CITIZENS HOLDING CO /MS/ - Quarter Report: 2021 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

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, 2021

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

For the transition period from

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		(IRS Employer
In Company or organization)		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.

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 5, 2021:


Title	Outstanding
Common Stock, $0.20 par value		5,595,320

Table of Contents

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	1

Item 1.	Consolidated Financial Statements	1

	Consolidated Statements of Financial Condition, as of March 31, 2021 (Unaudited) and December 31, 2020 (Audited)	1

	Consolidated Statements of Income for the Three months ended March 31, 2021 (Unaudited) and 2020 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the Three months ended March 31, 2021 (Unaudited) and 2020 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2021 (Unaudited) and 2020 (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	55

Item 4.	Controls and Procedures	57

PART II.	OTHER INFORMATION	58

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 6.	Exhibits	58

SIGNATURES		59

Table of Contents

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,
	2021			2020
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	26,667		$	16,840
Interest bearing deposits with other banks		25,009			25,468
Investment securities available for sale, at fair value		774,249			678,749
Loans, net of allowance for loan losses of $4,772 in 2021 and $4,735 in 2020		634,401			647,521
Premises and equipment, net		25,634			25,630
Other real estate owned, net		4,884			3,073
Accrued interest receivable		5,665			5,983
Cash surrender value of life insurance		25,970			25,814
Deferred tax assets, net		5,844			1,548
Identifiable intangible assets, net		13,633			13,660
Other assets		6,391			6,406

TOTAL ASSETS	$	1,548,347		$	1,450,692

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing deposits	$	284,266		$	276,033
Interest bearing deposits		945,355			819,156

Total deposits		1,229,621			1,095,189
Securities sold under agreement to repurchase		197,709			196,272
Federal Home Loan Bank (FHLB) advances		—			25,000
Accrued interest payable		432			522
Deferred compensation payable		9,736			9,665
Other liabilities		4,369			4,496

Total liabilities		1,441,867			1,331,144
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, 5,587,070 shares issued and outstanding at March 31, 2021 and at December 31, 2020		1,118			1,118
Additional paid-in capital		18,176			18,134
Accumulated other comprehensive (loss) income, net of tax benefit (expense) of $3,168 at March 31, 2021 and ($1,376) at December 31, 2020		(9,528	)		4,138
Retained earnings		96,714			96,158

Total shareholders’ equity		106,480			119,548

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,548,347		$	1,450,692

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

Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)


	For the Three Months
	Ended March 31,
	2021		2020
INTEREST INCOME
Interest and fees on loans	$	8,131	$	7,480
Interest on securities
Taxable		262		1,657
Nontaxable		671		340
Other interest		15		232

Total interest income		9,079		9,709
INTEREST EXPENSE
Deposits		1,266		1,969
Other borrowed funds		180		355

Total interest expense		1,446		2,324

NET INTEREST INCOME		7,633		7,385
PROVISION FOR LOAN LOSSES		87		314

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,546		7,071
OTHER INCOME
Service charges on deposit accounts		814		1,049
Other service charges and fees		975		773
Other operating income		1,443		559

Total other income		3,232		2,381

OTHER EXPENSES
Salaries and employee benefits		4,568		4,435
Occupancy expense		1,817		1,659
Other expense		2,083		1,973

Total other expenses		8,468		8,067

INCOME BEFORE PROVISION FOR INCOME TAXES		2,310		1,385
PROVISION FOR INCOME TAXES		413		225

NET INCOME	$	1,897	$	1,160

NET INCOME PER SHARE -Basic	$	0.34	$	0.21

-Diluted	$	0.34	$	0.21

DIVIDENDS PAID PER SHARE	$	0.24	$	0.24

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

Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(in thousands)


	For the Three Months
	Ended March 31,
	2021			2020
Net income	$	1,897		$	1,160
Other comprehensive (loss) income
Securities available-for-sale
Unrealized holding (losses) gains		(18,735	)		7,912
Income tax effect		4,674			(1,974	)

Net unrealized (losses) gains		(14,061	)		5,938
Reclassification adjustment for gains included in net income		526			77
Income tax effect		(131	)		(19	)

Net gains included in net income		395			58

Total other comprehensive (loss) income		(13,666	)		5,996

Comprehensive (loss) income	$	(11,771	)	$	7,156

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

Table of Contents

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	For the Three Months
	Ended March 31,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	4,845		$	2,340
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		77,734			74,267
Proceeds from sale of investment securities		206,125			37,196
Purchases of investment securities available for sale		(400,134	)		(122,722	)
Purchases of bank premises and equipment		(259	)		(70	)
Decrease in federal funds sold		—			1,600
Decrease (increase) in interest bearing deposits with other banks		460			(3,352	)
Proceeds from sale of other real estate owned		364			—
Net decrease (increase) in loans		11,165			(258	)

Net cash used in investing activities		(104,545	)		(13,339	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		134,432			26,892
Increase (decrease) in securities sold under agreement to repurchase		1,436			(10,968	)
Proceeds from exercise of stock options		—			87
Payment of FHLB advances		(25,000	)		—
Payment of dividends		(1,341	)		(1,339	)

Net cash provided by financing activities		109,527			14,672

Net increase in cash and due from banks		9,827			3,673
Cash and due from banks, beginning of period		16,840			15,937

Cash and due from banks, end of period	$	26,667		$	19,610

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

Table of Contents

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three months ended March 31, 2021

(Unaudited)

Note 1. Nature of Business and Summary of Significant Accounting Policies

(in thousands, except share and per share data)

Nature of Business

Citizens Holding Company (referred to herein as the “Company”) owns and operates The Citizens Bank of Philadelphia (the “Bank”). In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. As a state bank, the Bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Company. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central Mississippi, along with southern and northern counties of Mississippi and their surrounding areas. Services are provided at multiple branch offices.

Risks and Uncertainties

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 three separate stimulus bills, including the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act totaling approximately $4.8 trillion. The goal of these are 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 packages also include extensive emergency funding for hospitals and providers. In addition to the general impact of

COVID-19,

certain provisions of the these acts 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.

Table of Contents

Financial position and results of operations

The Company’s fee income has been, and could continue to be, reduced due to

COVID-19. Due

to the amount of stimulus and unemployment measures from the federal government, overdraft fees continue to be reduced significantly from

pre-pandemic

levels. 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.

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 have been adversely impacted due to loss of fee income, net interest margin compression along with the significant increase in assets from all the federal government stimulus. For a detailed discussion of the Company’s capital ratios see Capital Resources on page 43.

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, and rates for short term funding have recently been at historically lows. If funding costs start to elevate, 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 statements of financial condition. 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 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.

Table of Contents

Lending operations and accommodations to borrowers

(dollar amounts in thousands)

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 originated before June 5, 2020 have a

two-year

term while PPP loans originated after June 5, 2020 have a

five-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. The Company currently has 394 loans with a total balance of $23,649 still outstanding at March 31, 2021. 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. Additionally, the Consolidated Appropriations Act of 2021 appropriated a further $

284

billion to the PPP, and permitted certain PPP borrowers to make “second draw” loans. The Company began submitting PPP applications on behalf of and originating loans to qualified small businesses under this third round of PPP in January 2021 once allowable by the SBA.

