PEOPLES FINANCIAL CORP /MS/ - Quarter Report: 2021 September (Form 10-Q)

pfbx20210930_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, 2021

☐ 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 October 29, 2021 there were 15,000,000 shares of $1 par value common stock authorized, with 4,868,957 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, 2021		December 31, 2020
	(unaudited)		(audited)

Assets
Cash and due from banks	$	66,965	$	91,542

Available for sale securities		354,166		180,130

Held to maturity securities, fair value of $112,324 at September 30, 2021; $78,474 at December 31, 2020		110,563		75,688

Other investments		2,447		2,593

Federal Home Loan Bank Stock, at cost		2,152		2,149

Loans		251,046		278,421

Less: Allowance for loan losses		3,971		4,426

Loans, net		247,075		273,995

Bank premises and equipment, net of accumulated depreciation		15,672		15,679

Other real estate		2,525		3,475

Accrued interest receivable		2,761		2,100

Cash surrender value of life insurance		20,028		19,609

Other assets		965		1,066

Total assets	$	825,319	$	668,026

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

	September 30, 2021		December 31, 2020
	(unaudited)		(audited)
Liabilities and Shareholders' Equity
Liabilities:

Deposits:

Demand, non-interest bearing	$	201,040	$	170,269

Savings and demand, interest bearing		420,647		319,165

Time, $100,000 or more		62,730		38,581

Other time deposits		21,603		22,483

Total deposits		706,020		550,498

Borrowings from Federal Home Loan Bank		903		969

Employee and director benefit plans liabilities		19,042		18,882

Other liabilities		2,882		2,811

Total liabilities		728,847		573,160

Shareholders' Equity:
Common stock, $1 par value, 15,000,000 shares authorized, 4,878,557 issued and outstanding at September 30, 2021 and December 31, 2020		4,879		4,879

Surplus		65,780		65,780

Undivided profits		24,073		18,335

Accumulated other comprehensive income, net of tax		1,740		5,872

Total shareholders' equity		96,472		94,866

Total liabilities and shareholders' equity	$	825,319	$	668,026

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,
	2021			2020			2021			2020
Interest income:
Interest and fees on loans	$	3,156		$	3,242		$	9,485		$	9,706

Interest and dividends on securities:

U.S. Treasuries		199			91			436			594

U.S. Government agencies		26			42			77			174

Mortgage-backed securities		504			564			1,531			2,058

States and political subdivisions		1,031			600			2,745			1,449

Collateralized mortgage obligations		235			104			595			319

Other investments		5			13			7			25

Interest on balances due from depository institutions		28			27			84			196

Total interest income		5,184			4,683			14,960			14,521

Interest expense:
Deposits		149			312			670			1,287

Borrowings from Federal Home Loan Bank		6			8			18			26

Total interest expense		155			320			688			1,313

Net interest income		5,029			4,363			14,272			13,208

Provision for (reduction of) allowance for loan losses		(173	)		4,551			(5,004	)		5,948

Net interest income (loss) after provision for (reduction of) allowance for loan losses	$	5,202		$	(188	)	$	19,276		$	7,260

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,
	2021		2020			2021		2020
Non-interest income:
Trust department income and fees	$	487	$	461		$	1,387	$	1,237

Service charges on deposit accounts		908		875			2,683		2,597

Gain on liquidation, sales and calls of securities				24			5		538

Increase in cash surrender value of life insurance		108		109			323		326

Other income		160		125			450		915

Total non-interest income		1,663		1,594			4,848		5,613
Non-interest expense:
Salaries and employee benefits		2,632		2,538			7,768		7,723

Net occupancy		540		479			1,443		1,388

Equipment rentals, depreciation and maintenance		746		829			2,281		2,363

FDIC and state banking assessments		119		102			315		278

Data processing		345		300			1,053		936

ATM expense		251		215			802		613

Other real estate expense		100		523			383		889

Loss from other investments		60		18			146		69

Other expense		761		664			3,503		2,030

Total non-interest expense		5,554		5,668			17,694		16,289

Income (loss) before income taxes		1,311		(4,262	)		6,430		(3,416	)
Income tax		204					204

Net income (loss)	$	1,107	$	(4,262	)	$	6,226	$	(3,416	)

Basic and diluted earnings (loss) per share	$	.23	$	(.87	)	$	1.28	$	(.70	)
Dividends declared per share	$		$			$	.10	$	.02

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,
	2021			2020			2021			2020

Net income (loss)	$	1,107		$	(4,262	)	$	6,226		$	(3,416	)

Other comprehensive income (loss):

Net unrealized gain (loss) on available for sale securities		(817	)		(37	)		(4,127	)		4,477

Reclassification adjustment for realized gain on available for sale securities called or sold					(24	)		(5	)		(538	)

Total other comprehensive income (loss)		(817	)		(61	)		(4,132	)		3,939

Total comprehensive income (loss)	$	290		$	(4,323	)	$	2,094		$	523

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, 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


Balance, January 1, 2021		4,878,557		$	4,879		$	65,780	$	18,335		$	5,872		$	94,866
Net income										4,330						4,330
Other comprehensive loss													(4,248	)		(4,248	)
Dividends ($ .10 per share)										(488	)					(488	)

Balance, March 31, 2021		4,878,557			4,879			65,780		22,177			1,624			94,460
Net income										789						789
Other comprehensive income													933			933

Balance, June 30, 2021		4,878,557			4,879			65,780		22,966			2,557			96,182
Net income										1,107						1,107
Other comprehensive loss													(817	)		(817	)

