		4,207

Loans, net		285,209		264,742

Bank premises and equipment, net of accumulated depreciation		16,284		17,421

Other real estate		6,100		7,453

Accrued interest receivable		2,521		1,687

Cash surrender value of life insurance		19,332		19,381

Other assets		1,332		1,280

Total assets	$	656,450	$	594,702

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

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

Demand, non-interest bearing	$	159,048	$	122,592

Savings and demand, interest bearing		307,342		263,153

Time, $100,000 or more		45,711		64,492

Other time deposits		23,747		25,906

Total deposits		535,848		476,143

Borrowings from Federal Home Loan Bank		998		3,526

Employee and director benefit plans liabilities		18,317		18,361

Other liabilities		2,090		1,549

Total liabilities		557,253		499,579

Shareholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,883,661 and 4,943,186 shares issued and outstanding at June 30, 2020 and December 31, 2019		4,884		4,943

Surplus		65,780		65,780

Undivided profits		21,988		21,855

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

Total shareholders' equity		99,197		95,123

Total liabilities and shareholders' equity	$	656,450	$	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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Interest income:
Interest and fees on loans	$	3,259	$	3,415	$	6,464	$	7,104

Interest and dividends on securities:

U.S. Treasuries		212		295		503		589

U.S. Government agencies		50		117		132		242

Mortgage-backed securities		745		796		1,494		1,618

States and political subdivisions		436		436		849		896

Collateralized mortgage obligations		104		38		215		50

Other investments		11		29		12		40

Interest on balances due from depository institutions		14		104		169		191

Total interest income		4,831		5,230		9,838		10,730

Interest expense:
Deposits		376		810		975		1,612

Borrowings from Federal Home Loan Bank		6		80		18		158

Total interest expense		382		890		993		1,770

Net interest income		4,449		4,340		8,845		8,960

Provision for allowance for loan losses		1,333		56		1,397		110

Net interest income after provision for allowance for loan losses	$	3,116	$	4,284	$	7,448	$	8,850

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Operations (continued)

(in thousands except per share data)(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020		2019
Non-interest income:
Trust department income and fees	$	405		$	415		$	776	$	786

Service charges on deposit accounts		811			918			1,722		1,800

Gain on liquidation, sales and calls of securities		81						514

Increase in cash surrender value of life insurance		109			111			217		216

Other income		347			155			790		263

Total non-interest income		1,753			1,599			4,019		3,065
Non-interest expense:
Salaries and employee benefits		2,511			2,777			5,185		5,511

Net occupancy		422			542			909		1,016

Equipment rentals, depreciation and maintenance		740			839			1,534		1,672

FDIC and state banking assessments		78			88			176		190

Data processing		322			310			636		657

ATM expense		213			161			398		330

Other real estate expense		230			440			366		490

Loss from other investments		13			52			51		112

Other expense		617			1,002			1,366		1,860

Total non-interest expense		5,146			6,211			10,621		11,838

Income (loss) before income taxes		(277	)		(328	)		846		77
Income tax

Net income (loss)	$	(277	)	$	(328	)	$	846	$	77

Basic and diluted earnings (loss) per share	$	( .06	)	$	( .06	)	$	.17	$	.02
Dividends declared per share	$	.02		$	.01		$	.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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019

Net income (loss)	$	(277	)	$	(328	)	$	846		$	77

Other comprehensive income:

Net unrealized gain on available for sale securities		204			2,562			4,514			5,908

Reclassification adjustment for realized gain on available for sale securities called or sold		(81	)					(514	)

Total other comprehensive income		123			2,562			4,000			5,908

Total comprehensive income (loss)	$	(154	)	$	2,234		$	4,846		$	5,985

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

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

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)

	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net income	$	846		$	77

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

Depreciation		969			964

Provision for allowance for loan losses		1,397			110

Writedown of other real estate		289			442

Gain on sales of other real estate		(54	)		(58	)

Loss from other investments		51			112

Amortization of held to maturity securities		128			133

Amortization (accretion) of available for sale securities		(94	)		93

Gain on sales and calls of securities		(514	)

Gain on sale of banking house		(318	)

Change in accrued interest receivable		(834	)		19

Increase in cash surrender value of life insurance		(217	)		(216	)

Gain from death benefits from life insurance		(224	)

Change in other assets		(51	)		(385	)

