UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

 

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

For the quarterly period ended SeptemberJune 30, 20182019

or

 

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

For the transition period from                    to                    

Commission File Number:001-15375

 

 

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Mississippi 64-0666512

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

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

601-656-4692

(Registrant’s telephone number, including area code)

 

 

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

Title of Each Class

Trading

Symbol(s)

Name of Each Exchange

on Which Registered

Common Stock, $0.20 par valueCIZNNASDAQ 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 RegulationS-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, anon-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 Rule12b-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 Rule12b-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, 2018:August 6, 2019:

 

Title

 Outstanding 

Common Stock, $0.20 par value

   4,904,5304,912,030 

 

 

 


CITIZENS HOLDING COMPANY

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 1

Item 1.

 

Consolidated Financial Statements.

 1
 

Consolidated Statements of Financial Condition, as of SeptemberJune  30, 20182019 (Unaudited) and December 31, 20172018 (Audited)

 1
 

Consolidated Statements of Income for the Three and nineSix months ended SeptemberJune  30, 20182019 (Unaudited) and 20172018 (Unaudited)

 2
 

Consolidated Statements of Comprehensive Income (Loss) Income for the Three and nineSix months ended SeptemberJune 30, 20182019 (Unaudited) and 20172018 (Unaudited)

 3
 

Condensed Consolidated Statements of Cash Flows for the NineSix months ended SeptemberJune 30, 20182019 (Unaudited) and 20172018 (Unaudited)

 4
 

Notes to Consolidated Financial Statements (Unaudited)

 5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 3129

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk.

 4442

Item 4.

 

Controls and Procedures.

 4744

PART II.

 

OTHER INFORMATION

 4845
 

Item 1.

Legal Proceedings.

 4845
 

Item 1A.

Risk Factors.

 4845
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.*

 
 

Item 3.

Defaults Upon Senior Securities.*

 
 

Item 4.

Mine Safety Disclosures.*

 
 

Item 5.

Other Information.*

 

Item 6.

 

Exhibits.

 4945

*

 

None or Not Applicable.

 

SIGNATURES

 5046

 


PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

  September 30, December 31,   June 30, December 31, 
  2018 2017   2019 2018 
  (Unaudited) (Audited)   (Unaudited) (Audited) 

ASSETS

      

Cash and due from banks

  $12,609,437  $17,962,990   $21,754,884  $12,592,130 

Interest bearing deposits with other banks

   1,351,745  1,532,420    1,193,764  8,079,742 

Investment securities available for sale, at fair value

   449,254,631  505,046,377    483,906,292  444,746,454 

Loans, net of allowance for loan losses of $3,172,943 in 2018 and $3,019,228 in 2017

   431,433,287  402,390,574 

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

   461,914,254  425,905,093 

Premises and equipment, net

   19,868,597  20,571,551    20,169,558  19,717,305 

Other real estate owned, net

   3,413,734  3,980,127    3,383,444  3,440,148 

Accrued interest receivable

   3,946,179  4,450,723    4,400,453  4,165,783 

Cash surrender value of life insurance

   25,134,668  24,612,779    25,706,254  25,383,931 

Deferred tax assets, net

   8,326,417  5,362,750    2,789,557  6,633,539 

Other assets

   7,629,251  7,185,537    8,812,480  7,965,952 
  

 

  

 

   

 

  

 

 

TOTAL ASSETS

  $962,967,946  $993,095,828   $1,034,030,940  $958,630,077 
  

 

  

 

   

 

  

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

LIABILITIES

      

Deposits:

      

Noninterest-bearing demand

  $162,832,452  $159,291,356   $165,655,475  $170,029,729 

Interest-bearing NOW and money market accounts

   327,991,524  306,047,053    331,589,279  298,220,430 

Savings deposits

   81,085,547  77,784,876    77,686,521  76,735,710 

Certificates of deposit

   185,470,810  177,562,214    219,927,045  211,235,641 
  

 

  

 

   

 

  

 

 

Total deposits

   757,380,333  720,685,499    794,858,320  756,221,510 

Securities sold under agreement to repurchase

   88,908,916  142,497,938    119,327,404  107,965,505 

Federal funds purchased

   6,500,000  1,500,000    12,000,000    

Federal Home Loan Bank advances

   20,000,000  30,000,000 

Accrued interest payable

   245,839  198,183    706,261  470,710 

Deferred compensation payable

   8,923,577  8,620,890    9,225,972  9,052,972 

Other liabilities

   1,214,779  1,142,278    1,776,660  1,053,063 
  

 

  

 

   

 

  

 

 

Total liabilities

   883,173,444  904,644,788    937,894,617  874,763,760 

SHAREHOLDERS’ EQUITY

      

Common stock; $0.20 par value, 22,500,000 shares authorized, 4,904,530 shares issued and outstanding at September 30, 2018 and 4,894,705 shares issued and outstanding at December 31, 2017

   980,906  978,941 

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

   982,406  980,906 

Additionalpaid-in capital

   4,257,155  4,103,139    4,379,037  4,298,499 

Retained earnings

   93,022,796  91,594,379    93,803,054  93,561,515 

Accumulated other comprehensive loss, net of tax benefit of $6,139,049 in 2018 and $2,734,500 in 2017

   (18,466,355 (8,225,419

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

   (3,028,174 (14,974,603
  

 

  

 

   

 

  

 

 

Total shareholders’ equity

   79,794,502  88,451,040    96,136,323  83,866,317 
  

 

  

 

   

 

  

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $962,967,946  $993,095,828   $1,034,030,940  $958,630,077 
  

 

  

 

   

 

  

 

 

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

  For the Three Months For the Nine Months   For the Three Months   For the Six Months 
  Ended September 30, Ended September 30,   Ended June 30,   Ended June 30, 
  2018   2017 2018   2017   2019   2018   2019   2018 

INTEREST INCOME

               

Loans, including fees

  $5,166,554   $4,585,668  $14,867,465   $14,017,718 

Investment securities

   2,696,474    2,892,063  8,253,586    8,643,750 

Interest and fees on loans

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

Interest on securities

        

Taxable

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

Nontaxable

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

Other interest

   24,291    66,633  144,635    194,266    81,673    60,060    316,779    120,344 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest income

   7,887,319    7,544,364  23,265,686    22,855,734    8,650,544    7,778,976    17,033,969    15,378,367 

INTEREST EXPENSE

               

Deposits

   709,985    471,049  1,726,700    1,434,694    1,916,769    515,506    3,645,441    1,016,715 

Other borrowed funds

   458,039    353,968  1,062,505    1,027,587    527,823    311,034    972,850    604,466 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest expense

   1,168,024    825,017  2,789,205    2,462,281    2,444,592    826,540    4,618,291    1,621,181 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

NET INTEREST INCOME

   6,719,295    6,719,347  20,476,481    20,393,453    6,205,952    6,952,436    12,415,678    13,757,186 

PROVISION FOR (REVERSAL OF) LOAN LOSSES

   288,576    (73,808 140,765    (254,614   264,819    88,962    460,298    (147,811
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

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

   6,430,719    6,793,155  20,335,716    20,648,067    5,941,133    6,863,474    11,955,380    13,904,997 

OTHER INCOME

               

Service charges on deposit accounts

   1,170,956    1,115,474  3,381,809    3,176,877    1,046,255    1,067,260    2,142,947    2,210,853 

Other service charges and fees

   761,935    702,686  2,147,452    1,992,929    769,668    717,053    1,453,308    1,385,517 

Other operating income

   287,683    308,012  870,153    1,013,818    256,255    294,097    522,834    582,470 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total other income

   2,220,574    2,126,172  6,399,414    6,183,624    2,072,178    2,078,410    4,119,089    4,178,840 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

OTHER EXPENSES

               

Salaries and employee benefits

   3,668,012    3,744,831  11,011,291    11,154,068    3,469,724    3,675,422    7,016,393    7,343,279 

Occupancy expense

   1,486,232    1,335,676  4,373,233    3,984,549    1,409,862    1,361,622    2,832,289    2,887,001 

Other operating expense

   1,739,780    1,806,713  5,505,070    5,768,370 

Other expense

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

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

Total other expenses

   6,894,024    6,887,220  20,889,594    20,906,987    6,323,049    6,947,889    12,962,266    13,995,570 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

   1,757,269    2,032,107  5,845,536    5,924,704    1,690,262    1,993,995    3,112,203    4,088,267 

PROVISION FOR INCOME TAXES

   260,475    424,638  888,215    1,096,457    319,520    305,855    514,690    627,740 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

NET INCOME

  $1,496,794   $1,607,469  $4,957,321   $4,828,247   $1,370,742   $1,688,140   $2,597,513   $3,460,527 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

NET INCOME PER SHARE -Basic

  $0.31   $0.33  $1.01   $0.99   $0.28   $0.35   $0.53   $0.71 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

-Diluted

  $0.31   $0.33  $1.01   $0.99   $0.28   $0.35   $0.53   $0.71 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

DIVIDENDS PAID PER SHARE

  $0.24   $0.24  $0.72   $0.72   $0.24   $0.24   $0.48   $0.48 
  

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

 