Balance, September 30, 2021		4,878,557		$	4,879		$	65,780	$	24,073		$	1,740		$	96,472

Note: Balances as of January 1, 2020 and 2021 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,
	2021			2020
Cash flows from operating activities:
Net income (loss)	$	6,226		$	(3,416	)

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

Depreciation		1,368			1,469

Provision for (reduction of) allowance for loan losses		(5,004	)		5,948

Writedown of other real estate		299			555

Loss on sales of other real estate		1			123

Loss from other investments		146			69

Amortization of held to maturity securities		311			198

Amortization (accretion) of available for sale securities		210			(65	)

Gain on sales and calls of securities		(5	)		(538	)

Gain on sale of banking house					(318	)

Change in accrued interest receivable		(661	)		(1,090	)

Increase in cash surrender value of life insurance		(323	)		(326	)

Gain from death benefits from life insurance					(224	)

Change in other assets		101			51

Change in employee and director benefit plan liabilities and other liabilities		231			1,530
Net cash provided by operating activities	$	2,900		$	3,966

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands) (unaudited)

	Nine Months Ended September 30,
	2021			2020
Cash flows from investing activities:
Proceeds from maturities, sales and calls of available for sale securities	$	45,769		$	171,795

Proceeds from maturities of held to maturity securities		3,852			7,390

Purchases of available for sale securities		(224,142	)		(155,160	)

Purchases of held to maturity securities		(39,038	)		(18,563	)

Purchases of Federal Home Loan Bank stock		(3	)		(18	)

Proceeds from sales of other real estate		664			1,977

Proceeds from insurance on other real estate					77

Loans, net change		31,910			(23,372	)

Acquisition of bank premises and equipment		(1,361	)		(135	)

Proceeds from sale of banking house					547

Proceeds from death benefits from life insurance					548

Investment in cash surrender value of life insurance		(96	)		(73	)

Net cash used in investing activities		(182,445	)		(14,987	)

Cash flows from financing activities:
Demand and savings deposits, net change		132,253			121,711

Time deposits, net change		23,269			(26,136	)

Borrowings from Federal Home Loan Bank		22			59,500

Repayments to Federal Home Loan Bank		(88	)		(62,043	)

Cash dividends paid		(488	)		(98	)

Stock repurchase					(735	)
Net cash provided by financing activities		154,968			92,199
Net increase (decrease) in cash and cash equivalents		(24,577	)		81,178
Cash and cash equivalents, beginning of period		91,542			29,424
Cash and cash equivalents, end of period	$	66,965		$	110,602

See notes to consolidated financial statements.

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2021 and 2020

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, 2021 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 2020 Annual Report and Form 10-K.

The results of operations for the quarter or nine months ended September 30, 2021, 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, 2020.

Accounting Standards Update – In August 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-06 (“ASU 2021-06”), Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946). The FASB issued ASU 2021-06 to amend Securities and Exchange Commission (“SEC”) paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The update is effective upon issuance. The adoption of this ASU will impact disclosures in the Annual Report on Form 10-K only.

2. Earnings Per Share:

Per share data is based on the weighted average shares of common stock outstanding of 4,878,557 and 4,898,051 for the nine months ended September 30, 2021 and 2020, respectively. Per share data is based on the weighted average shares of common stock outstanding of 4,878,557 and 4,882,940 for the quarters ended September 30, 2021 and 2020, respectively.

3. Statements of Cash Flows:

The Company has defined cash and cash equivalents as cash and due from banks. The Company paid $697,154 and $1,331,012 for the nine months ended September 30, 2021 and 2020, respectively, for interest on deposits and borrowings. Income tax payments of $165,000 were made during the nine months ended September 30, 2021. No income tax payments were made during the nine months ended September 30, 2020. Loans in the amount of $13,648 were transferred to other real estate during the nine months ended September 30, 2021. 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, 2021 and December 31, 2020, are as follows (in thousands):

			Gross		Gross
			Unrealized		Unrealized
September 30, 2021	Amortized Cost		Gains		Losses			Fair Value

Available for sale securities:

U.S. Treasuries	$	73,846	$	410	$	(215	)	$	74,041

U.S. Government agencies		2,500		20					2,520

Mortgage-backed securities		64,738		1,679		(286	)		66,131

Collateralized mortgage obligations		127,761		1,074		(530	)		128,305

States and political subdivisions		84,136		341		(1,308	)		83,169


Total available for sale securities	$	352,981	$	3,524	$	(2,339	)	$	354,166

Held to maturity securities:

States and political subdivisions	$	110,563	$	2,146	$	(385	)	$	112,324

Total held to maturity securities	$	110,563	$	2,146	$	(385	)	$	112,324

			Gross		Gross
			Unrealized		Unrealized
December 31, 2020	Amortized Cost		Gains		Losses			Fair Value

Available for sale securities:

U.S. Treasuries	$	19,999	$	125	$			$	20,124

U.S. Government agencies		2,500		83					2,583

Mortgage-backed securities		69,485		3,237		(46	)		72,676

Collateralized mortgage obligations		44,230		1,207					45,437

States and political subdivisions		38,600		751		(41	)		39,310


Total available for sale securities	$	174,814	$	5,403	$	(87	)	$	180,130

Held to maturity securities:

