UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended September 30, ~~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 November 5, ~~2020:~~

2021:


Title		Outstanding
Common Stock, $0.20 par value	~~5,587,070~~	5,595,320

Table of Contents

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION		1

Item 1.	~~FINANCIAL INFORMATION~~Consolidated Financial Statements.		1

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

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

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

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

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

		Notes to Consolidated Financial Statements (Unaudited)			5

Item 2.	~~Item 2.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		45	38

Item 3.	~~Item 3.~~	Quantitative and Qualitative Disclosures About Market Risk.		62

55	~~Item 4.~~	~~Controls and Procedures.~~		64

~~PART II.~~ Item 4.	Controls and Procedures.	~~OTHER INFORMATION~~	57		65

PART II.	~~Item 1.~~ OTHER INFORMATION	~~Legal Proceedings.~~	58		65

Item 1.	~~Item 1A.~~ Legal Proceedings.	~~Risk Factors.~~	58		65

Item 1A.	Risk Factors.		58

Item 6.	Exhibits.	66	58

SIGNATURES		67	59

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

   September 30,
2020
(Unaudited)    December 31,
2019
(Audited)
ASSETS
Cash and due from banks
   $ 13,710    $ 15,937
Interest bearing deposits with other banks
   42,543    58,557
Federal funds sold
   —      1,600
Investment securities available for sale, at fair value
   582,698    464,383
Loans, net of allowance for loan losses of $4,494 in 2020 and $3,755 in 2019
   651,139    573,312
Premises and equipment, net
   25,141    24,672
Other real estate owned, net
   3,413    3,552
Accrued interest receivable
   5,861    4,181
Cash surrender value of life insurance
   25,515    25,088
Deferred tax assets, net
   2,145    3,684
Other assets
   22,052    20,468




TOTAL ASSETS
   $ 1,374,217    $ 1,195,434




LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

Deposits:

Noninterest-bearing demand
   $ 253,762    $ 190,406
Interest-bearing NOW and money market accounts
   469,777    369,354
Savings deposits
   100,527    83,065
Certificates of deposit
   225,091    256,171




Total deposits
   1,049,157    898,996
Securities sold under agreement to repurchase
   176,978    170,410
Federal Home Loan Bank advances
   15,000    —
Accrued interest payable
   561    1,128
Deferred compensation payable
   9,584    9,453
Other liabilities
   5,438    2,647




Total liabilities
   1,256,718    1,082,634
SHAREHOLDERS’ EQUITY

Common stock, $0.20 par value, 22,500,000 shares authorized, 5,587,070 shares issued and outstanding at September 30, 2020 and 5,578,131 at December 31, 2019
   1,118    1,116
Additional
paid-in
capital
   18,092    17,883
Retained earnings
   95,273    94,590
Accumulated other comprehensive income (loss), net of tax (expense) benefit of ($1,003) at September 30, 2020 and $262 at December 31, 2019
   3,016    (789 )




Total shareholders’ equity
   117,499    112,800




TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 1,374,217    $ 1,195,434


	September 30,			December 31,
	2021			2020
ASSETS	(Unaudited)			(Audited)
Cash and due from banks	$	17,795		$	16,840
Interest bearing deposits with other banks		76,132			25,468

Cash and cash equivalents		93,927			42,308
Investment securities available for sale, at fair value		574,189			678,749
Loans held for investment (LHFI), net of unearned income		611,027			652,256
Less allowance for loan losses, LHFI		5,318			4,735

Net LHFI		605,709			647,521
Premises and equipment, net		26,566			25,630
Other real estate owned, net		3,022			3,073
Accrued interest receivable		3,694			5,983
Cash surrender value of life insurance		25,491			25,814
Deferred tax assets, net		5,576			1,548
Identifiable intangible assets, net		13,578			13,660
Other assets		4,167			6,406

TOTAL ASSETS	$	1,355,919		$	1,450,692

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing deposits	$	295,097		$	276,033
Interest bearing deposits		818,882			819,156

Total deposits		1,113,979			1,095,189
Securities sold under agreement to repurchase		103,061			196,272
Federal Home Loan Bank (FHLB) advances		—			25,000
Borrowings on secured line of credit		18,000			—
Accrued interest payable		558			522
Deferred compensation payable		9,475			9,665
Other liabilities		3,464			4,496

Total liabilities		1,248,537			1,331,144
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value:
Authorized: 22,500,000 shares
Issued and outstanding: 5,595,320 shares - September 30, 2021; 5,587,070 shares - December 31, 2020		1,120			1,118
Additional paid-in capital		18,254			18,134
Retained earnings		97,815			96,158
Accumulated other comprehensive (loss) income, net of tax benefit (expense) of $3,260 at September 30, 2021 and ($1,376) at December 31, 2020		(9,807	)		4,138

Total shareholders’ equity		107,382			119,548

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,355,919		$	1,450,692

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

   For the Three Months    For the Nine Months
   Ended September 30,    Ended September 30,
   2020    2019    2020    2019
INTEREST INCOME

Interest and fees on loans
   $ 7,805    $ 5,941    $ 22,917    $ 17,221
Interest on securities

Taxable
   2,406    1,945    6,163    6,253
Nontaxable
   360    345    1,064    1,475
Other interest
   8    212    271    529








Total interest income
   10,579    8,443    30,415    25,478
INTEREST EXPENSE

Deposits
   1,506    1,922    5,087    5,568
Other borrowed funds
   167    603    687    1,575








Total interest expense
   1,673    2,525    5,774    7,143








NET INTEREST INCOME
   8,906    5,918    24,641    18,335
PROVISION FOR LOAN LOSSES
   247    12    1,183    472








NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
   8,659    5,906    23,458    17,863
OTHER INCOME

Service charges on deposit accounts
   771    1,126    2,488    3,268
Other service charges and fees
   1,031    863    2,675    2,317
Other operating income
   835    517    2,325    1,039








Total other income
   2,637    2,506    7,488    6,624








OTHER EXPENSES

Salaries and employee benefits
   4,389    3,509    13,131    10,525
Occupancy expense
   1,861    1,287    5,556    4,120
Other expense
   2,403    2,071    6,377    5,185








Total other expenses
   8,653    6,867    25,064    19,830








INCOME BEFORE PROVISION FOR INCOME TAXES
   2,643    1,545    5,882    4,657
PROVISION FOR INCOME TAXES
   560    212    1,177    727








NET INCOME
   $ 2,083    $ 1,333    $ 4,705    $ 3,930








NET INCOME PER SHARE -Basic
   $ 0.37    $ 0.27    $ 0.84    $ 0.80








-Diluted
   $ 0.37    $ 0.27    $ 0.84    $ 0.80








DIVIDENDS PAID PER SHARE
   $ 0.24    $ 0.24    $ 0.72    $ 0.72


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2021		2020		2021		2020
INTEREST INCOME
Interest and fees on loans	$	7,666	$	7,805	$	23,714	$	22,917
Interest on securities
Taxable		1,433		2,406		2,950		6,163
Nontaxable		642		360		1,947		1,064
Other interest		21		8		46		271

Total interest income		9,762		10,579		28,657		30,415
INTEREST EXPENSE
Deposits		951		1,506		3,403		5,087
Other borrowed funds		209		167		525		687

Total interest expense		1,160		1,673		3,928		5,774

NET INTEREST INCOME		8,602		8,906		24,729		24,641
PROVISION FOR LOAN LOSSES		968		247		1,287		1,183

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,634		8,659		23,442		23,458
OTHER INCOME
Service charges on deposit accounts		952		771		2,534		2,488
Other service charges and fees		1,135		1,031		3,201		2,675
Other operating income		1,207		835		3,780		2,325

Total other income		3,294		2,637		9,515		7,488

OTHER EXPENSES
Salaries and employee benefits		4,716		4,389		13,869		13,131
Occupancy expense		1,740		1,861		5,348		5,556
Other expense		2,285		2,403		6,974		6,377

Total other expenses		8,741		8,653		26,191		25,064

INCOME BEFORE PROVISION FOR INCOME TAXES		2,187		2,643		6,766		5,882
PROVISION FOR INCOME TAXES		307		560		1,082		1,177

NET INCOME	$	1,880	$	2,083	$	5,684	$	4,705

NET INCOME PER SHARE -Basic	$	0.34	$	0.37	$	1.02	$	0.84

-Diluted	$	0.34	$	0.37	$	1.02	$	0.84

DIVIDENDS PAID PER SHARE	$	0.24	$	0.24	$	0.72	$	0.72

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

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CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(in thousands)

   For the Three Months For the Nine Months
   Ended September 30, Ended September 30,
   2020 2019 2020 2019
Net income
   $ 2,083 $ 1,333 $ 4,705 $ 3,930
Other comprehensive (loss) income

Securities
available-for-sale

Unrealized holding (losses) gains
   (3,831 ) 3,311 4,367 19,283
Income tax benefit (expense)
   956 (826 ) (1,090 ) (4,811 )


   (2,875 ) 2,485 3,277 14,472
Reclassification adjustment for gains included in net income
   293 244 703 190
Income tax expense
   (73 ) (61 ) (175 ) (47 )


   220 183 528 143


Total other comprehensive (loss) income
   (2,655 ) 2,668 3,805 14,615


Comprehensive (loss) income
   $ (572 ) $ 4,001 $ 8,510 $ 18,545


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2021			2020			2021			2020
Net income	$	1,880		$	2,083		$	5,684		$	4,705
Other comprehensive (loss) income
Securities available-for-sale
Unrealized holding (losses) gains		(4,149	)		(3,831	)		(19,959	)		4,367
Income tax effect		1,036			956			4,980			(1,090	)

Net unrealized (losses) gains		(3,113	)		(2,875	)		(14,979	)		3,277
Reclassification adjustment for gains included in net income		459			293			1,378			703
Income tax effect		(115	)		(73	)		(344	)		(175	)

Net gains included in net income		344			220			1,034			528

Total other comprehensive (loss) income		(2,769	)		(2,655	)		(13,945	)		3,805

Comprehensive (loss) income	$	(889	)	$	(572	)	$	(8,261	)	$	8,510

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

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CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

   For the Nine Months
   Ended September 30,
   2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities
   $ 10,240 $ 8,868
CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from maturities and calls of securities available for sale
   179,028 39,517
Proceeds from sale of investment securities
   150,350 96,172
Purchases of investment securities available for sale
   (446,873 ) (108,815 )
Purchases of bank premises and equipment
   (1,271 ) (956 )
Proceeds from sales of bank premises and equipment
   124 —
Decrease in federal funds sold
   1,600 —
Decrease (increase) in interest bearing deposits with other banks
   16,014 (53,155 )
Proceeds from sale of other real estate
   1,303 170
Net increase in loans
   (80,536 ) (44,381 )


Net cash used in investing activities
   (180,261 ) (71,448 )
CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in deposits
   150,162 38,092
Increase in securities sold under agreement to repurchase
   6,568 36,538
Increase in Federal Home Loan Bank advances
   15,000 —
Proceeds from exercise of stock options
   86 —
Payment of dividends
   (4,022 ) (3,535 )


Net cash provided by financing activities
   167,794 71,095


Net (decrease) increase in cash and due from banks
   (2,227 ) 8,515
Cash and due from banks, beginning of period
   15,937 12,592


Cash and due from banks, end of period
   $ 13,710 $ 21,107


	For the Nine Months
	Ended September 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	14,910		$	10,240
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		132,774			179,028
Proceeds from sale of investment securities		500,685			150,350
Purchases of investment securities available for sale		(551,765	)		(446,873	)
Net change in FHLB stock		503			—
Purchases of bank premises and equipment		(2,232	)		(1,271	)
Proceeds from sales of bank premises and equipment		492			124
Net change in federal funds sold		—			1,600
Proceeds from sale of other real estate		3,263			1,303
Proceeds from death benefit of bank-owned life insurance		1,162			—
Net decrease (increase) in loans		37,276			(80,536	)

Net cash provided by (used in) investing activities		122,158			(196,275	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		18,789			150,162
Net change in securities sold under agreement to repurchase		(93,211	)		6,568
Proceeds from FHLB advances		—			15,000
Payments on FHLB advances		(25,000	)		—
Proceeds from borrowings on secured line of credit		18,000			—
Proceeds from exercise of stock options		—			86
Payment of common stock dividends		(4,027	)		(4,022	)

Net cash (used in) provided by financing activities		(85,449	)		167,794

Net change in cash and cash equivalents		51,619			(18,241	)
Cash and cash equivalents, beginning of period		42,308			74,494

Cash and cash equivalents, end of period	$	93,927		$	56,253

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

Table of Contents

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the nine months ended September 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 an affiliate, Title Services LLC. As a state bank, the Bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Company. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central Mississippi, along with southern and northern counties of Mississippi and their surrounding areas. Services are provided at multiple branch offices.