Credit

The Company has worked with customers directly affected by

COVID-19. The

Company offered short-term assistance in accordance with regulatory guidelines. However, as of March 31, 2021, the Company had no customer with deferments. While this is a positive trend, the Company makes no representations that there could not be future credit losses related to

COVID-19.

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, 2021 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 “Company”). 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.

Table of Contents

For further information and significant accounting policies of the Company, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 12, 2021.

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.

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.

Adoption of New Accounting Standards

In December 2019, the FASB issued Accounting Standards Update

No. 2019-12,

Income Taxes (Topic 740)

: Simplifying the Accounting for Income Taxes to simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. ASU

2019-12

was effective for the Company on January 1, 2021 and did not have a material impact on the Company’s financial statements.

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

Table of Contents

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.

Note 2. Commitments and Contingent Liabilities

(in thousands)

In the ordinary course of business, the Company 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, 2021, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $151,662 compared to an aggregate unused balance of $138,185 at December 31, 2020. There were $4,437 of letters of credit outstanding at March 31, 2021 and $4,565 at December 31, 2020. 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 Company does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.

The Company 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 Company’s consolidated financial condition or results of operations.

Table of Contents

Note 3. 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,
	2021		2020
Basic weighted average shares outstanding		5,578,820		5,579,381
Dilutive effect of granted options		994		2,030

Diluted weighted average shares outstanding		5,579,814		5,581,411

Net income	$	1,897	$	1,160
Net income per share-basic	$	0.34	$	0.21
Net income per share-diluted	$	0.34	$	0.21

Note 4. Equity Compensation Plans

(in thousands, except per share data)

The Company has adopted the 2013 Incentive Compensation Plan (the “2013 Plan”), which the Company 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 Company issued awards to directors from the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”), which has expired.

Table of Contents

The following table is a summary of the stock option activity for the three months ended March 31, 2021:


	Directors’ Plan				2013 Plan
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2020		19,500	$	19.42		—	$	—
Granted		—		—		—		—
Exercised		—		—		—		—
Expired		—		—		—		—

Outstanding at March 31, 2021		19,500	$	19.42		—	$	—

The intrinsic value of options outstanding under the Directors’ Plan at March 31, 2021, was $9. No options were outstanding under the 2013 Plan as of March 31, 2021.

During 2020, the Company’s directors received restricted stock grants totaling

8,250

shares of common stock under the 2013 Plan. These grants vest over a

one-year

period ending April 29, 2021 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $

169

and will be expensed ratably over the

one-year

vesting period.

Note 5. Income Taxes

(in thousands)

For the three months ended March 31, 2021 and 2020, the Company recorded a provision for income taxes totaling $413 and $225, respectively. The effective tax rate was 17.88% and 16.50% for the three months ending March 31, 2021 and 2020, 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.

Table of Contents

Note 6. 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 were as follows:


March 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	11,318	$	180	$	263	$	11,235
Mortgage backed securities		609,285		999		11,468		598,816
State, County, Municipals		165,842		2,012		4,156		163,698
Other securities		500		—		—		500

Total	$	786,945	$	3,191	$	15,887	$	774,249


December 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	11,870	$	191	$	—	$	12,061
Mortgage backed securities		560,033		4,550		2,600		561,983
State, County, Municipals		100,823		3,410		36		104,197
Other securities		500		8		—		508

Total	$	673,226	$	8,159	$	2,636	$	678,749

At March 31, 2021 and December 31, 2020, securities with a carrying value of $570,204 and $558,955, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

Table of Contents

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2021 and December 31, 2020 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.


	March 31, 2021				December 31, 2020
	Amortized		Estimated		Amortized		Estimated
Available-for-sale	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years		9,940		10,206		3,594		3,701
Due after five years through ten years		13,370		13,934		20,538		21,446
Due after ten years		154,350		151,293		89,061		91,619
Residential mortgage backed securities		591,951		581,017		536,215		537,027
Commercial mortgage backed securities		17,334		17,799		23,818		24,956

Total	$	786,945	$	774,249	$	673,226	$	678,749

The tables below show the Company’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, 2021 and December 31, 2020.

Table of Contents

A summary of unrealized loss information for securities

available-for-sale,

categorized by security type follows:


March 31, 2021	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	4,705	$	263	$	—	$	—	$	4,705	$	263
Mortgage backed securities		501,437		11,468		—		—		501,437		11,468
State, County, Municipal		97,153		4,156		—		—		97,153		4,156

Total	$	603,295	$	15,887	$	—	$	—	$	603,295	$	15,887


December 31, 2020	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Mortgage backed securities	$	278,162	$	2,600	$	—	$	—	$	278,162	$	2,600
State, County, Municipal		6,541		36		—		—		6,541		36

Total	$	284,703	$	2,636	$	—	$	—	$	284,703	$	2,636

The Company’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. Additionally, with mortgage rates at historical lows, all of the mortgage backed securities above are prepaying faster than expected at March 31, 2021, therefore causing the book yields to decrease and market yields to lower along with them. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Company 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 Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. The Company has determined that none of the securities were other-than-temporarily impaired at March 31, 2021 nor at December 31, 2020.

Table of Contents

Note 7. 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, 2021 and December 31, 2020 was as follows:


	March 31, 2021			December 31, 2020
Real Estate:
Land Development and Construction	$	50,209		$	42,677
Farmland		14,154			15,616
1-4 Family Mortgages		91,915			94,280
Commercial Real Estate		302,306			306,875

Total Real Estate Loans		458,584			459,448
Business Loans:
Commercial and Industrial Loans (1)		111,323			115,679
Farm Production and Other Farm Loans		491			541

Total Business Loans		111,814			116,220
Consumer Loans:
Credit Cards		1,710			1,878
Other Consumer Loans		10,118			10,929

Total Consumer Loans		11,828			12,807

Total Gross Loans		582,226			588,475
Unearned Income		(1	)		(1	)
Allowance for Loan Losses		(4,772	)		(4,735	)

Loans, net	$	577,453		$	583,739

(1)	Includes PPP loans of $23,649 and $29,523 as of March 31, 2021 and December 31, 2020, respectively.

Table of Contents

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.

Period-end,

non-accrual

loans, segregated by class, were as follows:


	March 31, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	192	$	308
Farmland		275		287
1-4 Family Mortgages		1,836		1,809
Commercial Real Estate		3,791		5,600

Total Real Estate Loans		6,094		8,004
Business Loans:
Commercial and Industrial Loans		476		413
Farm Production and Other Farm Loans		7		9

Total Business Loans		483		422
Consumer Loans:
Other Consumer Loans		26		33

Total Consumer Loans		26		33

Total Nonaccrual Loans	$	6,603	$	8,459

Table of Contents

An aging analysis of past due loans, segregated by class, as of March 31, 2021, 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	$	13	$	—	$	13	$	50,196	$	50,209	$	—
Farmland		60		75		135		14,019		14,154		—
1-4 Family Mortgages		1,083		89		1,172		90,743		91,915		—
Commercial Real Estate		184		814		998		301,308		302,306		—

Total Real Estate Loans		1,340		978		2,318		456,266		458,584		—
Business Loans:
Commercial and Industrial Loans		106		472		578		110,745		111,323		—
Farm Production and Other Farm Loans		11		—		11		480		491		—

