CITIZENS HOLDING CO /MS/ - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2020

or

 

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

For the transition period from                      to                     

Commission File Number: 001-15375

 

 

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Mississippi		64-0666512
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
521 Main Street, Philadelphia, MS		39350
(Address of principal executive offices)		(Zip Code)

601-656-4692

(Registrant’s telephone number, including area code)

 

 

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

 

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
Common Stock, $0.20 par value		CIZN		NASDAQ Global Market

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

None

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

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

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

 

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

Number of shares outstanding of each of the issuer’s classes of common stock, as of May 6, 2020:

 

Title			Outstanding
Common Stock, $0.20 par value			5,590,131

 

 

 

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS

 

PART I.		FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements			1
		Consolidated Statements of Financial Condition, as of March 31, 2020 (Unaudited) and December 31, 2019 (Audited)			1
		Consolidated Statements of Income for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited)			2
		Consolidated Statements of Comprehensive Income for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited)			3
		Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited)			4
		Notes to Consolidated Financial Statements (Unaudited)			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			53
Item 4.		Controls and Procedures			55
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			56
Item 1A..		Risk Factors			56
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.*
Item 3.		Defaults Upon Senior Securities.*
Item 4.		Mine Safety Disclosures.*
Item 5.		Other Information.*
Item 6.		Exhibits			58
*		None or Not Applicable
SIGNATURES					59

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

 

		March 31,				December 31,
		2020				2019
ASSETS		(Unaudited)				(Audited)
Cash and due from banks		$	19,610			$	15,937
Interest bearing deposits with other banks			61,909				58,557
Federal funds sold			—				1,600
Investment securities available for sale, at fair value			482,077				464,383
Loans, net of allowance for loan losses of
$3,816 in 2020 and $3,755 in 2019			573,163				573,312
Premises and equipment, net			24,495				24,672
Other real estate owned, net			3,643				3,552
Accrued interest receivable			4,106				4,181
Cash surrender value of life insurance			25,220				25,088
Deferred tax assets, net			1,669				3,684
Other assets			20,219				20,468
TOTAL ASSETS		$	1,216,111			$	1,195,434
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand		$	195,843			$	190,406
Interest-bearing NOW and money market accounts			410,485				369,354
Savings deposits			87,422				83,065
Certificates of deposit			232,138				256,171
Total deposits			925,888				898,996
Securities sold under agreement to repurchase			159,442				170,410
Accrued interest payable			722				1,128
Deferred compensation payable			9,530				9,453
Other liabilities			1,785				2,647
Total liabilities			1,097,367				1,082,634
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, 5,582,631 shares issued and outstanding at March 31, 2020 and 5,578,131 at December 31, 2019			1,117				1,116
Additional paid-in capital			18,009				17,883
Retained earnings			94,411				94,590
Accumulated other comprehensive loss, net of tax
(expense) benefit of ($1,731) at March 31, 2020 and
$262 at December 31, 2019			5,207				(789	)
Total shareholders’ equity			118,744				112,800
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,216,111			$	1,195,434

The accompanying notes are an integral part of these financial statements.

 

1

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

		(Unaudited)
		For the Three Months
		Ended March 31,
		2020				2019
INTEREST INCOME
Interest and fees on loans		$	7,480			$	5,450
Interest on securities
Taxable			1,657				2,082
Nontaxable			340				617
Other interest			232				235
Total interest income			9,709				8,384
INTEREST EXPENSE
Deposits			1,969				1,729
Other borrowed funds			355				445
Total interest expense			2,324				2,174
NET INTEREST INCOME			7,385				6,210
PROVISION FOR LOAN LOSSES			314				195
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES			7,071				6,015
OTHER INCOME
Service charges on deposit accounts			1,049				1,097
Other service charges and fees			773				684
Other operating income			559				266
Total other income			2,381				2,047
OTHER EXPENSES
Salaries and employee benefits			4,435				3,547
Occupancy expense			1,659				1,423
Other expense			1,973				1,670
Total other expenses			8,067				6,640
INCOME BEFORE PROVISION
FOR INCOME TAXES			1,385				1,422
PROVISION FOR INCOME TAXES			225				195
NET INCOME		$	1,160			$	1,227
NET INCOME PER SHARE -Basic		$	0.21			$	0.25
-Diluted		$	0.21			$	0.25
DIVIDENDS PAID PER SHARE		$	0.24			$	0.24

The accompanying notes are an integral part of these financial statements.

