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CIZN Citizens Holding

Filed: 5 Nov 21, 6:06am
 
 
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 September 30, 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
In Company or organization)
  
(IRS Employer
Identification No.)
    
521 Main Street, Philadelphia, MS
  
39350
(Address of principal executive offices)
  
(Zip Code)
601-656-4692
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
  
Trading
Symbol(s)
  
Name of Each Exchange
on Which Registered
Common Stock, $0.20 par value
  
CIZN
  
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   Accelerated filer 
    
Non-accelerated filer   Smaller Reporting Company 
    
Emerging growth company      
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).  ☐    Yes    ☒  No
Number of shares outstanding of each of the issuer’s classes of common stock, as of November 5, 2021:
 
Title   Outstanding 
Common Stock, $0.20 par value   5,595,320 
 
 
 

PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
         
   September 30,  December 31, 
   2021  2020 
ASSETS  (Unaudited)  (Audited) 
Cash and due from banks  $17,795  $16,840 
Interest bearing deposits with other banks   76,132   25,468 
          
Cash and cash equivalents   93,927   42,308 
Investment securities available for sale, at fair value   574,189   678,749 
Loans held for investment (LHFI), net of unearned income   611,027   652,256 
Less allowance for loan losses, LHFI   5,318   4,735 
          
Net LHFI   605,709   647,521 
Premises and equipment, net   26,566   25,630 
Other real estate owned, net   3,022   3,073 
Accrued interest receivable   3,694   5,983 
Cash surrender value of life insurance   25,491   25,814 
Deferred tax assets, net   5,576   1,548 
Identifiable intangible assets, net   13,578   13,660 
Other assets   4,167   6,406 
          
TOTAL ASSETS  $1,355,919  $1,450,692 
          
LIABILITIES AND SHAREHOLDERS’ EQUITY         
LIABILITIES         
Deposits:         
Non-interest
bearing deposits
  $295,097  $276,033 
Interest bearing deposits   818,882   819,156 
          
Total deposits   1,113,979   1,095,189 
Securities sold under agreement to repurchase   103,061   196,272 
Federal Home Loan Bank (FHLB) advances   —     25,000 
Borrowings on secured line of credit   18,000   —   
Accrued interest payable   558   522 
Deferred compensation payable   9,475   9,665 
Other liabilities   3,464   4,496 
          
Total liabilities   1,248,537   1,331,144 
SHAREHOLDERS’ EQUITY         
Common stock, $0.20 par value:         
Authorized: 22,500,000 shares         
Issued and outstanding: 5,595,320 shares - September 30, 2021; 5,587,070 shares - December 31, 2020   1,120   1,118 
Additional
paid-in
capital
   18,254   18,134 
Retained earnings   97,815   96,158 
Accumulated other comprehensive (loss) income, net of tax benefit (expense) of $3,260 at September 30, 2021 and ($1,376) at December 31, 2020   (9,807  4,138 
          
Total shareholders’ equity   107,382   119,548 
          
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $1,355,919  $1,450,692 
          
The accompanying notes are an integral part of these financial statements.
 
1  

CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data)
                 
   For the Three Months   For the Nine Months 
   Ended September 30,   Ended September 30, 
   2021   2020   2021   2020 
INTEREST INCOME                    
Interest and fees on loans  $7,666   $7,805   $23,714   $22,917 
Interest on securities                    
Taxable   1,433    2,406    2,950    6,163 
Nontaxable   642    360    1,947    1,064 
Other interest   21    8    46    271 
                     
Total interest income   9,762    10,579    28,657    30,415 
INTEREST EXPENSE                    
Deposits   951    1,506    3,403    5,087 
Other borrowed funds   209    167    525    687 
                     
Total interest expense   1,160    1,673    3,928    5,774 
                     
NET INTEREST INCOME   8,602    8,906    24,729    24,641 
PROVISION FOR LOAN LOSSES   968    247    1,287    1,183 
                     
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   7,634    8,659    23,442    23,458 
OTHER INCOME                    
Service charges on deposit accounts   952    771    2,534    2,488 
Other service charges and fees   1,135    1,031    3,201    2,675 
Other operating income   1,207    835    3,780    2,325 
                     
Total other income   3,294    2,637    9,515    7,488 
                     
OTHER EXPENSES                    
Salaries and employee benefits   4,716    4,389    13,869    13,131 
Occupancy expense   1,740    1,861    5,348    5,556 
Other expense   2,285    2,403    6,974    6,377 
                     
Total other expenses   8,741    8,653    26,191    25,064 
                     
INCOME BEFORE PROVISION FOR INCOME TAXES   2,187    2,643    6,766    5,882 
PROVISION FOR INCOME TAXES   307    560    1,082    1,177 
                     
NET INCOME  $1,880   $2,083   $5,684   $4,705 
                     
NET INCOME PER SHARE -Basic  $0.34   $0.37   $1.02   $0.84 
                     
-Diluted  $0.34   $0.37   $1.02   $0.84 
                     
DIVIDENDS PAID PER SHARE  $0.24   $0.24   $0.72   $0.72 
                     
The accompanying notes are an integral part of these financial statements.
 
2  
CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(in thousands)
                 
   For the Three Months  For the Nine Months 
   Ended September 30,  Ended September 30, 
   2021  2020  2021  2020 
Net income  $1,880  $2,083  $5,684  $4,705 
Other comprehensive (loss) income                 
Securities
available-for-sale
                 
Unrealized holding (losses) gains   (4,149  (3,831  (19,959  4,367 
Income tax effect   1,036   956   4,980   (1,090
                  
Net unrealized (losses) gains   (3,113  (2,875  (14,979  3,277 
Reclassification adjustment for gains included in net income   459   293   1,378   703 
Income tax effect   (115  (73  (344  (175
                  
Net gains included in net income   344   220   1,034   528 
                  
Total other comprehensive (loss) income   (2,769  (2,655  (13,945  3,805 
                  
Comprehensive (loss) income  $(889 $(572 $(8,261 $8,510 
                  
The accompanying notes are an integral part of these financial statements.
 
3  

CITIZENS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
         
   For the Nine Months 
   Ended September 30, 
   2021  2020 
CASH FLOWS FROM OPERATING ACTIVITIES         
Net cash provided by operating activities  $14,910  $10,240 
CASH FLOWS FROM INVESTING ACTIVITIES         
Proceeds from maturities and calls of securities available for sale   132,774   179,028 
Proceeds from sale of investment securities   500,685   150,350 
Purchases of investment securities available for sale   (551,765  (446,873
Net change in FHLB stock   503   —   
Purchases of bank premises and equipment   (2,232  (1,271
Proceeds from sales of bank premises and equipment   492   124 
Net change in federal funds sold   —     1,600 
Proceeds from sale of other real estate   3,263   1,303 
Proceeds from death benefit of bank-owned life insurance   1,162   —   
Net decrease (increase) in loans   37,276   (80,536
          
Net cash provided by (used in) investing activities   122,158   (196,275
CASH FLOWS FROM FINANCING ACTIVITIES         
Net change in deposits   18,789   150,162 
Net change in securities sold under agreement to repurchase   (93,211  6,568 
Proceeds from FHLB advances   —     15,000 
Payments on FHLB advances   (25,000  —   
Proceeds from borrowings on secured line of credit   18,000   —   
Proceeds from exercise of stock options   —     86 
Payment of common stock dividends   (4,027  (4,022
          
Net cash (used in) provided by financing activities   (85,449  167,794 
          
Net change in cash and cash equivalents   51,619   (18,241
Cash and cash equivalents, beginning of period   42,308   74,494 
          
Cash and cash equivalents, end of period  $93,927  $56,253 
          
The accompanying notes are an integral part of these financial statements.
 
