Company Quick10K Filing
Citizens Holding
Price21.00 EPS1
Shares5 P/E26
MCap103 P/FCF12
Net Debt-21 EBIT12
TEV82 TEV/EBIT7
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-03-13
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-15
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-15
10-Q 2016-09-30 Filed 2016-11-09
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-03-15
10-Q 2015-09-30 Filed 2015-11-09
10-Q 2015-06-30 Filed 2015-08-10
10-Q 2015-03-31 Filed 2015-05-11
10-K 2014-12-31 Filed 2015-03-13
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-08-11
10-Q 2014-03-31 Filed 2014-05-12
10-K 2013-12-31 Filed 2014-03-14
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-08
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-15
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-10
10-K 2011-12-31 Filed 2012-03-14
10-Q 2011-09-30 Filed 2011-11-08
10-Q 2011-06-30 Filed 2011-08-08
10-Q 2011-03-31 Filed 2011-05-10
10-K 2010-12-31 Filed 2011-03-15
10-Q 2010-09-30 Filed 2010-11-08
10-Q 2010-06-30 Filed 2010-08-09
10-Q 2010-03-31 Filed 2010-05-10
10-K 2009-12-31 Filed 2010-03-15
8-K 2020-05-28
8-K 2020-05-01
8-K 2020-04-24
8-K 2020-03-05
8-K 2020-01-28
8-K 2019-12-02
8-K 2019-10-24
8-K 2019-10-01
8-K 2019-08-29
8-K 2019-07-23
8-K 2019-05-21
8-K 2019-05-21
8-K 2019-04-23
8-K 2019-04-22
8-K 2019-03-01
8-K 2019-01-25
8-K 2018-11-29
8-K 2018-10-19
8-K 2018-08-30
8-K 2018-07-20
8-K 2018-05-23
8-K 2018-04-24
8-K 2018-04-20
8-K 2018-03-01
8-K 2018-01-30

CIZN 10Q Quarterly Report

Part I. Financial Information
Item 1. Consolidated Financial Statements.
Note 1. Summary of Significant Accounting Policies
Note 2. Mergers and Acquisitions
Note 3. Commitments and Contingent Liabilities
Note 4. Net Income per Share
Note 5. Equity Compensation Plans
Note 6. Income Taxes
Note 7. Securities
Note 8. Non Purchased Loans
Note 9. Purchased Loans
Note 10. Allowance for Loan Losses
Note 11. Premises and Equipment
Note 12. Goodwill and Other Intangible Assets
Note 13. Shareholders' Equity
Note 14. Fair Value of Financial Instruments
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 6. Exhibits.
EX-31.(A) d891624dex31a.htm
EX-31.(B) d891624dex31b.htm
EX-32.(A) d891624dex32a.htm
EX-32.(B) d891624dex32b.htm

Citizens Holding Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 d891624d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2020

or

 

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

For the transition period from                      to                     

Commission File Number: 001-15375

 

 

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Mississippi   64-0666512

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

521 Main Street, Philadelphia, MS   39350
(Address of principal executive offices)   (Zip Code)

601-656-4692

(Registrant’s telephone number, including area code)

 

 

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

 

Title of Each Class

 

Trading

Symbol(s)

 

Name of Each Exchange

on Which Registered

Common Stock, $0.20 par value   CIZN   NASDAQ Global Market

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

None

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

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

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

 

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of May 6, 2020:

 

Title

     Outstanding  

Common Stock, $0.20 par value

     5,590,131  

 

 

 


Table of Contents

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS

 

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Consolidated Financial Statements      1  
  Consolidated Statements of Financial Condition, as of March 31, 2020 (Unaudited) and December 31, 2019 (Audited)      1  
  Consolidated Statements of Income for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited)      2  
  Consolidated Statements of Comprehensive Income for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited)      3  
  Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited)      4  
  Notes to Consolidated Financial Statements (Unaudited)      5  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      41  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      53  

Item 4.

  Controls and Procedures      55  

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      56  

Item 1A..

  Risk Factors      56  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds.*   

Item 3.

  Defaults Upon Senior Securities.*   

Item 4.

  Mine Safety Disclosures.*   

Item 5.

  Other Information.*   

Item 6.

  Exhibits      58  

*

  None or Not Applicable   
SIGNATURES        59  


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

 

     March 31,      December 31,  
     2020      2019  
ASSETS    (Unaudited)      (Audited)  

Cash and due from banks

   $ 19,610      $ 15,937  

Interest bearing deposits with other banks

     61,909        58,557  

Federal funds sold

     —          1,600  

Investment securities available for sale, at fair value

     482,077        464,383  

Loans, net of allowance for loan losses of

     

$3,816 in 2020 and $3,755 in 2019

     573,163        573,312  

Premises and equipment, net

     24,495        24,672  

Other real estate owned, net

     3,643        3,552  

Accrued interest receivable

     4,106        4,181  

Cash surrender value of life insurance

     25,220        25,088  

Deferred tax assets, net

     1,669        3,684  

Other assets

     20,219        20,468  
  

 

 

    

 

 

 

TOTAL ASSETS

   $  1,216,111      $ 1,195,434  
  

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

LIABILITIES

     

Deposits:

     

Noninterest-bearing demand

   $ 195,843      $ 190,406  

Interest-bearing NOW and money market accounts

     410,485        369,354  

Savings deposits

     87,422        83,065  

Certificates of deposit

     232,138        256,171  
  

 

 

    

 

 

 

Total deposits

     925,888        898,996  

Securities sold under agreement to repurchase

     159,442        170,410  

Accrued interest payable

     722        1,128  

Deferred compensation payable

     9,530        9,453  

Other liabilities

     1,785        2,647  
  

 

 

    

 

 

 

Total liabilities

     1,097,367        1,082,634  

SHAREHOLDERS’ EQUITY

     

Common stock, $0.20 par value, 22,500,000 shares authorized, 5,582,631 shares issued and outstanding at March 31, 2020 and 5,578,131 at December 31, 2019

     1,117        1,116  

Additional paid-in capital

     18,009        17,883  

Retained earnings

     94,411        94,590  

Accumulated other comprehensive loss, net of tax

     

(expense) benefit of ($1,731) at March 31, 2020 and

     

$262 at December 31, 2019

     5,207        (789
  

 

 

    

 

 

 

Total shareholders’ equity

     118,744        112,800  
  

 

 

    

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,216,111      $ 1,195,434  
  

 

 

    

 

 

 

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

 

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Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

     (Unaudited)  
     For the Three Months  
     Ended March 31,  
     2020      2019  

INTEREST INCOME

     

Interest and fees on loans

   $ 7,480      $ 5,450  

Interest on securities

     

Taxable

     1,657        2,082  

Nontaxable

     340        617  

Other interest

     232        235  
  

 

 

    

 

 

 

Total interest income

     9,709        8,384  

INTEREST EXPENSE

     

Deposits

     1,969        1,729  

Other borrowed funds

     355        445  
  

 

 

    

 

 

 

Total interest expense

     2,324        2,174  
  

 