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME

(Unaudited)

 

   For the Three Months  For the Nine Months 
   Ended September 30,  Ended September 30, 
   2018  2017  2018  2017 

Net income

  $1,496,794  $1,607,469  $4,957,321  $4,828,247 

Other comprehensive (loss) income

     

Securitiesavailable-for-sale

     

Unrealized holding (losses) gains

   (3,006,277  (2,137,839  (13,656,532  8,378,246 

Income tax effect

   747,310   797,413   3,407,305   (3,125,086
  

 

 

  

 

 

  

 

 

  

 

 

 
   (2,258,967  (1,340,426  (10,249,227  5,253,160 

Rclassification adjustment for gains included in net income

   11,047   15,612   11,047   104,708 

Income tax effect

   (2,756  (5,823  (2,756  (39,056
  

 

 

  

 

 

  

 

 

  

 

 

 
   8,291   9,789   8,291   65,652 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive (loss) income

   (2,250,676  (1,330,637  (10,240,936  5,318,812 
  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive (loss) income

  $(753,882 $276,832  $(5,283,615 $10,147,059 
  

 

 

  

 

 

  

 

 

  

 

 

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

Net income

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

Other comprehensive income (loss)

     

Securitiesavailable-for-sale

     

Unrealized holding gains (losses)

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

Income tax effect

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

 

 

  

 

 

  

 

 

  

 

 

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

Rclassification adjustment for (losses) gains included in net income

   (54,149  3,026   (54,149  11,047 

Income tax effect

   13,510   (755  13,510   (2,756
  

 

 

  

 

 

  

 

 

  

 

 

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

 

 

  

 

 

  

 

 

  

 

 

 

Total other comprehensive income (loss)

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

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

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

 

 

  

 

 

  

 

 

  

 

 

 

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

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  For the Nine Months   For the Six Months 
  Ended September 30,   Ended June 30, 
  2018 2017   2019 2018 

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net cash provided by operating activities

  $8,832,306  $8,034,077   $5,293,805  $5,402,261 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Proceeds from maturities and calls of securities available for sale

   32,579,774  31,045,728    23,344,865  21,903,064 

Proceeds from sale of investment securities

   17,609,890  114,060,844    60,110,779  17,609,891 

Purchases of investment securities available for sale

   (10,550,000 (160,967,616   (108,814,987 (10,550,000

Purchases of bank premises and equipment

   (268,708 (2,844,102   (879,034 (48,702

Sales of bank premises and equipment

   264,000   —   

Proceeds from sales of bank premises and equipment

   —    264,000 

Decrease in interest bearing deposits with other banks

   180,675  18,962,673    6,885,978  239,241 

Purchase of Federal Home Loan Bank stock

   —    (498,700

Proceeds from sale of other real estate

   802,372  127,722    170,356  782,095 

Net (increase) decrease in loans

   (29,407,770 829,450 

Net increase in loans

   (36,591,743 (15,151,283
  

 

  

 

   

 

  

 

 

Net cash provided by investing activities

   11,210,233  715,999 

Net cash (used in) provided by investing activities

   (55,773,786 15,048,306 

CASH FLOWS FROM FINANCING ACTIVITIES

      

Net increase (decrease) in deposits

   36,694,834  (5,386,374

Net increase in deposits

   38,636,810  43,925,481 

Net change in securities sold under agreement to repurchase

   (53,589,022 (830,963   11,361,899  (68,372,991

Increase in federal funds purchased

   5,000,000   —      12,000,000  11,000,000 

Repayment of Federal Home Loan Bank advances

   (10,000,000  —      —    (10,000,000

Proceeds from exercise of stock options

   27,000  92,625    —    27,000 

Payment of dividends

   (3,528,904 (3,522,327   (2,355,974 (2,351,816
  

 

  

 

   

 

  

 

 

Net cash used in financing activities

   (25,396,092 (9,647,039

Net cash provided by (used in) financing activities

   59,642,735  (25,772,326
  

 

  

 

   

 

  

 

 

Net decrease in cash and due from banks

   (5,353,553 (896,963

Net increase (decrease) in cash and due from banks

   9,162,754  (5,321,759

Cash and due from banks, beginning of period

   17,962,990  21,688,557    12,592,130  17,962,990 
  

 

  

 

   

 

  

 

 

Cash and due from banks, end of period

  $12,609,437  $20,791,594   $21,754,884  $12,641,231 
  

 

  

 

   

 

  

 

 

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

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the ninesix months ended SeptemberJune 30, 20182019

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended SeptemberJune 30, 20182019 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 subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with the Company, the “Corporation”). In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation.

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form10-K for the year ended December 31, 2017,2018, filed with the Securities and Exchange Commission on March 15, 2018.2019.

Nature of Business

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

Estimates

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

Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and valuation of foreclosed real estate, management obtains independent appraisals for significant properties.

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

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous or future periods.

The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Adoption of New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU2014-09,2016-02 Revenue from Contracts with Customers“Leases” (Topic 842)” (“ASU2014-09”2016-02”), which requires an entity tolessees and lessors recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU2014-09 did not have a material impactlease assets and lease liabilities on the Company’s consolidated

financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of ASU2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.

In January 2016, the FASB issued ASUNo. 2016-01,Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU2016-01”). The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirementsstatement of financial instruments.condition and disclose key information about leasing arrangements. ASU2016-012016-02 was effective for the Company on January 1, 20182019. ASU2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and did not have a material impactmeasure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply ASU2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. Of the optional practical expedients available under ASU2016-02, all that apply have been adopted.

The Company’s consolidated financial statementsoperating leases relate primarily to branch properties and related disclosures as the Company does not hold any equity securities that are within the scopeequipment. As a result of implementing ASU2016-01.2016-02, ASUwe recognized an operating lease2016-01right-of-use also eliminates the disclosure(“ROU”) asset of assumptions used to estimate fair value for financial instruments measured at amortized cost$1.086 million and requires disclosurean operating lease liability of an exit price notion in determining the fair value of certain financial instruments prior to its changing to the exit price upon adoption of this standard in the first quarter of 2018. This ASU did not have any other implications to the Company at the time of adoption.

In August 2016, the FASB issued ASUNo. 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU2016-15”). ASU2016-15 is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows, including (1) debt prepayment or debt extinguishment costs, (2) settlement ofzero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance principle. The ASU was effective for the Company$1.086 million on January 1, 2018 and only impacts the presentation2019, with no impact on our consolidated statements of specific items within the Consolidated Statementincome or condensed consolidated statement of Cash Flows and did not have a material impactcash flows compared to the Company.

In January 2017, FASB issued ASU2017-01,“Business Combinations (Topic 805), Clarifyingprior lease accounting model. The ROU asset and liability are recorded in other assets and other liabilities, respectively, in the Definitionconsolidated statements of a Business”(“ASU2017-01”),that changes the definition of a business when evaluating whether transactions should be accountedcondition. See Note 8. Premises and Equipment for as the acquisition of assets or the acquisition of a business. ASU2017-01 requires an entity to evaluate if substantially all of the fair value of the assets acquired are concentrated in a single asset or a group of similar identifiable assets; if so, the acquired assets or group of similar identifiable assets is not considered a business. In addition, the guidance requires that, to be considered a business, the acquired assets must include an input and a substantive process that together significantly

contribute to the ability to create output. The ASU removes the evaluation of whether a market participant could replace any of the missing elements. ASU2017-01 was effective for the Company on January 1, 2018 and is to the be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations.

In February 2018, FASB issued ASU2018-02,“Income Statement - Reporting Comprehensive Income (Topic 220)”(“ASU2018-02”). The amendments in ASU2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings to eliminate the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act. ASU2018-02 will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for public companies for reporting periods for which financial statements have not yet been issued. The Company early adopted ASU2018-02 as of December 31, 2017 and, as a result, reclassified $1,588,198 from accumulated other comprehensive income to retained earnings as of December 31, 2017. The reclassification impacted the Consolidated Statements of Financial Condition and the Consolidated Statements of Changes in Shareholders’ Equity as of and for the twelve months

ended December 31, 2017.additional information.

Newly Issued, But Not Yet Effective Accounting Standards

On September 16,In June 2016, the FASB issued ASUNo. 2016-13,Financial “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments(“Instruments” (“ASU2016-13”). The update will significantly changeASU2016-13 makes significant changes to the way entities recognize impairment on many financial assets by requiring immediate recognition of estimatedaccounting for credit losses expected to occur over the asset’s remaining life.on financial instruments and disclosures about them. The FASB describes this impairment recognition model as thenew current expected credit loss (“CECL”) model and believes the CECL(CECL) impairment model will result in more timely recognitionrequire an estimate of credit losses since the CECL model incorporates expected credit losses, versus incurred creditmeasured 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. The scope of FASB’s CECL model would include loans,held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. For public business entities, this update becomes effective for interim and annual periods beginning after December 15, 2019. Management is currently evaluating the impact this ASU will have on the Company’s consolidated financial statements and will continue to monitor FASB’s progress on this topic.

