UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended June 30, ~~2020~~2021

☐	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~~In Company or organization)		(IRS Employer Identification No.)


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

601-656-4692

(Registrant’s telephone number, including area code)

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


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.20 par value	CIZN	NASDAQ Global Market

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

None

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller Reporting Company	☒

		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). ☐ Yes ☒ No

Number of shares outstanding of each of the issuer’s classes of common stock, as of August ~~5, 2020:~~6, 2021:


Title	Outstanding
Common Stock, $0.20 par value		~~5,586,381~~	5,595,320

Table of Contents

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS


PART I.			FINANCIAL INFORMATION	1

	Item 1.		Consolidated Financial ~~Statements~~Statements.	1

			Consolidated Statements of Financial Condition, as of June 30, ~~2020~~2021 (Unaudited) and December 31, ~~2019~~2020 (Audited)	1

			Consolidated Statements of Income for the Three and six months ended June 30, ~~2020~~2021 (Unaudited) and ~~2019~~2020 (Unaudited)	2

			Consolidated Statements of Comprehensive Income for the Three and six months ended June 30, ~~2020~~2021 (Unaudited) and ~~2019~~2020 (Unaudited)	3

			Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, ~~2020~~2021 (Unaudited) and ~~2019~~2020 (Unaudited)	4

			Notes to Consolidated Financial Statements (Unaudited)	5

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.	43	39

	Item 3.		Quantitative and Qualitative Disclosures About Market ~~Risk~~Risk.	56

	Item 4.		Controls and ~~Procedures~~Procedures.	58

PART II.			OTHER INFORMATION	59

	Item 1.		Legal ~~Proceedings~~Proceedings.	59

	Item 1A.		Risk ~~Factors~~Factors.	59

Item 6.	~~Item 6.~~	��	~~Exhibits~~Exhibits.	61	59

SIGNATURES				62	60

Table of Contents

PART I.

FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

   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


ASSETS	June 30, 2021 (Unaudited)			December 31, 2020 (Audited)

Cash and cash equivalents	$	16,050		$	16,840
Interest bearing cash and cash equivalents		66,153			25,468
Investment securities available for sale, at fair value		542,671			678,749
Loans, net of allowance for loan losses of $4,351 in 2021 and $4,735 in 2020		629,691			647,521
Premises and equipment, net		25,446			25,630
Other real estate owned, net		4,481			3,073
Accrued interest receivable		3,465			5,983
Cash surrender value of life insurance		25,830			25,814
Deferred tax assets, net		4,924			1,548
Identifiable intangible assets, net		13,605			13,660
Other assets		5,818			6,406

TOTAL ASSETS	$	1,338,134		$	1,450,692

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing deposits	$	287,519		$	276,033
Interest bearing deposits		839,843			819,156

Total deposits		1,127,362			1,095,189
Securities sold under agreement to repurchase		67,286			196,272
Federal Home Loan Bank (FHLB) advances		—			25,000
Borrowings on secured line of credit		18,000			—
Accrued interest payable		454			522
Deferred compensation payable		9,875			9,665
Other liabilities		5,583			4,496

Total liabilities		1,228,560			1,331,144
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value:
Authorized: 22,500,000 shares
Issued and outstanding: 5,595,320 shares - June 30, 2021; 5,587,070 shares - December 31, 2020		1,120			1,118
Additional paid-in capital		18,214			18,134
Retained earnings		97,278			96,158
Accumulated other comprehensive (loss) income, net of tax benefit (expense) of $2,340 at June 30, 2021 and ($1,376) at December 31, 2020		(7,038	)		4,138

Total shareholders’ equity		109,574			119,548

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,338,134		$	1,450,692

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

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CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

   For the Three Months    For the 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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
INTEREST INCOME
Interest and fees on loans	$	7,917	$	7,632	$	16,048	$	15,112
Interest on securities
Taxable		1,255		2,100		1,517		3,757
Nontaxable		634		364		1,305		704
Other interest		10		31		25		263

Total interest income		9,816		10,127		18,895		19,836

INTEREST EXPENSE
Deposits		1,186		1,612		2,452		3,581
Other borrowed funds		136		165		316		520

Total interest expense		1,322		1,777		2,768		4,101

NET INTEREST INCOME		8,494		8,350		16,127		15,735

PROVISION FOR LOAN LOSSES		232		622		319		936

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,262		7,728		15,808		14,799

OTHER INCOME
Service charges on deposit accounts		768		668		1,582		1,717
Other service charges and fees		1,091		871		2,066		1,644
Other operating income		1,130		931		2,573		1,490

Total other income		2,989		2,470		6,221		4,851

OTHER EXPENSES
Salaries and employee benefits		4,585		4,307		9,153		8,742
Occupancy expense		1,791		2,036		3,608		3,695
Other expense		2,606		2,001		4,689		3,974

Total other expenses		8,982		8,344		17,450		16,411

INCOME BEFORE PROVISION FOR INCOME TAXES		2,269		1,854		4,579		3,239

PROVISION FOR INCOME TAXES		362		392		775		617

NET INCOME	$	1,907	$	1,462	$	3,804	$	2,622

NET INCOME PER SHARE -Basic	$	0.34	$	0.26	$	0.68	$	0.47

-Diluted	$	0.34	$	0.26	$	0.68	$	0.47

DIVIDENDS PAID PER SHARE	$	0.24	$	0.24	$	0.48	$	0.48

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

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CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(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


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
Net income	$	1,907		$	1,462		$	3,804		$	2,622
Other comprehensive income (loss)
Securities available-for-sale
Unrealized holding gains (losses)		2,927			285			(15,810	)		8,197
Income tax effect		(730	)		(71	)		3,944			(2,045	)

Net unrealized gains (losses)		2,197			214			(11,866	)		6,152

Reclassification adjustment for gains included in net income		393			333			919			410
Income tax effect		(98	)		(83	)		(229	)		(102	)

Net gains included in net income		295			250			690			308

Total other comprehensive income (loss)		2,492			464			(11,176	)		6,460

Comprehensive income (loss)	$	4,399		$	1,926		$	(7,372	)	$	9,082

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

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CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

   For the 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


	For the Six Months Ended June 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities	$	12,387		$	5,871

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		114,330			135,188
Proceeds from sale of investment securities		464,528			71,168
Purchases of investment securities available for sale		(461,553	)		(363,823	)
Proceeds from sale of FHLB stock		4,447			—
Purchase of FHLB Stock		(3,943	)		—
Purchases of bank premises and equipment		(329	)		(163	)
Proceeds from sales of bank premises and equipment		—			124
Net change in federal funds sold		—			1,600
Net change in interest bearing deposits with other Banks		(40,685	)		17,373
Proceeds from sale of other real estate		1,774			392
Proceeds from death benefit of bank-owned life insurance		489			—
Net change in loans		14,262			(60,792	)

Net cash provided by (used in) investing activities		93,320			(198,933	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		32,173			176,353
Net change in securities sold under agreement to repurchase		(128,986	)		23,370
Proceeds from exercise of stock options		—			86
Proceeds from borrowings on secured line of credit		18,000			—
Payment of FHLB advances		(25,000	)		—
Payment of dividends		(2,684	)		(2,681	)

Net cash (used in) provided by financing activities		(106,497	)		197,128

Net change in cash and cash equivalents		(790	)		4,066

Cash and cash equivalents, beginning of period		16,840			15,937

Cash and cash equivalents, end of period	$	16,050		$	20,003

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

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CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, ~~2020~~2021

(Unaudited)

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

(in thousands, except share and per share data)

Nature of Business

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

Risks and Uncertainties

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 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 three separate stimulus bills, including the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act totaling approximately $4.8 trillion. The goal of these are to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The packages also include extensive emergency funding for hospitals and providers. In addition to the general impact of

COVID-19,

certain provisions of the these acts as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its 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.

Table of Contents

Financial position and results of operations

The Company’s fee income has been, and could continue to be, reduced due to

COVID-19. Due

to the amount of stimulus and unemployment measures from the federal government, overdraft fees continue to be reduced significantly from

pre-pandemic

levels. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected

COVID-19

related economic crisis.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by

COVID-19,

its reported and regulatory capital ratios have been adversely impacted due to loss of fee income, net interest margin compression along with the significant increase in assets from all the federal government stimulus. For a detailed discussion of the Company’s capital ratios see Capital Resources on page 43.

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

Asset valuation

Currently, the Company does not expect

COVID-19

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

The impact from

COVID-19

could cause a decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a

non-cash

charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

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Lending operations and accommodations to borrowers

(dollar amounts in thousands)

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans originated before June 5, 2020 have a

two-year

term while PPP loans originated after June 5, 2020 have a five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The Company currently has 610 loans with a total balance of $21,642 outstanding at June 30, 2021. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Credit

The Company has worked with customers directly affected by

COVID-19. The

Company offered short-term assistance in accordance with regulatory guidelines. However, as of June 30, 2021, the Company had no customer with deferments. While this is a positive trend, the Company makes no representations that there could not be future credit losses related to

COVID-19.

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended June 30, ~~2020~~2021 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

The interim consolidated financial statements of Citizens Holding Company (the “Company”) include the accounts of its ~~wholly owned~~wholly-owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with the Company, the ~~“Corporation”~~“Company”). 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,~~Company, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the ~~Corporation’s~~Company’s Annual Report on Form

10-K

for the year ended December 31, ~~2019,~~2020, filed with the Securities and Exchange Commission on March ~~13, 2020.~~12, 2021.

~~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~~7

Table of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Corporation. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central and southern counties of Mississippi and the surrounding areas. Services are provided at several branch offices.Contents

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.

~~Table of Contents~~

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.~~loans, or other real estate owned (“OREO”). In connection with the determination of the allowance for loan losses and valuation of foreclosed real estate, management obtains independent appraisals for significant properties.

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

~~Risks and Uncertainties~~

~~(in thousands, except for number of loans)~~

~~The outbreak of~~

~~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~~

~~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.~~

~~Table of Contents~~

~~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~~

~~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.~~

~~Table of Contents~~

~~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.

~~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.