4  

CITIZENS HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the nine months ended September 30, 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 an affiliate, 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
In 2020, the World Health Organization 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. Although some of the restrictions on business activities have been lifted in the Company’s markets in 2021, the spread of
COVID-19
and its variants have caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.
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 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 customers to conduct banking and other financial transactions. If the
COVID-19
outbreak escalates further, 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.
 

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 40.
The Company maintains access to multiple sources of liquidity. If an extended recession causes 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 historic 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.
The impact from
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.
 

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 371 loans with a total balance of $14,077 outstanding at September 30, 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.
Credit
The Company has worked with customers directly affected by
COVID-19. The
Company offered short-term assistance in accordance with regulatory guidelines. As of September 30, 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 September 30, 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 affiliate, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation.
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, or other real estate owned (“OREO”). 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 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 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 September 30, 2021, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $124,059 compared to an aggregate unused balance of $138,185 at December 31, 2020. There were $4,437 of letters of credit outstanding at September 30, 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.
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
September 30,
   For the Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Basic weighted average shares outstanding   5,587,070    5,578,281    5,583,491    5,574,060 
Dilutive effect of granted options   0      2,447    244    2,824 
                     
Diluted weighted average shares outstanding   5,587,070    5,580,728    5,583,735    5,576,884 
                     
Net income  $1,880   $2,083   $5,684   $4,705 
Net income per share-basic  $0.34   $0.37   $1.02   $0.84 
Net income per share-diluted  $0.34   $0.37   $1.02   $0.84 
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.
The following table is a summary of the stock option activity for the nine months ended September 30, 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    0     $0   
Granted   0      0      0      0   
Exercised   0      0      0      0   
Expired   (10,500   20.02    0      0   
                     
Outstanding at September 30, 2021   9,000   $18.76    0     $ 0   
                     
The intrinsic value of options outstanding under the Directors’ Plan at September 30, 2021, was $2. No options were outstanding under the 2013 Plan as of September 30, 2021.
During 2021, 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 28, 2022 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $156 and will be expensed ratably over the
one-year
vesting period.
 
10 

Note 5. Income Taxes
(in thousands)
For the three months ended September 30, 2021 and 2020, the Company recorded a provision for income taxes totaling $307 and $560, respectively. The effective tax rate was 14.04% and 21.19% for the three months ending September 30, 2021 and 2020, respectively.
For the nine months ended September 30, 2021 and 2020, the Company recorded a provision for income taxes totaling $1,082 and $1,177, respectively. The effective tax rate was 15.99% and 20.01% for the nine months ending September 30, 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.
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:
 
                 
September 30, 2021  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value
 
Securities
available-for-sale
                    
Obligations of U.S. Government agencies  $4,969   $ 0     $114   $4,855 
Mortgage backed securities   396,455    80    9,268    387,267 
State, County, Municipals   185,333    470    4,234    181,569 
Other Securities   500    0      2    498 
                     
Total  $ 587,257   $550   $ 13,618   $ 574,189 
                     
 
                 
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   $0     $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    0      508 
                     
Total  $ 673,226   $ 8,159   $ 2,636   $ 678,749 
                     
At September 30, 2021 and December 31, 2020
, securities with a carrying value of $372,457 and $558,955, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.
 
11  

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 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.
 
                 
   September 30, 2021   December 31, 2020 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 
Available-for-sale
                    
Due in one year or less  $217   $218   $—     $—   
Due after one year through five years   1,896    1,934    3,594    3,701 
Due after five years through ten years   3,886    3,948    20,538    21,446 
Due after ten years   184,803    180,822    89,061    91,619 
Residential mortgage backed securities   318,638    311,578    536,215    537,027 
Commercial mortgage backed securities   77,817    75,689    23,818    24,956 
                     
Total  $ 587,257   $ 574,189   $ 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 September 30, 2021 and December 31, 2020.
A summary of unrealized loss information for securities
available-for-sale,
categorized by security type follows:
 
                         
September 30, 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  $4,855   $114   $ 0     $ 0     $4,855   $114 
Mortgage backed securities   378,680    9,268    0      0      378,680    9,268 
State, County, Municipal   144,709    4,234    0      0      144,709    4,234 
Other Securities   498    2    0      0      498    2 
                               
Total  $528,742   $ 13,618   $0     $0     $ 528,742   $ 13,618 
                               
 
                         
    
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   $0     $0     $278,162   $2,600 
State, County, Municipal   6,541    36    0      0      6,541    36 
                               
Total  $284,703   $2,636   $ 0     $ 0     $284,703   $2,636 
                               
The Company’s unrealized losses on its obligations of United States government agencies, mortgage backed securities, other securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in the
mid-term
sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The 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 September 30, 2021 nor at December 31, 2020.
 
12  

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 7, all references to “loans” mean non purchased loans.
The composition of net loans at September 30, 2021 and December 31, 2020 was as follows:
 
         
   September 30, 2021   December 31, 2020 
Real Estate:          
Land Development and Construction  $69,195   $42,677 
Farmland   13,386    15,616 
1-4
Family Mortgages
   86,508    94,280 
Commercial Real Estate   282,394    306,875 
           
Total Real Estate Loans   451,483    459,448 
Business Loans:          
Commercial and Industrial Loans
(1)
   98,530    115,679 
Farm Production and Other Farm Loans   431    541 
           
Total Business Loans   98,961    116,220 
Consumer Loans:          
Credit Cards   1,836    1,878 
Other Consumer Loans   12,936    10,929 
           
Total Consumer Loans   14,772    12,807 
           
Total Gross Loans   565,216    588,475 
Unearned Income   0      (1
Allowance for Loan Losses   (5,318   (4,735
           
Loans, net  $ 559,898   $ 583,739 
           
 
(1)Includes PPP loans of $14,077 and $29,523 as of September 30, 2021 and December 31, 2020, respectively.
 
