PART I

 

ITEM 1 - DESCRIPTION OF BUSINESS

 

BACKGROUND AND CURRENT OPERATIONS

 

General

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

 

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

 

The Bank Subsidiary

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

 

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

 

Nonbank Subsidiary

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

 

Products And Services                    

The Bank currently offers a variety of services to individuals and small to middle market businesses within its trade area. The Company’s trade area is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary’s three most outlying locations.

 

 

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

 

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

 

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

 

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

 

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

 

Customers

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

 

Employees

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

 

Competition

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

 

 

Miscellaneous

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

 

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

 

Available Information

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

 

 

REGULATION AND SUPERVISION

 

General

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

The Dodd-Frank Act

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

 

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

 

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

 

 

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

 

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

 

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

 

Dividends

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

 

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

 

 

Capital

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

 

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

 

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

 

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minimizes disincentives to holding liquid, low-risk assets.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

New Capital Rules

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

Prompt Corrective Action

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

 

 

An institution is deemed to be:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

Interstate Banking and Branching Legislation

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

 

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

 

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

 

 

FDIC Insurance

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

 

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

 

Affiliate Transactions

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

 

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

 

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

 

 

The Community Reinvestment Act

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

 

Patriot Act

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

 

Consumer Privacy and Other Consumer Protection Laws

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

 

●

provide notice to customers regarding privacy policies and practices;

 

●

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

 

●

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

 

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

 

 

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

 

Incentive Compensation

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

 

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

 

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

 

Sarbanes-Oxley

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

 

 

Effect of Governmental Policies

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

 

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

 

Other Proposals

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

 

Summary

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

 

 

SUPPLEMENTAL STATISTICAL INFORMATION

 

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

 

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

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

 

 

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

 

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

 

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

 

Credit Risk Management and Loan Loss Experience

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

 

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

 

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

 

 

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

 

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

 

Return on Equity and Assets

 

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

 

Dividends

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

 

 

SCHEDULE I-A

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

 

For the Years Ended December 31,		2019				2018				2017
ASSETS:
Cash and due from banks		$	21,571			$	23,113			$	32,457
Available for sale securities:
Taxable securities			206,231				220,076				217,059
Non-taxable securities			8,953				13,055				15,677
Other securities			2,096				1,519				1,014
Held to maturity securities:
Taxable securities			37,987				33,864				29,389
Non-taxable securities			16,460				18,208				19,082
Other investments			2,644				2,811				2,735
Net loans (2)			262,259				268,019				284,541
Balances due from depository institutions			15,404				9,498				27,819
Other assets			49,314				51,114				50,342
TOTAL ASSETS		$	622,919			$	641,277			$	680,115
LIABILITIES AND SHAREHOLDERS' EQUITY:
Non-interest bearing deposits		$	121,829			$	121,055			$	132,748
Interest bearing deposits			378,758				401,365				435,390
Total deposits			500,587				522,420				568,138
Other liabilities			30,778				33,731				21,063
Total liabilities			531,365				556,151				589,201
Shareholders' equity			91,554				85,126				90,914
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	622,919			$	641,277			$	680,115

 

 

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

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

 

 

 

SCHEDULE I-B

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

And Interest Bearing Liabilities (In thousands)

 

For the Years Ended December 31,		2019				2018				2017
INTEREST EARNING ASSETS:
Loans (2)		$	267,263			$	273,724			$	290,329
Balances due from depository institutions			15,404				9,498				27,819
Available for sale securities:
Taxable securities			206,231				220,076				217,059
Non-taxable securities			8,953				13,055				15,677
Other securities			2,096				1,519				1,014
Held to maturity securities:
Taxable securities			37,987				33,864				29,389
Non-taxable securities			16,460				18,208				19,082
TOTAL INTEREST EARNING ASSETS		$	554,394			$	569,944			$	600,369
INTEREST BEARING LIABILITIES:
Savings and negotiable interest bearing deposits		$	291,152			$	317,197			$	353,352
Time deposits			87,606				84,168				82,038
Federal funds purchased							369				354
Borrowings from FHLB			10,242				13,044				1,883
TOTAL INTEREST BEARING LIABILITIES		$	389,000			$	414,778			$	437,627

 

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

(2) Net of unearned income. Includes nonaccrual loans

 

 