Total Business Loans		117		472		589		111,225		111,814		—
Consumer Loans:
Credit Cards		19		10		29		1,681		1,710		10
Other Consumer Loans		40		—		40		10,078		10,118		—

Total Consumer Loans		59		10		69		11,759		11,828		10

Total Loans	$	1,516	$	1,460	$	2,976	$	579,250	$	582,226	$	10

Table of Contents

An aging analysis of past due loans, segregated by class, as of December 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	$	112	$	—	$	112	$	42,565	$	42,677	$	—
Farmland		183		75		258		15,358		15,616		—
1-4 Family Mortgages		1,301		246		1,547		92,733		94,280		—
Commercial Real Estate		1,407		700		2,107		304,768		306,875		—

Total Real Estate Loans		3,003		1,021		4,024		455,424		459,448		—
Business Loans:
Commercial and Industrial Loans		97		405		502		115,177		115,679		5
Farm Production and Other Farm Loans		2		—		2		539		541		—

Total Business Loans		99		405		504		115,716		116,220		5
Consumer Loans:
Credit Cards		25		9		34		1,844		1,878		9
Other Consumer Loans		66		—		66		10,863		10,929		—

Total Consumer Loans		91		9		100		12,707		12,807		9

Total Loans	$	3,193	$	1,435	$	4,628	$	583,847	$	588,475	$	14

Loans are considered impaired when, based on current information and events, it is probable that the Company 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.

Table of Contents

Impaired loans as of March 31, 2021, segregated by class, were as follows:


	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	192	$	192	$	—	$	192	$	—	$	250
Farmland		35		35		—		35		—		73
1-4 Family Mortgages		1,105		1,105		—		1,105		—		1,061
Commercial Real Estate		4,157		1,463		2,501		3,964		766		4,896

Total Real Estate Loans		5,489		2,795		2,501		5,296		766	$	6,280
Business Loans:
Commercial and Industrial Loans		304		—		304		304		108	$	359

Total Business Loans		304		—		304		304		108	$	359

Total Loans	$	5,793	$	2,795	$	2,805	$	5,600	$	874	$	6,639

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


	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	308	$	256	$	52	$	308	$	13	$	210
Farmland		111		111		—		111		—		182
1-4 Family Mortgages		1,016		1,012		4		1,016		1		928
Commercial Real Estate		6,021		3,323		2,504		5,827		768		7,808

Total Real Estate Loans		7,456		4,702		2,560		7,262		782	$	9,127
Business Loans:
Commercial and Industrial Loans		413		54		359		413		125	$	279

Total Business Loans		413		54		359		413		125	$	279

Total Loans	$	7,869	$	4,756	$	2,919	$	7,675	$	907	$	9,405

Table of Contents

The Company did not have any new troubled debt restructurings as of March 31, 2021 or December 31, 2020.

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


	Number of Loans		Recorded Investment
Totals at January 1, 2020		3	$	2,495
Reductions due to:
Principal paydowns				(382	)

Totals at December 31, 2020		3	$	2,113
Reductions due to:
Principal paydowns				(39	)
Reclassification to OREO		2		(1,788	)

Total at March 31, 2021		1	$	286

The allocated allowance for loan losses attributable to restructured loans was

$-0-

at March 31, 2021 and December 31, 2020. The Company had no commitments to lend additional funds on these troubled debt restructurings as of March 31, 2021.

Table of Contents

The Company 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 Company. 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 Company. 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.

Table of Contents

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, 2021.

The following table details the amount of gross loans, segregated by loan grade and class, as of March 31, 2021:


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	48,774	$	785	$	650	$	—	$	—	$	50,209
Farmland		13,394		128		632		—		—		14,154
1-4 Family Mortgages		82,707		3,451		5,757		—		—		91,915
Commercial Real Estate		257,164		23,443		21,699		—		—		302,306

Total Real Estate Loans		402,039		27,807		28,738		—		—		458,584
Business Loans:
Commercial and Industrial Loans		104,909		4,443		1,966		—		5		111,323
Farm Production and Other Farm Loans		466		—		18		—		7		491

Total Business Loans		105,375		4,443		1,984		—		12		111,814
Consumer Loans:
Credit Cards		1,681		—		29		—		—		1,710
Other Consumer Loans		9,997		63		39		19		—		10,118

Total Consumer Loans		11,678		63		68		19		—		11,828

Total Loans	$	519,092	$	32,313	$	30,790	$	19	$	12	$	582,226

Table of Contents

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


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	41,775	$	120	$	782	$	—	$	—	$	42,677
Farmland		14,801		95		720		—		—		15,616
1-4 Family Mortgages		85,203		3,210		5,867		—		—		94,280
Commercial Real Estate		258,339		35,769		12,767		—		—		306,875

Total Real Estate Loans		400,118		39,194		20,136		—		—		459,448
Business Loans:
Commercial and Industrial Loans		109,525		4,409		1,738		—		7		115,679
Farm Production and Other Farm Loans		512		—		20		—		9		541

Total Business Loans		110,037		4,409		1,758		—		16		116,220
Consumer Loans:
Credit Cards		1,845		—		33		—		—		1,878
Other Consumer Loans		10,820		43		41		25		—		10,929

Total Consumer Loans		12,665		43		74		25		—		12,807

Total Loans	$	522,820	$	43,646	$	21,968	$	25	$	16	$	588,475

Table of Contents

Note 8. Purchased Loans

(in thousands)

For purposes of this Note 8, all references to “loans” means purchased loans.

The following is a summary of purchased loans:


	March 31, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	5,606	$	6,153
Farmland		476		520
1-4 Family Mortgages		20,089		23,306
Commercial Real Estate		23,273		24,237

Total Real Estate Loans		49,444		54,216
Business Loans:
Commercial and Industrial Loans		6,176		7,871
Farm Production and Other Farm Loans		518		755

Total Business Loans		6,694		8,626
Consumer Loans:
Other Consumer Loans		810		940

Total Consumer Loans		810		940

Total Purchased Loans	$	56,948	$	63,782

Table of Contents

Period-end,

non-accrual

loans, segregated by class, were as follows:


	March 31, 2021		December 31, 2020
Real Estate:
1-4 Family Mortgages	$	170	$	73

Total Real Estate Loans		170		73
Business Loans:
Commercial and Industrial Loans		16		18

Total Business Loans		16		18
Consumer Loans:
Other Consumer Loans		—		14

Total Consumer Loans		—		14

Total Nonaccrual Loans	$	186	$	105

Table of Contents

An age analysis of past due loans, segregated by class of loans, as of March 31, 2021, is 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	$	—	$	—	$	—	$	5,606	$	5,606	$	—
Farmland		—		—		—		476		476		—
1-4 Family Mortgages		—		162		162		19,927		20,089		39
Commercial Real Estate		—		—		—		23,273		23,273		—

Total Real Estate Loans		—		162		162		49,282		49,444		39
Business Loans:
Commercial and Industrial Loans		48		—		48		6,128		6,176		—
Farm Production and Other Farm Loans		—		—		—		518		518		—

Total Business Loans		48		—		48		6,646		6,694		—
Consumer Loans:
Other Consumer Loans		18		—		18		792		810		—