13 

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 nonaccrual 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 nonaccrual 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,
nonaccrual loans, segregated by class, were as follows:
 
         
   September 30, 2021   December 31, 2020 
Real Estate:          
Land Development and Construction  $178   $308 
Farmland   185    287 
1-4
Family Mortgages
   1,980    1,809 
Commercial Real Estate   962    5,600 
           
Total Real Estate Loans   3,305    8,004 
Business Loans:          
Commercial and Industrial Loans   322    413 
Farm Production and Other Farm Loans   5    9 
           
Total Business Loans   327    422 
Consumer Loans:          
Other Consumer Loans   17    33 
           
Total Consumer Loans   17    33 
           
Total Nonaccrual Loans  $ 3,649   $ 8,459 
           
 
14 

An aging analysis of past due loans, segregated by class, as of September 30, 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  $14   $—     $14   $69,181   $69,195   $—   
Farmland   93    34    127    13,259    13,386    0   
1-4
Family Mortgages
   1,261    230    1,491    85,017    86,508    —   
Commercial Real Estate   530    571    1,101    281,293    282,394    —   
                               
Total Real Estate Loans   1,898    835    2,733    448,750    451,483    0   
Business Loans:                              
Commercial and Industrial Loans   327    322    649    97,881    98,530    0   
Farm Production and Other Farm Loans   0      —      0      431    431    —   
                               
Total Business Loans   327    322    649    98,312    98,961    0   
Consumer Loans:                              
Credit Cards   37    16    53    1,783    1,836    16 
Other Consumer Loans   1,275    2    1,277    11,659    12,936    —   
                               
Total Consumer Loans   1,312    18    1,330    13,442    14,772    16 
                               
Total Loans  $3,537   $1,175   $4,712   $560,504   $565,216   $16 
                               
 
15  

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 by the impaired loan having sufficient collateral, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are
charged-off
when deemed uncollectible.
 
16  

Impaired loans as of September 30, 2021, segregated by class, were as follows:
 
                         
       Recorded   Recorded             
   Unpaid   Investment   Investment   Total       Average 
   Principal   With No   With   Recorded   Related   Recorded 
   Balance   Allowance   Allowance   Investment   Allowance   Investment 
Real Estate:                              
Land Development and Construction  $178   $178   $—     $178   $—     $243 
Farmland   34    34    —      34    —      73 
1-4
Family Mortgages
   944    944    —      944    —      980 
Commercial Real Estate   1,330    1,050    118    1,168    6    3,498 
                               
Total Real Estate Loans   2,486    2,206    118    2,324    6    4,794 
Business Loans:                              
Commercial and Industrial Loans   304    72    160    232    36    323 
                               
Total Business Loans   304    72    160    232    36    323 
                               
Consumer Loans:                              
Other Consumer Loans   1,200    —      1,200    1,200    1,200    600 
                               
Total Consumer Loans   1,200    —      1,200    1,200    1,200    600 
                               
Total Loans  $3,990   $2,278   $1,478   $3,756   $1,242   $5,717 
                               
Impaired loans as of December 31, 2020, segregated by class, were as follows:
 
                         
       Recorded   Recorded             
   Unpaid   Investment   Investment   Total       Average 
   Principal   With No   With   Recorded   Related   Recorded 
   Balance   Allowance   Allowance   Investment   Allowance   Investment 
Real Estate:                              
Land Development and Construction  $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 
                               
17  

The Company did not have any new troubled debt restructurings for the nine months ended September 30, 2021 or September 30, 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        (88
Reclassification to OREO   2    (1,788
           
Total at September 30, 2021   1   $237 
           
The allocated allowance for loan losses attributable to restructured loans was
$-0-
at September 30, 2021 and December 31, 2020. The Company had no commitments to lend additional funds on this troubled debt restructuring as of September 30, 2021.
 
18  

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 vary from 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 Company 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.
 
19  

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 September 30, 2021.
The following table details the amount of gross loans, segregated by loan grade and class, as of September 30, 2021:
 
                         
   Satisfactory
1,2,3,4
   Special
Mention
5,6
   Substandard
7
   Doubtful
8
   Loss
9
   Total
Loans
 
Real Estate:                              
Land Development and Construction  $67,898   $688   $609   $ —     $ —     $69,195 
Farmland   12,724    162    500    —      —      13,386 
1-4
Family Mortgages
   78,864    2,231    5,413    —      —      86,508 
Commercial Real Estate   241,016    7,034    34,344    —      —      282,394 
                               
Total Real Estate Loans   400,502    10,115    40,866    —      —      451,483 
Business Loans:                              
Commercial and Industrial Loans   91,911    987    5,629    —      3    98,530 
Farm Production and Other Farm Loans   412    —      14    —      5    431 
                               
Total Business Loans   92,323    987    5,643    —      8    98,961 
Consumer Loans:                              
Credit Cards   1,783    —      53    —      —      1,836 
Other Consumer Loans   11,633    67    1,227    9    —      12,936 
                               
Total Consumer Loans   13,416    67    1,280    9    —      14,772 
                               
Total Loans  $506,241   $11,169   $47,789   $9   $8   $565,216 
                               
 
20  

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 
                               
 
21
  

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:
 
         
   September 30, 2021   December 31, 2020 
Real Estate:          
Land Development and Construction  $4,795   $6,153 
Farmland   375    520 
1-4
Family Mortgages
   15,764    23,306 
Commercial Real Estate   19,348    24,237 
           
Total Real Estate Loans   40,282    54,216 
Business Loans:          
Commercial and Industrial Loans   4,820    7,871 
Farm Production and Other Farm Loans   222    755 
           
Total Business Loans   5,042    8,626 
Consumer Loans:          
Other Consumer Loans   487    940 
           
Total Consumer Loans   487    940 
           
Total Purchased Loans  $45,811   $63,782 
           
 
22  
Period-end,
nonaccrual loans, segregated by class, were as follows:
 
         
   September 30, 2021   December 31, 2020 
Real Estate:          
Land Development and Construction  $ —     $ —   
1-4
Family Mortgages
   44    73 
Commercial Real Estate   327    —   
           
Total Real Estate Loans   371    73 
Business Loans:          
Commercial and Industrial Loans   13    18 
           
Total Business Loans   13    18 
Consumer Loans:          
Other Consumer Loans   0      14 
           
Total Consumer Loans   0      14 
           
Total Purchased Nonaccrual Loans  $384   $105 
           
 
23

An age analysis of past due loans, segregated by class of loans, as of September 30, 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  $ —     $ —     $ —     $4,795   $4,795   $ —   
Farmland   —      —      —      375    375    —   
1-4
Family Mortgages
   210    0      210    15,554    15,764    0   
Commercial Real Estate   153    —      153    19,195    19,348    —   
                               
Total Real Estate Loans   363    0      363    39,919    40,282    0   
Business Loans:                              
Commercial and Industrial Loans   83    —      83    4,737    4,820    —   
Farm Production and Other Farm Loans   —      —      —      222    222    —   
                               
Total Business Loans   83    —      83    4,959    5,042    —   
Consumer Loans:                              
Other Consumer Loans   4    —      4    483    487    —   
                               
Total Consumer Loans   4    —      4    483    487    —   
                               
Total Loans  $450   $0     $450   $45,361   $45,811   $0   
                               
 
24

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   0      —      0      24,237    24,237    —   
                               
