CITIZENS HOLDING CO /MS/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (in thousands, except share and per share data) FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report. The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank” and collectively with the Company, the “Company”), include, but are not limited to, the following: • expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions; • adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan losses and our ability to foreclose on delinquent mortgages; • the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates including, but not limited to, the effects of the emergence of widespread health emergencies or pandemics, including the duration of the COVID-19 pandemic and its impact on the Company’s and its customers’ business, results of 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; 41 Table of Contents • events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people; • events that adversely affect our reputation, and the resulting potential adverse impact on our business operations; • risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and provisions in our governing documents that may make it more difficult for another party to obtain control of us; and • other risks detailed from time-to-time in the Company’s filings with the Securities and Exchange Commission. Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made. Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Company. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report. All dollar amounts appearing in this section of our Quarterly Report are in thousands unless otherwise notes 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 March 31, 2021, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,548,056 and total deposits of $1,231,805. In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank. LIQUIDITY The Company has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Company at March 31, 2021, was 29.78% and at December 31, 2020, was 22.06%. The increase was due to an increase in available for sale securities at March 31, 2021 due to increased deposits as a result of the COVID-19 savings trend along with record financial stimulus. Management believes it maintains adequate liquidity for the Company’s current needs. 42 Table of Contents The Company’s primary source of liquidity is customer deposits, which were $1,229,621 at March 31, 2021, and $1,095,189 at December 31, 2020. Other sources of liquidity include investment securities, the Company’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Company had $774,249 invested in available-for-sale investment securities at March 31, 2021, and $678,749 at December 31, 2020. The Company’s deposit growth during the COVID-19 pandemic, has outpaced loan growth and therefore, the excess funds were invested in securities to help the profitability of the Company. The Company also had $25,009 in interest bearing deposits at other banks at March 31, 2021 and $25,468 at December 31, 2020. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both March 31, 2021 and December 31, 2020. In addition, the Company has the ability to draw on its line of credit with the FHLB. At March 31, 2021, the Company had unused and available $207,835 of its line of credit with the FHLB and at December 31, 2020, the Company had unused and available $167,285 of its line of credit with the FHLB. The increase in the amount available under the Company’s line of credit with the FHLB from the end of 2020 to March 31, 2021, was the result of an increase in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. The Company had federal funds purchased of $-0- as of March 31, 2021 and December 31, 2020. The Company may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs. When the Company has more funds than it needs for its reserve requirements or short-term liquidity needs, the Company increases its investment portfolio, increases the balances in interest bearing due from bank accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to 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 $106,480 at March 31, 2021, as compared to $119,548 at December 31, 2020. The decrease in shareholders’ equity was the result of the accumulated other comprehensive loss brought about by the investment securities market value adjustment partially offset by earnings in excess of dividends paid. The Company paid aggregate cash dividends in the amount of $1,341, or $0.24 per share, during the three-month period ended March 31, 2021 compared to $1,339, or $0.24 per share, for the same period in 2020. 43 Table of Contents Quantitative measures established by federal regulations to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of March 31, 2021, the Company meets all capital adequacy requirements to which it is subject and according to these requirements the Company is considered to be well capitalized. Actual Minimum Capital Requirement to be Well Capitalized Minimum Capital Requirement to be Adequately Capitalized Amount Ratio Amount Ratio Amount Ratio March 31, 2021 Citizens Holding Company Tier 1 leverage ratio $ 102,303 6.93 % $ 73,852 5.00 % $ 59,082 4.00 % Common Equity tier 1 capital ratio 102,303 11.96 % 96,007 6.50 % 66,467 4.50 % Tier 1 risk-based capital ratio 102,303 11.96 % 68,450 8.00 % 51,338 6.00 % Total risk-based capital ratio 107,075 12.51 % 85,563 10.00 % 68,450 8.00 % December 31, 2020 Citizens Holding Company Tier 1 leverage ratio $ 101,640 7.22 % $ 70,344 5.00 % $ 56,275 4.00 % Common Equity tier 1 capital ratio 101,640 12.55 % 91,448 6.50 % 63,310 4.50 % Tier 1 risk-based capital ratio 101,640 12.55 % 64,780 8.00 % 48,585 6.00 % Total risk-based capital ratio 106,375 13.14 % 80,975 10.00 % 64,780 8.00 % The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance 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%. 