Total Consumer Loans		18		—		18		792		810		—

Total Loans	$	66	$	162	$	228	$	56,720	$	56,948	$	39

Table of Contents

An age analysis of past due loans, segregated by class of loans, as of December 31, 2020, is 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	$	332	$	—	$	332	$	5,821	$	6,153	$	—
Farmland		—		—		—		520		520		—
1-4 Family Mortgages		401		—		401		22,905		23,306		—
Commercial Real Estate		—		—		—		24,237		24,237		—

Total Real Estate Loans		733		—		733		53,483		54,216		—
Business Loans:
Commercial and Industrial Loans		849		—		849		7,022		7,871		—
Farm Production and Other Farm Loans		—		—		—		755		755		—

Total Business Loans		849		—		849		7,777		8,626		—
Consumer Loans:
Other Consumer Loans		35		—		35		905		940		—

Total Consumer Loans		35		—		35		905		940		—

Total Loans	$	1,617	$	—	$	1,617	$	62,165	$	63,782	$	—

Table of Contents

The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of March 31, 2021:


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	4,832	$	754	$	20	$	—	$	—	$	5,606
Farmland		315		161		—		—		—		476
1-4 Family Mortgages		17,532		1,870		687		—		—		20,089
Commercial Real Estate		21,704		1,286		283		—		—		23,273

Total Real Estate Loans		44,383		4,071		990		—		—		49,444
Business Loans:
Commercial and Industrial Loans		5,612		441		123		—		—		6,176
Farm Production and Other Farm Loans		518		—		—		—		—		518

Total Business Loans		6,130		441		123		—		—		6,694
Consumer Loans:
Other Consumer Loans		741		23		45		—		1		810

Total Consumer Loans		741		23		45		—		1		810

Total Loans	$	51,254	$	4,535	$	1,158	$	—	$	1	$	56,948

The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of December 31, 2020:


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	5,364	$	766	$	23	$	—	$	—	$	6,153
Farmland		357		163		—		—		—		520
1-4 Family Mortgages		21,116		1,655		535		—		—		23,306
Commercial Real Estate		22,469		1,484		284		—		—		24,237

Total Real Estate Loans		49,306		4,068		842		—		—		54,216
Business Loans:
Commercial and Industrial Loans		7,121		397		353		—		—		7,871
Farm Production and Other Farm Loans		755		—		—		—		—		755

Total Business Loans		7,876		397		353		—		—		8,626
Consumer Loans:
Other Consumer Loans		862		29		35		—		14		940

Total Consumer Loans		862		29		35		—		14		940

Total Loans	$	58,044	$	4,494	$	1,230	$	—	$	14	$	63,782

Table of Contents

Loans purchased in business combinations that exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, such that it was probable that all contractually required payments would not be collected, were as follows:


	March 31, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	6	$	8
1-4 Family Mortgages		—		25

Total Real Estate Loans		6		33

Business Loans:
Commercial and Industrial Loans		307		305

Total Business Loans		307		305
Total Purchased Credit Deteriorated Loans	$	313	$	338

Non-accrual

loans of

$-0-

and 25 are included in the

1-4

Family Mortgages at March 31, 2021 and December 31, 2020, respectively.

The following table presents the fair value of loans determined to be impaired at the time of acquisition:


	Total Purchased Credit Deteriorated Loans
Contractually-required principal	$	993
Nonaccretable difference		(68	)

Cash flows expected to be collected		925
Accretable yield		(36	)

Fair Value	$	889

There were

loans classified as TDRs purchased as part of the acquisition of Charter.

Table of Contents

The following table presents the fair value of loans purchased from Charter as of the October 1, 2019 acquisition date:


	October 1, 2019
At acquisition date:
Contractually-required principal	$	104,127
Nonaccretable difference		(68	)
Cash flows expected to be collected		104,059
Accretable yield		(394	)

Fair Value	$	103,665

Note 9. Allowance for Loan Losses

(in thousands)

The allowance for loan losses is established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.

The allowance on the majority of the loan portfolio is calculated using a historical chargeoff percentage applied to the current loan balances by loan segment. This historical period is the average of the previous twenty quarters with the most current quarters weighted more heavily to show the effect of the most recent chargeoff activity. This percentage is also adjusted for economic factors such as local unemployment and general business conditions, both local and nationwide.

The group of loans that are considered to be impaired are individually evaluated for possible loss and a specific reserve is established to cover any loss contingency. Loans that are determined to be a loss with no benefit of remaining in the portfolio are charged off to the allowance. These specific reserves are reviewed periodically for continued impairment and adequacy of the specific reserve and are adjusted when necessary.

Table of Contents

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2021:


March 31, 2021	Real Estate			Business Loans		Consumer		Total
Beginning Balance, January 1, 2021	$	3,885		$	611	$	239	$	4,735
Provision for loan losses		33			22		32		87
Chargeoffs		31			31		35		97
Recoveries		36			3		8		47

Net (recoveries) chargeoffs		(5	)		28		27		50

Ending Balance	$	3,923		$	605	$	244	$	4,772

Period end allowance allocated to:
Loans individually evaluated for impairment	$	766		$	108	$	—	$	874
Loans collectively evaluated for impairment		3,157			497		244		3,898

Ending Balance, March 31, 2021	$	3,923		$	605	$	244	$	4,772

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020:


March 31, 2020	Real Estate		Business Loans			Consumer		Total
Beginning Balance, January 1, 2020	$	3,075	$	371		$	309	$	3,755
Provision for loan losses		184		3			127		314
Chargeoffs		222		23			55		300
Recoveries		14		24			9		47

Net (recoveries) chargeoffs		208		(1	)		46		253

Ending Balance	$	3,051	$	375		$	390	$	3,816

Period end allowance allocated to:
Loans individually evaluated for impairment	$	582	$	95		$	—	$	677
Loans collectively evaluated for impairment		2,469		280			390		3,139

Ending Balance, March 31, 2020	$	3,051	$	375		$	390	$	3,816

Table of Contents

The Company’s recorded investment in loans as of March 31, 2021 and December 31, 2020 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:


March 31, 2021	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	5,296	$	304	$	—	$	5,600
Loans collectively evaluated for general impairment		502,726		117,897		12,638		633,261
Acquired with deteriorated credit quality		6		307		—		313

	$	508,028	$	118,508	$	12,638	$	639,174


December 31, 2020	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	7,262	$	413	$	—	$	7,675
Loans collectively evaluated for general impairment		506,368		124,128		13,748		644,244
Acquired with deteriorated credit quality		33		305		—		338

	$	513,663	$	124,846	$	13,748	$	652,257

Table of Contents

Note 10. Premises and Equipment

(in thousands)

The Company leases certain premises and equipment under operating leases. At March 31, 2021, the Company had lease liabilities and

Right-of-Use

(“ROU”) assets totaling $2,630 related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the three months ended March 31, 2021, the weighted average remaining lease term for operating leases was 1 year and the weighted average discount rate used in the measurement of operating lease liabilities was 3.19%.