Total Real Estate Loans   733    —      733    53,483    54,216    —   
Business Loans:                              
Commercial and Industrial Loans   849    0      849    7,022    7,871    —   
Farm Production and Other Farm Loans   —      —      —      755    755    —   
                               
Total Business Loans   849    0      849    7,777    8,626    —   
Consumer Loans:                              
Other Consumer Loans   35    0      35    905    940    —   
                               
Total Consumer Loans   35    0      35    905    940    —   
                               
Total Loans  $1,617   $0     $1,617   $62,165   $63,782   $—   
                               
 
25

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 September 30, 2021:
 
                         
       Special                 
   Satisfactory   Mention   Substandard   Doubtful   Loss   Total 
   1,2,3,4   5,6   7   8   9   Loans 
Real Estate:                              
Land Development and Construction  $4,052   $732   $11   $—     $—     $4,795 
Farmland   220    155    —      —      —      375 
1-4
Family Mortgages
   13,398    1,814    552    —      —      15,764 
Commercial Real Estate   17,590    1,151    607    —      —      19,348 
                               
Total Real Estate Loans   35,260    3,852    1,170    —      —      40,282 
Business Loans:                              
Commercial and Industrial Loans   4,287    428    105    —      —      4,820 
Farm Production and Other Farm Loans   222    —      —      —      —      222 
                               
Total Business Loans   4,509    428    105    —      —      5,042 
Consumer Loans:                              
Other Consumer Loans   467    0      20    —      0      487 
                               
Total Consumer Loans   467    0      20    —      0      487 
                               
Total Loans  $40,236   $4,280   $1,295   $—     $0     $45,811 
                               
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:
 
                         
       Special                 
   Satisfactory   Mention   Substandard   Doubtful   Loss   Total 
   1,2,3,4   5,6   7   8   9   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 
                               
 
26
 
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:
 
         
   September 30, 2021   December 31, 2020 
Real Estate:          
Land Development and Construction  $—     $8 
1-4
Family Mortgages
   —      25 
           
Total Real Estate Loans   0      33 
           
Business Loans:          
Commercial and Industrial Loans   309    305 
           
Total Business Loans   309    305 
           
Total Purchased Credit Deteriorated Loans  $309   $338 
           
Nonaccrual loans of
$-0-
and $25 are included in the
1-4
Family Mortgages at September 30, 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 purchased loans classified as TDRs as of the nine months ended September 30, 2021, or September 30, 2020.
 
27 

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.
The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2021:
 
                 
   Real   Business         
September 30, 2021
  Estate   Loans   Consumer   Total 
Balance, January 1, 2021  $3,885   $611   $239   $4,735 
Provision for loan losses   21    155    1,111    1,287 
Charge-offs   685    179    30    894 
Recoveries   168    15    7    190 
                     
Net charge-offs   517    164    23    704 
                     
Balance, September 30, 2021  $3,389   $602   $1,327   $5,318 
                     
Period end allowance allocated to:                    
Loans individually evaluated for impairment  $6   $36   $1,200   $1,242 
Loans collectively evaluated for impairment   3,383    566    127    4,076 
                     
Balance, September 30, 2021  $3,389   $602   $1,327   $5,318 
                     
 
28


The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2020:
 
                 
   Real   Business         
September 30, 2020
  Estate   Loans   Consumer   Total 
Balance, January 1, 2020  $3,075   $371   $309   $3,755 
Provision for loan losses   729    450    4    1,183 
Charge-offs   309    222    91    622 
Recoveries   104    35    39    178 
                     
Net charge-offs   205    187    52    444 
                     
Balance, September 30, 2020  $3,599   $634   $261   $4,494 
                     
Period end allowance allocated to:                    
Loans individually evaluated for impairment  $755   $13   $—     $768 
Loans collectively evaluated for impairment   2,844    621    261    3,726 
                     
Balance, September 30, 2020  $3,599   $634   $261   $4,494 
                     
The Company’s recorded investment in loans as of September 30, 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:
 
                 
   Real   Business         
September 30, 2021
  Estate   Loans   Consumer   Total 
Loans individually evaluated for specific impairment  $2,324   $232   $1,200   $3,756 
Loans collectively evaluated for general impairment   489,441    103,462    14,059    606,962 
Acquired with deteriorated credit quality   —      309    —      309 
                     
   $491,765   $104,003   $15,259   $611,027 
                     
 
                 
   Real   Business         
December 31, 2020
  Estate   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 
                     
 
29  

Note 10. Other Intangible Assets
(in thousands)
The following table provides a summary of finite-lived intangible assets as of the dates presented:
 
         
   
September 30, 2021
   
December 31, 2020
 
Core deposit intangible  $630   $739 
Accumulated amortization   (82   (109
           
Total finite-lived intangible assets  $548   $630 
           
Core deposit intangible amortization expense for the period ended September 30, 2021 and period ended December 31, 2020 was $82 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  $27 
2022   109 
2023   109 
2024   109 
2025   109 
Thereafter   85 
     
  $548 
     
 
30 

Note 11. Secured Line of Credit
(in thousands)
On June 9, 2021, the Company obtained a secured revolving line of credit (“Line”) in the amount of $20,000 with First Horizon Bank. The proceeds of the Line were used to enhance the Bank’s capital structure. The Line bears interest at a floating interest rate linked to WSJ Prime Rate with an initial interest rate of 3.25%, which is payable quarterly on the first day of each calendar quarter, commencing on July 1, 2021, with the final installment of interest being due and payable concurrently on the same date that the principal balance is due. The Line also bears an unused line fee at a rate equal to 0.25%, applied to the unused balance of the Line. The Line is fully secured by the common stock of the Bank. The Line matures on June 9, 2023, at which time all unpaid interest and principal is due and payable.
 
         
   
September 30, 2021
   
December 31,
2020
 
Funded balance  $18,000   $0   
Unfunded balance   2,000    0   
           
Total credit facility  $20,000   $0   
           
Note 12. Shareholders’ Equity
(in thousands, except share data)
The following summarizes the activity in the capital structure of the Company:
 
                         
              
Accumulated
       
   
Number
       
Additional
  
Other
       
   
of Shares
   
Common
   
Paid-In
  
Comprehensive
  
Retained
    
   
Issued
   
Stock
   
Capital
  
Income (Loss)
  
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
Stock compensation expense   —      —      42   —     —     42 
Other comprehensive loss, net   —      —      —     (13,668  —     (13,668
                            
Balance, March 31, 2021   5,587,070   $1,118   $18,176  $(9,530 $96,714  $106,478 
Net income   —      —      —     —     1,907   1,907 
Dividends paid ($0.24 per share)   —      —      —     —     (1,343  (1,343
Restricted stock granted   8,250    2    (2  —     —     —   
Stock compensation expense   —      —      40   —     —     40 
Other comprehensive income, net   —      —      —     2,492   —     2,492 
                            