In February 2016, the FASB issuedaddition, ASUNo. 2016-02,Leases (Topic 842) (“ASU2016-02”). ASU2016-022016-13 amends the accounting modelfor credit losses on debt securities and disclosure requirements for leases.purchased financial assets with credit deterioration. The current accounting model for leases distinguishes between capital leases, whichamendments in ASU2016-13 are recognizedon-balance sheet, and operating leases, which are not. Under the new standard, the lease classifications are defined as finance leases, which are similar to capital leases under current GAAP, and operating leases. Further, a lessee will recognize a lease liability and aright-of-use asset for all leases with a term greater than 12 months on its balance sheet regardless of the lease’s classification, which may significantly increase reported assets and liabilities. The accounting model and disclosure requirements for lessors remains substantially unchanged from current GAAP. ASU2016-02 iscurrently effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management31, 2019, and interim periods within those years for public business entities that are SEC filers. ASU2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU2016-13 to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation of said models is currently evaluatingrequired to determine the impact ASU2016-02that adoption of this standard will have on the Company’s financial positioncondition and results of operations.

In March 2017, the FASB issued ASUNo. 2017-08,Receivables- Nonrefundable Fees and Other Costs (Subtopic310-20) (“ASU2017-08”). ASU2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities due to market participants pricing securities to the call date that produces the worst yield when the coupon is above current market rates, and pricing securities to maturity when the coupon is below market rates in anticipation that the borrower will act in its economic best interest. Therefore, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economicsoperations of the underlying instrument. ASU2017-08 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU2017-08 will have on the Company’s financial position and results of operations.Company.

ASU2018-13Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU2018-13 is effective for annual and interim periods beginning after December 15, 2019. Management is currently evaluating the impact this ASU will have on the Company’s financial statements.

Note 2. Mergers and Acquisitions

Merger with Charter Bank

On May 21, 2019, the Company, the Bank and Charter Bank (“Charter”) entered into an agreement and plan of merger pursuant to which Charter will merge with and into the Bank. Under the terms of the merger agreement, each Charter shareholder will have the right to receive 0.39417 shares of the Company’s common stock and $3.615 in cash for each outstanding share of Charter common stock. The aggregate purchase price is estimated to be approximately $20.0 million, based on our closing price of $20.76 on August 1, 2019. The transaction is expected to close in the fourth quarter of 2019 and is subject to customary conditions set forth in the merger agreement, including the receipt of regulatory approvals and approval by a majority of Charter’s shareholders.

Note 2.3. Commitments and Contingent Liabilities

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of SeptemberJune 30, 2018,2019, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $55,982,175$57,647,121 compared to an aggregate unused balance of $46,405,869$58,835,208 at December 31, 2017.2018. There were $2,516,810$2,492,810 of letters of credit outstanding at SeptemberJune 30, 20182019 and $2,842,010$2,516,810 at December 31, 2017.2018. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments and into its asset and liability management program.

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

Note 3.4. Net Income per Share

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

   For the Three Months   For the Nine Months 
   Ended September 30,   Ended September 30, 
   2018   2017   2018   2017 

Basic weighted average shares outstanding

   4,899,520    4,882,705    4,888,372    4,877,338 

Dilutive effect of granted options

   5,093    10,443    9,586    17,412 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

   4,904,613    4,893,148    4,897,958    4,894,750 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $1,496,794   $1,607,469   $4,957,321   $4,828,247 

Net income per share-basic

  $0.31   $0.33   $1.01   $0.99 

Net income per share-diluted

  $0.31   $0.33   $1.01   $0.99 
   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2019   2018   2019   2018 

Basic weighted average shares outstanding

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

Dilutive effect of granted options

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

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

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

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

Net income per share-basic

  $0.28   $0.35   $0.53   $0.71 

Net income per share-diluted

  $0.28   $0.35   $0.53   $0.71 

Note 4.5. Equity Compensation Plans

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

Prior to the adoption of the 2013 Plan, the Corporation utilized two stock-based compensation plans,issued awards to directors from the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”) for directors, and the 1999 Employees’ Long-Term Incentive Plan (the “Employees’ Plan”) for employees, both of, which havehas expired.

The following table is a summary of the stock option activity for the ninesix months ended SeptemberJune 30, 2018:2019:

 

  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, 2017

   63,000   $20.96    —     $—   

Outstanding at December 31, 2018

   52,500   $21.55    —     $—   

Granted

   —      —      —      —      —      —      —      —   

Exercised

   (6,000   18.00    —      —      —      —      —      —   

Expired

   (4,500   18.00    —      —      (12,000   21.75    —      —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Outstanding at September 30, 2018

   52,500   $21.55    —     $—   

Outstanding at June 30, 2019

   40,500   $21.49    —     $—   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
        

The intrinsic value of options outstanding under the Directors’ Plan at SeptemberJune 30, 2018,2019, was $131,820.$33,480. No options were outstanding under the 2013 Plan or the Employee’s Plan as of SeptemberJune 30, 2018.2019.

During the quarter ended June 30, 2018,2019, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over aone-year period ending April 25, 201923, 2020 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $165,375$161,475 and will be recognizedexpensed ratably over theone-year one year vesting period at a cost of $13,781 per month less deferred taxes of $3,438 per month.    

Note 5. Income Taxes

The Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, among other things, permanently lowered the statutory federal corporate tax rate from 34% to 21%, effective for tax years including or beginning January 1, 2018. Under the guidance of ASC 740, “Income Taxes” (“ASC 740”), the Company revalued its net deferred tax assets on the date of enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new legislation, the Company’s revaluation of its net deferred tax assets was $2,558,859, which was included in “Provision for Income Taxes” in the Consolidated Statements of Income at December 31, 2017. Although in the normal course of business the Company is required to make estimates and assumptions for certain tax items which cannot be fully determined at period end, the Company did not identify items for which the income tax effects of the Tax Act had not been completed as of December 31, 2017 and, therefore, considered its accounting for the tax effects of the Tax Act on its net deferred tax asset to have been completed as of December 31, 2017.period.

Note 6. Income Taxes

For the three months ended June 30, 2019 and 2018, the Company recorded a provision for income taxes totaling $319 thousand and $306 thousand, respectively. The effective tax rate was 18.9% and 15.3% for the three months ending June 30, 2019 and nine2018, respectively.

For the six months ended SeptemberJune 30, 2019 and 2018, the Company recorded a provision for income taxes totaling $515 thousand and 2017 differ$628 thousand, respectively. The effective tax rate was 16.5% and 15.4% for the six months ending June 30, 2019 and 2018, respectively. The provision for income taxes includes both federal and state income taxes and differs from the statutory federal incomerate due to favorable permanent differences primarily related to tax rates of 21% and 34%, respectively, due primarily to state income taxes offset by tax exempt interest income.free municipal investments.

Note 6.7. Securities

The amortized cost and estimated fair value of securitiesavailable-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
September 30, 2018  Cost   Gains   Losses   Fair Value 

Securitiesavailable-for-sale

        

Obligations of U.S. Government agencies

  $99,367,877   $—     $4,515,549   $94,852,328 

Mortgage backed securities

   268,468,752    6,116    14,361,628    254,113,240 

State, County, Municipals

   106,023,406    52,086    5,786,429    100,289,063 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $473,860,035   $58,202   $24,663,606   $449,254,631 
  

 

 

   

 

 

   

 

 

   

 

 

 
       Gross   Gross     
   Amortized   Unrealized   Unrealized   Estimated 
December 31, 2017  Cost   Gains   Losses   Fair Value 

Securitiesavailable-for-sale

        

Obligations of U.S. Government agencies

  $180,647,580   $—     $4,199,022   $176,448,558 

Mortgage backed securities

   213,707,125    43,197    5,327,265    208,423,057 

State, County, Municipals

   118,786,297    849,364    2,535,126    117,100,535 

Other investments

   2,865,294    208,933        3,074,227 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $516,006,296   $1,101,494   $12,061,413   $505,046,377 
  

 

 

   

 

 

   

 

 

   

 

 

 

During the 2nd quarter of 2018, management reclassified Small Business Administration Pools (“SBAP”) that are backed by mortgages from the Obligation of U.S. Government agencies portfolio to the Mortgage backed securities portfolio. This resulted in a reclassification of $76,518,180 in securities and did not have an impact on shareholders’ equity or net income.

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

Securitiesavailable-for-sale

        

Obligations of U.S. Government agencies

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

Mortgage backed securities

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

State, County, Municipals

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

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

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

Securitiesavailable-for-sale

        

Obligations of U.S. Government agencies

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

Mortgage backed securities

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

State, County, Municipals

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

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

At SeptemberJune 30, 20182019 and December 31, 2017,2018, securities with a carrying value of $247,691,420$357,072,500 and $222,326,856,$357,231,440, respectively, were pledged to secure government and public deposits. Securities with a carrying value of $88,515,589deposits and $151,629,948, respectively, were pledged as collateral for customers who aresecurities sold under repurchase agreements.agreement to repurchase.