Change in employee and director benefit plan liabilities and other liabilities		496			(338	)
Net cash provided by operating activities	$	1,870		$	953

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

	Six Months Ended June 30,
	2020			2019
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities	$	139,257		$	19,642

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

Purchases of available for sale securities		(125,704	)		(9,799	)

Purchases of held to maturity securities		(16,145	)		(1,529	)

Purchases of Federal Home Loan Bank stock		(11	)		(34	)

Proceeds from sales of other real estate		1,041			1,205

Proceeds from insurance on other real estate		77

Loans, net change		(21,864	)		5,087

Acquisition of bank premises and equipment		(61	)		(325	)

Proceeds from sale of banking house		547

Proceeds from death benefits from life insurance		548

Investment in cash surrender value of life insurance		(58	)		(66	)

Net cash provided by (used in) investing activities		(14,983	)		15,921

Cash flows from financing activities:
Demand and savings deposits, net change		80,645			12,241

Time deposits, net change		(20,940	)		7,888

Borrowings from Federal Home Loan Bank		59,500			649,550

Repayments to Federal Home Loan Bank		(62,028	)		(669,640	)

Cash dividends paid		(98	)		(50	)

Stock repurchase		(674	)
Net cash provided by (used in) financing activities		56,405			(11	)
Net increase in cash and cash equivalents		43,292			16,863
Cash and cash equivalents, beginning of period		29,424			17,191
Cash and cash equivalents, end of period	$	72,716		$	34,054

See notes to consolidated financial statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 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 June 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 six months ended June 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 4,905,690 and 4,943,186 for the six months ended June 30, 2020 and 2019, respectively. Per share data is based on the weighted average shares of common stock outstanding of 4,883,764 and 4,943,186 for the quarters ended June 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 $1,018,398 and $1,765,203 for the six months ended June 30, 2020 and 2019, respectively, for interest on deposits and borrowings. No income tax payments were made during the six months ended June 30, 2020 and 2019. Loans transferred to other real estate amounted to $1,658,274 during the six months ended June 30, 2019. No loans were transferred to other real estate during the six months ended June 30, 2020.

4.	Investments:

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

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

Available for sale securities:

Debt securities:

U.S. Treasuries	$	35,978	$	321	$			$	36,299

U.S. Government agencies		7,500		125					7,625

Mortgage-backed securities		88,816		3,958		(35	)		92,739

Collateralized mortgage obligations		27,327		976					28,303

States and political subdivisions		22,115		291		(6	)		22,400


Total available for sale securities	$	181,736	$	5,671	$	(41	)	$	187,366

Held to maturity securities:

States and political subdivisions	$	60,858	$	2,176	$	(16	)	$	63,018

Total held to maturity securities	$	60,858	$	2,176	$	(16	)	$	63,018

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

Available for sale securities:

Debt 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 June 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	$	32,028	$	32,180
Due after one year through five years		12,088		12,292
Due after five years through ten years		29,999		31,073
Due after ten years		18,805		19,082
Mortgage-backed securities		88,816		92,739
Totals	$	181,736	$	187,366

Held to maturity securities:
Due in one year or less	$	2,038	$	2,050
Due after one year through five years		18,362		18,864
Due after five years through ten years		20,022		20,987
Due after ten years		20,436		21,117
Totals	$	60,858	$	63,018

Available for sale and held to maturity securities with gross unrealized losses at June 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
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
June 30, 2020:
Mortgage-backed securities	$	8,064	$	35	$		$		$	8,064	$	35

States and political subdivisions		3,366		22						3,366		22

TOTAL	$	11,430	$	57	$		$		$	11,430	$	57

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 June 30, 2020, 3 of the 46 mortgage-backed securities and 12 of the 130 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 $26,521,483 during the six months ended June 30, 2020. Available for sale debt securities were sold or called for a realized gain of $514,023 for the six months ended June 30, 2020. There were no sales or calls of securities in 2019.

