Peoples Financial Corp.
Annual Report 2020

Plain-text annual report

AND SUBSIDIARIES PEOPLES FI NANCIAL CORP ORATIO N PEOPLES FI NANCIAL CORP ORATIO N PEOPLES FI NANCIAL CORP ORATIO N AND SUBSIDIARIES AND SUBSIDIARIES 2020 PEO PLES FINANCIAL CORPORA TION AND SUBSIDIARIES PEO PLES FINANCIAL CORPORA TION AND SUBSIDIARIES PeoPles Financial corPoration To Our Shareholders: The year 2020 began with high expectations. Earnings for Peoples Financial Corporation (the “Company”) were encouraging and our continuing efforts to reduce non-performing assets were reaping benefits. After a strong performance during the first half of the year, the Company recorded a net loss due to a large provision for loan losses for The Peoples Bank (the “Bank”), the operating banking subsidiary of the Company, which was primarily the result of specific events impacting one customer and led to a total provision for loan losses of $6,002,000. As a result, the Company incurred a net loss of $2,751,000 for the year ended December 31, 2020. While these financial results for 2020 are disappointing, there were several positive trends. Nonaccrual loans of the Bank decreased 67% to $3,027,000 and the Bank’s other real estate decreased 53% to $3,475,000 during 2020. Strategies to reduce non-interest expense resulted in a reduction of these costs of $811,000. These efforts to continue to improve the financial position of the Bank and the Company will continue in 2021. The recovery in February of 2021 of $4,510,359 of a loan previously charged off was welcome news. This recovery will have a direct positive effect on results for the first quarter of 2021. We will share complete results from the first quarter in April. As I reported to you in last year’s annual report, during 2019, the Board of Directors of the Bank and its management team developed in 2019 a dynamic strategic plan for 2020 and beyond (the “Plan”), which set out a roadmap to improve the financial performance of the Bank and the Company. The Plan was delivered to the Board of Directors of the Company for review in 2020, and after receiving recommendations from the Company’s Audit Committee as to the adoption of the plan subject to small revisions for the purposes of application by the Company, the Company’s Board of Directors approved the Plan as the Company’s path forward. The foundation for the Plan is our mission, which states that we will continue our legacy as an economic anchor for the communities we serve by providing financial options and banking solutions consistent with quality experiences for every customer, one customer at a time. We will live out this mission by pursuing certain non-negotiable values that will define the customer experience for every customer. Those values are stability, honesty, loyalty, human empathy, and responsibility, and through the display of these values we will serve the groups that are most essential to the long term, economic health of our communities. This will allow us to serve as a stable financial anchor for our customers and to encourage them to “drop anchor” in our communities by providing them all of the financial tools they need to be successful. Maximizing shareholder value over the long-term and improving the strategic positioning of the Company are key objectives of the Plan. The main goals of the Plan include: • Increase the loan portfolio by 65% over the next ten years. • Increase deposit market share to 15% of the Mississippi Gulf Coast market. • Lower the efficiency ratio to the average efficiency ratio of the bank’s composite peer group over the next ten years. • Improve the employee focus through selection, compensation and development to ensure quality employee retention and development. • Increase annual earnings to a return on average assets of 1.00% within three years. • Develop an enhanced succession strategy for key/senior management positions. • Implement quarterly progress reports to the Board We have already reported the favorable impact of some of these strategies to you over the last year, and we look forward to sharing further results of these efforts during the remainder of 2021. The COVID-19 pandemic was a challenge we all faced in 2020. The Bank was proactive in ensuring the safety and health of its employees and customers, including 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 Bank actively worked with its customers to close 363 Paycheck Protection Program (PPP) loans, serving our customers that needed the most assistance with an average loan of $62,000. This important stimulus program was a great benefit, particularly for our local small businesses. Like all of you, we look forward to life returning to normal soon. Your bank has a robust disaster recovery and business continuity program. In addition to providing established protocols for challenges brought by the pandemic, these preparations enabled us to weather the impact of Hurricane Zeta. Although we did sustain wind damage to several Bank facilities, our outstanding service to our customers was uninterrupted. Drew Allen served as a member of the Boards of Director of the Company and the Bank for more than twenty-five years, providing invaluable counsel to them both. On March 19, 2020, our bank family and the broader Mississippi Gulf Coast community lost a treasured member and leader when Drew passed away after a brief illness. Drew left a strong legacy of community and professional service and we are grateful for the example he set for us all. On April 13, 2021, The Peoples Bank celebrates its 125th anniversary of serving the community banking needs of the Mississippi Gulf Coast. These many years later, we remain committed to our founders’ goal of helping consumers and small businesses with their financial needs in the communities in which we live. Our employees, officers and directors strive every day to continue to be the bank “where PEOPLE come first” here in South Mississippi. Sincerely yours, Chevis C. Swetman Chairman, President and Chief Executive Officer MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. The following presents Management’s discussion and analysis of the consolidated financial condition and results of operations of the Company and its consolidated subsidiaries for the years ended December 31, 2020, 2019 and 2018. These comments highlight the significant events for these years and should be considered in combination with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this annual report. FORWARD-LOOKING INFORMATION Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward- looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: 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 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 (“FASB”) issued new accounting standards updates in 2020, which have been disclosed in Note A to the Consolidated Financial Statements. The Company does not expect that these updates discussed in the Notes will have a material impact on its financial position, results of operations or cash flows. The Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) and Accounting Standards Update 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that Clarifies the Guidance in ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10), effective January1, 2018, neither of which had a material effect on its financial position, results of operations or cash flows. Further disclosure relating to these efforts is included in Note A. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. Certain critical accounting policies affect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. Investments Investments which are classified as available for sale are stated at fair value. A decline in the market value of an investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. The determination of the fair value of securities may require Management to develop estimates and assumptions regarding the amount and timing of cash flows. Allowance for Loan Losses The Company’s allowance for loan losses (“ALL”) reflects the estimated losses resulting from the inability of its borrowers to make loan payments. The ALL is established and maintained at an amount sufficient to cover the estimated loss associated with the loan portfolio of the Company as of the date of the financial statements. Credit losses arise not only from credit risk, but also from other risks inherent in the lending process including, but not limited to, collateral risk, operation risk, concentration risk and economic risk. As such, all related risks of lending are considered when assessing the adequacy of the ALL. On a quarterly basis, Management estimates the probable level of losses to determine whether the allowance is adequate to absorb reasonably foreseeable, anticipated losses in the existing portfolio based on our past loan loss experience, known and inherent risk in the portfolio, adverse situations that may affect the borrowers’ ability to repay and the estimated value of any underlying collateral and current economic conditions. Management believes that the ALL is adequate and appropriate for all 1 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 other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. 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. See Note I to the Consolidated Financial Statements for additional details. As part of the process of preparing our consolidated financial statements, the Company is required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as the provision for the allowance for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated statement of condition. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent the Company establishes a valuation allowance or adjusts this allowance in a period, we must include an expense within the tax provision in the consolidated statement of income. GAAP Reconciliation and Explanation This report contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non- GAAP financial measures include taxable equivalent interest income and taxable equivalent net interest income. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures for the years ended December 31, 2020, 2019 and 2018 is included in the table on the following page. 2 RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES (in thousands) Years Ended December 31, Interest income reconciliation: Interest income - taxable equivalent Taxable equivalent adjustment Interest income (GAAP) Net interest income reconciliation: Net interest income - taxable equivalent Taxable equivalent adjustment Net interest income (GAAP) OVERVIEW 2020 2019 2018 $ $ $ $ $ 19,470 (162) $ 21,131 (203) 19,308 $ 20,928 $ $ 17,889 (162) $ 17,885 (203) 17,727 $ 17,682 $ 19,999 (249) 19,750 17,341 (249) 17,092 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 is following guidance from the Centers for Disease Control and state and local orders. Assisting our customers during the pandemic is a priority. The Company has granted modifications by extending payments 90 days to certain customers as a result of the economic challenges of business closures and unemployment resulting from COVID-19. We are also actively participating in the Paycheck Protection Program (“PPP”), a specific stimulus resource designed to provide assistance to small businesses. The Company reported a net loss of $2,751,000 for 2020 compared with net income of $1,679,000 and $629,000 for 2019 and 2018, respectively. Results in 2020 included an increase in the provision for loan losses which was partially offset by an increase in non-interest income and a decrease in non-interest expense as compared with 2019. Results in 2019 included an increase in net interest income, a reduction in the provision for loan losses, an increase in non-interest income and a decrease in non-interest expense as compared with 2018. Managing the net interest margin is a key component of the Company’s earnings strategy. The Federal Reserve reduced rates by 75 basis points during the second half of 2019 as a result of global issues and slowing growth. In March 2020, the Federal Reserve reduced rates by 150 basis points in two emergency moves to respond to the unprecedented economic disruptions of the COVID-19 pandemic. As a result of these reductions, in 2020 total interest income decreased $1,620,000 and total interest expense decreased $1,665,000 as compared with 2019. In 2019, interest income increased $1,178,000 and total interest expense increased $588,000 as compared with 2018. Monitoring asset quality, estimating potential losses in our loan portfolio and addressing non-performing loans continue to be a major focus of the Company. The Company is working diligently to address and reduce its non-performing assets. The Company’s nonaccrual loans decreased during 2020 to $3,027,000 at December 31, 2020 from $9,266,000 at December 31, 2019. Despite this positive trend, a provision for the allowance for loan losses of $6,002,000 was recorded in 2020 as compared with no provision in 2019. The increase in 2020, which is non-COVID-19 related, is primarily the result of specific events impacting one credit. Non-interest income increased $716,000 in 2020 as compared with 2019 results. Results for 2020 included non-recurring gains on sales and calls of securities of $539,000, a gain from the redemption of death benefits on bank owned life insurance of $224,000 and a gain from the sale of banking house of $318,000 as well as a decrease in service charges on deposit accounts 3 of $354,000 as compared with 2019. Results for 2019 included an increase in service charges on deposit accounts of $65,000 and a gain from the sale of securities of $147,000 as compared with 2018. Non-interest expense decreased $811,000 in 2020 as compared with 2019 and decreased $110,000 for 2019 as compared with 2018. The decrease in 2020 was primarily the result of the decrease in salaries and employee benefits of $334,000, net occupancy of $322,000 and other expense of $258,000 as compared with 2019. The decrease in 2019 was primarily the result of reduced costs of salaries and employee benefits. Total assets at December 31, 2020 increased $73,324,000 as compared with December 31, 2019. Total deposits increased $74,355,000 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 cash and due from banks of $62,118,000, an increase in available for sale and held to maturity investments of $7,276,000 and the $9,472,000 increase in loans. RESULTS OF OPERATIONS Net Interest Income Net interest income, the amount by which interest income on loans, investments and other interest-earning assets exceeds interest expense on deposits and other borrowed funds, is the single largest component of the Company’s income. Management’s objective is to provide the largest possible amount of income while balancing interest rate, credit, liquidity and capital risk. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities combined with changes in market rates of interest directly affect net interest income. 