Risks and Uncertainties

In 2020, the World Health Organization declared

COVID-19

and its variants have caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

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

COVID-19,

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

The Company’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. If the

COVID-19

outbreak escalates further, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of

COVID-19,

and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

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Financial position and results of operations

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

COVID-19. Due

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

pre-pandemic

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

COVID-19

related economic crisis.

Capital and liquidity

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

COVID-19,

its reported and regulatory capital ratios have been adversely impacted due to loss of fee income, net interest margin compression along with the significant increase in assets from all the federal government stimulus. For a detailed discussion of the Company’s capital ratios see Capital Resources on page 40.

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

Asset valuation

Currently, the Company does not expect

COVID-19

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

The impact from

COVID-19

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

non-cash

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

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Lending operations and accommodations to borrowers

(dollar amounts in thousands)

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

two-year

term while PPP loans originated after June 5, 2020 have a five-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The Company currently has 371 loans with a total balance of $14,077 outstanding at September 30, 2021. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Credit

The Company has worked with customers directly affected by

COVID-19. The

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

COVID-19.

Basis of Presentation

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

~~Nature of Business~~

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

12, 2021.

Estimates

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

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Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of ~~loans.~~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 ~~Corporation’s~~Company’s allowance for loan losses and valuations of foreclosed real estate. Such agencies may require the ~~Corporation~~Company to recognize additions to the allowance or to make adjustments to the valuation based on their judgments about information available to them at the time of their examination. Due to these factors, it is reasonably possible that the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.

~~Risks and Uncertainties~~

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

~~The outbreak of~~

~~COVID-19~~

has adversely impacted a broad range of industries in which the Corporation’s customers operate and could impair their ability to fulfill their financial obligations to the Corporation. The World Health Organization has declared

~~COVID-19~~

to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Corporation operates. While there has been no material impact to the Corporation’s employees to date,

~~COVID-19~~

~~could also potentially create widespread business continuity issues for the Corporation.~~

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 Corporation’s operations.~~

~~The Corporation’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 Corporation 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 Corporation’s operations, the Corporation is disclosing potentially material items of which it is aware.~~

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~~Financial position and results of operations~~

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

~~COVID-19. In~~

~~keeping with guidance from regulators, the Corporation 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 Corporation 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 Corporation’s interest income could be reduced due to~~

~~COVID-19. In~~

~~keeping with guidance from regulators, the Corporation 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 Corporation 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 Corporation 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 Corporation maintains access to multiple sources of liquidity. If an extended recession caused large numbers of the Corporation’s deposit customers to withdraw their funds, the Corporation 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 Corporation’s net interest margin.

~~Asset valuation~~

~~Currently, the Corporation 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 Corporation does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

~~COVID-19~~

could cause a decline in the Corporation’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 Corporation concludes that all or a portion of its goodwill is impaired, a

~~non-cash~~

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

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~~Processes, controls and business continuity plan~~

The Corporation has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy, among other measures. The Corporation 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 Corporation does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Corporation has taken to prevent the spread of

~~COVID-19. The~~

~~Corporation does not currently face any material resource constraint through the implementation of its business continuity plans.~~

~~Lending operations and accommodations to borrowers~~

~~(dollar amounts in thousands)~~

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Corporation 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 Corporation 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 Corporation is offering an interest-only payment program for up to an additional six months on a

~~loan-by-loan~~

basis. As of October 15, 2020, the Corporation had 16 loans in the deferral program with a total balance of $33,601. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.

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

~~two-year~~

term and earn interest at 1%. The Corporation believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The Corporation closed 590 SBA PPP loans representing $48,830 in funding. It is the Corporation’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Corporation 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 Corporation is waiving certain late payments and service charges and has temporarily suspended collection efforts on past due loans.

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~~Credit~~

~~The Corporation is working with customers directly affected by~~

~~COVID-19. The~~

~~Corporation 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 Corporation 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 Corporation could experience further increases in its allowance for loan losses and record additional credit loss expense. It is possible that the Corporation’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 ~~Corporation~~Company on January 1, ~~2020~~2021 and did not have a material impact on the ~~Corporation’s~~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 Corporation on January 1, 2020 and did not have a material impact on the Corporation’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~~

~~Table of Contents~~

reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to

~~COVID-19~~

to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Corporation’s financial statements; however, this impact cannot be quantified at this time.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU

2016-13,

“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU

2016-13”).

ASU

2016-13

makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU

2016-13

amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU

2016-13

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

2016-13

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

2016-13

permits the use of estimation techniques that are practical and relevant to the ~~Corporation’s~~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 ~~Corporation~~Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The ~~Corporation~~Company expects ASU

2016-13

to have a significant impact on the ~~Corporation’s~~Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The ~~Corporation~~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 ~~Corporation.~~Company.

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~~Note 2. Mergers and Acquisitions~~

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

~~Merger with Charter Bank~~

Effective October 1, 2019, the Corporation completed its acquisition by merger of Charter Bank (“Charter”), in a transaction valued at approximately $19.7 million. The Corporation 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 Company’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 September 30, ~~2020,~~2021, the ~~Corporation~~Company had entered into loan commitments with certain customers with an aggregate unused balance of ~~$123,114~~$124,059 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 September 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 -~~ share—basic has been computed based on the weighted average number of shares outstanding during each period. Net income per ~~share -~~ share—diluted has been computed based on the weighted average number of shares outstanding during each period plus the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Net income per share was computed as follows:

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	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,				For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Basic weighted average shares outstanding		5,578,281		4,900,030		5,574,060		4,896,871		5,587,070		5,578,281		5,583,491		5,574,060
Dilutive effect of granted options		2,447		1,465		2,824		2,321		0		2,447		244		2,824


Diluted weighted average shares outstanding		5,580,728		4,901,495		5,576,884		4,899,192		5,587,070		5,580,728		5,583,735		5,576,884


Net income	$	2,083	$	1,333	$	4,705	$	3,930	$	1,880	$	2,083	$	5,684	$	4,705
Net income per share-basic	$	0.37	$	0.27	$	0.84	$	0.80	$	0.34	$	0.37	$	1.02	$	0.84
Net income per share-diluted	$	0.37	$	0.27	$	0.84	$	0.80	$	0.34	$	0.37	$	1.02	$	0.84

Note 5.4. Equity Compensation Plans

(in thousands, except per share data)

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

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

~~Table of Contents~~

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


	Directors’ Plan					2013 Plan				Directors’ Plan					2013 Plan
				Weighted				Weighted		Number of Shares			Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
	Number			Average		Number		Average
	of			Exercise		of		Exercise
	Shares			Price		Shares		Price
Outstanding at December 31, 2019		40,500		$	21.49		0	$	0
Outstanding at December 31, 2020											19,500		$	19.42		0	$	0
Granted		0			0		0		0		0			0		0		0
Exercised		(7,500	)		19.26		0		0		0			0		0		0
Expired		(13,500	)		25.72		0		0		(10,500	)		20.02		0		0

Outstanding at September 30, 2020		19,500		$	19.42		0	$	0
Outstanding at September 30, 2021											9,000		$	18.76		0	$	0

The intrinsic value of options outstanding under the Directors’ Plan at September 30, ~~2020,~~2021, was ~~$58.~~

~~NaN~~

$2. No options were outstanding under the 2013 Plan as of September 30, ~~2020.~~

2021.

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

one-year

period ending April ~~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~~10

Note 6.5. Income Taxes

(in thousands)

For the three months ended September 30, 2021 and 2020, ~~and 2019,~~ the ~~Corporation~~Company recorded a provision for income taxes totaling ~~$560~~$307 and ~~$212,~~$560, respectively. The effective tax rate was ~~21.2%~~14.04% and ~~13.7%~~21.19% for the three months ending September 30, 2021 and 2020, ~~and 2019,~~ respectively.

For the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ the ~~Corporation~~Company recorded a provision for income taxes totaling ~~$1,177~~$1,082 and ~~$727,~~$1,177, respectively. The effective tax rate was ~~20.0%~~15.99% and ~~15.6%~~20.01% for the nine months ending September 30, 2021 and 2020, ~~and 2019,~~ respectively.

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

~~Table of Contents~~

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 were as follows:


September 30, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	4,969	$	0	$	114	$	4,855
Mortgage backed securities		396,455		80		9,268		387,267
State, County, Municipals		185,333		470		4,234		181,569
Other Securities		500		0		2		498

Total	$	587,257	$	550	$	13,618	$	574,189


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
September 30, 2020	Cost		Gains		Losses		Fair Value
December 31, 2020									Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	6,906	$	193	$	—	$	7,099	$	11,870	$	191	$	0	$	12,061
Mortgage backed securities		506,070		5,225		4,003		507,292		560,033		4,550		2,600		561,983
State, County, Municipals		65,195		2,607		4		67,798		100,823		3,410		36		104,197
Other Securities		500		9		—		509		500		8		0		508

Total	$	578,671	$	8,034	$	4,007	$	582,698	$	673,226	$	8,159	$	2,636	$	678,749


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
December 31, 2019	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	97,400	$	—	$	289	$	97,111
Mortgage backed securities		308,310		640		2,050		306,900
State, County, Municipals		59,724		708		60		60,372

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

At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020

, securities with a carrying value of ~~$541,761~~$372,457 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 September 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.


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

Total	$	587,257	$	574,189	$	673,226	$	678,749

~~Table of Contents~~

   September 30, 2020    December 31, 2019
   Amortized    Estimated    Amortized    Estimated
   Cost    Fair Value    Cost    Fair Value
Available-for-sale

Due in one year or less
   $ 500    $ 509    $ 345    $ 345
Due after one year through five years
   3,230    3,314    89,920    89,681
Due after five years through ten years
   17,644    18,381    18,678    18,808
Due after ten years
   51,227    53,202    48,181    48,649
Residential mortgage backed securities
   474,568    473,950    259,309    258,415
Commercial mortgage backed securities
   31,502    33,342    49,001    48,485








Total
   $ 578,671    $ 582,698    $ 465,434    $ 464,383

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 September 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

A summary of unrealized loss information for securities

available-for-sale,

categorized by security type follows:


September 30, 2021	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	4,855	$	114	$	0	$	0	$	4,855	$	114
Mortgage backed securities		378,680		9,268		0		0		378,680		9,268
State, County, Municipal		144,709		4,234		0		0		144,709		4,234
Other Securities		498		2		0		0		498		2

Total	$	528,742	$	13,618	$	0	$	0	$	528,742	$	13,618


September 30, 2020	Less than 12 months				12 months or more				Total

December 31, 2020													Less than 12 months				12 months or more				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Value		Losses		Value		Losses		Value		Losses
Mortgage backed securities	$	288,233	$	4,003	$	—	$	—	$	288,233	$	4,003	$	278,162	$	2,600	$	0	$	0	$	278,162	$	2,600
State, County, Municipal		3,366		4		—		—		3,366		4		6,541		36		0		0		6,541		36

Total	$	291,599	$	4,007	$	—	$	—	$	291,599	$	4,007	$	284,703	$	2,636	$	0	$	0	$	284,703	$	2,636


December 31, 2019	Less than 12 months				12 months or more				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. government agencies	$	76,682	$	217	$	20,429	$	72	$	97,111	$	289
Mortgage backed securities		101,730		871		76,630		1,179		178,360		2,050
State, County, Municipal		8,280		37		3,731		23		12,011		60

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

The ~~Corporation’s~~Company’s unrealized losses on its obligations of United States government agencies, mortgage backed securities, other securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in the

mid-term

sector. Additionally, with mortgage rates at historical lows, all of the mortgage backed securities above are prepaying faster than expected at September 30, 2020, therefore causing the book yields to decrease and market yields to lower along with them. 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 September 30, ~~2020~~2021 nor at December 31, ~~2019.~~2020.