Securities with a fair value of $230,034,568 and $230,065,621 at June 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 June 30, 2020 and December 31, 2019, is as follows (in thousands):

	June 30, 2020		December 31, 2019

Gaming	$	21,371	$	19,899

Hotel/motel		45,197		47,294

Real estate, construction		18,560		23,209

Real estate, mortgage		154,036		141,406

Commercial and industrial		45,525		30,626

Other		5,849		6,515

Total	$	290,538	$	268,949

The age analysis of the loan portfolio, segregated by class of loans, as of June 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
June 30, 2020:
Gaming	$		$		$		$		$	21,371	$	21,371	$
Hotel/motel										45,197		45,197
Real estate, construction		475		148		403		1,026		17,534		18,560		40
Real estate, mortgage		835		885		5,604		7,324		146,712		154,036		42
Commercial and industrial		12		50		14		76		45,449		45,525
Other		58		1		8		67		5,782		5,849

Total	$	1,380	$	1,084	$	6,029	$	8,493	$	282,045	$	290,538	$	82
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 June 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
June 30, 2020:
Gaming	$	18,545	$		$	2,826	$		$	$	21,371

Hotel/motel		45,197									45,197

Real estate, construction		17,943				70		547			18,560

Real estate, mortgage		133,081		8,107		4,762		8,086			154,036

Commercial and industrial		39,828		5,600		24		73			45,525

Other		5,822				17		10			5,849


Total	$	260,416	$	13,707	$	7,699	$	8,716	$	$	290,538

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 June 30, 2020 and December 31, 2019, are as follows (in thousands):

	June 30, 2020		December 31, 2019

Real estate, construction	$	363	$	515

Real estate, mortgage		7,964		8,495

Commercial and industrial		46		256

Other		8

Total	$	8,381	$	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 July 31, 2020, the extension period for 143 of these loans with a total balance of $40,668,392 had expired with those customers resuming their regular payment schedule. As of July 31, 2020, the Company renewed the modification for 19 loans, primarily in its hotel/motel portfolio, with a balance of $31,459,610.

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 June 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 June 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 June 30, 2020 and December 31, 2019, are as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2020:
With no related allowance recorded:
Real estate, construction	$	149	$	149	$		$	150	$
Real estate, mortgage		3,325		3,325				3,403		20
Commercial and industrial		14		14				16
Other		8		8				8
Total		3,496		3,496				3,577		20

With a related allowance recorded:
Real estate, construction		214		214		20		215
Real estate, mortgage		5,639		5,639		1,205		5,620		3
Commercial and industrial		32		32		4		34
Total		5,885		5,885		1,229		5,869		3

Total by class of loans:
Real estate, construction		363		363		20		365
Real estate, mortgage		8,964		8,964		1,205		9,023		23
Commercial and industrial		46		46		4		50
Other		8		8				8

Total	$	9,381	$	9,381	$	1,229	$	9,446	$	23

	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 six months ended June 30, 2020 and 2019, and the balances of loans, individually and collectively evaluated for impairment, as of June 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 Six Months Ended June 30, 2020:
Allowance for Loan Losses:
Beginning balance	$	223		$	779		$	102		$	2,454		$	553		$	96		$	4,207
Charge-offs											(8	)		(248	)		(140	)		(396	)
Recoveries														23			98			121
Provision		(15	)		(40	)		(19	)		1,302			120			49			1,397
Ending Balance	$	208		$	739		$	83		$	3,748		$	448		$	103		$	5,329

For the Quarter Ended June 30, 2020:
Allowance for Loan Losses:
Beginning Balance	$	198		$	734		$	76		$	2,627		$	471		$	85		$	4,191
Charge-offs														(202	)		(52	)		(254	)
Recoveries														7			52			59
Provision		10			5			7			1,121			172			18			1,333
Ending Balance	$	208		$	739		$	83		$	3,748		$	448		$	103		$	5,329

Allowance for Loan Losses, June 30, 2020:
Ending balance: individually evaluated for impairment	$			$			$	20		$	1,376		$	17		$			$	1,413
Ending balance: collectively evaluated for impairment	$	208		$	739		$	63		$	2,372		$	431		$	103		$	3,916

Total Loans, June 30, 2020:
Ending balance: individually evaluated for impairment	$	2,826		$			$	617		$	15,675		$	329		$	22		$	19,469
Ending balance: collectively evaluated for impairment	$	18,545		$	45,197		$	17,943		$	138,361		$	45,196		$	5,827		$	271,069

	Gaming			Hotel/Motel		Real Estate, Construction			Real Estate, Mortgage			Commercial and Industrial			Other			Total
For the Six Months Ended June 30, 2019:
Allowance for Loan Losses:
Beginning balance	$	416		$	1,443	$	429		$	2,443		$	476		$	133		$	5,340
Charge-offs							(403	)		(46	)					(139	)		(588	)
Recoveries							2			2			21			59			84
Provision		(127	)		223		193			(175	)		(57	)		53			110
Ending Balance	$	289		$	1,666	$	221		$	2,224		$	440		$	106		$	4,946