2020 as compared with 2019 The Company’s average interest-earning assets increased approximately $43,772,000, or 8%, from approximately $554,394,000 for 2019 to approximately $598,166,000 for 2020. Average balances due from depository institutions increased $40,699,000 as an increase in deposits and proceeds from sales, calls and maturities of securities were held in balances due to depository institutions, primarily at the Federal Reserve Bank, as the Company managed its liquidity position. Average loans increased approximately $13,962,000 due to new loans, primarily as part of the PPP, exceeding principal payments, maturities, charge- offs and foreclosures on existing loans. Average taxable available for sale securities decreased approximately $12,605,000 as maturities, sales and calls of these securities exceeded investment purchases. The average yield on interest-earning assets was 3.81% for 2019 compared with 3.25% for 2020. The yield on average loans decreased from 5.17% for 2019 to 4.65% for 2020 as a result of the decrease in prime rate during 2019 and 2020 on the Company’s floating rate loans. Average interest-bearing liabilities increased approximately $9,731,000, or 3%, from approximately $389,000,000 for 2019 to approximately $398,731,000 for 2020. Average savings and interest-bearing DDA balances increased approximately $33,137,000 primarily as several large public fund customers maintained higher balances with the bank subsidiary in 2020 and some of the PPP loan proceeds were deposited and maintained in customers’ accounts. Average time deposits decreased approximately $14,824,000 as some customers invested their matured time deposit proceeds in savings and interest bearing DDA deposits. The average rate paid on interest-bearing liabilities decreased 43 basis points, from .83% for 2019 to .40% for 2020. This decrease was the result of decreased rates in 2019 and 2020. The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.23% for 2019 as compared with 2.99% for 2020. 2019 as compared with 2018 The Company’s average interest-earning assets decreased approximately $15,550,000, or 3%, from approximately $569,944,000 for 2018 to approximately $554,394,000 for 2019. Average loans decreased approximately $6,461,000 due to principal payments, maturities, charge-offs and foreclosures on existing loans significantly exceeding new loans. Average taxable available for sale securities decreased approximately $13,845,000 and average nontaxable available for sale securities decreased approximately $4,102,000 as maturities of these securities funded the decrease in average savings and interest bearing DDA deposits. The average yield on interest-earning assets was 3.51% for 2018 compared with 3.81% for 2019. The yield on average loans increased from 4.85% for 2018 to 5.17% for 2019 as a result of the increase in prime rate during 2018 on the Company’s floating rate loans as well as the recovery of previously charged-off interest on loans. The yield on taxable available for sale securities increased from 1.98% for 2018 to 2.32% for 2019 as the Company changed its investment strategy to improve yield while not compromising duration and credit risk. Average interest-bearing liabilities decreased approximately $25,778,000, or 6%, from approximately $414,778,000 for 2018 to approximately $389,000,000 for 2019. Average savings and interest-bearing DDA balances decreased approximately $26,045,000 primarily as several large commercial customers relocated their funds to other institutions. The average rate paid on interest-bearing liabilities increased 19 basis points, from .64% for 2018 to .83% for 2019. This increase was the result of increased rates in 2018 and 2019. 4 The Company’s net interest margin on a tax-equivalent basis, which is net interest income as a percentage of average earning assets, was 3.04% for 2018 as compared with 3.23% for 2019. The tables below analyze the changes in tax-equivalent net interest income for the years ended December 31, 2020, 2019 and 2018. ANALYSIS OF AVERAGE BALANCES, INTEREST EARNED/PAID AND YIELD (in thousands) Loans (1)(2) Balances due from depository institutions Held to maturity: Taxable Non taxable (3) Available for sale: Taxable Non taxable (3) Other Total Savings and interest- bearing DDA Time deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from FHLB Total Net tax-equivalent spread Net tax-equivalent margin on earning assets 2019 Interest Earned/Paid Rate $ 281,225 $ 13,076 4.65% $ 267,263 $ 13,812 2020 Interest Earned/Paid Average Balance Average Balance 2018 Interest Interest Rate Earned/Paid 5.17% $ 273,724 $ 13,265 Average Balance Rate 4.85% 56,103 227 0.40% 15,404 346 2.25% 9,498 205 2.16% 42,649 15,985 1,235 2.90% 525 3.28% 37,987 16,460 1,141 3.00% 551 3.35% 33,864 18,208 970 580 2.86% 3.19% 193,626 4,140 2.14% 206,231 4,788 2.32% 220,076 4,349 1.98% 6,425 2,153 240 3.74% 27 1.25% 8,953 2,096 422 4.71% 13,055 608 4.66% 71 3.39% 1,519 22 1.45% $ 598,166 $ 19,470 3.25% $ 554,394 $ 21,131 3.81% $ 569,944 $ 19,999 3.51% $ 324,289 72,782 $ 833 0.26% $ 291,152 87,606 716 0.98% $1,662 1,336 0.57% $317,197 84,168 1.53% $1,468 886 0.46% 1.05% 1,660 $ 398,731 32 1.93% 10,242 $ 1,581 0.40% $ 389,000 248 $ 3,246 2.42% 13,044 0.83% $ 414,778 294 $ 2,658 2.86% 2.99% 2.98% 3.23% 2.25% 0.64% 2.87% 3.04% 369 10 2.71% (1) Loan fees of $814, $304 and $310 for 2020, 2019 and 2018, respectively, are included in these figures. Of the loan fees recognized in 2020, $448 were related to PPP loans. (2) Includes nonaccrual loans. (3) All interest earned is reported on a taxable equivalent basis using a tax rate of 21% in 2020, 2019 and 2018. See disclosure of Non-GAAP financial measures on pages 2 and 3. 5 ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE (in thousands) For the Year Ended December 31, 2020 Compared With December 31, 2019 Volume Rate Rate/Volume Total Interest earned on: Loans Balances due from depository institutions Held to maturity securities: Taxable Non taxable Available for sale securities: Taxable Non taxable Other Total Interest paid on: Savings and interest-bearing DDA Time deposits Borrowings from FHLB Total Interest earned on: Loans Balances due from depository institutions Held to maturity securities: Taxable Non taxable Available for sale securities: Taxable Non taxable Other Total Interest paid on: $ 722 $ (1,385) $ (73) $ (284) (749) 914 140 (16) (293) (119) 2 1,350 189 (226) (208) $ $ $ $ $ (41) (10) (378) (88) (45) (2,231) (914) (474) (51) $ $ (5) 23 25 (1) (780) (104) 80 43 19 $ $ (736) (119) 94 (26) (648) (182) (44) (1,661) (829) (620) (216) (245) $ (1,439) $ $ (1,665) For the Year Ended December 31, 2019 Compared With December 31, 2018 Volume Rate Rate/Volume Total $ (313) $ 881 $ (21) $ 128 118 (56) (273) (191) 8 8 47 30 760 7 30 5 6 (3) (48) (2) 11 547 141 171 (29) 439 (186) 49 $ (579) $ 1,763 $ (52) $ 1,132 Savings and interest-bearing DDA $ (121) $ 343 $ (28) $ Time deposits Federal funds purchased Borrowings from FHLB Total 36 (10) (63) 398 22 16 (5) $ (158) $ 763 $ (17) $ 194 450 (10) (46) 588 Provision for Allowance for Loan Losses In the normal course of business, the Company assumes risk in extending credit to its customers. This credit risk is managed through compliance with the loan policy, which is approved by the Board of Directors. The policy establishes guidelines relating to underwriting standards, including but not limited to financial analysis, collateral valuation, lending limits, pricing considerations and loan grading. The Company’s Loan Review and Special Assets Departments play key roles in monitoring the loan portfolio and managing problem loans. New loans and, on a periodic basis, existing loans are reviewed to evaluate compliance with the loan policy. Loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area; residential and land development; construction and commercial real estate loans, and their direct and indirect impact on the Company’s operations are evaluated on a monthly basis. Loan delinquencies and deposit overdrafts are closely monitored in order to identify developing problems as early as possible. Lenders experienced in workout scenarios 6 consult with loan officers and customers to address non-performing loans. A monthly watch list of credits which pose a potential loss to the Company is prepared based on the loan grading system. This list forms the foundation of the Company’s allowance for loan loss computation. Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and to identify and estimate potential losses based on the best available information. The potential effect of declines in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral- dependent, requiring careful consideration of changes in the value of the collateral. Note A to the Consolidated Financial Statements discloses a summary of the accounting principles applicable to impaired and nonaccrual loans as well as the allowance for loan losses. Note C to the Consolidated Financial Statements presents additional analyses of the composition, aging, credit quality and performance of the loan portfolio as well as the transactions in the allowance for loan losses. The Company’s analysis includes evaluating the current value of collateral securing all nonaccrual loans. Nonaccrual loans totaled $3,027,000 and $9,266,000 with specific reserves on these loans of $50,000 and $59,000 as of December 31, 2020 and 2019, respectively. The specific reserves allocated to nonaccrual loans are relatively low as collateral values appear sufficient to cover loan losses or the loan balances have been charged down to their realizable value. Additional consideration was given to the impact of COVID-19 on the loan portfolio. The Company granted modifications by extending payments 90 days or granting interest only payments for 3 – 6 months for certain customers as a result of the economic challenges of business closures and unemployment resulting from COVID-19. These credits were generally current at the time they were modified. In compliance with guidance from the regulatory and accounting authorities, these modifications have not been classified as troubled debt restructurings at December 31, 2020. The Company continues its policy of closely monitoring past due loans and deposit overdrafts which may serve as indicators of performance issues. Proactive outreach to our loan customers has also been emphasized. In addition to the factors considered when assessing risk in the loan portfolio which are identified in Note A, 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 December 31, 2020. As of December 31, 2020, a general reserve of approximately $320,000 was allocated to non-classified loans as a result of COVID-19. As of December 31, 2020, 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 begin to return to normal operations in recent months. The Company’s on-going, systematic evaluation resulted in the Company not recording a provision for the allowance for loan losses in 2019 and recording a total provision for the allowance for loan losses of $6,002,000 and $122,000 in 2020 and 2018, respectively. The increase in 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 1.59%, 1.56% and 1.95% at December 31, 2020, 2019 and 2018, respectively. The Company believes that its allowance for loan losses is appropriate as of December 31, 2020. The allowance for loan losses is an estimate, and as such, events may occur in the future which may affect its accuracy. The Company anticipates that it is possible that additional information will be gathered in the future which may require an adjustment to the allowance for loan losses. Management will continue to closely monitor its portfolio and take such action as it deems appropriate to accurately report its financial condition and results of operations. Non-interest Income 2020 as compared with 2019 Total non-interest income increased $716,000 in 2020 as compared with 2019. Gains on liquidation, sales and calls of securities increased $392,000 as the Company had opportunities to sell securities which generated gains in 2020. The Company realized a gain of $224,000 from the redemption of death benefits on bank owned life insurance and a gain of $318,000 from the sale of banking premises. This increase was partially offset by the decrease in service charges on deposit accounts of $354,000 due to the impact of COVID-19 on the local economy and consumer spending in 2020. 2019 as compared with 2018 Total non-interest income increased $158,000 in 2019 as compared with 2018. Trust Department Income and Fees decreased $94,000 due to the decrease in account relationships in the current year. Gains on liquidation, sales and calls of securities increased $147,000 as the Company had opportunities to sell securities which generated gains in 2019. Other income increased $72,000 as rental income increased $83,000 as previously vacant properties were leased in the current year. 7 Non-interest Expense 2020 as compared with 2019 Total non-interest expense decreased $811,000 in 2020 as compared with 2019. Salaries and employee benefits decreased $334,000 primarily due to attrition and a reduction in costs associated with the retiree health plan. Net occupancy costs decreased $322,000 as the Company was able to eliminate some redundant telecommunications costs and resources were reconfigured for reduced costs and increased functionality. Equipment rentals, depreciation and maintenance increased $103,000 due to costs associated with contracts related to technology services. Other expense decreased $258,000 primarily as advertising, courier, consulting, conferences and classes and stationery and supplies were reduced as a part of the Company’s strategies to reduce overhead costs as well as the impact of COVID-19. In addition, legal fees were reduced by $182,000, primarily as the Company incurred costs of $201,000 to settle a lawsuit in 2019. Other real estate expense increased $491,000 as a result of increased write-downs and other expenses of holding and selling ORE in 2020 as compared with 2019. 2019 as compared with 2018 Total non-interest expense decreased $216,000 in 2019 as compared with 2018. Salaries and employee benefits decreased $190,000 primarily as a result of decreased costs for the retiree health plan. Net occupancy costs increased $183,000 as telecommunications costs increased $205,000 as the Company incurred redundant costs in the process of reconfiguring its resources for reduced costs and increased functionality in subsequent years. Equipment rentals, depreciation and maintenance decreased $50,000 primarily as a result of depreciable assets, primarily technology-related, purchased in prior years completing their depreciable life in the current year. Other expense decreased $159,000 in 2019 as compared with 2018. Included in this fluctuation is the decrease in other real estate expenses of $701,000, largely due to write-downs of ORE to new appraised values in 2018, which did not occur in 2019. Also impacting other expense were the increase in FDIC and state banking assessments of $126,000 as a result of the reduced assessment rate in 2018, an increase in non-recurring legal fees of $201,000 from the settlement of a lawsuit, an increase in ATM expense of $112,000 as a result of processing conversion costs and an increase in consulting fees of $135,000 primarily due to non-recurring services relating to strategic planning, operational assessments and revenue enhancement projects during 2019. Income Taxes The Company recognized an income tax benefit of $36,000 in 2018. During 2014, Management established a valuation allowance against its net deferred tax asset of approximately $8,140,000. As of December 31, 2020 and 2019, the valuation allowance is still in place. The 2018 benefit was the result of the impact of the elimination of the alternative minimum tax credit carryforwards from new tax legislation and the correction of refunds for prior years. Note I to the Consolidated Financial Statements presents a reconciliation of income taxes for these three years and further analysis of the valuation allowance. FINANCIAL CONDITION Cash and due from banks increased $62,118,000 at December 31, 2020 compared with December 31, 2019 due to the bank subsidiary’s liquidity position. Available for sale securities decreased $16,181,000 at December 31, 2020 compared with December 31, 2019 as the maturities, sales and calls exceeded investment purchases. Held to maturity securities increased $23,457,000 at December 31, 2020 compared with December 31, 2019 as the investment purchases exceeded maturities. Loans increased $9,472,000 at December 31, 2020 compared with December 31, 2019, as new loans, particularly relating to the PPP program, outpaced principal payments, maturities, charge-offs and foreclosures on existing loans. Total deposits increased $74,355,000 at December 31, 2020, as compared with December 31, 2019. Typically, significant increases or decreases in total deposits and/or significant fluctuations among the different types of deposits from year to year are anticipated by Management as customers in the casino industry and county and municipal entities reallocate their resources periodically. In addition, some of the PPP loan proceeds were deposited into customers’ accounts. Borrowings from the FHLB decreased $2,557,000 at December 31, 2020 as compared with December 31, 2019 based on the liquidity needs of the bank subsidiary. SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. The primary and risk-based capital ratios are important indicators of the strength of a Company’s capital. These figures are presented in the Five-Year Comparative Summary of Selected Financial Information. The Company has established the goal of being classified as “well-capitalized” by the banking regulatory authorities. 