~~Table of Contents~~

~~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,~~December 2019, the FASB issued ~~ASU~~Accounting Standards Update

~~2017-04, “~~No. 2019-12,

~~Intangibles—Goodwill and Other~~Income Taxes (Topic ~~350)—~~740)

: Simplifying the ~~Test~~Accounting for ~~Goodwill Impairment~~

~~” (“ASU~~

~~2017-04”). ASU~~

~~2017-04~~

~~simplifies~~Income Taxes to simplify various aspects of the ~~accounting for goodwill impairment for all~~current guidance to promote consistent application of the standard among reporting entities by ~~requiring impairment charges to be based on the first step in the previous~~

~~two-step~~

impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limitedmoving certain exceptions to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount.general principles. ASU

~~2017-04~~2019-12

was effective for the Company on January 1, ~~2020~~2021 and did not have a material impact on the Company’s financial statements.

~~ASU~~

~~2019-13~~

“

~~Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement~~

~~” (“ASU~~

~~2019-13”)~~

removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU

~~2019-13~~

~~is effective for annual and interim periods beginning after December 15, 2019. ASU~~

~~2019-13~~

~~was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.~~

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by

~~COVID-19.~~

~~The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification~~

~~310-40,~~

“

~~Receivables – Troubled Debt Restructurings by Creditors~~

~~,” (“ASC~~

~~310-40”),~~

a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to

~~COVID-19~~

to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or

~~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 implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time. See Note 8 of the condensed footnotes to the consolidated financial statements for disclosure of the impact to date.

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

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2016-13

are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU

2016-13

for certain companies. The new effective date for the Company is January 1, 2023. ASU

2016-13

permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU

2016-13

to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation ~~of said models~~ is required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

~~Table of Contents~~

~~Note 2. Mergers and Acquisitions~~

~~(in thousands, except share data)~~

~~Merger with Charter Bank~~

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

~~For further information regarding the merger with Charter, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form~~

~~10-K~~

~~for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 13, 2020.~~

Note 3.2. Commitments and Contingent Liabilities

(in thousands)

In the ordinary course of business, the ~~Corporation~~Company enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of June 30, ~~2020,~~2021, the ~~Corporation~~Company had entered into loan commitments with certain customers with an aggregate unused balance of ~~$88,744~~$131,792 compared to an aggregate unused balance of ~~$94,009~~$138,185 at December 31, ~~2019.~~2020. There were ~~$4,565~~$4,437 of letters of credit outstanding at June 30, ~~2020~~2021 and ~~$2,436~~$4,565 at December 31, ~~2019.~~2020. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the ~~Corporation~~Company does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.

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

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Note 4.3. Net Income per Share

(in thousands, except share and per share data)

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

   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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Basic weighted average shares outstanding		5,584,441		5,580,340		5,581,662		5,573,515
Dilutive effect of granted options		240		3,449		596		2,824

Diluted weighted average shares outstanding		5,584,681		5,583,789		5,582,258		5,576,339

Net income	$	1,907	$	1,462	$	3,804	$	2,622
Net income per share-basic	$	0.34	$	0.26	$	0.68	$	0.47
Net income per share-diluted	$	0.34	$	0.26	$	0.68	$	0.47

Note 5.4. Equity Compensation Plans

(in thousands, except per share data)

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

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

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The following table is a summary of the stock option activity for the six months ended June 30, ~~2020:~~2021:

   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    —      $ —


	Directors’ Plan					2013 Plan
	Number of Shares			Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2020		19,500		$	19.42		0	$	0
Granted		0			0		0		0
Exercised		0			0		0		0
Expired		(10,500	)		20.02		0		0

Outstanding at June 30, 2021		9,000		$	18.76		0	$	0

The intrinsic value of options outstanding under the Directors’ Plan at June 30, ~~2020,~~2021, was ~~$125,280. NaN~~

$-0-.

No options were outstanding under the 2013 Plan as of June 30, ~~2020.~~

2021.

During ~~2020,~~2021, the ~~Corporation’s~~Company’s directors received restricted stock grants totaling 8,250 shares of common stock under the 2013 Plan. These grants vest over a

one-year

period ending April ~~29, 2021~~28, 2022 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was ~~$169~~$156 and will be expensed ratably over the

~~one-year~~one-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 6.5. Income Taxes

(in thousands)

For the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, the Company recorded a provision for income taxes totaling ~~$392~~$362 and ~~$320,~~$392, respectively. The effective tax rate was ~~21.1%~~15.95% and ~~18.9%~~21.14% for the three months ending June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

For the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, the Company recorded a provision for income taxes totaling ~~$617~~$775 and ~~$515,~~$617, respectively. The effective tax rate was ~~19.0%~~16.93% and ~~16.5%~~19.05% for the six months ending June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

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

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Note 7.6. Securities

(in thousands)

The amortized cost and estimated fair value of securities

available-for-sale

and the corresponding amounts of gross unrealized gains and losses recognized ~~in accumulated other comprehensive income~~ were as follows:

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


			Gross		Gross
June 30, 2021	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	4,969	$	0	$	192	$	4,777
Mortgage backed securities		420,760		239		8,610		412,389
State, County, Municipals		125,818		837		1,650		125,005
Other Securities		500		0		0		500

Total	$	552,047	$	1,076	$	10,452	$	542,671


			Gross		Gross
December 31, 2020	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	11,870	$	191	$	0	$	12,061
Mortgage backed securities		560,033		4,550		2,600		561,983
State, County, Municipals		100,823		3,410		36		104,197
Other Securities		500		8		0		508

Total	$	673,226	$	8,159	$	2,636	$	678,749

At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, securities with a carrying value of ~~$559,885~~$392,018 and ~~$413,275,~~$558,955, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

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The amortized cost and estimated fair value of securities by contractual maturity at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

   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


	June 30, 2021				December 31, 2020
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available-for-sale
Due in one year or less	$	218	$	220	$	—	$	—
Due after one year through five years		2,247		2,286		3,594		3,701
Due after five years through ten years		2,821		2,884		20,538		21,446
Due after ten years		126,001		124,892		89,061		91,619
Residential mortgage backed securities		420,760		412,389		536,215		537,027
Commercial mortgage backed securities		0		0		23,818		24,956

Total	$	552,047	$	542,671	$	673,226	$	678,749

The tables below show the ~~Corporation’s~~Company’s gross unrealized losses and fair value of

available-for-sale

investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

A summary of unrealized loss information for securities

available-for-sale,

categorized by security type 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


June 30, 2021	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	4,777	$	192	$	0	$	0	$	4,777	$	192
Mortgage backed securities		370,942		8,610		0		0		370,942		8,610
State, County, Municipal		78,987		1,650		0		0		78,987		1,650

Total	$	454,706	$	10,452	$	0	$	0	$	454,706	$	10,452


December 31, 2020	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Mortgage backed securities	$	278,162	$	2,600	$	0	$	0	$	278,162	$	2,600
State, County, Municipal		6,541		36		0		0		6,541		36

Total	$	284,703	$	2,636	$	0	$	0	$	284,703	$	2,636

The ~~Corporation’s~~Company’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~~Company does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the ~~Corporation~~Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The ~~Corporation~~Company has determined that none of the securities ~~in this classification~~ were other-than-temporarily impaired at June 30, ~~2020~~2021 nor at December 31, ~~2019.~~2020.

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Note 8.7. Non Purchased Loans

(in thousands, except number of loans)

“Purchased” loans are those acquired in any of the Company’s previous acquisitions. “Non Purchased” loans include all of the Company’s other loans. For purposes of Note 8,7, all references to “loans” mean non purchased loans.

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


	June 30, 2021			December 31, 2020
Real Estate:
Land Development and Construction	$	66,633		$	42,677
Farmland		13,917			15,616
1-4 Family Mortgages		87,208			94,280
Commercial Real Estate		294,876			306,875

Total Real Estate Loans		462,634			459,448

Business Loans:
Commercial and Industrial Loans (1)		107,302			115,679
Farm Production and Other Farm Loans		455			541

Total Business Loans		107,757			116,220

Consumer Loans:
Credit Cards		1,875			1,878
Other Consumer Loans		10,856			10,929

Total Consumer Loans		12,731			12,807

Total Gross Loans		583,122			588,475

Unearned Income		0			(1	)
Allowance for Loan Losses		(4,351	)		(4,735	)

Loans, net	$	578,771		$	583,739

(1)	Includes PPP loans of $21,642 and $29,523 as of June 30, 2021 and December 31, 2020, respectively.

Table of Contents

~~The composition of net loans at June 30, 2020 and December 31, 2019 was as follows:~~

   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~~

nonaccrual status, when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on

~~non-accrual~~

nonaccrual status regardless of whether such loans are considered past due. When interest accruals are discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

~~Table of Contents~~

Period-end,

~~non-accrual~~

nonaccrual loans, segregated by class, were as follows:


	June 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	110	$	111	$	185	$	308
Farmland		218		232		191		287
1-4 Family Mortgages		2,129		2,160		1,844		1,809
Commercial Real Estate		7,243		9,082		1,736		5,600

Total Real Estate Loans		9,700		11,585		3,956		8,004

Business Loans:
Commercial and Industrial Loans		465		338		323		413
Farm Production and Other Farm Loans		10		10		6		9

Total Business Loans		475		348		329		422

Consumer Loans:
Other Consumer Loans		73		60		21		33

Total Consumer Loans		73		60		21		33

Total Nonaccrual Loans	$	10,248	$	11,993	$	4,306	$	8,459

1815

Table of Contents

An aging analysis of past due loans, segregated by class, as of June 30, ~~2020,~~2021, was as

~~follows~~

: follows:


																							Accruing
															Loans								Loans
													Loans		90 or more								90 or more
													30-89 Days		Days		Total Past		Current		Total		Days
	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		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	6	$	110	$	116	$	86,019	$	86,135	$	—	$	10	$	—	$	10	$	66,623	$	66,633	$	—
Farmland		145		44		189		15,269		15,458		44		101		0		101		13,816		13,917		0
1-4 Family Mortgages		1,419		518		1,937		87,806		89,743		126		1,247		19		1,266		85,942		87,208		—
Commercial Real Estate		2,850		1,214		4,064		214,807		218,871		118		941		573		1,514		293,362		294,876		—

Total Real Estate Loans		4,420		1,886		6,306		403,901		410,207		288		2,299		592		2,891		459,743		462,634		0

Business Loans:
Commercial and Industrial Loans		60		422		482		128,306		128,788		—		70		327		397		106,905		107,302		4
Farm Production and Other Farm Loans		25		—		25		559		584		—		0		—		0		455		455		—

Total Business Loans		85		422		507		128,865		129,372		—		70		327		397		107,360		107,757		4

Consumer Loans:
Credit Cards		17		10		27		1,576		1,603		10		38		1		39		1,836		1,875		1
Other Consumer Loans		62		40		102		11,081		11,183		3		32		2		34		10,822		10,856		—