 

2

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

( Unaudited)

(in thousands)

 

		For the Three Months
		Ended March 31,
		2020				2019
Net income		$	1,160			$	1,227
Other comprehensive income
Securities available-for-sale
Unrealized holding gains			7,912				8,823
Income tax effect			(1,974	)			(2,201	)
			5,938				6,622
Reclassification adjustment for gains included in net income			77				—
Income tax effect			(19	)			—
			58				—
Total other comprehensive income			5,996				6,622
Comprehensive income		$	7,156			$	7,849

The accompanying notes are an integral part of these financial statements.

 

3

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

		For the Three Months
		Ended March 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities		$	2,340			$	1,978
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale			74,267				8,336
Proceeds from sale of investment securities			37,196				—
Purchases of investment securities available for sale			(122,722	)			(63,403	)
Purchases of bank premises and equipment			(70	)			(45	)
Decrease in federal funds sold			1,600				—
Increase in interest bearing deposits with other banks			(3,352	)			(19,042	)
Proceeds from sale of other real estate			—				—
Net increase in loans			(258	)			(18,200	)
Net cash used in investing activities			(13,339	)			(92,354	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			26,892				83,938
(Decrease) increase in securities sold under agreement to repurchase			(10,968	)			7,485
Proceeds from exercise of stock options			87				—
Payment of dividends			(1,339	)			(1,177	)
Net cash provided by financing activities			14,672				90,246
Net increase (decrease) in cash and due from banks			3,673				(130	)
Cash and due from banks, beginning of period			15,937				12,592
Cash and due from banks, end of period		$	19,610			$	12,462

The accompanying notes are an integral part of these financial statements.    

 

4

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three months ended March 31, 2020

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

The interim consolidated financial statements of Citizens Holding Company (the “Company”) include the accounts of its wholly-owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with the Company, the “Corporation”). In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation.

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

Nature of Business

The Bank operates under a state bank charter and provides general banking services. As a state bank, the Bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Corporation. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central and southern counties of Mississippi and the surrounding areas. Services are provided at several branch offices.

Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

5

Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and valuation of foreclosed real estate, management obtains independent appraisals for significant properties.

While management uses available information to recognize losses on loans and to value foreclosed real estate, future additions to the allowance or adjustments to the valuation may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and valuations of foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance or to make adjustments to the valuation based on their judgments about information available to them at the time of their examination. Due to these factors, it is reasonably possible that the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.

Risks and Uncertainties

(in thousands, except for number of loans)

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as an over $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

 

6

Financial position and results of operations

The Company’s fee income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses and loss of fee income.

The Company maintains access to multiple sources of liquidity. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.

Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its consolidated statement of condition; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

 

7

Processes, controls and business continuity plan

The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy, among other measures. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days. As of April 30, 2020, the Company has executed 309 of these deferrals on outstanding loan balances of $148,120. In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of April 30, 2020, the Company has closed 386 SBA PPP loans representing $38,315 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Further, in sensitivity and service to its communities during this unprecedented time, the Company is waiving late payment and overdraft fees and has temporarily suspended collection efforts on past due loans.

Credit

The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its allowance for loan losses and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

 

8

Adoption of New Accounting Standards

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

ASU 2019-13 “Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement” (“ASU 2019-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2019-13 is effective for annual and interim periods beginning after December 15, 2019. ASU 2019-13 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. See Note 8 of the condensed footnotes to the consolidated financial statements for disclosure of the impact to date.