The amortized cost and estimated fair value of securities by contractual maturity at SeptemberJune 30, 20182019 and December 31, 20172018 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

  September 30, 2018   December 31, 2017   June 30, 2019   December 31, 2018 
  Amortized   Estimated   Amortized   Estimated   Amortized   Estimated   Amortized   Estimated 
  Cost   Fair Value   Cost   Fair Value   Cost   Fair Value   Cost   Fair Value 
Available-for-sale                        

Due in one year or less

  $2,020,810   $2,023,462   $3,398,727   $3,421,576   $784,744   $786,283   $1,875,288   $1,877,665 

Due after one year through five years

   91,951,412    88,193,981    70,836,435    69,594,014    91,101,901    90,842,206    91,948,838    89,121,194 

Due after five years through ten years

   31,859,642    30,351,244    55,691,854    54,740,055    17,737,676    17,899,263    32,801,788    31,718,293 

Due after ten years

   79,559,419    74,572,704    81,519,845    80,184,001    52,656,615    52,394,882    78,330,873    74,655,149 

Residential mortgage backed securities

   194,336,400    183,779,806    213,707,125    208,423,057    257,852,024    254,499,198    187,776,954    179,235,806 

Commercial mortgage backed securities

   74,132,352    70,333,434    90,852,310    88,683,674    67,808,209    67,484,460    71,965,548    68,138,347 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $473,860,035   $449,254,631   $516,006,296   $505,046,377   $487,941,169   $483,906,292   $464,699,289   $444,746,454 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The tables below show the Corporation’s gross unrealized losses and fair value ofavailable-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at SeptemberJune 30, 20182019 and December 31, 2017.2018.

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

 

September 30, 2018  Less than 12 months   12 months or more   Total 
June 30, 2019  Less than 12 months   12 months or more   Total 
  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 

Description of Securities

  Value   Losses   Value   Losses   Value   Losses   Value   Losses   Value   Losses   Value   Losses 

Obligations of U.S. government agencies

  $—     $—     $94,852,328   $4,515,549   $94,852,328   $4,515,549   $—     $—     $40,203,509   $255,641   $40,203,509   $255,641 

Mortgage backed securities

   17,492,984    367,341    236,430,049    13,994,287    253,923,033    14,361,628    55,354,535    389,940    207,450,160    3,558,207    262,804,695    3,948,147 

State, County, Municipal

   25,438,651    1,149,633    64,401,928    4,636,796    89,840,579    5,786,429    —      —      42,287,189    522,829    42,287,189    522,829 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $42,931,635   $1,516,974   $395,684,305   $23,146,632   $438,615,940   $24,663,606   $55,354,535   $389,940   $289,940,858   $4,336,677   $345,295,393   $4,726,617 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
December 31, 2017  Less than 12 months   12 months or more   Total 
December 31, 2018  Less than 12 months   12 months or more   Total 
  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 

Description of Securities

  Value   Losses   Value   Losses   Value   Losses   Value   Losses   Value   Losses   Value   Losses 

Obligations of U.S. government agencies

  $15,681,866   $223,534   $160,766,691   $3,975,488   $176,448,557   $4,199,022   $—     $—     $95,977,783   $3,388,147   $95,977,783   $3,388,147 

Mortgage backed securities

   88,499,852    1,613,091    116,753,236    3,714,174    205,253,088    5,327,265    12,257,636    179,281    234,928,705    12,193,988    247,186,341    12,373,269 

State, County, Municipal

   7,117,600    59,041    66,973,174    2,476,085    74,090,774    2,535,126    12,623,964    285,275    76,535,741    3,978,953    89,159,705    4,264,228 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $111,299,318   $1,895,666   $344,493,101   $10,165,747   $455,792,419   $12,061,413   $24,881,600   $464,556   $407,442,229   $19,561,088   $432,323,829   $20,025,644 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The Corporation’s unrealized losses on its obligations of United States government agencies, mortgage backed securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in themid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Corporation does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Corporation will be required to sell any such security prior to the recovery of it amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at SeptemberJune 30, 20182019 nor at December 31, 2017.2018.

Note 7.8. Loans

The composition of net loans (in thousands) at SeptemberJune 30, 20182019 and December 31, 20172018 was as follows:

 

  September 30, 2018   December 31, 2017   June 30,
2019
   December 31,
2018
 

Real Estate:

        

Land Development and Construction

  $41,937   $25,923   $54,574   $41,134 

Farmland

   15,541    16,905    16,649    14,498 

1-4 Family Mortgages

   88,448    95,925    86,861    88,747 

Commercial Real Estate

   197,235    191,736    203,205    203,595 
  

 

   

 

   

 

   

 

 

Total Real Estate Loans

   343,161    330,489    361,289    347,974 

Business Loans:

        

Commercial and Industrial Loans

   75,842    58,204    90,597    66,421 

Farm Production and Other Farm Loans

   966    922    746    907 
  

 

   

 

   

 

   

 

 

Total Business Loans

   76,808    59,126    91,343    67,328 

Consumer Loans:

        

Credit Cards

   1,492    1,310    1,666    1,648 

Other Consumer Loans

   13,214    14,680    11,457    12,372 
  

 

   

 

   

 

   

 

 

Total Consumer Loans

   14,706    15,990    13,123    14,020 
  

 

   

 

   

 

   

 

 

Total Gross Loans

   434,675    405,605    465,755    429,322 

Unearned Income

   (69   (195   (20   (45

Allowance for Loan Losses

   (3,173   (3,019   (3,821   (3,372
  

 

   

 

   

 

   

 

 

Loans, net

  $431,433   $402,391   $ 461,914   $ 425,905 
  

 

   

 

   

 

   

 

 

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 onnon-accrual status, when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed onnon-accrual status regardless of whether such loans are considered past due. When interest accruals are discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

 

  September 30, 2018   December 31, 2017   June 30,
2019
   December 31,
2018
 

Real Estate:

        

Land Development and Construction

  $—     $—     $113   $—   

Farmland

   264    366    263    200 

1-4 Family Mortgages

   1,929    2,131    2,030    1,831 

Commercial Real Estate

   7,719    4,891    8,375    7,612 
  

 

   

 

   

 

   

 

 

Total Real Estate Loans

   9,912    7,388    10,781    9,643 

Business Loans:

        

Commercial and Industrial Loans

   60    78    273    76 

Farm Production and Other Farm Loans

   31    32    31    31 
  

 

   

 

   

 

   

 

 

Total Business Loans

   91    110    304    107 

Consumer Loans:

        

Other Consumer Loans

   98    84    71    89 
  

 

   

 

   

 

   

 

 

Total Consumer Loans

   98    84    71    89 
  

 

   

 

   

 

   

 

 

Total Nonaccrual Loans

  $10,101   $7,582   $ 11,156   $ 9,839 
  

 

   

 

   

 

   

 

 

An aging analysis of past due loans (in thousands), segregated by class, as of SeptemberJune 30, 2018,2019, was as follows:

 

                      Accruing 
      Loans               Loans 
  Loans   90 or more               90 or more 
  30-89 Days   Days   Total Past   Current   Total   Days 
  Past Due   Past Due   Due Loans   Loans   Loans   Past Due   Loans
30-89 Days
Past Due
   Loans
90 or more
Days
Past Due
   Total Past
Due Loans
   Current
Loans
   Total Loans   Accruing
Loans
90 or more
Days Past
Due
 

Real Estate:

                        

Land Development and Construction

  $1,383   $—     $1,383   $40,554   $41,937   $—     $ 1,612   $113   $1,725   $52,849   $54,574   $ —   

Farmland

   327    37    364    15,177    15,541    —      279    —      279    16,370    16,649    —   

1-4 Family Mortgages

   1,756    166    1,922    86,526    88,448    —      2,197    526    2,723    84,138    86,861    —   

Commercial Real Estate

   1,785    2,074    3,859    193,376    197,235    —      724    4,019    4,743    198,462    203,205    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Real Estate Loans

   5,251    2,277    7,528    335,633    343,161    —      4,812    4,658    9,470    351,819    361,289    —   

Business Loans:

                        

Commercial and Industrial Loans

   338    —      338    75,504    75,842    —      345    189    534    90,063    90,597    26 

Farm Production and Other Farm Loans

   —      —      —      966    966    —      49    —      49    697    746    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Business Loans

   338    —      338    76,470    76,808    —      394    189    583    90,760    91,343    26 

Consumer Loans:

                        

Credit Cards

   47    —      47    1,445    1,492    —      52    18    70    1,596    1,666    18 

Other Consumer Loans

   205    88    293    12,921    13,214    —      226    3    229    11,228    11,457    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Consumer Loans

   252    88    340    14,366    14,706    —      278    21    299    12,824    13,123    18 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Loans

  $5,841   $2,365   $8,206   $426,469   $434,675   $—     $5,484   $ 4,868   $ 10,352   $ 455,403   $ 465,755   $44 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 20172018 was as follows:

 

