Citizens Holding Co 10-Q for FY2022 Q3
Citizens Holding Co (CIZN)
About this 10-Q
Citizens Holding Co filed this 10-Q on November 4, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $2.58M
- up 37.2% from net income of $1.88M a year earlier
- Diluted EPS
- $0.46
- up 35.3% from $0.34 a year earlier
Table of Contents
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of In Company or organization) |
(IRS Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered | ||
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| ☒ | Smaller Reporting Company | |||||
| Emerging growth company | ||||||
| Title | Outstanding | |
| Common Stock, $0.20 par value |
Table of Contents
CITIZENS HOLDING COMPANY
TABLE OF CONTENTS
Table of Contents
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | $ | ||||||
Interest bearing deposits with other banks |
||||||||
Cash and cash equivalents |
||||||||
Investment securities held-to-maturity, |
||||||||
Investment securities available-for-sale, |
||||||||
Loans held for investment (LHFI), net of unearned income |
||||||||
Less allowance for loan losses, LHFI |
||||||||
Net LHFI |
||||||||
Premises and equipment, net |
||||||||
Other real estate owned, net |
||||||||
Accrued interest receivable |
||||||||
Cash surrender value of life insurance |
||||||||
Deferred tax assets, net |
||||||||
Identifiable intangible assets, net |
||||||||
Other assets |
||||||||
TOTAL ASSETS |
$ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Non-interest bearing deposits |
$ | $ | ||||||
Interest bearing deposits |
||||||||
Total deposits |
||||||||
Securities sold under agreement to repurchase |
||||||||
Borrowings on secured line of credit |
||||||||
Accrued interest payable |
||||||||
Deferred compensation payable |
||||||||
Other liabilities |
||||||||
Total liabilities |
||||||||
SHAREHOLDERS’ EQUITY |
||||||||
Common stock, $ |
||||||||
Additional paid-in capital |
||||||||
Accumulated other comprehensive loss, net of tax benefit of $ |
( |
) | ( |
) | ||||
Retained earnings |
||||||||
Total shareholders’ equity |
||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | $ | ||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
Interest on securities |
||||||||||||||||
Taxable |
||||||||||||||||
Nontaxable |
||||||||||||||||
Other interest |
||||||||||||||||
Total interest income |
||||||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
||||||||||||||||
Other borrowed funds |
||||||||||||||||
Total interest expense |
||||||||||||||||
NET INTEREST INCOME |
||||||||||||||||
(REVERSAL OF) PROVISION FOR LOAN LOSSES |
( |
) | ||||||||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
||||||||||||||||
OTHER INCOME |
||||||||||||||||
Service charges on deposit accounts |
||||||||||||||||
Other service charges and fees |
||||||||||||||||
Net gains on sales of securities |
||||||||||||||||
Other operating income |
||||||||||||||||
Total other income |
||||||||||||||||
OTHER EXPENSES |
||||||||||||||||
Salaries and employee benefits |
||||||||||||||||
Occupancy expense |
||||||||||||||||
Other expense |
||||||||||||||||
Total other expenses |
||||||||||||||||
INCOME BEFORE PROVISION FOR INCOME TAXES |
||||||||||||||||
PROVISION FOR INCOME TAXES |
||||||||||||||||
NET INCOME |
$ | $ | $ | $ | ||||||||||||
NET INCOME PER SHARE -Basic |
$ | $ | $ | $ | ||||||||||||
-Diluted |
$ | $ | $ | $ | ||||||||||||
DIVIDENDS PAID PER SHARE |
$ | $ | $ | $ | ||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Other comprehensive income (loss) |
||||||||||||||||
Securities available-for-sale |
||||||||||||||||
Unrealized holding gains (losses) during the period |
( |
) | ( |
) | ( |
) | ||||||||||
Income tax effect |
( |
) | ||||||||||||||
Net unrealized gains (losses) |
( |
) | ( |
) | ( |
) | ||||||||||
Amortization of net unrealized losses transferred during the period |
||||||||||||||||
Income tax effect |
( |
) | ( |
) | ||||||||||||
Net unrealized losses |
||||||||||||||||
Reclassification adjustment for gains included in net income |
||||||||||||||||
Income tax effect |
( |
) | ( |
) | ||||||||||||
Net gains included in net income |
||||||||||||||||
Total other comprehensive income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
Comprehensive income (loss) |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| For the Nine Months | ||||||||
| Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net cash provided by operating activities |
$ | $ | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Proceeds from maturities, paydowns and calls of securities available-for-sale |
||||||||
Proceeds from maturities, paydowns and calls of securities held-to-maturity |
||||||||
Proceeds from sale of investment securities |
||||||||
Purchases of investment securities |
( |
) | ( |
) | ||||
Purchases of bank premises and equipment |
( |
) | ( |
) | ||||
Net change in FHLB stock |
( |
) | ||||||
Proceeds from sales of bank premises and equipment |
||||||||
Proceeds from sale of other real estate owned |
||||||||
Proceeds from death benefit of bank-owned life insurance |
||||||||
Net change in loans |
( |
) | ||||||
Net cash (used in) provided by investing activities |
( |
) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net change in deposits |
||||||||
Net change in securities sold under agreement to repurchase |
( |
) | ||||||
Proceeds from borrowings on secured line of credit |
||||||||
Payment of FHLB advances |
( |
) | ||||||
Payment of dividends |
( |
) | ( |
) | ||||
Net cash provided by (used in) financing activities |
( |
) | ||||||
Net (decrease) increase in cash and cash equivalents |
( |
) | ||||||
Cash and cash equivalents, beginning of period |
||||||||
Cash and cash equivalents, end of period |
$ | $ | ||||||
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Basic weighted average shares outstanding |
||||||||||||||||
| Dilutive effect of granted options |
— | — | — | |||||||||||||
| Diluted weighted average shares outstanding |
||||||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Net income per share-basic |
$ | $ | $ | $ | ||||||||||||
| Net income per share-diluted |
$ | $ | $ | $ | ||||||||||||
| Directors’ Plan | 2013 Plan | |||||||||||||||
| Number of Shares |
Weighted Average Exercise Price |
Number of Shares |
Weighted Average Exercise Price |
|||||||||||||
| Outstanding at December 31, 2021 |
$ | |
$ | |
||||||||||||
| Granted |
||||||||||||||||
| Exercised |
||||||||||||||||
| Expired |
( |
) | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Outstanding at September 30, 2022 |
$ | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross | Gross | |||||||||||||||
| September 30, 2022 | Amortized | Unrealized | Unrealized | Estimated | ||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
Securities available-for-sale |
||||||||||||||||
Mortgage backed securities |
$ | $ | $ | $ | ||||||||||||
State, County, Municipals |
||||||||||||||||
Other securities |
$ | $ | $ | |||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
| Gross | Gross | |||||||||||||||
| December 31, 2021 | Amortized | Unrealized | Unrealized | Estimated | ||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
Securities available-for-sale |
||||||||||||||||
Obligations of U.S. |
||||||||||||||||
Government agencies |
$ | $ | $ | $ | ||||||||||||
Mortgage backed securities |
||||||||||||||||
State, County, Municipals |
||||||||||||||||
Other securities |
||||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
| Gross | Gross | |||||||||||||||
| September 30, 2022 | Amortized | Unrealized | Unrealized | Estimated | ||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
Securities held-to-maturity |
||||||||||||||||
Obligations of U.S. |
||||||||||||||||
Government agencies |
$ | $ | $ | $ | ||||||||||||