Balance, June 30, 2021   5,595,320   $1,120   $18,214  $(7,038 $97,278  $109,574 
Net income   —      —      —     —     1,880   1,880 
Dividends paid ($0.24 per share)   —      —      —     —     (1,343  (1,343
Stock compensation expense   —      —      40   —     —     40 
Other comprehensive loss, net   —      —      —     (2,769  —     (2,769
                            
Balance, September 30, 2021   5,595,320   $1,120   $18,254  $(9,807 $97,815  $107,382 
                            
 
31 

                         
            
Accumulated
       
   
Number
     
Additional
  
Other
       
   
of Shares
  
Common
  
Paid-In
  
Comprehensive
  
Retained
    
   
Issued
  
Stock
  
Capital
  
Income (Loss)
  
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 
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 
Net income   —     —     —     —     1,462   1,462 
Dividends paid ($0.24 per share)   —     —     —     —     (1,342  (1,342
Restricted stock forfeited   (4,500  (1  1   —     —     —   
Restricted stock granted   8,250   2   (2  —     —     —   
Stock compensation expense   —     —     41   —     —     41 
Other comprehensive income, net   —     —     —     464   —     464 
                          
Balance, June 30, 2020   5,586,381  $1,118  $18,049  $5,671  $94,531  $119,369 
Net income   —     —     —     —     2,083   2,083 
Dividends paid ($0.24 per share)   —     —     —     —     (1,341  (1,341
Options exercised   689   —     —     —     —     —   
Stock compensation expense   —     —     43   —     —     43 
Other comprehensive loss, net   —     —     —     (2,655  —     (2,655
                          
Balance, September 30, 2020   5,587,070  $1,118  $18,092  $3,016  $95,273  $117,499 
                          
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.
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.
 
32 

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2021:
 
                 
   Quoted Prices             
   in Active   Significant         
   Markets for   Other   Significant     
   Identical   Observable   Unobservable     
   Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Totals 
Securities available for sale                    
Obligations of U.S. Government Agencies  $—     $4,855   $—     $4,855 
Mortgage-backed securities   —      387,267    —      387,267 
State, county and municipal obligations   —      181,569    —      181,569 
Other securities   498    —      —      498 
                     
Total  $498   $573,691   $—     $574,189 
                     
The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2020:
 
                 
   Fair Value Measurements Using: 
   Quoted Prices             
   in Active   Significant         
   Markets for   Other   Significant     
   Identical   Observable   Unobservable     
   Assets   Inputs   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 obligations   —      104,197    —      104,197 
Other securities   —      508    —      508 
                     
Total  $—     $678,749   $—     $678,749 
                     
The Company recorded 0 gains or losses in earnings for the period ended September 30, 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.
 
33  

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 September 30, 2021, the following table provides the hierarchy level and the fair value of the related assets:
 
                 
   Fair Value Measurements Using: 
   Quoted Prices             
   in Active   Significant         
   Markets for   Other   Significant     
   Identical   Observable   Unobservable     
   Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Totals 
Impaired loans  $—     $—     $111   $111 
Other real estate owned   —      —      1,567    1,567 
                     
Total  $—     $—     $1,678   $1,678 
                     
 
34  

The following table presents information as of September 30, 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  $111   Appraised value of collateral less estimated costs to sell  Estimated costs to sell   25
OREO   1,567   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   Significant         
   Markets for   Other   Significant     
   Identical   Observable   Unobservable     
   Assets   Inputs   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 $1,317 and $2,920, had an allocated allowance for loan losses of $1,206 and $907 at September 30, 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
$-0-
and $391 was necessary and recorded during the three and nine-month period ended September 30, 2021, respectively. Management determined 0 fair value adjustment was necessary for the year ended December 31, 2020.
 
35  

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 September 30, 2021:
 
                     
       Quoted Prices             
       in Active   Significant         
       Markets for   Other   Significant   Total 
   Carrying   Identical   Observable   Unobservable   Fair 
September 30, 2021  Value   Assets   Inputs   Inputs   Value 
       (Level 1)   (Level 2)   (Level 3)     
Financial assets                         
Cash and due from banks  $17,795   $17,795   $—     $—     $17,795 
Interest bearing deposits with banks   76,132    76,132    —      —      76,132 
Securities
available-for-sale
   574,189    498    573,691    —      574,189 
Net LHFI   605,709    —      —      596,189    596,189 
Financial liabilities                         
Deposits  $1,113,979   $868,375   $246,313   $—     $1,114,688 
Securities sold under agreement to repurchase   103,061    103,061    —      —      103,061 
Borrowings on secured line of credit   18,000    18,000    —      —      18,000 
 
36  

The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2020:
 
                     
       Quoted Prices             
       in Active   Significant         
       Markets for   Other   Significant   Total 
   Carrying   Identical   Observable   Unobservable   Fair 
December 31, 2020  Value   Assets   Inputs   Inputs   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 LHFI   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 
FHLB advances   25,000    25,000    —      —      25,000 
 
37  

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;
 
  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;
 
38  

  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 noted 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 September 30, 2021, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,356,704 and total deposits of $1,114,738. In addition to full service commercial banking, the Bank offers title insurance services through its affiliate, 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 September 30, 2021, was 35.59% and at December 31, 2020, was 22.06%. The increase was due to an increase in interest bearing cash and cash equivalents and a reduction in the amount of securities required to be pledged at September 30, 2021. Management believes it maintains adequate liquidity for the Company’s current needs.
 
39

The Company’s primary source of liquidity is customer deposits, which were $1,113,979 at September 30, 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”), the Company’s secured line of credit with First Horizon Bank (“FHN”) and federal funds lines with correspondent banks. The Company had $574,189 invested in
available-for-sale
investment securities at September 30, 2021, and $678,749 at December 31, 2020. The decrease in securities is the result of management strategically reducing higher interest-bearing deposits that increased significantly through the first quarter of 2021 due to government stimulus by liquidating under-performing securities.    
The Company also had $76,132 in interest bearing deposits at other banks at September 30, 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 September 30, 2021 and December 31, 2020. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At September 30, 2021, the Company had unused and available $219,107 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 September 30, 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 secured line of credit with FHN was originated on June 9, 2021. At September 30, 2021, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of
$-0-
as of September 30, 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 $107,382 at September 30, 2021, as compared to $119,548 at December 31, 2020. The decrease in shareholders’ equity was the result of the accumulated other comprehensive loss (“AOCL”) brought about by the investment securities market value adjustment partially offset by earnings in excess of dividends paid. The AOCL is a result of a modest increase in interest rates that have occurred since the purchase of securities. Management does not intend to sell any securities at an unrealized loss position.
 