 

    

 

 

 

NET INTEREST INCOME

     7,385        6,210  

PROVISION FOR LOAN LOSSES

     314        195  
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER

     

PROVISION FOR LOAN LOSSES

     7,071        6,015  

OTHER INCOME

     

Service charges on deposit accounts

     1,049        1,097  

Other service charges and fees

     773        684  

Other operating income

     559        266  
  

 

 

    

 

 

 

Total other income

     2,381        2,047  
  

 

 

    

 

 

 

OTHER EXPENSES

     

Salaries and employee benefits

     4,435        3,547  

Occupancy expense

     1,659        1,423  

Other expense

     1,973        1,670  
  

 

 

    

 

 

 

Total other expenses

     8,067        6,640  
  

 

 

    

 

 

 

INCOME BEFORE PROVISION

     

FOR INCOME TAXES

     1,385        1,422  

PROVISION FOR INCOME TAXES

     225        195  
  

 

 

    

 

 

 

NET INCOME

   $ 1,160      $ 1,227  
  

 

 

    

 

 

 

NET INCOME PER SHARE -Basic

   $ 0.21      $ 0.25  
  

 

 

    

 

 

 

-Diluted

   $ 0.21      $ 0.25  
  

 

 

    

 

 

 

DIVIDENDS PAID PER SHARE

   $ 0.24      $ 0.24  
  

 

 

    

 

 

 

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

 

2


Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

( Unaudited)

(in thousands)

 

     For the Three Months  
     Ended March 31,  
     2020     2019  

Net income

   $ 1,160     $ 1,227  

Other comprehensive income

    

Securities available-for-sale

    

Unrealized holding gains

     7,912       8,823  

Income tax effect

     (1,974     (2,201
  

 

 

   

 

 

 
     5,938       6,622  

Reclassification adjustment for gains included in net income

     77       —    

Income tax effect

     (19     —    
  

 

 

   

 

 

 
     58       —    
  

 

 

   

 

 

 

Total other comprehensive income

     5,996       6,622  
  

 

 

   

 

 

 

Comprehensive income

   $ 7,156     $ 7,849  
  

 

 

   

 

 

 

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

 

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CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

     For the Three Months  
     Ended March 31,  
     2020     2019  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net cash provided by operating activities

   $ 2,340     $ 1,978  

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from maturities and calls of securities available for sale

     74,267       8,336  

Proceeds from sale of investment securities

     37,196       —    

Purchases of investment securities available for sale

     (122,722     (63,403

Purchases of bank premises and equipment

     (70     (45

Decrease in federal funds sold

     1,600       —    

Increase in interest bearing deposits with other banks

     (3,352     (19,042

Proceeds from sale of other real estate

     —         —    

Net increase in loans

     (258     (18,200
  

 

 

   

 

 

 

Net cash used in investing activities

     (13,339     (92,354

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     26,892       83,938  

(Decrease) increase in securities sold under agreement to repurchase

     (10,968     7,485  

Proceeds from exercise of stock options

     87       —    

Payment of dividends

     (1,339     (1,177
  

 

 

   

 

 

 

Net cash provided by financing activities

     14,672       90,246  
  

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

     3,673       (130

Cash and due from banks, beginning of period

     15,937       12,592  
  

 

 

   

 

 

 

Cash and due from banks, end of period

   $ 19,610     $ 12,462  
  

 

 

   

 

 

 

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

 

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Table of Contents

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three months ended March 31, 2020

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

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

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

Nature of Business

The Bank operates under a state bank charter and provides general banking services. As a state bank, the Bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Corporation. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central and southern counties of Mississippi and the surrounding areas. Services are provided at several branch offices.

Estimates

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

 

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

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

Risks and Uncertainties

(in thousands, except for number of loans)

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as an over $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

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

 

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Table of Contents

Financial position and results of operations

The Company’s fee income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses and loss of fee income.

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

Asset valuation

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

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

 

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Processes, controls and business continuity plan

The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy, among other measures. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is executing a payment deferral program for its commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days. As of April 30, 2020, the Company has executed 309 of these deferrals on outstanding loan balances of $148,120. In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of April 30, 2020, the Company has closed 386 SBA PPP loans representing $38,315 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Further, in sensitivity and service to its communities during this unprecedented time, the Company is waiving late payment and overdraft fees and has temporarily suspended collection efforts on past due loans.

Credit

The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its allowance for loan losses and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

 

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Adoption of New Accounting Standards

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

ASU 2019-13Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement” (“ASU 2019-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2019-13 is effective for annual and interim periods beginning after December 15, 2019. ASU 2019-13 was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40,Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. See Note 8 of the condensed footnotes to the consolidated financial statements for disclosure of the impact to date.

 

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Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU 2016-13 for certain companies. The new effective date for the Company is January 1, 2023. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU 2016-13 to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation of said models is required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

 

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Note 2. Mergers and Acquisitions

(in thousands, except share data)

Merger with Charter Bank

Effective October 1, 2019, the Company completed its acquisition by merger of Charter Bank (“Charter”), in a transaction valued at approximately $19.7 million. The Company issued 666,101 shares of common stock and paid approximately $6.1 million in cash to Charter shareholders, excluding cash paid for fractional shares. At closing, Charter merged with and into the Bank, with the Bank being the surviving corporation in the merger. Operations of Charter will be included in the consolidated financial statements of the Corporation for periods subsequent to the acquisition date.

For further information regarding the merger with Charter, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

Note 3. Commitments and Contingent Liabilities

(in thousands)

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of March 31, 2020, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $86,167 compared to an aggregate unused balance of $94,009 at December 31, 2019. There were $2,488 of letters of credit outstanding at March 31, 2020 and $2,436 at December 31, 2019. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.

The Corporation 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 Corporation’s consolidated financial condition or results of operations.

 

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Note 4. Net Income per Share

(in thousands, except share and per share data)

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

 

    

For the Three Months

Ended March 31,

 
     2020      2019  

Basic weighted average shares outstanding

     5,579,381        4,892,530  

Dilutive effect of granted options

     2,030        2,598  
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     5,581,411        4,895,128  
  

 

 

    

 

 

 

Net income

   $ 1,160      $ 1,227  

Net income per share-basic

   $ 0.21      $ 0.25  

Net income per share-diluted

   $ 0.21      $ 0.25  

Note 5. Equity Compensation Plans

(in thousands, except per share data)

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

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

 

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The following table is a summary of the stock option activity for the three months ended March 31, 2020:

 

     Directors’ Plan      2013 Plan  
     Number
of
Shares
     Weighted
Average
Exercise
Price
     Number
of
Shares
     Weighted
Average
Exercise
Price
 

Outstanding at December 31, 2019

     40,500      $ 21.49        —        $ —    

Granted

     —          —          —          —    

Exercised

     (4,500      19.18        —          —    

Expired

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at March 31, 2020

     36,000      $ 21.78        —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

The intrinsic value of options outstanding under the Directors’ Plan at March 31, 2020, was $15,480. No options were outstanding under the 2013 Plan as of March 31, 2020.