8 Significant transactions affecting shareholders’ equity during 2020 are described in Note J to the Consolidated Financial Statements. The Statement of Changes in Shareholders’ Equity also presents all activity in the Company’s equity accounts. LIQUIDITY Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Note L to the Consolidated Financial Statements discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Management monitors these funding requirements in such a manner as to satisfy these demands and to provide the maximum return on its earning assets. The Company monitors and manages its liquidity position diligently through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a continuous basis in the management of its liquidity needs and also conducts contingency testing on its liquidity plan. The Company has also been approved to participate in the Federal Reserve’s Discount Window Primary Credit Program, which it intends to use only as a contingency. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits, and the Company has encountered no problems with meeting its liquidity needs. Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company. The Company also uses other sources of funds, including borrowings from the FHLB. The Company generally anticipates relying on deposits, purchases of federal funds and borrowings from the FHLB for its liquidity needs in 2021. The Company actively participated in the PPP, facilitating approximately $23 million in funding during 2020. As an additional liquidity resource, the Company was approved to participate in the Federal Reserve Bank’s PPP Liquidity Facility. REGULATORY MATTERS During 2016, Management identified opportunities for improving information technology operations and security, risk management and earnings, addressing asset quality concerns, analyzing and assessing the Bank’s management and staffing needs, and managing concentrations of credit risk as a result of its own investigation as well as examinations performed by certain bank regulatory agencies. In concert with the regulators, the Company has identified specific corrective steps and actions to enhance its information technology operations and security, risk management, earnings, asset quality and staffing. The Company and the Bank may not declare or pay any cash dividends without the prior written approval of their regulators. OFF-BALANCE SHEET ARRANGEMENTS The Company is a party to off-balance-sheet arrangements in the normal course of business to meet the financing needs of its customers. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet arrangements. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amount does not necessarily represent future cash requirements. As discussed previously, the Company carefully monitors its liquidity needs and considers its cash requirements, especially for loan commitments, in making decisions on investments and obtaining funds from its other sources. Further information relating to off-balance-sheet instruments can be found in Note L to the Consolidated Financial Statements. 9 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C O N D I T I O N (in thousands except share data) DECEMBER 31, Assets Cash and due from banks Available for sale securities Held to maturity securities, fair value of $78,474 - 2020; $53,130 - 2019 Other investments Federal Home Loan Bank Stock, at cost Loans Less: Allowance for loan losses Loans, net Bank premises and equipment, net of accumulated depreciation Other real estate Accrued interest receivable Cash surrender value of life insurance Other assets Total assets Liabilities and Shareholders’ Equity Liabilities: Deposits: Demand, non-interest bearing Savings and demand, interest bearing Time, $100,000 or more Other time deposits Total deposits Borrowings from Federal Home Loan Bank Employee and director benefit plans liabilities Other liabilities Total liabilities Shareholders' Equity: Common stock, $1 par value, 15,000,000 shares authorized, 4,878,557 and 4,943,186 shares issued and outstanding at December 31, 2020 and 2019 Surplus Undivided profits Accumulated other comprehensive income Total shareholders' equity 2020 2019 $ 91,542 $ 29,424 180,130 75,688 2,593 2,149 196,311 52,231 2,643 2,129 278,421 268,949 4,426 273,995 15,679 3,475 2,100 19,609 1,066 4,207 264,742 17,421 7,453 1,687 19,381 1,280 $ 668,026 $ 594,702 $ 170,269 $ 122,592 319,165 263,153 38,581 22,483 64,492 25,906 550,498 476,143 969 18,882 2,811 3,526 18,361 1,549 573,160 499,579 4,879 65,780 18,335 5,872 94,866 4,943 65,780 21,855 2,545 95,123 Total liabilities and shareholders' equity $ 668,026 $ 594,702 See Notes to Consolidated Financial Statements. 10 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S (in thousands except per share data) YEARS ENDED DECEMBER 31, Interest income: Interest and fees on loans Interest and dividends on securities: U. S. Treasuries U.S. Government agencies Mortgage-backed securities Collateralized mortgage obligations States and political subdivisions Other investments Interest on balances due from depository institutions Total interest income Interest expense: Deposits Federal funds purchased and securities sold under agreements to repurchase Borrowings from Federal Home Loan Bank Total interest expense Net interest income Provision for allowance for loan losses Net interest income after provision for allowance for loan losses Non-interest income: Trust department income and fees Service charges on deposit accounts Gain on liquidation, sales and calls of securities Gain on sale of other investments Increase in cash surrender value of life insurance Gain from death benefits from life insurance Gain on sale of banking house Other income Total non-interest income Non-interest expense: Salaries and employee benefits Net occupancy Equipment rentals, depreciation and maintenance Other expense Total non-interest expense Income (loss) before income taxes Income tax benefit Net income (loss) Basic and diluted earnings (loss) per share Dividends declared per share 2020 2019 2018 $ 13,076 $ 13,812 $ 13,265 657 199 2,530 466 2,126 27 227 1,077 477 3,208 192 1,745 71 346 19,308 20,928 1,549 2,998 32 1,581 17,727 6,002 11,725 1,695 3,448 539 484 224 318 543 7,251 10,367 1,865 3,187 6,308 21,727 (2,751) 248 3,246 17,682 17,682 1,614 3,802 147 440 532 6,535 10,701 2,187 3,084 6,566 22,538 1,679 $ $ $ (2,751) $ 1,679 $ (.56) $ .02 $ .34 .03 $ $ 1,410 471 2,633 1,744 22 205 19,750 2,354 10 294 2,658 17,092 122 16,970 1,708 3,737 17 455 460 6,377 10,891 2,004 3,134 6,725 22,754 593 (36) 629 .13 .02 See Notes to Consolidated Financial Statements. 11 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) YEARS ENDED DECEMBER 31, 2020 2019 2018 Net income (loss) $ (2,751) $ 1,679 $ 629 Other comprehensive income (loss): Net unrealized gain (loss) on available for sale securities 4,225 6,411 (1,645) Reclassification adjustment for realized gains on available for sale securities called or sold in current year (539) (147) Gain (loss) from unfunded post-retirement benefit obligation Total other comprehensive income (loss) (359) 3,327 394 459 6,658 (1,186) Total comprehensive income (loss) $ 576 $ 8,337 $ (557) See Notes to Consolidated Financial Statements. 12 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (in thousands except share and per share data) Number of Common Shares 4,943,186 Common Stock $ 4,943 Surplus $ 65,780 4,943,186 4,943 65,780 (64,629) 4,878,557 (64) 4,879 $ $ 65,780 Accumulated Other Comprehensive Income (Loss) (4,113) $ Total $ 86,934 6,658 2,545 3,327 $ 5,872 $ 1,679 (148) 6,658 95,123 (2,751) (98) 3,327 (735) 94,866 Undivided Profits $ 20,324 1,679 (148) 21,855 (2,751) (98) (671) $ 18,335 Balance, January 1, 2019 Net income Cash dividend ($.03 per share) Other comprehensive income Balance, December 31, 2019 Net loss Cash dividend ($.02 per share) Other comprehensive income Stock repurchase Balance, December 31, 2020 See Notes to Consolidated Financial Statements. 13 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation Provision for allowance for loan losses Write-down of other real estate (Gain) loss on sales of other real estate Loss from other investments Amortization (accretion) of available for sale securities Amortization of held to maturity securities Gain on liquidation, sales and calls of securities Gain on sale of bank premises and equipment Gain on sales of other investments Increase in cash surrender value of life insurance Gain from death benefits from life insurance Change in accrued interest receivable Change in other assets Change in employee and director benefit plan liabilities and other liabilities Net cash provided by operating activities Cash flows from investing activities: Proceeds from maturities, liquidation, sales and calls of available for sale securities Purchases of available for sale securities Proceeds from maturities of held to maturity securities Purchases of held to maturity securities Purchase of Federal Home Loan Bank Stock Proceeds from sales of other investments Proceeds from sales of other real estate Proceeds from insurance on other real estate Loans, net change Acquisition of bank premises and equipment Proceeds from sale of bank premises and equipment Investment in cash surrender value of life insurance Proceeds from death benefits from life insurance Net cash provided by (used in) investing activities Cash flows from financing activities: Demand and savings deposits, net change Time deposits, net change Cash dividends Retirement of Stock Borrowings from Federal Home Loan Bank Repayments to Federal Home Loan Bank Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See Notes to Consolidated Financial Statements. 2020 2019 2018 $ (2,751) $ 1,679 $ 629 1,954 6,002 661 103 50 (29) 271 (539) (318) (483) (224) (413) 214 1,424 5,922 183,726 (163,291) 9,365 (33,093) (20) 3,890 77 (16,008) (441) 547 (69) 548 (14,769) 103,689 (29,334) (98) (735) 59,500 (62,057) 70,965 62,118 29,424 91,542 1,914 442 (387) 168 182 266 (147) (440) 269 102 101 4,149 65,658 (33,631) 5,705 (3,604) (60) 3,142 1,557 (456) (100) 1,964 122 764 21 274 315 260 (17) (455) (52) (57) 506 4,274 60,222 (39,086) 760 (4,455) (699) 125 3,211 1,461 (690) (85) 38,211 20,764 (7,539) 10,176 (148) 984,856 (1,017,472) (30,127) (52,268) (3,796) (101) (1,907) 1,428,700 (1,403,756) (33,128) 12,233 17,191 29,424 $ (8,090) 25,281 17,191 $ $ 14 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A – BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Business of The Company Peoples Financial Corporation (the “Company”) is a one-bank holding company headquartered in Biloxi, Mississippi. Its two subsidiaries are The Peoples Bank, Biloxi, Mississippi (the “Bank”), and PFC Service Corp. Its principal subsidiary is the Bank, which provides a full range of banking, financial and trust services to state, county and local government entities and individuals and small and commercial businesses operating in those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the Bank’s three most outlying locations (the “trade area”). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Basis of Accounting The Company and its subsidiaries recognize assets and liabilities, and income and expense, on the accrual basis of accounting. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the valuation of other real estate acquired in connection with foreclosure or in satisfaction of loans, assumptions relating to employee and director benefit plan liabilities and valuation allowances associated with the realization of deferred tax assets, which are based on future taxable income. Revenue Recognition Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), prescribes the process related to the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 excludes revenue streams relating to loans and investment securities, which are the major source of revenue for the Company, from its scope. Consistent with this guidance, the Company recognizes non-interest income within the scope of this guidance as services are transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those services. Other types of revenue contracts, the income from which is included in non-interest income, that are within the scope of ASU 2014-09 are: Trust department income and fees: A contract for fiduciary and/or investment administration services on personal trust accounts and corporate trust services. Personal trust fee income is determined as a percentage of assets under management and is recognized over the period the underlying trust is serviced. Corporate trust fee income is recognized over the period the Company provides service to the entity. Service charges on deposit accounts: The deposit contract obligates the Company to serve as a custodian of the customer’s deposited funds and is generally terminable at will by either party. The contract permits the customer to access the funds on deposit and request additional services for which the Company earns a fee, including NSF and analysis charges, related to the deposit account. Income for deposit accounts is recognized over the statement cycle period (typically on a monthly basis) or at the time the service is provided, if additional services are requested. ATM fee income: A contract between the Company, as a card-issuing bank, and its customers whereby the Company receives a transaction fee from the merchant’s bank whenever a customer uses a debit or credit card to make a purchase. These fees are earned as the service is provided (i.e., when the customer uses a debit or ATM card). Other non-interest income: Other non-interest income includes several items, such as wire transfer income, check cashing fees, gain (loss) from sales of other real estate, the increase in cash surrender value of life insurance, rental income from bank properties and safe deposit box rental fees. This income is generally recognized at the time the service is provided and/or the income is earned. 