Equibles

10-Q

CITIZENS HOLDING CO /MS/ (CIZN)

10-Q 2021-11-05 For: 2021-09-30
View Original
Added on April 09, 2026

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

or

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

For the transition period from __________ to __________

Commission File Number: 001-15375

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

Mississippi 64-0666512
(State <br>or<br> other jurisdiction of<br> <br>In Company or organization) (IRS Employer<br> <br>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<br> <br>Symbol(s) Name of Each Exchange<br> <br>on Which Registered
Common Stock, $0.20 par value CIZN NASDAQ Global Market

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

None

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

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

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

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of November 5, 2021:

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

Table of Contents

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION 1
Item 1. Consolidated Financial Statements. 1
Consolidated Statements of Financial Condition, as of September 30, 2021 (Unaudited) and December 31, 2020 (Audited) 1
Consolidated Statements of Income for the Three and nine months ended September 30, 2021 (Unaudited) and 2020 (Unaudited) 2
Consolidated Statements of Comprehensive Income for the Three and nine months ended September 30, 2021 (Unaudited) and 2020 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2021 (Unaudited) and 2020 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 38
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 55
Item 4. Controls and Procedures. 57
PART II. OTHER INFORMATION 58
Item 1. Legal Proceedings. 58
Item 1A. Risk Factors. 58
Item 6. Exhibits. 58
SIGNATURES 59

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

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

All values are in US Dollars.

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

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CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2021 2020 2021 2020
INTEREST INCOME
Interest and fees on loans $ 7,666 $ 7,805 $ 23,714 $ 22,917
Interest on securities
Taxable 1,433 2,406 2,950 6,163
Nontaxable 642 360 1,947 1,064
Other interest 21 8 46 271
Total interest income 9,762 10,579 28,657 30,415
INTEREST EXPENSE
Deposits 951 1,506 3,403 5,087
Other borrowed funds 209 167 525 687
Total interest expense 1,160 1,673 3,928 5,774
NET INTEREST INCOME 8,602 8,906 24,729 24,641
PROVISION FOR LOAN LOSSES 968 247 1,287 1,183
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,634 8,659 23,442 23,458
OTHER INCOME
Service charges on deposit accounts 952 771 2,534 2,488
Other service charges and fees 1,135 1,031 3,201 2,675
Other operating income 1,207 835 3,780 2,325
Total other income 3,294 2,637 9,515 7,488
OTHER EXPENSES
Salaries and employee benefits 4,716 4,389 13,869 13,131
Occupancy expense 1,740 1,861 5,348 5,556
Other expense 2,285 2,403 6,974 6,377
Total other expenses 8,741 8,653 26,191 25,064
INCOME BEFORE PROVISION FOR INCOME TAXES 2,187 2,643 6,766 5,882
PROVISION FOR INCOME TAXES 307 560 1,082 1,177
NET INCOME $ 1,880 $ 2,083 $ 5,684 $ 4,705
NET INCOME PER SHARE -Basic $ 0.34 $ 0.37 $ 1.02 $ 0.84
-Diluted $ 0.34 $ 0.37 $ 1.02 $ 0.84
DIVIDENDS PAID PER SHARE $ 0.24 $ 0.24 $ 0.72 $ 0.72

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

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CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(in thousands)

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2021 2020 2021 2020
Net income $ 1,880 $ 2,083 $ 5,684 $ 4,705
Other comprehensive (loss) income
Securities <br>available-for-sale
Unrealized holding (losses) gains (4,149 ) (3,831 ) (19,959 ) 4,367
Income tax effect 1,036 956 4,980 (1,090 )
Net unrealized (losses) gains (3,113 ) (2,875 ) (14,979 ) 3,277
Reclassification adjustment for gains included in net income 459 293 1,378 703
Income tax effect (115 ) (73 ) (344 ) (175 )
Net gains included in net income 344 220 1,034 528
Total other comprehensive (loss) income (2,769 ) (2,655 ) (13,945 ) 3,805
Comprehensive (loss) income $ (889 ) $ (572 ) $ (8,261 ) $ 8,510

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

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CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

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

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

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CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the nine months ended September 30, 2021

(Unaudited)

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

(in thousands, except share and per share data)

Nature of Business

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

Risks and Uncertainties

In 2020, the World Health Organization declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. Although some of the restrictions on business activities have been lifted in the Company’s markets in 2021, the spread of COVID-19 and its variants have caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the three separate stimulus bills, including the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act totaling approximately $4.8 trillion. The goal of these are to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The packages also include extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of these acts as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

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

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Financial position and results of operations

The Company’s fee income has been, and could continue to be, reduced due to COVID-19. Due to the amount of stimulus and unemployment measures from the federal government, overdraft fees continue to be reduced significantly from pre-pandemic levels. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios have been adversely impacted due to loss of fee income, net interest margin compression along with the significant increase in assets from all the federal government stimulus. For a detailed discussion of the Company’s capital ratios see Capital Resources on page 40.

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

Asset valuation

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

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

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Lending operations and accommodations to borrowers

(dollar amounts in thousands)

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans originated before June 5, 2020 have a two-year term while PPP loans originated after June 5, 2020 have a five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The Company currently has 371 loans with a total balance of $14,077 outstanding at September 30, 2021. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Credit

The Company has worked with customers directly affected by COVID-19. The Company offered short-term assistance in accordance with regulatory guidelines. As of September 30, 2021, the Company had no customer with deferments. While this is a positive trend, the Company makes no representations that there could not be future credit losses related to COVID-19.

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended September 30, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

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

For further information and significant accounting policies of the Company, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 12, 2021.

Estimates

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

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

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

Adoption of New Accounting Standards

In December 2019, the FASB issued Accounting Standards Update No. 2019-12,

Income Taxes (Topic 740) : Simplifying the Accounting for Income Taxes to simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. ASU 2019-12 was effective for the Company on January 1, 2021 and did not have a material impact on the Company’s financial statements.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU 2016-13 for certain companies. The new effective date for the Company is January 1, 2023. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are

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acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU 2016-13 to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation is required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

Note 2. Commitments and Contingent Liabilities

(in thousands)

In the ordinary course of business, the Company enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of September 30, 2021, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $124,059 compared to an aggregate unused balance of $138,185 at December 31, 2020. There were $4,437 of letters of credit outstanding at September 30, 2021 and $4,565 at December 31, 2020. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Company does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.