States and political subdivisions	$	75,688	$	2,809	$	(23	)	$	78,474

Total held to maturity securities	$	75,688	$	2,809	$	(23	)	$	78,474

The amortized cost and fair value of debt securities at September 30, 2021 (in thousands), by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Available for sale securities:
Due in one year or less	$	565	$	565
Due after one year through five years		929		937
Due after five years through ten years		95,419		95,437
Due after ten years		63,569		62,791
Mortgage-backed securities		64,738		66,131
Collalaterized mortgage obligations		127,761		128,305
Totals	$	352,981	$	354,166

Held to maturity securities:
Due in one year or less	$	4,582	$	4,612
Due after one year through five years		18,567		19,215
Due after five years through ten years		42,605		43,042
Due after ten years		44,809		45,455
Totals	$	110,563	$	112,324

Available for sale and held to maturity securities with gross unrealized losses at September 30, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):

	Less Than Twelve Months				Over Twelve Months				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
September 30, 2021:
U.S. Treasuries	$	29,583	$	215	$		$		$	29,583	$	215

Mortgage-backed securities		10,618		286						10,618		286

Collateralized mortgage obligations		52,550		530						52,550		530

States and political subdivisions		90,079		1,634		1,220		59		91,299		1,693

TOTAL	$	182,830	$	2,665	$	1,220	$	59	$	184,050	$	2,724

December 31, 2020:
Mortgage-backed securities		6,278		30		1,619		16		7,897		46

States and political subdivisions		12,335		64						12,335		64

TOTAL	$	18,613	$	94	$	1,619	$	16	$	20,232	$	110

At September 30, 2021, 1 of the 6 U.S. Treasuries, 3 of the 46 mortgage-backed securities, 13 of the 33 collateralized mortgage obligations and 78 of the 213 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 of available for sale securities were $28,457,360 during the nine months ended September 30, 2020. Available for sale debt securities were sold for a realized gain of $538,907 for the nine months ended September 30, 2020. There were no sales of available for sale debt securities for the nine months ended September 30, 2021.

Securities with a fair value of $325,329,037 and $206,544,282 at September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, is as follows (in thousands):

	September 30, 2021		December 31, 2020

Gaming	$	14,364	$	18,765

Hotel/motel		49,902		45,499

Real estate, construction		26,980		26,609

Real estate, mortgage		128,633		144,276

Commercial and industrial		23,772		37,429

Other		7,395		5,843

Total	$	251,046	$	278,421

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a stimulus package intended to provide relief to businesses and consumers in the United States struggling as a result of COVID-19, was signed into law. A provision in the CARES Act included funding for the creation of the Paycheck Protection Program (“PPP”). PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The Company worked with its customers to close 363 PPP loans for a total outstanding balance of $22,445,026 as of June 30, 2020. As of September 30, 2021, 4 loans with a balance of $1,090,452 were outstanding. Additional funds were provided in 2021 legislation for another round of PPP loans. Under this new round, as of September 30, 2021, 80 loans with a balance of $5,539,326 were outstanding. All PPP loans are reported in the commercial and industrial segment within the loan portfolio.

The age analysis of the loan portfolio, segregated by class of loans, as of September 30, 2021 and December 31, 2020, 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, 2021:
Gaming	$		$		$		$		$	14,364	$	14,364	$
Hotel/motel										49,902		49,902
Real estate, construction				8				8		26,972		26,980
Real estate, mortgage		586		51		64		701		127,932		128,633
Commercial and industrial										23,772		23,772
Other		12						12		7,383		7,395

Total	$	598	$	59	$	64	$	721	$	250,325	$	251,046	$
December 31, 2020:
Gaming	$		$		$		$		$	18,765	$	18,765	$
Hotel/motel										45,499		45,499
Real estate, construction		277						277		26,332		26,609
Real estate, mortgage		2,865		263		118		3,246		141,030		144,276
Commercial and industrial		80						80		37,349		37,429
Other		63						63		5,780		5,843

Total	$	3,285	$	263	$	118	$	3,666	$	274,755	$	278,421	$

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, 2021 and December 31, 2020, is as follows (in thousands):

	Loans With A Grade Of:
	A, B or C		S		D		E		F	Total
September 30, 2021:
Gaming	$	14,364	$		$		$		$	$	14,364

Hotel/motel		49,902									49,902

Real estate, construction		26,568				8		404			26,980

Real estate, mortgage		115,345		7,778		3,417		2,093			128,633

Commercial and industrial		19,364		4,347		29		32			23,772

Other		7,381				14					7,395


Total	$	232,924	$	12,125	$	3,468	$	2,529	$	$	251,046

December 31, 2020:
Gaming	$	15,938	$		$	2,827	$		$	$	18,765

Hotel/motel		45,499									45,499

Real estate, construction		26,098				61		450			26,609

Real estate, mortgage		129,825		7,977		3,741		2,733			144,276

Commercial and industrial		31,810		5,525		45		49			37,429

Other		5,822				21					5,843


Total	$	254,992	$	13,502	$	6,695	$	3,232	$	$	278,421

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, 2021 and December 31, 2020, are as follows (in thousands):

	September 30, 2021		December 31, 2020

Real estate, construction	$	329	$	346

Real estate, mortgage		2,021		2,656

Commercial and industrial		11		25

Total	$	2,361	$	3,027

The CARES Act also addressed COVID-19-related loan modifications and specified that such modifications executed between March 1, 2020 and the earlier of (i) 60 days after the date of the termination of the national emergency declared by the President and (ii) December 31, 2020, on loans that were current as of December 31, 2019, are not TDR’s. Additionally, under guidance from the federal banking agencies encouraging financial institutions to work prudently with borrowers, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs. 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, 2021, all extensions have expired and the customers have resumed making regular payments.