For the Quarter Ended June 30, 2019:
Allowance for Loan Losses:
Beginning Balance	$	399		$	1,617	$	401		$	2,360		$	480		$	119		$	5,376
Charge-offs							(403	)		(46	)					(63	)		(512	)
Recoveries													7			19			26
Provision		(110	)		49		223			(90	)		(47	)		31			56
Ending Balance	$	289		$	1,666	$	221		$	2,224		$	440		$	106		$	4,946

Allowance for Loan Losses, June 30, 2019:
Ending balance: individually evaluated for impairment	$			$		$	20		$	254		$	91		$	4		$	369
Ending balance: collectively evaluated for impairment	$	289		$	1,666	$	201		$	1,970		$	349		$	102		$	4,577

Total Loans, June 20, 2019:
Ending balance: individually evaluated for impairment	$			$		$	788		$	14,614		$	1,239		$	14		$	16,655
Ending balance: collectively evaluated for impairment	$	20,703		$	48,295	$	23,911		$	122,019		$	26,966		$	7,548		$	249,442

7. Deposits:

Time deposits of $250,000 or more totaled approximately $27,437,000 and $46,618,000 at June 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 June 30, 2020 and December 31, 2019 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
June 30, 2020:
U.S. Treasuries	$	36,299	$	$	36,299	$
U.S. Government agencies		7,625			7,625
Mortgage-backed securities		92,739			92,739
Collateralized mortgage obligations		28,303			28,303
States and political subdivisions		22,400			22,400
Total	$	187,366	$	$	187,366	$

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 June 30, 2020 and December 31, 2019 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
June 30, 2020	$	4,655	$	$	$	4,655
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 June 30, 2020 and December 31, 2019 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
June 30, 2020	$	6,100	$	$	$	6,100
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 Six			For the Year
	Months Ended			Ended
	June 30, 2020			December 31, 2019
Balance, beginning of period	$	7,453		$	8,943

Loans transferred to ORE					1,707

Sales		(1,064	)		(2,755	)

Writedowns		(289	)		(442	)

Balance, end of period	$	6,100		$	7,453

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

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
June 30, 2020:
Financial Assets:
Cash and due from banks	$	72,716	$	72,716	$		$		$	72,716
Available for sale securities		187,366				187,366				187,366
Held to maturity securities		60,858				63,018				63,018
Other investments		2,592		2,592						2,592
Federal Home Loan Bank stock		2,140				2,140				2,140
Loans, net		285,209						285,956		285,956
Other real estate		6,100						6,100		6,100
Cash surrender value of life insurance		19,332				19,332				19,332
Financial Liabilities:
Deposits:
Non-interest bearing		159,048		159,048						159,048
Interest bearing		376,800						377,322		377,322
Borrowings from Federal Home Loan
Bank		998				1,425				1,425

	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 two 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 six months ended June 30, 2020 and 2019 is included on the following page.

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019

Interest income reconciliation:
Interest income - taxable equivalent	$	4,867		$	5,285		$	9,917		$	10,844
Taxable equivalent adjustment		(36	)		(55	)		(79	)		(114	)

Interest income (GAAP)	$	4,831		$	5,230		$	9,838		$	10,730

Net interest income reconciliation:
Net interest income - taxable equivalent	$	4,485		$	4,395		$	8,924		$	9,074
Taxable equivalent adjustment		(36	)		(55	)		(79	)		(114	)

Net interest income (GAAP)	$	4,449		$	4,340		$	8,845		$	8,960

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 $277,000 for the second quarter of 2020 compared with a net loss of $328,000 for the second quarter of 2019. The Company reported net income of $846,000 for the first half of 2020 compared with net income of $77,000 for the first half 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 $1,333,000 was recorded in the second quarter of 2020 as compared with $56,000 for the second quarter of 2019. A provision for the allowance for loan losses of $1,397,000 was recorded for the first two quarters of 2020 as compared with $110,000 for the first two 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 $8,381,000 and $9,266,000 at June 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 increased $154,000 for the first quarter of 2020 as compared with 2019 results. Current year results included a non-recurring gain of $224,000 from the redemption of death benefits on bank owned life insurance. Non-interest income increased $954,000 for the first two quarters of 2020 as compared with 2019 results. Current year results included non-recurring gains on sales and calls of securities of $514,000 and a gain from the sale of banking house of $318,000, as well as the gain from the redemption of death benefits on bank owned life insurance.