During 2019, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 23, 2020 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $161,475 and will be expensed ratably over the one-year vesting period.

Note 6. Income Taxes

(in thousands)

For the three months ended March 31, 2020 and 2019, the Company recorded a provision for income taxes totaling $225 and $195, respectively. The effective tax rate was 16.5% and 13.7% for the three months ending March 31, 2020 and 2019, respectively.

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

 

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Note 7. Securities

(in thousands)

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

 

March 31, 2020    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Securities available-for-sale

           

Obligations of U.S. Government agencies

   $ 44,574      $ 191      $ —        $ 44,765  

Mortgage backed securities

     367,582        6,024        118        373,488  

State, County, Municipals

     62,484        931        94        63,321  

Other Securities

     500        3        —          503  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 475,140      $ 7,149      $ 212      $ 482,077  
  

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2019    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Securities available-for-sale

           

Obligations of U.S. Government agencies

   $ 97,400      $ —        $ 289      $ 97,111  

Mortgage backed securities

     308,310        640        2,050        306,900  

State, County, Municipals

     59,724        708        60        60,372  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 465,434      $ 1,348      $ 2,399      $ 464,383  
  

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2020 and December 31, 2019, securities with a carrying value of $418,632 and $413,275, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2020 and December 31, 2019 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

 

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Table of Contents
     March 31, 2020      December 31, 2019  
     Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 

Available-for-sale

           

Due in one year or less

   $ 845      $ 848      $ 345      $ 345  

Due after one year through five years

     38,070        38,117        89,920        89,681  

Due after five years through ten years

     17,681        18,019        18,678        18,808  

Due after ten years

     50,962        51,605        48,181        48,649  

Residential mortgage backed securities

     320,902        326,742        259,309        258,415  

Commercial mortgage backed securities

     46,680        46,746        49,001        48,485  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 475,140      $ 482,077      $ 465,434      $ 464,383  
  

 

 

    

 

 

    

 

 

    

 

 

 

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at March 31, 2020 and December 31, 2019.

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

 

March 31, 2020    Less than 12 months      12 months or more      Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Obligations of U.S. government agencies

   $ —        $ —        $ —        $ —        $ —        $ —    

Mortgage backed securities

     25,319        93        5,566        25        30,885        118  

State, County, Municipal

     12,380        92        651        2        13,031        94  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,699      $ 185      $ 6,217      $ 27      $ 43,916      $ 212  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2019

   Less than 12 months     

 

12 months or more

     Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Obligations of U.S. government agencies

   $ 76,682      $ 217      $ 20,429      $ 72      $ 97,111      $ 289  

Mortgage backed securities

     101,730        871        76,630        1,179        178,360        2,050  

State, County, Municipal

     8,280        37        3,731        23        12,011        60  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 186,692      $ 1,125      $ 100,790      $ 1,274      $ 287,482      $ 2,399  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s unrealized losses on its obligations of United States government agencies, mortgage backed securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in the mid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Corporation does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Corporation will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at March 31, 2020 nor at December 31, 2019.

 

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Table of Contents

Note 8. Non Purchased Loans

(in thousands, except number of loans)

“Purchased” loans are those acquired in any of the Company’s previous acquisitions. “Non Purchased” loans include all of the Company’s other loans. For purposes of Note 8, all references to “loans” mean non purchased loans.

The composition of net loans at March 31, 2020 and December 31, 2019 was as follows:

 

     March 31, 2020      December 31, 2019  

Real Estate:

     

Land Development and Construction

   $ 78,059      $ 66,428  

Farmland

     15,241        15,595  

1-4 Family Mortgages

     88,400        87,631  

Commercial Real Estate

     207,453        207,604  
  

 

 

    

 

 

 

Total Real Estate Loans

     389,153        377,258  

Business Loans:

     

Commercial and Industrial Loans

     82,207        84,611  

Farm Production and Other Farm Loans

     649        683  
  

 

 

    

 

 

 

Total Business Loans

     82,856        85,294  

Consumer Loans:

     

Credit Cards

     1,629        1,833  

Other Consumer Loans

     11,445        12,060  
  

 

 

    

 

 

 

Total Consumer Loans

     13,074        13,893  
  

 

 

    

 

 

 

Total Gross Loans

     485,083        476,445  

Unearned Income

     (5      (8

Allowance for Loan Losses

     (3,816      (3,755
  

 

 

    

 

 

 

Loans, net

   $ 481,262      $ 472,682  
  

 

 

    

 

 

 

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

 

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

 

     March 31, 2020      December 31, 2019  

Real Estate:

     

Land Development and Construction

   $ 111      $ 111  

Farmland

     230        232  

1-4 Family Mortgages

     2,054        2,160  

Commercial Real Estate

     8,966        9,082  
  

 

 

    

 

 

 

Total Real Estate Loans

     11,361        11,585  

Business Loans:

     

Commercial and Industrial Loans

     512        338  

Farm Production and Other Farm Loans

     10        10  
  

 

 

    

 

 

 

Total Business Loans

     522        348  

Consumer Loans:

     

Other Consumer Loans

     58        60  
  

 

 

    

 

 

 

Total Consumer Loans

     58        60  
  

 

 

    

 

 

 

Total Nonaccrual Loans

   $ 11,941      $ 11,993  
  

 

 

    

 

 

 

 

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Table of Contents

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

 

     Loans
30-89 Days
Past Due
     Loans
90 or more
Days
Past Due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans
90 or more
Days
Past Due
 

Real Estate:

                 

Land Development and Construction

   $ 567      $ 111      $ 678      $ 77,381      $ 78,059      $ —    

Farmland

     376        —          376        14,865        15,241        —    

1-4 Family Mortgages

     2,263        496        2,759        85,641        88,400        —    

Commercial Real Estate

     18,676        2,890        21,566        185,887        207,453        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     21,882        3,497        25,379        363,774        389,153        —    

Business Loans:

                 

Commercial and Industrial Loans

     531        296        827        81,380        82,207        12  

Farm Production and Other Farm Loans

     35        —          35        614        649        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     566        296        862        81,994        82,856        12  

Consumer Loans:

                 

Credit Cards

     34        2        36        1,593        1,629        2  

Other Consumer Loans

     117        44        161        11,284        11,445        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     151        46        197        12,877        13,074        2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $  22,599      $ 3,839      $  26,438      $ 458,645      $ 485,083      $ 14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

An aging analysis of past due loans, segregated by class, as of December 31, 2019 was as follows:

 

     Loans
30-89 Days
Past Due
     Loans
90 or more
Days
Past Due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans
90 or more
Days
Past Due
 

Real Estate:

                 

Land Development and Construction

   $ 736      $ —        $ 736      $ 65,692      $ 66,428      $ —    

Farmland

     171        39        210        15,385        15,595        39  

1-4 Family Mortgages

     3,116        777        3,893        83,738        87,631        147  

Commercial Real Estate

     8,511        2,080        10,591        197,013        207,604        18  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     12,534        2,896        15,430        361,828        377,258        204  