1512

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Note 8.7. Non Purchased Loans

(in thousands, except

number

~~loans~~

) loans)

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

The composition of net loans at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 was as follows:


	September 30, 2021			December 31, 2020
Real Estate:
Land Development and Construction	$	69,195		$	42,677
Farmland		13,386			15,616
1-4 Family Mortgages		86,508			94,280
Commercial Real Estate		282,394			306,875

Total Real Estate Loans		451,483			459,448
Business Loans:
Commercial and Industrial Loans (1)		98,530			115,679
Farm Production and Other Farm Loans		431			541

Total Business Loans		98,961			116,220
Consumer Loans:
Credit Cards		1,836			1,878
Other Consumer Loans		12,936			10,929

Total Consumer Loans		14,772			12,807

Total Gross Loans		565,216			588,475
Unearned Income		0			(1	)
Allowance for Loan Losses		(5,318	)		(4,735	)

Loans, net	$	559,898		$	583,739

(1)	Includes PPP loans of $14,077 and $29,523 as of September 30, 2021 and December 31, 2020, respectively.

1613

Table of Contents

   September 30,
2020    December 31,
2019
Real Estate:

Land Development and Construction
   $ 85,684    $ 66,428
Farmland
   14,728    15,595
1-4
Family Mortgages
   90,040    87,631
Commercial Real Estate
   242,070    207,604




Total Real Estate Loans
   432,522    377,258
Business Loans:

Commercial and Industrial Loans
(1)
   136,559    84,611
Farm Production and Other Farm Loans
   572    683




Total Business Loans
   137,131    85,294
Consumer Loans:

Credit Cards
   1,742    1,833
Other Consumer Loans
   11,055    12,060




Total Consumer Loans
   12,797    13,893




Total Gross Loans
   582,450    476,445
Unearned Income
   (2 )    (8 )
Allowance for Loan Losses
   (4,494 )    (3,755 )




Loans, net
   $ 577,954    $ 472,682

~~(1)~~

~~Includes PPP loans of $48,830 and~~

~~$-0-~~

~~as of September 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.

Period-end,

nonaccrual loans, segregated by class, were as follows:


	September 30, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	178	$	308
Farmland		185		287
1-4 Family Mortgages		1,980		1,809
Commercial Real Estate		962		5,600

Total Real Estate Loans		3,305		8,004
Business Loans:
Commercial and Industrial Loans		322		413
Farm Production and Other Farm Loans		5		9

Total Business Loans		327		422
Consumer Loans:
Other Consumer Loans		17		33

Total Consumer Loans		17		33

Total Nonaccrual Loans	$	3,649	$	8,459

1714

Table of Contents

~~Period-end,~~

~~non-accrual~~

~~loans, segregated by~~

~~class~~

~~, were as~~

~~follows~~

   September 30,
2020    December 31,
2019
Real Estate:

Land Development and Construction
   $ 315    $ 111
Farmland
   346    232
1-4
Family Mortgages
   1,975    2,160
Commercial Real Estate
   7,077    9,082




Total Real Estate Loans
   9,713    11,585
Business Loans:

Commercial and Industrial Loans
   442    338
Farm Production and Other Farm Loans
   10    10




Total Business Loans
   452    348
Consumer Loans:

Other Consumer Loans
   40    60




Total Consumer Loans
   40    60




Total Nonaccrual Loans
   $ 10,205    $ 11,993

~~Table of Contents~~

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


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due		Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	5	$	0	$	5	$	85,679	$	85,684	$	—	$	14	$	—	$	14	$	69,181	$	69,195	$	—
Farmland		171		0		171		14,557		14,728		0		93		34		127		13,259		13,386		0
1-4 Family Mortgages		1,418		490		1,908		88,132		90,040		130		1,261		230		1,491		85,017		86,508		—
Commercial Real Estate		312		1,145		1,457		240,613		242,070		116		530		571		1,101		281,293		282,394		—

Total Real Estate Loans		1,906		1,635		3,541		428,981		432,522		246		1,898		835		2,733		448,750		451,483		0
Business Loans:
Commercial and Industrial Loans		116		415		531		136,028		136,559		0		327		322		649		97,881		98,530		0
Farm Production and Other Farm Loans		8		—		8		564		572		—		0		—		0		431		431		—

Total Business Loans		124		415		539		136,592		137,131		0		327		322		649		98,312		98,961		0
Consumer Loans:
Credit Cards		12		0		12		1,730		1,742		0		37		16		53		1,783		1,836		16
Other Consumer Loans		34		0		34		11,021		11,055		0		1,275		2		1,277		11,659		12,936		—

Total Consumer Loans		46		0		46		12,751		12,797		0		1,312		18		1,330		13,442		14,772		16

Total Loans	$	2,076	$	2,050	$	4,126	$	578,324	$	582,450	$	246	$	3,537	$	1,175	$	4,712	$	560,504	$	565,216	$	16

Table of Contents

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


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due		Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	736	$	—	$	736	$	65,692	$	66,428	$	—	$	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 by the impaired loan having sufficient collateral, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are

charged-off

when deemed uncollectible.

Table of Contents

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


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	178	$	178	$	—	$	178	$	—	$	243
Farmland		34		34		—		34		—		73
1-4 Family Mortgages		944		944		—		944		—		980
Commercial Real Estate		1,330		1,050		118		1,168		6		3,498

Total Real Estate Loans		2,486		2,206		118		2,324		6		4,794
Business Loans:
Commercial and Industrial Loans		304		72		160		232		36		323

Total Business Loans		304		72		160		232		36		323

Consumer Loans:
Other Consumer Loans		1,200		—		1,200		1,200		1,200		600

Total Consumer Loans		1,200		—		1,200		1,200		1,200		600

Total Loans	$	3,990	$	2,278	$	1,478	$	3,756	$	1,242	$	5,717

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


															Recorded		Recorded
													Unpaid		Investment		Investment		Total				Average
													Principal		With No		With		Recorded		Related		Recorded
	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	316	$	263	$	53	$	316	$	13	$	214	$	308	$	256	$	52	$	308	$	13	$	210
Farmland		152		152		—		152		—		202		111		111		—		111		—		182
1-4 Family Mortgages		1,042		1,036		6		1,042		3		941		1,016		1,012		4		1,016		1		928
Commercial Real Estate		7,984		3,273		4,519		7,792		649		8,791		6,021		3,323		2,504		5,827		768		7,808

Total Real Estate Loans		9,494		4,724		4,578		9,302		665		10,147		7,456		4,702		2,560		7,262		782		9,127

Business Loans:
Commercial and Industrial Loans		416		56		360		416		129		280		413		54		359		413		125		279

Total Business Loans		416		56		360		416		129		280		413		54		359		413		125		279


Total Loans	$	9,910	$	4,780	$	4,938	$	9,718	$	794	$	10,427	$	7,869	$	4,756	$	2,919	$	7,675	$	907	$	9,405

~~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    0      144    144    72    72












Total Business Loans
   144    0      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 nine months ended September 30, 2021 or September 30, 2020.

September 30, 2020    Number of
Loans
Pre-Modification

Outstanding
Recorded
Investment
Post-Modification

Outstanding
Recorded
Investment
Commercial real estate
   3    $ 4,871    $ 2,377






Total
   3    $ 4,871    $ 2,377






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	)
						Number of Loans		Recorded Investment
Totals at January 1, 2020		3	$	2,495			3	$	2,495
Reductions due to:
Principal paydowns				(118	)				(382	)

Totals at December 31, 2020							3	$	2,113
Reductions due to:
Principal paydowns									(88	)
Reclassification to OREO							2		(1,788	)

Total at September 30, 2020		3	$	2,377
Total at September 30, 2021							1	$	237

The allocated allowance for loan losses attributable to restructured loans was

$-0-

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

2218

Table of Contents

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

Grade 3. AVERAGE ~~RISK -~~ RISK—This is the rating assigned to the majority of the loans held by the ~~Corporation.~~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 -~~ 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~~vary from peers.

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

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

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

2319

Table of Contents

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

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

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

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


	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	$	82,960	$	1,921	$	803	$	—	$	—	$	85,684	$	67,898	$	688	$	609	$	—	$	—	$	69,195
Farmland		13,825		91		812		—		—		14,728		12,724		162		500		—		—		13,386
1-4 Family Mortgages		81,766		2,274		6,000		—		—		90,040		78,864		2,231		5,413		—		—		86,508
Commercial Real Estate		206,592		20,711		14,767		—		—		242,070		241,016		7,034		34,344		—		—		282,394

Total Real Estate Loans		385,143		24,997		22,382		—		—		432,522		400,502		10,115		40,866		—		—		451,483

Business Loans:
Commercial and Industrial Loans		128,017		4,776		3,759		—		7		136,559		91,911		987		5,629		—		3		98,530
Farm Production and Other Farm Loans		530		8		24		—		10		572		412		—		14		—		5		431

Total Business Loans		128,547		4,784		3,783		—		17		137,131		92,323		987		5,643		—		8		98,961

Consumer Loans:
Credit Cards		1,730		—		12		—		—		1,742		1,783		—		53		—		—		1,836
Other Consumer Loans		10,930		48		46		31		—		11,055		11,633		67		1,227		9		—		12,936

Total Consumer Loans		12,660		48		58		31		—		12,797		13,416		67		1,280		9		—		14,772


Total Loans	$	526,350	$	29,829	$	26,223	$	31	$	17	$	582,450	$	506,241	$	11,169	$	47,789	$	9	$	8	$	565,216

2420

Table of Contents

The following table details the amount of gross loans segregated by loan grade 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	$	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

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:


	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	9,113	$	14,722	$	4,795	$	6,153
Farmland		486		510		375		520
1-4 Family Mortgages		26,097		35,952		15,764		23,306
Commercial Real Estate		26,321		32,436		19,348		24,237

Total Real Estate Loans		62,017		83,620		40,282		54,216

Business Loans:
Commercial and Industrial Loans		9,280		14,153		4,820		7,871
Farm Production and Other Farm Loans		845		884		222		755

Total Business Loans		10,125		15,037		5,042		8,626

Consumer Loans:
Other Consumer Loans		1,043		1,973		487		940

Total Consumer Loans		1,043		1,973		487		940


Total Purchased Loans	$	73,185	$	100,630	$	45,811	$	63,782

Period-end,

nonaccrual loans, segregated by class, were as follows:


	September 30, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	—	$	—
1-4 Family Mortgages		44		73
Commercial Real Estate		327		—

Total Real Estate Loans		371		73
Business Loans:
Commercial and Industrial Loans		13		18

Total Business Loans		13		18
Consumer Loans:
Other Consumer Loans		0		14

Total Consumer Loans		0		14

Total Purchased Nonaccrual Loans	$	384	$	105

Table of Contents

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


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	—	$	—	$	—	$	4,795	$	4,795	$	—
Farmland		—		—		—		375		375		—
1-4 Family Mortgages		210		0		210		15,554		15,764		0
Commercial Real Estate		153		—		153		19,195		19,348		—

Total Real Estate Loans		363		0		363		39,919		40,282		0
Business Loans:
Commercial and Industrial Loans		83		—		83		4,737		4,820		—
Farm Production and Other Farm Loans		—		—		—		222		222		—

Total Business Loans		83		—		83		4,959		5,042		—
Consumer Loans:
Other Consumer Loans		4		—		4		483		487		—

Total Consumer Loans		4		—		4		483		487		—

Total Loans	$	450	$	0	$	450	$	45,361	$	45,811	$	0

   Loans
30-89 Days

Past Due    Loans
90 or more
Days
Past Due    Total Past
Due Loans    Current
Loans    Total
Loans    Accruing
Loans
90 or more
Days
Past Due
Real Estate:

Land Development and Construction
   $ 397    $ —      $ 397    $ 8,716    $ 9,113    $ —
Farmland
   —      —      —      486    486    —
1-4
Family Mortgages
   149    77    226    25,871    26,097    —
Commercial Real Estate
   —      2    2    26,319    26,321    —












Total Real Estate Loans
   546    79    625    61,392    62,017    —
Business Loans:

Commercial and Industrial Loans
   429    —      429    8,851    9,280    —
Farm Production and Other Farm Loans
   —      —      —      845    845    —












Total Business Loans
   429    —      429    9,696    10,125    —
Consumer Loans:

Other Consumer Loans
   —      —      —      1,043    1,043    —












Total Consumer Loans
   —      —      —      1,043    1,043    —












Total Loans
   $ 975    $ 79    $ 1,054    $ 72,131    $ 73,185    $ —

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:


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	332	$	—	$	332	$	5,821	$	6,153	$	—
Farmland		—		—		—		520		520		—
1-4 Family Mortgages		401		—		401		22,905		23,306		—
Commercial Real Estate		0		—		0		24,237		24,237		—