Non-interest expense decreased $1,065,000 for the quarter ended June 30, 2020 as compared with 2019 results. This decrease for the second quarter of 2020 was primarily the result of the decrease in salaries and employee benefits of $266,000, net occupancy of $120,000, other real estate expense of $210,000 and other expense of $385,000 in 2020 as compared with 2019. Non-interest expense decreased $1,217,000 for the two quarters ended June 30, 2020 as compared with 2019 results. This decrease for the two quarters ended June 30, 2020 was primarily the result of the decrease in salaries and employee benefits of $326,000, equipment rentals, depreciation and maintenance of $138,000, other real estate expense of $124,000 and other expense of $494,000 in 2020 as compared with 2019.

Total assets at June 30, 2020 increased $61,748,000 as compared with December 31, 2019. Total deposits increased $59,705,000 primarily as governmental entities’ balances increased due to tax collections. This increase in deposits funded an increase in cash and due from banks of $43,292,000 and the $21,589,000 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 June 30, 2020 as Compared with Quarter Ended June 30, 2019

The Company’s average interest-earning assets increased approximately $33,324,000, or 6%, from approximately $555,648,000 for the second quarter of 2019 to approximately $588,972,000 for the second quarter of 2020. The Company’s average balance sheet increased primarily as average loans increased approximately $21,784,000 and average balances due from depository institutions increased approximately $25,952,000. 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 the Company manages its liquidity position.

The average yield on interest-earning assets decreased by 49 basis points, from 3.80% for the second quarter of 2019 to 3.31% for the second quarter of 2020. The yield on average loans decreased from 5.12% for the second quarter of 2019 to 4.52% for the second quarter of 2020 primarily as a result of the decrease in rates during 2019 and 2020 discussed in the Overview.

Average interest-bearing liabilities decreased approximately $3,232,000, or 1%, from approximately $393,510,000 for the second quarter of 2019 to approximately $390,278,000 for the second quarter of 2020. Average savings and interest bearing DDA deposits increased approximately $23,915,000 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 $12,862,000 as the funds from the increase in deposits reduced the need to borrow.

The average rate paid on interest-bearing liabilities for the second quarter of 2019 was .90% as compared with .39% for the second 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 second quarter of 2019 as compared with 3.05% for the second quarter of 2020.

Six Months Ended June 30, 2020 as Compared with Six Months Ended June 30, 2019

The Company’s average interest-earning assets increased approximately $19,717,000, or 4%, from approximately $561,996,000 for the first two quarters of 2019 to approximately $581,713,000 for the first two quarters of 2020. The Company’s average balance sheet increased primarily as average loans increased approximately $7,778,000 and average balances due from depository institutions increased approximately $20,024,000. The Company’s average loans increased as new loans outpaced principal payments, maturities and charge-offs relating to existing loans. Average balances due from financial institutions increased as the Company manages its liquidity position.

The average yield on earning assets decreased from 3.86% for the first two quarters of 2019 to 3.41% for the first two quarters of 2020. The yield on average loans decreased from 5.30% for the first two quarters of 2019 to 4.68% for the first two quarters of 2020 primarily as a result of the decrease in rates during 2019 and 2020 discussed in the Overview.

Average interest-bearing liabilities decreased approximately $5,064,000, or 1%, from approximately $402,519,000 for the first two quarters of 2019 to approximately $397,455,000 for the first two quarters of 2020. Average savings and interest bearing DDA balances increased approximately $13,285,000 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 $9,879,000 as the funds from the increase in deposits reduced the need to borrow.

The average rate paid on interest-bearing liabilities for the first two quarters of 2019 was .88% compared with .50% for the first two 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 3.23% for the first two quarters of 2019 as compared with 3.07% for the first two quarters of 2020.

