UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

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

For the quarterly period ended June 30, 2019

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 August 6, 2019:

5, 2020:

Title

  
Outstanding
 

Common Stock, $0.20 par value

   4,912,0305,586,381 


Table of Contents


Table of Contents

PART I.
FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

   June 30,  December 31, 
   2019  2018 
   (Unaudited)  (Audited) 

ASSETS

   

Cash and due from banks

  $21,754,884  $12,592,130 

Interest bearing deposits with other banks

   1,193,764   8,079,742 

Investment securities available for sale, at fair value

   483,906,292   444,746,454 

Loans, net of allowance for loan losses of $3,821,473 in 2019 and $3,371,695 in 2018

   461,914,254   425,905,093 

Premises and equipment, net

   20,169,558   19,717,305 

Other real estate owned, net

   3,383,444   3,440,148 

Accrued interest receivable

   4,400,453   4,165,783 

Cash surrender value of life insurance

   25,706,254   25,383,931 

Deferred tax assets, net

   2,789,557   6,633,539 

Other assets

   8,812,480   7,965,952 
  

 

 

  

 

 

 

TOTAL ASSETS

  $1,034,030,940  $958,630,077 
  

 

 

  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

LIABILITIES

   

Deposits:

   

Noninterest-bearing demand

  $165,655,475  $170,029,729 

Interest-bearing NOW and money market accounts

   331,589,279   298,220,430 

Savings deposits

   77,686,521   76,735,710 

Certificates of deposit

   219,927,045   211,235,641 
  

 

 

  

 

 

 

Total deposits

   794,858,320   756,221,510 

Securities sold under agreement to repurchase

   119,327,404   107,965,505 

Federal funds purchased

   12,000,000    

Accrued interest payable

   706,261   470,710 

Deferred compensation payable

   9,225,972   9,052,972 

Other liabilities

   1,776,660   1,053,063 
  

 

 

  

 

 

 

Total liabilities

   937,894,617   874,763,760 

SHAREHOLDERS’ EQUITY

   

Common stock, $0.20 par value, 22,500,000 shares authorized, 4,912,030 shares issued and outstanding at June 30, 2019 and 4,904,530 at December 31, 2018

   982,406   980,906 

Additionalpaid-in capital

   4,379,037   4,298,499 

Retained earnings

   93,803,054   93,561,515 

Accumulated other comprehensive loss, net of tax benefit of $1,006,701 at June 30, 2019 and $4,978,232 at December 31, 2018

   (3,028,174  (14,974,603
  

 

 

  

 

 

 

Total shareholders’ equity

   96,136,323   83,866,317 
  

 

 

  

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $1,034,030,940  $958,630,077 
  

 

 

  

 

 

 

(in thousands, except share data)
   June 30,   December 31, 
   2020   2019 
   (Unaudited)   (Audited) 
ASSETS
    
Cash and due from banks
  $20,003   $15,937 
Interest bearing deposits with other banks
   41,184    58,557 
Federal funds sold
   —      1,600 
Investment securities available for sale, at fair value
   627,719    464,383 
Loans, net of allowance for loan losses of $4,257 in 2020 and $3,755 in 2019
   631,940    573,312 
Premises and equipment, net
   24,286    24,672 
Other real estate owned, net
   4,358    3,552 
Accrued interest receivable
   5,913    4,181 
Cash surrender value of life insurance
   25,375    25,088 
Deferred tax assets, net
   1,328    3,684 
Other assets
   20,118    20,468 
  
 
 
   
 
 
 
TOTAL ASSETS
  $1,402,224   $1,195,434 
  
 
 
   
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
    
LIABILITIES
    
Deposits:
    
Noninterest-bearing demand
  $254,214   $190,406 
Interest-bearing NOW and money market accounts
   501,327    369,354 
Savings deposits
   96,165    83,065 
Certificates of deposit
   223,642    256,171 
  
 
 
   
 
 
 
Total deposits
   1,075,348    898,996 
Securities sold under agreement to repurchase
   193,780    170,410 
Accrued interest payable
   699    1,128 
Deferred compensation payable
   9,505    9,453 
Other liabilities
   3,523    2,647 
  
 
 
   
 
 
 
Total liabilities
   1,282,855    1,082,634 
SHAREHOLDERS’ EQUITY
    
Common stock, $0.20 par value, 22,500,000 shares authorized, 5,586,381 shares issued and outstanding at June 30, 2020 and 5,578,131 at December 31, 2019
   1,118    1,116 
Additional
paid-in
capital
   18,049    17,883 
Retained earnings
   94,531    94,590 
Accumulated other comprehensive income (loss), net of tax (expense) benefit of ($1,885) at March 31, 2020 and $262 at December 31, 2019
   5,671    (789
  
 
 
   
 
 
 
Total shareholders’ equity
   119,369    112,800 
  
 
 
   
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $1,402,224   $1,195,434 
  
 
 
   
 
 
 
The accompanying notes are an integral part of these financial statements.

1

Table of Contents
CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2019   2018   2019   2018 

INTEREST INCOME

        

Interest and fees on loans

  $5,830,411   $4,984,492   $11,279,946   $9,700,911 

Interest on securities

        

Taxable

   2,225,591    1,438,596    4,307,596    4,261,284 

Nontaxable

   512,869    1,295,828    1,129,648    1,295,828 

Other interest

   81,673    60,060    316,779    120,344 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   8,650,544    7,778,976    17,033,969    15,378,367 

INTEREST EXPENSE

        

Deposits

   1,916,769    515,506    3,645,441    1,016,715 

Other borrowed funds

   527,823    311,034    972,850    604,466 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

   2,444,592    826,540    4,618,291    1,621,181 
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

   6,205,952    6,952,436    12,415,678    13,757,186 

PROVISION FOR (REVERSAL OF) LOAN LOSSES

   264,819    88,962    460,298    (147,811
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR (REVERSAL OF) LOAN LOSSES

   5,941,133    6,863,474    11,955,380    13,904,997 

OTHER INCOME

        

Service charges on deposit accounts

   1,046,255    1,067,260    2,142,947    2,210,853 

Other service charges and fees

   769,668    717,053    1,453,308    1,385,517 

Other operating income

   256,255    294,097    522,834    582,470 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

   2,072,178    2,078,410    4,119,089    4,178,840 
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER EXPENSES

        

Salaries and employee benefits

   3,469,724    3,675,422    7,016,393    7,343,279 

Occupancy expense

   1,409,862    1,361,622    2,832,289    2,887,001 

Other expense

   1,443,463    1,910,845    3,113,584    3,765,290 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

   6,323,049    6,947,889    12,962,266    13,995,570 
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

   1,690,262    1,993,995    3,112,203    4,088,267 

PROVISION FOR INCOME TAXES

   319,520    305,855    514,690    627,740 
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

  $1,370,742   $1,688,140   $2,597,513   $3,460,527 
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME PER SHARE -Basic

  $0.28   $0.35   $0.53   $0.71 
  

 

 

   

 

 

   

 

 

   

 

 

 

-Diluted

  $0.28   $0.35   $0.53   $0.71 
  

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS PAID PER SHARE

  $0.24   $0.24   $0.48   $0.48 
  

 

 

   

 

 

   

 

 

   

 

 

 

(in thousands, except per share data)
   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2020   2019   2020   2019 
INTEREST INCOME
        
Interest and fees on loans
  $7,632   $5,830   $15,112   $11,280 
Interest on securities
        
Taxable
   2,100    2,226    3,757    4,308 
Nontaxable
   364    513    704    1,130 
Other interest
   31    82    263    316 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total interest income
   10,127    8,651    19,836    17,034 
INTEREST EXPENSE
        
Deposits
   1,612    1,917    3,581    3,645 
Other borrowed funds
   165    528    520    973 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total interest expense
   1,777    2,445    4,101    4,618 
  
 
 
   
 
 
   
 
 
   
 
 
 
NET INTEREST INCOME
   8,350    6,206    15,735    12,416 
PROVISION FOR LOAN LOSSES
   622    265    936    460 
  
 
 
   
 
 
   
 
 
   
 
 
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
   7,728    5,941    14,799    11,956 
OTHER INCOME
        
Service charges on deposit accounts
   668    1,046    1,717    2,143 
Other service charges and fees
   871    770    1,644    1,453 
Other operating income
   931    257    1,490    523 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other income
   2,470    2,073    4,851    4,119 
  
 
 
   
 
 
   
 
 
   
 
 
 
OTHER EXPENSES
        
Salaries and employee benefits
   4,307    3,470    8,742    7,016 
Occupancy expense
   2,036    1,410    3,695    2,832 
Other expense
   2,001    1,443    3,974    3,114 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total other expenses
   8,344    6,323    16,411    12,962 
  
 
 
   
 
 
   
 
 
   
 
 
 
INCOME BEFORE PROVISION FOR INCOME TAXES
   1,854    1,691    3,239    3,113 
PROVISION FOR INCOME TAXES
   392    320    617    515 
  
 
 
   
 
 
   
 
 
   
 
 
 
NET INCOME
  $1,462   $1,371   $2,622   $2,598 
  
 
 
   
 
 
   
 
 
   
 
 
 
NET INCOME PER SHARE -Basic
  $0.26   $0.28   $0.47   $0.53 
  
 
 
   
 
 
   
 
 
   
 
 
 
-Diluted
  $0.26   $0.28   $0.47   $0.53 
  
 
 
   
 
 
   
 
 
   
 
 
 
DIVIDENDS PAID PER SHARE
  $0.24   $0.24   $0.48   $0.48 
  
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these financial statements.

2

Table of Contents
CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

   For the Three Months  For the Six Months 
   Ended June 30,  Ended June 30, 
   2019  2018  2019  2018 

Net income

  $1,370,742  $1,688,140  $2,597,513  $3,460,527 

Other comprehensive income (loss)

     

Securitiesavailable-for-sale

     

Unrealized holding gains (losses)

   7,149,042   (1,245,076  15,972,109   (10,661,302

Income tax effect

   (1,783,686  310,646   (3,985,041  2,659,994 
  

 

 

  

 

 

  

 

 

  

 

 

 
   5,365,356   (934,430  11,987,068   (8,001,308

Rclassification adjustment for (losses) gains included in net income

   (54,149  3,026   (54,149  11,047 

Income tax effect

   13,510   (755  13,510   (2,756
  

 

 

  

 

 

  

 

 

  

 

 

 
   (40,639  2,271   (40,639  8,291 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss)

   5,324,717   (932,159  11,946,429   (7,993,017
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $6,695,459  $755,981  $14,543,942  $(4,532,490
  

 

 

  

 

 

  

 

 

  

 

 

 

(in thousands)
   For the Three Months  For the Six Months 
   Ended June 30,  Ended June 30, 
   2020  2019  2020  2019 
Net income
  $1,462  $1,371  $2,622  $2,598 
Other comprehensive income
     
Securities
available-for-sale
     
Unrealized holding gains
   285   7,149   8,197   15,972 
Income tax effect
   (71  (1,784  (2,045  (3,985
  
 
 
  
 
 
  
 
 
  
 
 
 
   214   5,365   6,152   11,987 
Reclassification adjustment for gains (losses) included in net income
   333   (54  410   (54
Income tax effect
   (83  14   (102  13 
  
 
 
  
 
 
  
 
 
  
 
 
 
   250   (40  308   (41
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other comprehensive income
   464   5,325   6,460   11,946 
  
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive income
  $1,926  $6,696  $9,082  $14,544 
  
 
 
  
 
 
  
 
 
  
 
 
 
The accompanying notes are an integral part of these financial statements.