Total Consumer Loans		79		50		129		12,657		12,786		13		70		3		73		12,658		12,731		1

Total Loans	$	4,584	$	2,358	$	6,942	$	545,423	$	552,365	$	301	$	2,439	$	922	$	3,361	$	579,761	$	583,122	$	5

1916

An aging analysis of past due loans, segregated by class, as of December 31, ~~2019~~2020 was as

~~follows~~

: follows:


																							Accruing
															Loans								Loans
													Loans		90 or more								90 or more
													30-89 Days		Days		Total Past		Current		Total		Days
	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		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	736	$	—	$	736	$	65,692	$	66,428	$	—	$	112	$	—	$	112	$	42,565	$	42,677	$	—
Farmland		171		39		210		15,385		15,595		39		183		75		258		15,358		15,616		—
1-4 Family Mortgages		3,116		777		3,893		83,738		87,631		147		1,301		246		1,547		92,733		94,280		—
Commercial Real Estate		8,511		2,080		10,591		197,013		207,604		18		1,407		700		2,107		304,768		306,875		—

Total Real Estate Loans		12,534		2,896		15,430		361,828		377,258		204		3,003		1,021		4,024		455,424		459,448		—

Business Loans:
Commercial and Industrial Loans		586		312		898		83,713		84,611		52		97		405		502		115,177		115,679		5
Farm Production and Other Farm Loans		17		—		17		666		683		—		2		—		2		539		541		—

Total Business Loans		603		312		915		84,379		85,294		52		99		405		504		115,716		116,220		5

Consumer Loans:
Credit Cards		45		18		63		1,770		1,833		18		25		9		34		1,844		1,878		9
Other Consumer Loans		172		42		214		11,846		12,060		—		66		—		66		10,863		10,929		—

Total Consumer Loans		217		60		277		13,616		13,893		18		91		9		100		12,707		12,807		9

Total Loans	$	13,354	$	3,268	$	16,622	$	459,823	$	476,445	$	274	$	3,193	$	1,435	$	4,628	$	583,847	$	588,475	$	14

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

charged-off

when deemed uncollectible.

2017

Table of Contents

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


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	185	$	185	$	—	$	185	$	—	$	247
Farmland		34		34		—		34		—		73
1-4 Family Mortgages		962		962		—		962		—		989
Commercial Real Estate		2,687		2,051		114		2,165		3		3,996

Total Real Estate Loans		3,868		3,232		114		3,346		3		5,305

Business Loans:
Commercial and Industrial Loans		304		72		160		232		36		323

Total Business Loans		304		72		160		232		36		323

Total Loans	$	4,172	$	3,304	$	274	$	3,578	$	39	$	5,628

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


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	308	$	256	$	52	$	308	$	13	$	210
Farmland		111		111		—		111		—		182
1-4 Family Mortgages		1,016		1,012		4		1,016		1		928
Commercial Real Estate		6,021		3,323		2,504		5,827		768		7,808

Total Real Estate Loans		7,456		4,702		2,560		7,262		782		9,127

Business Loans:
Commercial and Industrial Loans		413		54		359		413		125		279

Total Business Loans		413		54		359		413		125		279

Total Loans	$	7,869	$	4,756	$	2,919	$	7,675	$	907	$	9,405

Table of Contents

~~Impaired loans 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:~~

   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

~~Table of Contents~~

The ~~following table presents~~Company did not have any new troubled debt restructurings ~~segregated by~~

~~class~~

:for the six months ended June 30, 2021 or June 30, 2020.

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

   Number of
Loans    Recorded
Investment
Totals at January 1, 2019
   3    $ 2,782
Reductions due to:

Principal paydowns
      (287 )




Totals at January 1, 2020
   3    $ 2,495
Reductions due to:

Principal paydowns
      (95 )




Total at June 30, 2020
   3    $ 2,400


	Number		Recorded
	of Loans		Investment
Totals at January 1, 2020		3	$	2,495
Reductions due to:
Principal paydowns				(382	)

Totals at December 31, 2020		3	$	2,113
Reductions due to:
Principal paydowns				(64	)
Reclassification to OREO		2		(1,788	)

Total at June 30, 2021		1	$	261

The allocated allowance for loan losses attributable to restructured loans was

$-0-

at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The ~~Corporation~~Company had no commitments to lend additional funds on ~~these~~this troubled debt restructurings as of June 30, ~~2020.~~2021.

2219

The ~~Corporation~~Company utilizes a risk grading matrix to assign a risk grade to each of its loans when

originated

and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades follows.

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

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

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

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

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

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

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

2320

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at June 30, ~~2020.~~2021.

The following table details the amount of gross loans, segregated by loan grade and class, as of June 30, ~~2020:~~2021:


															Special
													Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans		1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	83,509	$	1,922	$	704	$	—	$	—	$	86,135	$	65,232	$	771	$	630	$	—	$	—	$	66,633
Farmland		14,450		280		728		—		—		15,458		13,212		167		538		—		—		13,917
1-4 Family Mortgages		81,552		2,047		6,144		—		—		89,743		79,085		2,654		5,469		—		—		87,208
Commercial Real Estate		183,080		20,818		14,973		—		—		218,871		251,312		7,929		35,635		—		—		294,876

Total Real Estate Loans		362,591		25,067		22,549		—		—		410,207		408,841		11,521		42,272		—		—		462,634

Business Loans:
Commercial and Industrial Loans		121,398		4,050		3,331		—		9		128,788		101,184		901		5,214		—		3		107,302
Farm Production and Other Farm Loans		552		19		3		—		10		584		433		—		16		—		6		455

Total Business Loans		121,950		4,069		3,334		—		19		129,372		101,617		901		5,230		—		9		107,757

Consumer Loans:
Credit Cards		1,576		—		27		—		—		1,603		1,836		—		39		—		—		1,875
Other Consumer Loans		11,029		46		71		37		—		11,183		10,750		63		28		13		2		10,856

Total Consumer Loans		12,605		46		98		37		—		12,786		12,586		63		67		13		2		12,731

Total Loans	$	497,146	$	29,182	$	25,981	$	37	$	19	$	552,365	$	523,044	$	12,485	$	47,569	$	13	$	11	$	583,122

2421

Table of Contents

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

December

31, ~~2019:~~2020:


															Special
													Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans		1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	64,112	$	1,682	$	634	$	—	$	—	$	66,428	$	41,775	$	120	$	782	$	—	$	—	$	42,677
Farmland		14,533		331		731		—		—		15,595		14,801		95		720		—		—		15,616
1-4 Family Mortgages		79,068		1,917		6,646		—		—		87,631		85,203		3,210		5,867		—		—		94,280
Commercial Real Estate		169,270		21,266		17,068		—		—		207,604		258,339		35,769		12,767		—		—		306,875

Total Real Estate Loans		326,983		25,196		25,079		—		—		377,258		400,118		39,194		20,136		—		—		459,448

Business Loans:
Commercial and Industrial Loans		80,289		128		4,194		—		—		84,611		109,525		4,409		1,738		—		7		115,679
Farm Production and Other Farm Loans		669		—		4		—		10		683		512		—		20		—		9		541

Total Business Loans		80,958		128		4,198		—		10		85,294		110,037		4,409		1,758		—		16		116,220

Consumer Loans:
Credit Cards		1,770		—		63		—		—		1,833		1,845		—		33		—		—		1,878
Other Consumer Loans		11,907		59		53		41		—		12,060		10,820		43		41		25		—		10,929

Total Consumer Loans		13,677		59		116		41		—		13,893		12,665		43		74		25		—		12,807

Total Loans	$	421,618	$	25,383	$	29,393	$	41	$	10	$	476,445	$	522,820	$	43,646	$	21,968	$	25	$	16	$	588,475

2522

Table of Contents

Note 9.8. Purchased Loans

(in thousands)

For purposes of this Note 9,8, 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


	June 30, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	5,152	$	6,153
Farmland		388		520
1-4 Family Mortgages		18,197		23,306
Commercial Real Estate		21,188		24,237

Total Real Estate Loans		44,925		54,216

Business Loans:
Commercial and Industrial Loans		5,099		7,871
Farm Production and Other Farm Loans		226		755

Total Business Loans		5,325		8,626

Consumer Loans:
Other Consumer Loans		670		940

Total Consumer Loans		670		940

Total Purchased Loans	$	50,920	$	63,782

2623

Table of Contents

Period-end,

nonaccrual loans, segregated by class, were as follows:


	June 30, 2021		December 31, 2020
Real Estate:
1-4 Family Mortgages	$	45	$	73

Total Real Estate Loans		45		73

Business Loans:
Commercial and Industrial Loans		15		18

Total Business Loans		15		18

Consumer Loans:
Other Consumer Loans		0		14

Total Consumer Loans		0		14

Total Nonaccrual Loans	$	60	$	105

An age analysis of past due loans, segregated by class of loans, as of June 30, ~~2020,~~2021, is as

~~follows~~

: follows:


																							Accruing
															Loans								Loans
													Loans		90 or more								90 or more
													30-89 Days		Days		Total Past		Current		Total		Days
	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		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	—	$	50	$	50	$	12,097	$	12,147	$	—	$	—	$	—	$	—	$	5,152	$	5,152	$	—
Farmland		—		—		—		442		442		—		—		—		—		388		388		—
1-4 Family Mortgages		145		—		145		29,591		29,736		—		347		0		347		17,850		18,197		0
Commercial Real Estate		—		131		131		27,679		27,810		—		336		—		336		20,852		21,188		—

Total Real Estate Loans		145		181		326		69,809		70,135		—		683		0		683		44,242		44,925		0

Business Loans:
Commercial and Industrial Loans		73		147		220		11,335		11,555		—		47		—		47		5,052		5,099		—
Farm Production and Other Farm Loans		—		—		—		858		858		—		—		—		—		226		226		—

Total Business Loans		73		147		220		12,193		12,413		—		47		—		47		5,278		5,325		—

Consumer Loans:
Other Consumer Loans		43		—		43		1,243		1,286		—		11		—		11		659		670		—

Total Consumer Loans		43		—		43		1,243		1,286		—		11		—		11		659		670		—

Total Loans	$	261	$	328	$	589	$	83,245	$	83,834	$	—	$	741	$	0	$	741	$	50,179	$	50,920	$	0

2724

Table of Contents

An age analysis of past due loans, segregated by class of loans, as of December 31, ~~2019,~~2020, is as