Prior to 2020, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2020 and 2021, the Company did not restructure any additional loans. Specific reserves of $50,000 were allocated to troubled debt restructurings as of September 30, 2021 and December 31, 2020. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of September 30, 2021 and December 31, 2020.

Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of September 30, 2021 and December 31, 2020, are as follows (in thousands):

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2021:
With no related allowance recorded:
Real estate, construction	$	136	$	136	$		$	135	$
Real estate, mortgage		2,561		2,561				2,705		21
Total		2,697		2,697				2,840		21

With a related allowance recorded:
Real estate, construction		193		193		106		199
Real estate, mortgage		201		201		70		204		5
Commercial and industrial		11		11		4		18
Total		405		405		180		421		5

Total by class of loans:
Real estate, construction		329		329		106		334
Real estate, mortgage		2,762		2,762		70		2,909		26
Commercial and industrial		11		11		4		18

Total	$	3,102	$	3,102	$	180	$	3,261	$	26

	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2020:
With no related allowance recorded:
Real estate, construction	$	304	$	239	$		$	246	$	11
Real estate, mortgage		3,112		3,112				3,496		39

Total		3,416		3,351				3,742		50

With a related allowance recorded:
Real estate, construction		211		211		20		214
Real estate, mortgage		253		253		76		250		6
Commercial and industrial		25		25		4		31

Total		489		489		100		495		6

Total by class of loans:
Real estate, construction		515		450		20		460		11
Real estate, mortgage		3,365		3,365		76		3,746		45
Commercial and industrial		25		25		4		31

Total	$	3,905	$	3,840	$	100	$	4,237	$	56

6. Allowance for Loan Losses:

Transactions in the allowance for loan losses for the quarters and nine months ended September 30, 2021 and 2020, and the balances of loans, individually and collectively evaluated for impairment, as of September 30, 2021 and 2020, 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, 2021:
Allowance for Loan Losses:
Beginning balance	$	186		$	754		$	111		$	2,849		$	417		$	109		$	4,426
Charge-offs								(2	)		(2	)					(220	)		(224	)
Recoveries								18			4,565			89			101			4,773
Provision		(1	)		138			105			(5,167	)		(172	)		93			(5,004	)
Ending Balance	$	185		$	892		$	232		$	2,245		$	334		$	83		$	3,971

For the Quarter Ended September 30, 2021:
Allowance for Loan Losses:
Beginning Balance	$	190		$	939		$	177		$	2,336		$	357		$	129		$	4,128
Charge-offs																	(85	)		(85	)
Recoveries											55			14			32			101
Provision		(5	)		(47	)		55			(146	)		(37	)		7			(173	)
Ending Balance	$	185		$	892		$	232		$	2,245		$	334		$	83		$	3,971

Allowance for Loan Losses, September 30, 2021:
Ending balance: individually evaluated for impairment	$			$			$	106		$	123		$	33		$			$	262
Ending balance: collectively evaluated for impairment	$	185		$	892		$	126		$	2,122		$	301		$	83		$	3,709

Total Loans, September 30, 2021:
Ending balance: individually evaluated for impairment	$			$			$	412		$	5,510		$	61		$	14		$	5,997
Ending balance: collectively evaluated for impairment	$	14,364		$	49,902		$	26,568		$	123,123		$	23,711		$	7,381		$	245,049

	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

7. Deposits:

Time deposits of $250,000 or more totaled approximately $45,089,000 and $20,564,000 at September 30, 2021 and December 31, 2020, respectively.

8. Shareholders’ Equity:

On March 24, 2021, the Board of Directors declared a dividend of $.10 per share, which was payable on April 8, 2021, to shareholders of record as of April 5, 2021.

On April 28, 2021, the Board of Directors approved the repurchase of 200,000 of the outstanding shares of the Company’s common stock. As of September 30, 2021, no shares had yet been purchased under this plan. Subsequent to September 30, 2021, the Company repurchased and retired 200,000 shares under this plan for a total cost of $3,375,309.

9. Fair Value Measurements and Disclosures:

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

Fair Value Hierarchy

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

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

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

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

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

Cash and Due from Banks

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

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices. The Company’s held to maturity securities are reported at their amortized cost, and their estimated fair value, which is determined utilizing several sources, is disclosed in the financial statements and footnotes. The primary source is ICE Data Pricing and Reference Date, LLC (“ICE”) which purchased Interactive Data Corporation (“IDC”) but kept the IDC methodologies. Those methodologies include utilizing pricing models that vary based on asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s held to maturity securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

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

Loans

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

Other Real Estate

In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $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, 2021 and December 31, 2020 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2		Level 3
September 30, 2021:
U.S. Treasuries	$	74,041	$	$	74,041	$
U.S. Government agencies		2,520			2,520
Mortgage-backed securities		66,131			66,131
Collateralized mortgage obligations		128,305			128,305
States and political subdivisions		83,169			83,169
Total	$	354,166	$	$	354,166	$

December 31, 2020:
U.S. Treasuries	$	20,124	$	$	20,124	$
U.S. Government agencies		2,583			2,583
Mortgage-backed securities		72,676			72,676
Collateralized mortgage obligations		45,437			45,437
States and political subdivisions		39,310			39,310
Total	$	180,130	$	$	180,130	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of September 30, 2021 and December 31, 2020 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
September 30, 2021	$	225	$	$	$	225
December 31, 2020		493				493