3

Table of Contents
CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

   For the Six Months 
   Ended June 30, 
   2019  2018 

CASH FLOWS FROM OPERATING ACTIVITIES

   

Net cash provided by operating activities

  $5,293,805  $5,402,261 

CASH FLOWS FROM INVESTING ACTIVITIES

   

Proceeds from maturities and calls of securities available for sale

   23,344,865   21,903,064 

Proceeds from sale of investment securities

   60,110,779   17,609,891 

Purchases of investment securities available for sale

   (108,814,987  (10,550,000

Purchases of bank premises and equipment

   (879,034  (48,702

Proceeds from sales of bank premises and equipment

   —     264,000 

Decrease in interest bearing deposits with other banks

   6,885,978   239,241 

Proceeds from sale of other real estate

   170,356   782,095 

Net increase in loans

   (36,591,743  (15,151,283
  

 

 

  

 

 

 

Net cash (used in) provided by investing activities

   (55,773,786  15,048,306 

CASH FLOWS FROM FINANCING ACTIVITIES

   

Net increase in deposits

   38,636,810   43,925,481 

Net change in securities sold under agreement to repurchase

   11,361,899   (68,372,991

Increase in federal funds purchased

   12,000,000   11,000,000 

Repayment of Federal Home Loan Bank advances

   —     (10,000,000

Proceeds from exercise of stock options

   —     27,000 

Payment of dividends

   (2,355,974  (2,351,816
  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

   59,642,735   (25,772,326
  

 

 

  

 

 

 

Net increase (decrease) in cash and due from banks

   9,162,754   (5,321,759

Cash and due from banks, beginning of period

   12,592,130   17,962,990 
  

 

 

  

 

 

 

Cash and due from banks, end of period

  $21,754,884  $12,641,231 
  

 

 

  

 

 

 

(in thousands)
   For the Six Months 
   Ended June 30, 
   2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES
   
Net cash provided by operating activities
  $5,871  $5,294 
CASH FLOWS FROM INVESTING ACTIVITIES
   
Proceeds from maturities and calls of securities available for sale
   135,188   23,345 
Proceeds from sale of investment securities
   71,168   60,111 
Purchases of investment securities available for sale
   (363,823  (108,815
Purchases of bank premises and equipment
   (163  (879
Proceeds from sales of bank premises and equipment
   124   —   
Decrease in federal funds sold
   1,600   —   
Increase in interest bearing deposits with other banks
   17,373   6,886 
Proceeds from sale of other real estate
   392   170 
Net increase in loans
   (60,792  (36,592
  
 
 
  
 
 
 
Net cash used in investing activities
   (198,933  (55,774
CASH FLOWS FROM FINANCING ACTIVITIES
   
Net increase in deposits
   176,353   38,637 
Increase in securities sold under agreement to repurchase
   23,370   11,362 
Increase in federal funds purchased
   —     12,000 
Proceeds from exercise of stock options
   86   —   
Payment of dividends
   (2,681  (2,356
  
 
 
  
 
 
 
Net cash provided by financing activities
   197,128   59,643 
  
 
 
  
 
 
 
Net increase in cash and due from banks
   4,066   9,163 
Cash and due from banks, beginning of period
   15,937   12,592 
  
 
 
  
 
 
 
Cash and due from banks, end of period
  $20,003  $21,755 
  
 
 
  
 
 
 
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 six months ended June 30, 2019

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 June 30, 20192020 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-ownedwholly 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, 2018,2019, filed with the Securities and Exchange Commission on March 15, 2019.

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 Company.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.
6

Financial position and results of operations
The Company’s fee income has been, and could continue to 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 statements of financial 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 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.
7

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 has been 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 the original deferment period for many borrowers starts to expire, the Company is offering an interest-only payment program for up to an additional six months on a
loan-by-loan
basis. As of July 24, 2020, the Company has executed 311 deferrals on outstanding loan balances of $226,855. 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 July 24, 2020, the Company has closed 588 SBA PPP loans representing $48,821 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 certain late payments and service charges and has temporarily suspended collection efforts on past due loans.
8

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.
Adoption of New Accounting Standards

In January 2017, the FASB issued ASU2016-02 “Leases”
2017-04, “
Intangibles—Goodwill and Other (Topic 842)350)—Simplifying the Test for Goodwill Impairment
” (“ASU2016-02”
2017-04”) requires lessees and lessors recognize lease assets and lease liabilities. ASU
2017-04
simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the statementfirst 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 financial condition and disclose key information about leasing arrangements.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. ASU2016-02
2017-04
was effective for the Company on January 1, 2019. ASU2016-02 provides for a modified retrospective transition approach requiring lessees to recognize2020 and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply ASU2016-02 as of the beginning of the period of adoption (January 1, 2019) and havedid not restated comparative periods. Of the optional practical expedients available under ASU2016-02, all that apply have been adopted.

The Company’s operating leases relate primarily to branch properties and related equipment. As a result of implementing ASU2016-02, we recognized an operating leaseright-of-use (“ROU”) asset of $1.086 million and an operating lease liability of $1.086 million on January 1, 2019, with no impact on our consolidated statements of income or condensed consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and liability are recorded in other assets and other liabilities, respectively, in the consolidated statements of condition. See Note 8. Premises and Equipment for additional information.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU2016-13”). ASU2016-13 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, ASU2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU2016-13 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. ASU2016-13 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 ASU2016-13 to have a significantmaterial 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.

statements.

ASU2018-13
2019-13
Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement
” (“ASU2018-13”
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. ASU2018-13
2019-13
is effective for annual and interim periods beginning after December 15, 2019. ManagementASU
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
9

Table of Contents
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 currently evaluatingimplemented. 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.
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 ASUstandard will have on the Company’s financial statements.

condition and results of operations of the Company.

10

Table of Contents

Note 2. Mergers and Acquisitions

(in thousands, except share data)
Merger with Charter Bank

On May 21,

Effective October 1, 2019, the Company the Bank andcompleted its acquisition by merger of Charter Bank (“Charter”) entered into an agreement, in a transaction valued at approximately $19.7 million. The Company issued 666,101 shares of common stock and plan of merger pursuantpaid approximately $6.1 million in cash to which Charter will mergeshareholders, excluding cash paid for fractional shares. At closing, Charter merged with and into the Bank. UnderBank, with the termsBank being the surviving corporation in the merger. Operations of Charter are included in the consolidated financial statements of the Corporation for periods subsequent to the acquisition date.
For further information regarding the merger agreement, eachwith Charter, shareholder will havesee the rightNotes to receive 0.39417 sharesConsolidated Financial Statements of the Company’s common stock and $3.615 in cash for each outstanding share of Charter common stock. The aggregate purchase price is estimated to be approximately $20.0 million, based on our closing price of $20.76 on August 1, 2019. The transaction is expected to closeCitizens Holding Company included in the fourth quarter ofCorporation’s Annual Report on Form
10-K
for the year ended December 31, 2019, filed with the Securities and is subject to customary conditions set forth in the merger agreement, including the receipt of regulatory approvals and approval by a majority of Charter’s shareholders.

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 June 30, 2019,2020, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $57,647,121$88,744 compared to an aggregate unused balance of $58,835,208$94,009 at December 31, 2018.2019. There were $2,492,810$4,565 of letters of credit outstanding at June 30, 20192020 and $2,516,810$2,436 at December 31, 2018.2019. 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 and 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.

11

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   For the Six Months 
   Ended June 30,   Ended June 30, 
   2019   2018   2019   2018 

Basic weighted average shares outstanding

   4,897,970    4,889,772    4,895,265    4,886,258 

Dilutive effect of granted options

   2,921    5,020    2,697    7,729 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

   4,900,891    4,894,792    4,897,962    4,893,987 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $1,370,742   $1,688,140   $2,597,513   $3,460,527 

Net income per share-basic

  $0.28   $0.35   $0.53   $0.71 

Net income per share-diluted

  $0.28   $0.35   $0.53   $0.71 
   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2020   2019   2020   2019 
Basic weighted average shares outstanding
   5,580,340    4,897,970    5,573,515    4,895,265 
Dilutive effect of granted options
   3,449    2,921    2,824    2,697 
  
 
 
   
 
 
   
 
 
   
 
 
 
Diluted weighted average shares outstanding
   5,583,789    4,900,891    5,576,339    4,897,962 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net income
  $1,462   $1,371   $2,622   $2,598 
Net income per share-basic
  $0.26   $0.28   $0.47   $0.53 
Net income per share-diluted
  $0.26   $0.28   $0.47   $0.53 

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.

12

Table of Contents
The following table is a summary of the stock option activity for the six months ended June 30, 2019:

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

Outstanding at December 31, 2018

   52,500   $21.55    —     $—   

Granted

   —      —      —      —   

Exercised

   —      —      —      —   

Expired

   (12,000   21.75    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding at June 30, 2019

   40,500   $21.49    —     $—   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
   (13,500   25.72    —      —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Outstanding at June 30, 2020
   22,500   $19.41    —     $—   
  
 
 
   
 
 
   
 
 
   
 
 
 
The intrinsic value of options outstanding under the Directors’ Plan at June 30, 2019,2020, was $33,480. No$125,280. NaN options were outstanding under the 2013 Plan as of June 30, 2019.

2020.

During 2019,2020, the Corporation’s directors received restricted stock grants totaling 7,5008,250 shares of common stock under the 2013 Plan. These grants vest over a
one-year
period ending April 23, 202029, 2021 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$169 and will be expensed ratably over the
one year -year
vesting period.

During 2015, 7,500 shares of restricted stock were granted to the Chief Executive Officer (CEO) that would vest according to a stock performance schedule over the next five years. The stock performance for the Company met the goal for 2016 and the CEO became vested in 20%, or 1,500 shares of the restricted stock at an expense of $32. Again in 2017, the Company met 20% of its goal and the CEO became vested in an additional 1,500 shares of the restricted stock at an expense of $37. The stock performance for the Company did not meet the goal in 2020, 2019 or 2018 and no corresponding expense was recorded. Additionally, the remaining 4,500 shares of restricted stock were forfeited as of June 22, 2020, the expiration of the five-year vesting period.
Note 6. Income Taxes

(in thousands)
For the three months ended June 30, 20192020 and 2018,2019, the Company recorded a provision for income taxes totaling $319 thousand$392 and $306 thousand,$320, respectively. The effective tax rate was 18.9%21.1% and 15.3%18.9% for the three months ending June 30, 2020 and 2019, and 2018, respectively.

For the six months ended June 30, 20192020 and 2018,2019, the Company recorded a provision for income taxes totaling $515 thousand$617 and $628 thousand,$515, respectively. The effective tax rate was 16.5%19.0% and 15.4%16.5% for the six months ending June 30, 2020 and 2019, and 2018, 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.

13

Table of Contents
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:

June 30, 2019  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated Fair
Value
 

Securitiesavailable-for-sale

        

Obligations of U.S. Government agencies

  $98,909,861   $90,238   $255,641   $98,744,458 

Mortgage backed securities

   325,660,233    271,572    3,948,147    321,983,658 

State, County, Municipals

   63,371,075    329,930    522,829    63,178,176 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $487,941,169   $691,740   $4,726,617   $483,906,292 
  

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2018  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated Fair
Value
 

Securitiesavailable-for-sale

        

Obligations of U.S. Government agencies

  $99,365,930   $—     $3,388,147   $95,977,783 

Mortgage backed securities

   259,742,501    4,921    12,373,269    247,374,153 

State, County, Municipals

   105,590,858    67,888    4,264,228    101,394,518 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $464,699,289   $72,809   $20,025,644   $444,746,454 
  

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2020  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Estimated
Fair Value
 
Securities
available-for-sale
        
Obligations of U.S. Government agencies
  $7,605   $202   $—     $7,807 
Mortgage backed securities
   546,348    6,734    1,695    551,387 
State, County, Municipals
   65,711    2,325    21    68,015 
Other Securities
   500    10    —      510 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $620,164   $9,271   $1,716   $627,719 
  
 
 
   
 
 
   
 
 
   
 
 
 
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 June 30, 20192020 and December 31, 2018,2019, securities with a carrying value of $357,072,500$559,885 and $357,231,440,$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 June 30, 20192020 and December 31, 20182019 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

   June 30, 2019   December 31, 2018 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 

Available-for-sale

        

Due in one year or less

  $784,744   $786,283   $1,875,288   $1,877,665 

Due after one year through five years

   91,101,901    90,842,206    91,948,838    89,121,194 

Due after five years through ten years

   17,737,676    17,899,263    32,801,788    31,718,293 

Due after ten years

   52,656,615    52,394,882    78,330,873    74,655,149 

Residential mortgage backed securities

   257,852,024    254,499,198    187,776,954    179,235,806 

Commercial mortgage backed securities

   67,808,209    67,484,460    71,965,548    68,138,347 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $487,941,169   $483,906,292   $464,699,289   $444,746,454 
  

 

 

   

 

 

   

 

 

   

 

 

 

14

Table of Contents
   June 30, 2020   December 31, 2019 
   Amortized   Estimated   Amortized   Estimated 
   Cost   Fair Value   Cost   Fair Value 
Available-for-sale
        
Due in one year or less
  $845   $855   $345   $345 
Due after one year through five years
   1,349    1,384    89,920    89,681 
Due after five years through ten years
   18,862    19,569    18,678    18,808 
Due after ten years
   52,760    54,524    48,181    48,649 
Residential mortgage backed securities
   508,477    512,365    259,309    258,415 
Commercial mortgage backed securities
   37,871    39,022    49,001    48,485 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $620,164   $627,719   $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 June 30, 20192020 and December 31, 2018.

2019.

