CIZN 10-Q Quarterly Report June 30, 2022 | Alphaminr
CITIZENS HOLDING CO /MS/
ALPHAMINR

CIZN 10-Q Quarter ended June 30, 2022

Balance Sheet
Cash Flow
Income Statement
Debt
CITIZENS HOLDING CO /MS/
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PROXIES
DEF 14A
Filed on April 25, 2023
DEF 14A
Filed on March 21, 2023
DEF 14A
Filed on April 26, 2022
DEF 14A
Filed on March 18, 2022
DEF 14A
Filed on March 24, 2021
DEF 14A
Filed on March 20, 2020
DEF 14A
Filed on March 18, 2019
DEF 14A
Filed on March 20, 2018
DEF 14A
Filed on March 23, 2017
DEF 14A
Filed on March 18, 2016
DEF 14A
Filed on March 19, 2015
DEF 14A
Filed on March 20, 2014
DEF 14A
Filed on March 21, 2013
DEF 14A
Filed on March 20, 2012
DEF 14A
Filed on March 29, 2011
DEF 14A
Filed on March 19, 2010
10-Q
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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 June 30, 2022
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 August 5, 2022:
Title
Outstanding
Common Stock, $0.20 par value
5,603,570
CITIZENS HOLDING COMPANY
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION 1
Item 1.
Consolidated Financial Statements. 1
Consolidated Statements of Financial Condition, as of June 30, 2022 (Unaudited) and December 31, 2021 (Audited) 1
Consolidated Statements of Income for the Three and six months ended June 30, 2022 (Unaudited) and 2021 (Unaudited) 2
Consolidated Statements of Comprehensive Loss for the Three and six months ended June 30, 2022 (Unaudited) and 2021 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2022 (Unaudited) and 2021 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. 28
Item 3.
Quantitative and Qualitative Disclosures About Market Risk. 46
Item 4.
Controls and Procedures. 48
PART II. OTHER INFORMATION 49
Item 1.
Legal Proceedings. 49
Item 1A.
Risk Factors. 49
Item 6.
Exhibits. 49
SIGNATURES 50
PART I. FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS.
CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
June 30, December 31,
2022 2021
(Unaudited) (Audited)
ASSETS
Cash and due from banks
$ 14,274 $ 10,673
Interest bearing deposits with other banks
27,008 68,563
Cash and cash equivalents
41,282 79,236
Investment securities available for sale, at fair value
563,796 631,835
Loans held for investment (LHFI), net of unearned income
589,541 571,847
Less allowance for loan losses, LHFI
5,046 4,513
Net LHFI
584,495 567,334
Premises and equipment, net
26,444 26,661
Other real estate owned, net
1,328 2,475
Accrued interest receivable
4,103 4,171
Cash surrender value of life insurance
25,424 25,679
Deferred tax assets, net
33,340 6,279
Identifiable intangible assets, net
13,495 13,551
Other assets
5,374 4,088
TOTAL ASSETS
$ 1,299,081 $ 1,361,309
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest
bearing deposits
$ 304,640 $ 302,707
Interest bearing deposits
813,347 809,185
Total deposits
1,117,987 1,111,892
Securities sold under agreement to repurchase
124,162 112,760
Borrowings on secured line of credit
18,000 18,000
Accrued interest payable
389 328
Deferred compensation payable
9,715 9,543
Other liabilities
2,902 2,886
Total liabilities
1,273,155 1,255,409
SHAREHOLDERS’ EQUITY
Common stock, $ 0.20 par value, 22,500,000 shares authorized, Issued and outstanding: 5,603,570 shares - June 30, 2022; 5,595,320 shares - December 31, 2021
1,121 1,120
Additional
paid-in
capital
18,370 18,293
Accumulated other comprehensive loss, net of tax benefit of $ 31,162 at June 30, 2022 and $ 3,921 at December 31, 2021
( 93,736 ) ( 11,795 )
Retained earnings
100,171 98,282
Total shareholders’ equity
25,926 105,900
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 1,299,081 $ 1,361,309
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 Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
INTEREST INCOME
Interest and fees on loans
$ 6,639 $ 7,917 $ 13,036 $ 16,048
Interest on securities
Taxable
1,901 1,255 3,598 1,517
Nontaxable
983 634 1,930 1,305
Other interest
37 10 50 25
Total interest income
9,560 9,816 18,614 18,895
INTEREST EXPENSE
Deposits
528 1,186 1,084 2,452
Other borrowed funds
269 136 480 316
Total interest expense
797 1,322 1,564 2,768
NET INTEREST INCOME
8,763 8,494 17,050 16,127
PROVISION FOR LOAN LOSSES
56 232 149 319
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
8,707 8,262 16,901 15,808
OTHER INCOME
Service charges on deposit accounts
967 768 1,912 1,582
Other service charges and fees
1,094 1,091 2,119 2,066
Net gains on sales of securities
— 393 — 919
Other operating income
702 737 1,265 1,654
Total other income
2,763 2,989 5,296 6,221
OTHER EXPENSES
Salaries and employee benefits
4,412 4,585 8,851 9,153
Occupancy expense
1,711 1,791 3,486 3,608
Other expense
2,309 2,606 4,396 4,689
Total other expenses
8,432 8,982 16,733 17,450
INCOME BEFORE PROVISION FOR INCOME TAXES
3,038 2,269 5,464 4,579
PROVISION FOR INCOME TAXES
497 362 887 775
NET INCOME
$ 2,541 $ 1,907 $ 4,577 $ 3,804
NET INCOME PER SHARE -Basic
$ 0.45 $ 0.34 $ 0.82 $ 0.68
-Diluted
$ 0.45 $ 0.34 $ 0.82 $ 0.68
DIVIDENDS PAID PER SHARE
$ 0.24 $ 0.24 $ 0.48 $ 0.48
The accompanying notes are an integral part of these financial statements.
2
CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
Net income
$ 2,541 $ 1,907 $ 4,577 $ 3,804
Other comprehensive (loss) gains
Securities
available-for-sale
Net unrealized holding (losses) gains
( 50,978 ) 2,927 ( 109,182 ) ( 15,810 )
Income tax effect
12,719 ( 730 ) 27,241 3,944
Net unrealized (losses) gains
( 38,259 ) 2,197 ( 81,941 ) ( 11,866 )
Reclassification adjustment for gains included in net income
— 393 — 919
Income tax effect
— ( 98 ) — ( 229 )
Net gains included in net income
— 295 — 690
Total other comprehensive (loss) gain
( 38,259 ) 2,492 ( 81,941 ) ( 11,176 )
Comprehensive (loss) gain
$ ( 35,718 ) $ 4,399 $ ( 77,364 ) $ ( 7,372 )
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 Six Months
Ended June 30,
2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities
$ 6,778 $ 12,387
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale
28,258 114,330
Proceeds from sale of investment securities
— 464,528
Purchases of investment securities available for sale
( 71,190 ) ( 461,553 )
Purchases of bank premises and equipment
( 479 ) ( 329 )
Purchases of Federal Home Loan Bank (FHLB) stock
( 784 ) ( 3,943 )
Proceeds from the sale of FHLB stock
— 4,447
Proceeds from sale of other real estate owned
1,151 1,774
Proceeds from death benefit of bank-owned life insurance
813 489
Net change in loans
( 17,310 ) 14,262
Net cash (used in) provided by investing activities
( 59,541 ) 134,005
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits
6,095 32,173
Net change in securities sold under agreement to repurchase
11,402 ( 128,986 )
Proceeds from borrowings on secured line of credit
— 18,000
Payment of FHLB advances
— ( 25,000 )
Payment of dividends
( 2,688 ) ( 2,684 )
Net cash provided by (used in) financing activities
14,809 ( 106,497 )
Net (decrease) increase in cash and cash equivalents
( 37,954 ) 39,895
Cash and cash equivalents, beginning of period
79,236 42,308
Cash and cash equivalents, end of period
$ 41,282 $ 82,203
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 six months ended June 30, 2022
(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.