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, 2021 and December 31, 2020 are as follows (in thousands):

			Fair Value Measurements Using
	Total		Level 1	Level 2	Level 3
September 30, 2021	$	2,525	$	$	$	2,525
December 31, 2020		3,475				3,475

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, 2021			December 31, 2020
Balance, beginning of period	$	3,475		$	7,453

Loans transferred to ORE		14			753

Sales		(665	)		(4,070	)

Writedowns		(299	)		(661	)

Balance, end of period	$	2,525		$	3,475

The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at September 30, 2021 and December 31, 2020, are as follows (in thousands):

	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
September 30, 2021:
Financial Assets:
Cash and due from banks	$	66,965	$	66,965	$		$		$	66,965
Available for sale securities		354,166				354,166				354,166
Held to maturity securities		110,563				112,324				112,324
Other investments		2,447		2,447						2,447
Federal Home Loan Bank stock		2,152				2,152				2,152
Loans, net		247,075						249,973		249,973
Cash surrender value of life insurance		20,028				20,028				20,028
Financial Liabilities:
Deposits:
Non-interest bearing		201,040		201,040						201,040
Interest bearing		504,980						506,548		506,548
Borrowings from Federal Home Loan
Bank		903				1,161				1,161

	Carrying		Fair value Measuremeents Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2020:
Financial Assets:
Cash and due from banks	$	91,542	$	91,542	$		$		$	91,542
Available for sale securities		180,130				180,130				180,130
Held to maturity securities		75,688				78,474				78,474
Other investments		2,593		2,593						2,593
Federal Home Loan Bank stock		2,149				2,149				2,149
Loans, net		273,995						278,898		278,898
Cash surrender value of life insurance		19,609				19,609				19,609
Financial Liabilities:
Deposits:
Non-interest bearing		170,269		170,269						170,269
Interest bearing		380,229						380,733		380,733
Borrowings from Federal Home Loan
Bank		969				1,316				1,316

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, 2020.

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 has issued several accounting standards updates during the first three quarters of 2021, most of which have no material impact on the Company’s financial position, results of operations or cash flows. ASU 2021-06, which is disclosed in Note 1 to the Unaudited Consolidated Financial Statements, will impact the Company’s disclosures in the Annual Report on Form 10-K.

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, 2021 and 2020 is included on the following page.

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020

Interest income reconciliation:
Interest income - taxable equivalent	$	5,246		$	4,786		$	15,133		$	14,703
Taxable equivalent adjustment		(62	)		(103	)		(173	)		(182	)

Interest income (GAAP)	$	5,184		$	4,683		$	14,960		$	14,521

Net interest income reconciliation:
Net interest income - taxable equivalent	$	5,091		$	4,466		$	14,445		$	13,390
Taxable equivalent adjustment		(62	)		(103	)		(173	)		(182	)

Net interest income (GAAP)	$	5,029		$	4,363		$	14,272		$	13,208

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 volatility, 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 has followed guidance from the Centers for Disease Control and state and local orders. During the third quarter of 2021, the Company implemented certain vaccine incentives and mandates for the protection of our employees and customers.

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

The Company reported net income of $1,107,000 for the third quarter of 2021 compared with a net loss of $4,262,000 for the third quarter of 2020. The Company reported net income of $6,226,000 for the first three quarters of 2021 compared with a net loss of $3,416,000 for the first three quarters of 2020. Results in 2021 improved significantly due to the reduction in the allowance for loan losses. Results in 2020 were negatively impacted by a large provision for loan losses during the third quarter.

Managing the net interest margin is a key component of the Company’s earnings strategy. 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 generally decreased total interest income and total interest expense in 2021. The Company had adopted new investment strategies to improve yields on its securities while not compromising duration or credit risk.

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 reduction in the allowance for loan losses of $173,000 was recorded in the third quarter of 2021 as compared with a provision for the allowance for loan losses of $4,551,00 for the third quarter of 2020. A reduction in the allowance for loan losses of $5,004,000 was recorded for the first three quarters of 2021 as compared with a provision for the allowance for loan losses of $5,948,000 for the first three quarters of 2020. The reduction was the result of a large recovery of previously charged-off principal during the first quarter of 2021. The large provision in the third quarter of 2020, which was non-COVID-19 related, was 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 $2,361,000 and $3,027,000 at September 30, 2021 and December 31, 2020, 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 $69,000 for the third quarter of 2021 as compared with 2020 results. Current year results included an increase in trust department income and fees of $26,000 and an increase in service charges on deposit accounts of $33,000 as compared with 2020. Non-interest income decreased $765,000 for the first three quarters of 2021 as compared with 2020 results. Results in 2020 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 as compared with 2021.

Non-interest expense decreased $114,000 for the quarter ended September 30, 2021 as compared with 2020 results. This decrease for the third quarter of 2021 was primarily the result of the decrease in other real estate expense of $423,000 which was partially offset by the increase in salaries and benefits of $94,000, net occupancy costs of $61,000, data processing expense of $45,000, ATM expense of $36,000 and a loss from other investments of $42,000, as compared with 2020. Non-interest expense increased $1,405,000 for the three quarters of 2021 as compared with 2020 results. This increase for the three quarters of 2021 was primarily the result of the increase in other expense of $1,473,000 as compared with 2020.

Total assets at September 30, 2021 increased $157,293,000 as compared with December 31, 2020. Total deposits increased $155,522,000 primarily as governmental entities’ balances increased due to tax collections and some customers maintained their PPP loan proceeds in their deposit accounts. This increase in deposits funded an increase in available for sale securities of $174,036,000 and an increase in held to maturity securities of $34,875,000.