Total Real Estate Loans		733		—		733		53,483		54,216		—
Business Loans:
Commercial and Industrial Loans		849		0		849		7,022		7,871		—
Farm Production and Other Farm Loans		—		—		—		755		755		—

Total Business Loans		849		0		849		7,777		8,626		—
Consumer Loans:
Other Consumer Loans		35		0		35		905		940		—

Total Consumer Loans		35		0		35		905		940		—

Total Loans	$	1,617	$	0	$	1,617	$	62,165	$	63,782	$	—

   Loans
30-89 Days

Past Due    Loans
90 or more
Days
Past Due    Total Past
Due Loans    Current
Loans    Total
Loans    Accruing
Loans
90 or more
Days
Past Due
Real Estate:

Land Development and Construction
   $ 528    $ —      $ 528    $ 14,194    $ 14,722    $ —
Farmland
   —      —      —      510    510    —
1-4
Family Mortgages
   444    —      444    35,508    35,952    —
Commercial Real Estate
   603    —      603    31,833    32,436    —












Total Real Estate Loans
   1,575    —      1,575    82,045    83,620    —
Business Loans:

Commercial and Industrial Loans
   379    3    382    13,771    14,153    —
Farm Production and Other Farm Loans
   —      —      —      884    884    —












Total Business Loans
   379    3    382    14,655    15,037    —
Consumer Loans:

Other Consumer Loans
   49    8    57    1,916    1,973    —












Total Consumer Loans
   49    8    57    1,916    1,973    —












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

2825

Table of Contents

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

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

Land Development and Construction
   $ 7,787    $ 1,297    $ 29    $ —      $ —      $ 9,113
Farmland
   320    166    —      —      —      486
1-4
Family Mortgages
   23,612    1,559    926    —      —      26,097
Commercial Real Estate
   24,529    1,506    286    —      —      26,321












Total Real Estate Loans
   56,248    4,528    1,241    —      —      62,017
Business Loans:

Commercial and Industrial Loans
   8,674    434    172    —      —      9,280
Farm Production and Other Farm Loans
   845    —      —      —      —      845












Total Business Loans
   9,519    434    172    —      —      10,125
Consumer Loans:

Other Consumer Loans
   984    31    28    —      —      1,043












Total Consumer Loans
   984    31    28    —      —      1,043












Total Loans
   $ 66,751    $ 4,993    $ 1,441    $ —      $ —      $ 73,185

~~Table of Contents~~


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	4,052	$	732	$	11	$	—	$	—	$	4,795
Farmland		220		155		—		—		—		375
1-4 Family Mortgages		13,398		1,814		552		—		—		15,764
Commercial Real Estate		17,590		1,151		607		—		—		19,348

Total Real Estate Loans		35,260		3,852		1,170		—		—		40,282
Business Loans:
Commercial and Industrial Loans		4,287		428		105		—		—		4,820
Farm Production and Other Farm Loans		222		—		—		—		—		222

Total Business Loans		4,509		428		105		—		—		5,042
Consumer Loans:
Other Consumer Loans		467		0		20		—		0		487

Total Consumer Loans		467		0		20		—		0		487

Total Loans	$	40,236	$	4,280	$	1,295	$	—	$	0	$	45,811

The following table details the amount of gross loans by loan grade, which are consistent with the ~~Corporation’s~~Company’s loan grades, and class as of December 31, ~~2019:~~2020:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	5,364	$	766	$	23	$	—	$	—	$	6,153
Farmland		357		163		—		—		—		520
1-4 Family Mortgages		21,116		1,655		535		—		—		23,306
Commercial Real Estate		22,469		1,484		284		—		—		24,237

Total Real Estate Loans		49,306		4,068		842		—		—		54,216
Business Loans:
Commercial and Industrial Loans		7,121		397		353		—		—		7,871
Farm Production and Other Farm Loans		755		—		—		—		—		755

Total Business Loans		7,876		397		353		—		—		8,626
Consumer Loans:
Other Consumer Loans		862		29		35		—		14		940

Total Consumer Loans		862		29		35		—		14		940

Total Loans	$	58,044	$	4,494	$	1,230	$	—	$	14	$	63,782

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

Land Development and Construction
   $ 13,890    $ 789    $ 43    $ —      $ —      $ 14,722
Farmland
   510    —      —      —      —      510
1-4
Family Mortgages
   33,737    1,535    680    —      —      35,952
Commercial Real Estate
   30,780    1,656    —      —      —      32,436












Total Real Estate Loans
   78,917    3,980    723    —      —      83,620
Business Loans:

Commercial and Industrial Loans
   13,545    608    —      —      —      14,153
Farm Production and Other Farm Loans
   884    —      —      —      —      884












Total Business Loans
   14,429    608    —      —      —      15,037
Consumer Loans:

Other Consumer Loans
   1,937    36    —      —      —      1,973












Total Consumer Loans
   1,937    36    —      —      —      1,973












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

Table of Contents

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


	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
Real Estate:
Land Development and Construction	$	13	$	43	$	—	$	8
Farmland		0		0
1-4 Family Mortgages		330		706		—		25
Commercial Real Estate		2		0

Total Real Estate Loans		345		749		0		33

Business Loans:
Commercial and Industrial Loans						309		305

Total purchased credit deteriorated (PCD) loans	$	345	$	749
Total Business Loans						309		305

Total Purchased Credit Deteriorated Loans					$	309	$	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 September 30, 2021 and December 31, 2020, respectively.

   September 30, 2020    December 31, 2019
Real Estate:

Land Development and Construction
   $ —      $ —
1-4
Family Mortgages
   151    33
Commercial Real Estate
   2    —




Total Real Estate Loans
   153    33
Business Loans:

Commercial and Industrial Loans
   52    —




Total Business Loans
   52    —
Consumer Loans:

Other Consumer Loans
   —      —




Total Consumer Loans
   —      —




Total Purchased Nonaccrual Loans
   $ 205    $ 33

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


	Total Purchased Credit Deteriorated Loans			Total Purchased Credit Deteriorated Loans
Contractually-required principal	$	993		$	993
Nonaccretable difference		(68	)		(68	)

Cash flows expected to be collected		925			925
Accretable yield		(36	)		(36	)

Fair Value	$	889		$	889

~~Changes in~~There were no purchased loans classified as TDRs as of the ~~accretable yield of loans purchased with deteriorated credit quality were as follows:~~nine months ended September 30, 2021, or September 30, 2020.

Balance at January 1, 2020
   $ (16 )
Additions through acquisition
   —
Reclasses from nonaccretable difference
   (13 )
Accretion
   11
Charge-off
   —


Balance at September 30, 2020
   $ (18 )

Table of Contents

There were no loans classified as TDRs purchased as part of the acquisition of Charter. The following table presents the fair value of loans purchased from Charter as of the October 1, 2019 acquisition date:

   October 1, 2019
At acquisition date:

Contractually-required principal
   $ 104,127
Nonaccretable difference
   (68 )
Cash flows expected to be collected
   104,059
Accretable yield
   (394 )


Fair Value
   $ 103,665

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 nine months ended September 30, 2021:


	Real		Business
September 30, 2021	Estate		Loans		Consumer		Total
Balance, January 1, 2021	$	3,885	$	611	$	239	$	4,735
Provision for loan losses		21		155		1,111		1,287
Charge-offs		685		179		30		894
Recoveries		168		15		7		190

Net charge-offs		517		164		23		704

Balance, September 30, 2021	$	3,389	$	602	$	1,327	$	5,318

Period end allowance allocated to:
Loans individually evaluated for impairment	$	6	$	36	$	1,200	$	1,242
Loans collectively evaluated for impairment		3,383		566		127		4,076

Balance, September 30, 2021	$	3,389	$	602	$	1,327	$	5,318

3228

Table of Contents

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


									Real		Business
September 30, 2020	Real Estate		Business Loans		Consumer		Total		Estate		Loans		Consumer		Total
Beginning Balance, January 1, 2020	$	3,075	$	371	$	309	$	3,755
Balance, January 1, 2020									$	3,075	$	371	$	309	$	3,755
Provision for loan losses		729		450		4		1,183		729		450		4		1,183
Charge-offs		309		222		91		622		309		222		91		622
Recoveries		104		35		39		178		104		35		39		178

Net charge-offs		205		187		52		444		205		187		52		444

Ending Balance	$	3,599	$	634	$	261	$	4,494
Balance, September 30, 2020									$	3,599	$	634	$	261	$	4,494

Period end allowance allocated to:
Loans individually evaluated for impairment	$	665	$	129	$	—	$	794	$	755	$	13	$	—	$	768
Loans collectively evaluated for impairment		2,934		505		261		3,700		2,844		621		261		3,726

Ending Balance, September 30, 2020	$	3,599	$	634	$	261	$	4,494
Balance, September 30, 2020									$	3,599	$	634	$	261	$	4,494

The ~~following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2019:~~

September 30, 2019
   Real
Estate    Business
Loans    Consumer    Total
Beginning Balance, January 1, 2019
   $ 2,845    $ 222    $ 305    $ 3,372
Provision for loan losses
   (1 )    270    203    472
Charge-offs
   15    92    77    184
Recoveries
   101    9    35    145








Net (recoveries) charge-offs
   (86 )    83    42    39








Ending Balance
   $ 2,930    $ 409    $ 466    $ 3,805








Period end allowance allocated to:

Loans individually evaluated for impairment
   $ 506    $ 72    $ —      $ 578
Loans collectively evaluated for impairment
   2,424    337    466    3,227








Ending Balance, September 30, 2019
   $ 2,930    $ 409    $ 466    $ 3,805

~~Table of Contents~~

~~The Corporation’s~~Company’s recorded investment in loans as of September 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:


September 30, 2020	Real Estate		Business Loans		Consumer		Total
									Real		Business
September 30, 2021									Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	9,302	$	416	$	—	$	9,718	$	2,324	$	232	$	1,200	$	3,756
Loans collectively evaluated for general impairment		484,892		146,840		13,840		645,572		489,441		103,462		14,059		606,962
Acquired with deteriorated credit quality		345		—		—		345		—		309		—		309

	$494,539		$147,256		$13,840		$655,635		$	491,765	$	104,003	$	15,259	$	611,027


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


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

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

3429

Table of Contents

Note ~~11. Premises and Equipment~~

The Corporation leases certain premises and equipment under operating leases. At September 30, 2020, the Corporation had lease liabilities and ROU assets totaling $2,422 thousand related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the nine months ended September 30, 2020, the weighted average remaining lease term for operating leases was 1.3 year and the weighted average discount rate used in the measurement of operating lease liabilities was 0.75%.

~~Lease costs were as follows:~~

Three Months Ended
September 30, 2020

Nine Months Ended
September 30, 2020

(in thousands)

Operating lease cost
   $ 118    $ 303
Short-term lease cost
   6    17
Variable lease cost
   —      —




   $ 124    $ 320

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

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

Nine Months Ended
September 30, 2020

(in thousands)

Lease payments due:

Within one year
   $ 415
After one year but within two years
   1,994
After two years but within three years
   22
After three year but within four years
   0
After four years but within five years
   —
After five years
   —


Total undiscounted cash flows
   2,431
Discount on cash flows
   (9 )


Total lease liability
   $ 2,422

~~Table of Contents~~

~~Note 12. Goodwill and~~10. Other Intangible Assets

(in thousands)

~~The carrying amount of goodwill for the nine months ended September 30, 2020 were as follows:~~

Total

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


Balance at September 30, 2020
   $ 13,030

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


	September 30, 2020			December 31, 2019			September 30, 2021			December 31, 2020
Core deposit intangible	$	766		$	766		$	630		$	739
Accumulated amortization		(109	)		(27	)		(82	)		(109	)

Total finite-lived intangible assets	$	657		$	739		$	548		$	630

Core deposit intangible amortization expense for the ~~nine-month periods ended September 30, 2020 and 2019 was $82 and~~

~~$-0-,~~

~~respectively. Core deposit intangible amortization expense for the three-month~~ period ended September 30, 2021 and period ended December 31, 2020 was $82 and ~~2019 was $27 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
2021	$	27
2022		109
2023		109
2024		109
2025		109
Thereafter		85

	$	548

Year ending December 31,

Amount

2020
   $ 27
2021
   109
2022
   109
2023
   109
2024
   109
Thereafter
   194


   $ 657

Table of Contents

Note 11. Secured Line of Credit

(in thousands)