                      Accruing                       Accruing 
      Loans               Loans       Loans               Loans 
  Loans   90 or more               90 or more   Loans   90 or more               90 or more 
  30-89 Days   Days   Total Past   Current   Total   Days   30-89 Days   Days   Total Past   Current   Total   Days 
  Past Due   Past Due   Due Loans   Loans   Loans   Past Due   Past Due   Past Due   Due Loans   Loans   Loans   Past Due 

Real Estate:

                        

Land Development and Construction

  $281   $—     $281   $25,642   $25,923   $—     $ 1,494   $54   $1,548   $39,586   $41,134   $ 54 

Farmland

   93    —      93    16,812    16,905    —      779    29    808    13,690    14,498    —   

1-4 Family Mortgages

   2,657    —      2,657    93,268    95,925    —      3,456    330    3,786    84,961    88,747    —   

Commercial Real Estate

   2,585    862    3,447    188,289    191,736    807    1,059    2,981    4,040    199,555    203,595    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Real Estate Loans

   5,616    862    6,478    324,011    330,489    807    6,788    3,394    10,182    337,792    347,974    54 

Business Loans:

                        

Commercial and Industrial Loans

   32    —      32    58,172    58,204    —      1,672    21    1,693    64,728    66,421    —   

Farm Production and Other Farm Loans

   19    —      19    903    922    —      9    —      9    898    907    —   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Business Loans

   51    —      51    59,075    59,126    —      1,681    21    1,702    65,626    67,328    —   

Consumer Loans:

                        

Credit Cards

   25    6    31    1,279    1,310    6    16    4    20    1,628    1,648    4 

Other Consumer Loans

   422    —      422    14,258    14,680    —      212    33    245    12,127    12,372    15 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Consumer Loans

   447    6    453    15,537    15,990    6    228    37    265    13,755    14,020    19 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Loans

  $6,114   $868   $6,982   $398,623   $405,605   $813   $8,697   $ 3,452   $ 12,149   $ 417,173   $ 429,322   $73 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at all loans over $100,000 that are past due loans, bankruptcy filings and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original agreement terms. If a loan is determined to be impaired and the collateral is deemed to be insufficient to fully repay the loan, a specific reserve will be established. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, arecharged-off when deemed uncollectible.

Impaired loans (in thousands) as of SeptemberJune 30, 2019, segregated by class, were as follows:

       Recorded   Recorded             
   Unpaid   Investment   Investment   Total       Average 
   Principal   With No   With   Recorded   Related   Recorded 
   Balance   Allowance   Allowance   Investment   Allowance   Investment 

Real Estate:

            

Land Development and Construction

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

Farmland

   261    261    —      261    —     $265 

1-4 Family Mortgages

   803    714    89    803    24   $978 

Commercial Real Estate

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Loans

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

Business Loans:

            

Commercial and Industrial Loans

   149    —      149    149    77   $75 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Loans

   149    —      149    149    77   $75 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans (in thousands) as of December 31, 2018, 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

  $—     $—     $—     $—     $—     $111 

Farmland

   269    269    —      269    —      261 

1-4 Family Mortgages

   1,215    1,019    196    1,215    29    1,280 

Commercial Real Estate

   9,021    5,179    3,842    9,021    380    7,411 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Real Estate Loans

   10,505    6,467    4,038    10,505    409    9,062 

Business Loans:

            

Farm Production and Other Farm Loans

   —      —      —      —      —      25 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Business Loans

   —      —      —      —      —      25 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

  $ 10,505   $ 6,467   $ 4,038   $ 10,505   $ 409   $ 9,087 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans (in thousands) as of December 31, 2017, segregated by class, were as follows:

      Recorded   Recorded                   Recorded   Recorded             
  Unpaid   Investment   Investment   Total       Average   Unpaid   Investment   Investment   Total       Average 
  Principal   With No   With   Recorded   Related   Recorded   Principal   With No   With   Recorded   Related   Recorded 
  Balance   Allowance   Allowance   Investment   Allowance   Investment   Balance   Allowance   Allowance   Investment   Allowance   Investment 

Real Estate:

                        

Land Development and Construction

  $222   $—     $222   $222   $ —     $111   $—     $—     $—     $—     $ —     $—   

Farmland

   252    252    —      252    —      126    269    269    —      269    —     $135 

1-4 Family Mortgages

   1,344    1,141    203    1,344    46    906    1,153    1,062    91    1,153    27   $728 

Commercial Real Estate

   5,801    1,763    4,038    5,801    397    4,994    10,601    5,209    3,675    8,884    374   $ 6,489 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Real Estate Loans

   7,619    3,156    4,463    7,619    443    6,137    12,023    6,540    3,766    10,306    401   $7,352 

Business Loans:

            

Farm Production and Other Farm Loans

   50    50    —      50    —      25 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total Business Loans

   50    50    —      50    —      25 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total Loans

  $ 7,669   $ 3,206   $ 4,463   $ 7,669   $443   $ 6,162   $ 12,023   $ 6,540   $ 3,766   $ 10,306   $401   $7,352 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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

 

      Pre-Modification   Post-Modification       Pre-Modification   Post-Modification 
June 30, 2019      Outstanding   Outstanding 
      Outstanding   Outstanding   Number of   Recorded   Recorded 
  Number of   Recorded   Recorded   Loans   Investment   Investment 
September 30, 2018  Loans   Investment   Investment 

Commercial real estate

   3   $4,871   $2,963    3   $4,871   $2,645 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   3   $4,871   $ 2,963    3   $4,871   $ 2,645 
  

 

   

 

   

 

   

 

   

 

   

 

 
      Pre-Modification   Post-Modification       Pre-Modification   Post-Modification 
December 31, 2018      Outstanding   Outstanding 
      Outstanding   Outstanding   Number of   Recorded   Recorded 
  Number of   Recorded   Recorded   Loans   Investment   Investment 
December 31, 2017  Loans   Investment   Investment 

Commercial real estate

   3   $4,871   $3,047    3   $4,871   $2,782 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

   3   $4,871   $3,047    3   $4,871   $2,782 
  

 

   

 

   

 

   

 

   

 

   

 

 

Changes in the Corporation’s troubled debt restructurings (in thousands, except for number of loans) are set forth in the table below:

 

  Number   Recorded   Number   Recorded 
  of Loans   Investment   of Loans   Investment 

Totals at January 1, 2018

   3   $3,047    3   $ 3,047 

Reductions due to:

        

Principal paydowns

     (84     (265
  

 

   

 

   

 

   

 

 

Total at September 30, 2018

   3   $2,963 

Totals at January 1, 2019

   3   $2,782 

Reductions due to:

    

Principal paydowns

     (137
  

 

   

 

   

 

   

 

 

Total at June 30, 2019

   3   $2,645 
  

 

   

 

 

The allocated allowance for loan losses attributable to restructured loans was $174,274 at SeptemberJune 30, 20182019 and December 31, 2017.2018. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructurings as of SeptemberJune 30, 2018.2019.

The Corporation utilizes a risk grading matrix to assign a risk grade to each of its loans when originated and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades follows.

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

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

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

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

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

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

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

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 SeptemberJune 30, 2018.2019.

The following table details the amount of gross loans (in thousands), segregated by loan grade and class, as of SeptemberJune 30, 2018:2019:

 

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

Real Estate:

                        

Land Development and Construction

  $40,644   $720   $573   $—     $—     $41,937   $51,867   $2,037   $670   $ —     $ —     $54,574 

Farmland

   14,170    356    1,015    —      —      15,541    15,361    398    890    —      —      16,649 

1-4 Family Mortgages

   79,176    1,770    7,502    —      —      88,448    78,023    2,008    6,830    —      —      86,861 

Commercial Real Estate

   154,868    17,891    24,476    —      —      197,235    166,473    21,631    15,101    —      —      203,205 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Real Estate Loans

   288,858    20,737    33,566    —      —      343,161    311,724    26,074    23,491    —      —      361,289 

Business Loans:

                        

Commercial and Industrial Loans

   73,460    122    2,260    —      —      75,842    88,796    56    1,745    —      —      90,597 

Farm Production and Other Farm Loans

   931    2    33    —      —      966    715    —      —      —      31    746 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Business Loans

   74,391    124    2,293    —      —      76,808    89,511    56    1,745    —      31    91,343 

Consumer Loans:

                        

Credit Cards

   1,492    —      —      —      —      1,492    1,596    —      70    —      —      1,666 

Other Consumer Loans

   13,000    65    91    58    —      13,214    11,293    51    68    45    —      11,457 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Consumer Loans

   14,492    65    91    58    —      14,706    12,889    51    138    45    —      13,123 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Loans

  $377,741   $20,926   $35,950   $58   $—     $434,675   $ 414,124   $ 26,181   $ 25,374   $45   $31   $ 465,755 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as of December 31, 2017:2018:

 

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

Real Estate:

                        

Land Development and Construction

  $23,720   $2,116   $87   $—     $—     $25,923   $39,726   $840   $568   $—     $—     $41,134 

Farmland

   15,496    377    1,032    —      —      16,905    13,248    339    911    —      —      14,498 

1-4 Family Mortgages

   82,227    5,615    8,083    —      —      95,925    79,659    1,751    7,337    —      —      88,747 