Mortgage backed securities |
||||||||||||||||
State, County, Municipals |
||||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
Available-for-sale |
Held-to-maturity |
|||||||||||||||
| Amortized | Estimated | Amortized | Estimated | |||||||||||||
| Cost | Fair Value | Cost | Fair Value | |||||||||||||
Due in one year or less |
$ | $ | $ | $ | ||||||||||||
Due after one year through five years |
||||||||||||||||
Due after five years through ten years |
||||||||||||||||
Due after ten years |
||||||||||||||||
Residential mortgage backed securities |
||||||||||||||||
Commercial mortgage backed securities |
||||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
September 30, 2022 |
||||||||||||||||||||||||
Available-for-sale |
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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
State, County, Municipal |
||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Held-to-maturity |
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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
State, County, Municipal |
||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
December 31, 2021 |
||||||||||||||||||||||||
Available-for-sale |
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 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
Mortgage backed securities |
||||||||||||||||||||||||
State, County, Municipal |
||||||||||||||||||||||||
Total |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| September 30, 2022 | December 31, 2021 | |||||||
Real Estate: |
||||||||
Land Development and Construction |
$ | $ | ||||||
Farmland |
||||||||
1-4 Family Mortgages |
||||||||
Commercial Real Estate |
||||||||
Total Real Estate Loans |
||||||||
Business Loans: |
||||||||
Commercial and Industrial Loans (1) |
||||||||
Farm Production and Other Farm Loans |
||||||||
Total Business Loans |
||||||||
Consumer Loans: |
||||||||
Credit Cards |
||||||||
Other Consumer Loans |
||||||||
Total Consumer Loans |
||||||||
Total Gross Loans |
||||||||
Allowance for Loan Losses |
( |
) | ( |
) | ||||
Loans, net |
$ | $ | ||||||
| (1) | Includes PPP loans of $ |
| September 30, 2022 | December 31, 2021 | |||||||
Real Estate: |
||||||||
Land Development and Construction |
$ | $ | ||||||
Farmland |
||||||||
1-4 Family Mortgages |
||||||||
Commercial Real Estate |
||||||||
Total Real Estate Loans |
||||||||
Business Loans: |
||||||||
Commercial and Industrial Loans |
||||||||
Farm Production and Other Farm Loans |
||||||||
Total Business Loans |
||||||||
Consumer Loans: |
||||||||
Other Consumer Loans |
||||||||
Total Consumer Loans |
||||||||
Total Nonaccrual Loans |
$ | $ | ||||||
| Accruing | ||||||||||||||||||||||||
| Loans 30-89 Days Past Due |
Loans 90 or more Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans |
Loans 90 or more Days Past Due |
|||||||||||||||||||
Real Estate: |
||||||||||||||||||||||||
Land Development and Construction |
$ | $ | — | $ | $ | $ | $ | — | ||||||||||||||||
Farmland |
— | — | ||||||||||||||||||||||
1-4 Family Mortgages |
||||||||||||||||||||||||
Commercial Real Estate |
— | |||||||||||||||||||||||
Total Real Estate Loans |
||||||||||||||||||||||||
Business Loans: |
||||||||||||||||||||||||
Commercial and Industrial Loans |
— | |||||||||||||||||||||||
Farm Production and Other Farm Loans |
— | — | ||||||||||||||||||||||
Total Business Loans |
— | |||||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||
Credit Cards |
||||||||||||||||||||||||
Other Consumer Loans |
— | |||||||||||||||||||||||
Total Consumer Loans |
||||||||||||||||||||||||
Total Loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Loans 30-89 Days Past Due |
Loans 90 or more Days Past Due |
Total Past Due Loans |
Current Loans |
Total Loans |
Accruing Loans 90 or more Days Past Due |
|||||||||||||||||||
Real Estate: |
||||||||||||||||||||||||
Land Development and Construction |
$ | $ | — | $ | $ | $ | $ | — | ||||||||||||||||
Farmland |
— | |||||||||||||||||||||||
1-4 Family Mortgages |
||||||||||||||||||||||||
Commercial Real Estate |
— | |||||||||||||||||||||||
Total Real Estate Loans |
||||||||||||||||||||||||
Business Loans: |
||||||||||||||||||||||||
Commercial and Industrial Loans |
— | |||||||||||||||||||||||
Farm Production and Other Farm Loans |
— | — | ||||||||||||||||||||||
Total Business Loans |
— | |||||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||
Credit Cards |
||||||||||||||||||||||||
Other Consumer Loans |
||||||||||||||||||||||||
Total Consumer Loans |
||||||||||||||||||||||||
Total Loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Unpaid Principal Balance |
Recorded Investment With No Allowance |
Recorded Investment With Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Real Estate: |
||||||||||||||||||||||||
Land Development and Construction |
$ | $ | $ | — | $ | $ | — | $ | ||||||||||||||||
Farmland |
— | — | ||||||||||||||||||||||
1-4 Family Mortgages |
— | — | ||||||||||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||
Total Real Estate Loans |
$ | |||||||||||||||||||||||
Business Loans: |
||||||||||||||||||||||||
Commercial and Industrial Loans |
$ | |||||||||||||||||||||||
Total Business Loans |
$ | |||||||||||||||||||||||
Total Loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Unpaid Principal Balance |
Recorded Investment With No Allowance |
Recorded Investment With Allowance |
Total Recorded Investment |
Related Allowance |
Average Recorded Investment |
|||||||||||||||||||
Real Estate: |
||||||||||||||||||||||||
Land Development and Construction |
$ | $ | $ | — | $ | $ | — | $ | ||||||||||||||||
Farmland |
— | — | ||||||||||||||||||||||
1-4 Family Mortgages |
— | — | ||||||||||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||
Total Real Estate Loans |
$ | |||||||||||||||||||||||
Business Loans: |
||||||||||||||||||||||||
Commercial and Industrial Loans |
$ | |||||||||||||||||||||||
Total Business Loans |
$ | |||||||||||||||||||||||
Total Loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Number of Loans |
Recorded Investment |
|||||||
Totals at January 1, 2021 |
$ | |||||||
Reductions due to: |
||||||||
Principal paydowns |
( |
) | ||||||
Reclassification to OREO |
( |
) | ||||||
Totals at December 31, 2021 |
$ | |||||||
Reductions due to: |
||||||||
Principal paydowns |
( |
) | ||||||
Total at September 30, 2022 |
$ | |||||||
| Satisfactory 1,2,3,4 |
Special Mention 5,6 |
Substandard 7 |
Doubtful 8 |
Loss 9 |
Total Loans |
|||||||||||||||||||
Real Estate: |
||||||||||||||||||||||||
Land Development and Construction |
$ | $ | $ | $ | — | $ | — | $ | ||||||||||||||||
Farmland |
— | — | ||||||||||||||||||||||
1-4 Family Mortgages |
— | — | ||||||||||||||||||||||
Commercial Real Estate |
— | — | ||||||||||||||||||||||
Total Real Estate Loans |
— | — | ||||||||||||||||||||||
Business Loans: |
||||||||||||||||||||||||
Commercial and Industrial Loans |
— | — | ||||||||||||||||||||||
Farm Production and Other Farm Loans |
— | — | ||||||||||||||||||||||
Total Business Loans |
— | |||||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||
Credit Cards |
— | — | — | |||||||||||||||||||||
Other Consumer Loans |
— | — | ||||||||||||||||||||||
Total Consumer Loans |
— | — | ||||||||||||||||||||||
Total Loans |
$ | $ | $ | $ | — | $ | $ | |||||||||||||||||
| Satisfactory 1,2,3,4 |
Special Mention 5,6 |
Substandard 7 |
Doubtful 8 |
Loss 9 |
Total Loans |
|||||||||||||||||||
Real Estate: |
||||||||||||||||||||||||
Land Development and Construction |
$ | $ | $ | $ | — | $ | — | $ | ||||||||||||||||
Farmland |
— | — | ||||||||||||||||||||||
1-4 Family Mortgages |
— | — | ||||||||||||||||||||||
Commercial Real Estate |
— | — | ||||||||||||||||||||||
Total Real Estate Loans |
— | — | ||||||||||||||||||||||
Business Loans: |