SCHEDULE I-C

Interest Earned or Paid on Major Categories of Interest Earning Assets

And Interest Bearing Liabilities (In thousands)

 

For the Years Ended December 31,		2019				2018				2017
INTEREST EARNED ON:
Loans		$	13,812			$	13,265			$	12,970
Balances due from depository institutions			346				205				420
Available for sale securities:
Taxable securities			4,788				4,349				3,298
Non-taxable securities			422				608				864
Other securities			71				22				26
Held to maturity securities:
Taxable securities			1,141				970				753
Non-taxable securities			551				580				717
TOTAL INTEREST EARNED (1)		$	21,131			$	19,999			$	19,048
INTEREST PAID ON:
Savings and negotiable interest bearing deposits		$	1,662			$	1,468			$	736
Time deposits			1,336				886				637
Federal funds purchased							10				3
Other borrowed funds			248				294				47
TOTAL INTEREST PAID		$	3,246			$	2,658			$	1,423

 

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

 

 

SCHEDULE I-D

Average Interest Rate Earned or Paid for Major Categories of

Interest Earning Assets And Interest Bearing Liabilities 

 

For the Years Ended December 31,		2019				2018				2017
AVERAGE RATE EARNED ON:
Loans			5.17	%			4.85	%			4.47	%
Balances due from depository institutions			2.25	%			2.16	%			1.51	%
Available for sale securities:
Taxable securities			2.32	%			1.98	%			1.52	%
Non-taxable securities			4.71	%			4.66	%			5.51	%
Other securities			3.39	%			1.45	%			2.56	%
Held to maturity securities:
Taxable securities			3.00	%			2.86	%			2.56	%
Non-taxable securities			3.35	%			3.19	%			3.76	%
TOTAL (weighted average rate)(1)			3.81	%			3.51	%			3.17	%
AVERAGE RATE PAID ON:
Savings and negotiable interest bearing deposits			.57	%			.46	%			.21	%
Time deposits			1.53	%			1.05	%			.78	%
Federal funds purchased							2.71	%			.85	%
Other borrowed funds			2.42	%			2.25	%			2.50	%
TOTAL (weighted average rate)			.83	%			.64	%			.33	%

 

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

 

 

SCHEDULE I-E

Net Interest Earnings and Net Yield on Interest Earning Assets  

(In thousands, except percentages)

 

For the Years Ended December 31,		2019				2018				2017
Total interest income (1)		$	21,131			$	19,999			$	19,048
Total interest expense			3,246				2,658				1,423
Net interest earnings		$	17,885			$	17,341			$	17,625
Net yield on interest earning assets			3.23	%			3.04	%			2.94	%

 

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

 

 

SCHEDULE I-F

Analysis of Changes in Interest Income and Interest Expense  

(In thousands)

 

										Increase
For the Years Ended December 31,		2019				2018				(Decrease)				Volume				Rate				Rate/Volume
INTEREST EARNED ON:
Loans (1)		$	13,812			$	13,265			$	547			$	(313	)		$	881			$	(21	)
Balances due from depository institutions			346				205				141				128				8				5
Available for sale securities:
Taxable securities			4,788				4,349				439				(273	)			760				(48	)
Non-taxable securities			422				608				(186	)			(191	)			7				(2	)
Other securities			71				22				49				8				30				11
Held to maturity securities:
Taxable securities			1,141				970				171				118				47				6
Non-taxable securities			551				580				(29	)			(56	)			30				(3	)
TOTAL INTEREST EARNED (2)		$	21,131			$	19,999			$	1,132			$	(579	)		$	1,763			$	(52	)
INTEREST PAID ON:
Savings and negotiable interest bearing deposits		$	1,662			$	1,468			$	194			$	(121	)		$	343			$	(28	)
Time deposits			1,336				886				450				36				398				16
Federal funds purchased							10				(10	)			(10	)
Other borrowed funds			248				294				(46	)			(63	)			22				(5	)
TOTAL INTEREST PAID		$	3,246			$	2,658			$	588			$	(158	)		$	763			$	(17	)

 

 

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

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

 

 

SCHEDULE I-F (continued)

Analysis of Changes in Interest Income and Interest Expense  

(In thousands)

 