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

Note 3. Net Income per Share

(in thousands, except share and per share data)

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

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For the Three Months Ended<br> September 30, For the Nine Months Ended<br> September 30,
2021 2020 2021 2020
Basic weighted average shares outstanding 5,587,070 5,578,281 5,583,491 5,574,060
Dilutive effect of granted options — 2,447 244 2,824
Diluted weighted average shares outstanding 5,587,070 5,580,728 5,583,735 5,576,884
Net income $ 1,880 $ 2,083 $ 5,684 $ 4,705
Net income per share-basic $ 0.34 $ 0.37 $ 1.02 $ 0.84
Net income per share-diluted $ 0.34 $ 0.37 $ 1.02 $ 0.84

Note 4. Equity Compensation Plans

(in thousands, except per share data)

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

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

The following table is a summary of the stock option activity for the nine months ended September 30, 2021:

Directors’ Plan 2013 Plan
Number<br> of<br> Shares Weighted<br> Average<br> Exercise<br> Price Number<br> of<br> Shares Weighted<br> Average<br> Exercise<br> Price
Outstanding at December 31, 2020 19,500 $ 19.42 — $ —
Granted — — — —
Exercised — — — —
Expired (10,500 ) 20.02 — —
Outstanding at September 30, 2021 9,000 $ 18.76 — $ —

The intrinsic value of options outstanding under the Directors’ Plan at September 30, 2021, was $2. No options were outstanding under the 2013 Plan as of September 30, 2021.

During 2021, the Company’s directors received restricted stock grants totaling 8,250 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 28, 2022 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $156 and will be expensed ratably over the one-year vesting period.

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Note 5. Income Taxes

(in thousands)

For the three months ended September 30, 2021 and 2020, the Company recorded a provision for income taxes totaling $307 and $560, respectively. The effective tax rate was 14.04% and 21.19% for the three months ending September 30, 2021 and 2020, respectively.

For the nine months ended September 30, 2021 and 2020, the Company recorded a provision for income taxes totaling $1,082 and $1,177, respectively. The effective tax rate was 15.99% and 20.01% for the nine months ending September 30, 2021 and 2020, respectively.

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

Note 6. Securities

(in thousands)

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

September 30, 2021 Amortized<br> Cost Gross<br> Unrealized<br> Gains Gross<br> Unrealized<br> Losses Estimated<br> Fair Value
Securities <br>available-for-sale
Obligations of U.S. Government agencies $ 4,969 $ — $ 114 $ 4,855
Mortgage backed securities 396,455 80 9,268 387,267
State, County, Municipals 185,333 470 4,234 181,569
Other Securities 500 — 2 498
Total $ 587,257 $ 550 $ 13,618 $ 574,189
December 31, 2020 Amortized<br> Cost Gross<br> Unrealized<br> Gains Gross<br> Unrealized<br> Losses Estimated<br> Fair Value
--- --- --- --- --- --- --- --- ---
Securities <br>available-for-sale
Obligations of U.S. Government agencies $ 11,870 $ 191 $ — $ 12,061
Mortgage backed securities 560,033 4,550 2,600 561,983
State, County, Municipals 100,823 3,410 36 104,197
Other Securities 500 8 — 508
Total $ 673,226 $ 8,159 $ 2,636 $ 678,749

At September 30, 2021 and December 31, 2020 , securities with a carrying value of $372,457 and $558,955, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

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The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2021 and December 31, 2020 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

September 30, 2021 December 31, 2020
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Available-for-sale
Due in one year or less $ 217 $ 218 $ — $ —
Due after one year through five years 1,896 1,934 3,594 3,701
Due after five years through ten years 3,886 3,948 20,538 21,446
Due after ten years 184,803 180,822 89,061 91,619
Residential mortgage backed securities 318,638 311,578 536,215 537,027
Commercial mortgage backed securities 77,817 75,689 23,818 24,956
Total $ 587,257 $ 574,189 $ 673,226 $ 678,749

The tables below show the Company’s gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2021 and December 31, 2020.

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

September 30, 2021 Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Losses Value Losses Value Losses
Obligations of U.S. government agencies $ 4,855 $ 114 $ — $ — $ 4,855 $ 114
Mortgage backed securities 378,680 9,268 — — 378,680 9,268
State, County, Municipal 144,709 4,234 — — 144,709 4,234
Other Securities 498 2 — — 498 2
Total $ 528,742 $ 13,618 $ — $ — $ 528,742 $ 13,618
December 31, 2020 Less than 12 months 12 months or more Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Losses Value Losses Value Losses
Mortgage backed securities $ 278,162 $ 2,600 $ — $ — $ 278,162 $ 2,600
State, County, Municipal 6,541 36 — — 6,541 36
Total $ 284,703 $ 2,636 $ — $ — $ 284,703 $ 2,636

The Company’s unrealized losses on its obligations of United States government agencies, mortgage backed securities, other securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in the mid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Company does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. The Company has determined that none of the securities were other-than-temporarily impaired at September 30, 2021 nor at December 31, 2020.

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Note 7. Non Purchased Loans

(in thousands, except number of loans)

“Purchased” loans are those acquired in any of the Company’s previous acquisitions. “Non Purchased” loans include all of the Company’s other loans. For purposes of Note 7, all references to “loans” mean non purchased loans.

The composition of net loans at September 30, 2021 and December 31, 2020 was as follows:

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

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

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

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

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An aging analysis of past due loans, segregated by class, as of September 30, 2021, was as follows:

Loans<br> <br>30-89 Days<br><br> Past Due Loans<br> 90 or more<br> Days<br> Past Due Total Past<br> Due Loans Current<br> Loans Total<br> Loans Accruing<br> Loans<br> 90 or more<br> Days<br> Past Due
Real Estate:
Land Development and Construction $ 14 $ — $ 14 $ 69,181 $ 69,195 $ —
Farmland 93 34 127 13,259 13,386 —
1-4<br> Family Mortgages 1,261 230 1,491 85,017 86,508 —
Commercial Real Estate 530 571 1,101 281,293 282,394 —
Total Real Estate Loans 1,898 835 2,733 448,750 451,483 —
Business Loans:
Commercial and Industrial Loans 327 322 649 97,881 98,530 —
Farm Production and Other Farm Loans — — — 431 431 —
Total Business Loans 327 322 649 98,312 98,961 —
Consumer Loans:
Credit Cards 37 16 53 1,783 1,836 16
Other Consumer Loans 1,275 2 1,277 11,659 12,936 —
Total Consumer Loans 1,312 18 1,330 13,442 14,772 16
Total Loans $ 3,537 $ 1,175 $ 4,712 $ 560,504 $ 565,216 $ 16

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

Loans<br> <br>30-89 Days<br><br> Past Due Loans<br> 90 or more<br> Days Past<br> Due Total Past<br> Due Loans Current<br> Loans Total<br> Loans Accruing<br> Loans<br> 90 or more<br> Days Past<br> Due
Real Estate:
Land Development and Construction $ 112 $ — $ 112 $ 42,565 $ 42,677 $ —
Farmland 183 75 258 15,358 15,616 —
1-4<br> Family Mortgages 1,301 246 1,547 92,733 94,280 —
Commercial Real Estate 1,407 700 2,107 304,768 306,875 —
Total Real Estate Loans 3,003 1,021 4,024 455,424 459,448 —
Business Loans:
Commercial and Industrial Loans 97 405 502 115,177 115,679 5
Farm Production and Other Farm Loans 2 — 2 539 541 —
Total Business Loans 99 405 504 115,716 116,220 5
Consumer Loans:
Credit Cards 25 9 34 1,844 1,878 9
Other Consumer Loans 66 — 66 10,863 10,929 —
Total Consumer Loans 91 9 100 12,707 12,807 9
Total Loans $ 3,193 $ 1,435 $ 4,628 $ 583,847 $ 588,475 $ 14