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

June 30, 2019  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 

Description of Securities

  Value   Losses   Value   Losses   Value   Losses 

Obligations of U.S. government agencies

  $—     $—     $40,203,509   $255,641   $40,203,509   $255,641 

Mortgage backed securities

   55,354,535    389,940    207,450,160    3,558,207    262,804,695    3,948,147 

State, County, Municipal

   —      —      42,287,189    522,829    42,287,189    522,829 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $55,354,535   $389,940   $289,940,858   $4,336,677   $345,295,393   $4,726,617 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2018  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 

Description of Securities

  Value   Losses   Value   Losses   Value   Losses 

Obligations of U.S. government agencies

  $—     $—     $95,977,783   $3,388,147   $95,977,783   $3,388,147 

Mortgage backed securities

   12,257,636    179,281    234,928,705    12,193,988    247,186,341    12,373,269 

State, County, Municipal

   12,623,964    285,275    76,535,741    3,978,953    89,159,705    4,264,228 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $24,881,600   $464,556   $407,442,229   $19,561,088   $432,323,829   $20,025,644 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

follows:

June 30, 2020  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Securities
  Value   Losses   Value   Losses   Value   Losses 
Obligations of U.S. government agencies
  $—     $—     $—     $—     $—     $—   
Mortgage backed securities
   204,746    1,695    —      —      204,746    1,695 
State, County, Municipal
   3,363    21    —      —      3,363    21 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $208,109   $1,716   $—     $—     $208,109   $1,716 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
December 31, 2019  Less than 12 months   12 months or more   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Securities
  Value   Losses   Value   Losses   Value   Losses 
Obligations of U.S. government agencies
  $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 itits 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 June 30, 20192020 nor at December 31, 2018.

2019.

15

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.
16

Table of Contents
The composition of net loans (in thousands) at June 30, 20192020 and December 31, 20182019 was as follows:

   June 30,
2019
   December 31,
2018
 

Real Estate:

    

Land Development and Construction

  $54,574   $41,134 

Farmland

   16,649    14,498 

1-4 Family Mortgages

   86,861    88,747 

Commercial Real Estate

   203,205    203,595 
  

 

 

   

 

 

 

Total Real Estate Loans

   361,289    347,974 

Business Loans:

    

Commercial and Industrial Loans

   90,597    66,421 

Farm Production and Other Farm Loans

   746    907 
  

 

 

   

 

 

 

Total Business Loans

   91,343    67,328 

Consumer Loans:

    

Credit Cards

   1,666    1,648 

Other Consumer Loans

   11,457    12,372 
  

 

 

   

 

 

 

Total Consumer Loans

   13,123    14,020 
  

 

 

   

 

 

 

Total Gross Loans

   465,755    429,322 

Unearned Income

   (20   (45

Allowance for Loan Losses

   (3,821   (3,372
  

 

 

   

 

 

 

Loans, net

  $ 461,914   $ 425,905 
  

 

 

   

 

 

 

   June 30, 2020   December 31, 2019 
Real Estate:
    
Land Development and Construction
  $86,135   $66,428 
Farmland
   15,458    15,595 
1-4
Family Mortgages
   89,743    87,631 
Commercial Real Estate
   218,871    207,604 
  
 
 
   
 
 
 
Total Real Estate Loans
   410,207    377,258 
Business Loans:
    
Commercial and Industrial Loans
(1)
   128,788    84,611 
Farm Production and Other Farm Loans
   584    683 
  
 
 
   
 
 
 
Total Business Loans
   129,372    85,294 
Consumer Loans:
    
Credit Cards
   1,603    1,833 
Other Consumer Loans
   11,183    12,060 
  
 
 
   
 
 
 
Total Consumer Loans
   12,786    13,893 
  
 
 
   
 
 
 
Total Gross Loans
   552,365    476,445 
Unearned Income
   (2   (8
Allowance for Loan Losses
   (4,257   (3,755
  
 
 
   
 
 
 
Loans, net
  $548,106   $472,682 
  
 
 
   
 
 
 
(1)
Includes PPP loans of $48,821 and
$-0-
as of June 30, 2020 and December 31, 2019, respectively.
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.

17

Period-end,
non-accrual
loans, (in thousands), segregated by class, were as follows:

   June 30,
2019
   December 31,
2018
 

Real Estate:

    

Land Development and Construction

  $113   $—   

Farmland

   263    200 

1-4 Family Mortgages

   2,030    1,831 

Commercial Real Estate

   8,375    7,612 
  

 

 

   

 

 

 

Total Real Estate Loans

   10,781    9,643 

Business Loans:

    

Commercial and Industrial Loans

   273    76 

Farm Production and Other Farm Loans

   31    31 
  

 

 

   

 

 

 

Total Business Loans

   304    107 

Consumer Loans:

    

Other Consumer Loans

   71    89 
  

 

 

   

 

 

 

Total Consumer Loans

   71    89 
  

 

 

   

 

 

 

Total Nonaccrual Loans

  $ 11,156   $ 9,839 
  

 

 

   

 

 

 

   June 30, 2020   December 31, 2019 
Real Estate:
    
Land Development and Construction
  $110   $111 
Farmland
   218    232 
1-4
Family Mortgages
   2,129    2,160 
Commercial Real Estate
   7,243    9,082 
  
 
 
   
 
 
 
Total Real Estate Loans
   9,700    11,585 
Business Loans:
    
Commercial and Industrial Loans
   465    338 
Farm Production and Other Farm Loans
   10    10 
  
 
 
   
 
 
 
Total Business Loans
   475    348 
Consumer Loans:
    
Other Consumer Loans
   73    60 
  
 
 
   
 
 
 
Total Consumer Loans
   73    60 
  
 
 
   
 
 
 
Total Nonaccrual Loans
  $ 10,248   $11,993 
  
 
 
   
 
 
 
18

Table of Contents
An aging analysis of past due loans, (in thousands), segregated by class, as of June 30, 2019,2020, 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

  $ 1,612   $113   $1,725   $52,849   $54,574   $ —   

Farmland

   279    —      279    16,370    16,649    —   

1-4 Family Mortgages

   2,197    526    2,723    84,138    86,861    —   

Commercial Real Estate

   724    4,019    4,743    198,462    203,205    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Loans

   4,812    4,658    9,470    351,819    361,289    —   

Business Loans:

            

Commercial and Industrial Loans

   345    189    534    90,063    90,597    26 

Farm Production and Other Farm Loans

   49    —      49    697    746    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Loans

   394    189    583    90,760    91,343    26 

Consumer Loans:

            

Credit Cards

   52    18    70    1,596    1,666    18 

Other Consumer Loans

   226    3    229    11,228    11,457    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer Loans

   278    21    299    12,824    13,123    18 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

  $5,484   $ 4,868   $ 10,352   $ 455,403   $ 465,755   $44 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
follows

:

   Loans
30-89 Days

Past Due
   Loans
90 or more
Days Past
Due
   Total Past
Due Loans
   Current
Loans
   Total Loans   Accruing
Loans
90 or more
Days
Past Due
 
Real Estate:
            
Land Development and Construction
  $6   $110   $116   $86,019   $86,135   $ —   
Farmland
   145    44    189    15,269    15,458    44 
1-4
Family Mortgages
   1,419    518    1,937    87,806    89,743    126 
Commercial Real Estate
   2,850    1,214    4,064    214,807    218,871    118 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate Loans
   4,420    1,886    6,306    403,901    410,207    288 
Business Loans:
            
Commercial and Industrial Loans
   60    422    482    128,306    128,788    —   
Farm Production and Other Farm Loans
   25    —      25    559    584    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Business Loans
   85    422    507    128,865    129,372    —   
Consumer Loans:
            
Credit Cards
   17    10    27    1,576    1,603    10 
Other Consumer Loans
   62    40    102    11,081    11,183    3 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer Loans
   79    50    129    12,657    12,786    13 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Loans
  $ 4,584   $ 2,358   $ 6,942   $ 545,423   $ 552,365   $301 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
19

Table of Contents
An aging analysis of past due loans, (in thousands), segregated by class, as of December 31, 20182019 was 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

  $ 1,494   $54   $1,548   $39,586   $41,134   $ 54 

Farmland

   779    29    808    13,690    14,498    —   

1-4 Family Mortgages

   3,456    330    3,786    84,961    88,747    —   

Commercial Real Estate

   1,059    2,981    4,040    199,555    203,595    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Loans

   6,788    3,394    10,182    337,792    347,974    54 

Business Loans:

            

Commercial and Industrial Loans

   1,672    21    1,693    64,728    66,421    —   

Farm Production and Other Farm Loans

   9    —      9    898    907    —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Loans

   1,681    21    1,702    65,626    67,328    —   

Consumer Loans:

            

Credit Cards

   16    4    20    1,628    1,648    4 

Other Consumer Loans

   212    33    245    12,127    12,372    15 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer Loans

   228    37    265    13,755    14,020    19 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

  $8,697   $ 3,452   $ 12,149   $ 417,173   $ 429,322   $73 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 $100,000$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.

20

Table of Contents
Impaired loans (in thousands) as of June 30, 2020, segregated by class, were as follows:
   Unpaid
Principal
Balance
   Recorded
Investment
With No
Allowance
   Recorded
Investment
With
Allowance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
 
Real Estate:
            
Land Development and Construction
  $161   $108   $53   $161   $16   $136 
Farmland
   159    159    —      159    —      206 
1-4
Family Mortgages
   967    959    8    967    5    903 
Commercial Real Estate
   8,203    3,479    4,531    8,010    699    8,900 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate Loans
   9,490    4,705    4,592    9,297    720    10,144 
Business Loans:
            
Commercial and Industrial Loans
   566    59    507    566    165    355 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Business Loans
   566    59    507    566    165    355 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Loans
  $ 10,056   $ 4,764   $ 5,099   $ 9,863   $ 885   $ 10,499 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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

  $113   $59   $54   $113   $18   $57 

Farmland

   261    261    —      261    —     $265 

1-4 Family Mortgages

   803    714    89    803    24   $978 

Commercial Real Estate

   11,239    4,914    4,609    9,523    462   $9,204 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Loans

   12,416    5,948    4,752    10,700    504   $10,503 

Business Loans:

            

Commercial and Industrial Loans

   149    —      149    149    77   $75 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Loans

   149    —      149    149    77   $75 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

  $ 12,565   $ 5,948   $ 4,901   $ 10,849   $ 581   $ 10,578 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans (in thousands) as

   Unpaid
Principal
Balance
   Recorded
Investment
With No
Allowance
   Recorded
Investment
With
Allowance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
 
Real Estate:
            
Land Development and Construction
  $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 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
21

The following table presents troubled debt restructurings, (in thousands, except for number of loans), segregated by class:

       Pre-Modification   Post-Modification 
June 30, 2019      Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Loans   Investment   Investment 

Commercial real estate

   3   $4,871   $2,645 
  

 

 

   

 

 

   

 

 

 

Total

   3   $4,871   $ 2,645 
  

 

 

   

 

 

   

 

 

 
       Pre-Modification   Post-Modification 
December 31, 2018      Outstanding   Outstanding 
   Number of   Recorded   Recorded 
   Loans   Investment   Investment 

Commercial real estate

   3   $4,871   $2,782 
  

 

 

   

 

 

   

 

 

 

Total

   3   $4,871   $2,782 
  

 

 

   

 

 

   

 

 

 

class
:
June 30, 2020  Number of
Loans
   
Pre-Modification

Outstanding
Recorded
Investment
   
Post-Modification

Outstanding
Recorded
Investment
 
Commercial real estate
   3   $4,871   $2,400 
  
 
 
   
 
 
   
 
 
 
Total
   3   $4,871   $ 2,400 
  
 
 
   
 
 
   
 
 
 
December 31, 2019  Number of
Loans
   
Pre-Modification

Outstanding
Recorded
Investment
   
Post-Modification

Outstanding
Recorded
Investment
 
Commercial real estate
   3   $4,871   $2,495 
  
 
 
   
 
 
   
 
 
 
Total
   3   $4,871   $2,495 
  
 
 
   
 
 
   
 
 
 
Changes in the Corporation’s troubled debt restructurings (in thousands, except for number of loans) are set forth in the table below:

   Number   Recorded 
   of Loans   Investment 

Totals at January 1, 2018

   3   $ 3,047 

Reductions due to:

    

Principal paydowns

     (265
  

 

 

   

 

 

 

Totals at January 1, 2019

   3   $2,782 

Reductions due to:

    

Principal paydowns

     (137
  

 

 

   

 

 

 

Total at June 30, 2019

   3   $2,645 
  

 

 

   

 

 

 

   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
     (95
  
 
 
   
 
 
 
Total at June 30, 2020
   3   $2,400 
  
 
 
   
 
 
 
The allocated allowance for loan losses attributable to restructured loans was $174,274
$-0-
at June 30, 20192020 and December 31, 2018.2019. The Corporation had no commitments to lend additional funds on these troubled debt restructurings as of June 30, 2019.