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 June 30, 2022 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 the Company include the accounts of its wholly owned subsidiary, The Citizens Bank of Philadelphia (the “Bank”). 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, 2021, filed with the Securities and Exchange Commission on March 11, 2022.
5
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.
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
6
discounted cash flow 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
impa
ct that adoption of this standard will have on the
financial c
ondition 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 June 30, 2022, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $ 95,059 compared to an aggregate unused balance of $ 112,292 at December 31, 2021. There were $ 5,432 of letters of credit outstanding at June 30, 2022 and $ 4,432 at December 31, 2021. 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:
7
For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
2022 2021 2022 2021
Basic weighted average shares outstanding
5,592,782 5,584,441 5,589,958 5,581,662
Dilutive effect of granted options
— 240 — 596
Diluted weighted average shares outstanding
5,592,782 5,584,681 5,589,958 5,582,258
Net income
$ 2,541 $ 1,907 $ 4,577 $ 3,804
Net income per share-basic
$ 0.45 $ 0.34 $ 0.82 $ 0.68
Net income per share-diluted
$ 0.45 $ 0.34 $ 0.82 $ 0.68
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 six months ended June 30, 2022:
Directors’ Plan 2013 Plan
Number
of
Shares 		Weighted
Average
Exercise
Price 		Number
of
Shares 		Weighted
Average
Exercise
Price
Outstanding at December 31, 2021
9,000 $ 18.76 — $ —
Granted
— — — —
Exercised
— — — —
Expired
( 9,000 ) 18.76 — —
Outstanding at June 30, 2022
— $ — — $ —
The remaining outstanding options under the Directors’ Plan expired on April 25, 2022 . No options were outstanding under the 2013 Plan as of June 30, 2022.
During 2022, 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 27, 2023 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $ 157 and is expensed ratably over the
one-year
vesting period.
8
Note 5. Income Taxes
(in thousands)
For the three months ended June 30, 2022 and 2021, the Company recorded a provision for income taxes totaling $ 497 and $ 362 , respectively. The effective tax rate was 16.36 % and 15.95 % for the three months ending June 30, 2022 and 2021, respectively.
For the six months ended June 30, 2022 and 2021, the Company recorded a provision for income taxes totaling $ 887 and $ 775 , respectively. The effective tax rate was 16.23 % and 16.93 % for the six months ending June 30, 2022 and 2021, 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:
June 30, 2022 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Estimated
Fair Value
Securities
available-for-sale
Obligations of U.S.
Government agencies
$ 4,970 $ — $ 981 $ 3,989
Mortgage backed securities
441,600 — 68,391 373,209
State, County, Municipals
241,673 7 55,532 186,148
Other securities
500 — 50 450
Total
$ 688,743 $ 7 $ 124,954 $ 563,796
December 31, 2021 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Estimated
Fair Value
Securities
available-for-sale
Obligations of U.S.
Government agencies
$ 4,969 $ — $ 269 $ 4,700
Mortgage backed securities
411,729 42 12,180 399,591
State, County, Municipals
230,359 700 4,008 227,051
Other securities
500 — 7 493
Total
$ 647,557 $ 742 $ 16,464 $ 631,835
9
At June 30, 2022 and December 31, 2021, securities with a carrying value of $ 546,919 and $ 371,190 , respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.
The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2022 and December 31, 2021 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.
June 30, 2022 December 31, 2021
Amortized
Cost 		Estimated
Fair Value 		Amortized
Cost 		Estimated
Fair Value
Available-for-sale
Due in one year or less
$ 223 $ 222 $ 216 $ 217
Due after one year through five years
2,501 2,418 1,895 1,924
Due after five years through ten years
4,614 4,277 4,226 4,287
Due after ten years
239,805 183,670 229,491 225,816
Residential mortgage backed securities
365,333 311,168 332,779 323,736
Commercial mortgage backed securities
76,267 62,041 78,950 75,855
Total
$ 688,743 $ 563,796 $ 647,557 $ 631,835
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 June 30, 2022 and December 31, 2021.
A summary of unrealized loss information for securities
available-for-sale,
categorized by security type follows:
June 30, 2022 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
$ — $ — $ 3,989 $ 981 $ 3,989 $ 981
Mortgage backed securities
131,733 18,489 241,474 49,902 373,207 68,391
State, County, Municipal
153,946 40,021 31,221 15,511 185,167 55,532
Total
$ 285,679 $ 58,510 $ 276,684 $ 66,394 $ 562,363 $ 124,904
December 31, 2021 Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities
Value Losses Value Losses Value Losses
Obligations of U.S. government agencies
$ 4,700 $ 269 $ — $ — $ 4,700 $ 269
Mortgage backed securities
376,644 11,535 19,986 645 396,630 12,180
State, County, Municipal
175,520 3,997 119 11 175,639 4,008
Total
$ 556,864 $ 15,801 $ 20,105 $ 656 $ 576,969 $ 16,457
10
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 June 30, 2022 nor at December 31, 2021.
Note 7. Loans held for investment
(in thousands, except number of loans)
The composition of net loans at June 30, 2022 and December 31, 2021 was as follows:
June 30, 2022 December 31, 2021
Real Estate:
Land Development and Construction
$ 89,352 $ 71,898
Farmland
11,975 13,114
1-4
Family Mortgages
94,093 98,525
Commercial Real Estate
287,542 281,239
Total Real Estate Loans
482,962 464,776
Business Loans:
Commercial and Industrial Loans
(1)
90,799 92,501
Farm Production and Other Farm Loans
518 621
Total Business Loans
91,317 93,122
Consumer Loans:
Credit Cards
2,450 1,963
Other Consumer Loans
12,812 11,986
Total Consumer Loans
15,262 13,949
Total Gross Loans
589,541 571,847
Allowance for Loan Losses
( 5,046 ) ( 4,513 )
Loans, net
$ 584,495 $ 567,334
(1)
Includes PPP loans of $ 1,356 and $ 5,789 as of June 30, 2022 and December 31, 2021, respectively.
