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

Table of Contents
Table of Contents
 
 
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
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
                    
to
                    
Commission File Number:
001-15375
 
 
CITIZENS HOLDING COMPANY
(Exact name of registrant as specified in its charter)
 
 
 
Mississippi
 
64-0666512
(State or other jurisdiction of
 
(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.
 
Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller Reporting Company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    ☐  Yes    ☒  No
Number of shares outstanding of each of the issuer’s classes of common stock, as of May 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.
 
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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.
 
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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.
 
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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.
 
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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.
 
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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.
 
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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.
 
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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
 
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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.
 
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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.
 
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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.
 
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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.
 
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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.
 
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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.
 
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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.
 
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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  
    
 
 
    
 
 
 
 
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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  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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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.
 
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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  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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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.
 
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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.
 
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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
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
22

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  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
23

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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  
    
 
 
    
 
 
 
 
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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  
    
 
 
    
 
 
 
 
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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  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
26

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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      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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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  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
28

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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
no
loans classified as TDRs purchased as part of the acquisition of Charter.
 
29

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.
 
30

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  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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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  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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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  
    
 
 
 
 
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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
 
 
  
 
 
 
 
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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.
 
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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.
 
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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  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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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      25
OREO
     42     
Appraised value of collateral less
estimated costs to sell
   Estimated costs to sell      25
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.
 
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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  
 
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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  
 
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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;
 
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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.
 
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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.
 
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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%.
 
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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.
 
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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.
 
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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:
 
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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.
 
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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:
 
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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.
 
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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.
 
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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  
  
 
 
    
 
 
 
 
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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.
 
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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.
 
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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.
 
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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
 
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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.
 
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
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.
 
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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
 
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