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


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

Total credit facility	$	20,000	$	0

Note ~~13.~~12. 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										Accumulated
Balance, January 1, 2020		5,578,131		$	1,116		$	17,883		$	(789	)	$	94,590		$	112,800
																			Number				Additional			Other
																			of Shares		Common		Paid-In			Comprehensive			Retained
																			Issued		Stock		Capital			Income (Loss)			Earnings			Total
Balance, January 1, 2021																				5,587,070	$	1,118	$	18,134		$	4,138		$	96,158		$	119,548
Net income		—			—			—			—			1,160			1,160			—		—		—			—			1,897			1,897
Dividends paid ($0.24 per share)		—			—			—			—			(1,339	)		(1,339	)		—		—		—			—			(1,341	)		(1,341	)
Options exercised		4,500			1			86			—			—			87
Stock compensation expense																				—		—		42			—			—			42
Other comprehensive loss, net																				—		—		—			(13,668	)		—			(13,668	)

Balance, March 31, 2021																				5,587,070	$	1,118	$	18,176		$	(9,530	)	$	96,714		$	106,478
Net income																				—		—		—			—			1,907			1,907
Dividends paid ($0.24 per share)																				—		—		—			—			(1,343	)		(1,343	)
Restricted stock granted		—			—			—			—			—			—			8,250		2		(2	)		—			—			—
Stock compensation expense		—			—			40			—			—			40			—		—		40			—			—			40
Other comprehensive income, net		—			—			—			5,996			—			5,996			—		—		—			2,492			—			2,492

Balance, March 31, 2020		5,582,631		$	1,117		$	18,009		$	5,207		$	94,411		$	118,744
Balance, June 30, 2021																				5,595,320	$	1,120	$	18,214		$	(7,038	)	$	97,278		$	109,574
Net income		—			—			—			—			1,462			1,462			—		—		—			—			1,880			1,880
Dividends paid ($0.24 per share)		—			—			—			—			(1,342	)		(1,342	)		—		—		—			—			(1,343	)		(1,343	)
Restricted stock forfeited		(4,500	)		(1	)		1			—			—			—
Restricted stock granted		8,250			2			(2	)		—			—			—
Stock compensation expense		—			—			41			—			—			41
Other comprehensive income, net		—			—			—			464			—			464

Balance, June 30, 2020		5,586,381		$	1,118		$	18,049		$	5,671		$	94,531		$	119,369
Net income		—			—			—			—			2,083			2,083
Dividends paid ($0.24 per share)		—			—			—			—			(1,341	)		(1,341	)
Options exercised		689			—			—			—			—			—
Restricted stock granted		—			—			—			—			—			—
Stock compensation expense		—			—			43			—			—			43			—		—		40			—			—			40
Other comprehensive loss, net		—			—			—			(2,655	)		—			(2,655	)		—		—		—			(2,769	)		—			(2,769	)

Balance, September 30, 2020		5,587,070		$	1,118		$	18,092		$	3,016		$	95,273		$	117,499
Balance, September 30, 2021																				5,595,320	$	1,120	$	18,254		$	(9,807	)	$	97,815		$	107,382

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										Accumulated
	Number						Additional			Other
	of Shares			Common			Paid-In			Comprehensive			Retained
	Issued			Stock			Capital			Income (Loss)			Earnings			Total
Balance, January 1, 2020		5,578,131		$	1,116		$	17,883		$	(789	)	$	94,590		$	112,800
Net income														1,160			1,160
Dividends paid ($0.24 per share)		—			—			—			—			(1,339	)		(1,339	)
Options exercised		4,500			1			86			—			—			87
Stock compensation expense		—			—			40			—			—			40
Other comprehensive income, net		—			—			—			5,996			—			5,996

Balance, March 31, 2020		5,582,631		$	1,117		$	18,009		$	5,207		$	94,411		$	118,744
Net income		—			—			—			—			1,462			1,462
Dividends paid ($0.24 per share)		—			—			—			—			(1,342	)		(1,342	)
Restricted stock forfeited		(4,500	)		(1	)		1			—			—			—
Restricted stock granted		8,250			2			(2	)		—			—			—
Stock compensation expense		—			—			41			—			—			41
Other comprehensive income, net		—			—			—			464			—			464

Balance, June 30, 2020		5,586,381		$	1,118		$	18,049		$	5,671		$	94,531		$	119,369
Net income		—			—			—			—			2,083			2,083
Dividends paid ($0.24 per share)		—			—			—			—			(1,341	)		(1,341	)
Options exercised		689			—			—			—			—			—
Stock compensation expense		—			—			43			—			—			43
Other comprehensive loss, net		—			—			—			(2,655	)		—			(2,655	)

Balance, September 30, 2020		5,587,070		$	1,118		$	18,092		$	3,016		$	95,273		$	117,499

Number

of Shares
Issued

Common
Stock

Additional
Paid-In

Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total

Balance, January 1, 2019
   4,904,530    $ 981    $ 4,298 $ (14,975 ) $ 93,562 $ 83,866
Net income
   —      —      —   —   1,227 1,227
Dividends paid ($0.24 per share)
   —      —      —   —   (1,177 ) (1,177 )
Options exercised
   —      —      —   —   —   —
Restricted stock granted
   —      —      —   —   —   —
Stock compensation expense
   —      —      41 —   —   41
Other comprehensive income, net
   —      —      —   6,622 —   6,622






Balance, March 31, 2019
   4,904,530    $ 981    $ 4,339 $ (8,353 ) $ 93,612 $ 90,579
Net income
   —      —      —   —   1,371 1,371
Dividends paid ($0.24 per share)
   —      —      —   —   (1,179 ) (1,179 )
Options exercised
   —      —      —   —   —   —
Restricted stock granted
   7,500    2    (2 ) —   —   —
Stock compensation expense
   —      —      41 —   —   41
Other comprehensive income, net
   —      —      —   5,325 —   5,325






Balance, June 30, 2019
   4,912,030    $ 983    $ 4,378 $ (3,028 ) $ 93,804 $ 96,137
Net income
   —      —      —   —   1,333 1,333
Dividends paid ($0.24 per share)
   —      —      —   —   (1,179 ) (1,179 )
Options exercised
   —      —      —   —   —   —
Restricted stock granted
   —      —      —   —   —   —
Stock compensation expense
   —      —      40 —   —   40
Other comprehensive income, net
   —      —      —   2,668 —   2,668






Balance, September 30, 2019
   4,912,030    $ 983    $ 4,418 $ (360 ) $ 93,958 $ 98,999

Note ~~14.~~13. Fair Value of Financial Instruments

(in thousands)

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


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

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

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

~~Table of Contents~~

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.

Table of Contents

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


									Quoted Prices
									in Active		Significant
									Markets for		Other		Significant
			Fair Value Measurements Using:						Identical		Observable		Unobservable
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Assets		Inputs		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	$	—	$	7,099	$	—	$	7,099	$	—	$	4,855	$	—	$	4,855
Mortgage-backed securities		—		507,292		—		507,292		—		387,267		—		387,267
State, county and municipal obligations		—		67,798		—		67,798		—		181,569		—		181,569
Other securities		509		—		—		509		498		—		—		498

Total	$	509	$	582,189	$	—	$	582,698	$	498	$	573,691	$	—	$	574,189

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


									Fair Value Measurements Using:
									Quoted Prices
									in Active		Significant
									Markets for		Other		Significant
			Fair Value Measurements Using:						Identical		Observable		Unobservable
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Assets		Inputs		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 September 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.

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Impaired Loans

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

Other real estate owned

OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The ~~Corporation~~Company outsources the valuation of OREO with material balances to third party appraisers. The ~~Corporation~~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 September 30, ~~2020,~~2021, the following table provides the hierarchy level and the fair value of the related assets:


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

Total	$	—	$	—	$	1,678	$	1,678

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      Fair Value Measurements Using:
   Quoted Prices
   in Active    Significant
   Markets for    Other    Significant
   Identical    Observable    Unobservable
   Assets    Inputs    Inputs
   (Level 1)    (Level 2)    (Level 3)    Totals
Impaired loans
   $ —      $ —      $ 3,543    $ 3,543
Other real estate owned
   —      —      163    163








Total
   $ —      $ —      $ 3,706    $ 3,706

The following table presents information as of September 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	$	3,543	Appraised value of collateral less estimated costs to sell	Estimated costs to sell		25	%	$	111	Appraised value of collateral less estimated costs to sell	Estimated costs to sell		25	%
OREO	$	163	Appraised value of collateral less estimated costs to sell	Estimated costs to sell		25	%		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:

      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

~~Table of Contents~~


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

Total	$	—	$	—	$	2,013	$	2,013

Impaired loans, whose fair value was remeasured during the period, with a carrying value of ~~$4,137~~$1,317 and ~~$5,003~~$2,920, had an allocated allowance for loan losses of ~~$594~~$1,206 and ~~$427~~$907 at September 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 $

~~230~~

~~and~~

$-0-

and $391 was necessary and recorded during the three and nine-month period ended September 30, ~~2020 and~~2021, respectively. Management determined 0 fair value adjustment was necessary for the year ended December 31, ~~2019, respectively.~~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 ~~Corporation’s~~Company’s financial instruments at September 30, ~~2020:~~2021:


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

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         Fair Value Measurements Using:
      Quoted Prices
      in Active    Significant
      Markets for    Other    Significant    Total
   Carrying    Identical    Observable    Unobservable    Fair
September 30, 2020    Value    Assets    Inputs    Inputs    Value
      (Level 1)    (Level 2)    (Level 3)
Financial assets

Cash and due from banks
   $ 13,710    $ 13,710    $ —      $ —      $ 13,710
Interest bearing deposits with banks
   42,543    42,543    —      —      42,543
Securities
available-for-sale
   582,698    509    582,189    —      582,698
Net loans
   651,139    —      —      643,680    643,680
Financial liabilities

Deposits
   $ 1,049,157    $ 824,066    $ 226,439    $ —      $ 1,050,505
Securities sold under agreement to repurchase
   176,978    176,978    —      —      176,978
Federal Home Loan Bank advances
   15,000    15,000    —      —      15,000

~~Table of Contents~~

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:								Quoted Prices
			Quoted Prices										in Active		Significant
			in Active		Significant								Markets for		Other		Significant		Total
			Markets for		Other		Significant		Total		Carrying		Identical		Observable		Unobservable		Fair
	Carrying		Identical		Observable		Unobservable		Fair
December 31, 2019	Value		Assets		Inputs		Inputs		Value
December 31, 2020											Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)						(Level 1)		(Level 2)		(Level 3)
Financial assets
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

Net LHFI												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

Table of Contents

ITEM 2.

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

(in thousands, except share and per share data)

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form

10-Q

(the “Quarterly Report”) contains statements that constitute

forward-looking

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

forward-looking

statements. These statements appear in a number of places in this Quarterly Report. The ~~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 ~~Corporation~~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;

4538

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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 September 30, ~~2020,~~2021, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of ~~$1,373,958~~$1,356,704 and total deposits of ~~$1,051,267.~~$1,114,738. In addition to full service commercial banking, the Bank offers title insurance services through its ~~subsidiary,~~affiliate, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601)

656-4692.

All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The ~~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 September 30, ~~2020,~~2021, was ~~13.8%~~35.59% 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 September 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 ~~$1,049,157~~$1,113,979 at September 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 ~~$582,698~~$574,189 invested in

available-for-sale

investment securities at September 30, ~~2020,~~2021, and ~~$464,383~~$678,749 at December 31, ~~2019.~~2020. The ~~Corporation’s deposit growth during the~~

~~COVID-19~~

~~pandemic, like most banks in our region, has outpaced loan growth and therefore, the excess funds were invested~~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 ~~help profitability of the Corporation.~~government stimulus by liquidating under-performing securities.

The ~~Corporation~~Company also had ~~$42,543~~$76,132 in interest bearing deposits at other banks at September 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 September 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 September 30, ~~2020,~~2021, the ~~Corporation~~Company had unused and available ~~$206,299~~$219,107 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 September 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 September 30, 2021, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of

$-0-

as of September 30, ~~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 ~~$117,499~~$107,382 at September 30, ~~2020,~~2021, as compared to ~~$112,800~~$119,548 at December 31, ~~2019.~~2020. The ~~increase~~decrease in shareholders’ equity ~~per share reflects~~was the result of the accumulated other comprehensive loss (“AOCL”) brought about by the investment securities market value adjustment partially offset by earnings in excess of dividends paid. The AOCL is a result of a modest increase in interest rates that have occurred since the purchase of securities. Management does not intend to sell any securities at an unrealized loss position.