										Increase
For the Years Ended December 31,		2018				2017				(Decrease)				Volume				Rate				Rate/Volume
INTEREST EARNED ON:
Loans (1)		$	13,265			$	12,970			$	295			$	(742	)		$	1,100			$	(63	)
Balances due from depository institutions			205				420				(215	)			(277	)			180				(118	)
Available for sale securities:
Taxable securities			4,349				3,298				1,051				46				991				14
Non-taxable securities			608				864				(256	)			(145	)			(134	)			23
Other securities			22				26				(4	)			13				(11	)			(6	)
Held to maturity securities:
Taxable securities			970				753				217				115				89				13
Non-taxable securities			580				717				(137	)			(33	)			(109	)			5
TOTAL INTEREST EARNED (2)		$	19,999			$	19,048			$	951			$	(1,023	)		$	2,106			$	(132	)
INTEREST PAID ON:
Savings and negotiable interest bearing deposits		$	1,468			$	736			$	732			$	(75	)		$	899			$	(92	)
Time deposits			886				637				249				17				227				5
Federal funds purchased			10				3				7				1				6
Other borrowed funds			294				47				247				279				(5	)			(27	)
TOTAL INTEREST PAID		$	2,658			$	1,423			$	1,235			$	222			$	1,127			$	(114	)

 

 

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

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

 

 

SCHEDULE II-A

Book Value of Securities Portfolio  

(In thousands)

 

December 31,		2019				2018				2017
Available for sale securities:
U.S. Treasuries, U.S. Government agencies and Mortgage-backed securities		$	189,864			$	211,014			$	230,736
States and political subdivisions			6,447				11,096				14,470
Total		$	196,311			$	222,110			$	245,206
Held to maturity securities:
U.S. Government Agencies		$	5,000			$	8,185			$	8,185
States and political subdivisions			47,231				46,413				42,978
Total		$	52,231			$	54,598			$	51,163

 

 

SCHEDULE II-B

Maturity of Securities Portfolio at December 31, 2019

And Weighted Average Yields of Such Securities

(In thousands, except percentage data)

 

		Maturity
										After one year but								After five years but
		Within one year								within five years								within ten years								After ten years
December 31, 2019		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
Available for sale securities:
U.S. Treasuries, U.S. Government agencies and Mortgage-backed securities		$	26,023				1.78	%		$	38,068				1.50	%		$	42,950				2.30	%		$	82,823				3.26	%
States and political subdivisions			2,483				3.65	%			3,824				3.73	%			140				3.50	%
Total		$	28,506				2.08	%		$	41,892				1.95	%		$	43,090				2.30	%		$	82,823				3.26	%
Held to maturity securities:
U.S. Government agencies		$								$								$	5,000				2.04	%		$
States and political subdivisions			2,718				2.62	%			17,036				3.15	%			19,209				3.08	%			8,268				3.51	%
Total		$	2,718				2.62	%		$	17,036				3.15	%		$	24,209				2.93	%		$	8,268				3.51	%

 

 

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

 

 

SCHEDULE III-A

Loan Portfolio

Loans by Type Outstanding (1) (In thousands)

 

 

December 31,		2019				2018				2017				2016				2015
Real estate, construction		$	26,188			$	34,229			$	32,211			$	32,794			$	36,347
Real estate, mortgage			198,907				197,113				206,528				226,157				243,540
Loans to finance agricultural production			92																30
Commercial and industrial			37,340				35,076				35,174				48,361				50,520
Loans to individuals for household, family and other consumer expenditures			5,254				5,694				5,310				6,264				6,548
Obligations of states and political subdivisions			1,006				956				839				1,646				428
All other loans			162				278				387				133				144
Total		$	268,949			$	273,346			$	280,449			$	315,355			$	337,557

 

(1) No foreign debt outstanding.