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

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Impaired loans as of September 30, 2021, segregated by class, were as follows:

Recorded Recorded
Unpaid Investment Investment Total Average
Principal With No With Recorded Related Recorded
Balance Allowance Allowance Investment Allowance Investment
Real Estate:
Land Development and Construction $ 178 $ 178 $ — $ 178 $ — $ 243
Farmland 34 34 — 34 — 73
1-4<br> Family Mortgages 944 944 — 944 — 980
Commercial Real Estate 1,330 1,050 118 1,168 6 3,498
Total Real Estate Loans 2,486 2,206 118 2,324 6 4,794
Business Loans:
Commercial and Industrial Loans 304 72 160 232 36 323
Total Business Loans 304 72 160 232 36 323
Consumer Loans:
Other Consumer Loans 1,200 — 1,200 1,200 1,200 600
Total Consumer Loans 1,200 — 1,200 1,200 1,200 600
Total Loans $ 3,990 $ 2,278 $ 1,478 $ 3,756 $ 1,242 $ 5,717

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

Recorded Recorded
Unpaid Investment Investment Total Average
Principal With No With Recorded Related Recorded
Balance Allowance Allowance Investment Allowance Investment
Real Estate:
Land Development and Construction $ 308 $ 256 $ 52 $ 308 $ 13 $ 210
Farmland 111 111 — 111 — 182
1-4<br> Family Mortgages 1,016 1,012 4 1,016 1 928
Commercial Real Estate 6,021 3,323 2,504 5,827 768 7,808
Total Real Estate Loans 7,456 4,702 2,560 7,262 782 9,127
Business Loans:
Commercial and Industrial Loans 413 54 359 413 125 279
Total Business Loans 413 54 359 413 125 279
Total Loans $ 7,869 $ 4,756 $ 2,919 $ 7,675 $ 907 $ 9,405

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The Company did not have any new troubled debt restructurings for the nine months ended September 30, 2021 or September 30, 2020.

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

Number<br> of Loans Recorded<br> Investment
Totals at January 1, 2020 3 $ 2,495
Reductions due to:
Principal paydowns (382 )
Totals at December 31, 2020 3 $ 2,113
Reductions due to:
Principal paydowns (88 )
Reclassification to OREO 2 (1,788 )
Total at September 30, 2021 1 $ 237

The allocated allowance for loan losses attributable to restructured loans was $-0- at September 30, 2021 and December 31, 2020. The Company had no commitments to lend additional funds on this troubled debt restructuring as of September 30, 2021.

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

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

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

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

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

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

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

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

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at September 30, 2021.

The following table details the amount of gross loans, segregated by loan grade and class, as of September 30, 2021:

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

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

Satisfactory<br> 1,2,3,4 Special<br> Mention<br> 5,6 Substandard<br> 7 Doubtful<br> 8 Loss<br> 9 Total<br> Loans
Real Estate:
Land Development and Construction $ 41,775 $ 120 $ 782 $ — $ — $ 42,677
Farmland 14,801 95 720 — — 15,616
1-4<br> Family Mortgages 85,203 3,210 5,867 — — 94,280
Commercial Real Estate 258,339 35,769 12,767 — — 306,875
Total Real Estate Loans 400,118 39,194 20,136 — — 459,448
Business Loans:
Commercial and Industrial Loans 109,525 4,409 1,738 — 7 115,679
Farm Production and Other Farm Loans 512 — 20 — 9 541
Total Business Loans 110,037 4,409 1,758 — 16 116,220
Consumer Loans:
Credit Cards 1,845 — 33 — — 1,878
Other Consumer Loans 10,820 43 41 25 — 10,929
Total Consumer Loans 12,665 43 74 25 — 12,807
Total Loans $ 522,820 $ 43,646 $ 21,968 $ 25 $ 16 $ 588,475

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Note 8. Purchased Loans

(in thousands)

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

The following is a summary of purchased loans:

September 30, 2021 December 31, 2020
Real Estate:
Land Development and Construction $ 4,795 $ 6,153
Farmland 375 520
1-4<br> Family Mortgages 15,764 23,306
Commercial Real Estate 19,348 24,237
Total Real Estate Loans 40,282 54,216
Business Loans:
Commercial and Industrial Loans 4,820 7,871
Farm Production and Other Farm Loans 222 755
Total Business Loans 5,042 8,626
Consumer Loans:
Other Consumer Loans 487 940
Total Consumer Loans 487 940
Total Purchased Loans $ 45,811 $ 63,782

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

September 30, 2021 December 31, 2020
Real Estate:
Land Development and Construction $ — $ —
1-4<br> Family Mortgages 44 73
Commercial Real Estate 327 —
Total Real Estate Loans 371 73
Business Loans:
Commercial and Industrial Loans 13 18
Total Business Loans 13 18
Consumer Loans:
Other Consumer Loans — 14
Total Consumer Loans — 14
Total Purchased Nonaccrual Loans $ 384 $ 105

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An age analysis of past due loans, segregated by class of loans, as of September 30, 2021, is as follows:

Loans<br> <br>30-89 Days<br><br> Past Due Loans<br> 90 or more<br> Days<br> Past Due Total Past<br> Due Loans Current<br> Loans Total<br> Loans Accruing<br> Loans<br> 90 or more<br> Days<br> Past Due
Real Estate:
Land Development and Construction $ — $ — $ — $ 4,795 $ 4,795 $ —
Farmland — — — 375 375 —
1-4<br> Family Mortgages 210 — 210 15,554 15,764 —
Commercial Real Estate 153 — 153 19,195 19,348 —
Total Real Estate Loans 363 — 363 39,919 40,282 —
Business Loans:
Commercial and Industrial Loans 83 — 83 4,737 4,820 —
Farm Production and Other Farm Loans — — — 222 222 —
Total Business Loans 83 — 83 4,959 5,042 —
Consumer Loans:
Other Consumer Loans 4 — 4 483 487 —
Total Consumer Loans 4 — 4 483 487 —
Total Loans $ 450 $ — $ 450 $ 45,361 $ 45,811 $ —

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An age analysis of past due loans, segregated by class of loans, as of December 31, 2020, is as follows:

Loans<br> <br>30-89 Days<br><br> Past Due Loans<br> 90 or more<br> Days<br> Past Due Total Past<br> Due Loans Current<br> Loans Total<br> Loans Accruing<br> Loans<br> 90 or more<br> Days<br> Past Due
Real Estate:
Land Development and Construction $ 332 $ — $ 332 $ 5,821 $ 6,153 $ —
Farmland — — — 520 520 —
1-4<br> Family Mortgages 401 — 401 22,905 23,306 —
Commercial Real Estate — — — 24,237 24,237 —
Total Real Estate Loans 733 — 733 53,483 54,216 —
Business Loans:
Commercial and Industrial Loans 849 — 849 7,022 7,871 —
Farm Production and Other Farm Loans — — — 755 755 —
Total Business Loans 849 — 849 7,777 8,626 —
Consumer Loans:
Other Consumer Loans 35 — 35 905 940 —
Total Consumer Loans 35 — 35 905 940 —
Total Loans $ 1,617 $ — $ 1,617 $ 62,165 $ 63,782 $ —

