Item 2. Management’s Discussion and Analysis
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;
•
events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people;
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•
events that adversely affect our reputation, and the resulting potential adverse impact on our business operations;
•
risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and provisions in our governing documents that may make it more difficult for another party to obtain control of us; and
•
other risks detailed from time-to-time
in the Company’s filings with the Securities and Exchange Commission.
Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.
Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the 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, 2021, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,356,704 and total deposits of $1,114,738. In addition to full service commercial banking, the Bank offers title insurance services through its 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 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 September 30, 2021, was 35.59% and at December 31, 2020, was 22.06%. The increase was due to an increase in interest bearing cash and cash equivalents and a reduction in the amount of securities required to be pledged at September 30, 2021. Management believes it maintains adequate liquidity for the Company’s current needs.
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The Company’s primary source of liquidity is customer deposits, which were $1,113,979 at September 30, 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”), the Company’s secured line of credit with First Horizon Bank (“FHN”) and federal funds lines with correspondent banks. The Company had $574,189 invested in available-for-sale
investment securities at September 30, 2021, and $678,749 at December 31, 2020. The decrease in securities is the result of management strategically reducing higher interest-bearing deposits that increased significantly through the first quarter of 2021 due to government stimulus by liquidating under-performing securities.
The Company also had $76,132 in interest bearing deposits at other banks at September 30, 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 September 30, 2021 and December 31, 2020. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At September 30, 2021, the Company had unused and available $219,107 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 September 30, 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 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, 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 $107,382 at September 30, 2021, as compared to $119,548 at December 31, 2020. The decrease in shareholders’ equity 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 strategically reducing higher interest-bearing deposits, the Bank’s Tier 1 Leverage ratio increased at September 30, 2021 and December 31, 2020, respectively, to 9.08% from 7.05%.
The Company paid aggregate cash dividends in the amount of $4,027, or $0.72 per share, during the nine-month period ended September 30, 2021 compared to $4,022, or $0.72 per share, for the same period in 2020.
Quantitative measures established by federal regulations to ensure capital adequacy require the 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 to average assets. Management believes that as of September 30, 2021, the Company and Bank meets all capital adequacy requirements to which it is subject and according to these requirements the 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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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%.
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 September 30, 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.
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:
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For the Three Months
For the Nine Months
Ended September 30,
Ended September 30,
2021
2020
2021
2020
Interest Income, including fees
$
9,762
$
10,579
$
28,657
$
30,415
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
3,294
2,637
9,515
7,488
Other Expense
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
Net Income Per Share-Diluted
$
0.34
$
0.37
$
1.02
$
0.84
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 6.60% for the three months ended September 30, 2021, and 7.18% for the corresponding period in 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 6.69% for the nine months ended September 30, 2021, and 5.40% for the corresponding period in 2020. The increase in ROE for the nine months ended September 30, 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 $19.22 at September 30, 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 nine months ended September 30, 2021 were $1,433,229 compared to $1,336,513 for the year ended December 31, 2020. This increase was due mainly to the influx of deposits in 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 management strategically reduced approximately $200,000 in deposits 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 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 $8,602 and $24,729 for the three and nine months ended September 30, 2021, respectively, as compared to $8,906 and $24,641 for the same respective time periods in 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 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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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
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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, 2021, as compared to the respective corresponding period in 2020, the repricing of interest-bearing demand deposits and reallocating the investment portfolio into slower prepaying non-taxable
securities were the largest contributing factors to the increase in net interest income over these periods. Also, the Company’s continued efforts to reprice and reduce higher interest-bearing deposits has helped offset the yield decline in taxable securities that has been hampered by the low interest rate environment resulting from the Federal Reserve Board’s decreases to the target federal funds rate during the COVID-19
pandemic. Management believes by continuing to reprice and strategically reduce interest-bearing liabilities as they mature, continued focus on loan growth, and continuing to reallocate the investment mix will increase the net interest margin.