Business Loans:

                 

Commercial and Industrial Loans

     586        312        898        83,713        84,611        52  

Farm Production and Other Farm Loans

     17        —          17        666        683        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     603        312        915        84,379        85,294        52  

Consumer Loans:

                 

Credit Cards

     45        18        63        1,770        1,833        18  

Other Consumer Loans

     172        42        214        11,846        12,060        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     217        60        277        13,616        13,893        18  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $  13,354      $ 3,268      $  16,622      $ 459,823      $ 476,445      $ 274  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

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

 

            Recorded      Recorded                       
     Unpaid      Investment      Investment      Total             Average  
     Principal      With No      With      Recorded      Related      Recorded  
     Balance      Allowance      Allowance      Investment      Allowance      Investment  

Real Estate:

                 

Land Development and Construction

   $ 111      $ 58      $ 53      $ 111      $ 16      $ 111  

Farmland

     250        250        —          250        —        $ 251  

1-4 Family Mortgages

     805        795        10        805        8      $ 822  

Commercial Real Estate

     11,463        6,011        3,736        9,747        559      $ 9,768  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     12,629        7,114        3,799        10,913        583      $ 10,952  

Business Loans:

                 

Commercial and Industrial Loans

     433        233        200        433        94      $ 289  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     433        233        200        433        94      $ 289  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $  13,062      $  7,347      $  3,999      $  11,346      $ 677      $ 11,241  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans as of December 31, 2019, segregated by class, were as follows:

 

            Recorded      Recorded                       
     Unpaid      Investment      Investment      Total             Average  
     Principal      With No      With      Recorded      Related      Recorded  
     Balance      Allowance      Allowance      Investment      Allowance      Investment  

Real Estate:

                 

Land Development and Construction

   $ 111      $ 58      $ 53      $ 111      $ 16      $ 56  

Farmland

     252        252        —          252        —        $ 261  

1-4 Family Mortgages

     839        740        99        839        28      $ 996  

Commercial Real Estate

     11,506        5,949        3,840        9,789        566      $ 9,337  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     12,708        6,999        3,992        10,991        610      $ 10,650  

Business Loans:

                 

Commercial and Industrial Loans

     144        —          144        144        72      $ 72  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     144        —          144        144        72      $ 72  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $  12,852      $  6,999      $  4,136      $  11,135      $ 682      $ 10,722  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents troubled debt restructurings, segregated by class:

 

            Pre-Modification      Post-Modification  
March 31, 2020           Outstanding      Outstanding  
     Number of
Loans
     Recorded
Investment
     Recorded
Investment
 

Commercial real estate

     3      $ 4,871      $ 2,427  
  

 

 

    

 

 

    

 

 

 

Total

     3      $ 4,871      $  2,427  
  

 

 

    

 

 

    

 

 

 

 

            Pre-Modification      Post-Modification  
December 31, 2019           Outstanding      Outstanding  
     Number of      Recorded      Recorded  
     Loans      Investment      Investment  

Commercial real estate

     3      $ 4,871      $ 2,495  
  

 

 

    

 

 

    

 

 

 

Total

     3      $ 4,871      $ 2,495  
  

 

 

    

 

 

    

 

 

 

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

 

     Number
of Loans
     Recorded
Investment
 

Totals at January 1, 2019

     3      $  2,782  

Reductions due to:

     

Principal paydowns

        (287
  

 

 

    

 

 

 

Totals at January 1, 2020

     3      $ 2,495  

Reductions due to:

     

Principal paydowns

        (68
  

 

 

    

 

 

 

Total at March 31, 2020

     3      $ 2,427  
  

 

 

    

 

 

 

The allocated allowance for loan losses attributable to restructured loans was $-0- at March 31, 2020 and December 31, 2019. The Corporation had no commitments to lend additional funds on these troubled debt restructurings as of March 31, 2020.

 

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

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

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

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

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

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

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

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

 

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Table of Contents

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at March 31, 2020.

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

 

            Special                              
     Satisfactory      Mention      Substandard      Doubtful      Loss      Total  
     1,2,3,4      5,6      7      8      9      Loans  

Real Estate:

                 

Land Development and Construction

   $ 75,338      $ 2,099      $ 622      $ —        $ —        $ 78,059  

Farmland

     14,163        327        751        —          —          15,241  

1-4 Family Mortgages

     79,860        2,346        6,168        —          26        88,400  

Commercial Real Estate

     169,660        20,874        16,919        —          —          207,453  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     339,021        25,646        24,460        —          26        389,153  

Business Loans:

                 

Commercial and Industrial Loans

     77,968        275        3,951        13        —          82,207  

Farm Production and Other Farm Loans

     636        —          3        —          10        649  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     78,604        275        3,954        13        10        82,856  

Consumer Loans:

                 

Credit Cards

     1,593        —          36        —          —          1,629  

Other Consumer Loans

     11,295        45        59        41        5        11,445  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     12,888        45        95        41        5        13,074  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $  430,513      $  25,966      $ 28,509      $ 54      $ 41      $ 485,083  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table details the amount of gross loans segregated by loan grade and class, as of December 31, 2019:

 

            Special                              
     Satisfactory      Mention      Substandard      Doubtful      Loss      Total  
     1,2,3,4      5,6      7      8      9      Loans  

Real Estate:

                 

Land Development and Construction

   $ 64,112      $ 1,682      $ 634      $ —        $ —        $ 66,428  

Farmland

     14,533        331        731        —          —          15,595  

1-4 Family Mortgages

     79,068        1,917        6,646        —          —          87,631  

Commercial Real Estate

     169,270        21,266        17,068        —          —          207,604  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     326,983        25,196        25,079        —          —          377,258  

Business Loans:

                 

Commercial and Industrial Loans

     80,289        128        4,194        —          —          84,611  

Farm Production and Other Farm Loans

     669        —          4        —          10        683  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     80,958        128        4,198        —          10        85,294  

Consumer Loans:

                 

Credit Cards

     1,770        —          63        —          —          1,833  

Other Consumer Loans

     11,907        59        53        41        —          12,060  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     13,677        59        116        41        —          13,893  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 421,618      $ 25,383      $ 29,393      $ 41      $ 10      $ 476,445  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 9. Purchased Loans

(in thousands)

For purposes of this Note 9, all references to “loans” means purchased loans.