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The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of September 30, 2021:

Special
Satisfactory Mention Substandard Doubtful Loss Total
1,2,3,4 5,6 7 8 9 Loans
Real Estate:
Land Development and Construction $ 4,052 $ 732 $ 11 $ — $ — $ 4,795
Farmland 220 155 — — — 375
1-4<br> Family Mortgages 13,398 1,814 552 — — 15,764
Commercial Real Estate 17,590 1,151 607 — — 19,348
Total Real Estate Loans 35,260 3,852 1,170 — — 40,282
Business Loans:
Commercial and Industrial Loans 4,287 428 105 — — 4,820
Farm Production and Other Farm Loans 222 — — — — 222
Total Business Loans 4,509 428 105 — — 5,042
Consumer Loans:
Other Consumer Loans 467 — 20 — — 487
Total Consumer Loans 467 — 20 — — 487
Total Loans $ 40,236 $ 4,280 $ 1,295 $ — $ — $ 45,811

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

Special
Satisfactory Mention Substandard Doubtful Loss Total
1,2,3,4 5,6 7 8 9 Loans
Real Estate:
Land Development and Construction $ 5,364 $ 766 $ 23 $ — $ — $ 6,153
Farmland 357 163 — — — 520
1-4<br> Family Mortgages 21,116 1,655 535 — — 23,306
Commercial Real Estate 22,469 1,484 284 — — 24,237
Total Real Estate Loans 49,306 4,068 842 — — 54,216
Business Loans:
Commercial and Industrial Loans 7,121 397 353 — — 7,871
Farm Production and Other Farm Loans 755 — — — — 755
Total Business Loans 7,876 397 353 — — 8,626
Consumer Loans:
Other Consumer Loans 862 29 35 — 14 940
Total Consumer Loans 862 29 35 — 14 940
Total Loans $ 58,044 $ 4,494 $ 1,230 $ — $ 14 $ 63,782

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

September 30, 2021 December 31, 2020
Real Estate:
Land Development and Construction $ — $ 8
1-4<br> Family Mortgages — 25
Total Real Estate Loans — 33
Business Loans:
Commercial and Industrial Loans 309 305
Total Business Loans 309 305
Total Purchased Credit Deteriorated Loans $ 309 $ 338

Nonaccrual loans of $-0- and $25 are included in the 1-4 Family Mortgages at September 30, 2021 and December 31, 2020, respectively.

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

Total Purchased Credit Deteriorated Loans
Contractually-required principal $ 993
Nonaccretable difference (68 )
Cash flows expected to be collected 925
Accretable yield (36 )
Fair Value $ 889

There were no purchased loans classified as TDRs as of the nine months ended September 30, 2021, or September 30, 2020.

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Note 9. Allowance for Loan Losses

(in thousands)

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

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

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

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2021:

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

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The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2020:

Real Business
September 30, 2020 Estate Loans Consumer Total
Balance, January 1, 2020 $ 3,075 $ 371 $ 309 $ 3,755
Provision for loan losses 729 450 4 1,183
Charge-offs 309 222 91 622
Recoveries 104 35 39 178
Net charge-offs 205 187 52 444
Balance, September 30, 2020 $ 3,599 $ 634 $ 261 $ 4,494
Period end allowance allocated to:
Loans individually evaluated for impairment $ 755 $ 13 $ — $ 768
Loans collectively evaluated for impairment 2,844 621 261 3,726
Balance, September 30, 2020 $ 3,599 $ 634 $ 261 $ 4,494

The Company’s recorded investment in loans as of September 30, 2021 and December 31, 2020 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:

Real Business
September 30, 2021 Estate Loans Consumer Total
Loans individually evaluated for specific impairment $ 2,324 $ 232 $ 1,200 $ 3,756
Loans collectively evaluated for general impairment 489,441 103,462 14,059 606,962
Acquired with deteriorated credit quality — 309 — 309
$ 491,765 $ 104,003 $ 15,259 $ 611,027
Real Business
--- --- --- --- --- --- --- --- ---
December 31, 2020 Estate Loans Consumer Total
Loans individually evaluated for specific impairment $ 7,262 $ 413 $ — $ 7,675
Loans collectively evaluated for general impairment 506,368 124,128 13,748 644,244
Acquired with deteriorated credit quality 33 305 — 338
$ 513,663 $ 124,846 $ 13,748 $ 652,257

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Note 10. Other Intangible Assets

(in thousands)

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

September 30, 2021 December 31, 2020
Core deposit intangible $ 630 $ 739
Accumulated amortization (82 ) (109 )
Total finite-lived intangible assets $ 548 $ 630

Core deposit intangible amortization expense for the period ended September 30, 2021 and period ended December 31, 2020 was $82 and $109, respectively. The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:

Year ending December 31, Amount
2021 $ 27
2022 109
2023 109
2024 109
2025 109
Thereafter 85
$ 548

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Note 11. Secured Line of Credit

(in thousands)

On June 9, 2021, the Company obtained a secured revolving line of credit (“Line”) in the amount of $20,000 with First Horizon Bank. The proceeds of the Line were used to enhance the Bank’s capital structure. The Line bears interest at a floating interest rate linked to WSJ Prime Rate with an initial interest rate of 3.25%, which is payable quarterly on the first day of each calendar quarter, commencing on July 1, 2021, with the final installment of interest being due and payable concurrently on the same date that the principal balance is due. The Line also bears an unused line fee at a rate equal to 0.25%, applied to the unused balance of the Line. The Line is fully secured by the common stock of the Bank. The Line matures on June 9, 2023, at which time all unpaid interest and principal is due and payable.

September 30, 2021 December 31,<br> 2020
Funded balance $ 18,000 $ —
Unfunded balance 2,000 —
Total credit facility $ 20,000 $ —

Note 12. Shareholders’ Equity

(in thousands, except share data)

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

Accumulated
Additional Other
Common Paid-In Comprehensive Retained
Stock Capital Income (Loss) Earnings Total
Balance, January 1, 2021 5,587,070 $ 1,118 $ 18,134 $ 4,138 $ 96,158 $ 119,548
Net income — — — — 1,897 1,897
Dividends paid (0.24 per share) — — — — (1,341 ) (1,341 )
Stock compensation expense — — 42 — — 42
Other comprehensive loss, net — — — (13,668 ) — (13,668 )
Balance, March 31, 2021 5,587,070 $ 1,118 $ 18,176 $ (9,530 ) $ 96,714 $ 106,478
Net income — — — — 1,907 1,907
Dividends paid (0.24 per share) — — — — (1,343 ) (1,343 )
Restricted stock granted 8,250 2 (2 ) — — —
Stock compensation expense — — 40 — — 40
Other comprehensive income, net — — — 2,492 — 2,492
Balance, June 30, 2021 5,595,320 $ 1,120 $ 18,214 $ (7,038 ) $ 97,278 $ 109,574
Net income — — — — 1,880 1,880
Dividends paid (0.24 per share) — — — — (1,343 ) (1,343 )
Stock compensation expense — — 40 — — 40
Other comprehensive loss, net — — — (2,769 ) — (2,769 )
Balance, September 30, 2021 5,595,320 $ 1,120 $ 18,254 $ (9,807 ) $ 97,815 $ 107,382

All values are in US Dollars.