44 Table of Contents In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers. The final Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the final Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital. Management believes that, as of March 31, 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 Company’s capital ratios as presented. 45 Table of Contents RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods: For the Three Months Ended March 31, 2021 2020 Interest Income, including fees $ 9,079 $ 9,709 Interest Expense 1,446 2,324 Net Interest Income 7,633 7,385 Provision for loan losses 87 314 Net Interest Income after Provision for loan losses 7,546 7,071 Other Income 3,232 2,381 Other Expense 8,468 8,067 Income Before Provision For Income Taxes 2,310 1,385 Provision for Income Taxes 413 225 Net Income $ 1,897 $ 1,160 Net Income Per share - Basic $ 0.34 $ 0.21 Net Income Per Share-Diluted $ 0.34 $ 0.21 See Note 3 to the Company’s Consolidated Financial Statements for an explanation regarding the Company’s calculation of Net Income Per Share - basic and - diluted. Annualized return on average equity (“ROE”) was 6.45% for the three months ended March 31, 2021, and 4.11% for the corresponding period in 2020. The increase in ROE for the three months ended March 31, 2021 was caused by the increase in earnings and decrease in accumulated other comprehensive income (“AOCI “) compared to the same period in 2020. Book value per share decreased to $19.09 at March 31, 2021, compared to $21.43 at December 31, 2020. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity discussed above. Average assets for the three months ended March 31, 2021 were $1,490,670 compared to $1,336,513 for the year ended December 31, 2020. This increase was due mainly to an increase in loans and investment securities partially offset by a decrease in interest bearing deposits with other banks. 46 Table of Contents NET INTEREST INCOME / NET INTEREST MARGIN The main component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds. The net interest margin is net interest income expressed as a percentage of average earning assets. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities. Net interest income was $7,633 for the three months ended March 31, 2021, respectively, as compared to $7,385 for the same respective time period in 2020. The annualized net interest margin was 2.32% for the three months ended March 31, 2021 compared to 2.72% for the corresponding period of 2020. The decrease in net interest margin for the three months ended March 31, 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 139 basis points (“bps”) to 19 bps at March 31, 2021 compared to 158 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 53 bps for the three months ended March 31, 2021 compared to 105 bps for the same period in 2020. The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented: 47 Table of Contents TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES Three Months Ended March 31, Average Balance Income/Expense Average Yield/Rate 2021 2020 2021 2020 2021 2020 Loans: Loans, net of unearned (1) $ 652,783 $ 574,030 $ 8,173 $ 7,489 5.01 % 5.22 % Investment Securities Taxable 545,923 418,685 262 1,657 0.19 % 1.58 % Tax-exempt 128,612 61,013 899 458 2.80 % 3.00 % Total Investment Securities 674,535 479,698 1,161 2,115 0.17 % 0.44 % Federal Funds Sold and Other 51,206 52,838 15 218 0.12 % 1.65 % Total Interest Earning Assets (1)(2) 1,378,524 1,106,566 9,349 9,822 2.71 % 3.55 % Non-Earning Assets 112,146 95,917 Total Assets $ 1,490,670 $ 1,202,483 Deposits: Interest-bearing Demand Deposits (3) $ 513,117 $ 402,535 $ 518 $ 914 0.40 % 0.91 % Savings 107,314 84,656 27 32 0.10 % 0.15 % Time 242,861 243,748 721 1,023 1.19 % 1.68 % Total Deposits 863,292 730,939 1,266 1,969 0.15 % 0.27 % Borrowed Funds Short-term Borrowings 212,849 158,480 180 355 0.34 % 0.90 % Long-term Borrowings — — ` — — 0.00 % 0.00 % Total Borrowed Funds 212,849 158,480 180 355 0.34 % 0.90 % Total Interest-Bearing Liabilities (3) 1,076,141 889,419 1,446 2,324 0.53 % 1.05 % Non-Interest Bearing Liabilities Demand Deposits 269,051 184,734 Other Liabilities 27,866 15,385 Shareholders’ Equity 117,612 112,945 Total Liabilities and Shareholders’ Equity $ 1,490,670 $ 1,202,483 Interest Rate Spread 2.19 % 2.51 % Net Interest Margin $ 7,903 $ 7,498 2.32 % 2.72 % Less Tax Equivalent Adjustment 270 113 Net Interest Income $ 7,633 $ 7,385 (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. 