RESULTS OF OPERATIONS

Net Interest Income

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

Quarter Ended September 30, 2021 as Compared with Quarter Ended September 30, 2020

The Company’s average interest-earning assets increased approximately $137,663,000, or 23%, from approximately $608,030,000 for the third quarter of 2020 to approximately $745,693,000 for the third quarter of 2021. The Company’s average balance sheet increased primarily as average taxable held to maturity securities increased approximately $25,735,000, average nontaxable held to maturity securities increased approximately $20,556,000 and average taxable available for sale securities increased approximately $130,842,000. These increases were partially offset as average loans decreased approximately $27,853,000 and average balances due from depository institutions decreased approximately $9,541,000. These increases in securities were the result of investment of funds from the increase in deposits. The Company’s average loans decreased as principal payments, maturities and charge-offs relating to existing loans outpaced new loans.

The average yield on interest-earning assets decreased by 34 basis points, from 3.15% for the third quarter of 2020 to 2.81% for the third quarter of 2021. This decrease is primarily due to the decrease in rates during 2020 discussed in the Overview.

Average interest-bearing liabilities increased approximately $97,383,000, or 25%, from approximately $397,714,000 for the third quarter of 2020 to approximately $495,097,000 for the third quarter of 2021. Average savings and interest bearing DDA deposits increased approximately $81,339,000 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 increased approximately $16,124,000 primarily as the result of deposits from one public fund customer during the second quarter of 2021.

The average rate paid on interest-bearing liabilities for the third quarter of 2020 was .32% as compared with .13% for the third quarter of 2021. This decrease is primarily due to decreased rates in 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 2.94% for the third quarter of 2020 as compared with 2.73% for the third quarter of 2021.

Nine Months Ended September 30, 2021 as Compared with Nine Months Ended September 30, 2020

The Company’s average interest-earning assets increased approximately $119,070,000, or 20%, from approximately $590,965,000 for the first three quarters of 2020 to approximately $710,035,000 for the first three quarters of 2021. The Company’s average balance sheet increased primarily as average balances due from depository institutions increased approximately $32,913,000, average held to maturity taxable securities increased approximately $24,608,000 and average available for sale taxable securities increased approximately $57,484,000. These increases were the result of the increase in deposits being invested in investment securities and in balances due from depository institutions as the Company managed its liquidity position.

The average yield on earning assets decreased from 3.32% for the first three quarters of 2020 to 2.84% for the first three quarters of 2021. This decrease is primarily due to the decreased rates in 2020 discussed in the Overview.

Average interest-bearing liabilities increased approximately $71,104,000, or 18%, from approximately $397,582,000 for the first three quarters of 2020 to approximately $468,686,000 for the first three quarters of 2021. Average savings and interest bearing DDA balances increased approximately $77,984,000 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.

The average rate paid on interest-bearing liabilities for the first three quarters of 2020 was .44% compared with .20% for the first three quarters of 2021. This decrease is primarily due to the decreased rates in 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 3.02% for the first three quarters of 2020 as compared with 2.71% for the first three quarters of 2021.

The tables on the following pages analyze the changes in tax-equivalent net interest income for the quarters and nine months ended September 30, 2021 and 2020.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Quarter Ended September 30, 2021							Quarter Ended September 30, 2020
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	262,025	$	3,156		4.82	%	$	289,878	$	3,242		4.47	%

Balances due from depository institutions		59,303		28		0.19	%		68,844		27		0.16	%

HTM:
Taxable		72,261		461		2.55	%		46,526		332		2.85	%
Non taxable (1)		35,808		255		2.85	%		15,252		123		3.23	%

AFS:
Taxable		308,416		1,298		1.68	%		177,574		986		2.22	%
Non taxable (1)		5,729		43		3.00	%		7,763		63		3.25	%
Other		2,151		5		0.93	%		2,193		13		2.37	%

Total	$	745,693	$	5,246		2.81	%	$	608,030	$	4,786		3.15	%
Savings & interest- bearing DDA	$	410,215	$	82		0.08	%	$	328,876	$	173		0.21	%

Time deposits		83,970		67		0.32	%		67,846		139		0.82	%

Borrowings from FHLB		912		6		2.63	%		992		8		3.23	%

Total	$	495,097	$	155		0.13	%	$	397,714	$	320		0.32	%

Net tax-equivalent spread						2.68	%						2.83	%

Net tax-equivalent margin on earning assets						2.73	%						2.94	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2021 and 2020. See disclosure of Non-GAAP financial measures on pages 28 and 29.

(2) Loan fees of $449 and $219 for 2021 and 2020, respectively, are included in these figures. Of the loan fees recognized, $317 and $115 were related to PPP loans in 2021 and 2020, respectively.

(3) Average balance includes nonaccrual loans.