 

 

SCHEDULE III-B

Maturities and Sensitivity to Changes in

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

(In thousands)

 

 

		Maturity
						Over one year
December 31, 2019		One year or less				through 5 years				Over 5 years				Total
Real estate, construction		$	6,573			$	11,452			$	8,163			$	26,188
Real estate, mortgage			12,302				70,928				115,677				198,907
Agricultural											92				92
Commercial and industrial			18,021				13,623				5,696				37,340
Loans to individuals for household, family and other consumer expenditures			1,918				2,877				459				5,254
Obligations of states and political subdivisions							746				260				1,006
All other loans			88				74								162
Total		$	38,902			$	99,700			$	130,347			$	268,949
Loans with pre-determined interest rates		$	17,599			$	89,160			$	90,013			$	196,772
Loans with floating interest rates			21,303				10,540				40,334				72,177
Total		$	38,902			$	99,700			$	130,347			$	268,949

 

 

SCHEDULE III-C

Non-Performing Loans (In thousands)

 

 

December 31,		2019				2018				2017				2016				2015
Loans accounted for on a nonaccrual basis (1)		$	9,266			$	8,250			$	13,810			$	11,854			$	15,186
Loans which are contractually past due 90 or more days as to interest or principal payment, but are not included above							55												146

 

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

 

 

SCHEDULE IV-A

Summary of Loan Loss Expenses

(In thousands, except percentage data)

 

December 31,		2019				2018				2017				2016				2015
Average amount of loans outstanding (1)(2)		$	267,263			$	273,724			$	290,329			$	327,819			$	356,294
Balance of allowance for loan losses at beginning of period		$	5,340			$	6,153			$	5,466			$	8,070			$	9,206
Loans charged-off:
Commercial, financial and agricultural							372				36				509				275
Consumer and other			1,328				1,038				243				3,013				3,833
Total loans charged-off			1,328				1,410				279				3,522				4,108
Recoveries of loans:
Commercial, financial and agricultural			55				112				11				62				19
Consumer and other			140				363				839				288				371
Total recoveries			195				475				850				350				390
Net loans charged-off (recovered)			1,133				935				(571	)			3,172				3,718
Provision for loan losses charged to operating expense							122				116				568				2,582
Balance of allowance for loan losses at end of period		$	4,207			$	5,340			$	6,153			$	5,466			$	8,070
Ratio of net charge-offs during period to average loans outstanding			0.42	%			0.34	%			(.20%	)			0.97	%			1.04	%

 

(1) Net of unearned income.

(2) Includes nonaccrual loans.

 

 

SCHEDULE IV-B

Allocation of the Allowance for Loan Losses

(In thousands except percentage data)

 

		2019								2018								2017								2016								2015
						% of								% of								% of								% of								% of
						Loans to								Loans to								Loans to								Loans to								Loans to
						Total								Total								Total								Total								Total
December 31,		Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans
Real estate, construction		$	102				9			$	428				12			$	242				11			$	262				10			$	778				11
Real estate, mortgage			3,457				73				4,181				72				4,574				73				4,150				71				5,964				70
Loans to finance agricultural production							1																												1				1
Commercial and industrial			553				13				599				12				1,161				12				850				15				1,075				14
Loans to individuals for household, family and other consumer expenditures			91				2				128				2				174				2				200				2				247				2
Obligations of states and political subdivisions			1				1				1				1				1				1								1								1
All other loans			3				1				3				1				1				1				4				1				5				1
Total		$	4,207				100			$	5,340				100			$	6,153				100			$	5,466				100			$	8,070				100

 

 

SCHEDULE V

Summary of Average Deposits and Their Yields

(In thousands, except percentage data)

 

		2019								2018								2017
Years Ended December 31,		Amount				Rate				Amount				Rate				Amount				Rate
Demand deposits in domestic offices		$	121,829				N/A			$	121,055				N/A			$	132,748				N/A
Negotiable interest bearing deposits in domestic offices			230,492				.69	%			257,750				.55	%			295,413				.24	%
Savings deposits in domestic offices			60,660				.13	%			59,447				.09	%			57,939				.05	%
Time deposits in domestic offices			87,606				1.53	%			84,168				1.05	%			82,038				.78	%
Total		$	500,587				1.05	%		$	522,420				.73	%		$	568,138				.49	%

 

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

 

Remaining maturity:
3 months or less		$	35,717
Over 3 months through 6 months			7,586
Over 6 months through 12 months			10,586
Over 12 months			10,603
Total		$	64,492

 

 

SCHEDULE VI

Short Term Borrowings

(In thousands, except percentage data)

 

 

		2019				2018				2017
Balance, December 31,		$	2,500			$	35,000			$	10,000
Weighted average interest rate at December 31,			2.07	%			2.65	%			1.45	%
Maximum outstanding at any month- end during year		$	26,064			$	35,000			$	11,198
Average amount outstanding during year		$	10,242			$	13,044			$	1,883
Weighted average interest rate			2.42	%			2.27	%			2.44	%