The following is a summary of purchased loans:

 

     March 31, 2020      December 31, 2019  

Real Estate:

     

Land Development and Construction

   $ 13,029      $ 14,722  

Farmland

     504        510  

1-4 Family Mortgages

     32,157        35,952  

Commercial Real Estate

     30,789        32,436  
  

 

 

    

 

 

 

Total Real Estate Loans

     76,479        83,620  

Business Loans:

     

Commercial and Industrial Loans

     12,903        14,153  

Farm Production and Other Farm Loans

     871        884  
  

 

 

    

 

 

 

Total Business Loans

     13,774        15,037  

Consumer Loans:

     

Credit Cards

     —          —    

Other Consumer Loans

     1,648        1,973  
  

 

 

    

 

 

 

Total Consumer Loans

     1,648        1,973  
  

 

 

    

 

 

 

Total Purchased Loans

   $ 91,901      $ 100,630  
  

 

 

    

 

 

 

 

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Table of Contents

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

 

     Loans
30-89 Days
Past Due
     Loans
90 or more
Days
Past Due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans
90 or more
Days
Past Due
 

Real Estate:

                 

Land Development and Construction

   $ 610      $ —        $ 610      $ 12,419      $ 13,029      $ —    

Farmland

     167        —          167        337        504        —    

1-4 Family Mortgages

     189        53        242        31,915        32,157        —    

Commercial Real Estate

     17        4        21        30,768        30,789        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     983        57        1,040        75,439        76,479        —    

Business Loans:

                 

Commercial and Industrial Loans

     74        —          74        12,829        12,903        —    

Farm Production and Other Farm Loans

     —          —          —          871        871        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     74        —          74        13,700        13,774        —    

Consumer Loans:

                 

Credit Cards

     —          —          —          —          —          —    

Other Consumer Loans

     32        —          32        1,616        1,648        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     32        —          32        1,616        1,648        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 1,089      $ 57      $ 1,146      $ 90,755      $ 91,901      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

An age analysis of past due loans, segregated by class of loans, as of December 31, 2019, is as follows:

 

                                        Accruing  
            Loans                           Loans  
     Loans      90 or more                           90 or more  
     30-89 Days      Days      Total Past      Current      Total      Days  
     Past Due      Past Due      Due Loans      Loans      Loans      Past Due  

Real Estate:

                 

Land Development and Construction

   $ 528      $ —        $ 528      $ 14,194      $ 14,722      $ —    

Farmland

     —          —          —          510        510        —    

1-4 Family Mortgages

     444        —          444        35,508        35,952        —    

Commercial Real Estate

     603        —          603        31,833        32,436        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     1,575        —          1,575        82,045        83,620        —    

Business Loans:

                 

Commercial and Industrial Loans

     379        3        382        13,771        14,153        —    

Farm Production and Other Farm Loans

     —          —          —          884        884        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     379        3        382        14,655        15,037        —    

Consumer Loans:

                 

Credit Cards

     —          —          —          —          —          —    

Other Consumer Loans

     49        8        57        1,916        1,973        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     49        8        57        1,916        1,973        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 2,003      $ 11      $ 2,014      $ 98,616      $ 100,630      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

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

 

            Special                              
     Satisfactory      Mention      Substandard      Doubtful      Loss      Total  
     1,2,3,4      5,6      7      8      9      Loans  

Real Estate:

                 

Land Development and Construction

   $ 12,163      $ 780      $ 86      $ —        $ —        $ 13,029  

Farmland

     504        —          —          —          —          504  

1-4 Family Mortgages

     29,975        1,516        666        —          —          32,157  

Commercial Real Estate

     28,956        1,546        287        —          —          30,789  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     71,598        3,842        1,039        —          —          76,479  

Business Loans:

                 

Commercial and Industrial Loans

     11,999        588        316        —          —          12,903  

Farm Production and Other Farm Loans

     871        —          —          —          —          871  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     12,870        588        316        —          —          13,774  

Consumer Loans:

                 

Credit Cards

     —          —          —          —          —          —    

Other Consumer Loans

     1,615        33        —          —          —          1,648  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     1,615        33        —          —          —          1,648  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 86,083      $ 4,463      $ 1,355      $ —        $ —        $ 91,901  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of December 31, 2019:

 

            Special                              
     Satisfactory      Mention      Substandard      Doubtful      Loss      Total  
     1,2,3,4      5,6      7      8      9      Loans  

Real Estate:

                 

Land Development and Construction

   $ 13,890      $ 789      $ 43      $ —        $ —        $ 14,722  

Farmland

     510        —          —          —          —          510  

1-4 Family Mortgages

     33,737        1,535        680        —          —          35,952  

Commercial Real Estate

     30,780        1,656        —          —          —          32,436  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     78,917        3,980        723        —          —          83,620  

Business Loans:

                 

Commercial and Industrial Loans

     13,545        608        —          —          —          14,153  

Farm Production and Other Farm Loans

     884        —          —          —          —          884  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     14,429        608        —          —          —          15,037  

Consumer Loans:

                 

Credit Cards

     —          —          —          —          —          —    

Other Consumer Loans

     1,937        36        —          —          —          1,973  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     1,937        36        —          —          —          1,973  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 95,283      $ 4,624      $ 723      $ —        $ —        $ 100,630  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     March 31, 2020      December 31, 2019  

Real Estate:

     

Land Development and Construction

   $ 36      $ 43  

Farmland

     —          —    

1-4 Family Mortgages

     692        706  

Commercial Real Estate

     4        —    
  

 

 

    

 

 

 

Total Real Estate Loans

     732        749  
  

 

 

    

 

 

 

Total PCD Loans

   $ 732      $ 749  
  

 

 

    

 

 

 

Non-accrual loans of $82 and $33 are included in 1-4 Family Mortgages at March 31, 2020 and December 31, 2019 and $4 are included in Commercial Real Estate at March 31, 2020.

 

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Table of Contents

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

 

     Total Purchased Credit Deteriorated Loans  

Contractually-required principal

   $ 993  

Nonaccretable difference

     (68
  

 

 

 

Cash flows expected to be collected

     925  

Accretable yield

     (36
  

 

 

 

Fair Value

   $ 889  
  

 

 

 

Changes in the accretable yield of loans purchased with deteriorated credit quality were as follows:

 

Balance at January 1, 2020

   $ (16

Additions through acquisition

     —    

Reclasses from nonaccretable difference

     (13

Accretion

     5  

Charge-off

     —    
  

 

 

 

Balance at March 31, 2020

   $ (24
  

 

 

 

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

The following table presents the fair value of loans purchased from Charter as of the October 1, 2019 acquisition date:

 

     October 1, 2019  

At acquisition date:

  

Contractually-required principal

   $ 104,127  

Nonaccretable difference

     (68

Cash flows expected to be collected

     104,059  

Accretable yield

     (394
  

 

 

 

Fair Value

   $ 103,665  
  

 

 

 

 

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Note 10. Allowance for Loan Losses

(in thousands)

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

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

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

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020:

 

     Real
Estate
     Business
Loans
     Consumer      Total  

March 31, 2020

           

Beginning Balance, January 1, 2020

   $ 3,075      $ 371      $ 309      $ 3,755  

Provision for loan losses

     184        3        127        314  

Chargeoffs

     222        23        55        300  

Recoveries

     14        24        9        47  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (recoveries) chargeoffs

     208        (1      46        253  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 3,051      $ 375      $ 390      $ 3,816  
  

 

 

    

 

 

    

 

 

    

 

 

 

Period end allowance allocated to:

           

Loans individually evaluated for impairment

   $ 582      $ 95      $ —        $ 677  

Loans collectively evaluated for impairment

     2,469        280        390        3,139  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, March 31, 2020