Analysis of Average Balances, Interest Earned/Paid and Yield

(In Thousands)

	Nine Months Ended September 30, 2021							Nine Months Ended September 30, 2020
	Average Balance		Interest Earned/Paid		Rate			Average Balance		Interest Earned/Paid		Rate
Loans (2)(3)	$	269,518	$	9,485		4.69	%	$	280,672	$	9,706		4.61	%

Balances due from depository institutions		80,883		84		0.14	%		47,970		196		0.54	%

HTM:
Taxable		64,060		1,244		2.59	%		39,452		883		2.98	%
Non taxable (1)		30,773		688		2.98	%		14,849		367		3.30	%

AFS:
Taxable		256,782		3,489		1.81	%		199,298		3,333		2.23	%
Non taxable (1)		5,869		136		3.09	%		6,570		193		3.92	%
Other		2,150		7		0.43	%		2,154		25		1.55	%

Total	$	710,035	$	15,133		2.84	%	$	590,965	$	14,703		3.32	%
Savings & interest- bearing DDA	$	397,718	$	445		0.15	%	$	319,734	$	679		0.28	%

Time deposits		70,038		225		0.43	%		75,959		608		1.07	%

Borrowings from FHLB		930		18		2.58	%		1,889		26		1.84	%

Total	$	468,686	$	688		0.20	%	$	397,582	$	1,313		0.44	%

Net tax-equivalent spread						2.64	%						2.88	%

Net tax-equivalent margin on earning assets						2.71	%						3.02	%

(1) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2021 and 2020. See disclosure of Non-GAAP financial measures on pages 28 and 29.

(2) Loan fees of $1,145 and $497 for 2021 and 2020, respectively, are included in these figures. Of the loan fees recognized, $801 and $230 were related to PPP loans in 2021 and 2020, respectively.

(3) Average balance includes nonaccrual loans.

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Quarter Ended
	September 30, 2021 compared with September 30, 2020
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	(312	)	$	249		$	(23	)	$	(86	)

Balances due from financial institutions		(3	)		4						1

Held to maturity securities:
Taxable		184			(35	)		(20	)		129
Non taxable		166			(14	)		(20	)		132

Available for sale securities:
Taxable		727			(239	)		(176	)		312
Non taxable		(17	)		(5	)		2			(20	)
Other					(8	)					(8	)

Total	$	745		$	(48	)	$	(237	)	$	460

Interest paid on:

Savings & interest-bearing DDA	$	43		$	(107	)	$	(27	)	$	(91	)

Time deposits		33			(85	)		(20	)		(72	)

Borrowings from FHLB		(1	)		(2	)		1			(2	)

Total	$	75		$	(194	)	$	(46	)	$	(165	)

Analysis of Changes in Interest Income and Interest Expense

(In Thousands)

	For the Nine Months Ended
	September 30, 2021 compared with September 30, 2020
	Volume			Rate			Rate/Volume			Total
Interest earned on:

Loans	$	(386	)	$	172		$	(7	)	$	(221	)

Balances due from financial institutions		134			(146	)		(100	)		(112	)

Held to maturity securities:
Taxable		551			(117	)		(73	)		361
Non taxable		394			(35	)		(38	)		321

Available for sale securities:
Taxable		961			(625	)		(180	)		156
Non taxable		(21	)		(41	)		5			(57	)
Other					(18	)					(18	)

Total	$	1,633		$	(810	)	$	(393	)	$	430

Interest paid on:

Savings & interest-bearing DDA	$	166		$	(321	)	$	(79	)	$	(234	)

Time deposits		(47	)		(364	)		28			(383	)

Borrowings from FHLB		(13	)		11			(6	)		(8	)

Total	$	106		$	(674	)	$	(57	)	$	(625	)

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 $2,361,000 and $3,027,000 at September 30, 2021 and December 31, 2020, respectively, a specific reserve of only $130,000 has 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 were not classified as troubled debt restructurings. As of September 30, 2021, all of these modifications had expired and the customers have resumed making regular payments. 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 2020 Annual Report, the Company included the potential negative impact of COVID-19 on its loan portfolio, particularly the gaming and hotel/motel concentrations, in performing this risk assessment as of September 30, 2021. As of September 30, 2021, a general reserve of approximately $298,000 was allocated to non-classified loans as a result of COVID-19. As of September 30, 2021, no specific reserves were allocated to classified loans as a result of COVID-19 as customers in potentially vulnerable industries have resources through business interruption insurance, proceeds from PPP or other loan programs and/or have been able to turn to normal operations.

The Company’s on-going, systematic evaluation resulted in the Company recording a provision for (reduction of) the allowance for loan losses of $(173,000) and $4,551,000 for the third quarters of 2021 and 2020, respectively, and $(5,004,000) and $5,948,000 for the first three quarters of 2021 and 2020, respectively. As a result of a recovery of $4,510,000 realized during the first quarter of 2021, the Company recorded a reduction in the allowance for loan losses. 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 1.58% and 1.59% at September 30, 2021 and December 31, 2020, respectively. The Company believes that its allowance for loan losses is appropriate as of September 30, 2021.

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, 2021 as Compared with Quarter Ended September 30, 2020

Non-interest income increased $69,000 for the third quarter of 2021 as compared with the third quarter of 2020. Results in the third quarter of 2021 included an increase in Trust Department income and fees of $26,000 and service charges on deposit accounts of $33,000. Trust Department income and fees increased as a result of new account relationships. Service charges increased as customer transactions have begun to return to pre-COVID-19 activity.

Nine Months Ended September 30, 2021 as Compared with Nine Months Ended September 30, 2020

Non-interest income decreased $765,000 for the first three quarters of 2021 as compared with the first three quarters of 2020. Results for the first three quarters of 2020 included non-recurring gains from the sale of securities of $538,000, a gain from death benefits from life insurance of $224,000 and a gain from the sale of banking house of $318,000 as compared with 2021. This decrease in the current year was partially offset by the increase in Trust Department income and fees of $150,000 as a result of new account relationships and the increase in service charges on deposit accounts of $86,000 as customer transactions have begun to return to pre-COVID-19 activity.