48 Table of Contents 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 March 31, 2021, as compared to the respective corresponding period in 2020, growth in the Company’s loan portfolio was the largest contributing factor to the increase in net interest income over these periods. Also, the Company’s continued efforts to reprice deposits at lower rates has helped offset the yield decline in taxable securities that has been hampered by the low interest rate environment resulting from the Federal Reserve Board’s decreases to the target federal funds rate during the COVID-19 pandemic. Overall, margin compression continues due to the low-rate environment and the economy slowly recovering due to the pandemic. Management believes by continuing to reprice interest-bearing liabilities as they mature, continued focus on loan growth, and changing the investment mix will increase the net interest margin. The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three months ended March 31, 2021 compared to the same respective period in 2020: 49 Table of Contents TABLE 2 - VOLUME/RATE ANALYSIS (in thousands) Three Months Ended March 31, 2021 2021 Change from 2020 Volume Rate Total INTEREST INCOME Loans $ 1,027 (343 ) $ 684 Taxable Securities 504 (1,899 ) (1,395 ) Non-Taxable Securities 491 (66 ) 425 Federal Funds Sold and Other (7 ) (196 ) (203 ) TOTAL INTEREST INCOME $ 2,016 $ (2,505 ) $ (489 ) INTEREST EXPENSE Interest-bearing demand deposits $ 251 (508 ) (257 ) Savings Deposits 9 (11 ) (2 ) Time Deposits (4 ) (299 ) (303 ) Short-term borrowings 122 (297 ) (175 ) TOTAL INTEREST EXPENSE $ 378 $ (1,114 ) (737 ) NET INTEREST INCOME $ 1,638 $ (1,390 ) $ 248 CREDIT LOSS EXPERIENCE As a natural corollary to the Company’s lending activities, some loan losses are to be expected. The risk of loss varies with the type of loan being made and the overall creditworthiness of the borrower over the term of the loan. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and for various types of loans. The Company attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures. The Company maintains a program of systematic review of its existing loans. Loans are graded for their overall quality. Those loans, which management determines require further monitoring and supervision, are segregated and reviewed on a regular basis. Significant problem loans are reviewed monthly by the Company’s management and Board of Directors. The Company charges off that portion of any loan that the Company’s management and Board of Directors has determined to be a loss. A loan is generally considered by management to represent a loss, in whole or in part, when exposure beyond the collateral value is apparent, servicing of the unsecured portion has been discontinued or collection is not anticipated based on the borrower’s financial condition. The general economic conditions in the borrower’s industry influence this determination. The principal amount of any loan that is declared a loss is charged against the Company’s allowance for loan losses. 50 Table of Contents The Company’s allowance for loan losses is designed to provide for loan losses that can be reasonably anticipated. The allowance for loan losses is established through charges to operating expenses in the form of provisions for loan losses. Actual loan losses or recoveries are charged or credited to the allowance for loan losses. The Board of Directors determines the amount of the allowance. Among the factors considered in determining the allowance for loan losses are the current financial condition of the Company’s borrowers and the value of security, if any, for their loans. Estimates of future economic conditions and their impact on various industries and individual borrowers are also taken into consideration, as are the Company’s historical loan loss experience and reports of banking regulatory authorities. As these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether the Company will sustain loan losses in excess or below its allowance or that subsequent evaluation of the loan portfolio may not require material increases or decreases in such allowance. The following table summarizes the Company’s allowance for loan losses for the dates indicated: Quarter Ended March 31, 2021 Year Ended December 31, 2020 Amount of Increase (Decrease) Percent of Increase (Decrease) BALANCES: Gross Loans $ 639,174 $ 652,257 $ (13,083 ) -2.01 % Allowance for Loan Losses 4,772 4,735 37 0.78 % Nonaccrual Loans 6,789 8,484 (1,695 ) -19.98 % Ratios: Allowance for loan losses to gross loans 0.75 % 0.73 % Net loans charged off to allowance for loan losses 1.05 % 10.67 % The provision for loan losses for the three months ended March 31, 2021 was $87, a decrease of $227 from the provision for loan losses of $314 for the same period in 2020. The change in the Company’s loan loss provision for the three months ended March 31, 2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact of the vaccine distribution and improvement in the local and national unemployment rate coupled with a decrease in loan demand from the prior quarter. The Company’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to payments received and loans charged off in excess of new loans being added to nonaccrual status. For the three months ended March 31, 2021, net loan losses charged to the allowance for loan losses totaled $50, a decrease of $203 from the $253 charged off in the same period in 2020. 