Lease costs were as follows:


(in thousands)	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Operating lease cost	$	117	$	92
Short-term lease cost		6		6
Variable lease cost		—		—

	$	123	$	98

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the three months ended March 31, 2021.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:


(in thousands)	Three Months Ended March 31, 2021
Lease payments due:
Within one year	$	2,218
After one year but within two years		121
After two years but within three years		63
After three year but within four years		64
After four years but within five years		65
After five years		123

Total undiscounted cash flows		2,654
Discount on cash flows		(24	)

Total lease liability	$	2,630

Table of Contents

Note 11. Other Intangible Assets

(in thousands)

The following table provides a summary of finite-lived intangible assets as of the dates presented:


	March 31, 2021			December 31, 2020
Core deposit intangible	$	630		$	739
Accumulated amortization		(27	)		(109	)

Total finite-lived intangible assets	$	603		$	630

Core deposit intangible amortization expense for the period ended March 31, 2021 and period ended December 31, 2020 was $27 and $109, respectively. The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:


Year ending December 31,	Amount
2021	$	82
2022		109
2023		109
2024		109
2025		109
Thereafter		85

	$	603

Table of Contents

Note 12. Shareholders’ Equity

(in thousands, except share data)

The following summarizes the activity in the capital structure of the Company:


	Number of Shares Issued		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balance, January 1, 2021		5,587,070	$	1,118	$	18,134	$	4,138		$	96,158		$	119,548
Net income		—		—		—		—			1,897			1,897
Dividends paid ($0.24 per share)		—		—		—		—			(1,341	)		(1,341	)
Options exercised		—		—		—		—			—			—
Restricted stock granted		—		—		—		—			—			—
Stock compensation expense		—		—		42		—			—			42
Other comprehensive loss, net		—		—		—		(13,666	)		—			(13,666	)

Balance, March 31, 2021		5,587,070	$	1,118	$	18,176	$	(9,528)		$	96,714		$	106,480


	Number of Shares Issued		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income		Retained Earnings			Total
Balance, January 1, 2020		5,578,131	$	1,116	$	17,883	$	(789)	$	94,590		$	112,800
Net income		—		—		—		—		1,160			1,160
Dividends paid ($0.24 per share)		—		—		—		—		(1,339	)		(1,339	)
Options exercised		4,500		1		86		—		—			87
Restricted stock granted		—		—		—		—		—			—
Stock compensation expense		—		—		40		—		—			40
Other comprehensive income, net		—		—		—		5,996		—			5,996

Balance, March 31, 2020		5,582,631	$	1,117	$	18,009	$	5,207	$	94,411		$	118,744

Note 13. Fair Value of Financial Instruments

(in thousands)

The fair value topic of the ASC establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:


Level 1		Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2		Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or

Level 3		Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.

Table of Contents

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2021:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government Agencies	$	—	$	11,235	$	—	$	11,235
Mortgage-backed securities		—		598,816		—		598,816
State, county and municipal		—		163,698		—		163,698
Other securities		—		500		—		500

Total	$	—	$	774,249	$	—	$	774,249

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2020:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government Agencies	$	—	$	12,061	$	—	$	12,061
Mortgage-backed securities		—		561,983		—		561,983
State, county and municipal		—		104,197		—		104,197
Other securities		—		508		—		508

Total	$	—	$	678,749	$	—	$	678,749

The Company recorded no gains or losses in earnings for the period ended March 31, 2021 or December 31, 2020 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

Table of Contents

Impaired Loans

Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling, closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

Other real estate owned

OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.

For assets measured at fair value on a nonrecurring basis during 2021 that were still held on the Company’s balance sheet at March 31, 2021, the following table provides the hierarchy level and the fair value of the related assets:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	109	$	109
Other real estate owned		—		—		42		42

Total	$	—	$	—	$	151	$	151

Table of Contents

The following table presents information as of March 31, 2021 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

Financial instrument

Fair Value

Valuation Technique

Significant Unobservable Inputs

Range of
Inputs

Impaired loans

109

Appraised value of collateral less

estimated costs to sell

Estimated costs to sell

OREO

Appraised value of collateral less

estimated costs to sell

Estimated costs to sell

For assets measured at fair value on a nonrecurring basis during 2020 that were still held on the Company’s balance sheet at December 31, 2020, the following table provides the hierarchy level and the fair value of the related assets:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	2,013	$	2,013

Total	$	—	$	—	$	2,013	$	2,013

Impaired loans, whose fair value was remeasured during the period, with a carrying value of $118 and $2,920 had an allocated allowance for loan losses of $9 and $907 at March 31, 2021 and December 31, 2020, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of $16 and

$-0-

was necessary and recorded during the three-month period ended March 31, 2021 and the year ended December 31, 2020, respectively.

Table of Contents

The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. The following represents the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2021:


March 31, 2021	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	26,667	$	26,667	$	—	$	—	$	26,667
Interest bearing deposits with banks		25,009		25,009		—		—		25,009
Securities available-for-sale		774,249		—		774,249		—		774,249
Net loans		634,401		—		—		628,207		628,207
Financial liabilities
Deposits	$	1,229,621	$	972,079	$	258,733	$	—	$	1,230,812
Securities sold under agreement to repurchase		197,709		197,709		—		—		197,709

Table of Contents

The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2020:


December 31, 2020	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	16,840	$	16,840	$	—	$	—	$	16,840
Interest bearing deposits with banks		25,468		25,468		—		—		25,468
Securities available-for-sale		678,749		—		678,749		—		678,749
Net loans		647,521		—		—		638,362		638,362
Financial liabilities
Deposits	$	1,095,189	$	861,552	$	234,909	$	—	$	1,096,461
Securities sold under agreement to repurchase		196,272		196,272		—		—		196,272
Federal Home Loan Bank advances		25,000		25,000		—		—		25,000

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(in thousands, except share and per share data)

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form

10-Q

(the “Quarterly Report”) contains statements that constitute

forward-looking

statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify

forward-looking

statements. These statements appear in a number of places in this Quarterly Report. The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank” and collectively with the Company, the “Company”), include, but are not limited to, the following:

•

expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions;

•

adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan losses and our ability to foreclose on delinquent mortgages;

•

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates including, but not limited to, the effects of the emergence of widespread health emergencies or pandemics, including the duration of the

COVID-19

pandemic and its impact on the Company’s and its customers’ business, results of operations, asset quality and financial condition;

•

extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, or litigation;

•

increased competition from other financial institutions and the risk of failure to achieve our business strategies;

•

events affecting our business operations, including the effectiveness of our risk management framework, the accuracy of our estimates, our reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances;

•

our ability to maintain sufficient capital and to raise additional capital when needed;

•

our ability to maintain adequate liquidity to conduct business and meet our obligations;

Table of Contents

•

events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people;

•

events that adversely affect our reputation, and the resulting potential adverse impact on our business operations;

•

risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and provisions in our governing documents that may make it more difficult for another party to obtain control of us; and

•

other risks detailed from

time-to-time

in the Company’s filings with the Securities and Exchange Commission.

Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.

Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Company. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report. All dollar amounts appearing in this section of our Quarterly Report are in thousands unless otherwise notes or the context otherwise requires.

OVERVIEW

The Company is a

one-bank

holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of the Bank. The Company does not have any direct subsidiaries other than the Bank.

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At March 31, 2021, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,548,056 and total deposits of $1,231,805. 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. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601)

656-4692.