 

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

 

 

SCHEDULE VII

Interest Sensitivity/Gap Analysis

(In thousands)

 

 

December 31, 2019:		0 - 3 Months				4 - 12 Months				1 - 5 Years				Over 5 Years				Total
ASSETS:
Loans (1)		$	77,413			$	11,532			$	83,110			$	87,628			$	259,683
Available for sale securities			5,261				23,245				41,892				125,913				196,311
Held to maturity securities			950				1,768				17,036				32,477				52,231
Totals		$	83,624			$	36,545			$	142,038			$	246,018			$	508,225
FUNDING SOURCES:
Interest bearing deposits		$	304,732			$	29,094			$	19,725			$				$	353,551
Borrowings from FHLB			2,515				44				252				715				3,526
Totals		$	307,247			$	29,138			$	19,977			$	715			$	357,077
REPRICING/MATURITY GAP:
Period		$	(223,623	)		$	7,407			$	122,061			$	245,303
Cumulative			(223,623	)			(216,216	)			(94,155	)			151,148
Cumulative Gap/Total Assets			(37.60%	)			(36.36%	)			(15.83%	)			25.42	%

 

 

---

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

 

 

Capital Resources

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

 

 

ITEM 1A - RISK FACTORS

 

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

 

 

ITEM 1B - UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2 - PROPERTIES

 

 

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

 

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

 

ITEM 3 - LEGAL PROCEEDINGS

 

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

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

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

 

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

 

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

 

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

 

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

 

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

 

											Dividend
Year	Quarter		High				Low				Per share
2019	1st		$	11.65			$	11.22			$
	2nd			12.75				11.36				.01
	3rd			11.95				10.75
	4th			11.00				10.40				.02
2018	1st		$	14.70			$	12.60			$
	2nd			14.25				13.65				.01
	3rd			14.08				12.95
	4th			13.50				11.20				.01

 

 

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

 

		2019				2018				2017				2016				2015
Balance Sheet Summary
Total assets		$	594,702			$	616,786			$	650,424			$	688,014			$	641,004
Available for sale securities			196,311				222,110				245,664				233,578				202,807
Held to maturity securities			52,231				54,598				51,163				48,150				19,025
Loans, net of unearned discount			268,949				273,346				280,449				315,355				337,557
Deposits			476,143				473,506				529,570				575,016				512,707
Borrowings from FHLB			3,526				36,142				11,198				6,257				18,409
Shareholders' equity			95,123				86,934				89,499				88,461				91,839
Summary of Operations
Interest income		$	20,928			$	19,750			$	18,503			$	18,493			$	19,311
Interest expense			3,246				2,658				1,423				1,025				875
Net interest income			17,682				17,092				17,080				17,468				18,436
Provision for loan losses							122				116				568				2,582
Net interest income after provision for loan losses			17,682				16,970				16,964				16,900				15,854
Non-interest income			6,367				6,103				6,965				6,549				6,898
Non-interest expense			22,370				22,480				22,251				23,204				28,106
Income (loss) before taxes			1,679				593				1,678				245				(5,354	)
Income tax expense (benefit)							(36	)			(1,080	)			78				(762	)
Net income (loss)		$	1,679			$	629			$	2,758			$	167			$	(4,592	)
Per Share Data
Basic and diluted earnings (loss) per share		$	.34			$	.13			$	.54			$	.03			$	( .90	)
Dividends per share			.03				.02				.01
Book value			19.24				17.59				17.84				17.27				17.93
Weighted average number of shares			4,943,186				5,031,778				5,123,076				5,123,186				5,123,186
Selected Ratios
Return on average assets			0.28	%			0.10	%			0.41	%			0.02	%			(.69%	)
Return on average equity			1.84	%			0.73	%			3.08	%			0.19	%			(4.92%	)
Primary capital to average assets			16.27	%			14.43	%			14.34	%			13.99	%			15.06	%
Risk-based capital ratios:
Tier 1			25.08	%			24.05	%			23.87	%			21.69	%			20.58	%
Total			26.22	%			25.30	%			25.12	%			22.94	%			21.83	%

 

 

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

 

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

 

 