2020.

22

Table of Contents
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—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—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—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—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—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 - 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.

23

Table of Contents
Grade 8. DOUBTFUL—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—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 June 30, 2019.

2020.

The following table details the amount of gross loans, (in thousands), segregated by loan grade and class, as of June 30, 2019:

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

Real Estate:

            

Land Development and Construction

  $51,867   $2,037   $670   $ —     $ —     $54,574 

Farmland

   15,361    398    890    —      —      16,649 

1-4 Family Mortgages

   78,023    2,008    6,830    —      —      86,861 

Commercial Real Estate

   166,473    21,631    15,101    —      —      203,205 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Loans

   311,724    26,074    23,491    —      —      361,289 

Business Loans:

            

Commercial and Industrial Loans

   88,796    56    1,745    —      —      90,597 

Farm Production and Other Farm Loans

   715    —      —      —      31    746 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Loans

   89,511    56    1,745    —      31    91,343 

Consumer Loans:

            

Credit Cards

   1,596    —      70    —      —      1,666 

Other Consumer Loans

   11,293    51    68    45    —      11,457 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer Loans

   12,889    51    138    45    —      13,123 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

  $ 414,124   $ 26,181   $ 25,374   $45   $31   $ 465,755 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
2020:

   Satisfactory
1,2,3,4
   Special
Mention
5,6
   Substandard
7
   Doubtful
8
   Loss 9   Total
Loans
 
Real Estate:
            
Land Development and Construction
  $83,509   $1,922   $704   $ —     $ —     $86,135 
Farmland
   14,450    280    728    —      —      15,458 
1-4
Family Mortgages
   81,552    2,047    6,144    —      —      89,743 
Commercial Real Estate
   183,080    20,818    14,973    —      —      218,871 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate Loans
   362,591    25,067    22,549    —      —      410,207 
Business Loans:
            
Commercial and Industrial Loans
   121,398    4,050    3,331    —      9    128,788 
Farm Production and Other Farm Loans
   552    19    3    —      10    584 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Business Loans
   121,950    4,069    3,334    —      19    129,372 
Consumer Loans:
            
Credit Cards
   1,576    —      27    —      —      1,603 
Other Consumer Loans
   11,029    46    71    37    —      11,183 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer Loans
   12,605    46    98    37    —      12,786 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Loans
  $ 497,146   $ 29,182   $ 25,981   $37   $19   $ 552,365 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
24

Table of Contents
The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as of
December
31, 2019:
   Satisfactory
1,2,3,4
   Special
Mention
5,6
   Substandard
7
   Doubtful
8
   Loss 9   Total
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 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
25

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:
   June 30, 2020   December 31, 2019 
Real Estate:
    
Land Development and Construction
  $12,147   $14,722 
Farmland
   442    510 
1-4
Family Mortgages
   29,736    35,952 
Commercial Real Estate
   27,810    32,436 
  
 
 
   
 
 
 
Total Real Estate Loans
   70,135    83,620 
Business Loans:
    
Commercial and Industrial Loans
   11,555    14,153 
Farm Production and Other Farm Loans
   858    884 
  
 
 
   
 
 
 
Total Business Loans
   12,413    15,037 
Consumer Loans:
    
Other Consumer Loans
   1,286    1,973 
  
 
 
   
 
 
 
Total Consumer Loans
   1,286    1,973 
  
 
 
   
 
 
 
Total Purchased Loans
  $ 83,834   $ 100,630 
  
 
 
   
 
 
 
26

An age analysis of past due loans, segregated by class of loans, as of June 30, 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
  $ —     $50   $50   $12,097   $12,147   $ —  
Farmland
       —      —      442    442    —   
1-4
Family Mortgages
   145    —      145    29,591    29,736    —   
Commercial Real Estate
   —      131    131    27,679    27,810    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate Loans
   145    181    326    69,809    70,135    —   
Business Loans:
            
Commercial and Industrial Loans
   73    147    220    11,335    11,555    —   
Farm Production and Other Farm Loans
   —      —      —      858    858    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Business Loans
   73    147    220    12,193    12,413    —   
Consumer Loans:
            
Other Consumer Loans
   43    —      43    1,243    1,286    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer Loans
   43    —      43    1,243    1,286    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Loans
  $261   $ 328   $ 589   $ 83,245   $ 83,834   $ —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
27

An age analysis of past due loans, segregated by class of loans, as of December 31, 2018:

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

Real Estate:

            

Land Development and Construction

  $39,726   $840   $568   $—     $—     $41,134 

Farmland

   13,248    339    911    —      —      14,498 

1-4 Family Mortgages

   79,659    1,751    7,337    —      —      88,747 

Commercial Real Estate

   172,217    17,938    13,440    —      —      203,595 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Loans

   304,850    20,868    22,256    —      —      347,974 

Business Loans:

            

Commercial and Industrial Loans

   63,994    81    2,346    —      —      66,421 

Farm Production and Other Farm Loans

   876    —      31    —      —      907 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Loans

   64,870    81    2,377    —      —      67,328 

Consumer Loans:

            

Credit Cards

   1,628    —      20    —      —      1,648 

Other Consumer Loans

   12,181    65    71    55    —      12,372 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer Loans

   13,809    65    91    55    —      14,020 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

  $383,529   $21,014   $24,724   $55   $—     $429,322 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2019, is as

follows
:
   Loans
30-89 Days

Past Due
   Loans
90 or more
Days
Past Due
   Total Past
Due Loans
   Current
Loans
   Total
Loans
   Loans
90 or more
Days
Past Due
 
Real Estate:
            
Land Development and Construction
  $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:
            
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   $—   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
28

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 June 30, 2020:
   Satisfactory
1,2,3,4
   Mention
5,6
   Substandard
7
   Doubtful
8
   Loss 9   Total
Loans
 
Real Estate:
            
Land Development and Construction
  $10,466   $1,602   $79   $ —     $ —     $12,147 
Farmland
   275    167    —      —      —      442 
1-4
Family Mortgages
   27,231    1,396    1,109    —      —      29,736 
Commercial Real Estate
   25,857    1,538    415    —      —      27,810 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Real Estate Loans
   63,829    4,703    1,603    —      —      70,135 
Business Loans:
            
Commercial and Industrial Loans
   10,560    667    328    —      —      11,555 
Farm Production and Other Farm Loans
   858    —      —      —      —      858 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Business Loans
   11,418    667    328    —      —      12,413 
Consumer Loans:
            
Other Consumer Loans
   1,232    34    20    —      —      1,286 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Consumer Loans
   1,232    34    20    —      —      1,286 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Loans
  $76,479   $5,404   $1,951   $—     $—     $83,834 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
29

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:
   Satisfactory
1,2,3,4
   Special
Mention
5,6
   Substandard
7
   Doubtful
8
   Loss 9   Total
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:
            
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:
   June 30, 2020   December 31, 2019 
Real Estate:
    
Land Development and Construction
  $28   $43 
Farmland
   —      —   
1-4
Family Mortgages
   695    706 
Commercial Real Estate
   —      —   
  
 
 
   
 
 
 
Total Real Estate Loans
   723    749 
  
 
 
   
 
 
 
Total PCD Loans
  $723   $749 
  
 
 
   
 
 
 
30

The following table presents purchased loans that are classified as nonaccrual loans:
                      
                      
   June 30, 2020   December 31, 2019 
Real Estate:
    
Land Development and Construction
  $50   $ —   
1-4
Family Mortgages
   151    33 
Commercial Real Estate
   131    —   
  
 
 
   
 
 
 
Total Real Estate Loans
   332    33 
Business Loans:
    
Commercial and Industrial Loans
   206    —   
  
 
 
   
 
 
 
Total Business Loans
   206    —   
Consumer Loans:
    
Other Consumer Loans
   —      —   
  
 
 
   
 
 
 
Total Consumer Loans
   —      —   
  
 
 
   
 
 
 
Total Purchased Nonaccrual Loans
  $ 538   $33 
  
 
 
   
 
 
 
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
9
Charge-off
—  
Balance at June 30, 2020
$ (20
There were no loans classified as TDRs purchased as part of the acquisition of Charter.
31

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 
  
 
 
 
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.

32

Table of Contents
The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2020:
June 30, 2020
  Real
Estate
   Business
Loans
   Consumer   Total 
Beginning Balance, January 1, 2020
  $
 
3,075   $371   $309   $
 
3,755 
Provision for loan losses
   550    280    106    936 
Charge-offs
   265    210    65    540 
Recoveries
   59    28    19    106 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net charge-offs
   206    182    46    434 
  
 
 
   
 
 
   
 
 
   
 
 
 
Ending Balance
  $3,419   $469   $369   $4,257 
  
 
 
   
 
 
   
 
 
   
 
 
 
Period end allowance allocated to:
        
Loans individually evaluated for impairment
  $720   $ 165   $ —     $885 
Loans collectively evaluated for impairment
   2,699    304    369    3,372 
  
 
 
   
 
 
   
 
 
   
 
 
 
Ending Balance, June 30, 2020
  $3,419   $469   $369   $4,257 
  
 
 
   
 
 
   
 
 
   
 
 
 
The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2019:

June 30, 2019  Real
Estate
   Business
Loans
   Consumer   Total 

Beginning Balance, January 1, 2019

  $2,844,681   $221,841   $305,173   $3,371,695 

Provision for loan losses

   72,381    211,247    176,670    460,298 

Chargeoffs

   14,981    12,178    41,886    69,045 

Recoveries

   23,498    8,297    26,730    58,525 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (recoveries) chargeoffs

   (8,517   3,881    15,156    10,520 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $2,925,579   $429,207   $466,687   $3,821,473 
  

 

 

   

 

 

   

 

 

   

 

 

 

Period end allowance allocated to:

        

Loans individually evaluated for impairment

  $503,654   $77,046   $—     $580,700 

Loans collectively evaluated for impairment

   2,421,925    352,161    466,687    3,240,773 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2019

  $2,925,579   $429,207   $466,687   $3,821,473 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2018:

June 30, 2018  Real
Estate
   Business
Loans
   Consumer   Total 

Beginning Balance, January 1, 2018

  $2,151,715   $346,781   $520,732   $3,019,228 

Provision for (reversal of) loan losses

   481,714    (410,727   (218,798   (147,811

Chargeoffs

   98,644    15,347    59,355    173,346 

Recoveries

   82,114    197,321    50,444    329,879 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net chargeoffs (recoveries)

   16,530    (181,974   8,911    (156,533
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $2,616,899   $118,028   $293,023   $3,027,950 
  

 

 

   

 

 

   

 

 

   

 

 

 

Period end allowance allocated to:

        

Loans individually evaluated for impairment

  $528,937   $—     $—     $528,937 

Loans collectively evaluated for impairment

   2,087,962    118,028    293,023    2,499,013 
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance, June 30, 2018

  $2,616,899   $118,028   $293,023   $3,027,950 
  

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2019
  Real
Estate
  Business
Loans
   Consumer   Total 
Beginning Balance, January 1, 2019
  $2,845  $222   $305   $3,372 
Provision for loan losses
   72   211    177    460 
Charge-offs
   15   12    42    69 
Recoveries
   24   8    27    59 
  
 
 
  
 
 
   
 
 
   
 
 
 
Net (recoveries) charge-offs
   (9  4    15    10 
  
 
 
  
 
 
   
 
 
   
 
 
 
Ending Balance
  $2,926  $429   $467   $3,822 
  
 
 
  
 
 
   
 
 
   
 
 
 
Period end allowance allocated to:
       
Loans individually evaluated for impairment
  $504  $77   $ —     $581 
Loans collectively evaluated for impairment
   2,422   352    467    3,241 
  
 
 
  
 
 
   
 
 
   
 
 
 
Ending Balance, June 30, 2019
  $2,926  $429   $467   $3,822 
  
 
 
  
 
 
   
 
 
   
 
 
 
33

Table of Contents
The Corporation’s recorded investment in loans as of June 30, 20192020 and December 31, 20182019 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):

June 30, 2019  Real
Estate
   Business
Loans
   Consumer   Total 

Loans individually evaluated for specific impairment

  $10,700   $149   $—     $10,849 

Loans collectively evaluated for general impairment

   350,589    91,194    13,123    454,906 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $361,289   $91,343   $13,123   $465,755 
  

 

 

   

 

 

   

 

 

   