||||||||||||||||||||||||
Commercial and Industrial Loans |
— | |||||||||||||||||||||||
Farm Production and Other Farm Loans |
— | — | ||||||||||||||||||||||
Total Business Loans |
— | |||||||||||||||||||||||
Consumer Loans: |
||||||||||||||||||||||||
Credit Cards |
— | — | — | |||||||||||||||||||||
Other Consumer Loans |
||||||||||||||||||||||||
Total Consumer Loans |
||||||||||||||||||||||||
Total Loans |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
September 30, 2022 |
Real Estate |
Business Loans |
Consumer | Total | ||||||||||||
Beginning Balance, January 1, 2022 |
$ | $ | $ | $ | ||||||||||||
Provision for (reversal of) loan losses |
( |
) | ||||||||||||||
Chargeoffs |
||||||||||||||||
Recoveries |
||||||||||||||||
Net (recoveries) chargeoffs |
( |
) | ( |
) | ( |
) | ||||||||||
Ending Balance |
$ | $ | $ | $ | ||||||||||||
Period end allowance allocated to: |
||||||||||||||||
Loans individually evaluated for impairment |
$ | $ | $ | $ | ||||||||||||
Loans collectively evaluated for impairment |
||||||||||||||||
Ending Balance, September 30, 2022 |
$ | $ | $ | $ | ||||||||||||
September 30, 2021 |
Real Estate |
Business Loans |
Consumer | Total | ||||||||||||
Beginning Balance, January 1, 2021 |
$ | $ | $ | $ | ||||||||||||
Provision for loan losses |
||||||||||||||||
Chargeoffs |
||||||||||||||||
Recoveries |
||||||||||||||||
Net chargeoffs (recoveries) |
||||||||||||||||
Ending Balance |
$ | $ | $ | $ | ||||||||||||
Period end allowance allocated to: |
||||||||||||||||
Loans individually evaluated for impairment |
$ | $ | $ | $ | ||||||||||||
Loans collectively evaluated for impairment |
||||||||||||||||
Ending Balance, September 30, 2021 |
$ | $ | $ | $ | ||||||||||||
September 30, 2022 |
Real Estate |
Business Loans |
Consumer | Total | ||||||||||||
Loans individually evaluated for specific impairment |
$ | $ | $ | — | $ | |||||||||||
Loans collectively evaluated for general impairment |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
December 31, 2021 |
Real Estate |
Business Loans |
Consumer | Total | ||||||||||||
Loans individually evaluated for specific impairment |
$ | $ | $ | — | $ | |||||||||||
Loans collectively evaluated for general impairment |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
September 30, 2022 |
December 31, 2021 |
|||||||
Funded balance |
$ | $ | ||||||
Unfunded balance |
||||||||
Total credit facility |
$ | $ | ||||||
Number of Shares Issued |
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive (Loss) Income |
Retained Earnings |
Total |
|||||||||||||||||||
Balance, January 1, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Dividends paid ($ |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock compensation expense |
— | — | — | — | ||||||||||||||||||||
Other comprehensive loss, net |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Balance, March 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Dividends paid ($ |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Restricted stock granted |
( |
) | — | — | — | |||||||||||||||||||
Stock compensation expense |
— | — | — | — | ||||||||||||||||||||
Other comprehensive loss, net |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Balance, June 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Dividends paid ($ |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock compensation expense |
— | — | — | — | ||||||||||||||||||||
Other comprehensive income, net |
— | — | — | — | ||||||||||||||||||||
Balance, September 30, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Number of Shares Issued |
Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Income (Loss) |
Retained Earnings |
Total |
|||||||||||||||||||
Balance, January 1, 2021 |
$ | $ | $ | $ | $ | |||||||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Dividends paid ($ |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock compensation expense |
— | — | — | — | ||||||||||||||||||||
Other comprehensive loss, net |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Balance, March 31, 2021 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Dividends paid ($ |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Restricted stock granted |
( |
) | — | — | — | |||||||||||||||||||
Stock compensation expense |
— | — | — | — | ||||||||||||||||||||
Other comprehensive income, net |
— | — | — | — | ||||||||||||||||||||
Balance, June 30, 2021 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
Net income |
— | — | — | — | ||||||||||||||||||||
Dividends paid ($ |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
Stock compensation expense |
— | — | — | — | ||||||||||||||||||||
Other comprehensive loss, net |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
Balance, September 30, 2021 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| 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. | |
| Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Totals | |||||||||||||
Securities available-for-sale |
||||||||||||||||
Mortgage-backed securities |
$ | — | $ | $ | — | $ | ||||||||||
State, county and municipal |
— | — | ||||||||||||||
Other securities |
— | |||||||||||||||
Total |
$ | $ | $ | — | $ | |||||||||||
| Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Totals | |||||||||||||
Securities available-for-sale |
||||||||||||||||
Obligations of U.S. Government Agencies |
$ | — | $ | $ | — | $ | ||||||||||
Mortgage-backed securities |
— | — | ||||||||||||||
State, county and municipal |
— | — | ||||||||||||||
Other securities |
— | |||||||||||||||
Total |
$ | $ | $ | — | $ | |||||||||||
Quoted Prices in Active Markets for Identical |
Significant Other Observable |
Significant Unobservable |
||||||||||||||
| Assets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Totals | |||||||||||||
Impaired loans |
$ | — | $ | — | $ | $ | ||||||||||
Other real estate owned |
— | — | ||||||||||||||
Total |
$ | — | $ | — | $ | $ | ||||||||||
| Quoted Prices | ||||||||||||||||||||
| in Active | Significant | |||||||||||||||||||
| Markets for | Other | Significant | Total | |||||||||||||||||
| Carrying | Identical | Observable | Unobservable | Fair | ||||||||||||||||
| September 30, 2022 | Value | Assets | Inputs | Inputs | Value | |||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
$ | $ | $ | — | $ | — | $ | |||||||||||||
Interest bearing deposits with banks |
— | — | ||||||||||||||||||
Securities held-to-maturity |
— | — | ||||||||||||||||||
Securities available-for-sale |
— | — | ||||||||||||||||||
Net LHFI |
— | — | ||||||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits |
$ | $ | $ | $ | — | $ | ||||||||||||||
Securities sold under agreement to repurchase |
— | — | ||||||||||||||||||
Borrowings on secured line of credit |
— | — | ||||||||||||||||||
| Quoted Prices | ||||||||||||||||||||
| in Active | Significant | |||||||||||||||||||
| Markets for | Other | Significant | Total | |||||||||||||||||
| Carrying | Identical | Observable | Unobservable | Fair | ||||||||||||||||
| December 31, 2021 | Value | Assets | Inputs | Inputs | Value | |||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
$ | $ | $ | — | $ | — | $ | |||||||||||||
Interest bearing deposits with banks |
— | — | ||||||||||||||||||
Securities available-for-sale |
— | |||||||||||||||||||
Net LHFI |
— | — | ||||||||||||||||||
Financial liabilities |
||||||||||||||||||||
Deposits |
$ | $ | $ | $ | — | $ | ||||||||||||||
Securities sold under agreement to repurchase |
— | — | ||||||||||||||||||
Borrowings on secured line of credit |
— | — | ||||||||||||||||||
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(in thousands, except share and per share data)
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report. The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.