11
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:
June 30, 2022 December 31, 2021
Real Estate:
Land Development and Construction
$ 156 $ 171
Farmland
104 118
1-4
Family Mortgages
1,801 1,891
Commercial Real Estate
1,244 1,249
Total Real Estate Loans
3,305 3,429
Business Loans:
Commercial and Industrial Loans
271 386
Farm Production and Other Farm Loans
1 3
Total Business Loans
272 389
Consumer Loans:
Other Consumer Loans
3 8
Total Consumer Loans
3 8
Total Nonaccrual Loans
$ 3,580 $ 3,826
12
An aging analysis of past due loans, segregated by class, as of June 30, 2022, 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
$ 1,192 $ — $ 1,192 $ 88,160 $ 89,352 $ —
Farmland
143 — 143 11,832 11,975 —
1-4 Family Mortgages
1,768 274 2,042 92,051 94,093 56
Commercial Real Estate
457 646 1,103 286,439 287,542 —
Total Real Estate Loans
3,560 920 4,480 478,482 482,962 56
Business Loans:
Commercial and Industrial Loans
2,235 266 2,501 88,298 90,799 —
Farm Production and Other Farm Loans
— — — 518 518 —
Total Business Loans
2,235 266 2,501 88,816 91,317 —
Consumer Loans:
Credit Cards
15 8 23 2,427 2,450 8
Other Consumer Loans
25 — 25 12,787 12,812 —
Total Consumer Loans
40 8 48 15,214 15,262 8
Total Loans
$ 5,835 $ 1,194 $ 7,029 $ 582,512 $ 589,541 $ 64
13
An aging analysis of past due loans, segregated by class, as of December 31, 2021 was as follows:
Loans
30-89 Days

Past Due 		Loans
90 or more
Days
Past Due 		Total Past
Due Loans 		Current
Loans 		Total
Loans 		Accruing
Loans
90 or more
Days
Past Due
Real Estate:
Land Development and Construction
$ 6 $ — $ 6 $ 71,892 $ 71,898 $ —
Farmland
130 33 163 12,951 13,114 —
1-4
Family Mortgages
1,678 292 1,970 96,555 98,525 140
Commercial Real Estate
157 570 727 280,512 281,239 —
Total Real Estate Loans
1,971 895 2,866 461,910 464,776 140
Business Loans:
Commercial and Industrial Loans
205 376 581 91,920 92,501 —
Farm Production and Other Farm Loans
3 — 3 618 621 —
Total Business Loans
208 376 584 92,538 93,122 —
Consumer Loans:
Credit Cards
35 12 47 1,916 1,963 12
Other Consumer Loans
76 2 78 11,908 11,986 2
Total Consumer Loans
111 14 125 13,824 13,949 14
Total Loans
$ 2,290 $ 1,285 $ 3,575 $ 568,272 $ 571,847 $ 154
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.
14
Impaired loans as of June 30, 2022, segregated by class, were as follows:
Unpaid
Principal
Balance 		Recorded
Investment
With No
Allowance 		Recorded
Investment
With
Allowance 		Total
Recorded
Investment 		Related
Allowance 		Average
Recorded
Investment
Real Estate:
Land Development and Construction
$ 156 $ 156 $ — $ 156 $ — $ 164
Farmland
32 32 — 32 — 33
1-4
Family Mortgages
570 570 — 570 — 669
Commercial Real Estate
4,213 4,051 — 4,051 — 2,591
Total Real Estate Loans
4,971 4,809 — 4,809 — $ 3,457
Business Loans:
Commercial and Industrial Loans
304 196 — 196 — $ 214
Total Business Loans
304 196 — 196 — $ 214
Total Loans
$ 5,275 $ 5,005 $ — $ 5,005 $ — $ 3,671
Impaired loans as of December 31, 2021, segregated by class, were as follows:
Unpaid
Principal
Balance 		Recorded
Investment
With No
Allowance 		Recorded
Investment
With
Allowance 		Total
Recorded
Investment 		Related
Allowance 		Average
Recorded
Investment
Real Estate:
Land Development and Construction
$ 171 $ 171 $ — $ 171 $ — $ 240
Farmland
33 33 — 33 — 72
1-4
Family Mortgages
767 767 — 767 — 892
Commercial Real Estate
1,294 1,019 112 1,131 3 3,479
Total Real Estate Loans
2,265 1,990 112 2,102 3 $ 4,683
Business Loans:
Commercial and Industrial Loans
304 72 160 232 36 $ 323
Total Business Loans
304 72 160 232 36 $ 323
Total Loans
$ 2,569 $ 2,062 $ 272 $ 2,334 $ 39 $ 5,006
15
The Company did not have any new troubled debt restructurings as of June 30, 2022 or December 31, 2021.
Changes in the Company’s troubled debt restructurings are set forth in the table below:
Number
of Loans 		Recorded
Investment
Totals at January 1, 2021
3 $ 2,113
Reductions due to:
Principal paydowns
( 112 )
Reclassification to OREO
2 ( 1,788 )
Totals at December 31, 2021
1 $ 213
Reductions due to:
Principal paydowns
( 48 )
Total at June 30, 2022
1 $ 165
The allocated allowance for loan losses attributable to restructured loans was
$- 0 -
at June 30, 2022 and December 31, 2021. The Company had no commitments to lend additional funds on this troubled debt restructuring as of June 30,
2022.
16
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 is as 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 most 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 not align with peers.
Grade 5. MANAGEMENT ATTENTION - Borrower has potential 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 weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.
Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.
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 that 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.
17
Grade 9. LOSS - Loans classified 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 June 30, 2022.