15 New Accounting Pronouncements Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), is intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down. The Company has established a Current Expected Credit Loss (CECL) Committee which includes the appropriate members of management, credit administration and accounting to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing this ASU. The Company selected a third-party vendor to provide allowance for loan loss software as well as advisory services in developing a new methodology that would be compliant with ASU 2016-13, and is working with the approved third-party vendor to develop the CECL model and evaluate its impact. ASU 2016-13 was originally to become effective for the Company for interim and annual periods beginning after December 15, 2019. In November 2019, the FASB issued Accounting Standards Update 2019 – 10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates (“ASU 2019–10”). ASU 2019-10 amends the effective date for certain entities, including the Company, for ASU 2016-13, Financial Instruments – Credit Losses. Because the Company is a smaller reporting company, ASU 2016-13 is now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. In January 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2020-01 (“ASU 2020-01”), Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323) and Derivatives and Hedging (Topic 815). The amendments in this update improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. In February 2020, the FASB issued Accounting Standards Update 2020-02 (“ASU 2020-02”), Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 843) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) . This update adds an SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 relating to credit losses and addresses the adoption of new lease guidance. ASU 2020-02 is effective upon issuance. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. In March 2020, the FASB issued Accounting Standards Update 2020-03 (“ASU 2020-03”), Codification Improvements to Financial Instruments. This update amends or clarifies specific issues relating to fair value option disclosures, alignment of certain disclosures for depository and lending institutions, and improvement of guidance for debt instruments and net asset value practical expedient, leases, transfers and servicing. ASU 2020-03 is effective for various fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 and beginning after December 15, 2022. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. In October 2020, the FASB issued Accounting Standards Update 2020-08 (“ASU 2020-08”), Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. The amendments in this Update represent changes to clarify the Codification regarding callable debit securities. ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. In October 2020, the FASB issued Accounting Standards Update 2020-10 (“ASU 2020-10”), Codification Improvements. This Update improves the consistency by amending the Codification to include all disclosure guidance in the appropriate disclosure sections and clarifies the application of various provisions in the Codification by amending and adding hew headings, cross referencing to other guidance and refining or correcting terminology. ASU 2020-10 is effective for fiscal years, beginning after December 15, 2020. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations or cash flows. Cash and Due from Banks Until March 26, 2020, the Company was required to maintain average reserve balances in its vault or on deposit with the Federal Reserve Bank. At that time, the Federal Reserve Bank reduced the reserve requirement to zero percent across all deposit tiers. The average amount of these reserve requirements was approximately $17,000 and $383,000 for the years ending December 31, 2020 and 2019, respectively. 16 Securities The classification of securities is determined by Management at the time of purchase. Securities are classified as held to maturity when the Company has the positive intent and ability to hold the security until maturity. Securities held to maturity are stated at amortized cost. Securities not classified as held to maturity are classified as available for sale and are stated at fair value. Unrealized gains and losses, net of tax, on these securities are recorded in shareholders’ equity as accumulated other comprehensive income. The amortized cost of available for sale securities and held to maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity, determined using the interest method. Such amortization and accretion is included in interest income on securities. A decline in the market value of any investment below cost that is deemed to be other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. In estimating other-than-temporary losses, Management considers the length of time and the extent to which the fair value has been less than cost, the financial condition and nature of the issuer, the cause of the decline, especially if related to a change in interest rates, and the intent and ability of the Company to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as gain (loss) on sales and calls of securities in non-interest income. Other Investments Other investments include a low income housing partnership in which the Company is a 99% limited partner. The partnership has qualified to receive annual low income housing federal tax credits that are recognized as a reduction of the current tax expense. The investment is accounted for using the equity method. Federal Home Loan Bank Stock The Company is a member of the Federal Home Loan Bank of Dallas (“FHLB”) and as such is required to maintain a minimum investment in its stock that varies with the level of FHLB advances outstanding. The stock is bought from and sold to the FHLB based on its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment in accordance with GAAP. Loans The loan portfolio consists of commercial and industrial and real estate loans within the Company’s trade area that we have the intent and ability to hold for the foreseeable future or until maturity. The loan policy establishes guidelines relating to pricing; repayment terms; collateral standards including loan to value limits, appraisal and environmental standards; lending authority; lending limits and documentation requirements. Loans are stated at the amount of unpaid principal, reduced by unearned income and the allowance for loan losses. Interest on loans is recognized on a daily basis over the terms of each loan based on the unpaid principal balance. Loan origination fees are recognized as income when received. Revenue from these fees is not material to the financial statements. The Company continuously monitors its relationships with its loan customers in concentrated industries such as gaming and hotel/motel, as well as the exposure for out of area, land development, construction and commercial real estate loans, and their direct and indirect impact on its operations. Loan delinquencies and deposit overdrafts are monitored on a weekly basis in order to identify developing problems as early as possible. On a monthly basis, a watch list of credits based on our loan grading system is prepared. Grades are applied to individual loans based on factors including repayment ability, financial condition of the borrower and payment performance. Loans with lower grades are placed on the watch list of credits. The watch list is the primary tool for monitoring the credit quality of the loan portfolio. Once loans are determined to be past due, the loan officer and the special assets department work vigorously to return the loans to a current status. The Company places loans on a nonaccrual status when, in the opinion of Management, they possess sufficient uncertainty as to timely collection of interest or principal so as to preclude the recognition in reported earnings of some or all of the contractual interest. Accrued interest on loans classified as nonaccrual is reversed at the time the loans are placed on nonaccrual. Interest received on nonaccrual loans is applied against principal. Loans are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The placement of loans on and removal of loans from nonaccrual status must be approved by Management. Loans which become 90 days delinquent are reviewed relative to collectability. Unless such loans are in the process of terms revision to bring them to a current status or foreclosure or in the process of collection, these loans are placed on nonaccrual and, if deemed uncollectible, are charged off against the allowance for loan losses. That portion of a loan which is deemed uncollectible will be charged off against the allowance as a partial charge off. All charge offs must be approved by Management and are reported to the Board of Directors. 17 Allowance for Loan Losses The allowance for loan losses (“ALL”) is a valuation account available to absorb losses on loans. The ALL is established through provisions for loan losses charged against earnings. Loans deemed to be uncollectible are charged against the ALL, and subsequent recoveries, if any, are credited to the allowance. The ALL is based on Management’s evaluation of the loan portfolio under current economic conditions and is an amount that Management believes will be adequate to absorb probable losses on loans existing at the reporting date. On a quarterly basis, the Company’s problem asset committee meets to review the watch list of credits, which is formulated from the loan grading system. Members of this committee include loan officers, collection officers, the special assets director, the chief lending officer, the chief credit officer, the chief financial officer and the chief executive officer. The evaluation includes Management’s assessment of several factors: review and evaluation of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic conditions and the related impact on specific borrowers and industry groups, a study of loss experience, a review of classified, non-performing and delinquent loans, the estimated value of any underlying collateral, an estimate of the possibility of loss based on the risk characteristics of the portfolio, adverse situations that may affect the borrower’s ability to repay and the results of regulatory examinations. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The ALL consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component of the allowance relates to loans that are not impaired. Changes to the components of the ALL are recorded as a component of the provision for the allowance for loan losses. Management must approve changes to the ALL and must report its actions to the Board of Directors. The Company believes that its allowance for loan losses is appropriate at December 31, 2020. The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructurings and performing and non-performing major loans for which full payment of principal or interest is not expected. Payments received for impaired loans not on nonaccrual status are applied to principal and interest. All impaired loans are reviewed, at a minimum, on a quarterly basis. The Company calculates the specific allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of its collateral. Most of the Company’s impaired loans are collateral-dependent. The fair value of the collateral for collateral-dependent loans is based on appraisals performed by third-party valuation specialists, comparable sales and other estimates of fair value obtained principally from independent sources such as the Multiple Listing Service or county tax assessment valuations, adjusted for estimated selling costs. The Company has a Real Estate Appraisal Policy (the “Policy”) which is in compliance with the guidelines set forth in the “Interagency Appraisal and Evaluation Guidelines” which implement Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and the revised “Interagency Appraisal and Evaluation Guidelines” issued in 2010. The Policy further requires that appraisals be in writing and conform to the Uniform Standards of Professional Appraisal Practice (“USPAP”). An appraisal prepared by a state-licensed or state-certified appraiser is required on all new loans secured by real estate in excess of $500,000. Loans secured by real estate in an amount of $500,000 or less, or that qualify for an exemption under FIRREA, must have a summary appraisal report or in-house evaluation, depending on the facts and circumstances. Factors including the assumptions and techniques utilized by the appraiser, which could result in a downward adjustment to the collateral value estimates indicated in the appraisal, are considered by the Company. When Management determines that a loan is impaired and the loan is collateral-dependent, an evaluation of the fair value of the collateral is performed. The Company maintains established criteria for assessing whether an existing appraisal continues to reflect the fair value of the property for collateral-dependent loans. Appraisals are generally considered to be valid for a period of at least twelve months. However, appraisals that are less than 12 months old may need to be adjusted. Management considers such factors as the property type, property condition, current use of the property, current market conditions and the passage of time when determining the relevance and validity of the most recent appraisal of the property. If Management determines that the most recent appraisal is no longer valid, a new appraisal is ordered from an independent and qualified appraiser. During the interim period between ordering and receipt of the new appraisal, Management considers if the existing appraisal should be discounted to determine the estimated fair value of collateral. Discounts are applied to the existing appraisal and take into consideration the property type, condition of the property, external market data, internal data, reviews of recently obtained appraisals and evaluations of similar properties, comparable sales of similar properties and tax assessment valuations. When the new appraisal is received and approved by Management, the valuation stated in the appraisal is used as the fair value of the collateral in determining impairment, if any. If the recorded investment in the impaired loan exceeds the measure of fair value, 18 a valuation allowance is required as a specific component of the allowance for loan losses. Any specific reserves recorded in the interim are adjusted accordingly. The general component of the ALL is the loss estimated by applying historical loss percentages to non-classified loans which have been divided into segments. These segments include gaming; hotel/motel; real estate, construction; real estate, mortgage; commercial and industrial and all other. The loss percentages are based on each segment’s historical five-year average loss experience which may be adjusted by qualitative factors such as changes in the general economy, or economy or real estate market in a particular geographic area or industry. Management considers the following when assessing risk in the Company’s loan portfolio segments: gaming - loans in this segment are primarily susceptible to declines in tourism and general economic conditions; hotel/motel - loans in this segment are primarily susceptible to tourism, declines in occupancy rates, business failure, industry concentrations and general economic conditions; real estate, construction - loans in this segment are primarily susceptible to cost overruns, changes in market demand for property, delay in completion of construction and declining real estate values; real estate, mortgage - loans in this segment are primarily susceptible to general economic conditions, declining real estate values, industry concentrations and business failure; commercial and industrial - loans in this segment are primarily susceptible to general economic conditions, declining real estate values, industry concentrations and business failure; and other - loans in this segment, most of which are consumer loans, are primarily susceptible to regulatory risks, unemployment and general economic conditions. Bank Premises and Equipment Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of the related assets. Other Real Estate Other real estate (“ORE”) includes real estate acquired through foreclosure. Each other real estate property is carried at fair value, less estimated costs to sell. Fair value is principally based on appraisals performed by third-party valuation specialists. Any excess of the carrying value of the related loan over the fair value of the real estate at the date of foreclosure is charged against the ALL. Any expense incurred in connection with holding such real estate or resulting from any write-downs in value subsequent to foreclosure is included in non-interest expense. When the other real estate property is sold, a gain or loss is recognized on the sale for the difference, if any, between the sales proceeds and the carrying amount of the property. If the fair value of the ORE, less estimated costs to sell at the time of foreclosure, decreases during the holding period, the ORE is written down with a charge to non-interest expense. Generally, ORE properties are actively marketed for sale and Management is continuously monitoring these properties in order to minimize any losses. Trust Department Income and Fees Corporate trust fees are accounted for on an accrual basis and personal trust fees are recorded when the underlying trust is serviced. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carry forwards, is required to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. The Company currently evaluates income tax positions judged to be uncertain. A loss contingency reserve is accrued if it is probable that the tax position will be challenged, it is probable that the future resolution of the challenge will confirm that a loss has been incurred and the amount of such loss can be reasonably estimated. Post-Retirement Benefit Plan The Company accounts for its post-retirement benefit plan under Accounting Standards Codification (“Codification” or “ASC”) Topic 715, Retirement Benefits (“ASC 715”). The under or over funded status of the Company’s post-retirement benefit plan is recognized as a liability or asset in the statement of condition. Changes in the plan’s funded status are reflected in other comprehensive income. Net actuarial gains and losses and adjustments to prior service costs that are not recorded as components of the net periodic benefit cost are charged to other comprehensive income. 19 Earnings Per Share Basic and diluted earnings per share are computed on the basis of the weighted average number of common shares outstanding of 4,893,151 for 2020, 4,943,186 for 2019, and 5,031,778 for 2018. Accumulated Other Comprehensive Income (Loss) At December 31, 2020, 2019 and 2018, accumulated other comprehensive income (loss) consisted of net unrealized gains (losses) on available for sale securities and over (under) funded liabilities related to the Company’s post-retirement benefit plan. Statements of Cash Flows The Company has defined cash and cash equivalents to include cash and due from banks. The Company paid $1,610,864, $3,231,710, and $2,657,616 in 2020, 2019 and 2018, respectively, for interest on deposits and borrowings. No income tax payments were paid in 2020, 2019 and 2018. Loans transferred to other real estate amounted to $753,620, $1,707,389 and $4,706,732 in 2020, 2019 and 2018, respectively. Fair Value Measurement The Company reports certain assets and liabilities at their estimated fair value. These assets and liabilities are classified and disclosed in one of three categories based on the inputs used to develop the measurements. The categories establish a hierarchy for ranking the quality and reliability of the information used to determine fair value. Reclassifications Certain reclassifications have been made to the prior year statements to conform to current year presentation. The reclassifications had no effect on prior year net income. NOTE B – SECURITIES: The amortized cost and fair value of securities at December 31, 2020 and 2019, respectively, are as follows (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses December 31, 2020: Available for sale securities: U.S. Treasuries U.S. Government agencies Mortgage-backed securities Collateralized mortgage obligations States and political subdivisions $ 19,999 $ 2,500 69,485 44,230 38,600 Total available for sale securities $ 174,814 Held to maturity securities: States and political subdivisions Total held to maturity securities December 31, 2019: Available for sale securities: U.S. Treasuries U.S. Government agencies Mortgage-backed securities Collateralized mortgage obligations States and political subdivisions $ $ $ 75,688 75,688 55,922 12,493 104,414 15,440 6,412 Total available for sale securities $ 194,681 Held to maturity securities: U.S. Government agencies States and political subdivisions Total held to maturity securities $ $ 5,000 47,231 52,231 $ $ $ $ $ $ $ 125 83 3,237 1,207 751 5,403 2,809 2,809 6 93 1,832 251 35 2,217 985 985 $ $ $ $ $ $ $ $ Fair Value $ 20,124 2,583 72,676 45,437 39,310 $ 180,130 $ $ $ 78,474 78,474 55,653 12,570 106,153 15,488 6,447 (46) (41) (87) (23) (23) (275) (16) (93) (203) (587) $ 196,311 (20) (66) (86) $ $ 4,980 48,150 53,130 The amortized cost and fair value of debt securities at December 31, 2020, (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. 20 Available for sale securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed securities Total Held to maturity securities: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total Amortized Cost Fair Value $ $ $ $ 20,244 $ 1,493 31,347 52,245 69,485 174,814 $ 2,278 $ 19,822 18,466 35,122 75,688 $ 20,369 1,506 32,608 52,971 72,676 180,130 2,288 20,700 19,425 36,061 78,474 Available for sale and held to maturity securities with gross unrealized losses at December 31, 2020 and 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands): December 31, 2020: Mortgage-backed securities States and political subdivisions Total December 31, 2019: U.S. Treasuries U.S. Government agencies Mortgage-backed securities Collateralized mortgage obligations States and political subdivisions Less Than Twelve Months Over Twelve Months Total Gross Unrealized Losses Fair Value Gross Unrealized Losses Gross Unrealized Losses Fair Value Fair Value $ 6,278 $ 30 $ 1,619 $ 16 $ 7,897 $ 12,335 64 12,335 46 64 $ 18,613 $ 94 $ 1,619 $ 16 $ 20,232 $ 110 $ 4,894 $ 44 $ 49,753 $ 231 $ 54,647 $ 275 4,978 10,941 10,398 4,602 16 93 203 61 4,979 20 608 5 9,957 10,941 10,398 5,210 36 93 203 66 Total $ 35,813 $ 417 $ 55,340 $ 256 $ 91,153 $ 673 At December 31, 2020, 3 of the 45 mortgage-backed securities and 20 of the 146 securities issued by states and political subdivisions contained unrealized losses. Management evaluates securities for other-than-temporary impairment on a monthly basis. In performing this evaluation, the length of time and the extent to which the fair value has been less than cost, the fact that the Company’s securities are primarily issued by U.S. Treasury and U.S. Government agencies and the cause of the decline in value are considered. In addition, the Company does not intend to sell and it is not more likely than not that we will be required to sell these securities before maturity. While some available for sale securities have been sold for liquidity purposes or for gains, the Company has traditionally held its securities, including those classified as available for sale, until maturity. As a result of this evaluation, the Company has determined that the declines summarized in the tables above are not deemed to be other-than-temporary. Proceeds from sales and calls of available for sale debt securities were $29,457,361 and $15,123,868 during 2020 and 2019, respectively. Available for sale debt securities were sold and called for realized gains of $539,023 and $146,675 during 2020 and 2019, respectively. There were no sales or calls of available for sale securities in 2018. Proceeds from sales of other investments were $125,145 for a realized gain of $16,995 during 2018. Securities with a fair value of $206,544,282 and $230,065,621 at December 31, 2020 and 2019, respectively, were pledged to secure public deposits, federal funds purchased and other balances required by law. 21 NOTE C - LOANS: The composition of the loan portfolio at December 31, 2020 and 2019 is as follows (in thousands): December 31, Gaming Hotel/motel Real estate, construction Real estate, mortgage Commercial and industrial Other Total 2020 2019 $ 18,765 $ 19,899 45,499 26,609 144,276 37,429 5,843 47,294 23,209 141,406 30,626 6,515 $ 278,421 $ 268,949 In the ordinary course of business, the Company’s bank subsidiary extends loans to certain officers and directors and their personal business interests at, in the opinion of Management, the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of similar credit risk with persons not related to the Company or its subsidiaries. These loans do not involve more than normal risk of collectability and do not include other unfavorable features. An analysis of the activity with respect to such loans to related parties is as follows (in thousands): Balance, January 1 January 1 balance, loans of officer appointed during the year January 1 balance, loans of directors retired or deceased during the year New loans and advances Repayments Balance, December 31 2019 9,157 $ $ 2020 9,190 247 (4,441) 126 (664) $ 4,458 $ 1,174 (1,141) 9,190 As part of its evaluation of the quality of the loan portfolio, Management monitors the Company’s credit concentrations on a monthly basis. Total outstanding concentrations were as follows (in thousands): December 31, Gaming Hotel/motel Out of area 2020 $ 18,765 $ 45,499 7,995 2019 19,899 47,294 13,423 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. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. If not forgiven, in whole or in part, these loans carry a fixed rate of 1.00% with payments deferred until the date the Small Business Administration (the “SBA”) remits the borrower’s loan forgiveness amount to the lender or, if the borrower does not apply for loan forgiveness, ten months after the end of the borrowers’ loan forgiveness covered period. All PPP loans originated by the Company have a term of two years. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging for 1.00% to 5.00%, based on the size of the loan. 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 December 31, 2020, 74 loans with a balance of $5,665,092 were partially or completely forgiven by the Small Business Administration (the “SBA”) with the bank subsidiary receiving principal and interest payments directly from the SBA. The remaining balance of $16,779,934 is reported in the commercial and industrial segment within the loan portfolio. Recent legislation has provided for simplified forgiveness for PPP loans with an original balance of $150,000 or less. As most of the Company’s PPP loans are under this threshold, it is expected that these loans will be paid off in 2021. 22 The age analysis of the loan portfolio, segregated by class of loans, as of December 31, 2020 and 2019 is as follows (in thousands): Number of Days Past Due 30 - 59 60 - 89 Greater Than 90 Total Past Due Current Total Loans Loans Past Due Greater Than 90 Days and Still Accruing December 31, 2020: Gaming Hotel/motel Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2019: Gaming Hotel/motel Real estate, construction Real estate, mortgage Commercial and industrial Other Total $ $ $ $ $ 18,765 $ 18,765 $ 277 2,865 80 63 277 45,499 26,332 45,499 26,609 263 118 3,246 141,030 144,276 80 63 37,349 5,780 37,429 5,843 $ 3,285 $ 263 $ 118 $ 3,666 $ 274,755 $ 278,421 $ $ $ $ $ $ 19,899 $ 19,899 $ 303 4,150 92 50 69 343 58 12 14 5,580 218 47,294 47,294 386 10,073 22,823 131,333 23,209 141,406 368 62 30,258 6,453 30,626 6,515 $ 4,595 $ 482 $ 5,812 $ 10,889 $ 258,060 $ 268,949 $ The Company monitors the credit quality of its loan portfolio through the use of a loan grading system. A score of 1 – 5 is assigned to the loan based on factors including repayment ability, trends in net worth and/or financial condition of the borrower and guarantors, employment stability, management ability, loan to value fluctuations, the type and structure of the loan, conformity of the loan to bank policy and payment performance. Based on the total score, a loan grade of A, B, C, S, D, E or F is applied. A grade of A will generally be applied to loans for customers that are well known to the Company and that have excellent sources of repayment. A grade of B will generally be applied to loans for customers that have excellent sources of repayment which have no identifiable risk of collection. A grade of C will generally be applied to loans for customers that have adequate sources of repayment which have little identifiable risk of collection. A grade of S will generally be applied to loans for customers who meet the criteria for a grade of C but also warrant additional monitoring by placement on the watch list. A grade of D will generally be applied to loans for customers that are inadequately protected by current sound net worth, paying capacity of the borrower, or pledged collateral. Loans with a grade of D have unsatisfactory characteristics such as cash flow deficiencies, bankruptcy filing by the borrower or dependence on the sale of collateral for the primary source of repayment, causing more than acceptable levels of risk. Loans 60 to 89 days past due receive a grade of D. A grade of E will generally be applied to loans for customers with weaknesses inherent in the D classification and in which collection or liquidation in full is questionable. In addition, on a monthly basis the Company determines which loans are 90 days or more past due and assigns a grade of E to them. A grade of F is applied to loans which are considered uncollectible and of such little value that their continuance in an active bank is not warranted. Loans with this grade are charged off, even though partial or full recovery may be possible in the future. 