The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank” and collectively with the Company, the “Company”), include, but are not limited to, the following:
| • | expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions; |
| • | adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan losses and our ability to foreclose on delinquent mortgages; |
| • | natural disasters, civil unrest, epidemics (including the re-emergence of the COVID-19 pandemic) and other catastrophic events in the Company’s geographic area; |
| • | the impact of increasing inflation rates on the general economic, market or business conditions; |
| • | extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, or litigation; |
| • | increased competition from other financial institutions and the risk of failure to achieve our business strategies; |
| • | events affecting our business operations, including the effectiveness of our risk management framework, the accuracy of our estimates, our reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances; |
| • | climate change and societal responses to climate change could adversely affect the Company’s business and results of operations, including indirectly through impact to its customers; |
| • | 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; |
29
Table of Contents
| • | events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people; |
| • | events that adversely affect our reputation, and the resulting potential adverse impact on our business operations; |
| • | increased cybersecurity risk, including network breaches, business disruptions or financial losses; |
| • | risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and provisions in our governing documents that may make it more difficult for another party to obtain control of us; and |
| • | other risks detailed from time-to-time in the Company’s filings with the Securities and Exchange Commission. |
Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.
Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Company. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report. All dollar amounts appearing in this section of our Quarterly Report are in thousands unless otherwise noted or the context otherwise requires.
OVERVIEW
The Company is a one-bank holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of the Bank. The Company does not have any direct subsidiaries other than the Bank.
The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At September 30, 2022, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,328,121 and total deposits of $1,135,468. 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.
30
Table of Contents
CRITICAL ACCOUNTING POLICIES
For an overview of the Company’s critical accounting policies, see the section captioned “Critical Accounting Policies” included in Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s 2021 Annual Report. There have been no significant changes in the Company’s critical accounting policies during the nine months of 2022.
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, 2022, was 15.00% and at December 31, 2021, was 39.71%. The decrease was due to a decrease in interest bearing cash and cash equivalents and a decline in the fair market value of investment securities coupled with increased pledging requirements to collateralize public deposit funds as of September 30, 2022. Management believes it maintains adequate liquidity for the Company’s current needs.
The Company’s primary source of liquidity is customer deposits, which were $1,134,936 at September 30, 2022, and $1,111,892 at December 31, 2021. Other sources of liquidity include investment securities, the Company’s line of credit with the Federal Home Loan Bank (“FHLB”), the Company’s secured line of credit with First Horizon Bank (“FHN”) and federal funds lines with correspondent banks. The Company had $245,381 invested in available-for-sale investment securities at September 30, 2022, and $647,557 at December 31, 2021. The decrease in securities available-for-sale is the result of the transfer of securities available-for-sale to held-to-maturity during the third quarter to help further mitigate any negative impacts on shareholders’ equity that could result from continued interest rate hikes. See Note 6 to the Company’s Consolidated Financial Statements for more details of the transfer.
The Company also had $22,532 in interest bearing deposits at other banks at September 30, 2022 and $68,563 at December 31, 2021. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both September 30, 2022 and December 31, 2021. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At September 30, 2022, the Company had unused and available $168,109 of its line of credit with the FHLB and at December 31, 2021, the Company had unused and available $221,088 of its line of credit with the FHLB. The decrease in the amount available under the Company’s line of credit with the FHLB from the end of 2021 to September 30, 2022, was the result of a decrease in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. The secured line of credit with FHN was originated on June 9, 2021. At September 30, 2022, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of $-0- as of September 30, 2022 and December 31, 2021. The Company may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.
When the Company has more funds than it needs for its reserve requirements or short-term liquidity needs, the Company increases its investment portfolio, increases the balances in interest bearing due from bank accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to ensure rate flexibility and to meet loan funding and liquidity needs. When deposits decline or do not grow sufficiently to fund loan demand, management will seek funding either through federal funds purchased or advances from the FHLB.
31
Table of Contents
CAPITAL RESOURCES
Total shareholders’ equity was $32,637 at September 30, 2022, as compared to $105,900 at December 31, 2021. The decrease in shareholders’ equity was the result of the accumulated other comprehensive income (“AOCI”) brought about by the investment securities market value adjustment partially offset by earnings in excess of dividends paid. The AOCI is a result of an increase in the medium-term interest rates that has occurred since the purchase of securities. As mentioned earlier, the Company transferred securities to held-to-maturity during the third quarter to help further mitigate any future negative impacts on shareholders’ equity that could result from continued interest rate hikes. The unrealized loss that was frozen in AOCI at the time of the transfer will be amortized out of AOCI back into shareholders’ equity over the remaining life of the securities. See Note 6 to the Company’s Consolidated Financial Statements for more details of the transfer. Management does not intend to sell any securities at an unrealized loss position. Additionally, as noted in the Liquidity section of Item 2. of this Quarterly Report, the Company has sufficient liquidity options available if the need for short-term funds arises.
The Company paid aggregate cash dividends in the amount of $4,033, or $0.72 per share, during the nine-month period ended September 30, 2022 compared to $4,027, or $0.72 per share, for the same period in 2021.
Quantitative measures established by federal regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of September 30, 2022, the Company and Bank meets all capital adequacy requirements to which it is subject and according to these requirements the Company and Bank is considered to be well capitalized.
32
Table of Contents
| Actual | Minimum Capital Requirement to be Well Capitalized |
Minimum Capital Requirement to be |
||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| September 30, 2022 |
||||||||||||||||||||||||
| Citizens Holding Company |
||||||||||||||||||||||||
| Tier 1 leverage ratio |
$ | 107,555 | 7.84 | % | $ | 68,560 | 5.00 | % | $ | 54,848 | 4.00 | % | ||||||||||||
| Common Equity tier 1 capital ratio |
107,555 | 13.10 | % | 89,127 | 6.50 | % | 61,704 | 4.50 | % | |||||||||||||||
| Tier 1 risk-based capital ratio |
107,555 | 13.10 | % | 65,689 | 8.00 | % | 49,267 | 6.00 | % | |||||||||||||||
| Total risk-based capital ratio |
112,624 | 13.72 | % | 82,112 | 10.00 | % | 65,689 | 8.00 | % | |||||||||||||||
| The Citizens Bank of Philadelphia |
||||||||||||||||||||||||
| Tier 1 leverage ratio |
$ | 124,916 | 9.11 | % | $ | 68,548 | 5.00 | % | $ | 54,839 | 4.00 | % | ||||||||||||
| Common Equity tier 1 capital ratio |
124,916 | 9.11 | % | 89,113 | 6.50 | % | 61,694 | 4.50 | % | |||||||||||||||
| Tier 1 risk-based capital ratio |
124,916 | 15.22 | % | 65,660 | 8.00 | % | 49,245 | 6.00 | % | |||||||||||||||
| Total risk-based capital ratio |
129,985 | 15.84 | % | 82,076 | 10.00 | % | 65,660 | 8.00 | % | |||||||||||||||
| December 31, 2021 |
||||||||||||||||||||||||
| Citizens Holding Company |
||||||||||||||||||||||||
| Tier 1 leverage ratio |
$ | 104,181 | 7.80 | % | $ | 66,789 | 5.00 | % | $ | 53,431 | 4.00 | % | ||||||||||||
| Common Equity tier 1 capital ratio |
104,181 | 13.16 | % | 86,826 | 6.50 | % | 60,110 | 4.50 | % | |||||||||||||||
| Tier 1 risk-based capital ratio |
104,181 | 13.16 | % | 63,322 | 8.00 | % | 47,492 | 6.00 | % | |||||||||||||||
| Total risk-based capital ratio |
108,694 | 13.73 | % | 79,153 | 10.00 | % | 63,322 | 8.00 | % | |||||||||||||||
| The Citizens Bank of Philadelphia |
||||||||||||||||||||||||
| Tier 1 leverage ratio |
$ | 121,421 | 9.09 | % | $ | 66,776 | 5.00 | % | $ | 53,421 | 4.00 | % | ||||||||||||
| Common Equity tier 1 capital ratio |
121,421 | 9.09 | % | 86,808 | 6.50 | % | 60,098 | 4.50 | % | |||||||||||||||
| Tier 1 risk-based capital ratio |
121,421 | 15.34 | % | 63,314 | 8.00 | % | 47,486 | 6.00 | % | |||||||||||||||
| Total risk-based capital ratio |
125,934 | 15.91 | % | 79,143 | 10.00 | % | 63,314 | 8.00 | % | |||||||||||||||
The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Company (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II for non-core banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.