Commercial Real Estate

   143,271    41,833    6,632    —      —      191,736    172,217    17,938    13,440    —      —      203,595 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Real Estate Loans

   264,714    49,941    15,834    —      —      330,489    304,850    20,868    22,256    —      —      347,974 

Business Loans:

                        

Commercial and Industrial Loans

   55,081    2,990    133    —      —      58,204    63,994    81    2,346    —      —      66,421 

Farm Production and Other Farm Loans

   853    9    60    —      —      922    876    —      31    —      —      907 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Business Loans

   55,934    2,999    193    —      —      59,126    64,870    81    2,377    —      —      67,328 

Consumer Loans:

                        

Credit Cards

   1,304    —      6    —      —      1,310    1,628    —      20    —      —      1,648 

Other Consumer Loans

   14,414    71    137    58    —      14,680    12,181    65    71    55    —      12,372 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Consumer Loans

   15,718    71    143    58    —      15,990    13,809    65    91    55    —      14,020 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Loans

  $336,366   $53,011   $16,170   $58   $—     $405,605   $383,529   $21,014   $24,724   $55   $—     $429,322 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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 ninesix months ended SeptemberJune 30, 2018:2019:

 

September 30, 2018  Real
Estate
   Business
Loans
   Consumer   Total 

Beginning Balance, January 1, 2018

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

Provision for (reversal of) loan losses

   615,927    (289,894   (185,268   140,765 
June 30, 2019  Real
Estate
   Business
Loans
   Consumer   Total 

Beginning Balance, January 1, 2019

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

Provision for loan losses

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

Chargeoffs

   202,352    31,236    117,401    350,989    14,981    12,178    41,886    69,045 

Recoveries

   91,071    203,777    69,091    363,939    23,498    8,297    26,730    58,525 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net chargeoffs (recoveries)

   111,281    (172,541   48,310    (12,950

Net (recoveries) chargeoffs

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending Balance

  $2,656,361   $229,428   $287,154   $3,172,943   $2,925,579   $429,207   $466,687   $3,821,473 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Period end allowance allocated to:

                

Loans individually evaluated for impairment

  $409,496   $—     $—     $409,496   $503,654   $77,046   $—     $580,700 

Loans collectively evaluated for impairment

   2,246,865    229,428    287,154    2,763,447    2,421,925    352,161    466,687    3,240,773 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending Balance, September 30, 2018

  $2,656,361   $229,428   $287,154   $3,172,943 

Ending Balance, June 30, 2019

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the ninesix months ended SeptemberJune 30, 2017:2018:

 

September 30, 2017  Real
Estate
   Business
Loans
   Consumer   Total 

Beginning Balance, January 1, 2017

  $3,117,134   $257,554   $528,108   $3,902,796 

(Reversal of) provision for loan losses

   (482,980   199,355    29,011    (254,614
June 30, 2018  Real
Estate
   Business
Loans
   Consumer   Total 

Beginning Balance, January 1, 2018

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

Provision for (reversal of) loan losses

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

Chargeoffs

   126,757    146,139    41,788    314,684    98,644    15,347    59,355    173,346 

Recoveries

   26,188    754    43,493    70,435    82,114    197,321    50,444    329,879 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net chargeoffs (recoveries)

   100,569    145,385    (1,705   244,249    16,530    (181,974   8,911    (156,533
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending Balance

  $2,533,585   $311,524   $558,824   $3,403,933   $2,616,899   $118,028   $293,023   $3,027,950 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Period end allowance allocated to:

                

Loans individually evaluated for impairment

  $537,897   $—     $—     $537,897   $528,937   $—     $—     $528,937 

Loans collectively evaluated for impairment

   1,995,688    311,524    558,824    2,866,036    2,087,962    118,028    293,023    2,499,013 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending Balance, September 30, 2017

  $2,533,585   $311,524   $558,824   $3,403,933 

Ending Balance, June 30, 2018

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

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The Corporation’s recorded investment in loans as of SeptemberJune 30, 20182019 and December 31, 20172018 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):

 

September 30, 2018  Real
Estate
   Business
Loans
   Consumer   Total 
June 30, 2019  Real
Estate
   Business
Loans
   Consumer   Total 

Loans individually evaluated for specific impairment

  $10,505   $—     $—     $10,505   $10,700   $149   $—     $10,849 

Loans collectively evaluated for general impairment

   332,656    76,808    14,706    424,170    350,589    91,194    13,123    454,906 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $343,161   $76,808   $14,706   $434,675   $361,289   $91,343   $13,123   $465,755 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
December 31, 2017  Real
Estate
   Business
Loans
   Consumer   Total 
December 31, 2018  Real Estate   Business
Loans
   Consumer   Total 

Loans individually evaluated for specific impairment

  $7,669   $—     $—     $7,669   $10,306   $—     $—     $10,306 

Loans collectively evaluated for general impairment

   322,820    59,126    15,990    397,936    337,668    67,328    14,020    419,016 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  $330,489   $59,126   $15,990   $405,605   $347,974   $67,328   $14,020   $429,322 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Note 9. Premises and Equipment

The Company lease certain premises and equipment under operating leases. At June 30, 2019, the Company had lease liabilities and ROU assets totaling $932 million related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the six months ended June 30, 2019, the weighted average remaining lease term for operating leases was 1.5 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.3%.

Lease costs were as follows:

   Three Months Ended   Six Months Ended 
   June 30, 2019   June 30, 2019 
(in thousands)        

Operating lease cost

  $92   $184 

Short-term lease cost

   6    12 

Variable lease cost

   —      —   
  

 

 

   

 

 

 
  $98   $196 
  

 

 

   

 

 

 

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the six months ended June 30, 2019.

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

   Six Months Ended 
   June 30, 2019 
(in thousands)    

Lease payments due:

  

Within one year

  $348 

After one year but within two years

   336 

After two years but within three years

   250 

After three year but within four years

   41 

After four years but within five years

   —   

After five years

   —   
  

 

 

 

Total undiscounted cash flows

   975 

Discount on cash flows

   (43
  

 

 

 

Total lease liability

  $932 
  

 

 

 

Note 10. Shareholders’ Equity

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

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

Balance, January 1, 2019

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

Net income

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

Dividends paid ($0.24 per share)

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

Options exercised

   —      —      —     —     —     —   

Restricted stock granted

   —      —      —     —     —     —   

Stock compensation expense

   —      —      41,344   —     —     41,344 

Other comprehensive income, net

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, March 31, 2019

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

Net income

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

Dividends paid ($0.24 per share)

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

Options exercised

   —      —      —     —     —     —   

Restricted stock granted

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

Stock compensation expense

   —      —      40,694   —     —     40,694 

Other comprehensive income, net

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, June 30, 2019

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

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

Balance, January 1, 2018

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

Net income

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

Dividends paid ($0.24 per share)

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

Options exercised

   —      —      —     —     —     —   

Restricted stock granted

   —      —      —     —     —     —   

Stock compensation expense

   —      —      45,056   —     —     45,056 

Other comprehensive income, net

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, March 31, 2018

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

Net income

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

Dividends paid ($0.24 per share)

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

Options exercised

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

Restricted stock granted

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

Stock compensation expense

   —      —      42,581   —     —     42,581 

Other comprehensive income, net

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance, June 30, 2018

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

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Note 8.11. Fair Value of Financial Instruments

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

 

Level 1  Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2  Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or
Level 3  Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.

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

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2018:

   Fair Value Measurements Using: 
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
     
   (Level 1)   (Level 2)   (Level 3)   Totals 

Securities available for sale

        

Obligations of U.S. Government Agencies

  $—     $94,852,328   $—     $94,852,328 

Mortgage-backed securities

   —      254,113,240    —      254,113,240 

State, county and municipal obligations

   —      100,289,063    —      100,289,063 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—     $449,254,631   $—     $449,254,631 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2017:June 30, 2019:

 

      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

  $—     $176,448,558   $—     $176,448,558   $—     $98,744,458   $—     $98,744,458 

Mortgage-backed securities

   —      208,423,057    —      208,423,057    —      321,983,658    —      321,983,658 

State, county and municipal obligations

   —      117,100,535    —      117,100,535    —      63,178,176    —      63,178,176 

Other investments

   —      —      3,074,227    3,074,227 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $—     $501,972,150   $3,074,227   $505,046,377   $—     $483,906,292   $—     $483,906,292 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The following table reports the activity inpresents assets and liabilities that were measured at fair value on a recurring basis using significant unobservable inputs:as of December 31, 2018:

 

   Fair Value Measurements Using: 
   

Significant Unobservable Inputs

(Level 3)

Structured Financial Product

As of September 30,

 
   2018   2017 

Beginning Balance

  $3,074,227   $2,971,106 

Sales

   (2,865,294   —   

Principal payments received

   —      (5,067

Unrealized (loss) gains included in other comprehensive income

   (208,933   39,303 
  

 

 

   

 

 

 

Ending Balance

  $—     $3,005,342 
  

 

 

   

 

 