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Accumulated
Additional Other
Common Paid-In Comprehensive Retained
Stock Capital Income (Loss) Earnings Total
Balance, January 1, 2020 5,578,131 $ 1,116 $ 17,883 $ (789 ) $ 94,590 $ 112,800
Net income 1,160 1,160
Dividends paid (0.24 per share) — — — — (1,339 ) (1,339 )
Options exercised 4,500 1 86 — — 87
Stock compensation expense — — 40 — — 40
Other comprehensive income, net — — — 5,996 — 5,996
Balance, March 31, 2020 5,582,631 $ 1,117 $ 18,009 $ 5,207 $ 94,411 $ 118,744
Net income — — — — 1,462 1,462
Dividends paid (0.24 per share) — — — — (1,342 ) (1,342 )
Restricted stock forfeited (4,500 ) (1 ) 1 — — —
Restricted stock granted 8,250 2 (2 ) — — —
Stock compensation expense — — 41 — — 41
Other comprehensive income, net — — — 464 — 464
Balance, June 30, 2020 5,586,381 $ 1,118 $ 18,049 $ 5,671 $ 94,531 $ 119,369
Net income — — — — 2,083 2,083
Dividends paid (0.24 per share) — — — — (1,341 ) (1,341 )
Options exercised 689 — — — — —
Stock compensation expense — — 43 — — 43
Other comprehensive loss, net — — — (2,655 ) — (2,655 )
Balance, September 30, 2020 5,587,070 $ 1,118 $ 18,092 $ 3,016 $ 95,273 $ 117,499

All values are in US Dollars.

Note 13. Fair Value of Financial Instruments

(in thousands)

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

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or
Level 3 Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.

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

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The following table presents assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2021:

Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3) Totals
Securities available for sale
Obligations of U.S. Government Agencies $ — $ 4,855 $ — $ 4,855
Mortgage-backed securities — 387,267 — 387,267
State, county and municipal obligations — 181,569 — 181,569
Other securities 498 — — 498
Total $ 498 $ 573,691 $ — $ 574,189

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

Fair Value Measurements Using:
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3) Totals
Securities available for sale
Obligations of U.S. Government Agencies $ — $ 12,061 $ — $ 12,061
Mortgage-backed securities — 561,983 — 561,983
State, county and municipal obligations — 104,197 — 104,197
Other securities — 508 — 508
Total $ — $ 678,749 $ — $ 678,749

The Company recorded no gains or losses in earnings for the period ended September 30, 2021 or December 31, 2020 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

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Impaired Loans

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

Other real estate owned

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

For assets measured at fair value on a nonrecurring basis during 2021 that were still held on the Company’s balance sheet at September 30, 2021, the following table provides the hierarchy level and the fair value of the related assets:

Fair Value Measurements Using:
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3) Totals
Impaired loans $ — $ — $ 111 $ 111
Other real estate owned — — 1,567 1,567
Total $ — $ — $ 1,678 $ 1,678

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The following table presents information as of September 30, 2021 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

Financial instrument Fair Value Valuation Technique Significant Unobservable<br> Inputs Range of<br> Inputs
Impaired loans $ 111 Appraised value of collateral less estimated costs to sell Estimated costs to sell 25 %
OREO 1,567 Appraised value of collateral less estimated costs to sell Estimated costs to sell 25 %

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

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

Impaired loans, whose fair value was remeasured during the period, with a carrying value of $1,317 and $2,920, had an allocated allowance for loan losses of $1,206 and $907 at September 30, 2021 and December 31, 2020, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of $-0- and $391 was necessary and recorded during the three and nine-month period ended September 30, 2021, respectively. Management determined no fair value adjustment was necessary for the year ended December 31, 2020.

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The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. The following represents the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2021:

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

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

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

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

(in thousands, except share and per share data)

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report. The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

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

• expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions;
• adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan losses and our ability to foreclose on delinquent mortgages;
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• 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 <br>COVID-19<br> pandemic and its impact on the Company’s and its customers’ business, results of operations, asset quality and financial condition;
--- ---
• extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, or litigation;
--- ---
• increased competition from other financial institutions and the risk of failure to achieve our business strategies;
--- ---
• events affecting our business operations, including the effectiveness of our risk management framework, the accuracy of our estimates, our reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances;
--- ---
• our ability to maintain sufficient capital and to raise additional capital when needed;
--- ---
• our ability to maintain adequate liquidity to conduct business and meet our obligations;
--- ---
• events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people;
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• 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 <br>time-to-time<br> in the Company’s filings with the Securities and Exchange Commission.
--- ---

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

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

OVERVIEW

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

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At September 30, 2021, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,356,704 and total deposits of $1,114,738. In addition to full service commercial banking, the Bank offers title insurance services through its affiliate, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The Company has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Company at September 30, 2021, was 35.59% and at December 31, 2020, was 22.06%. The increase was due to an increase in interest bearing cash and cash equivalents and a reduction in the amount of securities required to be pledged at September 30, 2021. Management believes it maintains adequate liquidity for the Company’s current needs.

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The Company’s primary source of liquidity is customer deposits, which were $1,113,979 at September 30, 2021, and $1,095,189 at December 31, 2020. Other sources of liquidity include investment securities, the Company’s line of credit with the Federal Home Loan Bank (“FHLB”), the Company’s secured line of credit with First Horizon Bank (“FHN”) and federal funds lines with correspondent banks. The Company had $574,189 invested in available-for-sale investment securities at September 30, 2021, and $678,749 at December 31, 2020. The decrease in securities is the result of management strategically reducing higher interest-bearing deposits that increased significantly through the first quarter of 2021 due to government stimulus by liquidating under-performing securities.

The Company also had $76,132 in interest bearing deposits at other banks at September 30, 2021 and $25,468 at December 31, 2020. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both September 30, 2021 and December 31, 2020. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At September 30, 2021, the Company had unused and available $219,107 of its line of credit with the FHLB and at December 31, 2020, the Company had unused and available $167,285 of its line of credit with the FHLB. The increase in the amount available under the Company’s line of credit with the FHLB from the end of 2020 to September 30, 2021, was the result of an increase in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. The secured line of credit with FHN was originated on June 9, 2021. At September 30, 2021, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of $-0- as of September 30, 2021 and December 31, 2020. The Company may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

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

CAPITAL RESOURCES

Total shareholders’ equity was $107,382 at September 30, 2021, as compared to $119,548 at December 31, 2020. The decrease in shareholders’ equity was the result of the accumulated other comprehensive loss (“AOCL”) brought about by the investment securities market value adjustment partially offset by earnings in excess of dividends paid. The AOCL is a result of a modest increase in interest rates that have occurred since the purchase of securities. Management does not intend to sell any securities at an unrealized loss position.