The following table details the amount of gross loans, segregated by loan grade and class, as of June 30, 2022:
Satisfactory
1,2,3,4 		Special
Mention
5,6 		Substandard
7 		Doubtful
8 		Loss
9 		Total
Loans
Real Estate:
Land Development and Construction
$ 87,435 $ 1,750 $ 167 $ — $ — $ 89,352
Farmland
11,324 283 368 — — 11,975
1-4
Family Mortgages
87,211 2,091 4,791 — — 94,093
Commercial Real Estate
244,720 5,851 36,971 — — 287,542
Total Real Estate Loans
430,690 9,975 42,297 — — 482,962
Business Loans:
Commercial and Industrial Loans
87,881 696 2,222 — — 90,799
Farm Production and Other Farm Loans
511 — 6 — 1 518
Total Business Loans
88,392 696 2,228 — 1 91,317
Consumer Loans:
Credit Cards
2,432 — 18 — — 2,450
Other Consumer Loans
12,760 12 40 — — 12,812
Total Consumer Loans
15,192 12 58 — — 15,262
Total Loans
$ 534,274 $ 10,683 $ 44,583 $ — $ 1 $ 589,541
18
The following table details the amount of gross loans segregated by loan grade and class, as of December 31, 2021:
Satisfactory
1,2,3,4 		Special
Mention
5,6 		Substandard
7 		Doubtful
8 		Loss
9 		Total
Loans
Real Estate:
Land Development and Construction
$ 69,758 $ 1,547 $ 593 $ — $ — $ 71,898
Farmland
12,365 297 452 — — 13,114
1-4
Family Mortgages
89,120 3,590 5,815 — — 98,525
Commercial Real Estate
238,561 8,055 34,623 — — 281,239
Total Real Estate Loans
409,804 13,489 41,483 — — 464,776
Business Loans:
Commercial and Industrial Loans
85,138 1,483 5,877 — 3 92,501
Farm Production and Other Farm Loans
606 — 12 — 3 621
Total Business Loans
85,744 1,483 5,889 — 6 93,122
Consumer Loans:
Credit Cards
1,916 — 47 — — 1,963
Other Consumer Loans
11,903 20 58 3 2 11,986
Total Consumer Loans
13,819 20 105 3 2 13,949
Total Loans
$ 509,367 $ 14,992 $ 47,477 $ 3 $ 8 $ 571,847
19
Note 8. 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 six months ended June 30, 2022:
Real Business
June 30, 2022
Estate Loans Consumer Total
Beginning Balance, January 1, 2022
$ 3,622 $ 645 $ 246 $ 4,513
Provision for (reversal of) loan losses
251 65 ( 167 ) 149
Chargeoffs
1 56 46 103
Recoveries
110 20 357 487
Net (recoveries) chargeoffs
( 109 ) 36 ( 311 ) ( 384 )
Ending Balance
$ 3,982 $ 674 $ 390 $ 5,046
Period end allowance allocated to:
Loans individually evaluated for impairment
$ — $ — $ — $ —
Loans collectively evaluated for impairment
3,982 674 390 5,046
Ending Balance, June 30, 2022
$ 3,982 $ 674 $ 390 $ 5,046
20
The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2021:
Real Business
June 30, 2021
Estate Loans Consumer Total
Beginning Balance, January 1, 2021
$ 3,885 $ 611 $ 239 $ 4,735
Provision for loan losses
138 181 — 319
Chargeoffs
623 175 49 847
Recoveries
84 10 50 144
Net chargeoffs (recoveries)
539 165 ( 1 ) 703
Ending Balance
$ 3,484 $ 627 $ 240 $ 4,351
Period end allowance allocated to:
Loans individually evaluated for impairment
$ 3 $ 36 $ — $ 39
Loans collectively evaluated for impairment
3,481 591 240 4,312
Ending Balance, June 30, 2021
$ 3,484 $ 627 $ 240 $ 4,351
The Company’s recorded investment in loans as of June 30, 2022 and December 31, 2021 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
June 30, 2022
Estate Loans Consumer Total
Loans individually evaluated for specific impairment
$ 4,809 $ 196 $ — $ 5,005
Loans collectively evaluated for general impairment
478,153 91,121 15,262 584,536
$ 482,962 $ 91,317 $ 15,262 $ 589,541
Real Business
December 31, 2021
Estate Loans Consumer Total
Loans individually evaluated for specific impairment
$ 2,102 $ 232 $ — $ 2,334
Loans collectively evaluated for general impairment
462,674 92,890 13,949 569,513
$ 464,776 $ 93,122 $ 13,949 $ 571,847
21
Note 9. 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. As of June 30, 2022, the interest rate was 4.75 %. 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.
June 30, 2022
December 31, 2021
Funded balance
$ 18,000 $ 18,000
Unfunded balance
2,000 2,000
Total credit facility
$ 20,000 $ 20,000
Note 10. 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
(Loss) Income
Earnings
Total
Balance, January 1, 2022
5,595,320 $ 1,120 $ 18,293 $ ( 11,795 ) $ 98,282 $ 105,900
Net income
— — — — 2,036 2,036
Dividends paid ($0.24 per share)
— — — — ( 1,343 ) ( 1,343 )
Options exercised
— — — — — —
Restricted stock granted
— — — — — —
Stock compensation expense
— — 39 — — 39
Other comprehensive loss, net
— — — ( 43,682 ) — ( 43,682 )
Balance, March 31, 2022
5,595,320 $ 1,120 $ 18,332 $ ( 55,477 ) $ 98,975 $ 62,950
Net income
— — — — 2,541 2,541
Dividends paid ($0.24 per share)
— — — — ( 1,345 ) ( 1,345 )
Restricted stock granted
8,250 1 ( 1 ) — — —
Stock compensation expense
— — 39 — — 39
Other comprehensive income, net
— — — ( 38,259 ) — ( 38,259 )
Balance, June 30, 2022
5,603,570 $ 1,121 $ 18,370 $ ( 93,736 ) $ 100,171 $ 25,926
22
Accumulated
Number
Additional
Other
of Shares
Common
Paid-In
Comprehensive
Retained
Issued
Stock
Capital
(Loss) Income
Earnings
Total
Balance, January 1, 2021
5,587,070 $ 1,118 $ 18,134 $ 4,138 $ 96,158 $ 119,548
Net income
— — — — 1,897 1,897
Dividends paid ($0.24 per share)
— — — — ( 1,341 ) ( 1,341 )
Options exercised
— — — — — —
Restricted stock granted
— — — — — —
Stock compensation expense
— — 42 — — 42
Other comprehensive income, 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 forfeited
— — — — — —
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
Note 11. 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.
23
The following table presents assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2022:
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
$ — $ 3,989 $ — $ 3,989
Mortgage-backed securities
— 373,209 — 373,209
State, county and municipal
— 186,148 — 186,148
Other securities
450 — — 450
Total
$ 450 $ 563,346 $ — $ 563,796
The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 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
$ — $ 4,700 $ — $ 4,700
Mortgage-backed securities
— 399,591 — 399,591
State, county and municipal
— 227,051 — 227,051
Other securities
493 — — 493
Total
$ 493 $ 631,342 $ — $ 631,835
The Company recorded no gains or losses in earnings for the period ended June 30, 2022 or December 31, 2021 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.
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.
24
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.
The Company did not have any assets measured at fair value on a nonrecurring basis during 2022 that were still held on the Company’s balance sheet at June 30, 2022.
For assets measured at fair value on a nonrecurring basis during 2021 that were still held on the Company’s balance sheet at December 31, 2021, 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
$ — $ — $ 109 $ 109
Other real estate owned
— — 1,121 1,121
Total
$ — $ — $ 1,230 $ 1,230
Impaired loans, whose fair value was remeasured during the period, with a carrying value of
$- 0 -
and $ 112 , had an allocated allowance for loan losses of
$- 0 -
and $ 3 at June 30, 2022 and December 31, 2021, 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.
25
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 $ 836 was necessary and recorded during the three-month period ended June 30, 2022 and the year ended December 31, 2021, respectively.