51 Table of Contents Management reviews quarterly with the Company’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three months ended March 31, 2021 that have not been charged off. Management also believes that the Company’s allowance will be adequate to absorb probable losses inherent in the Company’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required. OTHER INCOME Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended March 31, 2021 was $3,232, an increase of $851, or 35.74%, from $2,381 in the same period in 2020. Service charges on deposit accounts were $814 in the three months ended March 31, 2021, compared to $1,049 for the same period in 2020. In correlation with the national trend of increased savings due to the uncertainty surrounding the pandemic and continued programs offered to our customers by the federal government, there has been a decrease in overdraft income when compared to the same period in 2020 which is the primary driver behind the reduction in service charges on deposit accounts. Offsetting the decline in overdraft income, interchange fees increased by $206, or 30.16%, to $889 in the three months ended March 31, 2021, compared to $683 for the same period in 2020. Other operating income not derived from service charges or fees increased $851, or 35.74% to $1,443 in the three months ended March 31, 2021, compared to $559 for the same period in 2020. This increase was primarily due to two reasons, (1) an increase in gains from security sales due to strategic investment decisions and (2) an increase in mortgage loan origination income. The following is a detail of the other major income classifications that were included in other operation income on the income statement: For the Three Months Ended March 31, Other operating income 2021 2020 BOLI Income $ 130 $ 106 Mortgage Loan Origination Income 395 252 Income from security sales, net 526 77 Other Income 392 124 Total Other Income $ 1,443 $ 559 52 Table of Contents 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 March 31, 2021 and 2020 were $8,468 and $8,067, respectively, an increase of $401 or 4.97%. Occupancy expense increased by $158, or 9.52%, to $1,817 for the three months ended March 31, 2021, compared to $1,659 for the same period of 2020. The increases in occupancy expense is related to the Company’s continued investment in customer facing and internal technology. Other operating expenses increased by $110, or 5.58%, to $2,083 for the three months ended March 31, 2021, compared to $1,973 for the same period of 2020. This increase was mainly due to an increase in regulatory related expenses. The following is a detail of the major expense classifications that make up the other operating expense line item in the income statement: For the Three Months Ended March 31, Other Operating Expense 2021 2020 Advertising $ 141 $ 204 Office Supplies 249 292 Professional Fees 237 258 Telephone expense 155 158 Postage and Freight 169 141 Loan Collection Expense 54 23 Regulatory and related expense 235 66 Debit Card/ATM expense 168 135 Travel and Convention 26 53 Other expenses 649 643 Total Other Expense $ 2,083 $ 1,973 The Company’s efficiency ratio for the three months ended March 31, 2021 was 76.12%, compared to 84.74% for the same period in 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. 53 Table of Contents BALANCE SHEET ANALYSIS March 31, 2021 December 31, 2020 Amount of Increase (Decrease) Percent of Increase (Decrease) Cash and Due From Banks $ 26,667 $ 16,840 $ 9,827 58.36 % Interest Bearing deposits with Other Banks 25,009 25,468 (459 ) -1.80 % Investment Securities 774,249 678,749 95,500 14.07 % Loans, net 634,401 647,521 (13,120 ) -2.03 % Premises and Equipment 25,634 25,630 4 0.02 % Total Assets 1,548,347 1,450,692 97,655 6.73 % Total Deposits 1,229,621 1,095,189 134,432 12.27 % Total Shareholders’ Equity 106,480 119,548 (13,068 ) -10.93 % 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 March 31, 2021 was $51,676, which was an increase of $9,368 from the balance of $42,308 at December 31, 2020. INVESTMENT SECURITIES The Company’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Company’s investments securities portfolio at March 31, 2021 increased by $95,500, or 14.07%, to $774,249 from $678,749 at December 31, 2020. As previously discussed, this increase was due to a large excess in liquidity as customers continue to save excess funds due to the uncertainty around the pandemic along with financial stimulus provided by the Federal government. LOANS The Company’s loan balance decreased by $13,120, or (2.03%), during the three months ended March 31, 2021, to $634,401 from $647,521 at December 31, 2020. The decrease was primarily due to two reasons: (1) Loan 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 PPP loans that were provided to customers. While loan demand continues to be strong in certain sectors, the uncertainty surrounding the pandemic has put a lot of projects on hold in other sectors in the near term. Additionally, no material changes were made to the loan products offered by the Company during this period. 54 Table of Contents PREMISES AND EQUIPMENT During the three months ended March 31, 2021, the Company’s premises and equipment increased by $4, or 0.02%, to $25,634 from $25,630 at December 31, 2020. DEPOSITS The following table shows the balance and percentage change in the various deposits: March 31, 2021 December 31, 2020 Amount of Increase (Decrease) Percent of Increase (Decrease) Noninterest-Bearing Deposits $ 284,266 $ 276,033 $ 8,233 2.98 % Interest-Bearing Deposits 574,706 480,987 93,719 19.48 % Savings Deposits 113,107 104,532 8,575 8.20 % Certificates of Deposit 257,542 233,637 23,905 10.23 % Total deposits $ 1,229,621 $ 1,095,189 $ 134,432 12.27 % All deposit accounts increased during the three months ended March 31, 2021. As previously discussed, the COVID-19 savings trend along with record financial stimulus is creating a large increase in deposits. Management continually monitors the interest rates on time deposit products to ensure that the Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances. OFF-BALANCE SHEET ARRANGEMENTS Please refer to Note 3 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Company’s off-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.