 
       Fair Value Measurements Using:     
   Quoted Prices             
   in Active   Significant         
   Markets for   Other   Significant     
   Identical   Observable   Unobservable     
   Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Totals 

Securities available for sale

        

Obligations of U.S. Government Agencies

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

Mortgage-backed securities

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

State, county and municipal obligations

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

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation recorded no gains or losses in earnings for the period ended SeptemberJune 30, 20182019 or December 31, 20172018 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

Impaired Loans

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

Other real estate owned

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

For assets measured at fair value on a nonrecurring basis during 20182019 that were still held on the Corporation’s balance sheet at SeptemberJune 30, 2018,2019, the following table provides the hierarchy level and the fair value of the related assets:

 

      Fair Value Measurements Using:     
  Quoted Prices             
  in Active   Significant         
  Markets for   Other   Significant     
  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 

Impaired loans

  $ —     $ —     $ 3,254,784   $ 3,254,784   $—     $—     $4,320,866   $4,320,866 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $—     $—     $3,254,784   $3,254,784   $—     $—     $4,320,866   $4,320,866 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The following table presents information as of SeptemberJune 30, 20182019 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

  $ 3,254,784   Appraised value of collateral less estimated costs to sell   Estimated costs to sell    25  $4,320,866   Appraised value of collateral less

estimated costs to sell

  Estimated costs to sell   25

For assets measured at fair value on a nonrecurring basis during 20172018 that were still held on the Corporation’s balance sheet at December 31, 2017,2018, the following table provides the hierarchy level and the fair value of the related assets:

 

      Fair Value Measurements Using:     
  Quoted Prices             
  in Active   Significant         
  Markets for   Other   Significant     
  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 

Impaired loans

  $ —     $ —     $544,502   $544,502   $—     $—     $3,364,538   $3,364,538 

Other real estate owned

   —      —      1,307,250    1,307,250    —      —      188,609    188,609 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $—     $—     $ 1,851,752   $ 1,851,752   $—     $—     $3,553,147   $3,553,147 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Impaired loans with a carrying value of $10,504,831$4,901,566 and $7,668,908$3,364,538 had an allocated allowance for loan losses of $409,496$580,700 and $442,589$401,347 at SeptemberJune 30, 20182019 and December 31, 2017,2018, 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.

Real estate acquired throughAfter monitoring the carrying amounts for subsequent declines or impairments after foreclosure, or deedmanagement determined that a fair value adjustment to OREO in lieu, sometimes referred to as other real estate owned (“OREO”),the amount of$-0- was necessary and recorded during the nine-monthsix-month period ended SeptemberJune 30, 2018,2019 and recorded at fair value, less costs to sell, was $223,859. There were no writedowns during the period on properties owned. OREO acquired during 2017 and recorded at fair value, less costs to sell, was $88,579. There were $413,740 in additional writedowns during 2017 on OREO acquired in previous years.year ended December 31, 2018.

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 financial instruments at SeptemberJune 30, 2018:2019:

 

           Fair Value Measurements Using:     
September 30, 2018  Carrying
Value
   Quoted Prices
in Active
Markets for
Identical Assets
   Significant Other
Observable
Inputs
   Significant
Unobservable
Inputs
   Total
Fair
Value
 
       (Level 1)   (Level 2)   (Level 3)     

Financial assets

          

Cash and due from banks

  $12,609,437   $ 12,609,437   $—     $—     $12,609,437 

Interest bearing deposits with banks

   1,351,745    1,351,745    —      —      1,351,745 

Securitiesavailable-for-sale

   449,254,631    —      449,254,631    —      449,254,631 

Net loans

   431,433,287    —      —      425,805,759    425,805,759 

Financial liabilities

          

Deposits

  $ 757,380,333   $—     $ 757,335,191   $—     $ 757,335,191 

Federal Funds Purchased

   6,500,000    6,500,000    —      —      6,500,000 

Federal Home Loan Bank advances

   20,000,000    —      20,000,000    —      20,000,000 

Securities Sold under Agreement to Repurchase

   88,908,916    —      88,908,916    —      88,908,916 

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

Financial assets

          

Cash and due from banks

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

Interest bearing deposits with banks

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

Securitiesavailable-for-sale

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

Net loans

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

Financial liabilities

          

Deposits

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

Securities sold under agreement to repurchase

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

Federal funds purchased

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

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at December 31, 2017:2018:

 

          Fair Value Measurements Using:               Fair Value Measurements Using:     
December 31, 2017  Carrying
Value
   Quoted Prices
in Active
Markets for
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
   Total
Fair
Value
 
      Quoted Prices             
      in Active   Significant         
      Markets for   Other   Significant   Total 
  Carrying   Identical   Observable   Unobservable   Fair 
December 31, 2018  Value   Assets   Inputs   Inputs   Value 
      (Level 1)   (Level 2)   (Level 3)           (Level 1)   (Level 2)   (Level 3)     

Financial assets

                    

Cash and due from banks

  $17,962,990   $17,962,990   $—     $—     $17,962,990   $12,592,130   $12,592,130   $—     $—     $12,592,130 

Interest bearing deposits with banks

   1,532,420    1,532,420    —      —      1,532,420    8,079,742    8,079,742    —      —      8,079,742 

Securitiesavailable-for-sale

   505,046,377    —      501,972,150    3,074,227    505,046,377    444,746,454    —      444,746,454    —      444,746,454 

Net loans

   402,390,574    —      —      401,706,081    401,706,081    425,905,093    —      —      420,992,074    420,992,074 

Financial liabilities

                    

Deposits

  $ 720,685,499   $ 543,123,284   $—     $ 177,698,280   $ 720,821,564   $756,221,510   $544,985,869   $210,477,092   $—     $755,462,961 

Federal Home Loan Bank advances

   30,000,000    —      —      30,005,541    30,005,541 

Securities Sold under Agreement to Repurchase

   142,497,938    142,497,938    —      —      142,497,938 

Securities sold under agreement to repurchase

   107,965,505    107,965,505    —      —      107,965,505 

ITEM 2.

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

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form10-Q (the “Quarterly Report”) contains statements that constituteforward-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 identifyforward-looking statements. These statements appear in a number of places in this Quarterly Report. The Corporation notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank”), 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;

 

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates;

 

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

 

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

 

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

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

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

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

Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Corporation. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report.

OVERVIEW

The Company is aone-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 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 SeptemberJune 30, 2018,2019, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $962.968$1,033.753 million and total deposits of $757.380$796.422 million.

The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601)656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The Corporation has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Corporation at SeptemberJune 30, 2018,2019, was 23.67%26.32% and at December 31, 2017,2018, was 28.59%21.34%. The decreaseincrease was due to a decreasean increase in short termshort-term marketable assets at SeptemberJune 30, 2018.2019. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $757,380,333$794,858,320 at SeptemberJune 30, 2018,2019, and $720,685,499$756,221,510 at December 31, 2017.2018. Other sources of liquidity include investment securities, the Corporation’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Corporation had $449,254,631$483,906,292 invested inavailable-for-sale investment securities at SeptemberJune 30, 2018,2019, and $505,046,377$444,746,454 at December 31, 2017.2018. This decreaseincrease was due to purchases in excess of maturities, paydowns, sales and calls in excess of purchases and decreasesan increase in the market value of the Corporation’s investment securities portfolio.

The Corporation also had $1,351,745$1,193,764 in interest bearing deposits at other banks at SeptemberJune 30, 20182019 and $1,532,420$8,079,742 at December 31, 2017.2018. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at both SeptemberJune 30, 20182019 and December 31, 2017.2018. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At SeptemberJune 30, 2018,2019, the Corporation had unused and available $147,138,402$178,955,028 of its line of credit with the FHLB and at December 31, 2017,2018, the Corporation had unused and available $169,925,797$171,252,131 of its line of credit with the FHLB. The decreaseincrease in the amount available under the Corporation’s line of credit with the FHLB from the end of 20172018 to SeptemberJune 30, 2018,2019, was the result of a decreasean increase in the amount of loans eligible for the collateral pool securing the Corporation’s line of credit with the FHLB. The Corporation had federal funds purchased of $6,500,000$12,000,000 as of SeptemberJune 30, 20182019 and $1,500,000$-0- as of December 31, 2017.2018. The Corporation may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

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

CAPITAL RESOURCES

Total shareholders’ equity was $79,794,502$96,136,323 at SeptemberJune 30, 2018,2019, as compared to $88,451,040$83,866,317 at December 31, 2017.2018. The decreaseincrease in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment partially offset bycoupled with the increase in earnings in excess of dividends paid. The market value adjustment, which was a decrease wasan increase due to general market conditions, specifically the increasedecrease in medium term interest rates, caused a decreasean increase in the market price of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $3,528,904,$2,355,974, or $0.72$0.48 per share, during the nine-monthsix-month period ended SeptemberJune 30, 20182019 compared to $3,522,327,$2,351,816, or $0.72$0.48 per share, for the same period in 2017.2018.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of SeptemberJune 30, 2018,2019, the Corporation meets all capital adequacy requirements to which it is subject and according to these requirements the Corporation is considered to be well capitalized.