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 June 30, 2022: ​​​​​​​
Quoted Prices
in Active Significant
Markets for Other Significant Total
Carrying Identical Observable Unobservable Fair
June 30, 2022 Value Assets Inputs Inputs Value
(Level 1) (Level 2) (Level 3)
Financial assets
Cash and due from banks
$ 14,274 $ 14,274 $ — $ — $ 14,274
Interest bearing deposits with banks
27,008 27,008 — — 27,008
Securities
available-for-sale
563,796 450 563,346 — 563,796
Net LHFI
584,495 — — 564,496 564,496
Financial liabilities
Deposits
$ 1,117,987 $ 918,987 $ 199,528 $ — $ 1,118,515
Securities sold under agreement to repurchase
124,162 124,162 — — 124,162
Borrowings on secured line of credit
18,000 18,000 — — 18,000
26
The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2021:
Quoted Prices
in Active Significant
Markets for Other Significant Total
Carrying Identical Observable Unobservable Fair
December 31, 2021 Value Assets Inputs Inputs Value
(Level 1) (Level 2) (Level 3)
Financial assets
Cash and due from banks
$ 10,673 $ 10,673 $ — $ — $ 10,673
Interest bearing deposits with banks
68,563 68,563 — — 68,563
Securities
available-for-sale
631,835 493 631,342 — 631,835
Net LHFI
567,334 — — 554,351 554,351
Financial liabilities
Deposits
$ 1,111,892 $ 861,552 $ 230,590 $ — $ 1,092,142
Securities sold under agreement to repurchase
112,760 112,760 — — 112,760
Borrowings on secured line of credit
18,000 18,000 — — 18,000
27
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;
•
the impact of increasing inflation rates on the general economic, market or business conditions;
•
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;
•
climate change and societal responses to climate change could adversely affect the Company’s business and results of operations, including indirectly through impact to its customers;
28
•
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;
•
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 June 30, 2022, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,298,752 and total deposits of $1,118,523. 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.
29
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 June 30, 2022, was 19.11% and at December 31, 2021, was 39.71%. The decrease was due to a decrease in interest bearing cash and cash equivalents and a decline in the fair market value of investment securities coupled with increased pledging requirements to collateralize public deposit funds as of June 30, 2022. Management believes it maintains adequate liquidity for the Company’s current needs.
The Company’s primary source of liquidity is customer deposits, which were $1,117,987 at June 30, 2022, and $1,111,892 at December 31, 2021. 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 $688,743 invested in
available-for-sale
investment securities at June 30, 2022, and $647,557 at December 31, 2021. The increase in securities is the result of management deploying excess cash into higher yielding assets.
The Company also had $27,008 in interest bearing deposits at other banks at June 30, 2022 and $68,563 at December 31, 2021. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both June 30, 2022 and December 31, 2021. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At June 30, 2022, the Company had unused and available $197,280 of its line of credit with the FHLB and at December 31, 2021, the Company had unused and available $221,088 of its line of credit with the FHLB. The decrease in the amount available under the Company’s line of credit with the FHLB from the end of 2021 to June 30, 2022, was the result of a decrease 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 June 30, 2022, 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 June 30, 2022 and December 31, 2021. 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 ensure 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.
30
CAPITAL RESOURCES
Total shareholders’ equity was $25,926 at June 30, 2022, as compared to $105,900 at December 31, 2021. 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 an increase in the medium-term interest rates that has occurred since the purchase of securities. Management does not intend to sell any securities at an unrealized loss position. Additionally, as noted in the liquidity section the Company has sufficient liquidity options available if the need for short-term funds arises.
The Company paid aggregate cash dividends in the amount of $2,688, or $0.48 per share, during the
six-month
period ended June 30, 2022 compared to $2,684, or $0.48 per share, for the same period in 2021.
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 June 30, 2022, 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.
31
Actual Minimum Capital
Requirement to be
Well Capitalized 		Minimum Capital
Requirement to be
Adequately
Capitalized
Amount Ratio Amount Ratio Amount Ratio
June 30, 2022
Citizens Holding Company
Tier 1 leverage ratio
$ 106,237 7.72 % $ 68,846 5.00 % $ 55,077 4.00 %
Common Equity tier 1 capital ratio
106,237 12.71 % 89,500 6.50 % 61,962 4.50 %
Tier 1 risk-based capital ratio
106,237 12.71 % 66,854 8.00 % 50,140 6.00 %
Total risk-based capital ratio
111,283 13.32 % 83,567 10.00 % 66,854 8.00 %
The Citizens Bank of Philadelphia
Tier 1 leverage ratio
$ 123,632 8.98 % $ 68,839 5.00 % $ 55,071 4.00 %
Common Equity tier 1 capital ratio
123,632 8.98 % 89,490 6.50 % 61,955 4.50 %
Tier 1 risk-based capital ratio
123,632 14.80 % 66,828 8.00 % 50,121 6.00 %
Total risk-based capital ratio
128,679 15.40 % 83,534 10.00 % 66,828 8.00 %
December 31, 2021
Citizens Holding Company
Tier 1 leverage ratio
$ 104,181 7.80 % $ 66,789 5.00 % $ 53,431 4.00 %
Common Equity tier 1 capital ratio
104,181 13.16 % 86,826 6.50 % 60,110 4.50 %
Tier 1 risk-based capital ratio
104,181 13.16 % 63,322 8.00 % 47,492 6.00 %
Total risk-based capital ratio
108,694 13.73 % 79,153 10.00 % 63,322 8.00 %
The Citizens Bank of Philadelphia
Tier 1 leverage ratio
$ 121,421 9.09 % $ 66,776 5.00 % $ 53,421 4.00 %
Common Equity tier 1 capital ratio
121,421 9.09 % 86,808 6.50 % 60,098 4.50 %
Tier 1 risk-based capital ratio
121,421 15.34 % 63,314 8.00 % 47,486 6.00 %
Total risk-based capital ratio
125,934 15.91 % 79,143 10.00 % 63,314 8.00 %
The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Company (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II for
non-core
banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.
Beginning January 1, 2015, the Company and the Bank began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner:
•
Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%;
•
Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking organizations);
•
Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and
32
•
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 June 30, 2022, the Company and the Bank met all capital adequacy requirements under Basel III.
33
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:
For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
2022 2021 2022 2021
Interest Income, including fees
$ 9,560 $ 9,816 $ 18,614 $ 18,895
Interest Expense
797 1,322 1,564 2,768
Net Interest Income
8,763 8,494 17,050 16,127
Provision for loan losses
56 232 149 319
Net Interest Income after
Provision for loan losses
8,707 8,262 16,901 15,808
Other Income
2,763 2,989 5,296 6,221
Other Expense
8,432 8,982 16,733 17,450
Income Before Provision For
Income Taxes
3,038 2,269 5,464 4,579
Provision for Income Taxes
497 362 887 775
Net Income
$ 2,541 $ 1,907 $ 4,577 $ 3,804
Net Income Per share - Basic
$ 0.45 $ 0.34 $ 0.82 $ 0.68
Net Income Per Share-Diluted
$ 0.45 $ 0.34 $ 0.82 $ 0.68
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 15.97% for the three months ended June 30, 2022, and 7.04% for the corresponding period in 2021. Annualized ROE was 11.52% for the six months ended June 30, 2022, and 6.74% for the corresponding period in 2021. The increase in ROE for the three and six months ended June 30, 2022 compared to the same period in 2021 was a result of an increase in earnings compared to prior period coupled with a decline in equity due to the unrealized losses on investments in AOCL.