 

 

 
December 31, 2018  Real Estate   Business
Loans
   Consumer   Total 

Loans individually evaluated for specific impairment

  $10,306   $—     $—     $10,306 

Loans collectively evaluated for general impairment

   337,668    67,328    14,020    419,016 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $347,974   $67,328   $14,020   $429,322 
  

 

 

   

 

 

   

 

 

   

 

 

 
June 30, 2020
  Real Estate   Business
Loans
   Consumer   Total 
Loans individually evaluated for specific impairment
  $9,297   $566   $—     $9,863 
Loans collectively evaluated for general impairment
   470,322    141,219    14,072    625,613 
Acquired with deteriorated credit quality
   723    —      —      723 
  
 
 
   
 
 
   
 
 
   
 
 
 
  $480,342   $141,785   $14,072   $636,199 
  
 
 
   
 
 
   
 
 
   
 
 
 
December 31, 2019
  Real Estate   Business
Loans
   Consumer   Total 
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 
  
 
 
   
 
 
   
 
 
   
 
 
 
34

Table of Contents

Note 9.11. Premises and Equipment

The Company leaseleases certain premises and equipment under operating leases. At June 30, 2019,2020, the Company had lease liabilities and ROU assets totaling $932 million$608 thousand related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the six months ended June 30, 2019,2020, the weighted average remaining lease term for operating leases was 1.5 years1.0 year 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   Six Months Ended 
   June 30, 2019   June 30, 2019 
(in thousands)        

Operating lease cost

  $92   $184 

Short-term lease cost

   6    12 

Variable lease cost

   —      —   
  

 

 

   

 

 

 
  $98   $196 
  

 

 

   

 

 

 

(in thousands)
  
Three Months Ended
June 30, 2020
   
Six Months Ended
June 30, 2020
 
Operating lease cost
  $92   $ 185 
Short-term lease cost
   6    12 
Variable lease cost
   —      —   
  
 
 
   
 
 
 
  $98   $197 
  
 
 
   
 
 
 
There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the six months ended June 30, 2019.

2020.

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

   Six Months Ended 
   June 30, 2019 
(in thousands)    

Lease payments due:

  

Within one year

  $348 

After one year but within two years

   336 

After two years but within three years

   250 

After three year but within four years

   41 

After four years but within five years

   —   

After five years

   —   
  

 

 

 

Total undiscounted cash flows

   975 

Discount on cash flows

   (43
  

 

 

 

Total lease liability

  $932 
  

 

 

 
(in thousands)
  
Six Months Ended
June 30, 2020
 
Lease payments due:
  
Within one year
  $336 
After one year but within two years
   250 
After two years but within three years
   41 
After three year but within four years
   —   
After four years but within five years
   —   
After five years
   —   
  
 
 
 
Total undiscounted cash flows
   627 
Discount on cash flows
   (19
  
 
 
 
Total lease liability
  $608 
  
 
 
 
35

Table of Contents
Note 12. Goodwill and Other Intangible Assets
(in thousands)
The carrying amount of goodwill for the six months ended June 30, 2020 were as follows:
            
   
Total
 
Balance at January 1, 2020
  $13,103 
Measurement period adjustment to goodwill from Charter acquisition
   (73
  
 
 
 
Balance at June 30, 2020
  $13,030 
  
 
 
 
The following table provides a summary of finite-lived intangible assets as of the dates presented:
   
June 30, 2020
   
December 31, 2019
 
Core deposit intangible
  $739   $766 
Accumulated amortization
   (55   (27
  
 
 
   
 
 
 
Total finite-lived intangible assets
  $684   $739 
  
 
 
   
 
 
 
Core deposit intangible amortization expense for the
six-month
periods ended June 30, 2020 and 2019 was $55 and
$-0-,
respectively. Core deposit intangible amortization expense for the three-month period ended June 30, 2020 and 2019 was $28 and
$-0-,
respectively. The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:
            
Year ending December 31,
  
Amount
 
2020
  $54 
2021
   109 
2022
   109 
2023
   109 
2024
   109 
Thereafter
   194 
  
 
 
 
  $ 684 
  
 
 
 
36

Table of Contents

Note 10.13. 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, 2019

   4,904,530   $980,906   $4,298,499  $(14,974,603 $93,561,515  $83,866,317 

Net income

   —      —      —     —     1,226,771   1,226,771 

Dividends paid ($0.24 per share)

   —      —      —     —     (1,177,087  (1,177,087

Options exercised

   —      —      —     —     —     —   

Restricted stock granted

   —      —      —     —     —     —   

Stock compensation expense

   —      —      41,344   —     —     41,344 

Other comprehensive income, net

   —      —      —     6,621,712   —     6,621,712 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, March 31, 2019

   4,904,530   $980,906   $4,339,843  $(8,352,891 $93,611,199  $90,579,057 

Net income

   —      —      —     —     1,370,742   1,370,742 

Dividends paid ($0.24 per share)

   —      —      —     —     (1,178,887  (1,178,887

Options exercised

   —      —      —     —     —     —   

Restricted stock granted

   7,500    1,500    (1,500  —     —     —   

Stock compensation expense

   —      —      40,694   —     —     40,694 

Other comprehensive income, net

   —      —      —     5,324,717   —     5,324,717 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, June 30, 2019

   4,912,030   $982,406   $4,379,037  $(3,028,174 $93,803,054  $96,136,323 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

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

Balance, January 1, 2018

   4,894,705   $978,941   $4,103,139  $(8,225,419 $91,594,379  $88,451,040 

Net income

   —      —      —     —     1,772,387   1,772,387 

Dividends paid ($0.24 per share)

   —      —      —     —     (1,174,729  (1,174,729

Options exercised

   —      —      —     —     —     —   

Restricted stock granted

   —      —      —     —     —     —   

Stock compensation expense

   —      —      45,056   —     —     45,056 

Other comprehensive income, net

   —      —      —     (7,068,858  —     (7,068,858
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, March 31, 2018

   4,894,705   $978,941   $4,148,195  $(15,294,277 $92,192,037  $82,024,896 

Net income

   —      —      —     —     1,688,140   1,688,140 

Dividends paid ($0.24 per share)

   —      —      —     —     (1,177,087  (1,177,087

Options exercised

   2,325    465    26,535   —     —     27,000 

Restricted stock granted

   7,500    1,500    (1,500  —     —     —   

Stock compensation expense

   —      —      42,581   —     —     42,581 

Other comprehensive income, net

   —      —      —     (924,159  —     (924,159
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, June 30, 2018

   4,904,530   $980,906   $4,215,811  $(16,218,436 $92,703,090  $81,681,371 
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 
                                                                                                                  
   
Number of
Shares
Issued
  
Common
Stock
  
Additional
Paid-In

Capital
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Retained
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 
Net income
   —     —     —     —     1,462   1,462 
Dividends paid ($0.24 per share)
   —     —     —     —     (1,342  (1,342
Restricted stock forfeited
   (4,500  (1  1   —     —     —   
Restricted stock granted
   8,250   2   (2  —     —     —   
Stock compensation expense
   —     —     41   —     —     41 
Other comprehensive income, net
   —     —     —     464   —     464 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance, June 30, 2020
   5,586,381  $1,118  $18,049  $5,671  $94,531  $119,369 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
                                                                                                                  
   
Number of
Shares
Issued
   
Common
Stock
   
Additional
Paid-In

Capital
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Retained
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 
Net income
   —      —      —     —     1,371   1,371 
Dividends paid ($0.24 per share)
   —      —      —     —     (1,179  (1,179
Options exercised
   —      —      —     —     —     —   
Restricted stock granted
   7,500    2    (2  —     —     —   
Stock compensation expense
   —      —      41   —     —     41 
Other comprehensive income, net
   —      —      —     5,325   —     5,325 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance, June 30, 2019
   4,912,030   $983   $4,378  $(3,028 $93,804  $96,137 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
37

Table of Contents

Note 11.14. 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:

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 June 30, 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

  $—     $98,744,458   $—     $98,744,458 

Mortgage-backed securities

   —      321,983,658    —      321,983,658 

State, county and municipal obligations

   —      63,178,176    —      63,178,176 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—     $483,906,292   $—     $483,906,292 
  

 

 

   

 

 

   

 

 

   

 

 

 

2020:

   Fair Value Measurements Using: 
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   (Level 1)   (Level 2)   (Level 3)   Totals 
Securities available for sale
        
Obligations of U.S. Government Agencies
  $ —     $7,807   $ —     $7,807 
Mortgage-backed securities
   —      551,387    —      551,387 
State, county and municipal obligations
   —      68,015    —      68,015 
Other securities
   510    —      —      510 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $510   $ 627,209   $—     $ 627,719 
  
 
 
   
 
 
   
 
 
   
 
 
 
38

Table of Contents
The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018:

       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

  $—     $95,977,783   $—     $95,977,783 

Mortgage-backed securities

   —      247,374,153    —      247,374,153 

State, county and municipal obligations

   —      101,394,518    —      101,394,518 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—     $444,746,454   $—     $444,746,454 
  

 

 

   

 

 

   

 

 

   

 

 

 

2019:

   Fair Value Measurements Using: 
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   (Level 1)   (Level 2)   (Level 3)   Totals 
Securities available for sale
        
Obligations of U.S. Government Agencies
  $ —     $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 no0 gains or losses in earnings for the period ended June 30, 20192020 or December 31, 20182019 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.

39

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 ALLL.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 June 30, 2020, the following table provides the hierarchy level and the fair value of the related assets:
       Fair Value Measurements Using:     
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   (Level 1)   (Level 2)   (Level 3)   Totals 
Impaired loans
  $ —     $ —     $ 3,614   $ 3,614 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $ —     $—     $3,614   $3,614 
  
 
 
   
 
 
   
 
 
   
 
 
 
The following table presents information as of June 30, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:
Financial instrument
  Fair Value   
Valuation Technique
  
Significant Unobservable
Inputs
  Range of
Inputs
 
Impaired loans
  $ 3,614   Appraised value of collateral less estimated costs to sell  Estimated costs to sell   25
For assets measured at fair value on a nonrecurring basis during 2019 that were still held on the Corporation’s balance sheet at June 30,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

  $—     $—     $4,320,866   $4,320,866 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—     $—     $4,320,866   $4,320,866 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents information as

40

Table of June 30, 2019 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured atContents
   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, whose fair value on a nonrecurring basis:

Financial instrument

  Fair Value   Valuation Technique  Significant Unobservable
Inputs
  Range of
Inputs
 

Impaired loans

  $4,320,866   Appraised value of collateral less

estimated costs to sell

  Estimated costs to sell   25

For assets measured at fair value on a nonrecurring basiswas remeasured during 2018 that were still held on the Corporation’s balance sheet at December 31, 2018, 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

  $—     $—     $3,364,538   $3,364,538 

Other real estate owned

   —      —      188,609    188,609 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—     $—     $3,553,147   $3,553,147 
  

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loansperiod, with a carrying value of $4,901,566$4,299 and $3,364,538$5,003 had an allocated allowance for loan losses of $580,700$685 and $401,347$427 at June 30, 20192020 and December 31, 2018,2019, 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 and
six-month
period ended June 30, 20192020 and the year ended December 31, 2018.

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.