All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The Company has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Company at March 31, 2021, was 29.78% and at December 31, 2020, was 22.06%. The increase was due to an increase in available for sale securities at March 31, 2021 due to increased deposits as a result of the

COVID-19

savings trend along with record financial stimulus. Management believes it maintains adequate liquidity for the Company’s current needs.

Table of Contents

The Company’s primary source of liquidity is customer deposits, which were $1,229,621 at March 31, 2021, and $1,095,189 at December 31, 2020. Other sources of liquidity include investment securities, the Company’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Company had $774,249 invested in

available-for-sale

investment securities at March 31, 2021, and $678,749 at December 31, 2020. The Company’s deposit growth during the

COVID-19

pandemic, has outpaced loan growth and therefore, the excess funds were invested in securities to help the profitability of the Company.

The Company also had $25,009 in interest bearing deposits at other banks at March 31, 2021 and $25,468 at December 31, 2020. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both March 31, 2021 and December 31, 2020. In addition, the Company has the ability to draw on its line of credit with the FHLB. At March 31, 2021, the Company had unused and available $207,835 of its line of credit with the FHLB and at December 31, 2020, the Company had unused and available $167,285 of its line of credit with the FHLB. The increase in the amount available under the Company’s line of credit with the FHLB from the end of 2020 to March 31, 2021, was the result of an increase in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. The Company had federal funds purchased of

$-0-

as of March 31, 2021 and December 31, 2020. The Company may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

When the Company has more funds than it needs for its reserve requirements or short-term liquidity needs, the Company increases its investment portfolio, increases the balances in interest bearing due from bank accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to insure rate flexibility and to meet loan funding and liquidity needs. When deposits decline or do not grow sufficiently to fund loan demand, management will seek funding either through federal funds purchased or advances from the FHLB.

CAPITAL RESOURCES

Total shareholders’ equity was $106,480 at March 31, 2021, as compared to $119,548 at December 31, 2020. The decrease in shareholders’ equity was the result of the accumulated other comprehensive loss brought about by the investment securities market value adjustment partially offset by earnings in excess of dividends paid.

The Company paid aggregate cash dividends in the amount of $1,341, or $0.24 per share, during the three-month period ended March 31, 2021 compared to $1,339, or $0.24 per share, for the same period in 2020.

Table of Contents

Quantitative measures established by federal regulations to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of March 31, 2021, the Company meets all capital adequacy requirements to which it is subject and according to these requirements the Company is considered to be well capitalized.


	Actual					Minimum Capital Requirement to be Well Capitalized					Minimum Capital Requirement to be Adequately Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2021
Citizens Holding Company
Tier 1 leverage ratio	$	102,303		6.93	%	$	73,852		5.00	%	$	59,082		4.00	%
Common Equity tier 1 capital ratio		102,303		11.96	%		96,007		6.50	%		66,467		4.50	%
Tier 1 risk-based capital ratio		102,303		11.96	%		68,450		8.00	%		51,338		6.00	%
Total risk-based capital ratio		107,075		12.51	%		85,563		10.00	%		68,450		8.00	%
December 31, 2020
Citizens Holding Company
Tier 1 leverage ratio	$	101,640		7.22	%	$	70,344		5.00	%	$	56,275		4.00	%
Common Equity tier 1 capital ratio		101,640		12.55	%		91,448		6.50	%		63,310		4.50	%
Tier 1 risk-based capital ratio		101,640		12.55	%		64,780		8.00	%		48,585		6.00	%
Total risk-based capital ratio		106,375		13.14	%		80,975		10.00	%		64,780		8.00	%

The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Company (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II for

non-core

banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

Beginning January 1, 2015, the Company and the Bank began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner:

•

Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%;

•

Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking organizations);

•

Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and

•

Maintain the minimum total risk-based capital ratio at 8%.

Table of Contents

In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.

The final Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the final Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital.

Management believes that, as of March 31, 2021, the Company and the Bank met all capital adequacy requirements under Basel III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Company’s capital ratios as presented.

Table of Contents

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:


	For the Three Months
	Ended March 31,
	2021		2020
Interest Income, including fees	$	9,079	$	9,709
Interest Expense		1,446		2,324

Net Interest Income		7,633		7,385
Provision for loan losses		87		314

Net Interest Income after
Provision for loan losses		7,546		7,071
Other Income		3,232		2,381
Other Expense		8,468		8,067

Income Before Provision For
Income Taxes		2,310		1,385
Provision for Income Taxes		413		225

Net Income	$	1,897	$	1,160

Net Income Per share - Basic	$	0.34	$	0.21

Net Income Per Share-Diluted	$	0.34	$	0.21

See Note 3 to the Company’s Consolidated Financial Statements for an explanation regarding the Company’s calculation of Net Income Per Share - basic and - diluted.

Annualized return on average equity (“ROE”) was 6.45% for the three months ended March 31, 2021, and 4.11% for the corresponding period in 2020. The increase in ROE for the three months ended March 31, 2021 was caused by the increase in earnings and decrease in accumulated other comprehensive income (“AOCI “) compared to the same period in 2020.

Book value per share decreased to $19.09 at March 31, 2021, compared to $21.43 at December 31, 2020. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity discussed above. Average assets for the three months ended March 31, 2021 were $1,490,670 compared to $1,336,513 for the year ended December 31, 2020. This increase was due mainly to an increase in loans and investment securities partially offset by a decrease in interest bearing deposits with other banks.

Table of Contents

NET INTEREST INCOME / NET INTEREST MARGIN

The main component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds. The net interest margin is net interest income expressed as a percentage of average earning assets. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities.

Net interest income was $7,633 for the three months ended March 31, 2021, respectively, as compared to $7,385 for the same respective time period in 2020. The annualized net interest margin was 2.32% for the three months ended March 31, 2021 compared to 2.72% for the corresponding period of 2020. The decrease in net interest margin for the three months ended March 31, 2021, when compared to the same period in 2020, was mainly due to the historical low mortgage interest rates increasing prepayments on mortgage-backed securities. Prepayments on mortgage-backed securities decreased the yield on taxable securities by 139 basis points (“bps”) to 19 bps at March 31, 2021 compared to 158 bps in 2020. However, the Company was able to offset this decline in yield on mortgage-backed securities by lowering the cost of cost funds to 53 bps for the three months ended March 31, 2021 compared to 105 bps for the same period in 2020.