~~follows~~

: follows:


																							Accruing
															Loans								Loans
													Loans		90 or more								90 or more
													30-89 Days		Days		Total Past		Current		Total		Days
	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		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	528	$	—	$	528	$	14,194	$	14,722	$	—	$	332	$	—	$	332	$	5,821	$	6,153	$	—
Farmland		—		—		—		510		510		—		—		—		—		520		520		—
1-4 Family Mortgages		444		—		444		35,508		35,952		—		401		—		401		22,905		23,306		—
Commercial Real Estate		603		—		603		31,833		32,436		—		0		—		0		24,237		24,237		—

Total Real Estate Loans		1,575		—		1,575		82,045		83,620		—		733		—		733		53,483		54,216		—

Business Loans:
Commercial and Industrial Loans		379		3		382		13,771		14,153		—		849		0		849		7,022		7,871		—
Farm Production and Other Farm Loans		—		—		—		884		884		—		—		—		—		755		755		—

Total Business Loans		379		3		382		14,655		15,037		—		849		0		849		7,777		8,626		—

Consumer Loans:
Other Consumer Loans		49		8		57		1,916		1,973		—		35		0		35		905		940		—

Total Consumer Loans		49		8		57		1,916		1,973		—		35		0		35		905		940		—

Total Loans	$	2,003	$	11	$	2,014	$	98,616	$	100,630	$	—	$	1,617	$	0	$	1,617	$	62,165	$	63,782	$	—

2825

Table of Contents

The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of June 30, ~~2020:~~2021:

   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


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	4,396	$	744	$	12	$	—	$	—	$	5,152
Farmland		231		157		—		—		—		388
1-4 Family Mortgages		15,788		1,847		562		—		—		18,197
Commercial Real Estate		19,731		1,176		281		—		—		21,188

Total Real Estate Loans		40,146		3,924		855		—		—		44,925

Business Loans:
Commercial and Industrial Loans		4,549		434		116		—		—		5,099
Farm Production and Other Farm Loans		226		—		—		—		—		226

Total Business Loans		4,775		434		116		—		—		5,325

Consumer Loans:
Other Consumer Loans		639		0		31		—		0		670

Total Consumer Loans		639		0		31		—		0		670

Total Loans	$	45,560	$	4,358	$	1,002	$	—	$	0	$	50,920

~~Table of Contents~~

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

December

31, ~~2019:~~2020:


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans		Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	13,890	$	789	$	43	$	—	$	—	$	14,722	$	5,364	$	766	$	23	$	—	$	—	$	6,153
Farmland		510		—		—		—		—		510		357		163		—		—		—		520
1-4 Family Mortgages		33,737		1,535		680		—		—		35,952		21,116		1,655		535		—		—		23,306
Commercial Real Estate		30,780		1,656		—		—		—		32,436		22,469		1,484		284		—		—		24,237

Total Real Estate Loans		78,917		3,980		723		—		—		83,620		49,306		4,068		842		—		—		54,216

Business Loans:
Commercial and Industrial Loans		13,545		608		—		—		—		14,153		7,121		397		353		—		—		7,871
Farm Production and Other Farm Loans		884		—		—		—		—		884		755		—		—		—		—		755

Total Business Loans		14,429		608		—		—		—		15,037		7,876		397		353		—		—		8,626

Consumer Loans:
Other Consumer Loans		1,937		36		—		—		—		1,973		862		29		35		—		14		940

Total Consumer Loans		1,937		36		—		—		—		1,973		862		29		35		—		14		940

Total Loans	$	95,283	$	4,624	$	723	$	—	$	—	$	100,630	$	58,044	$	4,494	$	1,230	$	—	$	14	$	63,782

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		June 30, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	28	$	43	$	—	$	8
Farmland		—		—
1-4 Family Mortgages		695		706		—		25
Commercial Real Estate		—		—

Total Real Estate Loans		723		749		0		33

Total PCD Loans	$	723	$	749
Business Loans:
Commercial and Industrial Loans						308		305

Total Business Loans						308		305

Total Purchased Credit Deteriorated Loans					$	308	$	338

Nonaccrual loans of

$-0-

~~Table of Contents~~

~~The following table presents purchased loans that~~and $25 are ~~classified as nonaccrual loans:~~included in the

1-4

Family Mortgages at June 30, 2021 and December 31, 2020, respectively.

   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 purchased loans classified as TDRs ~~purchased~~ as ~~part~~ of the ~~acquisition of Charter.~~six months ended June 30, 2021, or June 30, 2020.

Table of Contents

~~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.~~9. Allowance for Loan Losses

(in thousands)

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

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

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

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


	Real Estate		Business Loans		Consumer			Total
Balance, January 1, 2021	$	3,885	$	611	$	239		$	4,735
Provision for loan losses		138		181		0			319
Charge-offs		623		175		49			847
Recoveries		84		10		50			144

Net charge-offs (recoveries)		539		165		(1	)		703

Balance, June 30, 2021	$	3,484	$	627	$	240		$	4,351

Period end allowance allocated to:
Loans individually evaluated for impairment	$	3	$	36	$	—		$	39
Loans collectively evaluated for impairment		3,481		591		240			4,312

Balance, June 30, 2021	$	3,484	$	627	$	240		$	4,351

Table of Contents

The following table details activity in the allowance for loan losses by portfolio segment for the ~~six~~three 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


	Real Estate		Business Loans		Consumer		Total
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

Balance, June 30, 2020	$	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

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
   $ 2,845 $ 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

~~Table of Contents~~

~~The Corporation’s~~Company’s recorded investment in loans as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the ~~Corporation’s~~Company’s impairment methodology was as ~~follows (in thousands):~~follows:

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


June 30, 2021	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	3,346	$	232	$	—	$	3,578
Loans collectively evaluated for general impairment		504,213		112,542		13,401		630,156
Acquired with deteriorated credit quality		0		308		—		308

	$507,559		$113,082		$13,401		$634,042


December 31, 2020	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	7,262	$	413	$	—	$	7,675
Loans collectively evaluated for general impairment		506,368		124,128		13,748		644,244
Acquired with deteriorated credit quality		33		305		—		338

	$513,663		$124,846		$13,748		$652,257

3429

Table of Contents

Note ~~11.~~10. Premises and Equipment

(in thousands)

The Company leases certain premises and equipment under operating leases. AtAs of June 30, ~~2020,~~2021, the Company had lease liabilities and ~~ROU~~

Right-of-Use

(“ROU”) assets totaling ~~$608 thousand~~$2,521 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, ~~2020,~~2021, the weighted average remaining lease term for operating leases was ~~1.0~~1 year and the weighted average discount rate used in the measurement of operating lease liabilities was ~~3.3%~~3.26%.

Lease costs were as follows:


					Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
(in thousands)	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Operating lease cost	$	92	$	185	$	117	$	233
Short-term lease cost		6		12		6		12
Variable lease cost		—		—		0—		—

	$	98	$	197	$	123	$	245

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the six months ended June 30, ~~2020.~~2021.

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


				As of June 30, 2021
(in thousands)	Six Months Ended June 30, 2020
Lease payments due:
Within one year	$	336		$	2,137
After one year but within two years		250			102
After two years but within three years		41			63
After three year but within four years		—			64
After four years but within five years		—			66
After five years		—			106

Total undiscounted cash flows		627			2,538
Discount on cash flows		(19	)		(17	)

Total lease liability	$	608		$	2,521

3530

Table of Contents

Note ~~12. Goodwill and~~11. 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			June 30, 2021			December 31, 2020
Core deposit intangible	$	739		$	766		$	630		$	739
Accumulated amortization		(55	)		(27	)		(55	)		(109	)

Total finite-lived intangible assets	$	684		$	739		$	575		$	630

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, 2021 and period ended December 31, 2020 was $55 and ~~2019 was $28 and~~

~~$-0-,~~

$109, respectively. The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:


Year ending December 31,	Amount		Amount
2020	$	54
2021		109	$	54
2022		109		109
2023		109		109
2024		109		109
2025				109
Thereafter		194		85

	$	684	$ 575

3631

Table of Contents

Note 12. Secured Line of Credit

(in thousands)

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


	June 30, 2021		December 31, 2020
Funded balance	$	18,000	$	0
Unfunded balance		2,000		0

Total credit facility	$	20,000	$	0

Note 13. Shareholders’ Equity

(in thousands, except share data)

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

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			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
Balance, January 1, 2021																		5,587,070	$	1,118	$	18,134		$	4,138		$	96,158		$	119,548
Net income		—		—		—			—			1,227			1,227			—		—		—			—			1,897			1,897
Dividends paid ($0.24 per share)		—		—		—			—			(1,177	)		(1,177	)		—		—		—			—			(1,341	)		(1,341	)
Options exercised		—		—		—			—			—			—			—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—			—		—		—			—			—			—
Stock compensation expense		—		—		41			—			—			41			—		—		42			—			—			42
Other comprehensive income, net		—		—		—			6,622			—			6,622
Other comprehensive loss, net																		—		—		—			(13,668	)		—			(13,668	)

Balance, March 31, 2019		4,904,530	$	981	$	4,339		$	(8,353	)	$	93,612		$	90,579
Balance, March 31, 2021																		5,587,070	$	1,118	$	18,176		$	(9,530	)	$	96,714		$	106,478
Net income		—		—		—			—			1,371			1,371			—		—		—			—			1,907			1,907
Dividends paid ($0.24 per share)		—		—		—			—			(1,179	)		(1,179	)		—		—		—			—			(1,343	)		(1,343	)
Options exercised		—		—		—			—			—			—
Restricted stock forfeited																		—		—		—			—			—			—
Restricted stock granted		7,500		2		(2	)		—			—			—			8,250		2		(2	)		—			—			—
Stock compensation expense		—		—		41			—			—			41			—		—		40			—			—			40
Other comprehensive income, net		—		—		—			5,325			—			5,325			—		—		—			2,492			—			2,492

Balance, June 30, 2019		4,912,030	$	983	$	4,378		$	(3,028	)	$	93,804		$	96,137
Balance, June 30, 2021																		5,595,320	$	1,120	$	18,214		$	(7,038	)	$	97,278		$	109,574

3732


	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

Note 14. Fair Value of Financial Instruments

(in thousands)

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


Level 1		Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2		Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or

Level 3		Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.