23 An analysis of the loan portfolio by loan grade, segregated by class of loans, as of December 31, 2020 and 2019 is as follows (in thousands): December 31, 2020: Gaming Hotel/motel Real estate, construction Real estate, mortgage Commercial and industrial Other Total December 31, 2019: Gaming Hotel/motel Real estate, construction Real estate, mortgage Commercial and industrial Other Total A, B or C S D E F Total Loans With A Grade Of: $ 15,938 $ $ 2,827 $ $ $ 18,765 45,499 26,098 129,825 31,810 5,822 7,977 5,525 61 3,741 45 21 450 2,733 49 45,499 26,609 144,276 37,429 5,843 $ 254,992 $ 13,502 $ 6,695 $ 3,232 $ $ 278,421 $ 19,899 $ $ $ $ $ 19,899 47,294 22,611 123,841 21,609 6,501 5,338 8,627 83 3,608 59 12 515 8,619 331 2 47,294 23,209 141,406 30,626 6,515 $ 241,755 $ 13,965 $ 3,762 $ 9,467 $ $ 268,949 A loan may be impaired but not on nonaccrual status when the loan is well secured and in the process of collection. Total loans on nonaccrual as of December 31, 2020 and 2019 are as follows (in thousands): December 31, Real estate, construction Real estate, mortgage Commercial and industrial Total 2020 $ 346 $ 2,656 25 $ 3,027 $ 2019 515 8,495 256 9,266 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 December 31, 2020, the extension period for 187 of these loans with a total balance of $79,452,615 had expired with those customers resuming their regular payment schedule. Loans whose modifications had not expired as of December 31, 2020, had a balance of $26,214. As of December 31, 2020, the Company renewed the modification for 3 loans with a balance of $2,820,623. Prior to 2019, certain loans were modified by granting interest rate concessions to these customers with such loans being classified as troubled debt restructurings. During 2020 and 2019 the Company did not restructure any additional loans. Specific reserves of $50,000 and $63,106 have been allocated to troubled debt restructurings as of December 31, 2020 and 2019, respectively. The Bank had no commitments to lend additional amounts to customers with outstanding loans classified as troubled debt restructurings as of December 31, 2020 and 2019. 24 Impaired loans, which include loans classified as nonaccrual and troubled debt restructurings, segregated by class of loans, as of December 31, 2020 and 2019 were as follows (in thousands): Unpaid Principal Balance Recorded Investment Related Allowance Average Recorded Investment Interest Income Recognized December 31, 2020: With no related allowance recorded: Real estate, construction Real estate, mortgage Total With a related allowance recorded: Real estate, construction Real estate, mortgage Commercial and industrial Total Total by class of loans: Real estate, construction Real estate, mortgage Commercial and industrial Total December 31, 2019: With no related allowance recorded: Real estate, construction Real estate, mortgage Commercial and industrial Total With a related allowance recorded: Real estate, construction Real estate, mortgage Commercial and industrial Total Total by class of loans: Real estate, construction Real estate, mortgage Commercial and industrial Total $ 304 $ 239 $ $ 246 $ 3,112 3,416 211 253 25 489 515 3,365 25 3,112 3,351 211 253 25 489 450 3,365 25 3,496 3,742 214 250 31 495 460 3,746 31 20 76 4 100 20 76 4 $ 3,905 $ 3,840 $ 100 $ 4,237 $ $ 292 $ 292 $ $ 312 $ 8,906 217 9,415 223 624 39 886 515 9,530 256 8,906 217 9,415 223 624 39 886 515 9,530 256 20 98 4 122 20 98 4 $ 10,301 $ 10,301 $ 122 $ 9,075 217 9,604 230 614 41 885 542 9,689 258 10,489 $ 11 39 50 6 6 11 45 56 29 29 27 27 56 56 25 Transactions in the allowance for loan losses for the years ended December 31, 2020, 2019 and 2018, and the balances of loans, individually and collectively evaluated for impairment, as of December 31, 2020, 2019 and 2018 are as follows (in thousands): December 31, 2020: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Allowance for Loan Losses: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Total Loans: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2019: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Allowance for Loan Losses: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Total Loans: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment December 31, 2018: Allowance for Loan Losses: Beginning Balance Charge-offs Recoveries Provision Ending Balance Allowance for Loan Losses: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Total Loans: Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Gaming Hotel/Motel Real Estate, Construction Real Estate, Mortgage Commercial and Industrial Other Total $ 223 $ 779 $ (37) 186 $ (25) 754 $ $ 102 (17) 15 11 111 $ 2,454 (5,472) $ 5,867 $ 2,849 0 $ 553 (261) 34 91 417 $ $ 96 (227) 145 95 109 $ 4,207 (5,977) 194 6,002 $ 4,426 $ $ $ 20 $ 200 $ 40 $ $ 260 $ 186 $ 754 $ 91 $ 2,649 $ 377 $ 109 $ 4,166 $ 2,827 $ $ 511 $ 6,474 $ 94 $ 21 $ 9,927 $ 15,938 $ 45,499 $ 26,098 $ 137,802 $ 37,335 $ 5,822 $ 268,494 $ 416 $ 1,442 $ $ (193) 223 $ (663) 779 $ 429 (404) 25 52 102 $ 2,444 $ (63) 4 69 $ 2,454 $ $ 476 (591) 55 613 553 133 (270) 111 122 96 $ 5,340 (1,328) 195 $ $ 4,207 $ $ $ 20 $ 180 $ 57 $ 4 $ 261 $ 223 $ 779 $ 82 $ 2,274 $ 496 $ 92 $ 3,946 $ $ $ 597 $ 12,228 $ 390 $ 15 $ 13,230 $ 19,899 $ 47,294 $ 22,612 $ 129,178 $ 30,236 $ 6,500 $ 255,719 $ 536 $ 936 $ 242 (120) 416 506 $ 1,442 $ $ 17 170 429 $ 3,369 (715) 188 (398) $ 2,444 $ $ 892 (372) 112 (156) 476 $ $ 178 (323) 158 120 133 $ 6,153 (1,410) 475 122 $ 5,340 $ $ $ 283 $ 322 $ 120 $ 3 $ 728 $ 416 $ 1,442 $ 146 $ 2,122 $ 356 $ 130 $ 4,612 $ 4,687 $ $ 1,667 $ 18,122 $ 2,170 $ 24 $ 26,670 $ 21,080 $ 44,112 $ 27,096 $ 122,149 $ 25,335 $ 6,904 $ 246,676 In February 2021, the Company received a recovery of $4,510,359 of a previously charged-off loan that was reported in the Real Estate, Mortgage segment. 26 NOTE D - BANK PREMISES AND EQUIPMENT: Bank premises and equipment are shown as follows (in thousands): December 31, Land Building Furniture, fixtures and equipment Totals, at cost Less: Accumulated depreciation Totals NOTE E – OTHER REAL ESTATE: Estimated Useful Lives 2020 $ 5,554 $ 5 - 40 years 3 - 10 years 30,791 17,117 53,462 37,783 $ 15,679 $ 2019 5,783 30,688 17,283 53,754 36,333 17,421 The Company’s other real estate consisted of the following as of December 31, 2020 and 2019, respectively (in thousands except number of properties): December 31, 2020 2019 Construction, land development and other land 1 - 4 family residential properties Nonfarm nonresidential Other Total NOTE F - DEPOSITS: Number of Properties 9 1 2 1 Balance $ 2,303 49 770 353 13 $ 3,475 Number of Properties Balance 12 3 4 1 20 $ $ 4,828 370 1,902 353 7,453 At December 31, 2020, the scheduled maturities of time deposits are as follows (in thousands): 2021 2022 2023 2024 2025 Total $ 42,642 14,380 2,025 1,210 807 $ 61,064 Time deposits of $250,000 or more totaled approximately $20,564,000 and $46,618,000 at December 31, 2020 and 2019, respectively. Deposits held for related parties amounted to $4,396,827 and $2,259,360 at December 31, 2020 and 2019, respectively. Overdrafts totaling $470,700 and $422,304 were reclassified as loans at December 31, 2020 and 2019, respectively. NOTE G – FEDERAL FUNDS PURCHASED: At December 31, 2020, the Company had facilities in place to purchase federal funds up to $40,000,000 under established credit arrangements. NOTE H - BORROWINGS: At December 31, 2020, the Company was able to borrow up to $13,304,762 from the Federal Reserve Bank Discount Window Primary Credit Program. The borrowing limit is based on the amount of collateral pledged, with certain loans from the Bank’s portfolio serving as collateral. Borrowings bear interest at the primary credit rate, which is established periodically by the Federal Reserve Board, and have a maturity of one day. The primary credit rate was .25% at December 31, 2020. There was no outstanding balance at December 31, 2020. 27 At December 31, 2020, the Company had $968,822 outstanding in advances under a $39,410,180 line of credit with the FHLB. New advances may subsequently be obtained based on the liquidity needs of the bank subsidiary. The remaining balance consists of smaller advances bearing interest from 2.604% to 7.00% with maturity dates from 2030 – 2040. The advances are collateralized by specific loans, for which certain documents are held in custody by the FHLB, and, if needed, specific investment securities that are held in safekeeping at the FHLB. At December 31, 2020, the Company had a $500,000 unsecured revolving line of credit with First National Bankers Bank. The line has a term of one year and bears interest at Wall Street prime rate with interest due monthly. There was no outstanding balance at December 31, 2020. NOTE I - INCOME TAXES: Deferred taxes (or deferred charges) as of December 31, 2020 and 2019, included in other assets, were as follows (in thousands): December 31, Deferred tax assets: Allowance for loan losses Employee benefit plans’ liabilities Loss on credit impairment of securities Earned retiree health benefits plan liability General business and AMT credits Tax net operating loss carryforward Other Valuation allowance Deferred tax assets Deferred tax liabilities: Unrealized gain on available for sale securities, charged from equity Unearned retiree health benefits plan asset Bank premises and equipment Other Deferred tax liabilities Net deferred taxes Income taxes consist of the following components (in thousands): Years Ended December 31, Current Deferred: Federal Change in valuation allowance Total deferred Totals 2020 2019 $ $ 930 3,223 356 1,048 1,707 2,558 854 (7,209) 3,467 1,116 305 1,797 249 3,467 $ $ 2020 2019 $ $ $ (809) 809 166 (166) 883 3,189 356 1,049 1,707 2,048 863 (7,099) 2,996 342 381 2,047 226 2,996 2018 (36) (425) 425 $ $ $ (36) Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 21.0% for 2020, 2019 and 2018 to income before income taxes. The reasons for these differences are shown below (in thousands): Taxes computed at statutory rate Increase (decrease) resulting from: Tax-exempt interest income Income from BOLI Federal tax credits Other Realization of AMT credit Other changes in valuation allowance Total income tax (benefit) expense 2020 2019 2018 Tax $ (578) Rate Tax (21) $ 321 Rate Tax $ 125 21 (127) (148) (5) (5) (172) (92) (20) 129 (11) (6) (1) 8 (166) (11) $ $ 44 809 2 29 $ 28 Rate 21 (35) (16) (50) 8 (6) 72 (6) (206) (96) (298) 50 (36) 425 (36) During 2020 and 2019, the Company recorded no income tax benefit or expense. During 2018, the Company recorded an income tax benefit of $36,000. On December 22, 2017, the President signed into law The Tax Cuts and Jobs Act (the “Act”). In addition to reducing U.S. corporate income tax rates from 34% to 21%, the Act repealed the alternative minimum tax (“AMT”) regime for tax years beginning after December 31, 2017. For tax years beginning in 2018, 2019 and 2020, the AMT credit carryforward can be utilized to offset regular tax with any remaining AMT carryforwards eligible for a refund of 50%. Any remaining AMT credit carryforwards will become fully refundable beginning in the 2021 tax year. As a result, during 2018, the Company reclassified the AMT credit carryforward to a tax receivable resulting in a deferred tax benefit of $36,000. A valuation allowance is recognized against deferred tax assets when, based on the consideration of all available positive and negative evidence using a more likely than not criteria, it is determined that all or a portion of these tax benefits may not be realized. This assessment requires consideration of all sources of taxable income available to realize the deferred tax asset including taxable income in prior carry-back years, future reversals of existing temporary differences, tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. The Company incurred losses on a cumulative basis for the three-year period ended December 31, 2014, which is considered to be significant negative evidence. The positive evidence considered in support was insufficient to overcome this negative evidence. As a result, the Company established a full valuation allowance for its net deferred tax asset in the amount of $8,140,000 as of December 31, 2014. The Company intends to maintain this valuation allowance until it determines it is more likely than not that the asset can be realized through current and future taxable income. If not utilized, the Company’s federal net operating loss of $12,091,000 will begin to expire in 2035. The Company has reviewed its income tax positions and specifically considered the recognition and measurement requirements of the benefits recorded in its financial statements for tax positions taken or expected to be taken in its tax returns. The Company currently has no unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. NOTE J - SHAREHOLDERS’ EQUITY: Shareholders’ equity of the Company includes the undistributed earnings of the bank subsidiary. Dividends to the Company’s shareholders can generally be paid only from dividends paid to the Company by its bank subsidiary. Consequently, dividends are dependent upon the earnings, capital needs, regulatory policies and statutory limitations affecting the bank subsidiary. Dividends paid by the bank subsidiary are subject to the written approval of the Commissioner of Banking and Consumer Finance of the State of Mississippi and the Federal Deposit Insurance Corporation (the “FDIC”). At December 31, 2020, $10,815,059 of undistributed earnings of the bank subsidiary included in consolidated surplus and retained earnings was available for future distribution to the Company as dividends with regulatory approval. Dividends paid by the Company are subject to the written approval of the Federal Reserve Bank (“FRB”). On November 8, 2019, the Board approved the repurchase of up to 65,000 of the outstanding shares of the Company’s common stock. As a result of this repurchase plan, 64,629 shares have been repurchased for approximately $735,000 and retired through December 31, 2020. On April 25, 2018, the Board declared a dividend of $.01 per share payable May 10, 2018 to shareholders of record as of May 7, 2018. On September 26, 2018, the Board declared a dividend of $.01 per share payable on October 15, 2018 to shareholders of record as of October 9, 2018. On April 24, 2019, the Board declared a dividend of $.01 per share payable May 10, 2019 to shareholders of record as of May 6, 2019. On November 8, 2019, the Board declared a dividend of $.02 per share payable on November 25, 2019 to shareholders of record as of November 20, 2019. On April 22, 2020, the Board declared a dividend of $.02 per share payable May 8, 2020 to shareholders of record as of May 4, 2020. The Company and the bank subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines must be met that involve quantitative measures of the assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the bank subsidiary and the Company are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As of December 31, 2020, the most recent notification from the FDIC categorized the bank subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the bank subsidiary must have a Total risk-based capital ratio of 10.00% or greater, a Common equity tier 1 capital ratio of 6.50% or greater, a Tier 1 risk-based 29 capital ratio of 8.00% or greater and a Leverage capital ratio of 5.00% or greater. As of January 1, 2019, the Company must have a capital conservation buffer above these requirements of 2.50%. There are no conditions or events since that notification that Management believes have changed the bank subsidiary’s category. The Company’s actual capital amounts and ratios and required minimum capital amounts and ratios for 2020 and 2019, are as follows (in thousands): Actual For Capital Adequacy Purposes Amount Ratio Amount Ratio December 31, 2020: Total Capital (to Risk Weighted Assets) $ 93,268 23.00% $ 32,442 Common Equity Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2019: 88,842 88,842 88,842 21.91% 21.91% 14.07% 18,249 24,331 25,255 Total Capital (to Risk Weighted Assets) $ 96,632 26.22% $ 29,487 Common Equity Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) 