Beginning January 1, 2015, the Company and the Bank began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner:
| • | Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%; |
| • | Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking organizations); |
| • | Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and |
| • | Maintain the minimum total risk-based capital ratio at 8%. |
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Table of Contents
In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.
The final Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the final Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital.
Management believes that, as of September 30, 2022, the Company and the Bank met all capital adequacy requirements under Basel III.
34
Table of Contents
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Interest Income, including fees |
$ | 10,122 | $ | 9,762 | $ | 28,736 | $ | 28,657 | ||||||||
| Interest Expense |
1,073 | 1,160 | 2,637 | 3,928 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Interest Income |
9,049 | 8,602 | 26,099 | 24,729 | ||||||||||||
| (Reversal of) provision for loan losses |
(53 | ) | 968 | 96 | 1,287 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Interest Income after |
||||||||||||||||
| (Reversal of) provision for loan losses |
9,102 | 7,634 | 26,003 | 23,442 | ||||||||||||
| Other Income |
2,877 | 3,294 | 8,173 | 9,515 | ||||||||||||
| Other Expense |
8,936 | 8,741 | 25,669 | 26,191 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income Before Provision For |
||||||||||||||||
| Income Taxes |
3,043 | 2,187 | 8,507 | 6,766 | ||||||||||||
| Provision for Income Taxes |
463 | 307 | 1,350 | 1,082 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Income |
$ | 2,580 | $ | 1,880 | $ | 7,157 | $ | 5,684 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Income Per share - Basic |
$ | 0.46 | $ | 0.34 | $ | 1.28 | $ | 1.02 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net Income Per Share-Diluted |
$ | 0.46 | $ | 0.34 | $ | 1.28 | $ | 1.02 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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 13.36% for the three months ended September 30, 2022, and 6.60% for the corresponding period in 2021. Annualized ROE was 12.12% for the nine months ended September 30, 2022, and 6.69% for the corresponding period in 2021. The increase in ROE for the three and nine months ended September 30, 2022 compared to the same period in 2021 was a result of an increase in earnings compared to prior period coupled with a decline in equity due to the unrealized losses on investments in AOCI.
Book value per share decreased to $5.83 at September 30, 2022, compared to $18.95 at December 31, 2021. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity resulting from the AOCI caused by the increase in medium-term interest rates. Average assets for the nine months ended September 30, 2022 were $1,348,574 compared to $1,412,082 for the year ended December 31, 2021. This decrease was due mainly to the increase in the unrealized loss on investment securities.
35
Table of Contents
NET INTEREST INCOME / NET INTEREST MARGIN
The main component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds. The net interest margin is net interest income expressed as a percentage of average earning assets. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities.
Net interest income was $9,049 and $26,099 for the three and nine months ended September 30, 2022, respectively, as compared to $8,602 and $24,729 for the same respective time periods in 2021.
The annualized net interest margin was 2.90% for the three months ended September 30, 2022, compared to 2.74% for the corresponding period of 2021. Additionally, the annualized net interest margin was 2.79% for the nine months ended September 30, 2022, compared to 2.53% for the corresponding period of 2021. The increase in net interest margin for both the three and nine months ended September 30, 2022, when compared to the same period in 2021, was mainly due to management’s reallocation of the investment portfolio into higher yielding securities throughout 2021. In addition, management’s deposit repricing campaign and reduction of higher interest-bearing deposit balances throughout 2021 decreased the cost of funds to 45 basis point (“bps”) for the three months ended September 30, 2022 and 37 bps for the nine months ended September 30, 2022 compared to 50 and 51 bps for the three and nine months ended September 30, 2021, respectively. The increase in interest on securities coupled with the decrease in the cost of funds offset the decline in interest income on loans which decreased for the three and nine months ended September 30, 2022 by $811, or (10.58%), and $3,823, or (16.12%) when compared to the same periods in 2021.
Overall, the Company has benefited from the raising interest rate environment as shown by the overall increase in interest income and decrease in interest expense year-over-year. However, management expects cost of funds to start to increase as further interest rate hikes are expected. Management also expects any increase in the cost of funds will be partially offset with an increase in interest income as a result of higher yields on both new loan origination and security purchases.
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 of Contents
TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES
| Three Months Ended September 30, | ||||||||||||||||||||||||
| Average Balance | Income/Expense | Average Yield/Rate | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Loans: |
||||||||||||||||||||||||
| Loans, net of unearned(1) |
$ | 582,989 | $ | 622,721 | $ | 6,883 | $ | 7,677 | 4.72 | % | 4.93 | % | ||||||||||||
| Investment Securities |
||||||||||||||||||||||||
| Taxable |
474,032 | 478,968 | 2,131 | 1,625 | 1.80 | % | 1.36 | % | ||||||||||||||||
| Tax-exempt |
215,825 | 108,082 | 1,320 | 427 | 2.45 | % | 1.58 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Investment Securities |
689,857 | 587,050 | 3,451 | 2,052 | 2.00 | % | 1.40 | % | ||||||||||||||||
| Federal Funds Sold and Other |
15,627 | 44,640 | 73 | 15 | 1.87 | % | 0.13 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Interest Earning Assets(1)(2) |
1,288,474 | 1,254,412 | 10,407 | 9,744 | 3.23 | % | 3.11 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Non-Earning Assets |
69,953 | 88,148 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total Assets |
$ | 1,358,427 | $ | 1,342,560 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||
| Interest-bearing Demand Deposits (3) |
$ | 479,234 | $ | 463,319 | $ | 139 | $ | 205 | 0.12 | % | 0.18 | % | ||||||||||||
| Savings |
135,260 | 122,841 | 34 | 31 | 0.10 | % | 0.10 | % | ||||||||||||||||
| Time |
195,438 | 246,875 | 323 | 715 | 0.66 | % | 1.16 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Deposits |
809,932 | 833,035 | 496 | 951 | 0.24 | % | 0.46 | % | ||||||||||||||||
| Borrowed Funds |
||||||||||||||||||||||||
| Short-term Borrowings |
132,430 | 90,490 | 323 | 209 | 0.98 | % | 0.92 | % | ||||||||||||||||
| Long-term Borrowings |
18,000 | — | 254 | — | 5.64 | % | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Borrowed Funds |
150,430 | 90,490 | 577 | 209 | 1.53 | % | 0.92 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Interest-Bearing Liabilities (3) |