41

Table of Contents
The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at June 30, 2019:

           Fair Value Measurements Using:     
       Quoted Prices             
       in Active   Significant         
       Markets for   Other   Significant   Total 
   Carrying   Identical   Observable   Unobservable   Fair 
June 30, 2019  Value   Assets   Inputs   Inputs   Value 
       (Level 1)   (Level 2)   (Level 3)     

Financial assets

          

Cash and due from banks

  $21,754,884   $21,754,884   $—     $—     $21,754,884 

Interest bearing deposits with banks

   1,193,764    1,193,764    —      —      1,193,764 

Securitiesavailable-for-sale

   483,906,292    —      483,906,292    —      483,906,292 

Net loans

   461,914,254    —      —      457,451,358    457,451,358 

Financial liabilities

          

Deposits

  $794,858,320   $574,931,275   $220,639,846   $—     $795,571,121 

Securities sold under agreement to repurchase

   119,327,404    119,327,404    —      —      119,327,404 

Federal funds purchased

   12,000,000    12,000,000    —      —      12,000,000 

2020:

           Fair Value Measurements Using:     
       Quoted Prices             
       in Active   Significant         
       Markets for   Other   Significant   Total 
   Carrying   Identical   Observable   Unobservable   Fair 
June 30, 2020  Value   Assets   Inputs   Inputs   Value 
       (Level 1)   (Level 2)   (Level 3)     
Financial assets
          
Cash and due from banks
  $20,003   $20,003   $—     $—     $20,003 
Interest bearing deposits with banks
   41,184    41,184            41,184 
Securities
available-for-sale
   627,719    510    627,209        627,719 
Net loans
   631,940    —      —      624,458    624,458 
Financial liabilities
              
Deposits
  $1,075,348   $851,706   $225,141   $—     $1,076,847 
Securities sold under agreement to repurchase
   193,780    193,780    —      —      193,780 
The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at December 31, 2018:

           Fair Value Measurements Using:     
       Quoted Prices             
       in Active   Significant         
       Markets for   Other   Significant   Total 
   Carrying   Identical   Observable   Unobservable   Fair 
December 31, 2018  Value   Assets   Inputs   Inputs   Value 
       (Level 1)   (Level 2)   (Level 3)     

Financial assets

          

Cash and due from banks

  $12,592,130   $12,592,130   $—     $—     $12,592,130 

Interest bearing deposits with banks

   8,079,742    8,079,742    —      —      8,079,742 

Securitiesavailable-for-sale

   444,746,454    —      444,746,454    —      444,746,454 

Net loans

   425,905,093    —      —      420,992,074    420,992,074 

Financial liabilities

          

Deposits

  $756,221,510   $544,985,869   $210,477,092   $—     $755,462,961 

Securities sold under agreement to repurchase

   107,965,505    107,965,505    —      —      107,965,505 
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 
Interest bearing deposits with banks
   58,557    58,557    —      —      58,557 
Federal funds sold
   1,600    1,600    —      —      1,600 
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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Table of Contents
ITEM 2.

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

(in thousands, except share and per share data)
FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form
10-Q (the
(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;

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;

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, andor 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;
43

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

expectations about overall economic strength and the performance of the economy in the Company’s market area;

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 the provisions in our governing documents that may make it more difficult for another party to obtain control of us; and

risks relating to the merger of Charter with and into the Bank, including the risks relating to merger outlined in the Company’s registration statement on FormS-4 filed with the Securities and Exchange Commission;

other risks detailed from
time-to-time
in the Company’s filings with the Securities and Exchange Commission.

Except as required by law, the CorporationCompany 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 June 30, 2019,2020, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,033.753 million$1,402,061 and total deposits of $796.422 million.

$1,077,318. 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 June 30, 2019,2020, was 26.32%18.19% and at December 31, 2018,2019, was 21.34%24.87%. The increasedecrease was due to an increase in short-term marketable assetsdeposits at June 30, 2019.2020. Management believes it maintains adequate liquidity for the Corporation’s current needs.

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Table of Contents
The Corporation’s primary source of liquidity is customer deposits, which were $794,858,320$1,075,348 at June 30, 2019,2020, and $756,221,510$898,996 at December 31, 2018.2019. 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 $483,906,292$627,719 invested in
available-for-sale
investment securities at June 30, 2019,2020, and $444,746,454$464,383 at December 31, 2018.2019. This increase was due to purchases in excess of maturities, paydowns, sales and calls andcoupled with an increase in the marketfair value of the Corporation’s investment securities portfolio.

portfolio in excess of paydowns, maturities, sales and calls.

The Corporation also had $1,193,764$41,184 in interest bearing deposits at other banks at June 30, 20192020 and $8,079,742$58,557 at December 31, 2018.2019. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000$45,000 at both June 30, 20192020 and December 31, 2018.2019. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At June 30, 2019,2020, the Corporation had unused and available $178,955,028$209,280 of its line of credit with the FHLB and at December 31, 2018,2019, the Corporation had unused and available $171,252,131$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 20182019 to June 30, 2019,2020, 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 $12,000,000
$-0-
as of June 30, 20192020 and$-0- as of December 31, 2018.2019. 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 $96,136,323$119,369 at June 30, 2019,2020, as compared to $83,866,317$112,800 at December 31, 2018.2019. The increase in shareholders’ equity was the result of a decreaseper share reflects an increase in the accumulated other comprehensive loss brought about byfair value of the Corporation’s investment securities market value adjustment coupled with the increase in earningspartially offset by dividends in excess of dividends paid.earnings. The marketfair value adjustment, which was an increase due to general market conditions, specificallycaused by the decrease in medium term interest rates, causedresulted in an increase in the market pricefair value of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $2,355,974,$2,681, or $0.48 per share, during the
six-month
period ended June 30, 20192020 compared to $2,351,816,$2,356, or $0.48 per share, for the same period in 2018.

2019.

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 June 30, 2019,2020, 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
Requirement to be
  Minimum Capital
Requirement to be
Adequately
 
   Actual  Well Capitalized  Capitalized 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 

June 30, 2019

          

Citizens Holding Company

          

Tier 1 leverage ratio

  $96,015    9.33 $51,430    5.00 $41,144    4.00

Common Equity tier 1 capital ratio

   96,015    16.49  66,859    6.50  46,287    4.50

Tier 1 risk-based capital ratio

   96,015    16.49  46,571    8.00  34,928    6.00

Total risk-based capital ratio

   99,836    17.15  58,213    10.00  46,571    8.00

December 31, 2018

          

Citizens Holding Company

          

Tier 1 leverage ratio

  $95,691    9.93 $48,191    5.00 $38,553    4.00

Common Equity tier 1 capital ratio

   95,691    17.40  62,648    6.50  43,372    4.50

Tier 1 risk-based capital ratio

   95,691    17.40  43,986    8.00  32,990    6.00

Total risk-based capital ratio

   99,063    18.02  54,983    10.00  43,986    8.00

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Table of Contents
                 Minimum Capital 
          Minimum Capital  Requirement to be 
          Requirement to be  Adequately 
   Actual  Well Capitalized  Capitalized 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 
June 30, 2020
          
Citizens Holding Company
          
Tier 1 leverage ratio
  $99,630    7.56 $65,906    5.00 $52,725    4.00
Common Equity tier 1 capital ratio
   99,630    13.50  85,678    6.50  59,316    4.50
Tier 1 risk-based capital ratio
   99,630    13.50  59,040    8.00  44,280    6.00
Total risk-based capital ratio
   103,887    14.08  73,799    10.00  59,040    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%.

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.

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

Management believes that, as of June 30, 2019,2020, the Company and the Bank meetmet 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
June 30,
   

For the Six Months

Ended June 30,

 
   2019   2018   2019   2018 

Interest Income, including fees

  $8,650,544   $7,778,976   $17,033,969   $15,378,367 

Interest Expense

   2,444,592    826,540    4,618,291    1,621,181 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

   6,205,952    6,952,436    12,415,678    13,757,186 

Provision for (reversal of) loan losses

   264,819    88,962    460,298    (147,811
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after

        

Provision for (reversal of) loan losses

   5,941,133    6,863,474    11,955,380    13,904,997 

Other Income

   2,072,178    2,078,410    4,119,089    4,178,840 

Other Expense

   6,323,049    6,947,889    12,962,266    13,995,570 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Provision For

        

Income Taxes

   1,690,262    1,993,995    3,112,203    4,088,267 

Provision for Income Taxes

   319,520    305,855    514,690    627,740 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $1,370,742   $1,688,140   $2,597,513   $3,460,527 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per share—Basic

  $0.28   $0.35   $0.53   $0.71 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Share-Diluted

  $0.28   $0.35   $0.53   $0.71 
  

 

 

   

 

 

   

 

 

   

 

 

 

   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2020   2019   2020   2019 
Interest Income, including fees
  $10,127   $8,651   $19,836   $17,034 
Interest Expense
   1,777    2,445    4,101    4,618 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net Interest Income
   8,350    6,206    15,735    12,416 
Provision for loan losses
   622    265    936    460 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net Interest Income after
        
Provision for loan losses
   7,728    5,941    14,799    11,956 
Other Income
   2,470    2,073    4,851    4,119 
Other Expense
   8,344    6,323    16,411    12,962 
  
 
 
   
 
 
   
 
 
   
 
 
 
Income Before Provision For
        
Income Taxes
   1,854    1,691    3,239    3,113 
Provision for Income Taxes
   392    320    617    515 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net Income
  $1,462   $1,371   $2,622   $2,598 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net Income Per share - Basic
  $0.26   $0.28   $0.47   $0.53 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net Income Per Share-Diluted
  $0.26   $0.28   $0.47   $0.53 
  
 
 
   
 
 
   
 
 
   
 
 
 
See Note 34 to the Corporation’s Consolidated Financial Statements for an explanation regarding the Corporation’s calculation of Net Income Per Share—Share - basic and—and - diluted.

Annualized return on average equity (“ROE”) was 6.10%4.90% for the three months ended June 30, 2019,2020, and 8.06%6.10% for the corresponding period in 2018. For the six months ended June 30, 2019, ROE2019. Annualized return on average equity (“ROE”) was 5.90% compared to 8.05%4.52% for the six months ended June 30, 2018.2020, and 5.90% for the corresponding period in 2019. The decrease in ROE for the three and six months ended June 30, 20192020 was caused by the increase in equity balances and a decrease in net income compared to the same period in 2018.

2019.

Book value per share increased to $19.57$21.37 at June 30, 2019,2020, compared to $17.09$20.22 at December 31, 2018.2019. The increase in book value per share reflects earningsan increase in excess of dividends coupled with a decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities.securities partially offset by dividends in excess of earnings. Average assets for the six months ended June 30, 20192020 were $1,019,183,686$1,267,163 compared to $971,893,427$1,164,570 for the year ended December 31, 2018.2019. This increase was due mainly to an increase in loans andavailable-for-sale investment securities partially offset by a decrease in interest bearing due from bank accounts.

deposits with other banks.

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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 2.65%2.60% for the three months ended June 30, 20192020 compared to 3.14%2.65% for the corresponding period of 2018. For the six months ended June 30, 2019, annualized net interest margin was 2.69% compared to 3.12% for the six months ended June 30, 2018.2019. The decrease in net interest margin for the three and six months ended June 30, 2019,2020, when compared to the same period in 2018,2019, was primarily driven by the resultimpact of $48,821 in PPP loans yielding 1%. Earning assets averaged $1,237,906 for the three months ended June 30, 2020. This represents an increase of $281,415, or 29.4%, over average earning assets of $956,491 for the three months ended June 30, 2019.
The annualized net interest margin was 2.74% for the six months ended June 30, 2020 compared to 2.69% for the corresponding period of 2019. The increase in rates paid on depositsnet interest margin for the six months ended June 30, 2020, when compared to the same period in excess of the increase in2019, was due to yields on earning assets as detailed below.decreasing less than rates paid on interest bearing liabilities. While the margin growth was significant, the increase was partially offset by the aforementioned impact the PPP loans had on our loan yields. Earning assets averaged $956,491,167$1,173,734 for the six months ended June 30, 2020. This represents an increase of $230,576, or 24.4%, over average earning assets of $943,158 for the six months ended June 30, 2019.    
Interest bearing deposits averaged $770,288 for the three months ended June 30, 2020. This represents an increase of $119,537, or 18.4%, from the average of interest-bearing deposits of $650,751 for the three months ended June 30, 2019. In correlation with the national trend of increased savings, all
non-time
deposit categories increased as customers increased savings due to the uncertainty surrounding the
COVID-19
pandemic. The decrease in time deposits was caused by a strategic rate reduction made by the Company.
Interest bearing deposits averaged $750,879 for the six months ended June 30, 2020. This represents an increase of $126,465, or 20.2%, from the average of interest-bearing deposits of $624,414 for the six months ended June 30, 2019. This increase was discussed previously.
Other borrowed funds averaged $190,620 for the three months ended June 30, 2020. This represents an increase of $76,736, or 67.4%, over the other borrowed funds of $113,884 for the three months ended June 30, 2019. This represents an increase of $65,756,131, or 7.4%, over average earning assets of $890,735,036 for the three months ended June 30, 2018. For the six months ended June 30, 2019, earning assets averaged $943,158,101. This represents an increase of $27,217,623, or 3.0%, over average earning assets of $915,940,478 for the six months ended June 30, 2018.

Interest bearing deposits averaged $650,751,387 for the three months ended June 30, 2019. This represents an increase of $46,571,978, or 7.7%, from the average of interest-bearing deposits of $604,179,409 for the three months ended June 30, 2018. This was due to an increase in interest-bearing NOW accounts, savings and certificates of deposit.

Other borrowed funds averaged $113,884,108 for the three months ended June 30, 2019. This represents an increase of $4,165,069, or 3.8%, over the other borrowed funds of $109,719,039 for the three months ended June 30, 2018. This increase in other borrowed funds was due to a decreasean increase in federal funds purchased and securities sold under agreements to repurchase for the three months ended June 30, 2019,2020, when compared to the three months ended June 30, 2018.