92,425 92,425 92,425 25.08% 25.08% 15.26% 16,586 22,115 24,230 8.00% 4.50% 6.00% 4.00% 8.00% 4.50% 6.00% 4.00% The bank subsidiary’s actual capital amounts and ratios and required minimum capital amounts and ratios and capital amounts and ratios to be well capitalized for 2020 and 2019, are as follows (in thousands): Actual For Capital Adequacy Purposes To Be Well Capitalized Amount Ratio Amount Ratio Amount Ratio 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) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) December 31, 2019: 86,133 86,133 86,133 21.75% 21.75% 12.53% 17,821 23,762 27,504 4.50% 6.00% 4.00% 25,742 31,683 34,380 6.50% 8.00% 5.00% Total Capital (to Risk Weighted Assets) $ 93,228 25.48% $ 29,274 8.00% $ 36,592 10.00% Common Equity Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) 89,021 89,021 89,021 24.33% 24.33% 14.72% 16,466 21,955 24,198 4.50% 6.00% 4.00% 23,785 29,274 30,248 6.50% 8.00% 5.00% NOTE K - OTHER INCOME AND EXPENSES: Other income consisted of the following (in thousands): Years Ended December 31, Other service charges, commissions and fees Rentals Other Totals $ $ 30 2020 80 $ 369 94 543 $ 2019 91 $ 329 112 532 $ 2018 93 246 121 460 Other expenses consisted of the following (in thousands): Years Ended December 31, Advertising Data processing FDIC and state banking assessments Legal and accounting Other real estate ATM expense Trust expense Other Totals $ 2020 350 $ 1,226 359 532 1,044 917 338 1,542 $ 6,308 $ 2019 529 $ 1,356 374 714 553 697 368 1,975 6,566 $ 2018 557 1,355 248 449 1,254 585 304 1,973 6,725 NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and irrevocable letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the bank subsidiary has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and irrevocable letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any conditions established in the agreement. Irrevocable letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Commitments and irrevocable letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments and irrevocable letters of credit may expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluated each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on Management’s credit evaluation of the customer. Collateral obtained varies but may include equipment, real property and inventory. The Company generally grants loans to customers in its trade area. At December 31, 2020 and 2019, the Company had outstanding irrevocable letters of credit aggregating $141,000 and $89,097, respectively. At December 31, 2020 and 2019, the Company had outstanding unused loan commitments aggregating $37,738,829 and $28,596,286, respectively. Approximately $22,290,172 and $15,082,587 of outstanding commitments were at fixed rates and the remainder were at variable rates at December 31, 2020 and 2019, respectively. NOTE M - CONTINGENCIES: The Bank is involved in various legal matters and claims which are being defended and handled in the ordinary course of business. None of these matters are expected, in the opinion of Management, to have a material adverse effect upon the financial position or results of operations of the Company. NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION: Peoples Financial Corporation began its operations September 30, 1985, when it acquired all the outstanding stock of The Peoples Bank, Biloxi, Mississippi. A condensed summary of its financial information is shown below. 31 CONDENSED BALANCE SHEETS (IN THOUSANDS): December 31, Assets Investments in subsidiaries, at underlying equity: Bank subsidiary Nonbank subsidiary Cash in bank subsidiary Other assets Total assets Liabilities and Shareholders’ Equity Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity 2020 2019 $ 92,157 $ 91,718 1 92 2,616 94,866 $ $ $ $ 1 740 2,664 95,123 94,866 $ 94,866 $ 95,123 95,123 CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS): Years Ended December 31, Income 2020 2019 2018 Distributed income of bank subsidiary Undistributed income (loss) of bank subsidiary Other income (loss) Total income Expenses Other Total expenses Income (loss) before income taxes Income tax Net income (loss) $ 250 $ 700 $ (2,888) (46) (2,684) 67 67 (2,751) 1,240 (164) 1,776 97 97 1,679 901 112 (252) 761 132 132 629 $ (2,751) $ 1,679 $ 629 CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS): Years Ended December 31, Cash flows from operating activities: 2020 2019 2018 Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss from other investments Undistributed income (loss) of subsidiaries Gain from sale of securities Other assets Net cash provided by operating activities Cash flows from investing activities: Redemption of equity securities Net cash provided by investing activities Cash flows from financing activities: Retirement of common stock Dividends paid Net cash used in financing activities Net increase (decrease) in cash Cash, beginning of year Cash, end of year $ (2,751) $ 1,679 $ 629 50 2,888 (2) 185 (735) (98) (833) (648) 740 92 166 (1,240) 605 274 (112) (17) 774 125 125 (148) (148) 457 283 740 $ (1,907) (101) (2,008) (1,109) 1,392 283 $ $ 32 NOTE O - EMPLOYEE AND DIRECTOR BENEFIT PLANS: The Company sponsors the Peoples Financial Corporation Employee Stock Ownership Plan (“ESOP”). Employees who are in a position requiring at least 1,000 hours of service during a plan year and who are 21 years of age are eligible to participate in the ESOP. The Plan included 401(k) provisions and the former Gulf National Bank Profit Sharing Plan. Effective January 1, 2001, the ESOP was amended to separate the 401(k) funds into the Peoples Financial Corporation 401(k) Profit Sharing Plan. The separation had no impact on the eligibility or benefits provided to participants of either plan. The 401(k) provides for a matching contribution of 75% of the amounts contributed by the employee (up to 6% of compensation). Contributions are determined by the Board of Directors and may be paid either in cash or Peoples Financial Corporation common stock. Total contributions to the plans charged to operating expense were $260,000 for each of 2020, 2019 and 2018. The ESOP was frozen to further contributions and eligibility effective January 1, 2019. Compensation expense of $7,285,390 was the basis for determining the ESOP contribution allocation to participants for 2018. The ESOP held 223,976, 237,923 and 247,627 allocated shares at December 31, 2020, 2019 and 2018, respectively. The Company established an Executive Supplemental Income Plan and a Directors’ Deferred Income Plan, which provide for pre-retirement and post-retirement benefits to certain key executives and directors. Benefits under the Executive Supplemental Income Plan are based upon the position and salary of the officer at retirement or death. Normal retirement benefits under the plan are equal to 67% of salary for the president and chief executive officer, 58% of salary for the executive vice president and 50% of salary for all other executive officers and are payable monthly over a period of fifteen years. Under the Directors’ Deferred Income Plan, the directors are given an opportunity to defer receipt of their annual directors’ fees until retirement from the board. For those who choose to participate, benefits are payable monthly for ten years beginning the first day of the month following the director’s normal retirement date. The normal retirement date is the later of the normal retirement age (65) or separation of service. Interest on deferred fees accrues at an annual rate of ten percent, compounded annually. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $17,145,869 and $17,024,779 at December 31, 2020 and 2019, respectively. The present value of accumulated benefits under these plans, using an interest rate of 4.00% and the interest ramp-up method has been accrued. The accrual amounted to $13,416,820 and $13,229,501 at December 31, 2020 and 2019, respectively, and is included in Employee and director benefit plans liabilities. The Company also has additional plans for post-retirement benefits for certain key executives. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $1,976,912 and $1,850,592 at December 31, 2020 and 2019, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.00% and the projected unit cost method has been accrued. The accrual amounted to $1,594,591 and $1,622,840 at December 31, 2020 and 2019, respectively, and is included in Employee and director benefit plans liabilities. Additionally, there are two endorsement split dollar policies, with the bank subsidiary as owner and beneficiary, which provide a guaranteed death benefit to the participants’ beneficiaries. These contracts are carried at their cash surrender value, which amounted to $318,861 and $311,088 at December 31, 2020 and 2019, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.00% and the projected unit cost method has been accrued. The accrual amounted to $105,358 and $101,613 at December 31, 2020 and 2019, respectively, and is included in Employee and director benefit plans liabilities. The Company has additional plans for post-retirement benefits for directors. The Company has acquired insurance policies, with the bank subsidiary as owner and beneficiary, which it may use as a source to pay potential benefits to the plan participants. These contracts are carried at their cash surrender value, which amounted to $167,262 and $194,270 at December 31, 2020 and 2019, respectively. The present value of accumulated benefits under these plans using an interest rate of 4.00% and the projected unit cost method has been accrued. The accrual amounted to $230,337 and $229,392 at December 31, 2020 and 2019, respectively, and is included in Employee and director benefit plans liabilities. The Company provides post-retirement health insurance to certain of its retired employees. Employees are eligible to participate in the retiree health plan if they retire from active service no earlier than age 60. In addition, the employee must have at least 25 continuous years of service with the Company immediately preceding retirement. However, any active employee who was at least age 65 as of January 1, 1995, does not have to meet the 25 years of service requirement. The Company reserves the right to modify, reduce or eliminate these health benefits. The Company has chosen to not offer this post-retirement benefit to individuals entering the employ of the Company after December 31, 2006. Employees who are eligible and enroll in the bank subsidiary’s group medical and dental health care plans upon their retirement must enroll in Medicare Parts A, B and D when first eligible upon their retirement from the bank subsidiary. This results in the bank subsidiary’s programs being secondary insurance coverage for retired employees and any dependent(s), if applicable, while Medicare Parts A and B will be their primary coverage, and Medicare Part D will be the sole and exclusive prescription drug benefit plan for retired employees. 33 The net postretirement benefit cost (income) was as follows (in thousands): For the Year Ended December 31, Net Postretirement Benefit Cost/(Income) $ 2020 61 $ 2019 (15) The accumulated postretirement benefit obligation and the balance in accumulated other comprehensive income was as follows (in thousands): December 31, Accumulated Postretirement Benefit Obligation Fair Value of Plan Assets Funded Status Balance in Accumulated Other Comprehensive Income $ $ $ 2020 3,625 $ 3,625 $ 1,453 $ Amounts recognized in Accumulated Other Comprehensive Income were as follows (in thousands): For the Year Ended December 31, Net Gain Prior Service Credit Total $ $ 2020 754 699 $ 1,453 $ The amount of accumulated other comprehensive income expected to be recognized in 2021 (in thousands): For the Year Ended December 31, Amortization of Net Gain Amortization of Prior Service Credit Total $ $ 2019 3,182 3,182 1,813 2019 1,033 780 1,813 2020 (46) (81) (127) The following is a summary of the actuarial assumptions used to determine the accumulated postretirement benefit obligation: December 31, Equivalent APBO Single Discount Rate Rate of Increase in Future Compensation Levels Current Pre 65 Health Care Trend Rate Current Post 64 Health Care Trend Rate Ultimate Health Care Trend Rate Year Ultimate Trend Rate Reached 2020 2.50% N/A 5.75% 5.75% 4.50% 2026 The following is a summary of the assumptions used to determine the net postretirement benefit cost: January 1, Equivalent APBO Single Discount Rate Rate of Increase in Future Compensation Levels Current Pre 65 Health Care Trend Rate Current Post 64 Health Care Trend Rate Ultimate Health Care Trend Rate Year Ultimate Trend Rate Reached 2020 3.20% N/A 6.00% 6.00% 4.50% 2026 2019 3.20% N/A 6.00% 6.00% 4.50% 2026 2019 4.30% N/A 6.25% 6.25% 4.50% 2026 34 The following is a reconciliation of the accumulated postretirement benefit obligation, which is included in Employee and director benefit plans liabilities (in thousands): Reconciliation of Funded Status December 31, 2019: Service cost Interest cost Losses Benefits paid Participant contributions Employer Contributions December 31, 2020 Accumulated Postretirement Benefit Obligation Fair Value of Plan Assets Funded Status $ (3,182) $ $ (3,182) (116) (101) (203) 36 (59) (116) (101) (203) (23) (36) 59 (23) $ (3,625) $ $ (3,625) The following is a reconciliation of the accumulated other comprehensive income (in thousands): December 31, 2019: Amortization payment Liability (Gain)/Loss December 31, 2020 Net Gain/Loss $ (1,032) Prior Service Cost/(Credit) (780) $ 75 203 81 Accumulated Other Comprehensive Income $ (1,812) 156 203 $ (754) $ (699) $ (1,453) The following is a reconciliation of the Accrued Postretirement Cost (in thousands): Accrued Postretirement Cost at December 31, 2019 Employer Contributions Total Net Postretirement Benefit cost Accrued Postretirement Cost at December 31, 2020 $ (4,995) (23) (61) $ (5,079) NOTE P - FAIR VALUE MEASUREMENTS AND DISCLOSURES: The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a non-recurring basis, such as impaired loans and ORE. These non-recurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments. Fair Value Hierarchy The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 - Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. 