 

9

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU 2016-13 for certain companies. The new effective date for the Company is January 1, 2023. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU 2016-13 to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation of said models is required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

 

10

Note 2. Mergers and Acquisitions

(in thousands, except share data)

Merger with Charter Bank

Effective October 1, 2019, the Company completed its acquisition by merger of Charter Bank (“Charter”), in a transaction valued at approximately $19.7 million. The Company issued 666,101 shares of common stock and paid approximately $6.1 million in cash to Charter shareholders, excluding cash paid for fractional shares. At closing, Charter merged with and into the Bank, with the Bank being the surviving corporation in the merger. Operations of Charter will be included in the consolidated financial statements of the Corporation for periods subsequent to the acquisition date.

For further information regarding the merger with Charter, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

Note 3. Commitments and Contingent Liabilities

(in thousands)

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of March 31, 2020, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $86,167 compared to an aggregate unused balance of $94,009 at December 31, 2019. There were $2,488 of letters of credit outstanding at March 31, 2020 and $2,436 at December 31, 2019. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.

The Corporation is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provisions are made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the present time, management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not likely have a material impact on the Corporation’s consolidated financial condition or results of operations.

 

11

Note 4. Net Income per Share

(in thousands, except share and per share data)

Net income per share - basic has been computed based on the weighted average number of shares outstanding during each period. Net income per share - diluted has been computed based on the weighted average number of shares outstanding during each period plus the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Net income per share was computed as follows:

 

		For the Three Months Ended March 31,
		2020				2019
Basic weighted average shares outstanding			5,579,381				4,892,530
Dilutive effect of granted options			2,030				2,598
Diluted weighted average shares outstanding			5,581,411				4,895,128
Net income		$	1,160			$	1,227
Net income per share-basic		$	0.21			$	0.25
Net income per share-diluted		$	0.21			$	0.25

Note 5. Equity Compensation Plans

(in thousands, except per share data)

The Corporation has adopted the 2013 Incentive Compensation Plan (the “2013 Plan”), which the Corporation intends to use for future equity grants to employees, directors or consultants until the termination or expiration of the 2013 Plan.

Prior to the adoption of the 2013 Plan, the Corporation issued awards to directors from the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”), which has expired.

 

12

The following table is a summary of the stock option activity for the three months ended March 31, 2020:

 

		Directors’ Plan								2013 Plan
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Outstanding at December 31, 2019			40,500			$	21.49				—			$	—
Granted			—				—				—				—
Exercised			(4,500	)			19.18				—				—
Expired			—				—				—				—
Outstanding at March 31, 2020			36,000			$	21.78				—			$	—

The intrinsic value of options outstanding under the Directors’ Plan at March 31, 2020, was $15,480. No options were outstanding under the 2013 Plan as of March 31, 2020.

During 2019, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 23, 2020 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $161,475 and will be expensed ratably over the one-year vesting period.

Note 6. Income Taxes

(in thousands)

For the three months ended March 31, 2020 and 2019, the Company recorded a provision for income taxes totaling $225 and $195, respectively. The effective tax rate was 16.5% and 13.7% for the three months ending March 31, 2020 and 2019, respectively.

The provision for income taxes includes both federal and state income taxes and differs from the statutory rate due to favorable permanent differences primarily related to tax free municipal investments.

 

13

Note 7. Securities

(in thousands)

The amortized cost and estimated fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

March 31, 2020		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies		$	44,574			$	191			$	—			$	44,765
Mortgage backed securities			367,582				6,024				118				373,488
State, County, Municipals			62,484				931				94				63,321
Other Securities			500				3				—				503
Total		$	475,140			$	7,149			$	212			$	482,077
December 31, 2019		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies		$	97,400			$	—			$	289			$	97,111
Mortgage backed securities			308,310				640				2,050				306,900
State, County, Municipals			59,724				708				60				60,372
Total		$	465,434			$	1,348			$	2,399			$	464,383

At March 31, 2020 and December 31, 2019, securities with a carrying value of $418,632 and $413,275, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2020 and December 31, 2019 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