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

The ~~Corporation~~Company paid aggregate cash dividends in the amount of ~~$4,022,~~$4,027, or $0.72 per share, during the nine-month period ended September 30, ~~2020~~2021 compared to ~~$3,535,~~$4,022, or $0.72 per share, for the same period in ~~2019.~~2020.

Quantitative measures established by federal regulations to ensure capital adequacy require the ~~Corporation~~Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital

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to average assets. Management believes that as of September 30, ~~2020,~~2021, the ~~Corporation~~Company and Bank meets all capital adequacy requirements to which it is subject and according to these requirements the ~~Corporation~~Company and Bank is considered to be well capitalized.


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

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

Citizens Holding Company

Tier 1 leverage ratio
   $ 100,649    7.31 % $ 68,799    5.00 % $ 55,039    4.00 %
Common Equity tier 1 capital ratio
   100,649    13.01 % 89,439    6.50 % 61,919    4.50 %
Tier 1 risk-based capital ratio
   100,649    13.01 % 61,872    8.00 % 46,404    6.00 %
Total risk-based capital ratio
   105,143    13.59 % 77,340    10.00 % 61,872    8.00 %
December 31, 2019

Citizens Holding Company

Tier 1 leverage ratio
   $ 98,733    8.33 % $ 59,270    5.00 % $ 47,416    4.00 %
Common Equity tier 1 capital ratio
   98,733    13.86 % 77,051    6.50 % 53,343    4.50 %
Tier 1 risk-based capital ratio
   98,733    13.86 % 56,972    8.00 % 42,729    6.00 %
Total risk-based capital ratio
   102,488    14.39 % 71,215    10.00 % 56,972    8.00 %

The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance ~~Corporation~~Company (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II for

non-core

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

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

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

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

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

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

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

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minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.

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

Management believes that, as of September 30, ~~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.

~~Table of Contents~~

RESULTS OF OPERATIONS

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

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	For the Three Months				For the Nine Months				For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,				Ended September 30,				Ended September 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Interest Income, including fees	$	10,579	$	8,443	$	30,415	$	25,478	$	9,762	$	10,579	$	28,657	$	30,415
Interest Expense		1,673		2,525		5,774		7,143		1,160		1,673		3,928		5,774


Net Interest Income		8,906		5,918		24,641		18,335		8,602		8,906		24,729		24,641
Provision for loan losses		247		12		1,183		472		968		247		1,287		1,183


Net Interest Income after
Provision for loan losses		8,659		5,906		23,458		17,863		7,634		8,659		23,442		23,458
Other Income		2,637		2,506		7,488		6,624		3,294		2,637		9,515		7,488
Other Expense		8,653		6,867		25,064		19,830		8,741		8,653		26,191		25,064


Income Before Provision For
Income Taxes		2,643		1,545		5,882		4,657		2,187		2,643		6,766		5,882
Provision for Income Taxes		560		212		1,177		727		307		560		1,082		1,177


Net Income	$	2,083	$	1,333	$	4,705	$	3,930	$	1,880	$	2,083	$	5,684	$	4,705


Net Income Per share - Basic	$	0.37	$	0.27	$	0.84	$	0.80	$	0.34	$	0.37	$	1.02	$	0.84


Net Income Per Share-Diluted	$	0.37	$	0.27	$	0.84	$	0.80	$	0.34	$	0.37	$	1.02	$	0.84

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 ~~7.18%~~6.60% for the three months ended September 30, ~~2020,~~2021, and ~~5.52%~~7.18% for the corresponding period in ~~2019.~~ 2020. The decrease in ROE for the three months September 30, 2021 compared to the same period in 2020 was a result of a decrease in earnings compared to prior period.

Annualized return on average equity (“ROE”) was ~~5.40%~~6.69% for the nine months ended September 30, ~~2020,~~2021, and ~~5.77%~~5.40% for the corresponding period in ~~2019.~~2020. The increase in ROE for the ~~three and~~ nine months ended September 30, ~~2020~~2021 was caused by the increase in earnings and decrease in accumulated other comprehensive income (“AOCI “) compared to the same period in ~~2019.~~2020.

Book value per share ~~increased~~decreased to ~~$21.03~~$19.22 at September 30, ~~2020,~~2021, compared to ~~$20.22~~$21.43 at December 31, ~~2019.~~2020. The ~~increase~~decrease in book value per share is directly attributable to the ~~increase~~decrease in shareholders’ equity discussed above. Average assets for the nine months ended September 30, ~~2020~~2021 were ~~$1,308,298~~$1,433,229 compared to ~~$1,164,570~~$1,336,513 for the year ended December 31, ~~2019.~~2020. This increase was due mainly to ~~an increase~~the influx of deposits in ~~loans~~the first quarter of 2021 as a result of government stimulus programs benefitting the Bank’s customers. A portion of the deposits were subsequently invested into the securities portfolio and ~~investment securities partially offset by a decrease~~management strategically reduced approximately $200,000 in ~~interest bearing~~ deposits ~~with other banks.~~

during the second quarter of 2021. Due to this deposit

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

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NET INTEREST INCOME / NET INTEREST MARGIN

The main component of the ~~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 ~~$8,906~~$8,602 and ~~$24,641~~$24,729 for the three and nine months ended September 30, ~~2020,~~2021, respectively, as compared to ~~$5,918~~$8,906 and ~~$18,335~~$24,641 for the same respective time periods in ~~2019.~~

2020.

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

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

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   Three Months Ended September 30,
   Average Balance    Income/Expense    Average
Yield/Rate
   2020    2019    2020    2019    2020 2019
Loans:

Loans, net of unearned
(1)
   $ 647,530    $ 468,310    $ 7,814    $ 5,951    4.83 % 5.08 %
Investment Securities

Taxable
   566,102    395,281    2,406    1,945    1.70 % 1.97 %
Tax-exempt
   67,729    61,133    481    513    2.84 % 3.36 %










Total Investment Securities
   633,831    456,414    2,887    2,458    0.46 % 0.54 %
Federal Funds Sold and Other
   18,408    43,696    8    212    0.17 % 1.94 %










Total Interest Earning Assets
(1)(2)
   1,299,769    968,420    10,709    8,621    3.30 % 3.56 %










Non-Earning
Assets
   89,905    73,068





Total Assets
   $ 1,389,674    $ 1,041,488





Deposits:

Interest-bearing Demand

Deposits
(3)
   $ 475,857    $ 336,998    $ 715    $ 801    0.60 % 0.95 %
Savings
   98,756    77,884    27    32    0.11 % 0.16 %
Time
   225,248    220,096    764    1,089    1.36 % 1.98 %










Total Deposits
   799,861    634,978    1,506    1,922    0.19 % 0.30 %
Borrowed Funds

Short-term Borrowings
   198,656    131,269    167    602    0.34 % 1.83 %
Long-term Borrowings
   —      —      —      —      0.00 % 0.00 %










Total Borrowed Funds
   198,656    131,269    167    602    0.34 % 1.83 %










Total Interest-Bearing Liabilities
(3)
   998,517    766,247    1,673    2,524    0.67 % 1.32 %
Non-Interest
Bearing Liabilities

Demand Deposits
   257,222    172,252
Other Liabilities
   13,543    6,417
Shareholders’ Equity
   120,392    96,572





Total Liabilities and Shareholders’ Equity
   $ 1,389,674    $ 1,041,488





Interest Rate Spread
               2.63 % 2.24 %


Net Interest Margin
         $ 9,036    $ 6,097    2.81 % 2.49 %






Less

Tax Equivalent Adjustment
         130    179





Net Interest Income
         $ 8,906    $ 5,918

TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES


	Three Months Ended September 30,
	Average Balance				Income/Expense				Average Yield/Rate
	2021		2020		2021		2020		2021			2020
Loans:
Loans, net of unearned (1)	$	622,721	$	647,122	$	7,636	$	7,812		4.90	%		4.83	%
Investment Securities
Taxable		478,968		560,906		1,625		2,400		1.36	%		1.71	%
Tax-exempt		108,082		65,425		563		491		2.08	%		3.00	%

Total Investment Securities		587,050		626,331		2,188		2,891		1.49	%		1.85	%
Federal Funds Sold and Other		44,640		14,428		15		5		0.13	%		0.14	%

Total Interest Earning Assets (1)(2)		1,254,412		1,287,881		9,839		10,708		3.14	%		3.33	%

Non-Earning Assets		88,148		101,793

Total Assets	$	1,342,560	$	1,389,674

Deposits:
Interest-bearing Demand Deposits (3)	$	463,319	$	472,407	$	205	$	714		0.18	%		0.60	%
Savings		122,841		100,226		31		27		0.10	%		0.11	%
Time		246,875		225,249		715		767		1.16	%		1.36	%

Total Deposits		833,035		797,882		951		1,508		0.46	%		0.76	%
Borrowed Funds
Short-term Borrowings		90,490		198,658		209		167		0.92	%		0.34	%
Long-term Borrowings		—		—		—		—		—			—

Total Borrowed Funds		90,490		198,658		209		167		0.92	%		0.34	%

Total Interest-Bearing Liabilities (3)		923,525		996,540		1,160		1,675		0.50	%		0.67	%
Non-Interest Bearing Liabilities
Demand Deposits		294,790		257,224
Other Liabilities		10,327		15,516
Shareholders’ Equity		113,918		120,394

Total Liabilities and Shareholders’ Equity	$	1,342,560	$	1,389,674

Interest Rate Spread										2.63	%		2.65	%

Net Interest Margin					$	8,679	$	9,033		2.74	%		2.81	%

Less
Tax Equivalent Adjustment						77		127

Net Interest Income					$	8,602	$	8,906

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	Nine Months Ended September 30,
	Average Balance				Income/Expense				Average Yield/Rate
	2021		2020		2021		2020		2021			2020
Loans:
Loans, net of unearned (1)	$	638,675	$	613,155	$	23,805	$	22,943		4.97	%		4.99	%
Investment Securities
Taxable		516,661		481,077		2,950		6,157		0.76	%		1.71	%
Tax-exempt		134,233		63,546		2,433		1,434		2.42	%		3.01	%

Total Investment Securities		650,894		544,623		5,383		7,591		1.10	%		1.86	%
Federal Funds Sold and Other		45,746		49,677		40		243		0.12	%		0.65	%

Total Interest Earning Assets (1)(2)		1,335,315		1,207,455		29,228		30,777		2.92	%		3.40	%

Non-Earning Assets		97,914		100,843

Total Assets	$	1,433,229	$	1,308,298

Deposits:
Interest-bearing Demand Deposits (3)	$	503,576	$	442,907	$	1,138	$	2,395		0.30	%		0.72	%
Savings		115,579		92,335		88		84		0.10	%		0.12	%
Time		249,149		232,082		2,177		2,610		1.17	%		1.50	%

Total Deposits		868,304		767,324		3,403		5,089		0.52	%		0.88	%
Borrowed Funds
Short-term Borrowings		151,196		182,644		525		687		0.46	%		0.50	%
Long-term Borrowings		—		—		—		—		—			—

Total Borrowed Funds		151,196		182,644		525		687		0.46	%		0.50	%

Total Interest-Bearing Liabilities (3)		1,019,500		949,968		3,928		5,776		0.51	%		0.81	%
Non-Interest Bearing Liabilities
Demand Deposits		286,667		228,078
Other Liabilities		13,811		12,713
Shareholders’ Equity		113,251		117,539

Total Liabilities and Shareholders’ Equity	$	1,433,229	$	1,308,298

Interest Rate Spread										2.40	%		2.59	%

Net Interest Margin					$	25,300	$	25,001		2.53	%		2.76	%

Less
Tax Equivalent Adjustment						571		360

Net Interest Income					$	24,729	$	24,641

Table of Contents

   Nine Months Ended September 30,
   Average Balance    Income/Expense    Average
Yield/Rate
   2020    2019    2020    2019    2020 2019
Loans:

Loans, net of unearned
(1)
   $ 613,155    $ 453,044    $ 22,943    $ 17,250    4.99 % 5.08 %
Investment Securities

Taxable
   481,077    392,896    6,157    6,253    1.71 % 2.12 %
Tax-exempt
   63,546    85,252    1,434    1,976    3.01 % 3.09 %










Total Investment Securities
   544,623    478,148    7,591    8,229    1.86 % 2.29 %
Federal Funds Sold and Other
   49,677    29,141    243    488    0.65 % 2.23 %










Total Interest Earning Assets
(1)(2)
   1,207,455    960,333    30,777    25,967    3.40 % 3.61 %