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

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Quarter Ended June 30, 2020							Quarter Ended June 30, 2019
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	288,411	$	3,259		4.52	%	$	266,627	$	3,415		5.12	%

Balances due from depository institutions		39,044		14		0.14	%		13,092		104		3.18	%

HTM:
Taxable		36,319		276		3.04	%		37,397		284		3.04	%
Non taxable (1)		14,216		118		3.32	%		16,317		132		3.24	%

AFS:
Taxable		202,964		1,131		2.23	%		210,460		1,206		2.29	%
Non taxable (1)		5,879		58		3.95	%		9,665		115		4.76	%
Other		2,139		11		2.06	%		2,090		29		5.55	%

Total	$	588,972	$	4,867		3.31	%	$	555,648	$	5,285		3.80	%
Savings & interest- bearing DDA	$	313,482	$	193		0.25	%	$	289,567	$	466		0.64	%

Time deposits		75,790		183		0.97	%		90,075		344		1.53	%

Borrowings from FHLB		1,006		6		2.39	%		13,868		80		2.31	%

Total	$	390,278	$	382		0.39	%	$	393,510	$	890		0.90	%

Net tax-equivalent spread						2.92	%						2.90	%

Net tax-equivalent margin on earning assets						3.05	%						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 $181 and $76 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)

	Six Months Ended June 30, 2020							Six Months Ended June 30, 2019
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	276,018	$	6,464		4.68	%	$	268,240	$	7,104		5.30	%

Balances due from depository institutions		36,791		169		0.92	%		16,767		191		2.28	%

HTM:
Taxable		35,876		551		3.07	%		37,238		555		2.98	%
Non taxable (1)		14,645		244		3.33	%		16,903		289		3.42	%

AFS:
Taxable		210,279		2,347		2.23	%		210,390		2,417		2.30	%
Non taxable (1)		5,967		130		4.36	%		10,375		248		4.78	%
Other		2,137		12		1.12	%		2,083		40		3.84	%

Total	$	581,713	$	9,917		3.41	%	$	561,996	$	10,844		3.86	%
Savings & interest- bearing DDA	$	315,052	$	506		0.32	%	$	301,767	$	957		0.63	%

Time deposits		80,060		469		1.17	%		88,530		655		1.48	%

Borrowings from FHLB		2,343		18		1.54	%		12,222		158		2.59	%

Total	$	397,455	$	993		0.50	%	$	402,519	$	1,770		0.88	%

Net tax-equivalent spread						2.91	%						2.98	%

Net tax-equivalent margin on earning assets						3.07	%						3.23	%

(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 $278 and $149 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
	June 30, 2020 compared with June 30, 2019
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	279		$	(402	)	$	(33	)	$	(156	)

Balances due from financial institutions		206			(99	)		(197	)		(90	)

Held to maturity securities:
Taxable		(8	)								(8	)
Non taxable		(17	)		3						(14	)

Available for sale securities:
Taxable		(43	)		(33	)		1			(75	)
Non taxable		(45	)		(20	)		8			(57	)
Other		1			(18	)		(1	)		(18	)

Total	$	373		$	(569	)	$	(222	)	$	(418	)

Interest paid on:

Savings & interest-bearing DDA	$	38		$	(288	)	$	(23	)	$	(273	)

Time deposits		(55	)		(127	)		21			(161	)

Borrowings from FHLB		(74	)		3			(3	)		(74	)

Total	$	(91	)	$	(412	)	$	(5	)	$	(508	)

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

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

Loans	$	206		$	(822	)	$	(24	)	$	(640	)

Balances due from financial institutions		228			(114	)		(136	)		(22	)

Held to maturity securities:
Taxable		(20	)		17			(1	)		(4	)
Non taxable		(39	)		(7	)		1			(45	)

Available for sale securities:
Taxable		(1	)		(69	)					(70	)
Non taxable		(105	)		(22	)		9			(118	)
Other		1			(28	)		(1	)		(28	)

Total	$	270		$	(1,045	)	$	(152	)	$	(927	)

Interest paid on:

Savings & interest-bearing DDA	$	42		$	(472	)	$	(21	)	$	(451	)

Time deposits		(63	)		(136	)		13			(186	)

Borrowings from FHLB		(128	)		(64	)		52			(140	)

Total	$	(149	)	$	(672	)	$	44		$	(777	)