40

On June 9, 2021, the Company obtained a $20,000 secured revolving line of credit with FHN to enhance the Bank’s capital structure by injecting $18,000 into the Bank. With the capital injection coupled with strategically reducing higher interest-bearing deposits, the Bank’s Tier 1 Leverage ratio increased at September 30, 2021 and December 31, 2020, respectively, to 9.08% from 7.05%.
The Company paid aggregate cash dividends in the amount of $4,027, or $0.72 per share, during the nine-month period ended September 30, 2021 compared to $4,022, or $0.72 per share, for the same period in 2020.
Quantitative measures established by federal regulations to ensure capital adequacy require the Company and Bank 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 September 30, 2021, the Company and Bank meets all capital adequacy requirements to which it is subject and according to these requirements the Company and Bank is considered to be well capitalized.
 
                 Minimum Capital 
          Minimum Capital  Requirement to be 
          Requirement to be  Adequately 
   Actual  Well Capitalized  Capitalized 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 
September 30, 2021          
Citizens Holding Company:          
Tier 1 leverage ratio  $103,611    7.80 $66,449    5.00 $53,159    4.00
Common Equity tier 1 capital ratio   103,611    12.69  86,384    6.50  59,804    4.50
Tier 1 risk-based capital ratio   103,611    12.69  65,294    8.00  48,970    6.00
Total risk-based capital ratio   108,929    13.35  81,617    10.00  65,294    8.00
Citizens Bank:          
Tier 1 leverage ratio  $120,713    9.08 $66,437    5.00 $53,150    4.00
Common Equity tier 1 capital ratio   120,713    14.79  86,368    6.50  59,793    4.50
Tier 1 risk-based capital ratio   120,713    14.79  65,284    8.00  48,963    6.00
Total risk-based capital ratio   126,031    15.44  81,606    10.00  65,284    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
Citizens Bank:          
Tier 1 leverage ratio  $99,170    7.05 $70,326    5.00 $56,261    4.00
Common Equity tier 1 capital ratio   99,170    12.25  91,423    6.50  63,293    4.50
Tier 1 risk-based capital ratio   99,170    12.25  64,759    8.00  48,569    6.00
Total risk-based capital ratio   103,905    12.84  80,948    10.00  64,759    8.00
 
41

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%.
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 September 30, 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.
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:
 
42

   For the Three Months   For the Nine Months 
   Ended September 30,   Ended September 30, 
   2021   2020   2021   2020 
Interest Income, including fees  $9,762   $10,579   $28,657   $30,415 
Interest Expense   1,160    1,673    3,928    5,774 
                    
Net Interest Income   8,602    8,906    24,729    24,641 
Provision for loan losses   968    247    1,287    1,183 
                    
Net Interest Income after        
Provision for loan losses   7,634    8,659    23,442    23,458 
Other Income   3,294    2,637    9,515    7,488 
Other Expense   8,741    8,653    26,191    25,064 
                    
Income Before Provision For        
Income Taxes   2,187    2,643    6,766    5,882 
Provision for Income Taxes   307    560    1,082    1,177 
                    
Net Income  $1,880   $2,083   $5,684   $4,705 
                    
Net Income Per share - Basic  $0.34   $0.37   $1.02   $0.84 
                    
Net Income Per Share-Diluted  $0.34   $0.37   $1.02   $0.84 
                    
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 6.60% for the three months ended September 30, 2021, and 7.18% for the corresponding period in 2020. The decrease in ROE for the three months September 30, 2021 compared to the same period in 2020 was a result of a decrease in earnings compared to prior period.
Annualized return on average equity (“ROE”) was 6.69% for the nine months ended September 30, 2021, and 5.40% for the corresponding period in 2020. The increase in ROE for the nine months ended September 30, 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 $19.22 at September 30, 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 nine months ended September 30, 2021 were $1,433,229 compared to $1,336,513 for the year ended December 31, 2020. This increase was due mainly to the influx of deposits in the first quarter of 2021 as a result of government stimulus programs benefitting the Bank’s customers. A portion of the deposits were subsequently invested into the securities portfolio and management strategically reduced approximately $200,000 in deposits during the second quarter of 2021. Due to this deposit
reduction the average asset balance will continue to trend down for the rest of the year.
 
43

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 $8,602 and $24,729 for the three and nine months ended September 30, 2021, respectively, as compared to $8,906 and $24,641 for the same respective time periods in 2020.
The annualized net interest margin was 2.53% for the nine months ended September 30, 2021 compared to 2.76% for the corresponding period of 2020. The decrease in net interest margin for the nine months ended September 30, 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 95 basis points (“bps”) to 76 bps at September 30, 2021 compared to 171 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 51 bps for the nine months ended September 30, 2021 compared to 81 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:
 
44

TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES    
 
   Three Months Ended September 30, 
   Average Balance   Income/Expense   Average Yield/Rate 
   2021   2020   2021   2020   2021  2020 
Loans:           
Loans, net of unearned
(1)
  $622,721   $647,122   $7,636   $7,812    4.90  4.83
Investment Securities           
Taxable   478,968    560,906    1,625    2,400    1.36  1.71
Tax-exempt
   108,082    65,425    563    491    2.08  3.00
                             
Total Investment Securities   587,050    626,331    2,188    2,891    1.49  1.85
Federal Funds Sold and Other   44,640    14,428    15    5    0.13  0.14
                             
Total Interest Earning Assets
(1)(2)
   1,254,412    1,287,881    9,839    10,708    3.14  3.33
                             
Non-Earning
Assets
   88,148    101,793        
                 
Total Assets  $1,342,560   $1,389,674        
                 
Deposits:           
Interest-bearing Demand Deposits
(3)
  $463,319   $472,407   $205   $714    0.18  0.60
Savings   122,841    100,226    31    27    0.10  0.11
Time   246,875    225,249    715    767    1.16  1.36
                             
Total Deposits   833,035    797,882    951    1,508    0.46  0.76
Borrowed Funds           
Short-term Borrowings   90,490    198,658    209    167    0.92  0.34
Long-term Borrowings   —      —      —      —      —     —   
                             
Total Borrowed Funds   90,490    198,658    209    167    0.92  0.34
                             
Total Interest-Bearing Liabilities
(3)
   923,525    996,540    1,160    1,675    0.50  0.67
Non-Interest
Bearing Liabilities
           
Demand Deposits   294,790    257,224        
Other Liabilities   10,327    15,516        
Shareholders’ Equity   113,918    120,394        
                 
Total Liabilities and Shareholders’ Equity  $1,342,560   $1,389,674        
                 
Interest Rate Spread           2.63  2.65
                 
Net Interest Margin      $8,679   $9,033    2.74  2.81
                       
Less           
Tax Equivalent Adjustment       77    127    
                 
Net Interest Income      $8,602   $8,906    
                 
 
45

   Nine Months Ended September 30, 
   Average Balance   Income/Expense   Average Yield/Rate 
   2021   2020   2021   2020   2021  2020 
Loans:           
Loans, net of unearned
(1)
  $638,675   $613,155   $23,805   $22,943    4.97  4.99
Investment Securities           
Taxable   516,661    481,077    2,950    6,157    0.76  1.71
Tax-exempt
   134,233    63,546    2,433    1,434    2.42  3.01
                             