FORWARD-LOOKING INFORMATION

Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about a company’s anticipated future financial performance. This act provides a safe harbor for such disclosure which protects the companies from unwarranted litigation if actual results are different from management expectations. This report contains forward-looking statements and reflects industry conditions, company performance and financial results. These forward-looking statements are subject to a number of factors and uncertainties which could cause the Company’s actual results and experience to differ from the anticipated results and expectations expressed in such forward-looking statements. Such factors and uncertainties include, but are not limited to: changes in interest rates and market prices, changes in local economic and business conditions, increased competition for deposits and loans, a deviation in actual experience from the underlying assumptions used to determine and establish the allowance for loan losses, changes in the availability of funds resulting from reduced liquidity, changes in government regulations and acts of terrorism, weather or other events beyond the Company’s control.

 

NEW ACCOUNTING PRONOUNCEMENTS

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

 

 

CRITICAL ACCOUNTING POLICIES

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

 

Investments

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

 

Allowance for Loan Losses

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

 

 

Other Real Estate

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, 2019, 2018 and 2017 is included in the table below.

 

RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES 

(in thousands)

 

 

Years Ended December 31,		2019				2018				2017
Interest income reconciliation:
Interest income - taxable equivalent		$	21,131			$	19,999			$	19,048
Taxable equivalent adjustment			(203	)			(249	)			(545	)
Interest income (GAAP)		$	20,928			$	19,750			$	18,503
Net interest income reconciliation:
Net interest income - taxable equivalent		$	17,885			$	17,341			$	17,625
Taxable equivalent adjustment			(203	)			(249	)			(545	)
Net interest income (GAAP)		$	17,682			$	17,092			$	17,080

 

 

OVERVIEW

 

The Company is a community bank serving the financial and trust needs of its customers in our trade area, which is defined as those portions of Mississippi, Louisiana and Alabama which are within a fifty mile radius of the Waveland, Wiggins and Gautier branches, the bank subsidiary’s three most outlying locations. Maintaining a strong core deposit base and providing commercial and real estate lending in our trade area are the traditional focuses of the Company. Growth has largely been achieved through de novo branching activity, and it is expected that these strategies will continue to be emphasized in the future.

 

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

 

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

 

 

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

 

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

 

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

 

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

 

 

RESULTS OF OPERATIONS

 

Net Interest Income

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

 

2019 as compared with 2018

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

 

 

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

 

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

 

2018 as compared with 2017

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

 

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

 

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

 

 

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

 

ANALYSIS OF AVERAGE BALANCES, INTEREST EARNED/PAID AND YIELD

(in thousands)

 

		2019												2018												2017
		Average				Interest								Average				Interest								Average				Interest
		Balance				Earned/Paid				Rate				Balance				Earned/Paid				Rate				Balance				Earned/Paid				Rate
Loans (1)(2)		$	267,263			$	13,812				5.17	%		$	273,724			$	13,265				4.85	%		$	290,329			$	12,970				4.47	%
Balances due from depository institutions			15,404				346				2.25	%			9,498				205				2.16	%			27,819				420				1.51	%
Held to maturity:
Taxable			37,987				1,141				3.00	%			33,864				970				2.86	%			29,389				753				2.56	%
Non taxable (3)			16,460				551				3.35	%			18,208				580				3.19	%			19,082				717				3.76	%
Available for sale:
Taxable			206,231				4,788				2.32	%			220,076				4,349				1.98	%			217,059				3,298				1.52	%
Non taxable (3)			8,953				422				4.71	%			13,055				608				4.66	%			15,677				864				5.51	%
Other			2,096				71				3.39	%			1,519				22				1.45	%			1,014				26				2.56	%
Total		$	554,394			$	21,131				3.81	%		$	569,944			$	19,999				3.51	%		$	600,369			$	19,048				3.17	%
Savings and interest- bearing DDA		$	291,152			$	1,662				0.57	%		$	317,197			$	1,468				0.46	%		$	353,352			$	736				0.21	%
Time deposits			87,606				1,336				1.53	%			84,168				886				1.05	%			82,038				637				0.78	%
Federal funds purchased and securities sold under agreements to repurchase															369				10				2.71	%			354				3				0.85	%
Borrowings from FHLB			10,242				248				2.42	%			13,044				294				2.25	%			1,883				47				2.50	%
Total		$	389,000			$	3,246				0.83	%		$	414,778			$	2,658				0.64	%		$	437,627			$	1,423				0.33	%
Net tax-equivalent spread											2.98	%											2.87	%											2.84	%
Net tax-equivalent margin on earning assets											3.23	%											3.04	%											2.94	%

 

 

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

(2) Includes nonaccrual loans.