The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented:

Table of Contents

TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES


	Three Months Ended March 31,
	Average Balance				Income/Expense				Average Yield/Rate
	2021		2020		2021		2020		2021			2020
Loans:
Loans, net of unearned (1)	$	652,783	$	574,030	$	8,173	$	7,489		5.01	%		5.22	%
Investment Securities
Taxable		545,923		418,685		262		1,657		0.19	%		1.58	%
Tax-exempt		128,612		61,013		899		458		2.80	%		3.00	%

Total Investment Securities		674,535		479,698		1,161		2,115		0.17	%		0.44	%
Federal Funds Sold and Other		51,206		52,838		15		218		0.12	%		1.65	%

Total Interest Earning Assets (1)(2)		1,378,524		1,106,566		9,349		9,822		2.71	%		3.55	%

Non-Earning Assets		112,146		95,917

Total Assets	$	1,490,670	$	1,202,483

Deposits:
Interest-bearing Demand
Deposits (3)	$	513,117	$	402,535	$	518	$	914		0.40	%		0.91	%
Savings		107,314		84,656		27		32		0.10	%		0.15	%
Time		242,861		243,748		721		1,023		1.19	%		1.68	%

Total Deposits		863,292		730,939		1,266		1,969		0.15	%		0.27	%
Borrowed Funds
Short-term Borrowings		212,849		158,480		180		355		0.34	%		0.90	%
Long-term Borrowings		—		— `		—		—		0.00	%		0.00	%

Total Borrowed Funds		212,849		158,480		180		355		0.34	%		0.90	%

Total Interest-Bearing Liabilities (3)		1,076,141		889,419		1,446		2,324		0.53	%		1.05	%
Non-Interest Bearing Liabilities
Demand Deposits		269,051		184,734
Other Liabilities		27,866		15,385
Shareholders’ Equity		117,612		112,945

Total Liabilities and Shareholders’ Equity	$	1,490,670	$	1,202,483

Interest Rate Spread										2.19	%		2.51	%

Net Interest Margin					$	7,903	$	7,498		2.32	%		2.72	%

Less
Tax Equivalent Adjustment						270		113

Net Interest Income					$	7,633	$	7,385

(1)	Overdrafts, while not considered an earning asset, are included in Loans, net of unearned in the average volume calculation due to the immaterial impact on the yield.

(2)	Earnings Assets in the table above does include the dividend paying stock of the Federal Home Loan Bank.

(3)	Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the non-interest bearing liabilities section above.

Table of Contents

The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on

tax-exempt

loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 3.95%, which is net of federal tax benefit.

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three months ended March 31, 2021, as compared to the respective corresponding period in 2020, growth in the Company’s loan portfolio was the largest contributing factor to the increase in net interest income over these periods. Also, the Company’s continued efforts to reprice deposits at lower rates has helped offset the yield decline in taxable securities that has been hampered by the low interest rate environment resulting from the Federal Reserve Board’s decreases to the target federal funds rate during the

COVID-19

pandemic. Overall, margin compression continues due to the

low-rate

environment and the economy slowly recovering due to the pandemic. Management believes by continuing to reprice interest-bearing liabilities as they mature, continued focus on loan growth, and changing the investment mix will increase the net interest margin.

The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three months ended March 31, 2021 compared to the same respective period in 2020:

Table of Contents

TABLE 2 - VOLUME/RATE ANALYSIS

(in thousands)


	Three Months Ended March 31, 2021 2021 Change from 2020
	Volume			Rate			Total
INTEREST INCOME
Loans	$	1,027			(343	)	$	684
Taxable Securities		504			(1,899	)		(1,395	)
Non-Taxable Securities		491			(66	)		425
Federal Funds Sold and Other		(7	)		(196	)		(203	)

TOTAL INTEREST INCOME	$	2,016		$	(2,505	)	$	(489	)

INTEREST EXPENSE
Interest-bearing demand deposits	$	251			(508	)		(257	)
Savings Deposits		9			(11	)		(2	)
Time Deposits		(4	)		(299	)		(303	)
Short-term borrowings		122			(297	)		(175	)

TOTAL INTEREST EXPENSE	$	378		$	(1,114	)		(737	)

NET INTEREST INCOME	$	1,638		$	(1,390	)	$	248

CREDIT LOSS EXPERIENCE

As a natural corollary to the Company’s lending activities, some loan losses are to be expected. The risk of loss varies with the type of loan being made and the overall creditworthiness of the borrower over the term of the loan. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and for various types of loans. The Company attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures.

The Company maintains a program of systematic review of its existing loans. Loans are graded for their overall quality. Those loans, which management determines require further monitoring and supervision, are segregated and reviewed on a regular basis. Significant problem loans are reviewed monthly by the Company’s management and Board of Directors.

The Company charges off that portion of any loan that the Company’s management and Board of Directors has determined to be a loss. A loan is generally considered by management to represent a loss, in whole or in part, when exposure beyond the collateral value is apparent, servicing of the unsecured portion has been discontinued or collection is not anticipated based on the borrower’s financial condition. The general economic conditions in the borrower’s industry influence this determination. The principal amount of any loan that is declared a loss is charged against the Company’s allowance for loan losses.

Table of Contents

The Company’s allowance for loan losses is designed to provide for loan losses that can be reasonably anticipated. The allowance for loan losses is established through charges to operating expenses in the form of provisions for loan losses. Actual loan losses or recoveries are charged or credited to the allowance for loan losses. The Board of Directors determines the amount of the allowance. Among the factors considered in determining the allowance for loan losses are the current financial condition of the Company’s borrowers and the value of security, if any, for their loans. Estimates of future economic conditions and their impact on various industries and individual borrowers are also taken into consideration, as are the Company’s historical loan loss experience and reports of banking regulatory authorities. As these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether the Company will sustain loan losses in excess or below its allowance or that subsequent evaluation of the loan portfolio may not require material increases or decreases in such allowance.

The following table summarizes the Company’s allowance for loan losses for the dates indicated:


	Quarter Ended March 31, 2021			Year Ended December 31, 2020			Amount of Increase (Decrease)			Percent of Increase (Decrease)
BALANCES:
Gross Loans	$	639,174		$	652,257		$	(13,083	)		-2.01	%
Allowance for Loan Losses		4,772			4,735			37			0.78	%
Nonaccrual Loans		6,789			8,484			(1,695	)		-19.98	%
Ratios:
Allowance for loan losses to gross loans		0.75	%		0.73	%
Net loans charged off to allowance for loan losses		1.05	%		10.67	%

The provision for loan losses for the three months ended March 31, 2021 was $87, a decrease of $227 from the provision for loan losses of $314 for the same period in 2020. The change in the Company’s loan loss provision for the three months ended March 31, 2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact of the vaccine distribution and improvement in the local and national unemployment rate coupled with a decrease in loan demand from the prior quarter. The Company’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to payments received and loans charged off in excess of new loans being added to nonaccrual status.

For the three months ended March 31, 2021, net loan losses charged to the allowance for loan losses totaled $50, a decrease of $203 from the $253 charged off in the same period in 2020.

Table of Contents

Management reviews quarterly with the Company’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three months ended March 31, 2021 that have not been charged off. Management also believes that the Company’s allowance will be adequate to absorb probable losses inherent in the Company’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended March 31, 2021 was $3,232, an increase of $851, or 35.74%, from $2,381 in the same period in 2020. Service charges on deposit accounts were $814 in the three months ended March 31, 2021, compared to $1,049 for the same period in 2020. In correlation with the national trend of increased savings due to the uncertainty surrounding the pandemic and continued programs offered to our customers by the federal government, there has been a decrease in overdraft income when compared to the same period in 2020 which is the primary driver behind the reduction in service charges on deposit accounts. Offsetting the decline in overdraft income, interchange fees increased by $206, or 30.16%, to $889 in the three months ended March 31, 2021, compared to $683 for the same period in 2020. Other operating income not derived from service charges or fees increased $851, or 35.74% to $1,443 in the three months ended March 31, 2021, compared to $559 for the same period in 2020. This increase was primarily due to two reasons, (1) an increase in gains from security sales due to strategic investment decisions and (2) an increase in mortgage loan origination income.