Total Investment Securities   650,894    544,623    5,383    7,591    1.10  1.86
Federal Funds Sold and Other   45,746    49,677    40    243    0.12  0.65
                             
Total Interest Earning Assets
(1)(2)
   1,335,315    1,207,455    29,228    30,777    2.92  3.40
                             
Non-Earning
Assets
   97,914    100,843        
                 
Total Assets  $1,433,229   $1,308,298        
                 
Deposits:           
Interest-bearing Demand Deposits
(3)
  $503,576   $442,907   $1,138   $2,395    0.30  0.72
Savings   115,579    92,335    88    84    0.10  0.12
Time   249,149    232,082    2,177    2,610    1.17  1.50
                             
Total Deposits   868,304    767,324    3,403    5,089    0.52  0.88
Borrowed Funds           
Short-term Borrowings   151,196    182,644    525    687    0.46  0.50
Long-term Borrowings   —      —      —      —      —     —   
                             
Total Borrowed Funds   151,196    182,644    525    687    0.46  0.50
                             
Total Interest-Bearing Liabilities
(3)
   1,019,500    949,968    3,928    5,776    0.51  0.81
Non-Interest
Bearing Liabilities
           
Demand Deposits   286,667    228,078        
Other Liabilities   13,811    12,713        
Shareholders’ Equity   113,251    117,539        
                 
Total Liabilities and Shareholders’ Equity  $1,433,229   $1,308,298        
                 
Interest Rate Spread           2.40  2.59
                 
Net Interest Margin      $25,300   $25,001    2.53  2.76
                       
Less           
Tax Equivalent Adjustment       571    360    
                 
Net Interest Income      $24,729   $24,641    
                 
 
46

(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.
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 September 30, 2021, repricing of interest-bearing demand deposits, and reallocating the investment portfolio into slower prepaying
non-taxable
securities offset the decline in yield on taxable securities compared to the same period in 2020. For the nine months ended September 30, 2021, as compared to the respective corresponding period in 2020, the repricing of interest-bearing demand deposits and reallocating the investment portfolio into slower prepaying
non-taxable
securities were the largest contributing factors to the increase in net interest income over these periods. Also, the Company’s continued efforts to reprice and reduce higher interest-bearing deposits 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. Management believes by continuing to reprice and strategically reduce interest-bearing liabilities as they mature, continued focus on loan growth, and continuing to reallocate the investment mix will increase the net interest margin.
 
47

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 and nine months ended September 30, 2021 compared to the same respective period in 2020:
TABLE 2 - VOLUME/RATE ANALYSIS
 
       (in thousands)     
   Three Months Ended September 30, 2021 
   2021 Change from 2020 
   Volume   Rate   Total 
INTEREST INCOME      
Loans  $(295   119   $(176
Taxable Securities   (351   (424   (775
Non-Taxable
Securities
   320    (248   72 
Federal Funds Sold and Other   10    (0   10 
               
TOTAL INTEREST INCOME  $(315  $(554  $(869
               
INTEREST EXPENSE      
Interest-bearing demand deposits  $(14   (495   (509
Savings Deposits   6    (2   4 
Time Deposits   74    (126   (52
Short-term borrowings   (91   133    42 
               
TOTAL INTEREST EXPENSE  $(25  $(490   (515
               
NET INTEREST INCOME  $(290  $(64  $(354
               
 
48

   Nine Months Ended September 30, 2021 
   2021 Change from 2020 
   Volume   Rate   Total 
INTEREST INCOME      
Loans  $955    (93  $862 
Taxable Securities   455    (3,662   (3,207
Non-Taxable
Securities
   2,076    (596   1,480 
Federal Funds Sold and Other   1,481    (3,689   (2,208
               
TOTAL INTEREST INCOME  $4,968   $(8,041  $(3,073
               
INTEREST EXPENSE      
Interest-bearing demand deposits  $328    (1,585   (1,257
Savings Deposits   21    (17   4 
Time Deposits   192    (625   (433
Short-term borrowings   670    (2,356   (1,686
               
TOTAL INTEREST EXPENSE  $1,211   $(4,583   (3,372
               
NET INTEREST INCOME  $3,757   $(3,458  $299 
               
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.
 
49

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. Management determines the amount of the allowance, and the Board of Directors reviews and approves the allowance for loan losses. 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  Year Ended  Amount of   Percent of 
   September 30,  December 31,  (Decrease)   (Decrease) 
   2021  2020  Increase   Increase 
BALANCES:      
Gross Loans  $611,027  $652,257  $(41,230   -6.32
Allowance for Loan Losses   5,318   4,735   583    12.31
Nonaccrual Loans   4,033   8,564   (4,531   -52.91
Ratios:      
Allowance for loan losses to gross loans   0.87  0.73   
Net loans charged off to allowance for loan losses   13.24  10.67   
The provision for loan losses for the three months ended September 30, 2021 was $968, a linked quarter increase of $736. The provision for loan losses for the nine months ended September 30, 2021 was $1,287, an increase of $104 from the provision for loan losses of $1,183 for the same period in 2020. The change in the Company’s loan loss provision for the three and nine months ended September 30, 2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the specific provisioning for one relationship partially offset by the decline in qualitative reserves coupled with the decline in loans balances. 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 September 30, 2021, net loan losses charged to the allowance for loan losses totaled $1, a decrease of $9 from the $10 charged off in the same period in 2020. For the nine months ended September 30, 2021, net loan losses charged to the allowance for loan losses totaled $704, an increase of $260 from the $444 charged off in the same period in 2020.
 
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The increase was primarily due to two significant charge-offs during the second quarter. 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 nine months ended September 30, 2021 that have not been charged off or specifically reserved for in the allowance. 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 September 30, 2021 was $3,294, an increase of $657, or 24.91%, from $2,637 in the same period in 2020. Service charges on deposit accounts were $952 in the three months ended September 30, 2021, compared to $771 for the same period in 2020. As the vaccine distribution continues, the national and local economies are starting to recover resulting in increased spending and overdraft income. Included in the service charges on deposit accounts line item for the three months ended September 30, 2021, overdraft income increased by $163, or 31.83% from the same period in 2020. Interchange fees which are included in the other service charges and fees line item on the income statement also increased by $83, or 9.71%, to $933 for the three months ended September 30, 2021, compared to $850 for the same period in 2020. Other operating income not derived from service charges or fees increased $372, or 44.55% to $1,207 in the three months ended September 30, 2021, compared to $835 for the same period in 2020. This increase was primarily due to three reasons, (1) an increase in gains from security sales due to strategic investment decisions (2) an increase in mortgage loan origination income and (3) income from the payout of the Company’s bank-owned life insurance (“BOLI”) claims.
Other income for the nine months ended September 30, 2021 was $9,515, an increase of $2,027, or 27.07%, from $7,488 in the same period in 2020. Service charges on deposit accounts were $2,534 in the nine months ended September 30, 2021, compared to $2,488 for the same period in 2020. As the vaccine distribution continues, the national and local economies are starting to recover resulting in increased spending and overdraft income. Interchange fees which are included in the other service charges and fees line item on the income statement continues its growing trend by increasing by $488, or 21.07%, to $2,804 for the nine months ended September 30, 2021, compared to $2,316 for the same period in 2020. Other operating income not derived from service charges or fees increased $1,455, or 62.58% to $3,780 in the nine months ended September 30, 2021, compared to $2,325 for the same period in 2020. The reasons for the significant increase were discussed above.
 