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

 

 

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

(in thousands)

 

		For the Year Ended
		December 31, 2019 Compared With December 31, 2018
		Volume				Rate				Rate/Volume				Total
Interest earned on:
Loans		$	(313	)		$	881			$	(21	)		$	547
Balances due from depository institutions			128				8				5				141
Held to maturity securities:
Taxable			118				47				6				171
Non taxable			(56	)			30				(3	)			(29	)
Available for sale securities:
Taxable			(273	)			760				(48	)			439
Non taxable			(191	)			7				(2	)			(186	)
Other			8				30				11				49
Total		$	(579	)		$	1,763			$	(52	)		$	1,132
Interest paid on:
Savings and interest-bearing DDA		$	(121	)		$	343			$	(28	)		$	194
Time deposits			36				398				16				450
Federal funds purchased			(10	)											(10	)
Borrowings from FHLB			(63	)			22				(5	)			(46	)
Total		$	(158	)		$	763			$	(17	)		$	588

 

 

ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE

(in thousands)

 

		For the Year Ended
		December 31, 2018 Compared With December 31, 2017
		Volume				Rate				Rate/Volume				Total
Interest earned on:
Loans		$	(742	)		$	1,100			$	(63	)		$	295
Balances due from depository institutions			(277	)			180				(118	)			(215	)
Held to maturity securities:
Taxable			115				89				13				217
Non taxable			(33	)			(109	)			5				(137	)
Available for sale securities:
Taxable			46				991				14				1,051
Non taxable			(145	)			(134	)			23				(256	)
Other			13				(11	)			(6	)			(4	)
Total		$	(1,023	)		$	2,106			$	(132	)		$	951
Interest paid on:
Savings and interest-bearing DDA		$	(75	)		$	899			$	(92	)		$	732
Time deposits			17				227				5				249
Federal funds purchased			1				6								7
Borrowings from FHLB			279				(5	)			(27	)			247
Total		$	222			$	1,127			$	(114	)		$	1,235

 

Provision for Allowance for Loan Losses

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

 

 

Management relies on its guidelines and existing methodology to monitor the performance of its loan portfolio and to identify and estimate potential losses based on the best available information. The potential effect of declines in real estate values and actual losses incurred by the Company were key factors in our analysis. Much of the Company’s loan portfolio is collateral-dependent, requiring careful consideration of changes in the value of the collateral. Note A to the Consolidated Financial Statements discloses a summary of the accounting principles applicable to impaired and nonaccrual loans as well as the allowance for loan losses. Note C to the Consolidated Financial Statements presents additional analyses of the composition, aging, credit quality and performance of the loan portfolio as well as the transactions in the allowance for loan losses.

 

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

 

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

 

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

 

 

Non-interest Income

 

2019 as compared with 2018

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

 

2018 as compared with 2017

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

 

 

Non-interest Expense

 

2019 as compared with 2018

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

 

 

2018 as compared with 2017

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

 

Income Taxes

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

 

 

FINANCIAL CONDITION

 

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

 

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

 

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

 

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

 

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

 

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

 

 

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

 

Strength, security and stability have been the hallmark of the Company since its founding in 1985 and of its bank subsidiary since its founding in 1896. A strong capital foundation is fundamental to the continuing prosperity of the Company and the security of its customers and shareholders. The primary and risk-based capital ratios are important indicators of the strength of a Company’s capital. These figures are presented in the Five-Year Comparative Summary of Selected Financial Information. The Company has established the goal of being classified as “well-capitalized” by the banking regulatory authorities.

 

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

 

 

LIQUIDITY

 

Liquidity represents the Company’s ability to adequately provide funds to satisfy demands from depositors, borrowers and other commitments by either converting assets to cash or accessing new or existing sources of funds. Note L to the Consolidated Financial Statements discloses information relating to financial instruments with off-balance-sheet risk, including letters of credit and outstanding unused loan commitments. The Company closely monitors the potential effects of funding these commitments on its liquidity position. Management monitors these funding requirements in such a manner as to satisfy these demands and to provide the maximum return on its earning assets.