   $ 3,051      $ 375      $ 390      $ 3,816  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019:

 

     Real
Estate
     Business
Loans
     Consumer      Total  

March 31, 2019

           

Beginning Balance, January 1, 2019

   $ 2,845      $ 222      $ 305      $ 3,372  

Provision for loan losses

     (63      99        159        195  

Chargeoffs

     —          12        25        37  

Recoveries

     12        4        14        30  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (recoveries) chargeoffs

     (12      8        11        7  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 2,794      $ 313      $ 453      $ 3,560  
  

 

 

    

 

 

    

 

 

    

 

 

 

Period end allowance allocated to:

           

Loans individually evaluated for impairment

   $ 417      $ 5      $ —        $ 422  

Loans collectively evaluated for impairment

     2,377        308        453        3,138  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, March 31, 2019

   $ 2,794      $ 313      $ 453      $ 3,560  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s recorded investment in loans as of March 31, 2020 and December 31, 2019 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):

 

     Real
Estate
     Business
Loans
     Consumer      Total  

March 31, 2020

           

Loans individually evaluated for specific impairment

   $ 10,913      $ 433      $ —        $ 11,346  

Loans collectively evaluated for general impairment

     453,987        96,197        14,722        564,906  

Acquired with deteriorated credit quality

     732        —          —          732  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 465,632      $ 96,630      $ 14,722      $ 576,984  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Real
Estate
     Business
Loans
     Consumer      Total  

December 31, 2019

           

Loans individually evaluated for specific impairment

   $ 10,991      $ 144      $ —        $ 11,135  

Loans collectively evaluated for general impairment

     449,138        100,187        15,866        565,191  

Acquired with deteriorated credit quality

     749        —          —          749  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 460,878      $ 100,331      $ 15,866      $ 577,075  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 11. Premises and Equipment

The Company leases certain premises and equipment under operating leases. At March 31, 2020, the Company had lease liabilities and ROU assets totaling $690 thousand related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the three months ended March 31, 2020, the weighted average remaining lease term for operating leases was 1.1 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.3%.

Lease costs were as follows:

 

     Three Months Ended  
     March 31, 2020  
(in thousands)       

Operating lease cost

   $ 92  

Short-term lease cost

     6  

Variable lease cost

     —    
  

 

 

 
   $ 98  
  

 

 

 

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the three months ended March 31, 2020.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

 

     Three Months Ended  
     March 31, 2020  
(in thousands)       

Lease payments due:

  

Within one year

   $ 348  

After one year but within two years

     306  

After two years but within three years

     60  

After three year but within four years

     —    

After four years but within five years

     —    

After five years

     —    
  

 

 

 

Total undiscounted cash flows

     714  

Discount on cash flows

     (24
  

 

 

 

Total lease liability

   $ 690  
  

 

 

 

 

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Note 12. Goodwill and Other Intangible Assets

(in thousands)

The carrying amount of goodwill for the three months ended March 31, 2020 were as follows:

 

     Total  

Balance at January 1, 2020

   $ 13,103  

Measurement period adjustment to goodwill from Charter acquisition

     27  
  

 

 

 

Balance at March 31, 2020

   $ 13,130  
  

 

 

 

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

 

     March 31, 2020      December 31, 2019  

Core deposit intangible

   $ 739      $ 766  

Accumulated amortization

     (27      (27
  

 

 

    

 

 

 

Total finite-lived intangible assets

   $ 712      $ 739  
  

 

 

    

 

 

 

Core deposit intangible amortization expense for the three month periods ended March 31, 2020 and 2019 was $27 and $-0-, respectively. The estimated amortization expense of finite-lived intangible assets for the fived succeeding fiscal years is summarized as follows:

 

Year ending December 31,

   Amount  

2020

   $ 82  

2021

     109  

2022

     109  

2023

     109  

2024

     109  

Thereafter

     194  
  

 

 

 
   $ 712  
  

 

 

 

 

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Note 13. Shareholders’ Equity

(in thousands, except share data)

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

 

                          Accumulated              
     Number             Additional      Other              
     of Shares      Common      Paid-In      Comprehensive     Retained        
     Issued      Stock      Capital      Income (Loss)     Earnings     Total  

Balance, January 1, 2020

     5,578,131      $ 1,116      $ 17,883      $ (789   $ 94,590     $ 112,800  

Net income

     —          —          —          —         1,160       1,160  

Dividends paid ($0.24 per share)

     —          —          —          —         (1,339     (1,339

Options exercised

     4,500        1        86        —         —         87  

Restricted stock granted

     —          —          —          —         —         —    

Stock compensation expense

     —          —          40        —         —         40  

Other comprehensive income, net

     —          —          —          5,996       —         5,996  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, March 31, 2020

     5,582,631      $ 1,117      $ 18,009      $ 5,207     $ 94,411     $ 118,744  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

                          Accumulated              
     Number             Additional      Other              
     of Shares      Common      Paid-In      Comprehensive     Retained        
     Issued      Stock      Capital      Income (Loss)     Earnings     Total  

Balance, January 1, 2019

     4,904,530      $ 981      $ 4,298      $ (14,975   $ 93,562     $ 83,866  

Net income

     —          —          —          —         1,227       1,227  

Dividends paid ($0.24 per share)

     —          —          —          —         (1,177     (1,177

Options exercised

     —          —          —          —         —         —    

Restricted stock granted

     —          —          —          —         —         —    

Stock compensation expense

     —          —          41        —         —         41  

Other comprehensive income, net

     —          —          —          6,622       —         6,622  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

     4,904,530      $ 981      $ 4,339      $ (8,353   $ 93,612     $ 90,579  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Note 14. Fair Value of Financial Instruments

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

 

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

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

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

 

            Fair Value Measurements Using:         
     Quoted Prices                       
     in Active      Significant                
     Markets for      Other      Significant         
     Identical      Observable      Unobservable         
     Assets      Inputs      Inputs         
     (Level 1)      (Level 2)      (Level 3)      Totals  

Securities available for sale

           

Obligations of U.S.