960,362 | 923,525 | 1,073 | 1,160 | 0.45 | % | 0.50 | % | ||||||||||||||||
| Non-Interest Bearing Liabilities |
||||||||||||||||||||||||
| Demand Deposits |
309,913 | 294,790 | ||||||||||||||||||||||
| Other Liabilities |
10,931 | 10,327 | ||||||||||||||||||||||
| Shareholders’ Equity |
77,221 | 113,918 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total Liabilities and Shareholders’ Equity |
$ | 1,358,427 | $ | 1,342,560 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Interest Rate Spread |
2.78 | % | 2.60 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net Interest Margin |
$ | 9,334 | $ | 8,584 | 2.90 | % | 2.74 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Less |
||||||||||||||||||||||||
| Tax Equivalent Adjustment |
285 | (18 | ) | |||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net Interest Income |
$ | 9,049 | $ | 8,602 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
37
Table of Contents
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| Average Balance | Income/Expense | Average Yield/Rate | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Loans: |
||||||||||||||||||||||||
| Loans, net of unearned(1) |
$ | 583,859 | $ | 638,675 | $ | 19,976 | $ | 23,805 | 4.56 | % | 4.97 | % | ||||||||||||
| Investment Securities |
||||||||||||||||||||||||
| Taxable |
470,223 | 516,661 | 5,729 | 2,950 | 1.62 | % | 0.76 | % | ||||||||||||||||
| Tax-exempt |
213,708 | 134,233 | 3,732 | 2,433 | 2.33 | % | 2.42 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Investment Securities |
683,931 | 650,894 | 9,461 | 5,383 | 1.84 | % | 1.10 | % | ||||||||||||||||
| Federal Funds Sold and Other |
23,621 | 45,746 | 123 | 40 | 0.69 | % | 0.12 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Interest Earning Assets(1)(2) |
1,291,411 | 1,335,315 | 29,560 | 29,228 | 3.05 | % | 2.92 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Non-Earning Assets |
57,163 | 97,914 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total Assets |
$ | 1,348,574 | $ | 1,433,229 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||
| Interest-bearing Demand Deposits (3) |
$ | 482,405 | $ | 503,576 | $ | 534 | $ | 1,138 | 0.15 | % | 0.30 | % | ||||||||||||
| Savings |
133,263 | 115,579 | 98 | 88 | 0.10 | % | 0.10 | % | ||||||||||||||||
| Time |
205,661 | 249,149 | 948 | 2,177 | 0.61 | % | 1.17 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Deposits |
821,329 | 868,304 | 1,580 | 3,403 | 0.26 | % | 0.52 | % | ||||||||||||||||
| Borrowed Funds |
||||||||||||||||||||||||
| Short-term Borrowings |
112,723 | 151,196 | 466 | 525 | 0.55 | % | 0.46 | % | ||||||||||||||||
| Long-term Borrowings |
18,000 | — | 591 | — | 4.38 | % | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Borrowed Funds |
130,723 | 151,196 | 1,057 | 525 | 1.08 | % | 0.46 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Interest-Bearing Liabilities (3) |
952,052 | 1,019,500 | 2,637 | 3,928 | 0.37 | % | 0.51 | % | ||||||||||||||||
| Non-Interest Bearing Liabilities |
||||||||||||||||||||||||
| Demand Deposits |
305,374 | 286,667 | ||||||||||||||||||||||
| Other Liabilities |
12,438 | 13,811 | ||||||||||||||||||||||
| Shareholders’ Equity |
78,710 | 113,251 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Total Liabilities and Shareholders’ Equity |
$ | 1,348,574 | $ | 1,433,229 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Interest Rate Spread |
2.68 | % | 2.40 | % | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net Interest Margin |
$ | 26,923 | $ | 25,300 | 2.79 | % | 2.53 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Less |
||||||||||||||||||||||||
| Tax Equivalent Adjustment |
824 | 571 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net Interest Income |
$ | 26,099 | $ | 24,729 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
38
Table of Contents
| (1) | Overdrafts, while not considered an earning asset, are included in Loans, net of unearned in the average volume calculation due to the immaterial impact on the yield. |
| (2) | Earnings Assets in the table above does include the dividend paying stock of the Federal Home Loan Bank. |
| (3) | Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the non-interest bearing liabilities section above. |
The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 3.95%, which is net of federal tax benefit.
Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three and nine months ended September 30, 2022, management’s disciplined deposit pricing coupled with increasing interest rates and corresponding yields on both new loans originated and securities purchased were the largest contributing factors to the increase in net interest income over these periods. Management believes net interest margin should continue to expand by continuing its disciplined deposit pricing and continued focus on loan growth coupled with reallocating excess funds into higher yielding securities as the Federal Reserve continues interest rate hikes.
39
Table of Contents
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, 2022 compared to the same respective period in 2021:
| TABLE 2 - VOLUME/RATE ANALYSIS | ||||||||||||
| (in thousands) | ||||||||||||
| Three Months Ended September 30, 2022 | ||||||||||||
| 2022 Change from 2021 | ||||||||||||
| Volume | Rate | Total | ||||||||||
| INTEREST INCOME |
||||||||||||
| Loans |
$ | (490 | ) | (304 | ) | $ | (794 | ) | ||||
| Taxable Securities |
(17 | ) | 523 | 506 | ||||||||
| Non-Taxable Securities |
426 | 467 | 893 | |||||||||
| Federal Funds Sold and Other |
(10 | ) | 68 | 58 | ||||||||
|
|
|
|
|
|
|
|||||||
| TOTAL INTEREST INCOME |
$ | (91 | ) | $ | 754 | $ | 663 | |||||
|
|
|
|
|
|
|
|||||||
| INTEREST EXPENSE |
||||||||||||
| Interest-bearing demand deposits |
$ | 7 | (73 | ) | (66 | ) | ||||||
| Savings Deposits |
3 | (0 | ) | 3 | ||||||||
| Time Deposits |
(149 | ) | (243 | ) | (392 | ) | ||||||
| Short-term borrowings |
97 | 17 | 114 | |||||||||
| Long-term borrowings |
— | 254 | 254 | |||||||||
|
|
|
|
|
|
|
|||||||
| TOTAL INTEREST EXPENSE |
$ | (42 | ) | $ | (45 | ) | (87 | ) | ||||
|
|
|
|
|
|
|
|||||||
| NET INTEREST INCOME |
$ | (49 | ) | $ | 799 | $ | 750 | |||||
|
|
|
|
|
|
|
|||||||
40
Table of Contents
| Nine Months Ended September 30, 2022 | ||||||||||||
| 2022 Change from 2021 | ||||||||||||
| Volume | Rate | Total | ||||||||||
| INTEREST INCOME |
||||||||||||
| Loans |
$ | (2,043 | ) | (1,786 | ) | $ | (3,829 | ) | ||||
| Taxable Securities |
(265 | ) | 3,044 | 2,779 | ||||||||
| Non-Taxable Securities |
1,441 | (142 | ) | 1,299 | ||||||||
| Federal Funds Sold and Other |
(19 | ) | 102 | 83 | ||||||||
|
|
|
|
|
|
|
|||||||
| TOTAL INTEREST INCOME |
$ | (887 | ) | $ | 1,219 | $ | 332 | |||||
|
|
|
|
|
|
|
|||||||
| INTEREST EXPENSE |
||||||||||||
| Interest-bearing demand deposits |
$ | (48 | ) | (556 | ) | (604 | ) | |||||
| Savings Deposits |
13 | (3 | ) | 10 | ||||||||
| Time Deposits |
(380 | ) | (849 | ) | (1,229 | ) | ||||||
| Short-term borrowings |
(134 | ) | 75 | (59 | ) | |||||||
| Long-term borrowings |
— | 591 | 591 | |||||||||
|
|
|
|
|
|
|
|||||||
| TOTAL INTEREST EXPENSE |
$ | (548 | ) | $ | (743 | ) | (1,291 | ) | ||||
|
|
|
|
|
|
|
|||||||
| NET INTEREST INCOME |
$ | (339 | ) | $ | 1,962 | $ | 1,623 | |||||
|
|
|
|
|
|
|
|||||||
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.