Interest bearing deposits2019.

Other borrowed funds averaged $624,414,186$174,553 for the six months ended June 30, 2020. This represents an increase of $64,197, or 58.2%, over the other borrowed funds of $110,356 for the six months ended June 30, 2019. This represents an increase was discussed previously.
49

Table of $21,595,519, or 3.6%, from the average of interest-bearing deposits of $602,818,667Contents
Net interest income was $8,350 for the sixthree months ended June 30, 2018. This was due, in large part, to2020, an increase in interest-bearing NOW accounts, money market accounts and certificates of deposit partially offset by a decrease in savings.

Other borrowed funds averaged $110,356,373 for the six months ended June 30, 2019. This represents a decrease of $4,506,049, or 3.9%, over the other borrowed funds of $114,862,422 for the six months ended June 30, 2018. This decrease in other borrowed funds was due to a decrease in federal funds purchased and FHLB advances partially offset by an increase in securities sold under agreements to repurchase for the six months ended June 30, 2019, when compared to the six months ended June 30, 2018.

Net interest income was $6,205,952$2,144 from $6,206 for the three months ended June 30, 2019, a decrease of $746,484 from $6,952,436 for the three months ended June 30, 2018, primarily due to an increase in the rates paid on depositsloan volume from the same period in 2018.2019. 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 June 30, 2019,2020, the yields on earning assets increaseddecreased and the rates paid on deposits increaseddecreased from the same period in 2018.2019. The yield on all interest-bearing assets increased 10decreased 33 basis points to 3.60%3.27% in the three months ended June 30, 20192020 from 3.50%3.60% for the same period in 2018.2019. At the same time, the rate paid on all interest-bearing liabilities for the three months ended June 30, 2019 increased 752020 decreased 36 basis points to 1.21%0.85% from 0.46%1.21% in the same period in 2018.2019. As longer termlonger-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 decrease.

remain at similar levels for extended period of time.

Net interest income was $12,415,678$15,735 for the six months ended June 30, 2020, an increase of $3,319 from $12,416 for the six months ended June 30, 2019, a decrease of $1,341,508 from $13,757,186 for the six months ended June 30, 2018, primarily due to an increase in the rates paid on depositsloan volume from the same period in 2018.2019. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the six months ended June 30, 2019,2020, the yields on earning assets increaseddecreased and the rates paid on deposits increaseddecreased from the same period in 2018.2019. The yield on all interest-bearing assets increased 19decreased 21 basis points to 3.66%3.45% in the six months ended June 30, 20192020 from 3.47%3.66% for the same period in 2018.2019. At the same time, the rate paid on all interest-bearing liabilities for the six months ended June 30, 2019 increased 782020 decreased 34 basis points to 1.23%0.89% from 0.45%1.23% in the same period in 2018.2019. As longer termlonger-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 decrease.

remain at similar levels for extended period of time.

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

   

For the Three Months

Ended June 30,

  

For the Six Months

Ended June 30,

 
   2019  2018  2019  2018 

Interest and Fees

  $5,830,411  $4,984,492  $11,279,946  $9,700,911 

Average Gross Loans

   456,841,231   411,823,914   446,015,689   409,429,328 

Annualized Yield

   5.10  4.84  5.06  4.74

   For the Three Months  For the Six Months 
   Ended June 30,  Ended June 30, 
   2020  2019  2020  2019 
Interest and Fees
  $7,632  $5,830  $15,112  $11,280 
Average Gross Loans
   618,365   456,841   596,560   446,016 
Annualized Yield
   4.94  5.10  5.07  5.06
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.

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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.

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

   Quarter Ended
June 30,
2019
  Year Ended
December 31,
2018
  Amount of
Increase
(Decrease)
   Percent of
Increase
(Decrease)
 

BALANCES:

      

Gross Loans

  $ 465,754,828  $ 429,322,113  $ 36,432,715    8.49

Allowance for Loan Losses

   3,821,473   3,371,695   449,778    13.34

Nonaccrual Loans

   11,156,736   9,838,870   1,317,866    13.39

Ratios:

      

Allowance for loan losses to gross loans

   0.82  0.79   

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

   0.28  -0.55   

   Quarter Ended  Year Ended  Amount of   Percent of 
   June 30,  December 31,  Increase   Increase 
   2020  2019  (Decrease)   (Decrease) 
BALANCES:
      
Gross Loans
  $636,199  $577,075  $59,124    10.25
Allowance for Loan Losses
   4,257   3,755   502    13.37
Nonaccrual Loans
   10,786   11,993   (1,207   -10.06
Ratios:
      
Allowance for loan losses to gross loans
   0.67  0.65   
Net loans charged off (recovered) to allowance for loan losses
   10.19  5.06   
The provision for loan losses for the three months ended June 30, 20192020 was $264,819,$622, an increase of $175,857$357 from the provision for loan losses of $88,962$265 for the same period in 2018.2019. The provision for loan losses for the six months ended June 30, 20192020 was $460,298,$936, an increase of $608,109$476 from the reversal of provision for loan losses of $147,811$460 for the same period in 2018.2019. The change in the Corporation’s loan loss provisions for the three and six months ended June 30, 20192020 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
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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 increaseddecreased during this period due to payments received and loans charged off in excess of new loans being added to nonaccrual status in excess of the amount of payments received and loans charged off.

status.

For the three months ended June 30, 2019,2020, net loan losses charged to the allowance for loan losses totaled $3,242,$181, an increase of $216,789$178 from the $213,547 recovered$4 charged off in the same period in 2018.2019. The increase was primarily due to aone significant

charge-off
during the firstsecond quarter of 2018.

2020.

For the six months ended June 30, 2019,2020, net loan losses charged to the allowance for loan losses totaled $10,520,$434, an increase of $167,053$424 from the $156,533 recovered$10 charged off in the same period in 2018.2019. The increase was primarily due to atwo significantcharge-off charge-offs during the first quarter of 2018.

six month period ended June 30, 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 six months ended June 30, 20192020 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.
OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended June 30, 20192020 was $2,072,178, a decrease$2,470, an increase of $6,232,$397, or 0.3%19.2%, from $2,078,410$2,073 in the same period in 2018.2019. Service charges on deposit accounts were $1,046,255$668 in the three months ended June 30, 2019,2020, compared to $1,067,260$1,046 for the same period in 2018.2019. In correlation with the national trend of increased savings due to the uncertainty surrounding
COVID-19,
there has been a decrease in overdraft income when compared to the same period in 2019 that is driving the reduction in service charges on deposit accounts. Other service charges and fees increased by $52,615,$101, or 2.5%13.1%, to $769,668$871 in the three months ended June 30, 2019,2020, compared to $717,053$770 for the same period in 2018.2019. Other operating income not derived from service charges or fees decreased $37,842,increased $674, or 12.9%262.3% to $256,255$931 in the three months ended June 30, 2019,2020, compared to $294,097$257 for the same period in 2018.2019. This decreaseincrease was primarily due mainly to two reasons, (1) an increase in lossesgains from security sales due to strategic investment decisions and a decrease(2) an increase in mortgage loan origination income fromdue to a decrease in long-term mortgage loans originated for sale in the secondary market partially offset by an increase in 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. rates.

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Other income for the six months ended June 30, 20192020 was $4,119,089, a decrease$4,851, an increase of $59,751,$732, or 1.4%17.8%, from $4,178,840$4,119 in the same period in 2018.2019. Service charges on deposit accounts were $2,142,947$1,717 in the six months ended June 30, 2019,2020, compared to $2,210,853$2,143 for the same period in 2018.2019. The reason for the significant decrease was discussed above. Other service charges and fees increased by $67,791,$191, or 4.9%13.2%, to $1,453,308$1,644 in the six months ended June 30, 2019,2020, compared to $1,385,517$1,453 for the same period in 2018.2019. Other operating income not derived from service charges or fees decreased $59,636,increased $967, or 10.2%184.9% to $522,834$1,490 in the six months ended June 30, 2019,2020, compared to $582,470$523 for the same period in 2018. This decrease2019. The reason for the significant increase was due mainly to an increase in losses from security sales due to strategic investment decisions and a decrease in mortgage loan origination income from long-term mortgage loans originated for sale in the secondary market partially offset by an increase in other income.

discussed above.

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

   For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
 

Other operating income

  2019   2018   2019   2018 

BOLI Income

  $120,000   $124,435   $246,000   $250,435 

Mortgage Loan Origination Income

   58,571    99,767    106,599    172,290 

Income from security sales, net

   (54,149   3,026    (54,149   11,047 

Other Income

   131,833    66,869    224,384    148,698 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income

  $ 256,255   $ 294,097   $ 522,834   $ 582,470 
  

 

 

   

 

 

   

 

 

   

 

 

 

   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
Other operating income
  2020   2019   2020   2019 
BOLI Income
  $123   $120   $229   $246 
Mortgage Loan Origination Income
   282    59    529    107 
Income from security sales, net
   333    (54   410    (54
Other Income
   193    132    322    224 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Other Income
  $931   $257   $1,490   $523 
  
 
 
   
 
 
   
 
 
   
 
 
 
OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate
non-interest
expenses for the three months ended June 30, 2020 and 2019 were $8,344 and 2018 were $6,323,049 and $6,947,889,$6,323, respectively, a decreasean increase of $624,840$2,021 or 9.0%32.0%. Salaries and benefits decreasedincreased to $3,469,724$4,307 for the three months ended June 30, 2019,2020, from $3,675,422$3,470 for the same period in 2018.2019. Occupancy expense increased by $48,240,$626, or 3.4%44.4%, to $1,409,862$2,036 for the three months ended June 30, 2019,2020, compared to $1,361,622$1,410 for the same period of 2018.2019. The increases in salaries and benefits and occupancy expense are directly related to the Company closing the Charter merger in Q4 of 2019. Other operating expenses decreasedincreased by $467,382,$558, or 24.5%38.7%, to $1,443,463$2,001 for the three months ended June 30, 2019,2020, compared to $1,910,845$1,443 for the same period of 2018.2019. This decreaseincrease was mainly due to a refund of prepaid postage and cost containment throughout the Company partially offset by an increase inone-time legal Postage and consulting fees related toFreight as a result of a
one-time
postage rebate in the acquisitionsame period of Charter.

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. 2019.

Aggregate
non-interest
expenses for the six months ended June 30, 2020 and 2019 were $16,411 and 2018 were $12,962,266 and $13,995,570,$12,962, respectively, a decreasean increase of $1,033,304$3,449 or 7.4%26.6%. Salaries and benefits decreasedincreased to $7,016,393$8,742 for the six months ended June 30, 2019,2020, from $7,343,279$7,016 for the same period in 2018.2019. Occupancy expense decreasedincreased by $54,712,$863, or 1.9%30.5%, to $2,832,289$3,695 for the six months ended June 30, 2019,2020, compared to $2,887,001$2,832 for the same period of 2018.2019. Other operating expenses decreasedincreased by $651,706,$860, or 17.3%27.6%, to $3,113,584$3,974 for the six months ended June 30, 2019,2020, compared to $3,765,290$3,114 for the same period of 2018.

2019. The increases for all expense categories were discussed previously.

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

   

For the Three Months

Ended June 30,

   

For the Six Months

Ended June 30,

 

Other Operating Expense

  2019   2018   2019   2018 

Advertising

  $124,641   $170,471   $303,296   $326,517 

Office Supplies

   236,127    248,306    453,374    491,382 

Legal and Audit Fees

   279,982    135,512    413,270    244,869 

Telephone expense

   121,718    152,173    233,776    277,006 

Postage and Freight

   (447,286   152,151    (298,164   289,068 

Loan Collection Expense

   1,638    3,120    9,674    16,822 

Other Losses

   24,822    66,152    31,599    233,426 

Regulatory and related expense

   83,960    98,306    168,877    193,353 

Debit Card/ATM expense

   142,758    113,382    263,643    222,383 

Travel and Convention

   63,729    62,666    100,509    112,014 

Other expenses

   811,374    708,606    1,433,730    1,358,450 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Expense

  $ 1,443,463   $ 1,910,845   $ 3,113,584   $ 3,765,290 
  

 

 

   

 

 

   

 

 

   

 

 

 

   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
Other Operating Expense
  2020   2019   2020   2019 
Advertising
  $156   $125   $360   $303 
Office Supplies
   311    236    603    453 
Professional Fees
   261    280    519    413 
Telephone expense
   138    122    296    234 
Postage and Freight
   138    (447   279    (298
Loan Collection Expense
   20    2    43    10 
Regulatory and related expense
   104    84    239    169 
Debit Card/ATM expense
   148    143    283    264 
Travel and Convention
   18    64    71    101 
Other expenses
   707    834    1,281    1,465 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total Other Expense
  $2,001   $1,443   $3,974   $3,114 
  
 
 
   
 
 
   
 
 
   
 
 
 
The Corporation’s efficiency ratio for the three months ended June 30, 20192020 was 81.46%82.78%, compared to 77.65%81.46% for the same period in 2018. For2019. The Corporation’s efficiency ratio for the six months ended June 30, 2019 and 2018, the Corporation’s efficiency ratio2020 was 79.95%82.46%, compared to 76.07%79.95% for the same period in 2018.2019. The efficiency ratio is the ratio of
non-interest
expenses divided by the sum of net interest income (on a fully tax equivalent basis) and
non-interest
income.