Non-Earning
Assets
   100,843    66,367





Total Assets
   $ 1,308,298    $ 1,026,700





Deposits:

Interest-bearing Demand Deposits
(3)
   $ 442,907    $ 343,294    $ 2,395    $ 2,349    0.72 % 0.91 %
Savings
   92,335    77,166    84    92    0.12 % 0.16 %
Time
   232,082    219,449    2,610    3,127    1.50 % 1.90 %










Total Deposits
   767,324    639,909    5,089    5,568    0.88 % 1.16 %
Borrowed Funds

Short-term Borrowings
   182,644    117,393    687    1,575    0.50 % 1.79 %
Long-term Borrowings
   —      —      —      —      0.00 % 0.00 %










Total Borrowed Funds
   182,644    117,393    687    1,575    0.50 % 1.79 %










Total Interest-Bearing Liabilities
(3)
   949,968    757,302    5,776    7,143    0.81 % 1.26 %
Non-Interest
Bearing Liabilities

Demand Deposits
   228,078    167,321
Other Liabilities
   12,713    11,192
Shareholders’ Equity
   117,539    90,885





Total Liabilities and Shareholders’ Equity
   $ 1,308,298    $ 1,026,700





Interest Rate Spread
               2.59 % 2.35 %


Net Interest Margin
         $ 25,001    $ 18,824    2.76 % 2.62 %






Less

Tax Equivalent Adjustment
         360    489





Net Interest Income
         $ 24,641    $ 18,335

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

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

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

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

tax-exempt

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

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

non-taxable

securities offset the decline in yield on taxable securities compared to the same period in 2020. For the nine months ended September 30, ~~2020,~~2021, as compared to the respective corresponding ~~periods~~period in ~~2019, growth in~~2020, the ~~Company’s loan~~repricing of interest-bearing demand deposits and reallocating the investment portfolio ~~was~~into slower prepaying

non-taxable

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

COVID-19

~~pandemic,~~pandemic. Management believes by continuing to reprice and ~~coupled with our efforts~~strategically reduce interest-bearing liabilities as they mature, continued focus on loan growth, and continuing to ~~limit~~reallocate the ~~growth in deposits and borrowing costs (while remaining competitive), drove further~~investment mix will increase the net interest ~~income and interest margin expansion.~~margin.

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The following ~~tables~~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 ~~both~~ the three and nine months ended September 30, ~~2020~~2021 compared to the same respective ~~periods~~period in ~~2019:~~

2020:

TABLE 2 - VOLUME/RATE ANALYSIS


													(in thousands)
	Three Months Ended September 30, 2020									Three Months Ended September 30, 2021
	2020 Change from 2019									2021 Change from 2020
	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME

Loans	$	2,289			(414	)	$	1,875		$	(295	)		119		$	(176	)
Taxable Securities		841			(380	)		461			(351	)		(424	)		(775	)
Non-Taxable Securities		175			(87	)		88			320			(248	)		72
Federal Funds Sold and Other		(123	)		(81	)		(204	)		10			(0	)		10


TOTAL INTEREST INCOME	$	3,183		$	(963	)	$	2,220		$	(315	)	$	(554	)	$	(869	)


INTEREST EXPENSE

Interest-bearing demand deposits	$	330			(295	)		35		$	(14	)		(495	)		(509	)
Savings Deposits		9			(11	)		(2	)		6			(2	)		4
Time Deposits		25			(342	)		(317	)		74			(126	)		(52	)
Short-term borrowings		309			(744	)		(435	)		(91	)		133			42
Long-term borrowings		—			—			—


TOTAL INTEREST EXPENSE	$	673		$	(1,392	)		(719	)	$	(25	)	$	(490	)		(515	)


NET INTEREST INCOME	$	2,509		$	429		$	2,939		$	(290	)	$	(64	)	$	(354	)

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	Nine Months Ended September 30, 2020									Nine Months Ended September 30, 2021
	2020 Change from 2019									2021 Change from 2020
	Volume			Rate			Total			Volume		Rate			Total
INTEREST INCOME
Loans	$	6,134			(403	)	$	5,731		$	955		(93	)	$	862
Taxable Securities		1,403			(1,499	)		(96	)		455		(3,662	)		(3,207	)
Non-Taxable Securities		(356	)		(39	)		(395	)		2,076		(596	)		1,480
Federal Funds Sold and Other		344			(589	)		(245	)		1,481		(3,689	)		(2,208	)


TOTAL INTEREST INCOME	$	7,526		$	(2,531	)	$	4,995		$	4,968	$	(8,041	)	$	(3,073	)


INTEREST EXPENSE

Interest-bearing demand deposits	$	682			(493	)		189		$	328		(1,585	)		(1,257	)
Savings Deposits		18			(22	)		(4	)		21		(17	)		4
Time Deposits		180			(659	)		(479	)		192		(625	)		(433	)
Short-term borrowings		875			(1,763	)		(888	)		670		(2,356	)		(1,686	)
Long-term borrowings		—			—			—


TOTAL INTEREST EXPENSE	$	1,755		$	(2,937	)		(1,182	)	$	1,211	$	(4,583	)		(3,372	)


NET INTEREST INCOME	$	5,770		$	406		$	6,177		$	3,757	$	(3,458	)	$	299

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.

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.

5649

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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~~Management determines the amount of the ~~allowance.~~allowance, and the Board of Directors reviews and approves the allowance for loan losses. Among the factors considered in determining the allowance for loan losses are the current financial condition of the ~~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
	September 30,			December 31,			Increase			Increase			Quarter Ended			Year Ended			Amount of			Percent of
	2020			2019			(Decrease)			(Decrease)			September 30,			December 31,			(Decrease)			(Decrease)
													2021			2020			Increase			Increase
BALANCES:
Gross Loans	$	655,633		$	577,075		$	78,558			13.61	%	$	611,027		$	652,257		$	(41,230	)		-6.32	%
Allowance for Loan Losses		4,494			3,755			739			19.68	%		5,318			4,735			583			12.31	%
Nonaccrual Loans		10,410			11,993			(1,583	)		-13.20	%		4,033			8,564			(4,531	)		-52.91	%
Ratios:
Allowance for loan losses to gross loans		0.69	%		0.65	%								0.87	%		0.73	%
Net loans charged off (recovered) to allowance for loan losses		9.90	%		5.06	%
Net loans charged off to allowance for loan losses														13.24	%		10.67	%

The provision for loan losses for the three months ended September 30, ~~2020~~2021 was ~~$247, an~~$968, a linked quarter increase of ~~$235 from the provision for loan losses of $12 for the same period in 2019.~~$736. The provision for loan losses for the nine months ended September 30, ~~2020~~2021 was ~~$1,183,~~$1,287, an increase of ~~$711~~$104 from the provision for loan losses of ~~$472~~$1,183 for the same period in ~~2019.~~2020. The change in the ~~Corporation’s~~Company’s loan loss ~~provisions~~provision for the three and nine months ended September 30, ~~2020~~2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the ~~impact caused~~specific provisioning for one relationship partially offset by ~~current local, national and international economic conditions~~the decline in qualitative reserves coupled with ~~an increase~~the decline in ~~loan demand. As a result of the~~

~~COVID-19~~

~~virus, the Corporation increased the allowance for loan losses qualitatively, specifically related to exposures that we felt were more~~

~~“at-risk”~~

~~than others, including hotels, restaurants and retail real estate.~~loans balances. 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.

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For the three months ended September 30, ~~2020,~~2021, net loan losses charged to the allowance for loan losses totaled ~~$10,~~$1, a decrease of ~~$17~~$9 from the ~~$27~~$10 charged off in the same period in ~~2019.~~

2020. For the nine months ended September 30, ~~2020,~~2021, net loan losses charged to the allowance for loan losses totaled ~~$444,~~$704, an increase of ~~$405~~$260 from the ~~$39~~$444 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 ~~nine month period ended September 30, 2020.~~

second quarter. 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 nine months ended September 30, ~~2020~~2021 that have not been charged ~~off.~~off or specifically reserved for in the allowance. 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 September 30, ~~2020~~2021 was ~~$2,637,~~$3,294, an increase of ~~$131,~~$657, or ~~5.2%~~24.91%, from ~~$2,506~~$2,637 in the same period in ~~2019.~~2020. Service charges on deposit accounts were ~~$771~~$952 in the three months ended September 30, ~~2020,~~2021, compared to ~~$1,126~~$771 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 the primary driver behind the reduction in~~ service charges on deposit ~~accounts. Other service charges and fees increased by $168, or 19.5%, to $1,031 in~~accounts line item for the three months ended September 30, ~~2020,~~2021, overdraft income increased by $163, or 31.83% from the same period in 2020. Interchange fees which are included in the other service charges and fees line item on the income statement also increased by $83, or 9.71%, to $933 for the three months ended September 30, 2021, compared to ~~$863~~$850 for the same period in ~~2019.~~2020. Other operating income not derived from service charges or fees increased ~~$318,~~$372, or ~~61.5%~~44.55% to ~~$835~~$1,207 in the three months ended September 30, ~~2020,~~2021, compared to ~~$517~~$835 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 ~~due to a decrease in long-term mortgage rates driving increased mortgage volume.~~and (3) income from the payout of the Company’s bank-owned life insurance (“BOLI”) claims.

Other income for the nine months ended September 30, ~~2020~~2021 was ~~$7,488,~~$9,515, an increase of ~~$864,~~$2,027, or ~~13.0%~~27.07%, from ~~$6,624~~$7,488 in the same period in ~~2019.~~2020. Service charges on deposit accounts were ~~$2,488~~$2,534 in the nine months ended September 30, ~~2020,~~2021, compared to ~~$3,268~~$2,488 for the same period in ~~2019. The reason for~~2020. As the ~~significant decrease was discussed above. Other~~vaccine distribution continues, the national and local economies are starting to recover resulting in increased spending and overdraft income. Interchange fees which are included in the other service charges and fees ~~increased~~line item on the income statement continues its growing trend by ~~$358,~~increasing by $488, or ~~15.5%~~21.07%, to ~~$2,675 in~~$2,804 for the nine months ended September 30, ~~2020,~~2021, compared to ~~$2,317~~$2,316 for the same period in ~~2019.~~2020. Other operating income not derived from service charges or fees increased ~~$1,286,~~$1,455, or ~~123.8%~~62.58% to ~~$2,325~~$3,780 in the nine months ended September 30, ~~2020,~~2021, compared to ~~$1,039~~$2,325 for the same period in ~~2019.~~2020. The ~~reason~~reasons for the significant increase ~~was~~were discussed above.

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


	For the Three Months				For the Nine Months				For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,				Ended September 30,				Ended September 30,
Other operating income	2020		2019		2020		2019		2021		2020		2021		2020

BOLI income	$	123	$	120	$	352	$	366	$	310	$	123	$	746	$	352
Mortgage loan origination income		361		73		890		179		301		361		1,019		890
Income from security sales, net		293		244		703		190		459		293		1,378		703
Other income		58		80		380		304		137		58		637		380


Total Other Income	$	835	$	517	$	2,325	$	1,039	$	1,207	$	835	$	3,780	$	2,325

OTHER EXPENSES

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

non-interest

expenses for the three months ended September 30, 2021 and 2020 were $8,741 and ~~2019 were~~ $8,653, ~~and $6,867,~~ respectively, an increase of ~~$1,786~~$88 or ~~26.0%~~1.02%. Salaries and benefits increased to ~~$4,389~~$327 for the three months ended September 30, ~~2020,~~2021 and increased to $4,716 from ~~$3,509~~$4,389 for the same period in ~~2019.~~2020. Occupancy expense ~~increased~~decreased by ~~$574,~~$121, or ~~44.6%~~(6.50%), to ~~$1,861~~$1,740 for the three months ended September 30, ~~2020,~~2021, compared to ~~$1,287~~$1,861 for the same period of 2019. The increases in salaries and benefits and occupancy expense are directly related to the Corporation closing the Charter merger in Q4 of 2019. Other operating expenses increased by $332, or 16.0%, to $2,403 for2020. For the three months ended September 30, ~~2020,~~2021, other

non-interest

expense decreased $118, or (4.91%) to $2,285 compared to ~~$2,071~~$2,403 for the same period ~~of 2019. This increase was mainly due to the write down of one OREO property during the third quarter of~~in 2020.