41
Table of Contents
The Company’s allowance for loan losses is designed to provide for loan losses that can be reasonably anticipated. The allowance for loan losses is established through charges to operating expenses in the form of provisions for loan losses. Actual loan losses or recoveries are charged or credited to the allowance for loan losses. 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 September 30, 2022 |
Year Ended December 31, 2021 |
Amount of Increase (Decrease) |
Percent of Increase (Decrease) |
|||||||||||||
| BALANCES: |
||||||||||||||||
| Gross Loans |
$ | 578,665 | $ | 571,847 | $ | 6,818 | 1.19 | % | ||||||||
| Allowance for Loan Losses |
5,068 | 4,513 | 555 | 12.30 | % | |||||||||||
| Nonaccrual Loans |
3,087 | 3,826 | (739 | ) | (19.32 | %) | ||||||||||
| Ratios: |
||||||||||||||||
| Allowance for loan losses to gross loans |
0.88 | % | 0.79 | % | ||||||||||||
| Net loans (recovered) charged off to allowance for loan losses |
(9.06 | %) | 20.56 | % | ||||||||||||
The reversal of provision for loan losses for the three months ended September 30, 2022 was $53. The release in provision for loan losses was primarily driven by a net decrease in loan balances of $10,876 during the quarter partially offset with qualitative factor adjustments due to continued inflationary risk concerns to both the local and national economy. The Company’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. The allowance for loan losses to LHFI was 0.88% and 0.87% at September 30, 2022 and 2021, respectively, and 0.79% at December 31, 2021 representing a level management considers commensurate with the present risk in the loan portfolio.
For the three months ended September 30, 2022, net loan losses recovered to the allowance for loan losses totaled $75, an increase of $1,163 in net recoveries from the $1,088 charged off in the same period in 2021. For the nine months ended September 30, 2022, net loan losses recovered to the allowance for loan losses totaled $459, an increase of $1,163 in net recoveries from the $704 charged off in the same period in 2021. The increase in net recoveries was primarily due to one significant charged off credit that occurred in the fourth quarter of 2021 and has since paid a total of $387 during the nine-month period ended September 30, 2022.
42
Table of Contents
Management reviews quarterly with the Company’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the nine months ended September 30, 2022 that have not been charged off or specifically reserved for in the allowance. Management also believes that the Company’s allowance will be adequate to absorb probable losses inherent in the Company’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.
OTHER INCOME
Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended September 30, 2022 was $2,877, a decrease of $417, or (12.66%), from $3,294 in the same period in 2021. Service charges on deposit accounts were $1,019 in the three months ended September 30, 2022, compared to $952 for the same period in 2021. As inflationary pressures continue throughout both the national and local economy, spending and overdraft income have continued to trend upward. Included in the service charges on deposit accounts line item for the three months ended September 30, 2022, overdraft income increased by $75, or 11.17% from the same period in 2021. Interchange fees which are included in the other service charges and fees line item on the Comprehensive Statements of Income decreased marginally by $21, or (2.23%), to $912 for the three months ended September 30, 2022, compared to $933 for the same period in 2021. Other operating income not derived from service charges or fees decreased $1, or (0.13%) to $747 in the three months ended September 30, 2022, compared to $748 for the same period in 2021. This decrease was primarily due to the decline in mortgage loan origination income due to increased mortgage interest rates. Mortgage loan origination income decreased for the three months ended September 30, 2022 by $150, or (49.50%), to $152 compared to $301 for the same period in 2021.
Other income for the nine months ended September 30, 2022 was $8,173, a decrease of $1,342, or (14.10%), from $9,515 in the same period in 2021. Service charges on deposit accounts were $2,931 in the nine months ended September 30, 2022, compared to $2,534 for the same period in 2021. The increase in service charges on deposit accounts year-over-year is primarily due to overdraft income increasing by $396, or 23.02% compared to the same period in 2021. Other service charges and fees were $3,230 for the nine months ended September 30, 2022 slightly up from the same period in 2021 due to interchange fees increasing slightly by $3, or 0.09% and other miscellaneous service charges increasing by $43, or 16.63%. Other operating income not derived from service charges or fees decreased $390, or (16.24%) to $2,012 in the nine months ended September 30, 2022, compared to $2,402 for the same period in 2021. This decrease, as stated earlier, was primarily due to the decline in mortgage loan origination income due to increased mortgage interest rates. Mortgage loan origination income decreased for the nine months ended September 30, 2022 by $453, or (44.46%), to $566 compared to $1,019 for the same period in 2021.
43
Table of Contents
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 |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| BOLI Income |
$ | 98 | $ | 306 | $ | 339 | $ | 746 | ||||||||
| Mortgage Loan Origination Income |
152 | 323 | 566 | 1,019 | ||||||||||||
| Gain on sale of OREO |
5 | — | 86 | 323 | ||||||||||||
| Other Income |
492 | 119 | 1,021 | 314 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Other Income |
$ | 747 | $ | 748 | $ | 2,012 | $ | 2,402 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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, 2022 and 2021 were $8,936 and $8,741, respectively, an increase of $195, or 2.23%. Salaries and benefits decreased $210, or (4.45%), to $4,506 for the three months ended September 30, 2022 when compared to the same period in 2021. Occupancy expense increased by $228, or 13.10%, to $1,968 for the three months ended September 30, 2022, compared to $1,740 for the same period of 2021. The increase in occupancy expense is the result of the Company replacing ATMs and ITMs at several branch locations throughout the quarter. For the three months ended September 30, 2022, other expense increased $177, or 7.75% to $2,462 compared to $2,285 for the same period in 2021. The increase in other expense is the result of an additional write-down of $85 of a bank owned property due to storm damage that occurred during the second quarter of 2022.
Aggregate non-interest expenses for the nine months ended September 30, 2022 and 2021 were $25,669 and $26,191, respectively, a decrease of $522 or (1.99%). Salaries and benefits decreased $512, or (3.69%), to $13,357 for the nine months ended September 30, 2022, when compared to the same period in 2021. Occupancy expense increased by $106, or 1.98%, to $5,454 for the nine months ended September 30, 2022, compared to $5,348 for the same period of 2021. Other operating expenses decreased by $116, or (1.66%), to $6,858 for the nine months ended September 30, 2022, compared to $6,974 for the same period of 2021. Overall, other expenses have decreased for the nine months ended September 30, 2022 compared to the same period in 2021 as a result of management’s focus on expense management that started in 2020 due to the uncertainty stemming from the pandemic.
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The following is a detail of the major expense classifications that make up the other expense line item in the income statement:
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| Other Expense |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Advertising |
$ | 172 | $ | 126 | $ | 475 | $ | 429 | ||||||||
| Office Supplies |
284 | 256 | 743 | 740 | ||||||||||||
| Professional Fees |
346 | 320 | 788 | 774 | ||||||||||||
| Technology expense |
111 | 128 | 336 | 424 | ||||||||||||
| Postage and Freight |
132 | 135 | 438 | 465 | ||||||||||||
| Loan Collection Expense |
5 | 15 | 25 | 85 | ||||||||||||
| Regulatory and related expense |
208 | 231 | 620 | 703 | ||||||||||||
| Debit Card/ATM expense |
200 | 186 | 590 | 546 | ||||||||||||
| Write down on OREO |
— | — | 42 | 390 | ||||||||||||
| Travel and Convention |
53 | 33 | 168 | 91 | ||||||||||||
| Other expenses |
951 | 855 | 2,633 | 2,327 | ||||||||||||
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| Total Other Expense |
$ | 2,462 | $ | 2,285 | $ | 6,858 | $ | 6,974 | ||||||||
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The Company’s efficiency ratio for the three months ended September 30, 2022 was 72.79%, compared to 75.48% for the same period in 2021. The Company’s efficiency ratio for the nine months ended September 30, 2022 was 73.26%, compared to 76.36% for the same period in 2021. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.