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On June 9, 2021, the Company obtained a $20,000 secured revolving line of credit with FHN to enhance the Bank’s capital structure by injecting $18,000 into the Bank. With the capital injection coupled with strategically reducing higher interest-bearing deposits, the Bank’s Tier 1 Leverage ratio increased at September 30, 2021 and December 31, 2020, respectively, to 9.08% from 7.05%.

The Company paid aggregate cash dividends in the amount of $4,027, or $0.72 per share, during the nine-month period ended September 30, 2021 compared to $4,022, or $0.72 per share, for the same period in 2020.

Quantitative measures established by federal regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of September 30, 2021, the Company and Bank meets all capital adequacy requirements to which it is subject and according to these requirements the Company and Bank is considered to be well capitalized.

Minimum Capital
Minimum Capital Requirement to be
Requirement to be Adequately
Actual Well Capitalized Capitalized
Amount Ratio Amount Ratio Amount Ratio
September 30, 2021
Citizens Holding Company:
Tier 1 leverage ratio $ 103,611 7.80 % $ 66,449 5.00 % $ 53,159 4.00 %
Common Equity tier 1 capital ratio 103,611 12.69 % 86,384 6.50 % 59,804 4.50 %
Tier 1 risk-based capital ratio 103,611 12.69 % 65,294 8.00 % 48,970 6.00 %
Total risk-based capital ratio 108,929 13.35 % 81,617 10.00 % 65,294 8.00 %
Citizens Bank:
Tier 1 leverage ratio $ 120,713 9.08 % $ 66,437 5.00 % $ 53,150 4.00 %
Common Equity tier 1 capital ratio 120,713 14.79 % 86,368 6.50 % 59,793 4.50 %
Tier 1 risk-based capital ratio 120,713 14.79 % 65,284 8.00 % 48,963 6.00 %
Total risk-based capital ratio 126,031 15.44 % 81,606 10.00 % 65,284 8.00 %
December 31, 2020
Citizens Holding Company:
Tier 1 leverage ratio $ 101,640 7.22 % $ 70,344 5.00 % $ 56,275 4.00 %
Common Equity tier 1 capital ratio 101,640 12.55 % 91,448 6.50 % 63,310 4.50 %
Tier 1 risk-based capital ratio 101,640 12.55 % 64,780 8.00 % 48,585 6.00 %
Total risk-based capital ratio 106,375 13.14 % 80,975 10.00 % 64,780 8.00 %
Citizens Bank:
Tier 1 leverage ratio $ 99,170 7.05 % $ 70,326 5.00 % $ 56,261 4.00 %
Common Equity tier 1 capital ratio 99,170 12.25 % 91,423 6.50 % 63,293 4.50 %
Tier 1 risk-based capital ratio 99,170 12.25 % 64,759 8.00 % 48,569 6.00 %
Total risk-based capital ratio 103,905 12.84 % 80,948 10.00 % 64,759 8.00 %

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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);
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• Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and
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• Maintain the minimum total risk-based capital ratio at 8%.
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In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.

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

Management believes that, as of September 30, 2021, the Company and the Bank met all capital adequacy requirements under Basel III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Company’s capital ratios as presented.

RESULTS OF OPERATIONS

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

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For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2021 2020 2021 2020
Interest Income, including fees $ 9,762 $ 10,579 $ 28,657 $ 30,415
Interest Expense 1,160 1,673 3,928 5,774
Net Interest Income 8,602 8,906 24,729 24,641
Provision for loan losses 968 247 1,287 1,183
Net Interest Income after
Provision for loan losses 7,634 8,659 23,442 23,458
Other Income 3,294 2,637 9,515 7,488
Other Expense 8,741 8,653 26,191 25,064
Income Before Provision For
Income Taxes 2,187 2,643 6,766 5,882
Provision for Income Taxes 307 560 1,082 1,177
Net Income $ 1,880 $ 2,083 $ 5,684 $ 4,705
Net Income Per share - Basic $ 0.34 $ 0.37 $ 1.02 $ 0.84
Net Income Per Share-Diluted $ 0.34 $ 0.37 $ 1.02 $ 0.84

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

Annualized return on average equity (“ROE”) was 6.60% for the three months ended September 30, 2021, and 7.18% for the corresponding period in 2020. The decrease in ROE for the three months September 30, 2021 compared to the same period in 2020 was a result of a decrease in earnings compared to prior period.

Annualized return on average equity (“ROE”) was 6.69% for the nine months ended September 30, 2021, and 5.40% for the corresponding period in 2020. The increase in ROE for the nine months ended September 30, 2021 was caused by the increase in earnings and decrease in accumulated other comprehensive income (“AOCI “) compared to the same period in 2020.

Book value per share decreased to $19.22 at September 30, 2021, compared to $21.43 at December 31, 2020. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity discussed above. Average assets for the nine months ended September 30, 2021 were $1,433,229 compared to $1,336,513 for the year ended December 31, 2020. This increase was due mainly to the influx of deposits in the first quarter of 2021 as a result of government stimulus programs benefitting the Bank’s customers. A portion of the deposits were subsequently invested into the securities portfolio and management strategically reduced approximately $200,000 in deposits during the second quarter of 2021. Due to this deposit

reduction the average asset balance will continue to trend down for the rest of the year.

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NET INTEREST INCOME / NET INTEREST MARGIN

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

Net interest income was $8,602 and $24,729 for the three and nine months ended September 30, 2021, respectively, as compared to $8,906 and $24,641 for the same respective time periods in 2020.

The annualized net interest margin was 2.53% for the nine months ended September 30, 2021 compared to 2.76% for the corresponding period of 2020. The decrease in net interest margin for the nine months ended September 30, 2021, when compared to the same period in 2020, was mainly due to the historical low mortgage interest rates increasing prepayments on mortgage-backed securities. Prepayments on mortgage-backed securities decreased the yield on taxable securities by 95 basis points (“bps”) to 76 bps at September 30, 2021 compared to 171 bps in 2020. However, the Company was able to offset this decline in yield on mortgage-backed securities by lowering the cost of cost funds to 51 bps for the nine months ended September 30, 2021 compared to 81 bps for the same period in 2020.

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

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TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES

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

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

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(1) Overdrafts, while not considered an earning asset, are included in Loans, net of unearned in the average volume calculation due to the immaterial impact on the yield.
(2) Earnings Assets in the table above does include the dividend paying stock of the Federal Home Loan Bank.
--- ---
(3) Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the <br>non-interest<br> bearing liabilities section above.
--- ---

The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 3.95%, which is net of federal tax benefit.