Book value per share decreased to $4.64 at June 30, 2022, compared to $18.95 at December 31, 2021. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity resulting from the AOCL caused by the increase in medium-term interest rates. Average assets for the six months ended June 30, 2022 were $1,343,566 compared to $1,412,082 for the year ended December 31, 2021. This decrease was due mainly to the Company reducing higher interest-bearing deposits throughout 2021 coupled with the increase in the unrealized loss on investment securities.
34
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 $8,763 and $17,050 for the three and six months ended June 30, 2022, respectively, as compared to $8,494 and $16,127 for the same respective time periods in 2021.
The annualized net interest margin was 2.78% for the three months ended June 30, 2022, compared to 2.57% for the corresponding period of 2021. Additionally, the annualized net interest margin was 2.74% for the six months ended June 30, 2022, compared to 2.45% for the corresponding period of 2021. The increase in net interest margin for both the three and six months ended June 30, 2022, when compared to the same period in 2021, was mainly due to management’s reallocation of the investment portfolio into higher yielding securities throughout 2021. In addition, management’s deposit repricing campaign and reduction of higher interest-bearing deposit balances throughout 2021 decreased the cost of funds to 33 basis point (“bps”) for both the three and six months ended June 30, 2022 compared to 50 and 52 bps for the three and six months ended June 30, 2021, respectively. The increase in interest on securities coupled with the decrease in the cost of funds offset the decline in interest income on loans which decreased for the three and six months ended June 30, 2020 by $1,288, or (16.19%), and $3,305, or (18.82%) when compared to the same periods in 2021.
With interest rates starting to increase due to quantitative tightening by the Federal Reserve Bank to combat inflationary pressure that is starting to affect the economic recovery, the Company expects interest rates will continue to increase in the coming year. As a result, the Company is in position to benefit from interest rate hikes due to the amount of assets set to reprice during the coming year, and due to the fact interest-bearing demand and savings deposits may not be immediately affected by changes in general interest rates.
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:
35
TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES
Three Months Ended June 30,
Average Balance Income/Expense Average Yield/Rate
2022 2021 2022 2021 2022 2021
Loans:
Loans, net of unearned
(1)
$ 590,407 $ 640,851 $ 6,667 $ 7,955 4.52 % 4.97 %
Investment Securities
Taxable
474,366 525,828 1,901 1,063 1.60 % 0.81 %
Tax-exempt
214,330 166,230 1,229 1,107 2.29 % 2.66 %
Total Investment Securities
688,697 692,058 3,130 2,170 1.82 % 1.25 %
Federal Funds Sold and Other
22,634 41,464 37 10 0.65 % 0.10 %
Total Interest Earning Assets
(1)(2)
1,301,738 1,374,373 9,834 10,135 3.02 % 2.95 %
Non-Earning
Assets
32,786 93,712
Total Assets
$ 1,334,523 $ 1,468,085
Deposits:
Interest-bearing Demand Deposits
(3)
$ 490,712 $ 534,839 $ 207 $ 415 0.17 % 0.31 %
Savings
134,774 116,412 33 30 0.10 % 0.10 %
Time
202,027 257,667 288 741 0.57 % 1.15 %
Total Deposits
827,513 908,918 528 1,186 0.26 % 0.52 %
Borrowed Funds
Short-term Borrowings
106,153 151,593 83 136 0.31 % 0.36 %
Long-term Borrowings
18,000 — 186 — 4.13 % —
Total Borrowed Funds
124,153 151,593 269 136 0.87 % 0.36 %
Total Interest-Bearing Liabilities
(3)
951,665 1,060,511 797 1,322 0.33 % 0.50 %
Non-Interest
Bearing Liabilities
Demand Deposits
305,677 295,877
Other Liabilities
13,533 3,433
Shareholders’ Equity
63,648 108,264
Total Liabilities and Shareholders’ Equity
$ 1,334,523 $ 1,468,085
Interest Rate Spread
2.69 % 2.45 %
Net Interest Margin
$ 9,037 $ 8,813 2.78 % 2.57 %
Less
Tax Equivalent Adjustment
274 319
Net Interest Income
$ 8,763 $ 8,494
36
Six Months Ended June 30,
Average Balance Income/Expense Average Yield/Rate
2022 2021 2022 2021 2022 2021
Loans:
Loans, net of unearned
(1)
$ 584,301 $ 646,784 $ 13,093 $ 16,128 4.48 % 4.99 %
Investment Securities
Taxable
468,287 535,820 3,598 1,325 1.54 % 0.49 %
Tax-exempt
212,632 147,525 2,412 2,006 2.27 % 2.72 %
Total Investment Securities
680,919 683,345 6,010 3,331 1.77 % 0.97 %
Federal Funds Sold and Other
27,684 46,308 50 25 0.36 % 0.11 %
Total Interest Earning Assets
(1)(2)
1,292,904 1,376,437 19,153 19,484 2.96 % 2.83 %
Non-Earning
Assets
50,662 102,878
Total Assets
$ 1,343,566 $ 1,479,315
Deposits:
Interest-bearing Demand Deposits
(3)
$ 484,017 $ 524,038 $ 395 $ 933 0.16 % 0.36 %
Savings
132,248 111,888 64 57 0.10 % 0.10 %
Time
210,857 250,305 625 1,462 0.59 % 1.17 %
Total Deposits
827,122 886,231 1,084 2,452 0.26 % 0.55 %
Borrowed Funds
Short-term Borrowings
102,706 182,052 143 316 0.28 % 0.35 %
Long-term Borrowings
18,000 — 337 — 3.74 % —
Total Borrowed Funds
120,706 182,052 480 316 0.80 % 0.35 %
Total Interest-Bearing Liabilities
(3)
947,828 1,068,283 1,564 2,768 0.33 % 0.52 %
Non-Interest
Bearing Liabilities
Demand Deposits
303,067 282,538
Other Liabilities
13,204 15,582
Shareholders’ Equity
79,467 112,912
Total Liabilities and Shareholders’ Equity
$ 1,343,566 $ 1,479,315
Interest Rate Spread
2.63 % 2.31 %
Net Interest Margin
$ 17,589 $ 16,716 2.74 % 2.45 %
Less
Tax Equivalent Adjustment
539 589
Net Interest Income
$ 17,050 $ 16,127
(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.