The following is a detail of the other major income classifications that were included in other operation income on the income statement:


	For the Three Months Ended March 31,
Other operating income	2021		2020
BOLI Income	$	130	$	106
Mortgage Loan Origination Income		395		252
Income from security sales, net		526		77
Other Income		392		124

Total Other Income	$	1,443	$	559

Table of Contents

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate

non-interest

expenses for the three months ended March 31, 2021 and 2020 were $8,468 and $8,067, respectively, an increase of $401 or 4.97%. Occupancy expense increased by $158, or 9.52%, to $1,817 for the three months ended March 31, 2021, compared to $1,659 for the same period of 2020. The increases in occupancy expense is related to the Company’s continued investment in customer facing and internal technology. Other operating expenses increased by $110, or 5.58%, to $2,083 for the three months ended March 31, 2021, compared to $1,973 for the same period of 2020. This increase was mainly due to an increase in regulatory related expenses.

The following is a detail of the major expense classifications that make up the other operating expense line item in the income statement:


	For the Three Months Ended March 31,
Other Operating Expense	2021		2020
Advertising	$	141	$	204
Office Supplies		249		292
Professional Fees		237		258
Telephone expense		155		158
Postage and Freight		169		141
Loan Collection Expense		54		23
Regulatory and related expense		235		66
Debit Card/ATM expense		168		135
Travel and Convention		26		53
Other expenses		649		643

Total Other Expense	$	2,083	$	1,973

The Company’s efficiency ratio for the three months ended March 31, 2021 was 76.12%, compared to 84.74% for the same period in 2020. The efficiency ratio is the ratio of

non-interest

expenses divided by the sum of net interest income (on a fully tax equivalent basis) and

non-interest

income.

Table of Contents

BALANCE SHEET ANALYSIS


	March 31, 2021		December 31, 2020		Amount of Increase (Decrease)			Percent of Increase (Decrease)
Cash and Due From Banks	$	26,667	$	16,840	$	9,827			58.36	%
Interest Bearing deposits with Other Banks		25,009		25,468		(459	)		-1.80	%
Investment Securities		774,249		678,749		95,500			14.07	%
Loans, net		634,401		647,521		(13,120	)		-2.03	%
Premises and Equipment		25,634		25,630		4			0.02	%
Total Assets		1,548,347		1,450,692		97,655			6.73	%
Total Deposits		1,229,621		1,095,189		134,432			12.27	%
Total Shareholders’ Equity		106,480		119,548		(13,068	)		-10.93	%

CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at March 31, 2021 was $51,676, which was an increase of $9,368 from the balance of $42,308 at December 31, 2020.

INVESTMENT SECURITIES

The Company’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Company’s investments securities portfolio at March 31, 2021 increased by $95,500, or 14.07%, to $774,249 from $678,749 at December 31, 2020. As previously discussed, this increase was due to a large excess in liquidity as customers continue to save excess funds due to the uncertainty around the pandemic along with financial stimulus provided by the Federal government.

LOANS

The Company’s loan balance decreased by $13,120, or (2.03%), during the three months ended March 31, 2021, to $634,401 from $647,521 at December 31, 2020. The decrease was primarily due to two reasons: (1) Loan competition continues to be strong in our operating regions, especially in land development and construction and commercial real estate categories resulting in large payoffs and (2) payoffs of the PPP loans that were provided to customers. While loan demand continues to be strong in certain sectors, the uncertainty surrounding the pandemic has put a lot of projects on hold in other sectors in the near term. Additionally, no material changes were made to the loan products offered by the Company during this period.

Table of Contents

PREMISES AND EQUIPMENT

During the three months ended March 31, 2021, the Company’s premises and equipment increased by $4, or 0.02%, to $25,634 from $25,630 at December 31, 2020.

DEPOSITS

The following table shows the balance and percentage change in the various deposits:


	March 31, 2021		December 31, 2020		Amount of Increase (Decrease)		Percent of Increase (Decrease)
Noninterest-Bearing Deposits	$	284,266	$	276,033	$	8,233		2.98	%
Interest-Bearing Deposits		574,706		480,987		93,719		19.48	%
Savings Deposits		113,107		104,532		8,575		8.20	%
Certificates of Deposit		257,542		233,637		23,905		10.23	%

Total deposits	$	1,229,621	$	1,095,189	$	134,432		12.27	%

All deposit accounts increased during the three months ended March 31, 2021. As previously discussed, the

COVID-19

savings trend along with record financial stimulus is creating a large increase in deposits. Management continually monitors the interest rates on time deposit products to ensure that the Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.

OFF-BALANCE

SHEET ARRANGEMENTS

Please refer to Note 3 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Company’s

off-balance

sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors of the Bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.

As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values. We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so should the situation warrant. Based upon the nature of our operations, we are not subject to material foreign exchange or commodity price risk. We do not own any trading assets.

Table of Contents

We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in projected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is a longer-term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of March 31, 2021 and December 31, 2020:


	March 31, 2021						December 31, 2020
	Following			Months			Following			Months
	12 months			13-24			12 months			13-24
+400 basis points		-16.7	%		-12.3	%		9.1	%		8.9	%
+300 basis points		-10.6	%		-6.7	%		10.7	%		8.4	%
+200 basis points		-5.4	%		-2.1	%		11.6	%		7.3	%
+100 basis points		-1.0	%		1.0	%		10.9	%		5.3	%
Flat rates		—			—			—			—
-100 basis points		-9.5	%		-9.3	%		-12.2	%		-9.0	%
-200 basis points		-14.1	%		-13.8	%		-19.8	%		-19.9	%

The following table presents the change in our economic value of equity as of March 31, 2021 and December 31, 2020, assuming immediate parallel shifts in interest rates:


	Economic Value of Equity at Risk (%)
	March 31, 2021			December 31, 2020
+400 basis points		-26.2	%		11.3	%
+300 basis points		-18.4	%		18.8	%
+200 basis points		-10.5	%		24.6	%
+100 basis points		-3.4	%		21.9	%
Flat rates		—			—
-100 basis points		-16.5	%		-29.4	%
-200 basis points		-38.6	%		-43.1	%

Table of Contents

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.

As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest-bearing

non-maturity

deposit accounts, whose cost is less sensitive to changes in interest rates.

ITEM 4. CONTROLS AND PROCEDURES.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of March 31, 2021 (the end of the period covered by this Quarterly Report).

There were no changes to the Company’s internal control over financial reporting that occurred in the three months ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1A. RISK FACTORS.

The Company’s business, future

financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form

10-K

for the year ended December 31, 2020, which the Company filed with the Securities and Exchange Commission on March 12, 2021. Additional information regarding some of those risks and uncertainties is contained in the notes to the consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Company’s Annual Report on Form

10-K

for the year ended December 31, 2020, the Company’s quarterly reports on Form

10-Q

and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Company’s business, financial condition and results of operations in the future.

ITEM 6. EXHIBITS.


Exhibits

31(a)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

31(b)		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

32(a)		Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.

32(b)		Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.

101		Financial Statements submitted in XBRL format.

Table of Contents

SIGNATURES

Pursuant to the requirements 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.


CITIZENS HOLDING COMPANY

BY:		/s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer
(Principal Executive Officer)

BY:		/s/ Phillip R. Branch
Phillip R. Branch
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)

DATE: May 7, 2021