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

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The following table presents assets and liabilities that were measured at fair value on a recurring basis as of June 30, ~~2020:~~2021:

   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


	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	$	—	$	4,777	$	—	$	4,777
Mortgage-backed securities		—		412,389		—		412,389
State, county and municipal obligations		—		125,005		—		125,005
Other securities		500		—		—		500

Total	$	500	$	542,171	$	—	$	542,671

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The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, ~~2019:~~2020:


	Fair Value Measurements Using:										Fair Value Measurements Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals		(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government Agencies	$	—	$	97,111	$	—	$	97,111	$	—	$	12,061	$	—	$	12,061
Mortgage-backed securities		—		306,900		—		306,900		—		561,983		—		561,983
State, county and municipal obligations		—		60,372		—		60,372		—		104,197		—		104,197
Other securities										—		508		—		508

Total	$	—	$	464,383	$	—	$	464,383	$	—	$	678,749	$	—	$	678,749

The ~~Corporation~~Company recorded 0 gains or losses in earnings for the period ended June 30, ~~2020~~2021 or December 31, ~~2019~~2020 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

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

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Other real estate owned

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

For assets measured at fair value on a nonrecurring basis during ~~2020~~2021 that were still held on the ~~Corporation’s~~Company’s balance sheet at June 30, ~~2020,~~2021, the following table provides the hierarchy level and the fair value of the related assets:


			Fair Value Measurements Using:								2021 Fair Value Measurements Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals		(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	3,614	$	3,614	$	—	$	—	$	111	$	111
Other real estate owned										—		—		1,567		1,567

Total	$	—	$	—	$	3,614	$	3,614	$	—	$	—	$	1,678	$	1,678

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The following table presents information as of June 30, ~~2020~~2021 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

Financial instrument

Fair Value

Valuation Technique

Significant Unobservable

Inputs

Range of
Inputs

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

111

Appraised value of collateral less estimated costs to sell

Estimated costs to sell

25%

OREO

1,567

Appraised value of collateral less estimated costs to sell

Estimated costs to sell

25%

For assets measured at fair value on a nonrecurring basis during ~~2019~~2020 that were still held on the ~~Corporation’s~~Company’s balance sheet at December 31, ~~2019,~~2020, the following table provides the hierarchy level and the fair value of the related assets:

~~Table of Contents~~

   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


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

Total	$	—	$	—	$	2,013	$	2,013

Impaired loans, whose fair value was remeasured during the period, with a carrying value of ~~$4,299~~$114 and ~~$5,003~~$2,920, had an allocated allowance for loan losses of ~~$685~~$3 and ~~$427~~$907 at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of

~~$-0-~~

$375 and $391 was necessary and recorded during the three and

six-month

period ended June 30, ~~2020 and~~2021, respectively. Management determined 0 fair value adjustment was necessary for the year ended December 31, ~~2019.~~2020.

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


	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
June 30, 2021	Carrying Value		(Level 1)		(Level 2)		(Level 3)		Total Fair Value
Financial assets
Cash and due from banks	$	16,050	$	16,050	$	—	$	—	$	16,050
Interest bearing deposits with banks		66,153		66,153		—		—		66,153
Securities available-for-sale		542,671		500		542,171		—		542,671
Net loans		629,691		—		—		622,348		622,348
Financial liabilities
Deposits	$	1,127,362	$	875,283	$	253,178	$	—	$	1,128,461
Securities sold under agreement to repurchase		67,286		67,286		—		—		67,286
Secured line of credit		18,000		18,000		—		—		18,000

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The following represents the carrying value and estimated fair value of the ~~Corporation’s financial instruments at June 30, 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~~Company’s financial instruments at December 31, ~~2019:~~2020:


					Fair Value Measurements Using:						Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
			Quoted Prices								Carrying Value								Total Fair Value
			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)
December 31, 2020											Carrying Value		(Level 1)		(Level 2)		(Level 3)		Total Fair Value
Financial assets											Carrying Value								Total Fair Value
Cash and due from banks	$	15,937	$	15,937	$	—	$	—	$	15,937	$	16,840	$	16,840	$	—	$	—	$	16,840
Interest bearing deposits with banks		58,557		58,557		—		—		58,557		25,468		25,468		—		—		25,468
Federal funds sold		1,600		1,600		—		—		1,600
Securities available-for-sale		464,383		—		464,383		—		464,383		678,749		—		678,749		—		678,749
Net loans		573,312		—		—		569,640		569,640		647,521		—		—		638,362		638,362
Financial liabilities
Deposits	$	898,996	$	642,825	$	258,100	$	—	$	900,925	$	1,095,189	$	861,552	$	234,909	$	—	$	1,096,461
Securities sold under agreement to repurchase		170,410		170,410		—		—		170,410		196,272		196,272		—		—		196,272
FHLB advances												25,000		25,000		—		—		25,000

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS.

(in thousands, except share and per share data)

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form

10-Q

(the “Quarterly Report”) contains statements that constitute

forward-looking

statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify

forward-looking

statements. These statements appear in a number of places in this Quarterly Report. The ~~Corporation~~Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

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

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

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

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates including, but not limited to, the ~~negative impacts~~effects of the emergence of widespread health emergencies or pandemics, including the duration of the

COVID-19

pandemic and ~~disruptions resulting from~~its impact on the ~~recent outbreak~~Company’s and its customers’ business, results of

~~COVID-19;~~ operations, asset quality and financial condition;

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

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

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

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

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

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

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

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

other risks detailed from

time-to-time

in the Company’s filings with the Securities and Exchange Commission.

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

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

OVERVIEW

The Company is a

one-bank

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

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At June 30, ~~2020,~~2021, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of ~~$1,402,061~~$1,337,945 and total deposits of ~~$1,077,318.~~$1,128,203. 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~~Company has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the ~~Corporation~~Company at June 30, ~~2020,~~2021, was ~~18.19%~~28.31% and at December 31, ~~2019,~~2020, was ~~24.87%~~22.06%. The ~~decrease~~increase was due to an increase in ~~deposits~~interest bearing cash and cash equivalents and a reduction in the amount of securities required to be pledged at June 30, ~~2020.~~2021. Management believes it maintains adequate liquidity for the ~~Corporation’s~~Company’s current needs.

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The ~~Corporation’s~~Company’s primary source of liquidity is customer deposits, which were ~~$1,075,348~~$1,127,362 at June 30, ~~2020,~~2021, and ~~$898,996~~$1,095,189 at December 31, ~~2019.~~2020. Other sources of liquidity include investment securities, the ~~Corporation’s~~Company’s line of credit with the Federal Home Loan Bank (“FHLB”), the Company’s secured line of credit with First Horizon Bank (“FHN”) and federal funds lines with correspondent banks. The ~~Corporation~~Company had ~~$627,719~~$542,671 invested in

available-for-sale

investment securities at June 30, ~~2020,~~2021, and ~~$464,383~~$678,749 at December 31, ~~2019. This increase was~~2020. The decrease in securities is the result of management strategically reducing higher interest-bearing deposits that increased significantly through the first quarter of 2021 due to ~~purchases coupled with an increase in the fair value of the Corporation’s investment securities portfolio in excess of paydowns, maturities, sales and calls.~~government stimulus by liquidating under-performing securities.

The ~~Corporation~~Company also had ~~$41,184~~$66,153 in interest bearing deposits at other banks at June 30, ~~2020~~2021 and ~~$58,557~~$25,468 at December 31, ~~2019.~~2020. The ~~Corporation~~Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. In addition, the ~~Corporation~~Company has the ability to draw on its line of credit with the ~~FHLB.~~FHLB and FHN. At June 30, ~~2020,~~2021, the ~~Corporation~~Company had unused and available ~~$209,280~~$222,073 of its line of credit with the FHLB and at December 31, ~~2019,~~2020, the ~~Corporation~~Company had unused and available ~~$177,592~~$167,285 of its line of credit with the FHLB. The increase in the amount available under the ~~Corporation’s~~Company’s line of credit with the FHLB from the end of ~~2019~~2020 to June 30, ~~2020,~~2021, was the result of an increase in the amount of loans eligible for the collateral pool securing the ~~Corporation’s~~Company’s line of credit with the FHLB. The ~~Corporation~~secured line of credit with FHN was originated on June 9, 2021. At June 30, 2021, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of

$-0-

as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The ~~Corporation~~Company may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

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

CAPITAL RESOURCES

Total shareholders’ equity was ~~$119,369~~$109,574 at June 30, ~~2020,~~2021, as compared to ~~$112,800~~$119,548 at December 31, ~~2019.~~2020. The ~~increase~~decrease in shareholders’ equity ~~per share reflects an increase in~~was the ~~fair value~~result of the ~~Corporation’s~~accumulated other comprehensive loss brought about by the investment securities market value adjustment partially offset by ~~dividends~~earnings in excess of ~~earnings. The fair value adjustment, caused by the decrease in medium term interest rates, resulted in an increase in the fair value of the Corporation’s investment portfolio.~~dividends paid.

On June 9, 2021, the Company obtained a $20,000 secured revolving line of credit with FHN to enhance the Bank’s capital structure by injecting $18,000 into the Bank. With the capital injection coupled with strategically reducing higher interest-bearing deposits, the Bank’s Tier 1 Leverage ratio increased at June 30, 2021 and December 31, 2020, respectively, to 8.25% from 7.05%.

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The ~~Corporation~~Company paid aggregate cash dividends in the amount of ~~$2,681,~~$2,684, or $0.48 per share, during the

six-month

period ended June 30, ~~2020~~2021 compared to ~~$2,356,~~$2,681, or $0.48 per share, for the same period in ~~2019.~~2020.

Quantitative measures established by federal regulations to ensure capital adequacy require the ~~Corporation~~Company 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, ~~2020,~~2021, the ~~Corporation~~Company meets all capital adequacy requirements to which it is subject and according to these requirements the ~~Corporation~~Company is considered to be well capitalized.