35 Following is a description of valuation methodologies used to determine the fair value of financial assets and liabilities. Cash and Due from Banks The carrying amount shown as cash and due from banks approximates fair value. Available for Sale Securities The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based by asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. Another source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. The Company’s available for sale securities for which fair value is determined through the use of such pricing models and matrix pricing are classified as Level 2 assets. If the fair value of available for sale securities is generated through model-based techniques including the discounting of estimated cash flows, such securities are classified as Level 3 assets. Held to Maturity Securities The fair value of held to maturity securities is based on quoted market prices. Other Investments The carrying amount shown as other investments approximates fair value. Federal Home Loan Bank Stock The carrying amount shown as Federal Home Loan Bank Stock approximates fair value. Loans The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets. Other Real Estate In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. Other real estate is a non-recurring Level 3 asset. Cash Surrender Value of Life Insurance The carrying amount of cash surrender value of bank-owned life insurance approximates fair value. Deposits The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates for time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates. 36 Borrowings from Federal Home Loan Bank The fair value of FHLB fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of FHLB variable rate borrowings is estimated to be its carrying value. The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of December 31, 2020 and 2019, were as follows (in thousands): December 31, 2020: U.S. Treasuries U.S. Government agencies Mortgage-backed securities Collateralized mortgage obligations States and political subdivisions Total December 31, 2019: U.S. Treasuries U.S. Government agencies Mortgage-backed securities Collateralized mortgage obligations States and political subdivisions Total Fair Value Measurements Using Total Level 1 Level 2 Level 3 $ 20,124 $ $ 20,124 $ 2,583 72,676 45,437 39,310 2,583 72,676 45,437 39,310 $ 180,130 $ $ 180,130 $ $ 55,653 $ 12,570 106,153 15,488 6,447 $ 55,653 $ 12,570 106,153 15,488 6,447 $ 196,311 $ $ 196,311 $ Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2020 and 2019 were as follows (in thousands): December 31: 2020 2019 Fair Value Measurements Using Total Level 1 Level 2 Level 3 $ 493 $ $ $ 764 493 764 Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2019 and 2018 are as follows (in thousands): December 31: 2020 2019 Fair Value Measurements Using Total Level 1 Level 2 Level 3 $ 3,475 $ $ $ 7,453 3,475 7,453 The following table presents a summary of changes in the fair value of other real estate which is measured using Level 3 inputs (in thousands): Balance, beginning of year Loans transferred to ORE Sales Write downs Balance, end of year 2020 $ 7,453 $ 753 (4,070) (661) $ 3,475 $ 2019 8,943 1,707 (2,755) (422) 7,453 37 The carrying value and estimated fair value of financial instruments, by level within the fair value hierarchy, at December 31, 2020 and 2019 are as follows (in thousands): December 31, 2020: Financial Assets: Cash and due from banks Available for sale securities Held to maturity securities Other investments Federal Home Loan Bank stock Loans, net Other real estate Cash surrender value of life insurance Financial Liabilities: Deposits: Non-interest bearing Interest bearing Borrowings from Federal Home Loan Bank December 31, 2019: Financial Assets: Cash and due from banks Available for sale securities Held to maturity securities Other investments Federal Home Loan Bank stock Loans, net Other real estate Cash surrender value of life insurance Financial Liabilities: Deposits: Non-interest bearing Interest bearing Borrowings from Federal Home Loan Bank NOTE Q - SUBSEQUENT EVENT: Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Measurements Using $ 91,542 $ 91,542 $ $ $ 91,542 180,130 75,688 2,593 2,149 273,995 3,475 19,609 170,269 380,229 969 2,593 170,269 180,130 78,474 2,149 19,609 1,316 278,898 3,475 380,733 180,130 78,474 2,593 2,149 278,898 3,475 19,609 170,269 380,733 1,316 Carrying Amount Level 1 Level 2 Level 3 Total Fair Value Measurements Using $ 29,424 $ 29,424 $ $ $ 29,424 196,311 52,231 2,643 2,129 264,742 7,453 19,381 122,592 353,551 3,526 2,643 122,592 196,311 53,130 2,129 19,381 3,730 261,710 7,453 354,141 196,311 53,130 2,643 2,129 261,710 7,453 19,381 122,592 354,141 3,730 On March 24, 2021, the Board declared a dividend of $.10 per share payable April 8, 2021 to shareholders of record on April 5, 2021. 38 39 235 Peachtree Street, NE 235 Peachtree Street, NE Suite 1800 Suite 1800 Atlanta, GA 30303 Atlanta, GA 30303 404 588 4200 wipfli.com 404 588 4200 wipfli.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors To the Shareholders and Board of Directors Peoples Financial Corporation Peoples Financial Corporation Biloxi, Mississippi Biloxi, Mississippi Opinion on the Financial Statements Opinion on the Financial Statements We have audited the accompanying consolidated statements of condition of Peoples Financial Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. We have audited the accompanying consolidated statements of condition of Peoples Financial Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the 40 235 Peachtree Street, NE Suite 1800 Atlanta, GA 30303 404 588 4200 wipfli.com critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Peoples Financial Corporation Biloxi, Mississippi Estimate of allowance for loan losses – reserves related to loans collectively evaluated for impairment As described in Notes A and C to the financial statements, the Company’s allowance for loan losses (“ALL”) totaled $4,166,000 relating to loans collectively evaluated for impairment (general reserve). The Company estimated the general reserve using the historical loss method which utilizes historical loss rates of pools of loans with similar risk characteristics applied to the respective loan pool balances. These amounts are then adjusted for certain qualitative factors related to current economic and general conditions currently observed by management. Opinion on the Financial Statements We identified the estimate of the general reserve portion of the ALL as a critical audit matter because auditing this portion of the ALL required significant auditor judgment and involved significant estimation uncertainty requiring industry knowledge and experience. We have audited the accompanying consolidated statements of condition of Peoples Financial Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The primary audit procedures we performed to address this critical audit matter included: • We tested the completeness and accuracy of the data used by management to calculate historical loss Basis for Opinion rates. • We tested the completeness and accuracy of the data used by management in determining qualitative These financial statements are the responsibility of the Company’s management. Our responsibility is to factor adjustments, including the reasonable and supportable factors, by agreeing them to internal express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm and external information. registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. consistency in relation to the Bank’s loan portfolio and local economy. • We analyzed the qualitative factors in comparison to historical periods to evaluate the directional We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. We have served as the Company’s auditor since 2006. Atlanta, Georgia March 29, 2021 Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Peoples Financial Corporation Biloxi, Mississippi To the Shareholders and Board of Directors Peoples Financial Corporation Biloxi, Mississippi Opinion on the Financial Statements Opinion on the Financial Statements We have audited the accompanying consolidated statements of operations, comprehensive income (loss), and cash flows for the year ended December 31, 2018 and the related notes to the financial statements (collectively, the financial statements) of Peoples Financial Corporation and subsidiaries (the Company). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. We have audited the accompanying consolidated statements of operations, comprehensive income (loss), and cash flows for the year ended December 31, 2018 and the related notes to the financial statements (collectively, the financial statements) of Peoples Financial Corporation and subsidiaries (the Company). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. We have served as the Company’s auditor since 2006. We have served as the Company’s auditor since 2006. Atlanta, Georgia March 13, 2019 Atlanta, Georgia March 13, 2019 42 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S FIVE-YEAR COMPARATIVE SUMMARY OF SELECTED FINANCIAL INFORMATION (In thousands except per share data) Balance Sheet Summary Total assets Available for sale securities Held to maturity securities Loans, net of unearned discount Deposits Borrowings from FHLB Shareholders' equity Summary of Operations Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income (loss) before taxes Income tax expense (benefit) Net income (loss) Per Share Data Basic and diluted earnings (loss) per share Dividends per share Book value Weighted average number of shares Selected Ratios Return on average assets Return on average equity Primary capital to average assets Risk-based capital ratios: Tier 1 Total 2020 2019 2018 2017 2016 $ 668,026 180,130 75,688 278,421 550,498 969 94,866 $ 594,702 196,311 52,231 268,949 476,143 3,526 95,123 $ 616,786 222,110 54,598 273,346 473,506 36,142 86,934 $ 650,424 245,664 51,163 280,449 529,570 11,198 89,499 $ 688,014 233,578 48,150 315,355 575,016 6,257 88,461 $ 19,308 1,581 17,727 6,002 $ $ 20,928 3,246 17,682 11,725 7,251 21,727 (2,751) 17,682 6,367 22,370 1,679 $ (2,751) $ 1,679 $ 19,750 2,658 17,092 122 16,970 6,103 22,480 593 (36) 629 $ $ 18,503 1,423 17,080 116 16,964 6,965 22,251 1,678 (1,080) 2,758 $ $ 18,493 1,025 17,468 568 16,900 6,549 23,204 245 78 167 $ ( .56) $ .34 $ .13 $ .54 $ .03 .02 19.45 4,893,151 .03 19.24 4,943,186 .02 17.59 5,031,778 .01 17.84 5,123,076 17.27 5,123,186 (.43%) (2.90%) 15.62% 0.28% 1.84% 16.27% 0.10% 0.73% 14.43% 0.41% 3.08% 14.34% 0.02% 0.19% 13.99% 21.19% 23.00% 25.08% 26.22% 24.05% 25.30% 23.87% 25.12% 21.69% 22.94% 43 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S C O R P O R AT E I N F O R M AT I O N A N D M A R K E T I N F O R M AT I O N Corporate Information: Mailing Address P. O. Box 529 Biloxi, MS 39533-0529 Website www.thepeoples.com Physical Address 152 Lameuse Street Biloxi, MS 39530 (228) 435-8205 Corporate Stock The common stock of Peoples Financial Corporation is traded on the OTCQX Best Market under the symbol: PFBX. S.E.C. Form 10-K Requests A copy of the Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, may be obtained without charge by directing a written request to: Lauri A. Wood, Chief Financial Officer and Controller Peoples Financial Corporation P. O. Box 529, Biloxi, Mississippi 39533-0529 (228) 435-8412 e-mail: lwood@thepeoples.com Shareholder Information For investor relations and general information about Peoples Financial Corporation: Investor Relations The Peoples Bank, Biloxi, Mississippi P.O. Box 529, Biloxi, MS 39533-0529 (228) 435-8761 e-mail: investorrelations@thepeoples.com For information about the common stock of Peoples Financial Corporation, including dividend reinvestment and other transfer agent inquiries: Asset Management and Trust Services Department The Peoples Bank, Biloxi, Mississippi P.O. Box 1416, Biloxi, MS 39533-1416 (228) 435-8208 e-mail: investorrelations@thepeoples.com Independent Registered Public Accounting Firm Wipfli LLP Atlanta, Georgia Market Information: The Company’s stock is traded on the OTCQX Best Market (“OTCQX”) under the symbol PFBX. As of March 19, 2021, there were approximately 391 holders of the Company’s common stock, which does not reflect persons or entities that hold our common stock in nominee or “street” name through various brokerage firms. At that date, the Company had 4,878,557 shares of common stock issued and outstanding. Year 2020 2019 Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th High $12.25 10.00 10.99 14.60 $11.65 12.75 11.95 11.00 Low Dividend per share $9.75 8.05 9.40 10.25 $11.22 11.36 10.75 10.40 $12.25 .02 $12.25 .01 .02 44 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S B R A N C H L O C AT I O N S The Peoples Bank, Biloxi, Mississippi BILOXI BRANCHES Main OTHER BRANCHES Bay St. Louis 152 Lameuse Street, Biloxi, Mississippi 39530 408 Highway 90 East, Bay St. Louis, Mississippi 39520 (228) 435-5511 (228) 897-8710 Asset Management and Trust Department Diamondhead Personal and Corporate Trust Services 5429 West Aloha Drive, Diamondhead, Mississippi 39525 758 Vieux Marche, Biloxi, Mississippi 39530 (228) 897-8714 (228) 435-8208 Cedar Lake 1740 Popps Ferry Road, Biloxi, Mississippi 39532 10491 Lemoyne Boulevard, D’Iberville, Mississippi 39540 (228) 435-8202 D’Iberville - St. Martin (228) 435-8688 Keesler Air Force Base 1507 Meadows Drive Keesler AFB, MS 39534 (228) 435-8690 Gautier 2609 Highway 90, Gautier, Mississippi 39553 (228) 497-1766 Long Beach 298 Jeff Davis Avenue, Long Beach, Mississippi 39560 West Biloxi (228) 897-8712 2560 Pass Road, Biloxi, Mississippi 39531 (228) 435-8203 Ocean Springs GULFPORT BRANCHES Armed Forces Retirement Home 2015 Bienville Boulevard, Ocean Springs, Mississippi 39564 (228) 435-8204 1800 Beach Drive, Gulfport, Mississippi 39507 Pass Christian (228) 897-8724 301 East Second Street, Pass Christian, Mississippi 39571 Downtown Gulfport 1105 30th Avenue, Gulfport, Mississippi 39501 Saucier (228) 897-8719 (228) 897-8715 17689 Second Street, Saucier, Mississippi 39574 Handsboro 0412 E. Pass Road, Gulfport, Mississippi 39507 Waveland (228) 897-8716 (228) 897-8717 470 Highway 90, Waveland, Mississippi 39576 Orange Grove 12020 Highway 49 North, Gulfport, Mississippi 39503 Wiggins (228) 467-7257 (228) 897-8718 1312 S. Magnolia Drive, Wiggins, Mississippi 39577 (228) 897-8722 45 P E O P L E S F I N A N C I A L C O R P O R A T I O N A N D S U B S I D I A R I E S B O A R D O F D I R E C T O R S A N D E X E C U T I V E O F F I C E R S BOARD OF DIRECTORS Peoples Financial Corporation Chevis C. Swetman, Chairman; President and Chief Executive Officer, Peoples Financial Corporation and The Peoples Bank, Biloxi, Mississippi Jeffrey H. O’Keefe, Vice Chairperson; Chief Executive Officer, Bradford-O’Keefe Funeral Homes, Inc. Ronald G. Barnes, President and Chief Executive Officer, Coast Electric Power Association Padrick D. Dennis, Vice-President, Specialty Contractors & Associates, Inc. George J. Sliman, III, President, SunStates Holdings, Inc. OFFICERS Peoples Financial Corporation Chevis C. Swetman, President and Chief Executive Officer A. Wes Fulmer, Executive Vice-President Ann F. Guice, First Vice-President J. Patrick Wild, Second Vice-President Evelyn R. Herrington, Vice-President and Secretary Brian J. Kozlowski, Vice-President A. Tanner Swetman, Vice-President Lauri A. Wood, Chief Financial Officer and Controller BOARD OF DIRECTORS The Peoples Bank, Biloxi, Mississippi Chevis C. Swetman, Chairman; President and Chief Executive Officer, Peoples Financial Corporation and The Peoples Bank, Biloxi, Mississippi Liz Corso Joachim, Vice Chairperson; President, Frank P. Corso, Inc. Ronald G. Barnes, President and Chief Executive Officer, Coast Electric Power Association Padrick D. Dennis, Vice-President, Specialty Contractors & Associates, Inc. A. Wes Fulmer, Executive Vice-President, Peoples Financial Corporation and The Peoples Bank, Biloxi, Mississippi Jeffrey H. O’Keefe, Chief Executive Officer, Bradford-O’Keefe Funeral Homes, Inc. Paige Reed Riley, Owner, Hillyer House George J. Sliman, III, President, SunStates Holdings, Inc. A. Tanner Swetman, Senior Vice-President, The Peoples Bank, Biloxi, Mississippi and Vice-President, Peoples Financial Corporation SENIOR MANAGEMENT The Peoples Bank, Biloxi, Mississippi Chevis C. Swetman, President and Chief Executive Officer A. Wes Fulmer, Executive Vice-President Lauri A. Wood, Senior Vice-President and Cashier Ann F. Guice, Senior Vice-President J. Patrick Wild, Senior Vice-President Evelyn R. Herrington, Senior Vice-President Brian J. Kozlowski, Senior Vice-President A. Tanner Swetman, Senior Vice-President 46 47 48 

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