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BALANCE SHEET ANALYSIS
| September 30, 2022 |
December 31, 2021 |
Amount of Increase (Decrease) |
Percent of Increase (Decrease) |
|||||||||||||
| Cash and due from banks |
$ | 13,256 | $ | 10,673 | $ | 2,583 | 24.20 | % | ||||||||
| Interest bearing deposits with other banks |
22,532 | 68,563 | (46,031 | ) | (67.14 | %) | ||||||||||
| Investment securities held to maturity |
411,859 | — | 411,859 | — | ||||||||||||
| Investment securities available for sale |
198,547 | 631,835 | (433,288 | ) | (68.58 | %) | ||||||||||
| Net LHFI |
573,597 | 567,334 | 6,263 | 1.10 | % | |||||||||||
| Premises and equipment |
27,802 | 26,661 | 1,141 | 4.28 | % | |||||||||||
| Total assets |
1,328,478 | 1,361,309 | (32,831 | ) | (2.41 | %) | ||||||||||
| Total deposits |
1,134,936 | 1,111,892 | 23,044 | 2.07 | % | |||||||||||
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, 2022 was $13,256, which was an increase of $2,583 from the balance of $10,673 at December 31, 2021. Interest bearing deposits with other banks decreased by $46,031, or (67.14%), to $22,532 at September 30, 2022 compared to $68,563 at December 31, 2021.
INVESTMENT SECURITIES
The Company’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. Due to recent increases in the medium-term interest rates, the fair value of the Company’s investment securities on the balance sheet represents a decrease in investment securities as of September 30, 2022 when compared to the balance of investment securities at December 31, 2021. Additionally, the Company transferred $413,921 from available-for-sale to held-to-maturity to help limit any further negative impacts on shareholders’ equity that could result from continued interest rate hikes. The impact of the related unrealized losses transferred net of the tax benefit was $53,195 as presented on the consolidated statements of comprehensive income. However, as disclosed in Note 6 of the Notes to the Consolidated Financial Statements, the Company’s investments securities portfolio at September 30, 2022 increased by $9,683, or 1.50%, to $657,240 from $647,557 at December 31, 2021 when comparing the amortized cost of the Company’s investments securities. The increase is a result of the Company deploying excess cash into higher yielding investment securities.
LOANS
The Company’s gross loan balance increased by $6,818, or 1.19%, during the nine months ended September 30, 2022, to $578,665 from $571,847 at December 31, 2021. Excluding PPP loans with a total balance of $274 at September 30, 2022 and $5,789 at December 31, 2021, total loans increased $12,333, or 2.18%, compared to $566,058 at December 31, 2021. The year-to-date growth primarily reflects increases in construction and development and consumer loans. No material changes were made to the loan products offered by the Company during this period.
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DEPOSITS
The following table shows the balance and percentage change in the various deposits:
| September 30, 2022 |
December 31, 2021 |
Amount of Increase (Decrease) |
Percent of Increase (Decrease) |
|||||||||||||
| Noninterest-Bearing Deposits |
$ | 308,538 | $ | 302,707 | $ | 5,831 | 1.93 | % | ||||||||
| Interest-Bearing Deposits |
497,842 | 451,809 | 46,033 | 10.19 | % | |||||||||||
| Savings Deposits |
138,133 | 127,217 | 10,916 | 8.58 | % | |||||||||||
| Certificates of Deposit |
190,423 | 230,159 | (39,736 | ) | (17.26 | %) | ||||||||||
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| Total deposits |
$ | 1,134,936 | $ | 1,111,892 | $ | 23,044 | 2.07 | % | ||||||||
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All deposit accounts except for certificates of deposits increased during the nine months ended September 30, 2022. The modest increase in deposit accounts is primarily due to excess liquidity in the financial markets coupled with increased inflationary pressures causing increased precautionary saving by households and businesses. The decrease in certificates of deposit accounts is a result of management strategically reducing higher interest-bearing accounts to help improve both interest margin and the Bank’s capital ratios. Additionally, some customers have moved from renewing their time deposits to keeping their funds in transactional accounts due to low time deposits rates and inflationary pressures. As a result of the Federal Reserve interest rate hikes throughout 2022, management has started increasing time deposit rates marginally to remain competitive within the Company’s markets. Management continually monitors the interest rates on time deposit products to ensure that the Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.
OFF-BALANCE SHEET ARRANGEMENTS
Please refer to Note 2 to the Consolidated Financial Statements included in this Quarterly Report for a discussion of the nature and extent of the Company’s off-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Asset/Liability Management and Interest Rate Risk
The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors of the Bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.
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As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values. We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so should the situation warrant. Based upon the nature of our operations, we are not subject to material foreign exchange or commodity price risk. We do not own any trading assets.
We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in projected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is a longer-term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.
The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||||||||||
| Following 12 months |
Months 13-24 |
Following 12 months |
Months 13-24 |
|||||||||||||
| +400 basis points |
-10.2 | % | -2.2 | % | -3.7 | % | 6.6 | % | ||||||||
| +300 basis points |
-7.4 | % | -1.4 | % | -1.3 | % | 6.9 | % | ||||||||
| +200 basis points |
-4.6 | % | -0.6 | % | -0.1 | % | 5.8 | % | ||||||||
| +100 basis points |
-1.9 | % | 0.1 | % | -0.8 | % | 2.6 | % | ||||||||
| Flat rates |
— | — | — | — | ||||||||||||
| -100 basis points |
-0.8 | % | -2.7 | % | -5.5 | % | -7.7 | % | ||||||||
| -200 basis points |
-5.1 | % | -10.5 | % | -10.9 | % | -13.6 | % | ||||||||
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The following table presents the change in our economic value of equity as of September 30, 2022 and December 31, 2021, assuming immediate parallel shifts in interest rates:
| Economic Value of Equity at Risk (%) | ||||||||
| September 30, 2022 | December 31, 2021 | |||||||
| +400 basis points |
-31.7 | % | -20.4 | % | ||||
| +300 basis points |
-24.6 | % | -13.8 | % | ||||
| +200 basis points |
-16.8 | % | -7.8 | % | ||||
| +100 basis points |
-8.4 | % | -3.1 | % | ||||
| Flat rates |
— | — | ||||||
| -100 basis points |
6.8 | % | -13.0 | % | ||||
| -200 basis points |
3.3 | % | -33.1 | % | ||||
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.
As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest-bearing non-maturity deposit accounts, whose cost is less sensitive to changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of September 30, 2022 (the end of the period covered by this Quarterly Report).
There were no changes to the Company’s internal control over financial reporting that occurred in the nine months ended September 30, 2022, 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, 2021, which the Company filed with the Securities and Exchange Commission on March 11, 2022. Additional information regarding some of those risks and uncertainties is contained in the notes to the consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the Company’s quarterly reports on Form 10-Q and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Company’s business, financial condition and results of operations in the future.
| ITEM 6. | EXHIBITS. |
| Exhibits | ||
| 10(1) | Citizens Holding Company Revolving Credit Loan Agreement(1) | |
| 31(a) | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
| 31(b) | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | |
| 32(a) | Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350. | |
| 32(b) | Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350. | |
| 101 | Financial Statements submitted in Inline XBRL format. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
| (1) | Filed as exhibit 10(1) to the Current Report on Form 8-K of the Company filed with the SEC on June 14, 2021 and incorporated herein by reference. |
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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 4, 2022 | ||
51
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
5. 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 4, 2022
| /s/ Greg L. McKee |
| Greg L. McKee |
| President and Chief Executive Officer |
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 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 4, 2022
| /s/ Phillip R. Branch |
| Phillip R. Branch |
| Treasurer and Chief Financial Officer |
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, 2022, 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 of 1934, as amended; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 4, 2022 | /s/ Greg L. McKee | |||||
| Greg L. McKee | ||||||
| President and Chief Executive Officer |
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, 2022, 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 of 1934, as amended; and |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 4, 2022 | /s/ Phillip R. Branch | |||||
| Phillip R. Branch | ||||||
| Treasurer and Chief Financial Officer |