~~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 %


	Actual					Minimum Capital Requirement to be Well Capitalized					Minimum Capital Requirement to be Adequately Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2021
Citizens Holding Company
Tier 1 leverage ratio	$	102,970		7.08	%	$	72,724		5.00	%	$	58,179		4.00	%
Common Equity tier 1 capital ratio		102,970		12.67	%		94,541		6.50	%		65,452		4.50	%
Tier 1 risk-based capital ratio		102,970		12.67	%		64,994		8.00	%		48,746		6.00	%
Total risk-based capital ratio		107,322		13.21	%		81,243		10.00	%		64,994		8.00	%

December 31, 2020
Citizens Holding Company
Tier 1 leverage ratio	$	101,640		7.22	%	$	70,344		5.00	%	$	56,275		4.00	%
Common Equity tier 1 capital ratio		101,640		12.55	%		91,448		6.50	%		63,310		4.50	%
Tier 1 risk-based capital ratio		101,640		12.55	%		64,780		8.00	%		48,585		6.00	%
Total risk-based capital ratio		106,375		13.14	%		80,975		10.00	%		64,780		8.00	%

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~~Company (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II for

non-core

banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

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

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

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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, ~~2020,~~2021, the Company and the Bank met all capital adequacy requirements under Basel III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the ~~Corporation’s~~Company’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~~Company and the related changes between those periods:

   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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Interest Income, including fees	$	9,816	$	10,127	$	18,895	$	19,836
Interest Expense		1,322		1,777		2,768		4,101

Net Interest Income		8,494		8,350		16,127		15,735
Provision for loan losses		232		622		319		936

Net Interest Income after
Provision for loan losses		8,262		7,728		15,808		14,799
Other Income		2,989		2,470		6,221		4,851
Other Expense		8,982		8,344		17,450		16,411

Income Before Provision For
Income Taxes		2,269		1,854		4,579		3,239
Provision for Income Taxes		362		392		775		617

Net Income	$	1,907	$	1,462	$	3,804	$	2,622

Net Income Per share - Basic	$	0.34	$	0.26	$	0.68	$	0.47

Net Income Per Share-Diluted	$	0.34	$	0.26	$	0.68	$	0.47

See Note 43 to the ~~Corporation’s~~Company’s Consolidated Financial Statements for an explanation regarding the ~~Corporation’s~~Company’s calculation of Net Income Per Share - basic and - diluted.

Annualized return on average equity (“ROE”) was ~~4.90%~~7.04% for the three months ended June 30, ~~2020,~~2021, and ~~6.10%~~4.90% for the corresponding period in ~~2019.~~2020. Annualized return on average equity (“ROE”) was ~~4.52%~~6.74% for the six months ended June 30, ~~2020,~~2021, and ~~5.90%~~4.52% for the corresponding period in ~~2019.~~2020. The ~~decrease~~increase in ROE for the three and six months ended June 30, ~~2020~~2021 was caused by the increase in ~~equity balances~~earnings and decrease in accumulated other comprehensive income (“AOCI “) compared to the same period in ~~2019.~~2020.

Book value per share ~~increased~~decreased to ~~$21.37~~$19.61 at June 30, ~~2020,~~2021, compared to ~~$20.22~~$21.43 at December 31, ~~2019.~~2020. The ~~increase~~decrease in book value per share ~~reflects an increase~~is directly attributable to the decrease in ~~the fair value of the Corporation’s investment securities partially offset by dividends in excess of earnings.~~shareholders’ equity discussed above. Average assets for the six months ended June 30, ~~2020~~2021 were ~~$1,267,163~~$1,479,315 compared to ~~$1,164,570~~$1,336,513 for the year ended December 31, ~~2019.~~2020. This increase was due mainly to an increase in ~~loans and~~ investment securities ~~partially offset~~and loans held for investment. During the second quarter management strategically reduced higher interest-bearing deposits by ~~a decrease~~approximately $200,000 to improve the Bank’s capital structure. In doing so management liquidated securities available for sale along with utilizing excess cash in ~~interest bearing deposits with~~the Bank’s interest-bearing deposit account held by other banks. The overall effect of this reduction will be reflected in the third quarter average balances.

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NET INTEREST INCOME / NET INTEREST MARGIN

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

Net interest income was $8,494 and $16,127 for the three and six months ended June 30, 2021, respectively, as compared to $8,350 and $15,735 for the same respective time periods in 2020.

The annualized net interest margin was 2.60% for the three months ended June 30, 2020 compared to 2.65% for the corresponding period of 2019. The decrease in net interest margin for the three months ended June 30, 2020, when compared to the same period in 2019, was primarily driven by the impact 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%~~2.45% for the six months ended June 30, ~~2020~~2021 compared to ~~2.69%~~2.74% for the corresponding period of ~~2019.~~2020. The ~~increase~~decrease in net interest margin for the six months ended June 30, ~~2020,~~2021, when compared to the same period in ~~2019,~~2020, was mainly due to ~~yields~~the historical low mortgage interest rates increasing prepayments on ~~earning assets decreasing less than rates paid~~mortgage-backed securities. Prepayments on ~~interest bearing liabilities. While~~mortgage-backed securities decreased the ~~margin growth~~yield on taxable securities by 121 basis points (“bps”) to 49 bps at June 30, 2021 compared to 170 bps in 2020. However, the Company was ~~significant,~~able to offset this decline in yield on mortgage-backed securities by lowering the ~~increase was partially offset by the aforementioned impact the PPP loans had on our loan yields. Earning assets averaged $1,173,734~~cost of cost funds to 52 bps for the six months ended June 30, 2021 compared to 89 bps for the same period in 2020.

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

TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES


	Three Months Ended June 30,
	Average Balance				Income/Expense				Average Yield/Rate
	2021		2020		2021		2020		2021			2020
Loans:
Loans, net of unearned (1)	$	640,851	$	617,940	$	7,955	$	7,617		4.97	%		4.93	%

Investment Securities
Taxable		525,828		462,763		1,063		2,100		0.81	%		1.82	%
Tax-exempt		166,230		64,179		1,107		485		2.66	%		3.02	%

Total Investment Securities		692,058		526,942		2,170		2,585		1.25	%		1.96	%

Federal Funds Sold and Other		41,464		82,152		10		45		0.10	%		0.22	%

Total Interest Earning Assets (1)(2)		1,374,373		1,227,034		10,135		10,247		2.95	%		3.34	%

Non-Earning Assets		93,712		104,809

Total Assets	$	1,468,085	$	1,331,843

Deposits:
Interest-bearing Demand Deposits (3)	$	534,839	$	453,455	$	415	$	767		0.31	%		0.68	%
Savings		116,412		92,036		30		25		0.10	%		0.11	%
Time		257,667		227,324		741		820		1.15	%		1.44	%

Total Deposits		908,918		772,815		1,186		1,612		0.52	%		0.83	%

Borrowed Funds
Short-term Borrowings		151,593		190,618		136		165		0.36	%		0.35	%
Long-term Borrowings		—		—		—		—		—			—

Total Borrowed Funds		151,593		190,618		136		165		0.36	%		0.35	%

Total Interest-Bearing Liabilities (3)		1,060,511		963,433		1,322		1,777		0.50	%		0.74	%

Non-Interest Bearing Liabilities
Demand Deposits		295,877		241,956
Other Liabilities		3,433		7,207
Shareholders’ Equity		108,264		119,247

Total Liabilities and Shareholders’ Equity	$	1,468,085	$	1,331,843

Interest Rate Spread										2.45	%		2.60	%

Net Interest Margin					$	8,813	$	8,470		2.57	%		2.76	%

Less
Tax Equivalent Adjustment						319		120

Net Interest Income					$	8,494	$	8,350

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	Six Months Ended June 30,
	Average Balance				Income/Expense				Average Yield/Rate
	2021		2020		2021		2020		2021			2020
Loans:
Loans, net of unearned (1)	$	646,784	$	595,985	$	16,128	$	15,106		4.99	%		5.07	%

Investment Securities
Taxable		535,820		440,724		1,325		3,757		0.49	%		1.70	%
Tax-exempt		147,525		62,596		2,006		943		2.72	%		3.01	%

Total Investment Securities		683,345		503,320		3,331		4,700		0.97	%		1.87	%

Federal Funds Sold and Other		46,308		67,495		25		263		0.11	%		0.78	%

Total Interest Earning Assets (1)(2)		1,376,437		1,166,800		19,484		20,069		2.83	%		3.44	%

Non-Earning Assets		102,878		100,363

Total Assets	$	1,479,315	$	1,267,163

Deposits:
Interest-bearing Demand Deposits (3)	$	524,038	$	427,995	$	933	$	1,681		0.36	%		0.79	%
Savings		111,888		88,346		57		57		0.10	%		0.13	%
Time		250,305		235,536		1,462		1,843		1.17	%		1.56	%

Total Deposits		886,231		751,877		2,452		3,581		0.55	%		0.95	%

Borrowed Funds
Short-term Borrowings		182,052		174,549		316		520		0.35	%		0.60	%
Long-term Borrowings		—		—		—		—		—			—

Total Borrowed Funds		182,052		174,549		316		520		0.35	%		0.60	%

Total Interest-Bearing Liabilities (3)		1,068,283		926,426		2,768		4,101		0.52	%		0.89	%

Non-Interest Bearing Liabilities
Demand Deposits		282,538		213,345
Other Liabilities		15,582		11,296
Shareholders’ Equity		112,912		116,096

Total Liabilities and Shareholders’ Equity	$	1,479,315	$	1,267,163

Interest Rate Spread										2.31	%		2.55	%

Net Interest Margin					$	16,716	$	15,968		2.45	%		2.74	%

Less
Tax Equivalent Adjustment						589		233

Net Interest Income					$	16,127	$	15,735

(1)	Overdrafts, while not considered an earning asset, are included in Loans, net of unearned in the average volume calculation due to the immaterial impact on the yield.

(2)	Earnings Assets in the table above does include the dividend paying stock of the Federal Home Loan Bank.

(3)	Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the non-interest bearing liabilities section above.

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The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on

tax-exempt

loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 3.95%, which is net of federal tax benefit.

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three months ended June 30, 2021, repricing of interest-bearing demand deposits, and reallocating the investment portfolio into slower prepaying

non-taxable

securities offset the decline in yield on taxable securities compared to the same period in 2020. ~~This represents an increase of $230,576, or 24.4%, over average earning assets of $943,158 for~~For the six months ended June 30, ~~2019.~~2021, as compared to the respective corresponding period in 2020, the repricing of interest-bearing demand deposits, loan growth, and reallocating the investment portfolio into slower prepaying

non-taxable

securities were the largest contributing factors to the increase in net interest income over these periods. Also, the Company’s continued efforts to reprice and reduce higher interest-bearing deposits has helped offset the yield decline in taxable securities that has been hampered by the low interest rate environment resulting from the Federal Reserve Board’s decreases to the target federal funds rate during the

COVID-19

pandemic. Management believes by continuing to reprice and strategically reduce interest-bearing liabilities as they mature, continued focus on loan growth, and continuing to reallocate the investment mix will increase the net interest margin.