 

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		March 31, 2020								December 31, 2019
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Available-for-sale
Due in one year or less		$	845			$	848			$	345			$	345
Due after one year through five years			38,070				38,117				89,920				89,681
Due after five years through ten years			17,681				18,019				18,678				18,808
Due after ten years			50,962				51,605				48,181				48,649
Residential mortgage backed securities			320,902				326,742				259,309				258,415
Commercial mortgage backed securities			46,680				46,746				49,001				48,485
Total		$	475,140			$	482,077			$	465,434			$	464,383

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at March 31, 2020 and December 31, 2019.

A summary of unrealized loss information for securities available-for-sale, categorized by security type follows:

 

March 31, 2020		Less than 12 months								12 months or more								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S. government agencies		$	—			$	—			$	—			$	—			$	—			$	—
Mortgage backed securities			25,319				93				5,566				25				30,885				118
State, County, Municipal			12,380				92				651				2				13,031				94
Total		$	37,699			$	185			$	6,217			$	27			$	43,916			$	212
December 31, 2019		Less than 12 months								12 months or more								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S. government agencies		$	76,682			$	217			$	20,429			$	72			$	97,111			$	289
Mortgage backed securities			101,730				871				76,630				1,179				178,360				2,050
State, County, Municipal			8,280				37				3,731				23				12,011				60
Total		$	186,692			$	1,125			$	100,790			$	1,274			$	287,482			$	2,399

The Corporation’s unrealized losses on its obligations of United States government agencies, mortgage backed securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in the mid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Corporation does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Corporation will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at March 31, 2020 nor at December 31, 2019.

 

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Note 8. Non Purchased Loans

(in thousands, except number of loans)

“Purchased” loans are those acquired in any of the Company’s previous acquisitions. “Non Purchased” loans include all of the Company’s other loans. For purposes of Note 8, all references to “loans” mean non purchased loans.

The composition of net loans at March 31, 2020 and December 31, 2019 was as follows:

 

		March 31, 2020				December 31, 2019
Real Estate:
Land Development and Construction		$	78,059			$	66,428
Farmland			15,241				15,595
1-4 Family Mortgages			88,400				87,631
Commercial Real Estate			207,453				207,604
Total Real Estate Loans			389,153				377,258
Business Loans:
Commercial and Industrial Loans			82,207				84,611
Farm Production and Other Farm Loans			649				683
Total Business Loans			82,856				85,294
Consumer Loans:
Credit Cards			1,629				1,833
Other Consumer Loans			11,445				12,060
Total Consumer Loans			13,074				13,893
Total Gross Loans			485,083				476,445
Unearned Income			(5	)			(8	)
Allowance for Loan Losses			(3,816	)			(3,755	)
Loans, net		$	481,262			$	472,682

Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status, when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether such loans are considered past due. When interest accruals are discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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Period-end, non-accrual loans, segregated by class, were as follows:

 

		March 31, 2020				December 31, 2019
Real Estate:
Land Development and Construction		$	111			$	111
Farmland			230				232
1-4 Family Mortgages			2,054				2,160
Commercial Real Estate			8,966				9,082
Total Real Estate Loans			11,361				11,585
Business Loans:
Commercial and Industrial Loans			512				338
Farm Production and Other Farm Loans			10				10
Total Business Loans			522				348
Consumer Loans:
Other Consumer Loans			58				60
Total Consumer Loans			58				60
Total Nonaccrual Loans		$	11,941			$	11,993

 

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An aging analysis of past due loans, segregated by class, as of March 31, 2020, was as follows:

 