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three months ended September 30, 2021, repricing of interest-bearing demand deposits, and reallocating the investment portfolio into slower prepaying non-taxable securities offset the decline in yield on taxable securities compared to the same period in 2020. For the nine months ended September 30, 2021, as compared to the respective corresponding period in 2020, the repricing of interest-bearing demand deposits and reallocating the investment portfolio into slower prepaying non-taxable securities were the largest contributing factors to the increase in net interest income over these periods. Also, the Company’s continued efforts to reprice and reduce higher interest-bearing deposits has helped offset the yield decline in taxable securities that has been hampered by the low interest rate environment resulting from the Federal Reserve Board’s decreases to the target federal funds rate during the COVID-19 pandemic. Management believes by continuing to reprice and strategically reduce interest-bearing liabilities as they mature, continued focus on loan growth, and continuing to reallocate the investment mix will increase the net interest margin.

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The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three and nine months ended September 30, 2021 compared to the same respective period in 2020:

TABLE 2 - VOLUME/RATE ANALYSIS

(in thousands)
Three Months Ended September 30, 2021
2021 Change from 2020
Volume Rate Total
INTEREST INCOME
Loans $ (295 ) 119 $ (176 )
Taxable Securities (351 ) (424 ) (775 )
Non-Taxable<br> Securities 320 (248 ) 72
Federal Funds Sold and Other 10 (0 ) 10
TOTAL INTEREST INCOME $ (315 ) $ (554 ) $ (869 )
INTEREST EXPENSE
Interest-bearing demand deposits $ (14 ) (495 ) (509 )
Savings Deposits 6 (2 ) 4
Time Deposits 74 (126 ) (52 )
Short-term borrowings (91 ) 133 42
TOTAL INTEREST EXPENSE $ (25 ) $ (490 ) (515 )
NET INTEREST INCOME $ (290 ) $ (64 ) $ (354 )

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

CREDIT LOSS EXPERIENCE

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

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

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

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

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

Quarter Ended Year Ended Amount of Percent of
September 30, December 31, (Decrease) (Decrease)
2021 2020 Increase Increase
BALANCES:
Gross Loans $ 611,027 $ 652,257 $ (41,230 ) -6.32 %
Allowance for Loan Losses 5,318 4,735 583 12.31 %
Nonaccrual Loans 4,033 8,564 (4,531 ) -52.91 %
Ratios:
Allowance for loan losses to gross loans 0.87 % 0.73 %
Net loans charged off to allowance for loan losses 13.24 % 10.67 %

The provision for loan losses for the three months ended September 30, 2021 was $968, a linked quarter increase of $736. The provision for loan losses for the nine months ended September 30, 2021 was $1,287, an increase of $104 from the provision for loan losses of $1,183 for the same period in 2020. The change in the Company’s loan loss provision for the three and nine months ended September 30, 2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the specific provisioning for one relationship partially offset by the decline in qualitative reserves coupled with the decline in loans balances. The Company’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to payments received and loans charged off in excess of new loans being added to nonaccrual status.

For the three months ended September 30, 2021, net loan losses charged to the allowance for loan losses totaled $1, a decrease of $9 from the $10 charged off in the same period in 2020. For the nine months ended September 30, 2021, net loan losses charged to the allowance for loan losses totaled $704, an increase of $260 from the $444 charged off in the same period in 2020.

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The increase was primarily due to two significant charge-offs during the second quarter. Management reviews quarterly with the Company’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the nine months ended September 30, 2021 that have not been charged off or specifically reserved for in the allowance. Management also believes that the Company’s allowance will be adequate to absorb probable losses inherent in the Company’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended September 30, 2021 was $3,294, an increase of $657, or 24.91%, from $2,637 in the same period in 2020. Service charges on deposit accounts were $952 in the three months ended September 30, 2021, compared to $771 for the same period in 2020. As the vaccine distribution continues, the national and local economies are starting to recover resulting in increased spending and overdraft income. Included in the service charges on deposit accounts line item for the three months ended September 30, 2021, overdraft income increased by $163, or 31.83% from the same period in 2020. Interchange fees which are included in the other service charges and fees line item on the income statement also increased by $83, or 9.71%, to $933 for the three months ended September 30, 2021, compared to $850 for the same period in 2020. Other operating income not derived from service charges or fees increased $372, or 44.55% to $1,207 in the three months ended September 30, 2021, compared to $835 for the same period in 2020. This increase was primarily due to three reasons, (1) an increase in gains from security sales due to strategic investment decisions (2) an increase in mortgage loan origination income and (3) income from the payout of the Company’s bank-owned life insurance (“BOLI”) claims.

Other income for the nine months ended September 30, 2021 was $9,515, an increase of $2,027, or 27.07%, from $7,488 in the same period in 2020. Service charges on deposit accounts were $2,534 in the nine months ended September 30, 2021, compared to $2,488 for the same period in 2020. As the vaccine distribution continues, the national and local economies are starting to recover resulting in increased spending and overdraft income. Interchange fees which are included in the other service charges and fees line item on the income statement continues its growing trend by increasing by $488, or 21.07%, to $2,804 for the nine months ended September 30, 2021, compared to $2,316 for the same period in 2020. Other operating income not derived from service charges or fees increased $1,455, or 62.58% to $3,780 in the nine months ended September 30, 2021, compared to $2,325 for the same period in 2020. The reasons for the significant increase were discussed above.

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

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
Other operating income 2021 2020 2021 2020
BOLI income $ 310 $ 123 $ 746 $ 352
Mortgage loan origination income 301 361 1,019 890
Income from security sales, net 459 293 1,378 703
Other income 137 58 637 380
Total Other Income $ 1,207 $ 835 $ 3,780 $ 2,325

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended September 30, 2021 and 2020 were $8,741 and $8,653, respectively, an increase of $88 or 1.02%. Salaries and benefits increased to $327 for the three months ended September 30, 2021 and increased to $4,716 from $4,389 for the same period in 2020. Occupancy expense decreased by $121, or (6.50%), to $1,740 for the three months ended September 30, 2021, compared to $1,861 for the same period of 2020. For the three months ended September 30, 2021, other non-interest expense decreased $118, or (4.91%) to $2,285 compared to $2,403 for the same period in 2020.

Aggregate non-interest expenses for the nine months ended September 30, 2021 and 2020 were $26,191 and $25,064, respectively, an increase of $1,127 or 4.50%. Salaries and benefits increased to $738 for the nine months ended September 30, 2021 and increased to $13,869 from $13,131 for the same period in 2020. Occupancy expense decreased by $208, or (3.74%), to $5,348 for the nine months ended September 30, 2021, compared to $5,556 for the same period of 2020. Other operating expenses increased by $597, or 9.36%, to $6,974 for the nine months ended September 30, 2021, compared to $6,377 for the same period of 2020. The increase is primary attributed to the write down of two OREO properties coupled with continued investment in customer facing and internal technology.