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 $8,381,000 and $9,266,000 at June 30, 2020 and December 31, 2019, respectively, specific reserves of only $1,179,000 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 June 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 June 30, 2020. As of June 30, 2020, a general reserve of approximately $320,000 was allocated to non-classified loans as a result of COVID-19. As of June 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 $1,333,000 and $56,000 for the second quarters of 2020 and 2019, respectively, and $1,397,000 and $110,000 for the first two quarters of 2020 and 2019, respectively. The increase in the second quarter of 2020 is the direct result of the allocation of a specific reserve of $1,135,000 to one credit that is on nonaccrual and in bankruptcy as a result of new information, which is non-COVID-19 related, obtained by the Company. The allowance for loan losses as a percentage of loans was 1.83% and 1.56% at June 30, 2020 and December 31, 2019, respectively. The Company believes that its allowance for loan losses is appropriate as of June 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 June 30, 2020 as Compared with Quarter Ended June 30, 2019

Non-interest income increased $154,000 for the second quarter of 2020 as compared with the second quarter of 2019. Results in the second quarter of 2020 included a gain from the sale of securities of $81,000 and an increase in other income of $192,000 as the Company realized a gain from death benefits from life insurance of $224,000. This increase was partially offset by the decrease in service charges on deposit accounts of $107,000 due the impact of stimulus payments and other effects of COVID-19 on the local economy and consumer spending in 2020.

Six Months Ended June 30, 2020 as Compared with Six Months Ended June 30, 2019

Non-interest income increased $954,000 for the first two quarters of 2020 as compared with the first two quarters of 2019. Results for the first two quarters of 2020 included gains from the sale of securities of $514,000 and an increase in other income of $527,000 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 $78,000 primarily due the impact of stimulus payments and other effects of COVID-19 on the local economy and consumer spending in 2020.

Non-interest expense

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

Total non-interest expense decreased $1,065,000 for the second quarter of 2020 as compared with the second quarter of 2019. In 2020, salaries and employee benefits decreased $266,000, net occupancy decreased $120,000, other real estate expenses decreased $210,000 and other expense decreased $385,000.

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 decreased as write-downs in the value of ORE were less in 2020.

Other expenses primarily decreased as advertising costs were reduced by $63,000 and legal fees were reduced by $191,000. Advertising expenditures have been curtailed as a result of COVID-19 and 2019 results included expense of $201,000 in settlement of a lawsuit.

Six Months Ended June 30, 2020 as Compared with Six Months Ended June 30, 2019

Total non-interest expense decreased $1,217,000 for the first two quarters of 2020 as compared with the first two quarters of 2019. In 2020, salaries and employee benefits decreased $326,000, net occupancy decreased $107,000, other real estate expenses decreased $124,000 and other expense decreased $494,000.

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.

ORE expense decreased as write-downs in the value of ORE were less in 2020.

Other expense primarily decreased as advertising costs were reduced by $122,000, legal fees were reduced by $183,000 and consulting fees were reduced by $33,000. Advertising expenditures have been curtailed as a result of COVID-19. Prior year results included expense of $201,000 in settlement of a lawsuit and non-recurring consulting fees for operations and strategic planning projects.

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 $43,292,000 at June 30, 2020, as compared with December 31, 2019 in the management of the bank subsidiary’s liquidity position.

Loan increased $21,589,000 at June 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 $59,705,000 at June 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 June 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 June 30, 2020 and December 31, 2019, are as follows (in thousands):

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
June 30, 2020:
Total Capital (to Risk Weighted Assets)	$	97,505		24.37	%	$	32,011		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		92,499		23.12	%		18,006		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		92,499		23.12	%		24,008		6.00	%
Tier 1 Capital (to Average Assets)		92,499		14.79	%		25,023		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	%		2,423		4.00	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of June 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
June 30, 2020:
Total Capital (to Risk Weighted Assets)	$	94,690		23.80	%	$	31,829		8.00	%	$	39,786		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		89,713		22.55	%		17,904		4.50	%		25,861		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		89,713		22.55	%		23,871		6.00	%		31,829		8.00	%
Tier 1 Capital (to Average Assets)		89,713		13.63	%		26,319		4.00	%		32,899		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 June 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 June 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 June 30, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Condition at June 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the quarters and six months ended June 30, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income (Loss)for the quarters and six months ended June 30, 2020 and 2019, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the quarters ended March 31, 2019 and June 30, 2019 and March 31, 2020 and June 30, 2020, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 and (vi) Notes to the Unaudited Consolidated Financial Statements for the six months ended June 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:	August 13, 2020


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

Date:	August 13, 2020


By:	/s/ Lauri A. Wood
	Lauri A. Wood Chief Financial Officer and Controller (principal financial and accounting officer)