		Loans 30-89 Days Past Due				Loans 90 or more Days Past Due				Total Past Due Loans				Current Loans				Total Loans				Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction		$	567			$	111			$	678			$	77,381			$	78,059			$	—
Farmland			376				—				376				14,865				15,241				—
1-4 Family Mortgages			2,263				496				2,759				85,641				88,400				—
Commercial Real Estate			18,676				2,890				21,566				185,887				207,453				—
Total Real Estate Loans			21,882				3,497				25,379				363,774				389,153				—
Business Loans:
Commercial and Industrial Loans			531				296				827				81,380				82,207				12
Farm Production and Other Farm Loans			35				—				35				614				649				—
Total Business Loans			566				296				862				81,994				82,856				12
Consumer Loans:
Credit Cards			34				2				36				1,593				1,629				2
Other Consumer Loans			117				44				161				11,284				11,445				—
Total Consumer Loans			151				46				197				12,877				13,074				2
Total Loans		$	22,599			$	3,839			$	26,438			$	458,645			$	485,083			$	14

 

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An aging analysis of past due loans, segregated by class, as of December 31, 2019 was as follows:

 

		Loans 30-89 Days Past Due				Loans 90 or more Days Past Due				Total Past Due Loans				Current Loans				Total Loans				Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction		$	736			$	—			$	736			$	65,692			$	66,428			$	—
Farmland			171				39				210				15,385				15,595				39
1-4 Family Mortgages			3,116				777				3,893				83,738				87,631				147
Commercial Real Estate			8,511				2,080				10,591				197,013				207,604				18
Total Real Estate Loans			12,534				2,896				15,430				361,828				377,258				204
Business Loans:
Commercial and Industrial Loans			586				312				898				83,713				84,611				52
Farm Production and Other Farm Loans			17				—				17				666				683				—
Total Business Loans			603				312				915				84,379				85,294				52
Consumer Loans:
Credit Cards			45				18				63				1,770				1,833				18
Other Consumer Loans			172				42				214				11,846				12,060				—
Total Consumer Loans			217				60				277				13,616				13,893				18
Total Loans		$	13,354			$	3,268			$	16,622			$	459,823			$	476,445			$	274

Loans are considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at all loans over $100 that are past due loans, bankruptcy filings and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original agreement terms. If a loan is determined to be impaired and the collateral is deemed to be insufficient to fully repay the loan, a specific reserve will be established. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

 

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Impaired loans as of March 31, 2020, segregated by class, were as follows:

 

						Recorded				Recorded
		Unpaid				Investment				Investment				Total								Average
		Principal				With No				With				Recorded				Related				Recorded
		Balance				Allowance				Allowance				Investment				Allowance				Investment
Real Estate:
Land Development and Construction		$	111			$	58			$	53			$	111			$	16			$	111
Farmland			250				250				—				250				—			$	251
1-4 Family Mortgages			805				795				10				805				8			$	822
Commercial Real Estate			11,463				6,011				3,736				9,747				559			$	9,768
Total Real Estate Loans			12,629				7,114				3,799				10,913				583			$	10,952
Business Loans:
Commercial and Industrial Loans			433				233				200				433				94			$	289
Total Business Loans			433				233				200				433				94			$	289
Total Loans		$	13,062			$	7,347			$	3,999			$	11,346			$	677			$	11,241

Impaired loans as of December 31, 2019, segregated by class, were as follows:

 

						Recorded				Recorded
		Unpaid				Investment				Investment				Total								Average
		Principal				With No				With				Recorded				Related				Recorded
		Balance				Allowance				Allowance				Investment				Allowance				Investment
Real Estate:
Land Development and Construction		$	111			$	58			$	53			$	111			$	16			$	56
Farmland			252				252				—				252				—			$	261
1-4 Family Mortgages			839				740				99				839				28			$	996
Commercial Real Estate			11,506				5,949				3,840				9,789				566			$	9,337
Total Real Estate Loans			12,708				6,999				3,992				10,991				610			$	10,650
Business Loans:
Commercial and Industrial Loans			144				—				144				144				72			$	72
Total Business Loans			144				—				144				144				72			$	72
Total Loans		$	12,852			$	6,999			$	4,136			$	11,135			$	682			$	10,722

 

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The following table presents troubled debt restructurings, segregated by class:

 