~~Interest bearing deposits averaged $770,288~~

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The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three 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~~and 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 increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase for the three months ended June 30, 2020, when2021 compared to the ~~three months ended June 30, 2019.~~same respective period in 2020:

Other borrowed funds averaged $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 increase was discussed previously.


	TABLE 2 - VOLUME/RATE ANALYSIS (in thousands)
	Three Months Ended June 30, 2021
	2021 Change from 2020
	Volume			Rate			Total
INTEREST INCOME

Loans	$	282			56		$	338
Taxable Securities		286			(1,323	)		(1,037	)
Non-Taxable Securities		771			(149	)		622
Federal Funds Sold and Other		(22	)		(13	)		(35	)

TOTAL INTEREST INCOME	$	1,318		$	(1,430	)	$	(112	)

INTEREST EXPENSE

Interest-bearing demand deposits	$	138			(490	)		(352	)
Savings Deposits		7			(2	)		5
Time Deposits		109			(188	)		(79	)
Short-term borrowings		(34	)		5			(29	)

TOTAL INTEREST EXPENSE	$	220		$	(675	)		(455	)

NET INTEREST INCOME	$	1,098		$	(755	)	$	343

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Net interest income was $8,350 for the three months ended June 30, 2020, an increase of $2,144 from $6,206 for the three months ended June 30, 2019, primarily due to an increase in the loan volume from the same period in 2019. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the three months ended June 30, 2020, the yields on earning assets decreased and the rates paid on deposits decreased from the same period in 2019. The yield on all interest-bearing assets decreased 33 basis points to 3.27% in the three months ended June 30, 2020 from 3.60% for the same period in 2019. At the same time, the rate paid on all interest-bearing liabilities for the three months ended June 30, 2020 decreased 36 basis points to 0.85% from 1.21% in the same period in 2019. As longer-term interest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will remain at similar levels for extended period of time.

Net interest income was $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, primarily due to an increase in the loan volume from the same period in 2019. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the six months ended June 30, 2020, the yields on earning assets decreased and the rates paid on deposits decreased from the same period in 2019. The yield on all interest-bearing assets decreased 21 basis points to 3.45% in the six months ended June 30, 2020 from 3.66% for the same period in 2019. At the same time, the rate paid on all interest-bearing liabilities for the six months ended June 30, 2020 decreased 34 basis points to 0.89% from 1.23% in the same period in 2019. As longer-term interest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will 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 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 %


	Six Months Ended June 30, 2021
	2021 Change from 2020
	Volume			Rate			Total
INTEREST INCOME

Loans	$	1,288			(266	)	$	1,022
Taxable Securities		811			(3,243	)		(2,432	)
Non-Taxable Securities		1,279			(216	)		1,063
Federal Funds Sold and Other		(83	)		(155	)		(238	)

TOTAL INTEREST INCOME	$	3,295		$	(3,880	)	$	(585	)

INTEREST EXPENSE

Interest-bearing demand deposits	$	377			(1,125	)		(748	)
Savings Deposits		15			(15	)		—
Time Deposits		116			(497	)		(381	)
Short-term borrowings		22			(226	)		(204	)

TOTAL INTEREST EXPENSE	$	530		$	(1,863	)		(1,333	)

NET INTEREST INCOME	$	2,765		$	(2,017	)	$	748

CREDIT LOSS EXPERIENCE

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

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

~~Table of Contents~~

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

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

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

   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 %


	Quarter Ended June 30, 2021			Year Ended December 31, 2020			Amount of Increase (Decrease)			Percent of Increase (Decrease)
BALANCES:
Gross Loans	$	634,042		$	652,257		$	(18,215	)		-2.79	%
Allowance for Loan Losses		4,351			4,735			(384	)		-8.11	%
Nonaccrual Loans		4,366			8,484			(4,118	)		-48.54	%
Ratios:
Allowance for loan losses to gross loans		0.69	%		0.73	%
Net loans charged off to allowance for loan losses		16.16	%		10.67	%

The provision for loan losses for the three months ended June 30, ~~2020~~2021 was ~~$622, an increase~~$232, a decrease of ~~$357~~$390 from the provision for loan losses of ~~$265~~$622 for the same period in ~~2019.~~2020. The provision for loan losses for the six months ended June 30, ~~2020~~2021 was ~~$936, an increase~~$319, a decrease of ~~$476~~$617 from the provision for loan losses of ~~$460~~$936 for the same period in ~~2019.~~2020. The change in the ~~Corporation’s~~Company’s loan loss ~~provisions~~provision for the three and six months ended June 30, ~~2020~~2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact ~~caused by current~~of the continuing vaccine distribution and improvement in the local and national ~~and international economic conditions~~unemployment rate coupled with ~~an increase~~a decrease in loan

~~Table of Contents~~

~~demand. As a result of~~ demand from 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.~~ prior quarter. The ~~Corporation’s~~Company’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to payments received and loans charged off in excess of new loans being added to nonaccrual status.

For the three months ended June 30, ~~2020,~~2021, net loan losses charged to the allowance for loan losses totaled ~~$181,~~$653, an increase of ~~$178~~$471 from the $4$181 charged off in the same period in ~~2019. The increase was primarily due to one significant~~

~~charge-off~~

~~during the second quarter of~~ 2020.

For the six months ended June 30, ~~2020,~~2021, net loan losses charged to the allowance for loan losses totaled ~~$434,~~$703, an increase of ~~$424~~$269 from the ~~$10~~$434 charged off in the same period in ~~2019.~~ 2020.

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The increase was primarily due to two significant charge-offs during the ~~six month~~

six-month

period ended June 30, ~~2020.~~2021.

Management reviews quarterly with the ~~Corporation’s~~Company’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the six months ended June 30, ~~2020~~2021 that have not been charged off. Management also believes that the ~~Corporation’s~~Company’s allowance will be adequate to absorb probable losses inherent in the ~~Corporation’s~~Company’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, ~~2020~~2021 was ~~$2,470,~~$2,989, an increase of ~~$397,~~$519, or ~~19.2%~~21.01%, from ~~$2,073~~$2,470 in the same period in ~~2019.~~2020. Service charges on deposit accounts were ~~$668~~$768 in the three months ended June 30, ~~2020,~~2021, compared to ~~$1,046~~$668 for the same period in ~~2019. In correlation with~~2020. As the vaccine distribution continues, the national ~~trend of~~and local economies are starting to recover resulting in increased ~~savings due to~~spending and overdraft income. Included in 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 $101, or 13.1%, to $871 in~~accounts line item for the three months ended June 30, ~~2020,~~2021, overdraft income increased by $90, or 22.01% from the same period in 2020. Interchange fees which are included in the other service charges and fees line item on the income statement continues its upward trend by increasing by $199, or 25.46%, to $982 for the three months ended June 30, 2021, compared to ~~$770~~$783 for the same period in ~~2019.~~2020. Other operating income not derived from service charges or fees increased ~~$674,~~$199, or ~~262.3%~~21.37% to ~~$931~~$1,130 in the three months ended June 30, ~~2020,~~2021, compared to ~~$257~~$931 for the same period in ~~2019.~~2020. This increase was primarily due to ~~two~~three reasons, (1) an increase in gains from security sales due to strategic investment decisions ~~and~~ (2) an increase in mortgage loan origination income and (3) income from the payout of the Company’s bank-owned life insurance (“BOLI”) claim.

Other income for the six months ended June 30, 2021 was $6,221, an increase of $1,370, or 28.24%, from $4,851 in the same period in 2020. Service charges on deposit accounts were $1,582 in the six months ended June 30, 2021, compared to $1,717 for the same period in 2020. The decrease in service charges on deposit accounts year-over-year is due to ~~a decrease~~overdraft income being down in ~~long-term mortgage rates.~~the first quarter. As discussed above, the second quarter results show overdraft income is starting to recover due to the vaccine distribution and local and national economies recovering. Other operating income not derived from service charges or fees increased $1,083, or 72.68% to $2,573 in the six months ended June 30, 2021, compared to $1,490 for the same period in 2020. The reasons for the significant increase were discussed above.

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Other income for the six months ended June 30, 2020 was $4,851, an increase of $732, or 17.8%, from $4,119 in the same period in 2019. Service charges on deposit accounts were $1,717 in the six months ended June 30, 2020, compared to $2,143 for the same period in 2019. The reason for the significant decrease was discussed above. Other service charges and fees increased by $191, or 13.2%, to $1,644 in the six months ended June 30, 2020, compared to $1,453 for the same period in 2019. Other operating income not derived from service charges or fees increased $967, or 184.9% to $1,490 in the six months ended June 30, 2020, compared to $523 for the same period in 2019. The reason for the significant increase was 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    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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Other operating income	2021		2020		2021		2020
BOLI Income	$	306	$	123	$	436	$	229
Mortgage Loan Origination Income		323		282		718		529
Income from security sales, net		393		333		919		410
Other Income		108		193		500		322

Total Other Income	$	1,130	$	931	$	2,573	$	1,490

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, 2021 and 2020 were $8,982 and ~~2019 were~~ $8,344, ~~and $6,323,~~ respectively, an increase of ~~$2,021~~$638 or ~~32.0%~~7.65%. Salaries and benefits increased to ~~$4,307~~$278 for the three months ended June 30, ~~2020,~~2021, and increased to $4,585 from ~~$3,470~~$4,307 for the same period in ~~2019.~~2020. Occupancy expense ~~increased~~decreased by ~~$626,~~$245, or ~~44.4%~~(12.03%), to ~~$2,036~~$1,791 for the three months ended June 30, ~~2020,~~2021, compared to ~~$1,410~~$2,036 for the same period of 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 increased by $558, or 38.7%, to $2,001 for2020. For the three months ended June 30, ~~2020,~~2021, other

non-interest

expense increased $605, or 30.23% to $2,606 compared to ~~$1,443~~$2,001 for the same period ~~of 2019.~~in 2020. This increase was mainly due to ~~an increase~~the write down of two OREO properties coupled with continued investment in ~~Postage~~customer facing and ~~Freight as a result of a~~

~~one-time~~

~~postage rebate in the same period of 2019.~~internal technology.