           

Government Agencies

   $ —        $ 44,765      $ —        $ 44,765  

Mortgage-backed securities

     —          373,488        —          373,488  

State, county and municipal obligations

     —          63,321        —          63,321  

Other securities

     503        —          —          503  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 503      $ 481,574      $ —        $ 482,077  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2019:

 

            Fair Value Measurements Using:         
     Quoted Prices                       
     in Active      Significant                
     Markets for      Other      Significant         
     Identical      Observable      Unobservable         
     Assets      Inputs      Inputs         
     (Level 1)      (Level 2)      (Level 3)      Totals  

Securities available for sale

           

Obligations of U.S. Government Agencies

   $ —        $ 97,111      $ —        $ 97,111  

Mortgage-backed securities

     —          306,900        —          306,900  

State, county and municipal obligations

     —          60,372        —          60,372  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ 464,383      $ —        $ 464,383  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation recorded no gains or losses in earnings for the period ended March 31, 2020 or December 31, 2019 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

Impaired Loans

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

 

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Other real estate owned

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

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

 

     Quoted Prices                       
     in Active      Significant                
     Markets for      Other      Significant         
     Identical      Observable      Unobservable         
     Assets      Inputs      Inputs         
     (Level 1)      (Level 2)      (Level 3)      Totals  

Impaired loans

   $ —        $ —        $ 254      $ 254  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 254      $ 254  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents information as of March 31, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

 

                   Significant Unobservable      Range of  

Financial instrument

   Fair Value      Valuation Technique      Inputs      Inputs  

Impaired loans

   $ 254        Appraised value of collateral less        Estimated costs to sell        25
        estimated costs to sell        

 

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For assets measured at fair value on a nonrecurring basis during 2019 that were still held on the Corporation’s balance sheet at December 31, 2019, the following table provides the hierarchy level and the fair value of the related assets:

 

            Fair Value Measurements Using:         
     Quoted Prices                       
     in Active      Significant                
     Markets for      Other      Significant         
     Identical      Observable      Unobservable         
     Assets      Inputs      Inputs         
     (Level 1)      (Level 2)      (Level 3)      Totals  

Impaired loans

   $ —        $ —        $ 4,576      $ 4,576  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —        $ —        $ 4,576      $ 4,576  
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a carrying value of $390 and $5,003 had an allocated allowance for loan losses of $136 and $427 at March 31, 2020 and December 31, 2019, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of $-0- was necessary and recorded during the three-month period ended March 31, 2020 and the year ended December 31, 2019.

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

 

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

 

                   Fair Value Measurements Using:         
            Quoted Prices                       
            in Active      Significant                
            Markets for      Other      Significant      Total  
     Carrying      Identical      Observable      Unobservable      Fair  
March 31, 2020    Value      Assets      Inputs      Inputs      Value  
            (Level 1)      (Level 2)      (Level 3)         

Financial assets

              

Cash and due from banks

   $ 19,610      $ 19,610      $ —        $ —        $ 19,610  

Interest bearing deposits with banks

     61,909        61,909        —          —          61,909  

Securities available-for-sale

     482,077        503        481,574        —          482,077  

Net loans

     573,163        —          —          566,944        566,944  

Financial liabilities Deposits

   $ 925,888      $ 693,750      $ 234,138      $ —        $ 927,888  

Securities sold under agreement to repurchase

     159,442        159,442        —          —          159,442  

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at December 31, 2019:

 

                   Fair Value Measurements Using:         
            Quoted Prices                       
            in Active      Significant                
            Markets for      Other      Significant      Total  
     Carrying      Identical      Observable      Unobservable      Fair  
December 31, 2019    Value      Assets      Inputs      Inputs      Value  
            (Level 1)      (Level 2)      (Level 3)         

Financial assets

              

Cash and due from banks

   $ 15,937      $ 15,937      $ —        $ —        $ 15,937  

Federal funds sold

     1,600        1,600        —          —          1,600  

Interest bearing deposits with banks

     58,557        58,557        —          —          58,557  

Securities available-for-sale

     464,383        —          464,383        —          464,383  

Net loans

     573,312        —          —          569,640        569,640  

Financial liabilities Deposits

   $ 898,996      $ 642,825      $ 258,100      $ —        $ 900,925  

Securities sold under agreement to repurchase

     170,410        170,410        —          —          170,410  

 

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ITEM 2.

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

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 Corporation 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 “Corporation”), include, but are not limited to, the following:

 

   

expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions;

 

   

adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan losses and our ability to foreclose on delinquent mortgages;

 

   

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates including, but not limited to, the negative impacts and disruptions resulting from the recent outbreak of COVID-19;

 

   

extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, or litigation;

 

   

increased competition from other financial institutions and the risk of failure to achieve our business strategies;

 

   

events affecting our business operations, including the effectiveness of our risk management framework, the accuracy of our estimates, our reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances;

 

   

our ability to maintain sufficient capital and to raise additional capital when needed;

 

   

our ability to maintain adequate liquidity to conduct business and meet our obligations;

 

   

events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people;

 

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events that adversely affect our reputation, and the resulting potential adverse impact on our business operations;

 

   

risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and provisions in our governing documents that may make it more difficult for another party to obtain control of us; and

 

   

other risks detailed from 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 Corporation. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report.

OVERVIEW

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

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At March 31, 2020, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,216 and total deposits of $927,645. In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The Corporation 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 Corporation at March 31, 2020, was 21.67% and at December 31, 2019, was 24.87%. The decrease was due to an increase in deposits at March 31, 2020. Management believes it maintains adequate liquidity for the Corporation’s current needs.

 

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The Corporation’s primary source of liquidity is customer deposits, which were $925,888 at March 31, 2020, and $898,996 at December 31, 2019. Other sources of liquidity include investment securities, the Corporation’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Corporation had $482,077 invested in available-for-sale investment securities at March 31, 2020, and $464,383 at December 31, 2019. This increase was due to purchases coupled with an increase in the market value of the Corporation’s investment securities portfolio in excess of paydowns, maturities, sales and calls.

The Corporation also had $61,909 in interest bearing deposits at other banks at March 31, 2020 and $58,557 at December 31, 2019. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both March 31, 2020 and December 31, 2019. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At March 31, 2020, the Corporation had unused and available $223,047 of its line of credit with the FHLB and at December 31, 2019, the Corporation had unused and available $177,592 of its line of credit with the FHLB. The increase in the amount available under the Corporation’s line of credit with the FHLB from the end of 2019 to March 31, 2020, was the result of an increase in the amount of loans eligible for the collateral pool securing the Corporation’s line of credit with the FHLB. The Corporation had federal funds purchased of $-0- as of March 31, 2020 and December 31, 2019. The Corporation may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

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

CAPITAL RESOURCES

Total shareholders’ equity was $118,744 at March 31, 2020, as compared to $112,800 at December 31, 2019. The increase in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment partially offset by dividends paid in excess of earnings. The market value adjustment, which was an increase due to general market conditions, specifically the decrease in medium term interest rates, caused an increase in the market price of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $1,339, or $0.24 per share, during the three-month period ended March 31, 2020 compared to $1,177, or $0.24 per share, for the same period in 2019.

 

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Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of March 31, 2020, the Corporation meets all capital adequacy requirements to which it is subject and according to these requirements the Corporation is considered to be well capitalized.

 

                               Minimum Capital  
                  Minimum Capital     Requirement to be  
                  Requirement to be     Adequately  
     Actual     Well Capitalized     Capitalized  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

March 31, 2020

               

Citizens Holding Company Tier 1 leverage ratio

   $ 98,695        8.30   $ 59,432        5.00   $ 47,546        4.00

Common Equity tier 1 capital ratio

     98,695        13.82     77,262        6.50     53,489        4.50

Tier 1 risk-based capital ratio

     98,695        13.82     57,147        8.00     42,861        6.00

Total risk-based capital ratio

     102,510        14.35     71,434        10.00     57,147        8.00

December 31, 2019

               

Citizens Holding Company Tier 1 leverage ratio

   $ 98,733        8.33   $ 59,270        5.00   $ 47,416        4.00

Common Equity tier 1 capital ratio

     98,733        13.86     77,051        6.50     53,343        4.50

Tier 1 risk-based capital ratio

     98,733        13.86     56,972        8.00     42,729        6.00

Total risk-based capital ratio

     102,488        14.39     71,215        10.00     56,972        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 Corporation (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II for non-core banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

Beginning January 1, 2015, the Company and the Bank began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner:

 

   

Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%;

 

   

Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking organizations);

 

   

Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and

 

   

Maintain the minimum total risk-based capital ratio at 8%.