 

The Company monitors and manages its liquidity position diligently through a number of methods, including through the computation of liquidity risk targets and the preparation of various analyses of its funding sources and utilization of those sources on a monthly basis. The Company also uses proforma liquidity projections which are updated on a continuous basis in the management of its liquidity needs and also conducts contingency testing on its liquidity plan. The Company has also been approved to participate in the Federal Reserve’s Discount Window Primary Credit Program, which it intends to use only as a contingency. Management carefully monitors its liquidity needs, particularly relating to potentially volatile deposits, and the Company has encountered no problems with meeting its liquidity needs.

 

Deposits, payments of principal and interest on loans, proceeds from maturities of investment securities and earnings on investment securities are the principal sources of funds for the Company.

 

The Company also uses other sources of funds, including borrowings from the FHLB. The Company generally anticipates relying on deposits, purchases of federal funds and borrowings from the FHLB for its liquidity needs in 2020.

 

 

REGULATORY MATTERS

 

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

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

 

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

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

 

 

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

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

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

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

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

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

Notes to the Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition

(in thousands except share data)

 

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Condition (continued)

(in thousands except share data)

 

 

See Notes to Consolidated Financial Statements.

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income

(in thousands except per share data)

 

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Income (continued)

(in thousands except per share data)

 

 

 

See Notes to Consolidated Financial Statements.

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

 

 

See Notes to Consolidated Financial Statements.

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands except share and per share data)

 

 

See Notes to Consolidated Financial Statements.

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows 

(in thousands)

 

 

 

Peoples Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

 

 

See Notes to Consolidated Financial Statements.

 

 

PEOPLES FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

235 Peachtree Street NE  Suite 1800  Atlanta, GA 30303

404 588 4200 wipfli.com

 

  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors

Peoples Financial Corporation

Biloxi, Mississippi

 

Opinion on the Financial Statements

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

 

Basis for Opinion

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

 

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

 

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

 

/s/ WIPFLI LLP

 

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

 

Atlanta, Georgia

March 13, 2020

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors

Peoples Financial Corporation

Biloxi, Mississippi

 

Opinion on the Financial Statements

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

 

Basis for Opinion

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

 

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

 

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

 

/s/ PORTER KEADLE MOORE, LLC

 

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

 

Atlanta, Georgia

March 13, 2019

 

 

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

 

None.

 

 

ITEM 9A - CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

As of December 31, 2019, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

 

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

 

 

Management’s Report on Internal Controls Over Financial Reporting

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

 

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

 

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

 

 

ITEM 9B - OTHER INFORMATION

 

None.

 

 

PART III

 

 

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

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

 

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

 

 

ITEM 11 - EXECUTIVE COMPENSATION

 

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

 

 

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

 

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

 

 

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

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

 

 

ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES

 

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

 

 

PART IV

 

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) 1. Index of Financial Statements:

        See Item 8.

 

(a) 2. Index of Financial Statement Schedules:

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

 

 

(a) 3. Index of Exhibits:

 

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

 

ITEM 16 – Form 10-K SUMMARY

 

None

 

 

SIGNATURES

 

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

 

	PEOPLES FINANCIAL CORPORATION (Registrant)
	Date:	March 13, 2020
	BY:	/s/ Chevis C. Swetman
		Chevis C. Swetman, Chairman of the Board
		(principal executive officer)

 

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

 

	BY:	/s/ Chevis C. Swetman
	Date:	March 13, 2020
		Chevis C. Swetman, Chairman of the Board
		(principal executive officer)

 

 

BY:			BY:	/s/ Dan Magruder
Date:			Date:	March 13, 2020
	Drew Allen, Director			Dan Magruder, Director
			BY:	/s/ Jeffrey H. O’Keefe
BY:	/s/ Rex E. Kelly
			Date:	March 13, 2020
Date:	March 13, 2020
				Jeffrey H. O’Keefe, Director
	Rex E. Kelly, Director
BY:	/s/ George J. Sliman, III		BY:	/s/ Lauri A. Wood
Date:	March 13, 2020		Date:	March 13, 2020
	George J. Sliman, III, Director			Lauri A. Wood, Chief Financial Officer (principal financial and accounting officer)

 

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