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The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three and nine months ended September 30, 2021 compared to the same respective period in 2020:
TABLE 2 - VOLUME/RATE ANALYSIS
(in thousands)
Three Months Ended September 30, 2021
2021 Change from 2020
Volume
Rate
Total
INTEREST INCOME
Loans
$
(295
)
119
$
(176
)
Taxable Securities
(351
)
(424
)
(775
)
Non-Taxable
Securities
320
(248
)
72
Federal Funds Sold and Other
10
(0
)
10
TOTAL INTEREST INCOME
$
(315
)
$
(554
)
$
(869
)
INTEREST EXPENSE
Interest-bearing demand deposits
$
(14
)
(495
)
(509
)
Savings Deposits
6
(2
)
4
Time Deposits
74
(126
)
(52
)
Short-term borrowings
(91
)
133
42
TOTAL INTEREST EXPENSE
$
(25
)
$
(490
)
(515
)
NET INTEREST INCOME
$
(290
)
$
(64
)
$
(354
)
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Nine Months Ended September 30, 2021
2021 Change from 2020
Volume
Rate
Total
INTEREST INCOME
Loans
$
955
(93
)
$
862
Taxable Securities
455
(3,662
)
(3,207
)
Non-Taxable
Securities
2,076
(596
)
1,480
Federal Funds Sold and Other
1,481
(3,689
)
(2,208
)
TOTAL INTEREST INCOME
$
4,968
$
(8,041
)
$
(3,073
)
INTEREST EXPENSE
Interest-bearing demand deposits
$
328
(1,585
)
(1,257
)
Savings Deposits
21
(17
)
4
Time Deposits
192
(625
)
(433
)
Short-term borrowings
670
(2,356
)
(1,686
)
TOTAL INTEREST EXPENSE
$
1,211
$
(4,583
)
(3,372
)
NET INTEREST INCOME
$
3,757
$
(3,458
)
$
299
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.
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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. Management determines the amount of the 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 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
Year Ended
Amount of
Percent of
September 30,
December 31,
(Decrease)
(Decrease)
2021
2020
Increase
Increase
BALANCES:
Gross Loans
$
611,027
$
652,257
$
(41,230
)
-6.32
%
Allowance for Loan Losses
5,318
4,735
583
12.31
%
Nonaccrual Loans
4,033
8,564
(4,531
)
-52.91
%
Ratios:
Allowance for loan losses to gross loans
0.87
%
0.73
%
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, 2021 was $968, a linked quarter increase of $736. The provision for loan losses for the nine months ended September 30, 2021 was $1,287, an increase of $104 from the provision for loan losses of $1,183 for the same period in 2020. The change in the Company’s loan loss provision for the three and nine months ended September 30, 2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the specific provisioning for one relationship partially offset by the decline in qualitative reserves coupled with the decline in loans balances. 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 September 30, 2021, net loan losses charged to the allowance for loan losses totaled $1, a decrease of $9 from the $10 charged off in the same period in 2020. For the nine months ended September 30, 2021, net loan losses charged to the allowance for loan losses totaled $704, an increase of $260 from the $444 charged off in the same period in 2020.