 

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

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

Management believes that, as of March 31, 2020, the Company and the Bank met all capital adequacy requirements under Basel III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporation’s capital ratios as presented.

 

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RESULTS OF OPERATIONS

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

 

     For the Three Months  
     Ended March 31,  
     2020      2019  

Interest Income, including fees

   $ 9,709      $ 8,384  

Interest Expense

     2,324        2,174  
  

 

 

    

 

 

 

Net Interest Income

     7,385        6,210  

Provision for loan losses

     314        195  
  

 

 

    

 

 

 

Net Interest Income after

     

Provision for loan losses

     7,071        6,015  

Other Income

     2,381        2,047  

Other Expense

     8,067        6,640  
  

 

 

    

 

 

 

Income Before Provision For

     

Income Taxes

     1,385        1,422  

Provision for Income Taxes

     225        195  
  

 

 

    

 

 

 

Net Income

   $ 1,160      $ 1,227  
  

 

 

    

 

 

 

Net Income Per share - Basic

   $ 0.21      $ 0.25  
  

 

 

    

 

 

 

Net Income Per Share - Diluted

   $ 0.21      $ 0.25  
  

 

 

    

 

 

 

See Note 4 to the Corporation’s Consolidated Financial Statements for an explanation regarding the Corporation’s calculation of Net Income Per Share - basic and - diluted.

Annualized return on average equity (“ROE”) was 4.11% for the three months ended March 31, 2020, and 5.70% for the corresponding period in 2019. The decrease in ROE for the three months ended March 31, 2020 was caused by the increase in equity balances and a decrease in net income compared to the same period in 2019.

Book value per share increased to $21.27 at March 31, 2020, compared to $20.22 at December 31, 2019. The increase in book value per share reflects an increase in the fair value of the Corporation’s investment securities partially offset by dividends in excess of earnings. Average assets for the three months ended March 31, 2020 were $1,202,483 compared to $1,164,570 for the year ended December 31, 2019. This increase was due mainly to an increase in investment

securities.

 

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NET INTEREST INCOME / NET INTEREST MARGIN

One component of the Corporation’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 annualized net interest margin was 2.72% for the three months ended March 31, 2020 compared to 2.74% for the corresponding period of 2019. The decrease in net interest margin for the three months ended March 31, 2020, when compared to the same period in 2019, was overall minimal as yields on earning assets and rates on interest bearing liabilities decreased proportionally, as detailed below. Earning assets averaged $1,109,562 for the three months ended March 31, 2020. This represents an increase of $179,885, or 19.3%, over average earning assets of $929,677 for the three months ended March 31, 2019.

Interest bearing deposits averaged $731,470 for the three months ended March 31, 2020. This represents an increase of $97,486, or 15.4%, from the average of interest-bearing deposits of $633,984 for the three months ended March 31, 2019. This was due to an increase in interest-bearing NOW and money market accounts, savings and certificates of deposit.

Other borrowed funds averaged $158,424 for the three months ended March 31, 2020. This represents an increase of $51,635, or 48.4%, over the other borrowed funds of $106,789 for the three months ended March 31, 2019. This increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase for the three months ended March 31, 2020, when compared to the three months ended March 31, 2019.

Net interest income was $7,385 for the three months ended March 31, 2020, an increase of $1,175 from $6,210 for the three months ended March 31, 2019, primarily due to an increase in the loan volume from the same period in 2019. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the three months ended March 31, 2020, the yields on earning assets decreased and the rates paid on deposits decreased from the same period in 2019. The yield on all interest-bearing assets decreased 11 basis points to 3.56% in the three months ended March 31, 2020 from 3.67% for the same period in 2019. At the same time, the rate paid on all interest-bearing liabilities for the three months ended March 31, 2020 decreased 14 basis points to 1.05% from 1.19% in the same period in 2019. As longer term interest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

 

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The following table shows the interest and fees and corresponding yields for loans only.

 

     For the Three Months  
     Ended March 31,  
     2020     2019  

Interest and Fees

   $ 7,480     $ 5,450  

Average Gross Loans

     574,755       435,070  

Annualized Yield

     5.21     5.01

CREDIT LOSS EXPERIENCE

As a natural corollary to the Corporation’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 Corporation attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures.

The Corporation 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 Corporation’s management and Board of Directors.

The Corporation charges off that portion of any loan that the Corporation’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 Corporation’s allowance for loan losses.

The Corporation’s allowance for loan losses is designed to provide for loan losses that can be reasonably anticipated. The allowance for loan losses is established through charges to operating expenses in the form of provisions for loan losses. Actual loan losses or recoveries are charged or credited to the allowance for loan losses. The Board of Directors determines the amount of the allowance. Among the factors considered in determining the allowance for loan losses are the current financial condition of the Corporation’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 Corporation’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 Corporation 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.

 

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

 

     Quarter Ended     Year Ended     Amount of      Percent of  
     March 31,     December 31,     Increase      Increase  
     2020     2019     (Decrease)      (Decrease)  

BALANCES:

         

Gross Loans

   $ 576,984     $  577,075     $ (91      -0.02

Allowance for Loan Losses

     3,816       3,755       61        1.62

Nonaccrual Loans

     11,941       11,993       (52      -0.43

Ratios:

         

Allowance for loan losses to gross loans

     0.66     0.65     

Net loans charged off (recovered) to allowance for loan losses

     6.63     5.06     

The provision for loan losses for the three months ended March 31, 2020 was $314, an increase of $119 from the provision for loan losses of $195 for the same period in 2019. The change in the Corporation’s loan loss provisions for the three months ended March 31, 2020 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact caused by current local, national and international economic conditions coupled with an increase in loan demand. As a result of the COVID-19 virus, the Corporation increased the allowance for loan losses qualitatively, specifically related to exposures that we felt were more “at-risk” than others, including hotels, restaurants and retail real estate. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to payments received and loans charged off in excess of new loans being added to nonaccrual status.

For the three months ended March 31, 2020, net loan losses charged to the allowance for loan losses totaled $253, an increase of $246 from the $7 charged off in the same period in 2019. The decrease was primarily due to one significant charge-off during the first quarter of 2020.

Management reviews quarterly with the Corporation’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three months ended March 31, 2020 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required. We are working with customers directly affected by COVID-19. We have been and continue to be prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, we are engaging in more frequent communications with borrowers to better understand their situation and challenges faced, allowing us to proactively respond as needs and issues arise.    

 

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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.