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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   For the Nine Months 
   Ended September 30,   Ended September 30, 
Other operating income  2021   2020   2021   2020 
BOLI income  $310   $123   $746   $352 
Mortgage loan origination income   301    361    1,019    890 
Income from security sales, net   459    293    1,378    703 
Other income   137    58    637    380 
                    
Total Other Income  $1,207   $835   $3,780   $2,325 
                    
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 September 30, 2021 and 2020 were $8,741 and $8,653, respectively, an increase of $88 or 1.02%. Salaries and benefits increased to $327 for the three months ended September 30, 2021 and increased to $4,716 from $4,389 for the same period in 2020. Occupancy expense decreased by $121, or (6.50%), to $1,740 for the three months ended September 30, 2021, compared to $1,861 for the same period of 2020. For the three months ended September 30, 2021, other
non-interest
expense decreased $118, or (4.91%) to $2,285 compared to $2,403 for the same period in 2020.
Aggregate
non-interest
expenses for the nine months ended September 30, 2021 and 2020 were $26,191 and $25,064, respectively, an increase of $1,127 or 4.50%. Salaries and benefits increased to $738 for the nine months ended September 30, 2021 and increased to $13,869 from $13,131 for the same period in 2020. Occupancy expense decreased by $208, or (3.74%), to $5,348 for the nine months ended September 30, 2021, compared to $5,556 for the same period of 2020. Other operating expenses increased by $597, or 9.36%, to $6,974 for the nine months ended September 30, 2021, compared to $6,377 for the same period of 2020. The increase is primary attributed to the write down of two OREO properties coupled with continued investment in customer facing and internal technology.
 
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The following is a detail of the major expense classifications that make up the other operating expense line item in the income statement:
 
   Ended September 30,   Ended September 30, 
Other Operating Expense  2021   2020   2021   2020 
Advertising  $126   $159   $429   $519 
Office supplies   256    270    740    873 
Professional fees   320    272    774    791 
Technology expense   128    139    424    435 
Postage and freight   135    142    465    421 
Loan collection expense   15    57    85    100 
Regulatory and related expense   231    230    703    230 
Debit card/ATM expense   186    203    546    442 
Write down on OREO   —      162    390    445 
Other expenses   888    769    2,418    2,121 
                    
Total Other Expense  $2,285   $2,403   $6,974   $6,377 
                    
The Company’s efficiency ratio for the three months ended September 30, 2021 was 75.48%, compared to 77.66% for the same period in 2020. The Company’s efficiency ratio for the nine months ended September 30, 2021 was 76.36%, compared to 80.07% 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.
BALANCE SHEET ANALYSIS
 
           Amount of   Percent of 
   September 30,   December 31,   Increase   Increase 
   2021   2020   (Decrease)   (Decrease) 
Cash and Due From Banks  $17,795   $16,840   $955    5.67
Interest Bearing deposits with        
Other Banks   76,132    25,468    50,664    198.93
Investment Securities   574,189    678,749    (104,560   -15.40
Loans, net   605,709    647,521    (41,812   -6.46
Premises and Equipment   26,566    25,630    936    3.65
Total Assets   1,355,919    1,450,692    (94,773   -6.53
Total Deposits   1,113,979    1,095,189    18,790    1.72
Total Shareholders’ Equity   107,382    119,548    (12,166   -10.18
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 September 30, 2021 was $93,927, which was an increase of $51,619 from the balance of $42,308 at December 31, 2020.
 
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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 September 30, 2021 decreased by $104,560, or (15.40%), to $574,189 from $678,749 at December 31, 2020. The decrease is a result of the Company liquidating a portion of the investment portfolio to provide funding for the Company’s strategic high interest-bearing deposit reduction plan.
LOANS
The Company’s loan balance decreased by $41,812, or (6.46%), during the nine months ended September 30, 2021, to $605,709 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. PPP loans have decreased by $15,446 for the nine months ended September 30, 2021. While loan demand continues to recover in certain sectors, the uncertainty surrounding the pandemic continues to 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.    
DEPOSITS
The following table shows the balance and percentage change in the various deposits:
 
           Amount of   Percent of 
   September 30,   December 31,   Increase   Increase 
   2021   2020   (Decrease)   (Decrease) 
Noninterest-Bearing Deposits  $295,097   $276,033   $19,064    6.91
Interest-Bearing Deposits   447,525    480,987    (33,462   -6.96
Savings Deposits   125,753    104,532    21,221    20.30
Certificates of Deposit   245,604    233,637    11,967    5.12
                    
Total deposits  $1,113,979   $1,095,189   $18,790    1.72
                    
All deposit accounts except for interest-bearing deposits increased during the nine months ended September 30, 2021. The increase in deposit accounts is a result of the
COVID-19
savings trend coupled with record financial stimulus. The decrease in interest-bearing accounts is a result of management strategically reducing higher interest-bearing accounts to help improve both interest margin and the Bank’s capital ratios. While total deposits are still up from December 31, 2020, management reduced higher interest-bearing deposits during the second quarter by approximately $200,000. 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.
 
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OFF-BALANCE
SHEET ARRANGEMENTS
Please refer to Note 2 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 September 30, 2021 and December 31, 2020:
 
   September 30, 2021  December 31, 2020 
   Following  Months  Following  Months 
   12 months  13-24  12 months  13-24 
+400 basis points   -4.5  3.9  9.1  8.9
+300 basis points   -2.1  4.7  10.7  8.4
+200 basis points   -0.7  4.3  11.6  7.3
+100 basis points   -0.5  2.4  10.9  5.3
Flat rates   —     —     —     —   
-100 basis points   -7.0  -8.9  -12.2  -9.0
-200 basis points   -11.1  -12.8  -19.8  -19.9
The following table presents the change in our economic value of equity as of September 30, 2021 and December 31, 2020, assuming immediate parallel shifts in interest rates:
 
   Economic Value of Equity at Risk (%) 
   September 30, 2021  December 31, 2020 
+400 basis points   -17.2  11.3
+300 basis points   -11.4  18.8
+200 basis points   -6.5  24.6
+100 basis points   -2.4  21.9
Flat rates   —     —   
-100 basis points   -14.9  -29.4
-200 basis points   -33.1  -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 September 30, 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 nine months ended September 30, 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
 
 
Filed as exhibit 10(1) to the Current Report on Form
8-K
of the Company filed with the SEC on June 14, 2021 and incorporated herein by reference.
 
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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: November 5, 2021
 
 
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