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The increase was primarily due to two significant charge-offs during the second quarter. 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 nine months ended September 30, 2021 that have not been charged off or specifically reserved for in the allowance. 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 September 30, 2021 was $3,294, an increase of $657, or 24.91%, from $2,637 in the same period in 2020. Service charges on deposit accounts were $952 in the three months ended September 30, 2021, compared to $771 for the same period in 2020. As the vaccine distribution continues, the national and local economies are starting to recover resulting in increased spending and overdraft income. Included in the service charges on deposit accounts line item for the three months ended September 30, 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 $850 for the same period in 2020. Other operating income not derived from service charges or fees increased $372, or 44.55% to $1,207 in the three months ended September 30, 2021, compared to $835 for the same period in 2020. This increase was primarily due to three reasons, (1) an increase in gains from security sales due to strategic investment decisions (2) an increase in mortgage loan origination income 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, 2021 was $9,515, an increase of $2,027, or 27.07%, from $7,488 in the same period in 2020. Service charges on deposit accounts were $2,534 in the nine months ended September 30, 2021, compared to $2,488 for the same period in 2020. As the 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 line item on the income statement continues its growing trend by increasing by $488, or 21.07%, to $2,804 for the nine months ended September 30, 2021, compared to $2,316 for the same period in 2020. Other operating income not derived from service charges or fees increased $1,455, or 62.58% to $3,780 in the nine months ended September 30, 2021, compared to $2,325 for the same period in 2020. The reasons for the significant increase 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
Ended September 30,
Ended September 30,
Other operating income
2021
2020
2021
2020
BOLI income
$
310
$
123
$
746
$
352
Mortgage loan origination income
301
361
1,019
890
Income from security sales, net
459
293
1,378
703
Other income
137
58
637
380
Total Other Income
$
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 $8,653, respectively, an increase of $88 or 1.02%. Salaries and benefits increased to $327 for the three months ended September 30, 2021 and increased to $4,716 from $4,389 for the same period in 2020. Occupancy expense decreased by $121, or (6.50%), to $1,740 for the three months ended September 30, 2021, compared to $1,861 for the same period of 2020. For the three months ended September 30, 2021, other non-interest
expense decreased $118, or (4.91%) to $2,285 compared to $2,403 for the same period in 2020.
Aggregate non-interest
expenses for the nine months ended September 30, 2021 and 2020 were $26,191 and $25,064, respectively, an increase of $1,127 or 4.50%. Salaries and benefits increased to $738 for the nine months ended September 30, 2021 and increased to $13,869 from $13,131 for the same period in 2020. Occupancy expense decreased by $208, or (3.74%), to $5,348 for the nine months ended September 30, 2021, compared to $5,556 for the same period of 2020. Other operating expenses increased by $597, or 9.36%, to $6,974 for the nine months ended September 30, 2021, compared to $6,377 for the same period of 2020. The increase is primary attributed to the write down of two OREO properties coupled with continued investment in customer facing and internal technology.
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The following is a detail of the major expense classifications that make up the other operating expense line item in the income statement:
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 Company’s efficiency ratio for the three months ended September 30, 2021 was 75.48%, compared to 77.66% for the same period in 2020. The Company’s efficiency ratio for the nine months ended September 30, 2021 was 76.36%, compared to 80.07% 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.
BALANCE SHEET ANALYSIS
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, 2021 was $93,927, which was an increase of $51,619 from the balance of $42,308 at December 31, 2020.
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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 September 30, 2021 decreased by $104,560, or (15.40%), to $574,189 from $678,749 at December 31, 2020. The decrease is a result of the Company liquidating a portion of the investment portfolio to provide funding for the Company’s strategic high interest-bearing deposit reduction plan.
LOANS
The Company’s loan balance decreased by $41,812, or (6.46%), during the nine months ended September 30, 2021, to $605,709 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. PPP loans have decreased by $15,446 for the nine months ended September 30, 2021. While loan demand continues to recover in certain sectors, the uncertainty surrounding the pandemic 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 Company during this period.
DEPOSITS
The following table shows the balance and percentage change in the various deposits:
Amount of
Percent of
September 30,
December 31,
Increase
Increase
2021
2020
(Decrease)
(Decrease)
Noninterest-Bearing Deposits
$
295,097
$
276,033
$
19,064
6.91
%
Interest-Bearing Deposits
447,525
480,987
(33,462
)
-6.96
%
Savings Deposits
125,753
104,532
21,221
20.30
%
Certificates of Deposit
245,604
233,637
11,967
5.12
%
Total deposits
$
1,113,979
$
1,095,189
$
18,790
1.72
%
All deposit accounts except for interest-bearing deposits increased during the nine months ended September 30, 2021. The increase in deposit accounts is a result of the COVID-19
savings trend coupled with record financial stimulus. The decrease in interest-bearing accounts is a 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 Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.
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OFF-BALANCE
SHEET ARRANGEMENTS
Please refer to Note 2 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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.