						Pre-Modification				Post-Modification
March 31, 2020						Outstanding				Outstanding
		Number of Loans				Recorded Investment				Recorded Investment
Commercial real estate			3			$	4,871			$	2,427
Total			3			$	4,871			$	2,427

 

						Pre-Modification				Post-Modification
December 31, 2019						Outstanding				Outstanding
		Number of				Recorded				Recorded
		Loans				Investment				Investment
Commercial real estate			3			$	4,871			$	2,495
Total			3			$	4,871			$	2,495

Changes in the Corporation’s troubled debt restructurings are set forth in the table below:

 

		Number of Loans				Recorded Investment
Totals at January 1, 2019			3			$	2,782
Reductions due to:
Principal paydowns							(287	)
Totals at January 1, 2020			3			$	2,495
Reductions due to:
Principal paydowns							(68	)
Total at March 31, 2020			3			$	2,427

The allocated allowance for loan losses attributable to restructured loans was $-0- at March 31, 2020 and December 31, 2019. The Corporation had no commitments to lend additional funds on these troubled debt restructurings as of March 31, 2020.

 

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The Corporation utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades follows.

Grade 1. MINIMAL RISK - These loans are without loss exposure to the Corporation. This classification is reserved for only the best, well secured loans to borrowers with significant capital strength, low leverage, stable earnings and growth and other readily available financing alternatives. This type of loan would also include loans secured by a program of the government.

Grade 2. MODEST RISK - These loans include borrowers with solid credit quality and moderate risk of loss. These loans may be fully secured by certificates of deposit with another reputable financial institution, or secured by readily marketable securities with acceptable margins.

Grade 3. AVERAGE RISK - This is the rating assigned to the majority of the loans held by the Corporation. This includes loans with average loss exposure and average overall quality. These loans should liquidate through possessing adequate collateral and adequate earnings of the borrower. In addition, these loans are properly documented and are in accordance with all aspects of the current loan policy.

Grade 4. ACCEPTABLE RISK - Borrower generates sufficient cash flow to fund debt service but most working asset and capital expansion needs are provided from external sources. Profitability and key balance sheet ratios are usually close to peers but one or more may be higher than peers.

Grade 5. MANAGEMENT ATTENTION - Borrower has significant weaknesses resulting from performance trends or management concerns. The financial condition of the borrower has taken a negative turn and may be temporarily strained. Cash flow is weak but cash reserves remain adequate to meet debt service. Management weakness is evident.

Grade 6. OTHER LOANS ESPECIALLY MENTIONED (“OLEM”) - Loans in this category are fundamentally sound but possess some weaknesses. OLEM loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.

Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss. This classification does not mean that the loan will incur a total or partial loss. Substandard loans may or may not be impaired.

 

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Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment.

Grade 9. LOSS - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets.

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at March 31, 2020.

The following table details the amount of gross loans, segregated by loan grade and class, as of March 31, 2020:

 

						Special
		Satisfactory				Mention				Substandard				Doubtful				Loss				Total
		1,2,3,4				5,6				7				8				9				Loans
Real Estate:
Land Development and Construction		$	75,338			$	2,099			$	622			$	—			$	—			$	78,059
Farmland			14,163				327				751				—				—				15,241
1-4 Family Mortgages			79,860				2,346				6,168				—				26				88,400
Commercial Real Estate			169,660				20,874				16,919				—				—				207,453
Total Real Estate Loans			339,021				25,646				24,460				—				26				389,153
Business Loans:
Commercial and Industrial Loans			77,968				275				3,951				13				—				82,207
Farm Production and Other Farm Loans			636				—				3				—				10				649
Total Business Loans			78,604				275				3,954				13				10				82,856
Consumer Loans:
Credit Cards			1,593				—				36				—				—				1,629
Other Consumer Loans			11,295				45				59				41				5				11,445
Total Consumer Loans			12,888				45				95				41				5				13,074
Total Loans		$	430,513			$	25,966			$	28,509			$	54			$	41			$	485,083

 

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