Aggregate

non-interest

expenses for the six months ended June 30, 2021 and 2020 were $17,450 and ~~2019 were~~ $16,411, ~~and $12,962,~~ respectively, an increase of ~~$3,449~~$1,039 or ~~26.6%~~6.33%. Salaries and benefits increased to ~~$8,742~~$411 for the six months ended June 30, ~~2020,~~2021, and increased to $9,153 from ~~$7,016~~$8,742 for the same period in ~~2019.~~2020. Occupancy expense ~~increased~~decreased by ~~$863,~~$87, or ~~30.5%~~(2.35%), to ~~$3,695~~$3,608 for the six months ended June 30, ~~2020,~~2021, compared to ~~$2,832~~$3,695 for the same period of ~~2019.~~2020. Other operating expenses increased by ~~$860,~~$715, or ~~27.6%~~17.99%, to ~~$3,974~~$4,689 for the six months ended June 30, ~~2020,~~2021, compared to ~~$3,114~~$3,974 for the same period of ~~2019.~~2020. The ~~increases~~reason for ~~all expense categories were~~the significant increase was discussed ~~previously.~~above.

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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    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


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Other Operating Expense	2021		2020		2021		2020
Advertising	$	162	$	156	$	303	$	360
Office supplies		235		311		484		603
Professional fees		217		261		454		519
Telephone expense		141		138		296		296
Postage and freight		161		138		330		279
Loan collection expense		16		20		70		43
Regulatory and related expense		237		104		472		239
Debit card/ATM expense		192		148		360		283
Write down on OREO		375		—		390		—
Other expenses		870		725		1,530		1,352

Total Other Expense	$	2,606	$	2,001	$	4,689	$	3,974

The ~~Corporation’s~~Company’s efficiency ratio for the three months ended June 30, ~~2020~~2021 was ~~82.78%~~77.61%, compared to ~~81.46%~~82.78% for the same period in ~~2019.~~2020. The ~~Corporation’s~~Company’s efficiency ratio for the six months ended June 30, ~~2020~~2021 was ~~82.46%~~76.80%, compared to ~~79.95%~~82.46% for the same period in ~~2019.~~2020. The efficiency ratio is the ratio of

non-interest

expenses divided by the sum of net interest income (on a fully tax equivalent basis) and

non-interest

income.

BALANCE SHEET ANALYSIS

         Amount of    Percent of
   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 %


	June 30, 2021		December 31, 2020		Amount of Increase (Decrease)			Percent of Increase (Decrease)
Cash and Due From Banks	$	16,050	$	16,840	$		(790)		-4.69	%
Interest Bearing deposits with Other Banks		66,153		25,468		40,685			159.75	%
Investment Securities		542,671		678,749		(136,078	)		-20.05	%
Loans, net		629,691		647,521		(17,830	)		-2.75	%
Premises and Equipment		25,446		25,630		(184	)		-0.72	%
Total Assets		1,338,134		1,450,692		(112,558	)		-7.76	%
Total Deposits		1,127,362		1,095,189		32,173			2.94	%
Total Shareholders’ Equity		109,574		119,548		(9,974	)		-8.34	%

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, ~~2020~~2021 was ~~$20,003,~~$82,203, which was an increase of ~~$4,066~~$39,895 from the balance of ~~$15,937~~$42,308 at December 31, ~~2019. The increase was due to an increase in the balances being held at the Company’s branches due to uncertainty around the~~

~~COVID-19~~2020.

~~pandemic.~~

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INVESTMENT SECURITIES

The ~~Corporation’s~~Company’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The ~~Corporation’s~~Company’s investments securities portfolio at June 30, ~~2020 increased~~2021 decreased by ~~$163,336,~~$136,078, or ~~35.2%~~(20.05%), to ~~$627,719~~$542,671 from ~~$464,383~~$678,749 at December 31, ~~2019. This increase was due~~2020. The decrease is a result of the Company liquidating a portion of the investment portfolio to ~~a large excess in liquidity as customers continue to save excess funds due to~~provide funding for the ~~uncertainty around the~~

~~COVID-19~~Company’s strategic high interest-bearing deposit reduction plan.

~~pandemic.~~

LOANS

The ~~Corporation’s~~Company’s loan balance ~~increased~~decreased by ~~$58,628,~~$17,830, or ~~10.2%~~(2.75%), during the six months ended June 30, ~~2020,~~2021, to ~~$631,940~~$629,691 from ~~$573,312~~$647,521 at December 31, ~~2019. This large increase~~2020. The decrease was primarily due to two reasons: (1) Loan ~~demand~~competition continues to be strong in our operating regions, especially in land development and construction and commercial real estate categories resulting in large payoffs and (2) payoffs of the ~~Company funded approximately $48,821 in~~ PPP loans ~~during the second quarter of 2020.~~that were provided to customers. While loan demand continues to be strong in certain sectors, the uncertainty surrounding the

~~COVID-19~~

pandemic ~~has~~continues to put a lot of projects on hold in other sectors in the near term. Additionally, no material changes were made to the loan products offered by the ~~Corporation~~Company during this period.

~~PREMISES AND EQUIPMENT~~

~~During~~ Management remains optimistic for loan growth for the ~~six months ended June 30, 2020,~~second half of the ~~Corporation’s premises and equipment decreased by $386, or 1.6%,~~year as the economy starts to ~~$24,286 from $24,672 at December 31, 2019. The decrease was due to~~open back up with the ~~sale of an old branch building coupled with depreciation expense.~~vaccine distribution.

DEPOSITS

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


					Amount of			Percent of
	June 30,		December 31,		Increase			Increase
	2020		2019		(Decrease)			(Decrease)			June 30, 2021		December 31, 2020		Amount of Increase (Decrease)			Percent of Increase (Decrease)
Noninterest-Bearing Deposits	$	254,214	$	190,406	$	63,808			33.51	%	$	287,519	$	276,033	$	11,486			4.16	%
Interest-Bearing Deposits		501,327		369,354		131,973			35.73	%		465,606		480,987		(15,381	)		-3.20	%
Savings Deposits		96,165		83,065		13,100			15.77	%		122,158		104,532		17,626			16.86	%
Certificates of Deposit		223,642		256,171		(32,529	)		-12.70	%		252,079		233,637		18,442			7.89	%

Total deposits	$	1,075,348	$	898,996	$	176,352			19.62	%	$	1,127,362	$	1,095,189	$	32,173			2.94	%

~~Noninterest-bearing,~~All deposit accounts except for interest-bearing ~~and savings accounts~~deposits increased during the six months ended June 30, ~~2020 while certificates~~2021. The increase in deposit accounts is a result of ~~deposit decreased. As previously discussed,~~ the

COVID-19

savings trend coupled with record financial stimulus. The decrease in interest-bearing accounts is ~~creating~~ a ~~large increase in~~

~~non-time~~

~~deposits.~~result of management strategically reducing higher interest-bearing accounts to help improve both interest margin and the Bank’s capital ratios. While total deposits are still up from December 31, 2021, management has reduced higher interest-bearing deposits during the second quarter by approximately $200,000. Management continually monitors the interest rates on time deposit products to ensure that the ~~Corporation~~Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.

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OFF-BALANCE

SHEET ARRANGEMENTS

Please refer to Note 32 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the ~~Corporation’s~~Company’s

off-balance

sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

~~ITEM 3.~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

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

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

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

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

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The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of June 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

   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 %


	June 30, 2021						December 31, 2020
	Following 12 months			Months 13-24			Following 12 months			Months 13-24
+400 basis points		-5.3	%		0.5	%		9.1	%		8.9	%
+300 basis points		-3.5	%		1.1	%		10.7	%		8.4	%
+200 basis points		-2.2	%		1.2	%		11.6	%		7.3	%
+100 basis points		-0.4	%		1.4	%		10.9	%		5.3	%
Flat rates		—			—			—			—
-100 basis points		-6.0	%		-7.7	%		-12.2	%		-9.0	%
-200 basis points		-9.9	%		-12.9	%		-19.8	%		-19.9	%

The following table presents the change in our economic value of equity as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, assuming immediate parallel shifts in interest rates:


	Economic Value of Equity at Risk (%)						Economic Value of Equity at Risk (%)
	June 30, 2020			December 31, 2019			June 30, 2021			December 31, 2020
+400 basis points		33.7	%		7.1	%		-18.8	%		11.3	%
+300 basis points		38.6	%		8.0	%		-13.2	%		18.8	%
+200 basis points		39.7	%		7.8	%		-7.7	%		24.6	%
+100 basis points		24.8	%		5.4	%		-2.9	%		21.9	%
Flat rates		—			—			—			—
-100 basis points		-35.4	%		-18.5	%		-16.7	%		-29.4	%
-200 basis points		-51.5	%		-42.3	%		-34.1	%		-43.1	%

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

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

non-maturity

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

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~~ITEM 4.~~

ITEM 4. CONTROLS AND PROCEDURES.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of June 30, ~~2020~~2021 (the end of the period covered by this Quarterly Report).

There were no changes to the Company’s internal control over financial reporting that occurred in the ~~three~~six months ended June 30, ~~2020,~~2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

~~ITEM 1.~~

ITEM 1. LEGAL PROCEEDINGS.

~~ITEM 1A.~~

ITEM 1A. RISK FACTORS.

The ~~Corporation’s~~Company’s business, future

financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form

10-K

for the year ended December 31, ~~2019,~~2020, which the ~~Corporation~~Company filed with the Securities and Exchange Commission on March ~~13, 2020.~~12, 2021. 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~~Company’s Annual Report on Form

10-K

for the year ended December 31, ~~2019,~~2020, the ~~Corporation’s~~Company’s quarterly reports on Form

10-Q

and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the ~~Corporation’s~~Company’s business, financial condition and results of operations in the future.

~~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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~~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 assurance 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.

~~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 of litigation, from both clients and

~~non-clients~~

that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the 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.~~

ITEM 6. EXHIBITS.

Exhibits


10(1)		Citizens Holding Company Revolving Credit Loan Agreement(1)

31(a)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).


31(b)		~~31(b)~~	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).


32(a)		~~32(a)~~	Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.


32(b)	~~32(b)~~	Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.

101	Financial Statements submitted in Inline XBRL format.

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

~~101~~(1)

~~Financial Statements submitted in XBRL format.~~Filed as exhibit 10(1) to the Current Report on Form 8-K of the Company filed with the SEC on June 14, 2021 and incorporated herein by reference.

6159

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~~Phillip R. Branch
~~Robert T. Smith~~Phillip R. Branch
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)

DATE: August ~~7, 2020~~6, 2021

6260


	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


	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		—	$	—


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


	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


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


	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


	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


	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


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


	Total
Balance at January 1, 2020	$	13,103
Measurement period adjustment to goodwill from Charter acquisition		(73	)

Balance at June 30, 2020	$	13,030


											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	%


	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	%


	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	%