Aggregate

non-interest

expenses for the nine months ended September 30, 2021 and 2020 were $26,191 and ~~2019 were~~ $25,064, ~~and $19,830,~~ respectively, an increase of ~~$5,234~~$1,127 or ~~26.4%~~4.50%. Salaries and benefits increased to ~~$13,131~~$738 for the nine months ended September 30, ~~2020,~~2021 and increased to $13,869 from ~~$10,525~~$13,131 for the same period in ~~2019.~~2020. Occupancy expense ~~increased~~decreased by ~~$1,436,~~$208, or ~~34.9%~~(3.74%), to ~~$5,556~~$5,348 for the nine months ended September 30, ~~2020,~~2021, compared to ~~$4,120~~$5,556 for the same period of ~~2019.~~2020. Other operating expenses increased by ~~$1,192,~~$597, or ~~23.0%~~9.36%, to ~~$6,377~~$6,974 for the nine months ended September 30, ~~2020,~~2021, compared to ~~$5,185~~$6,377 for the same period of ~~2019. This~~2020. The increase ~~was mainly due~~is primary attributed to a

~~one-time~~

~~postage refund in 2019, a~~the write down of ~~one~~two OREO ~~property during 2020~~properties coupled with continued investment in customer facing and ~~an increase in regulatory assessment due to the increase in the size of the Bank.~~internal technology.

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 Nine Months
   Ended September 30,    Ended September 30,
Other Operating Expense
   2020    2019    2020    2019
Advertising
   $ 159    $ 128    $ 519    $ 431
Office Supplies
   270    265    873    718
Professional Fees
   272    442    791    1,114
Telephone expense
   139    119    435    353
Postage and Freight
   142    121    421    (177 )
Loan Collection Expense
   57    187    100    196
Writedown of other real estate owned
   230    —      230    —
Regulatory and related expense
   203    90    442    259
Debit Card/ATM expense
   162    172    445    409
Travel and Convention
   29    79    100    179
Other expenses
   740    468    2,021    1,703








Total Other Expense
   $ 2,403    $ 2,071    $ 6,377    $ 5,185


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

Total Other Expense	$	2,285	$	2,403	$	6,974	$	6,377

The ~~Corporation’s~~Company’s efficiency ratio for the three months ended September 30, ~~2020~~2021 was ~~77.66%~~75.48%, compared to ~~75.19%~~77.66% for the same period in ~~2019.~~2020. The ~~Corporation’s~~Company’s efficiency ratio for the nine months ended September 30, ~~2020~~2021 was ~~80.07%~~76.36%, compared to ~~78.03%~~80.07% 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

   September 30,    December 31,    Amount of
Increase    Percent of
Increase
   2020    2019    (Decrease)    (Decrease)
Cash and Due From Banks
   $ 13,710    $ 15,937    $ (2,227 )    -13.97 %
Interest Bearing deposits with Other Banks
   42,543    58,557    (16,014 )    -27.35 %
Investment Securities
   582,698    464,383    118,315    25.48 %
Loans, net
   651,139    573,312    77,827    13.57 %
Premises and Equipment
   25,141    24,672    469    1.90 %
Total Assets
   1,374,217    1,195,434    178,783    14.96 %
Total Deposits
   1,049,157    898,996    150,161    16.70 %
Total Shareholders’ Equity
   117,499    112,800    4,699    4.17 %


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

CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at September 30, ~~2020~~2021 was ~~$13,710,~~$93,927, which was an increase of ~~$2,227~~$51,619 from the balance of ~~$15,937~~$42,308 at December 31, ~~2019.~~2020.

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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 September 30, ~~2020 increased~~2021 decreased by ~~$118,315,~~$104,560, or ~~25.5%~~(15.40%), to ~~$582,698~~$574,189 from ~~$464,383~~$678,749 at December 31, ~~2019. As previously discussed, 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~~

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

LOANS

The ~~Corporation’s~~Company’s loan balance ~~increased~~decreased by ~~$77,827,~~$41,812, or ~~13.6%~~(6.46%), during the nine months ended September 30, ~~2020,~~2021, to ~~$651,139~~$605,709 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 ~~Corporation funded approximately $48,830f in~~ PPP loans ~~during~~that were provided to customers. PPP loans have decreased by $15,446 for the ~~second quarter of 2020.~~nine months ended September 30, 2021. While loan demand continues to ~~be strong~~recover 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 the nine months ended September 30, 2020, the Corporation’s premises and equipment increased by $469, or 1.9%, to $25,141 from $24,672 at December 31, 2019. The increase was primarily due to ongoing expansion efforts, including the purchase of 2 branches in the Jackson, Mississippi market partially offset by the sale of an old branch building coupled with depreciation expense.

DEPOSITS

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


					Amount of			Percent of							Amount of			Percent of
	September 30,		December 31,		Increase			Increase			September 30,		December 31,		Increase			Increase
	2020		2019		(Decrease)			(Decrease)			2021		2020		(Decrease)			(Decrease)
Noninterest-Bearing Deposits	$	253,762	$	190,406	$	63,356			33.27	%	$	295,097	$	276,033	$	19,064			6.91	%
Interest-Bearing Deposits		469,777		369,354		100,423			27.19	%		447,525		480,987		(33,462	)		-6.96	%
Savings Deposits		100,527		83,065		17,462			21.02	%		125,753		104,532		21,221			20.30	%
Certificates of Deposit		225,091		256,171		(31,080	)		-12.13	%		245,604		233,637		11,967			5.12	%


Total deposits	$	1,049,157	$	898,996	$	150,161			16.70	%	$	1,113,979	$	1,095,189	$	18,790			1.72	%

~~Noninterest-bearing,~~All deposit accounts except for interest-bearing ~~and savings accounts~~deposits increased during the nine months ended September 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, 2020, management reduced higher interest-bearing deposits during the second quarter by approximately $200,000. Management continually monitors the interest rates on time deposit products to ensure that the ~~Corporation~~Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.

OFF-BALANCE

SHEET ARRANGEMENTS

Please refer to Note 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.

~~Table of Contents~~

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

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

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


	September 30, 2020						December 31, 2019						September 30, 2021						December 31, 2020
	Following			Months			Following			Months			Following			Months			Following			Months
	12 months			13-24			12 months			13-24			12 months			13-24			12 months			13-24
+400 basis points		14.3	%		6.6	%		6.4	%		20.9	%		-4.5	%		3.9	%		9.1	%		8.9	%
+300 basis points		15.5	%		6.1	%		6.3	%		17.5	%		-2.1	%		4.7	%		10.7	%		8.4	%
+200 basis points		16.0	%		5.2	%		5.7	%		13.3	%		-0.7	%		4.3	%		11.6	%		7.3	%
+100 basis points		14.0	%		3.9	%		3.0	%		7.0	%		-0.5	%		2.4	%		10.9	%		5.3	%
Flat rates		—			—			—			—			—			—			—			—
-100 basis points		-10.4	%		-8.3	%		-7.3	%		-7.5	%		-7.0	%		-8.9	%		-12.2	%		-9.0	%
-200 basis points		-16.8	%		-18.0	%		-14.5	%		-15.1	%		-11.1	%		-12.8	%		-19.8	%		-19.9	%

The following table presents the change in our economic value of equity as of September 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 (%)
	September 30, 2020			December 31, 2019			September 30, 2021			December 31, 2020
+400 basis points		26.0	%		7.1	%		-17.2	%		11.3	%
+300 basis points		31.7	%		8.0	%		-11.4	%		18.8	%
+200 basis points		34.9	%		7.8	%		-6.5	%		24.6	%
+100 basis points		25.7	%		5.4	%		-2.4	%		21.9	%
Flat rates		—			—			—			—
-100 basis points		-31.0	%		-18.5	%		-14.9	%		-29.4	%
-200 basis points		-44.1	%		-42.3	%		-33.1	%		-43.1	%

6356

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

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

non-maturity

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

~~ITEM 4.~~

ITEM 4. CONTROLS AND PROCEDURES.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of September 30, ~~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~~nine months ended September 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 and in Item 1A, in Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which the Corporation filed with the Securities and Exchange Commission on May 8, 2020.12, 2021. Additional information regarding some of those risks and uncertainties is contained in the notes to the consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the ~~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.

ITEM 6. EXHIBITS.

Exhibits

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~~ITEM 6.~~

~~EXHIBITS.~~


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

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

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

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

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

101		Financial Statements submitted in Inline XBRL format.

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

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

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SIGNATURES

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


CITIZENS HOLDING COMPANY

BY:		/s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer
(Principal Executive Officer)


BY:		/s/ Phillip R. Branch
Phillip R. Branch
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)

DATE: November ~~9, 2020~~5, 2021

6759


	September 30, 2020 (Unaudited)		December 31, 2019 (Audited)


ASSETS
Cash and due from banks	$	13,710	$	15,937
Interest bearing deposits with other banks		42,543		58,557
Federal funds sold		—		1,600
Investment securities available for sale, at fair value		582,698		464,383
Loans, net of allowance for loan losses of $4,494 in 2020 and $3,755 in 2019		651,139		573,312
Premises and equipment, net		25,141		24,672
Other real estate owned, net		3,413		3,552
Accrued interest receivable		5,861		4,181
Cash surrender value of life insurance		25,515		25,088
Deferred tax assets, net		2,145		3,684
Other assets		22,052		20,468


TOTAL ASSETS	$	1,374,217	$	1,195,434


LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Deposits:
Noninterest-bearing demand	$	253,762	$	190,406
Interest-bearing NOW and money market accounts		469,777		369,354
Savings deposits		100,527		83,065
Certificates of deposit		225,091		256,171

Total deposits		1,049,157		898,996

Securities sold under agreement to repurchase		176,978		170,410
Federal Home Loan Bank advances		15,000		—
Accrued interest payable		561		1,128
Deferred compensation payable		9,584		9,453
Other liabilities		5,438		2,647

Total liabilities		1,256,718		1,082,634

SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, 5,587,070 shares issued and outstanding at September 30, 2020 and 5,578,131 at December 31, 2019		1,118		1,116
Additional paid-in capital		18,092		17,883
Retained earnings		95,273		94,590
Accumulated other comprehensive income (loss), net of tax (expense) benefit of ($1,003) at September 30, 2020 and $262 at December 31, 2019		3,016		(789	)


Total shareholders’ equity		117,499		112,800


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,374,217	$	1,195,434


September 30, 2020	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial real estate		3	$	4,871	$	2,377


Total		3	$	4,871	$	2,377


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


Balance at January 1, 2020	$	(16	)
Additions through acquisition		—
Reclasses from nonaccretable difference		(13	)
Accretion		11
Charge-off		—

Balance at September 30, 2020	$	(18	)


	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


September 30, 2019	Real Estate			Business Loans		Consumer		Total
Beginning Balance, January 1, 2019	$	2,845		$	222	$	305	$	3,372
Provision for loan losses		(1	)		270		203		472
Charge-offs		15			92		77		184
Recoveries		101			9		35		145

Net (recoveries) charge-offs		(86	)		83		42		39

Ending Balance	$	2,930		$	409	$	466	$	3,805

Period end allowance allocated to:
Loans individually evaluated for impairment	$	506		$	72	$	—	$	578
Loans collectively evaluated for impairment		2,424			337		466		3,227

Ending Balance, September 30, 2019	$	2,930		$	409	$	466	$	3,805


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
(in thousands)
Operating lease cost	$	118	$	303
Short-term lease cost		6		17
Variable lease cost		—		—

	$	124	$	320


	Nine Months Ended September 30, 2020
(in thousands)
Lease payments due:
Within one year	$	415
After one year but within two years		1,994
After two years but within three years		22
After three year but within four years		0
After four years but within five years		—
After five years		—

Total undiscounted cash flows		2,431
Discount on cash flows		(9	)

Total lease liability	$	2,422


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

Balance at September 30, 2020	$	13,030


	September 30,		December 31,		Amount of Increase			Percent of Increase
	2020		2019		(Decrease)			(Decrease)

Cash and Due From Banks	$	13,710	$	15,937	$	(2,227	)		-13.97	%
Interest Bearing deposits with Other Banks		42,543		58,557		(16,014	)		-27.35	%
Investment Securities		582,698		464,383		118,315			25.48	%
Loans, net		651,139		573,312		77,827			13.57	%
Premises and Equipment		25,141		24,672		469			1.90	%
Total Assets		1,374,217		1,195,434		178,783			14.96	%

Total Deposits		1,049,157		898,996		150,161			16.70	%

Total Shareholders’ Equity		117,499		112,800		4,699			4.17	%