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

Ended September 30, Ended September 30,
Other Operating Expense 2021 2020 2021 2020
Advertising $ 126 $ 159 $ 429 $ 519
Office supplies 256 270 740 873
Professional fees 320 272 774 791
Technology expense 128 139 424 435
Postage and freight 135 142 465 421
Loan collection expense 15 57 85 100
Regulatory and related expense 231 230 703 230
Debit card/ATM expense 186 203 546 442
Write down on OREO — 162 390 445
Other expenses 888 769 2,418 2,121
Total Other Expense $ 2,285 $ 2,403 $ 6,974 $ 6,377

The Company’s efficiency ratio for the three months ended September 30, 2021 was 75.48%, compared to 77.66% for the same period in 2020. The Company’s efficiency ratio for the nine months ended September 30, 2021 was 76.36%, compared to 80.07% for the same period in 2020. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.

BALANCE SHEET ANALYSIS

Amount of Percent of
September 30, December 31, Increase Increase
2021 2020 (Decrease) (Decrease)
Cash and Due From Banks $ 17,795 $ 16,840 $ 955 5.67 %
Interest Bearing deposits with
Other Banks 76,132 25,468 50,664 198.93 %
Investment Securities 574,189 678,749 (104,560 ) -15.40 %
Loans, net 605,709 647,521 (41,812 ) -6.46 %
Premises and Equipment 26,566 25,630 936 3.65 %
Total Assets 1,355,919 1,450,692 (94,773 ) -6.53 %
Total Deposits 1,113,979 1,095,189 18,790 1.72 %
Total Shareholders’ Equity 107,382 119,548 (12,166 ) -10.18 %

CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at September 30, 2021 was $93,927, which was an increase of $51,619 from the balance of $42,308 at December 31, 2020.

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INVESTMENT SECURITIES

The Company’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Company’s investments securities portfolio at September 30, 2021 decreased by $104,560, or (15.40%), to $574,189 from $678,749 at December 31, 2020. The decrease is a result of the Company liquidating a portion of the investment portfolio to provide funding for the Company’s strategic high interest-bearing deposit reduction plan.

LOANS

The Company’s loan balance decreased by $41,812, or (6.46%), during the nine months ended September 30, 2021, to $605,709 from $647,521 at December 31, 2020. The decrease was primarily due to two reasons: (1) Loan competition continues to be strong in our operating regions, especially in land development and construction and commercial real estate categories resulting in large payoffs and (2) payoffs of the PPP loans that were provided to customers. PPP loans have decreased by $15,446 for the nine months ended September 30, 2021. While loan demand continues to recover in certain sectors, the uncertainty surrounding the pandemic continues to put a lot of projects on hold in other sectors in the near term. Additionally, no material changes were made to the loan products offered by the Company during this period.

DEPOSITS

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

Amount of Percent of
September 30, December 31, Increase Increase
2021 2020 (Decrease) (Decrease)
Noninterest-Bearing Deposits $ 295,097 $ 276,033 $ 19,064 6.91 %
Interest-Bearing Deposits 447,525 480,987 (33,462 ) -6.96 %
Savings Deposits 125,753 104,532 21,221 20.30 %
Certificates of Deposit 245,604 233,637 11,967 5.12 %
Total deposits $ 1,113,979 $ 1,095,189 $ 18,790 1.72 %

All deposit accounts except for interest-bearing deposits increased during the nine months ended September 30, 2021. The increase in deposit accounts is a result of the COVID-19 savings trend coupled with record financial stimulus. The decrease in interest-bearing accounts is a result of management strategically reducing higher interest-bearing accounts to help improve both interest margin and the Bank’s capital ratios. While total deposits are still up from December 31, 2020, management reduced higher interest-bearing deposits during the second quarter by approximately $200,000. Management continually monitors the interest rates on time deposit products to ensure that the Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.

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OFF-BALANCE SHEET ARRANGEMENTS

Please refer to Note 2 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Company’s off-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

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

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

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

The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020
Following Months Following Months
12 months 13-24 12 months 13-24
+400 basis points -4.5 % 3.9 % 9.1 % 8.9 %
+300 basis points -2.1 % 4.7 % 10.7 % 8.4 %
+200 basis points -0.7 % 4.3 % 11.6 % 7.3 %
+100 basis points -0.5 % 2.4 % 10.9 % 5.3 %
Flat rates — — — —
-100 basis points -7.0 % -8.9 % -12.2 % -9.0 %
-200 basis points -11.1 % -12.8 % -19.8 % -19.9 %

The following table presents the change in our economic value of equity as of September 30, 2021 and December 31, 2020, assuming immediate parallel shifts in interest rates:

Economic Value of Equity at Risk (%)
September 30, 2021 December 31, 2020
+400 basis points -17.2 % 11.3 %
+300 basis points -11.4 % 18.8 %
+200 basis points -6.5 % 24.6 %
+100 basis points -2.4 % 21.9 %
Flat rates — —
-100 basis points -14.9 % -29.4 %
-200 basis points -33.1 % -43.1 %

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

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

ITEM 4. CONTROLS AND PROCEDURES.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of September 30, 2021 (the end of the period covered by this Quarterly Report).

There were no changes to the Company’s internal control over financial reporting that occurred in the nine months ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

The Company’s business, future

financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, which the Company filed with the Securities and Exchange Commission on March 12, 2021. Additional information regarding some of those risks and uncertainties is contained in the notes to the consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, the Company’s quarterly reports on Form 10-Q and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Company’s business, financial condition and results of operations in the future.

ITEM 6. EXHIBITS.

Exhibits

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 <br>8-K<br> of the Company filed with the SEC on June 14, 2021 and incorporated herein by reference.
--- ---

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CITIZENS HOLDING COMPANY
BY: /s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Phillip R. Branch
Phillip R. Branch
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
DATE: November 5, 2021

59

EX-31.(a)

EXHIBIT 31(a)

Certification of Chief Executive Officer

Pursuant to Rule 13a-14(a)/15d-14(a)

I, Greg L. McKee, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Citizens Holding Company;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

  1. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2021

/s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer

EX-31.(b)

EXHIBIT 31(b)

Certification of Chief Financial Officer

Pursuant to Rule 13a-14(a)/15d-14(a)

I, Phillip R. Branch, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Citizens Holding Company;

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of<br>internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 5, 2021

/s/ Phillip R. Branch
Phillip R. Branch
Treasurer and Chief Financial Officer

EX-32.(a)

EXHIBIT 32(a)

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350

In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, of Citizens Holding Company (the “Company”), as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Greg L. McKee, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act<br>of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and<br>results of operations of the Company.
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/s/ Greg L. McKee
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Date: November 5, 2021
Greg L. McKee
President and Chief Executive Officer

EX-32.(b)

EXHIBIT 32(b)

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. § 1350

In connection with the Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, of Citizens Holding Company (the “Company”), as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Phillip R. Branch, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act<br>of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and<br>results of operations of the Company.
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Date: November 5, 2021 /s/ Phillip R. Branch
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Phillip R. Branch
Treasurer and Chief Financial Officer

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