37
(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 and six months ended June 30, 2022, management’s disciplined deposit pricing coupled with increasing interest rates and corresponding yields on both new loans originated and securities purchased were the largest contributing factors to the increase in net interest income over these periods. Management believes by continuing its disciplined deposit pricing and continued focus on loan growth, and continuing to reallocate excess funds into higher yielding securities as the Federal Reserve continues interest rate hikes will increase the net interest margin.
38
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 six months ended June 30, 2022 compared to the same respective period in 2021:
TABLE 2 - VOLUME/RATE ANALYSIS
(in thousands)
Three Months Ended June 30, 2022
2022 Change from 2021
Volume Rate Total
INTEREST INCOME
Loans
$ (626 ) (662 ) $ (1,288 )
Taxable Securities
(104 ) 942 838
Non-Taxable
Securities
320 (198 ) 122
Federal Funds Sold and Other
(5 ) 32 27
TOTAL INTEREST INCOME
$ (414 ) $ 113 $ (301 )
INTEREST EXPENSE
Interest-bearing demand deposits
$ (34 ) (174 ) (208 )
Savings Deposits
5 (2 ) 3
Time Deposits
(160 ) (293 ) (453 )
Short-term borrowings
(41 ) (12 ) (53 )
Long-term borrowings
— 186 186
TOTAL INTEREST EXPENSE
$ (230 ) $ (295 ) (525 )
NET INTEREST INCOME
$ (184 ) $ 408 $ 224
39
Six Months Ended June 30, 2022
2022 Change from 2021
Volume Rate Total
INTEREST INCOME
Loans
$ (1,558 ) (1,477 ) $ (3,035 )
Taxable Securities
(167 ) 2,440 2,273
Non-Taxable
Securities
885 (479 ) 406
Federal Funds Sold and Other
(10 ) 35 25
TOTAL INTEREST INCOME
$ (850 ) $ 519 $ (331 )
INTEREST EXPENSE
Interest-bearing demand deposits
$ (71 ) (467 ) (538 )
Savings Deposits
10 (3 ) 7
Time Deposits
(230 ) (607 ) (837 )
Short-term borrowings
(138 ) (35 ) (173 )
Long-term borrowings
— 337 337
TOTAL INTEREST EXPENSE
$ (429 ) $ (775 ) (1,204 )
NET INTEREST INCOME
$ (421 ) $ 1,294 $ 873
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.
40
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
June 30,
2022 		Year Ended
December 31,
2021 		Amount of
Increase
(Decrease) 		Percent of
Increase
(Decrease)
BALANCES:
Gross Loans
$ 589,541 $ 571,847 $ 17,694 3.09 %
Allowance for Loan Losses
5,046 4,513 533 11.81 %
Nonaccrual Loans
3,580 3,826 (246 ) (6.43 %)
Ratios:
Allowance for loan losses to gross loans
0.86 % 0.79 %
Net loans (recovered) charged off to allowance for loan losses
(7.61 %) 20.56 %
The provision for loan losses for the three months ended June 30, 2022 was $56. The provision was primarily driven by loan growth during the quarter coupled with qualitative factor adjustments due to inflationary risk concerns to both the local and national economy. 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. The allowance for loan losses to LHFI was 0.86% and 0.69% at June 30, 2022 and 2021, respectively, and 0.79% at December 31, 2021 representing a level management considers commensurate with the present risk in the loan portfolio.
For the three months ended June 30, 2022, net loan losses recovered to the allowance for loan losses totaled $214, an increase of $867 in net recoveries from the $653 charged off in the same period in 2021. For the six months ended June 30, 2022, net loan losses recovered to the allowance for loan losses totaled $384, an increase of $1,087 in net recoveries from the $703 charged off in the same period in 2021. The increase in net recoveries was primarily due to one significant charged off credit that occurred in the fourth quarter of 2021 and has since paid a total of $327 during the
six-month
period ended June 30, 2022.
41
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 six months ended June 30, 2022 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 June 30, 2022 was $2,763, a decrease of $226, or (7.56%), from $2,989 in the same period in 2021. Service charges on deposit accounts were $967 in the three months ended June 30, 2022, compared to $768 for the same period in 2021. As inflationary pressures continue throughout both the national and local economy, spending and overdraft income have continued to trend upward. Included in the service charges on deposit accounts line item for the three months ended June 30, 2022, overdraft income increased by $197, or 39.46% from the same period in 2021. Interchange fees which are included in the other service charges and fees line item on the income statement decreased slightly by decreasing by $9, or (0.97%), to $972 for the three months ended June 30, 2022, compared to $981 for the same period in 2021. Other operating income not derived from service charges or fees decreased $45, or (4.75%) to $702 in the three months ended June 30, 2022, compared to $737 for the same period in 2021. This decrease was primarily due to the decline in mortgage loan origination income due to increased mortgage interest rates. Mortgage loan origination income decreased for the three months ended June 30, 2022 by $113, or (34.98%), to $210 compared to $323 for the same period in 2021.
Other income for the six months ended June 30, 2022 was $5,296, a decrease of $925, or (14.87%), from $6,221 in the same period in 2021. Service charges on deposit accounts were $1,912 in the six months ended June 30, 2022, compared to $1,582 for the same period in 2021. The increase in service charges on deposit accounts year-over-year is primarily due to overdraft income increasing by $321, or 30.63% compared to the same period in 2021. Other service charges and fees were $2,119 for the six months ended June 30, 2022 slightly up from the same period in 2021 due to interchange fees increasing modestly by $23, or 1.24% and other miscellaneous service charges increasing by $31, or 18.97%. Other operating income not derived from service charges or fees decreased $389, or (23.52%) to $1,265 in the six months ended June 30, 2022, compared to $1,654 for the same period in 2021. This decrease, as stated earlier, was primarily due to the decline in mortgage loan origination income due to increased mortgage interest rates. Mortgage loan origination income decreased for the six months ended June 30, 2022 by $304, or (42.34%), to $414 compared to $718 for the same period in 2021.
42
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 Six Months
Ended June 30, Ended June 30,
Other operating income
2022 2021 2022 2021
BOLI Income
$ 120 $ 306 $ 241 $ 436
Mortgage Loan Origination Income
210 323 414 718
Gain on sale of OREO
16 — 81 323
Other Income
356 108 529 177
Total Other Income
$ 702 $ 737 $ 1,265 $ 1,654
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 June 30, 2022 and 2021 were $8,432 and $8,982, respectively, a decrease of $550, or (6.12%). Salaries and benefits decreased $173, or (3.77%), to $4,412 for the three months ended June 30, 2022 when compared to the same period in 2021. Occupancy expense decreased by $80, or (4.47%), to $1,711 for the three months ended June 30, 2022, compared to $1,791 for the same period of 2021. For the three months ended June 30, 2022, other expense decreased $297, or (11.40%) to $2,309 compared to $2,606 for the same period in 2021.