Non-interest expense

Quarter Ended September 30, 2021 as Compared with Quarter Ended September 30, 2020

Total non-interest expense decreased $114,000 for the third quarter of 2021 as compared with the third quarter of 2020. In 2021, other real estate expenses decreased $423,000, which was partially offset by the increase in salaries and employee benefits of $94,000, net occupancy of $61,000, data processing costs of $45,000, ATM expense of $36,000 and the loss from other investments of $42,000.

Salaries and employee benefits increased primarily as a result of costs associated with the retiree health plan.

Net occupancy expense increased as the Company primarily due to increased liability insurance costs.

Data processing costs increased due to the implementation of new applications in the current year.

ATM expense increased as costs associated with debit card processing increased since conversion to a new provider.

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

Loss from other investments increased as operations of an investment in a low-income housing partnership declined as a result of decreased occupancy.

Nine Months Ended September 30, 2021 as Compared with Nine Months Ended September 30, 2020

Total non-interest expense increased $1,405,000 for the first three quarters of 2021 as compared with the first three quarters of 2020. In 2021, Data processing costs increased $117,000, ATM expense increased $189,000, the loss from other investments increased $77,000 and other expense increased $1,473,000. These increases were partially offset by other real estate expense, which decreased $506,000.

Data processing costs increased due to the implementation of new applications in the current year.

ATM expense increased as costs associated with debit card processing increased since conversion to a new provider.

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

Loss from other investments increased as operations of an investment in a low-income housing partnership declined as a result of decreased occupancy.

Other expense primarily increased due to the settlement of a lawsuit for $1,125,000 and non-recurring legal and consulting costs relating to the contested 2021 annual shareholders’ meeting.

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. The 2018 Tax Cuts and Jobs Act began limiting NOL usage to 80% of taxable income, which resulted in the Company recording income tax expense for 2021. The full valuation allowance remains as of September 30, 2021. The Company continues to evaluate its deferred tax asset position.

FINANCIAL CONDITION

Cash and due from banks decreased $24,577,000 at September 30, 2021, as compared with December 31, 2020 as the Company utilized some of its excess liquidity to fund investment purchases.

Available for sale securities and held to maturity securities increased $174,036,000 and $34,875,000, respectively at September 30, 2021, as compared with December 31, 2020 as the Company increased its investment purchases, which were funded by using funds available from cash and due from bank and the increase in deposits.

Loans decreased $27,375,000 at September 30, 2021, as compared with December 31, 2020 as principal payments, particularly from PPP loan forgiveness, maturities and charge-offs relating to existing loans outpaced new loans.

Total deposits increased $155,522,000 at September 30, 2021, as compared with December 31, 2020. 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 and maintained in 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, 2021, 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. 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, 2021 and December 31, 2020, are as follows (in thousands):

	Actual					For Capital Adequacy Purposes
	Amount		Ratio			Amount		Ratio
September 30, 2021:
Total Capital (to Risk Weighted Assets)	$	98,550		21.42	%	$	36,801		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		94,579		20.56	%		20,700		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		94,579		20.56	%		27,600		6.00	%
Tier 1 Capital (to Average Assets)		94,579		12.67	%		29,867		4.00	%

December 31, 2020:
Total Capital (to Risk Weighted Assets)	$	93,268		23.00	%	$	32,442		8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		88,842		21.91	%		18,249		4.50	%
Tier 1 Capital (to Risk Weighted Assets)		88,842		21.91	%		24,331		6.00	%
Tier 1 Capital (to Average Assets)		88,842		14.07	%		25,255		4.00	%

The actual capital amounts and ratios and required minimum capital amounts and ratios for the Bank as of September 30, 2021 and December 31, 2020, are as follows (in thousands):

						For Capital Adequacy
	Actual					Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2021:
Total Capital (to Risk Weighted Assets)	$	92,636		20.25	%	$	36,604		8.00	%	$	45,756		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		88,665		19.38	%		20,590		4.50	%		29,741		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		88,665		19.38	%		27,453		6.00	%		36,604		8.00	%
Tier 1 Capital (to Average Assets)		88,665		10.86	%		32,669		4.00	%		40,836		5.00	%

December 31, 2020:
Total Capital (to Risk Weighted Assets)	$	90,559		22.87	%	$	31,683		8.00	%	$	39,603		10.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets)		86,133		21.75	%		17,821		4.50	%		25,742		6.50	%
Tier 1 Capital (to Risk Weighted Assets)		86,133		21.75	%		23,762		6.00	%		31,683		8.00	%
Tier 1 Capital (to Average Assets)		86,133		12.53	%		27,504		4.00	%		34,380		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.

Item 4: Controls and Procedures

As of September 30, 2021, 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, 2021 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. However, as discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, during the nine months ended September 30, 2021, the Company settled a lawsuit for $1,125,000 after consulting with legal counsel in the long-term best interest 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, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Statements of Condition at September 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Operations for the quarters and nine months ended September 30, 2021 and 2020, (iii) Consolidated Statements of Comprehensive Income (Loss) for the quarters and nine months ended September 30, 2021 and 2020, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and March 31, 2021, June 30, 2021 and September 30, 2021, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 and (vi) Notes to the Unaudited Consolidated Financial Statements for the nine months ended September 30, 2021 and 2020.
	Exhibit 104	Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

SIGNATURES

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

PEOPLES FINANCIAL CORPORATION

(Registrant)

	Date:	November 10, 2021

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

	Date:	November 10, 2021

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