BALANCE SHEET ANALYSIS

   June 30,
2019
   December 31,
2018
   Amount of
Increase
(Decrease)
��  Percent of
Increase
(Decrease)
 

Cash and Due From Banks

  $21,754,884   $12,592,130   $9,162,754    72.77

Interest Bearing deposits with Other Banks

   1,193,764    8,079,742    (6,885,978   -85.23

Investment Securities

   483,906,292    444,746,454    39,159,838    8.80

Loans, net

   461,914,254    425,905,093    36,009,161    8.45

Premises and Equipment

   20,169,558    19,717,305    452,253    2.29

Total Assets

   1,034,030,940    958,630,077    75,400,863    7.87

Total Deposits

   794,858,320    756,221,510    38,636,810    5.11

Total Shareholders’ Equity

   96,136,323    83,866,317    12,270,006    14.63

           Amount of   Percent of 
   June 30,   December 31,   Increase   Increase 
   2020   2019   (Decrease)   (Decrease) 
Cash and Due From Banks
  $20,003   $15,937   $4,066    25.51
Interest Bearing deposits with Other Banks
   41,184    58,557    (17,373   -29.67
Investment Securities
   627,719    464,383    163,336    35.17
Loans, net
   631,940    573,312    58,628    10.23
Premises and Equipment
   24,286    24,672    (386   -1.56
Total Assets
   1,402,224    1,195,434    206,790    17.30
Total Deposits
   1,075,348    898,996    176,352    19.62
Total Shareholders’ Equity
   119,369    112,800    6,569    5.82
CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at June 30, 20192020 was $21,754,884,$20,003, which was an increase of $9,162,754$4,066 from the balance of $12,592,130$15,937 at December 31, 2018.2019. The increase was due to an increase in the balances being held at correspondent banksthe Company’s branches due to a increase inuncertainty around the amount
COVID-19
pandemic.
54

Table of checks drawn on other banks in the normal process of clearing funds between these banks.

Contents

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Corporation’s investments securities portfolio at June 30, 20192020 increased by $39,159,838,$163,336, or 8.8%35.2%, to $483,906,292$627,719 from $444,746,454$464,383 at December 31, 2018.2019. This increase was due to purchases and increasesa large excess in liquidity as customers continue to save excess funds due to the market value ofuncertainty around the Corporation’s investment securities portfolio in excess of maturities, paydowns, sales and calls.

COVID-19
pandemic.
LOANS

The Corporation’s loan balance increased by $36,009,161,$58,628, or 8.5%10.2%, during the six months ended June 30, 2019,2020, to $461,914,254$631,940 from $425,905,093$573,312 at December 31, 2018.2019. This large increase was primarily due to two reasons: (1) Loan demand continues to be strong in our operating regions, especially in land development and construction commercial and industrial, and commercial real estate categories strengthenedand (2) the Company funded approximately $48,821 in PPP loans during the six months ended June 30, 2019 but competition for available loans continuedsecond quarter of 2020. While loan demand continues to be strong during that period. Noin certain sectors, the uncertainty surrounding the
COVID-19
pandemic has put a lot of projects on hold in other sectors in the near term. Additionally, no material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the six months ended June 30, 2019,2020, the Corporation’s premises and equipment increaseddecreased by $452,253,$386, or 2.3%1.6%, to $20,169,558$24,286 from $19,717,305$24,672 at December 31, 2018.2019. The increasedecrease was due to the purchasesale of a piece of property for expansion partially offset byan old branch building coupled with depreciation expense.

DEPOSITS

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

   June 30, 2019   December 31,
2018
   Amount of
Increase
(Decrease)
   Percent of
Increase
(Decrease)
 

Noninterest-Bearing Deposits

  $165,655,475   $170,029,729   $(4,374,254   -2.57

Interest-Bearing Deposits

   331,589,279    298,220,430    33,368,849    11.19

Savings Deposits

   77,686,521    76,735,710    950,811    1.24

Certificates of Deposit

   219,927,045    211,235,641    8,691,404    4.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

  $794,858,320   $756,221,510   $38,636,810    5.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing,

           Amount of   Percent of 
   June 30,   December 31,   Increase   Increase 
   2020   2019   (Decrease)   (Decrease) 
Noninterest-Bearing Deposits
  $254,214   $190,406   $63,808    33.51
Interest-Bearing Deposits
   501,327    369,354    131,973    35.73
Savings Deposits
   96,165    83,065    13,100    15.77
Certificates of Deposit
   223,642    256,171    (32,529   -12.70
  
 
 
   
 
 
   
 
 
   
 
 
 
Total deposits
  $1,075,348   $898,996   $176,352    19.62
  
 
 
   
 
 
   
 
 
   
 
 
 
Noninterest-bearing, interest-bearing and savings and certificates of depositsaccounts increased during the six months ended June 30, 20192020 while noninterest-bearing deposits decreased slightly.certificates of deposit decreased. As previously discussed, the
COVID-19
savings trend is creating a large increase in
non-time
deposits. Management continually monitors the interest rates on loan andtime deposit products to ensure that the Corporation is managing liquidity in line with the rates dictated by the market and our asset and liability management objectives. These rate adjustments impact deposit balances.

55

OFF-BALANCE
SHEET ARRANGEMENTS

Please refer to Note 23 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Corporation’s
off-balance
sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

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

As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values.

We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so should the situation warrant. Based upon the nature of our operations, we are not subject to material foreign exchange or commodity price risk. We do not own any trading assets.

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

56

Table of Contents
The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of June 30, 20192020 and December 31, 2018:

   June 30, 2019  December 31, 2018 
   Following
12 months
  Months
13-24
  Following
12 months
  Months
13-24
 

+400 basis points

   0.5  9.7  -3.6  6.2

+300 basis points

   2.8  9.9  -1.8  5.7

+200 basis points

   4.5  9.2  -0.4  4.9

+100 basis points

   3.2  5.6  0.5  3.2

Flat rates

   —     —     —     —   

-100 basis points

   -8.5  -7.6  -1.7  -1.1

-200 basis points

   -16.2  -17.2  -11.5  -9.5

2019:

   June 30, 2020  December 31, 2019 
   Following  Months  Following  Months 
   12 months  13-24  12 months  13-24 
+400 basis points
   26.5  32.6  6.4  20.9
+300 basis points
   25.7  27.5  6.3  17.5
+200 basis points
   23.3  21.0  5.7  13.3
+100 basis points
   16.3  12.5  3.0  7.0
Flat rates
   —     —     —     —   
-100 basis points
   -10.8  -12.5  -7.3  -7.5
-200 basis points
   -16.3  -22.8  -14.5  -15.1
The following table presents the change in our economic value of equity as of June 30, 20192020 and December 31, 2018,2019, assuming immediate parallel shifts in interest rates:

   Economic Value of Equity at Risk (%) 
   June 30, 2019  December 31, 2018 

+400 basis points

   1.9  -5.3

+300 basis points

   4.7  -3.0

+200 basis points

   6.2  -1.2

+100 basis points

   4.6  -0.1

Flat rates

   —     —   

-100 basis points

   -17.6  -9.4

-200 basis points

   -40.7  -27.1

   Economic Value of Equity at Risk (%) 
   June 30, 2020  December 31, 2019 
+400 basis points
   33.7  7.1
+300 basis points
   38.6  8.0
+200 basis points
   39.7  7.8
+100 basis points
   24.8  5.4
Flat rates
   —     —   
-100 basis points
   -35.4  -18.5
-200 basis points
   -51.5  -42.3
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.

As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest bearinginterest-bearing

non-maturity
deposit accounts, whose cost is less sensitive to changes in interest rates.

57

Table of Contents
ITEM 4.

CONTROLS AND PROCEDURES.

The management of the Corporation,Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Corporation’sCompany’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of June 30, 20192020 (the end of the period covered by this Quarterly Report).

There were no changes to the Corporation’sCompany’s internal control over financial reporting that occurred in the three months ended June 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, the Corporation’sCompany’s internal control over financial reporting.

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Table of Contents
PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

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.

ITEM 1A.

RISK FACTORS.

The Corporation’s business, futurefinancialfuture
financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form
10-K
for the year ended December 31, 2018,2019, which the Corporation filed with the Securities and Exchange Commission on March 15, 2019.13, 2020. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Corporation’s Annual Report on Form
10-K
for the year ended December 31, 2018,2019, the Corporation’s quarterly reports on Form
10-Q
and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Corporation’s business, financial condition and results of operations in the future.

There

The outbreak of the novel coronavirus
(“COVID-19”)
could adversely affect the Corporation’s business, financial condition, and results of operations.
The ongoing
COVID-19
global and national health emergency has caused significant disruption in the international and United States economies and financial markets. As a result, the
COVID-19
pandemic could have an adverse effect on the Corporation’s business, financial condition and results of operations. The spread of
COVID-19
has caused illness, quarantines, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. Additionally, in response to the
COVID-19
pandemic, the state government of Mississippi, where all of the Bank’s branch offices and the Corporation’s principal executive office are located, and the governments of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego activities outside of their homes, and ordering temporary closures of businesses that have been deemed to be
non-essential.
These restrictions and other consequences of the pandemic have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Bank operates.
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Table of Contents
The ultimate effects of
COVID-19
on the broader economy and the markets that the Bank serves are not known. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect the Corporation’s interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of
COVID-19
on the Corporation’s business could be widespread and material, and may include, or exacerbate, among other consequences, the following:
employees contracting
COVID-19;
a work stoppage, forced quarantine, or other interruption of the Corporation’s business;
unavailability of key personnel necessary to conduct the Corporation’s business activities;
sustained closures of the Bank’s branch lobbies or the offices of the Bank’s customers;
declines in demand for loans and other banking services and products;
reduced consumer spending due to both job losses and other effects attributable to the pandemic;
unprecedented volatility in United States financial markets;
volatile performance of the Corporation’s investment securities portfolio;
decline in the credit quality of the Bank’s loan portfolio, owing to the effects of
COVID-19
in the markets the Bank serves, leading to a need to increase the Corporation’s allowance for loan losses;
declines in value of collateral for loans, including real estate collateral;
declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and
declines in demand resulting from businesses being deemed to be
“non-essential”
by governments in the markets the Bank serves, and from
“non-essential”
and “essential” businesses suffering adverse effects from reduced levels of economic activity in the Corporation’s markets.
These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect the Company’s business, financial condition and results of operations.
The ongoing
COVID-19
pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the
COVID-19
outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which the Bank operates. This could result in further decline in demand for the Bank’s banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and growth strategy of the Corporation.
The Corporation is taking precautions to protect the safety and well-being of its employees and customers. However, no material changesassurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can the Corporation predict the level of disruption which will occur to employee’s ability to provide customer support and service. If the Corporation is unable to recover from a business disruption on a timely basis, its business, financial condition and results of operations could be materially and adversely affected. The Corporation may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect its business, financial condition and results of operations.
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Table of Contents
Since the Bank is a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP
.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk factors as disclosedof litigation, from both clients and
non-clients
that approached the Bank regarding PPP loans, regarding its process and procedures used in the Corporation’s Annual Report on Form10-Kprocessing applications for the Corporation’s year ended December 31, 2018.

PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
ITEM 6.

EXHIBITS.

Exhibits
Exhibits 
2.1Agreement and Plan of Merger, dated as of May  21, 2019, by and among Citizens Holding Company, The Citizens Bank of Philadelphia and Charter Bank (incorporated by reference to Exhibit 2.1 to Form8-K filed by Citizens Holding Company on May 21, 2019)
31(a)
31(b)
32(a)
32(b)
101
Financial Statements submitted in XBRL format.

61

Table of Contents
SIGNATURES

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

CITIZENS HOLDING COMPANY
BY: 
/s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer
(Principal Executive Officer)
BY: 
/s/ Robert T. Smith
Robert T. Smith
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
DATE: August 9, 20197, 2020

46

62