Aggregate
non-interest
expenses for the six months ended June 30, 2022 and 2021 were $16,733 and $17,450, respectively, a decrease of $717 or (4.11%). Salaries and benefits decreased $302, or (3.30%), to $8,851 for the six months ended June 30, 2022, when compared to the same period in 2021. Occupancy expense decreased by $122, or (3.38%), to $3,486 for the six months ended June 30, 2022, compared to $3,608 for the same period of 2021. Other operating expenses decreased by $293, or (6.25%), to $4,396 for the six months ended June 30, 2022, compared to $4,689 for the same period of 2021. Overall, other expenses have decreased for both the three and six months ended June 30, 2022 compared to the same periods in 2021 as a result of management’s focus on expense management that started in 2020 due to the uncertainty stemming from the pandemic.
43
The following is a detail of the major expense classifications that make up the other expense line item in the income statement:
For the Three Months
Ended June 30, 		For the Six Months
Ended June 30,
Other Expense
2022 2021 2022 2021
Advertising
$ 172 $ 162 $ 303 $ 303
Office Supplies
250 235 459 484
Professional Fees
223 217 442 454
Technology expense
109 141 225 296
Postage and Freight
168 161 306 330
Loan Collection Expense
13 16 20 70
Regulatory and related expense
208 237 412 472
Debit Card/ATM expense
202 192 390 360
Write down on OREO
— 375 42 390
Travel and Convention
63 32 115 58
Other expenses
901 838 1,682 1,472
Total Other Expense
$ 2,309 $ 2,606 $ 4,396 $ 4,689
The Company’s efficiency ratio for the three months ended June 30, 2022 was 71.83%, compared to 77.61% for the same period in 2021. The Company’s efficiency ratio for the six months ended June 30, 2022 was 73.51%, compared to 76.80% for the same period in 2021. 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.
44
BALANCE SHEET ANALYSIS
June 30,
2022 		December 31,
2021 		Amount of
Increase
(Decrease) 		Percent of
Increase
(Decrease)
Cash and due from banks
$ 14,274 $ 10,673 $ 3,601 33.74 %
Interest bearing deposits with other banks
27,008 68,563 (41,555 ) (60.61 %)
Investment securities
563,796 631,835 (68,039 ) (10.77 %)
Net LHFI
584,495 567,334 17,161 3.02 %
Premises and equipment
26,444 26,661 (217 ) (0.81 %)
Total assets
1,299,081 1,361,309 (62,228 ) (4.57 %)
Total deposits
1,117,987 1,111,892 6,095 0.55 %
Total shareholders’ equity
25,926 105,900 (79,974 ) (75.52 %)
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 June 30, 2022 was $14,274, which was an increase of $3,601 from the balance of $10,673 at December 31, 2021. Interest bearing deposits with other banks decreased by $41,555, or (60.61%), to $27,008 at June 30, 2022 compared to $68,563 at December 31, 2021.
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. Due to recent increases in the medium-term interest rates, the fair value of the Company’s investment securities on the balance sheet represents a decrease in investment securities as of June 30, 2022 when compared to the balance of investment securities at December 31, 2021. The impact of the related unrealized losses net of the tax benefit was $81,941 as presented on the consolidated statements of comprehensive loss. However, as disclosed in Note 6 of the Notes to the Consolidated Financial Statements, the Company’s investments securities portfolio at June 30, 2022 increased by $41,186, or 6.36%, to $688,743 from $647,557 at December 31, 2021 when comparing the amortized cost of the Company’s investments securities. The increase is a result of the Company deploying excess cash into higher yielding investment securities.
LOANS
The Company’s gross loan balance increased by $17,694, or 3.09%, during the six months ended June 30, 2022, to $589,541 from $571,847 at December 31, 2021. Excluding PPP loans with a total balance of $1,356 at June 30, 2022 and $5,789 at December 31, 2021, total loans increased $22,127, or 3.91%, compared to $566,058 at December 31, 2021. The
year-to-date
growth primarily reflects increases in construction and development, commercial real estate, and consumer loans. No material changes were made to the loan products offered by the Company during this period.
45
DEPOSITS
The following table shows the balance and percentage change in the various deposits:
June 30,
2022 		December 31,
2021 		Amount of
Increase
(Decrease) 		Percent of
Increase
(Decrease)
Noninterest-Bearing Deposits
$ 304,640 $ 302,707 $ 1,933 0.64 %
Interest-Bearing Deposits
478,844 451,809 27,035 5.98 %
Savings Deposits
135,503 127,217 8,286 6.51 %
Certificates of Deposit
199,000 230,159 (31,159 ) (13.54 %)
Total deposits
$ 1,117,987 $ 1,111,892 $ 6,095 0.55 %
All deposit accounts except for certificates of deposits increased during the six months ended June 30, 2022. The modest increase in deposit accounts is primarily due to excess liquidity in the financial markets coupled with increased inflationary pressures causing increased precautionary saving by households and businesses. The decrease in certificates of deposit accounts is a result of management strategically reducing higher interest-bearing accounts to help improve both interest margin and the Bank’s capital ratios. Additionally, some customers have moved from renewing their time deposits to keeping their funds in transactional accounts due to low time deposits rates and inflationary pressures. As the Federal Reserve continues interest rate hikes management expects time deposit rates to increase modestly to stay competitive within the Company’s markets. Management continually monitors the interest rates on time deposit products to ensure that the Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.
OFF-BALANCE
SHEET ARRANGEMENTS
Please refer to Note 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.
46
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.
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 June 30, 2022 and December 31, 2021:
June 30, 2022 December 31, 2021
Following Months Following Months
12 months
13-24
12 months
13-24
+400 basis points
-6.6 % 0.6 % -3.7 % 6.6 %
+300 basis points
-4.3 % 1.0 % -1.3 % 6.9 %
+200 basis points
-2.1 % 1.4 % -0.1 % 5.8 %
+100 basis points
-0.5 % 1.3 % -0.8 % 2.6 %
Flat rates
— — — —
-100 basis points
-4.2 % -7.4 % -5.5 % -7.7 %
-200 basis points
-8.2 % -14.8 % -10.9 % -13.6 %
47
The following table presents the change in our economic value of equity as of June 30, 2022 and December 31, 2021, assuming immediate parallel shifts in interest rates:
Economic Value of Equity at Risk (%)
June 30, 2022 December 31, 2021
+400 basis points
-24.7 % -20.4 %
+300 basis points
-19.2 % -13.8 %
+200 basis points
-13.1 % -7.8 %
+100 basis points
-6.6 % -3.1 %
Flat rates
— —
-100 basis points
1.1 % -13.0 %
-200 basis points
-3.7 % -33.1 %
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 June 30, 2022 (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 six months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
48
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, 2021, which the Company filed with the Securities and Exchange Commission on March 11, 2022. 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, 2021, 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
10(1) Citizens Holding Company Revolving Credit Loan Agreement (1)
31(a) Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31(b) Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32(a) Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.
32(b) Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.
101 Financial Statements submitted in Inline XBRL format.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1)
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.
49
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: August 5, 2022
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TABLE OF CONTENTS