              Minimum Capital         Minimum Capital
Requirement to be
 Minimum Capital
Requirement to be
Adequately
 
        Minimum Capital Requirement to be   Actual Well Capitalized Capitalized 
        Requirement to be Adequately   Amount   Ratio Amount   Ratio Amount   Ratio 
  Actual Well Capitalized Capitalized 
  Amount   Ratio Amount   Ratio Amount   Ratio 

September 30, 2018

          

June 30, 2019

          

Citizens Holding Company

                    

Tier 1 leverage ratio

  $ 95,111    9.93 $ 47,914    5.00 $ 38,331    4.00  $96,015    9.33 $51,430    5.00 $41,144    4.00

Common Equity tier 1 capital ratio

   95,111    9.93 62,288    6.50 43,123    4.50   96,015    16.49 66,859    6.50 46,287    4.50

Tier 1 risk-based capital ratio

   95,111    17.15 44,358    8.00 33,268    6.00   96,015    16.49 46,571    8.00 34,928    6.00

Total risk-based capital ratio

   98,284    17.73 55,447    10.00 44,358    8.00   99,836    17.15 58,213    10.00 46,571    8.00

December 31, 2017

          

December 31, 2018

          

Citizens Holding Company

                    

Tier 1 leverage ratio

  $93,527    9.17 $51,005    5.00 $40,804    4.00  $95,691    9.93 $48,191    5.00 $38,553    4.00

Common Equity tier 1 capital ratio

   93,527    9.17 66,307    6.50 45,905    4.50   95,691    17.40 62,648    6.50 43,372    4.50

Tier 1 risk-based capital ratio

   93,527    17.93 41,737    8.00 31,303    6.00   95,691    17.40 43,986    8.00 32,990    6.00

Total risk-based capital ratio

   96,546    18.51 52,171    10.00 41,737    8.00   99,063    18.02 54,983    10.00 43,986    8.00

The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II fornon-core banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III will replacereplaced 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 were requiredbegan to comply with the final Basel III rules, although the rules will not be fullyphased-in untilwhich became effective on January 1, 2019. Among other things, the final Basel III rules will impact regulatory capital ratios of banking organizations in the following manner, when fully phased-in:manner:

 

Create a new 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 when fully phased-in, will subject a banking organizationorganizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization diddoes 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 when fully phased-in, will be to increaseincreases 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 SeptemberJune 30, 2018,2019, the Company and the Bank would meet all capital adequacy requirements under Basel III and the banking agencies’ proposals on a fullyphased-in basis, if such requirements were currently effective.III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporation’s capital ratios as presented. Management will continue to monitor these and any future proposals submitted by the Corporation’s and Bank’s regulators.

RESULTS OF OPERATIONS

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

   

For the Three Months

Ended September 30,

   

For the Nine Months

Ended September 30,

 
   2018   2017   2018   2017 

Interest Income, including fees

  $7,887,319   $7,544,364   $23,265,686   $22,855,734 

Interest Expense

   1,168,024    825,017    2,789,205    2,462,281 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

   6,719,295    6,719,347    20,476,481    20,393,453 

Provision for (reversal of) loan losses

   288,576    (73,808   140,765    (254,614
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for (reversal of) loan losses

   6,430,719    6,793,155    20,335,716    20,648,067 

Other Income

   2,220,574    2,126,172    6,399,414    6,183,624 

Other Expense

   6,894,024    6,887,220    20,889,594    20,906,987 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Provision For Income Taxes

   1,757,269    2,032,107    5,845,536    5,924,704 

Provision for Income Taxes

   260,475    424,638    888,215    1,096,457 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $1,496,794   $1,607,469   $4,957,321   $4,828,247 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per share - Basic

  $0.31   $0.33   $1.01   $0.99 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Share-Diluted

  $0.31   $0.33   $1.01   $0.99 
  

 

 

   

 

 

   

 

 

   

 

 

 
   For the Three Months Ended
June 30,
   

For the Six Months

Ended June 30,

 
   2019   2018   2019   2018 

Interest Income, including fees

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

Interest Expense

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

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

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

Provision for (reversal of) loan losses

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

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after

        

Provision for (reversal of) loan losses

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

Other Income

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

Other Expense

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

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Provision For

        

Income Taxes

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

Provision for Income Taxes

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

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

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

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per share—Basic

  $0.28   $0.35   $0.53   $0.71 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Share-Diluted

  $0.28   $0.35   $0.53   $0.71 
  

 

 

   

 

 

   

 

 

   

 

 

 

See Note 3 to the Corporation’s Consolidated Financial Statements for an explanation regarding the Corporation’s calculation of Net Income Per Share - Share—basic and - and—diluted.

Annualized return on average equity (“ROE”) was 7.31%6.10% for the three months ended SeptemberJune 30, 2018,2019, and 7.42%8.06% for the corresponding period in 2017.2018. For the ninesix months ended SeptemberJune 30, 2018,2019, ROE was 7.81%5.90% compared to 7.18%8.05% for the ninesix months ended SeptemberJune 30, 2017.2018. The decrease in ROE for the threesix months ended SeptemberJune 30, 2018 was caused by a decrease in net income for the period partially offset by a decrease in equity balances. The increase in ROE for the nine months ended September 30, 20182019 was caused by the decreaseincrease in equity balances and an increasea decrease in net income compared to the same period in 2017.2018.

Book value per share decreasedincreased to $16.27$19.57 at SeptemberJune 30, 2018,2019, compared to $18.07$17.09 at December 31, 2017.2018. The decreaseincrease in book value per share reflects earnings in excess of dividends offset by an increasecoupled with a decrease in other comprehensive loss due to the decreaseincrease in fair value of the Corporation’s investment securities. Average assets for the ninesix months ended SeptemberJune 30, 2018,2019 were $973,552,832$1,019,183,686 compared to $996,266,145$971,893,427 for the year ended December 31, 2017.2018. This decreaseincrease was due mainly to a decreasean increase in loans andavailable-for-sale securities andpartially offset by a decrease in interest bearing due from bank accounts partially offset by an increase in loans.accounts.

NET INTEREST INCOME / NET INTEREST MARGIN

One component of the Corporation’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds. The net interest margin is net interest income expressed as a percentage of average earning assets.

The annualized net interest margin was 3.07%2.65% for the quarterthree months ended SeptemberJune 30, 20182019 compared to 2.98%3.14% for the corresponding period of 2017.2018. For the ninesix months ended SeptemberJune 30, 2018,2019, annualized net interest margin was 3.10%2.69% compared to 3.03%3.12% for the ninesix months ended SeptemberJune 30, 2017.2018. The increasedecrease in net interest margin for the three and ninesix months ended SeptemberJune 30, 2018,2019, when compared to the same period in 2017,2018, was the result of the increase in rates paid on deposits in excess of the increase in yields on earning assets, in excess of the increase in rates paid on deposits and borrowed funds, as detailed below. Earning assets averaged $882,576,323$956,491,167 for the three months ended SeptemberJune 30, 2018.2019. This represents a decreasean increase of $51,631,253,$65,756,131, or 5.5%7.4%, over average earning assets of $934,204,576$890,735,036 for the three months ended SeptemberJune 30, 2017.2018. For the ninesix months ended SeptemberJune 30, 2018,2019, earning assets averaged $894,031,031.$943,158,101. This represents a decreasean increase of $37,115,781$27,217,623, or 4.0%3.0%, over average earning assets of $931,146,812$915,940,478 for the ninesix months ended SeptemberJune 30, 2017. The decrease in average earning assets for the three and nine months ended September 30, 2018, is the result of a decrease in investment securities and interest bearing due from bank accounts partially offset by an increase in loans.2018.

Interest bearing deposits averaged $595,613,872$650,751,387 for the three months ended SeptemberJune 30, 2018.2019. This represents a decreasean increase of $17,942,852,$46,571,978, or 2.9%7.7%, from the average of interest bearinginterest-bearing deposits of $613,556,724$604,179,409 for the three months ended SeptemberJune 30, 2017.2018. This was due to an increase in interest-bearing NOW accounts, savings and certificates of deposit.

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

Interest bearing deposits averaged $624,414,186 for the six months ended June 30, 2019. This represents an increase of $21,595,519, or 3.6%, from the average of interest-bearing deposits of $602,818,667 for the six months ended June 30, 2018. This was due, in large part, to a decreasean increase in interest-bearing NOW accounts, money market accounts and certificates of deposit partially offset by an increasea decrease in savings and money market accounts.savings.

Other borrowed funds averaged $110,281,373$110,356,373 for the threesix months ended SeptemberJune 30, 2018.2019. This represents a decrease of $33,745,137,$4,506,049, or 23.4%3.9%, over the other borrowed funds of $144,026,510$114,862,422 for the threesix months ended SeptemberJune 30, 2017.2018. This decrease in other borrowed funds was due to a decrease in thefederal funds purchased and FHLB advances partially offset by an increase in securities sold under agreements to repurchase partially offset byfor the increase in federal funds purchasedsix months ended June 30, 2019, when compared to the six months ended June 30, 2018.

Net interest income was $6,205,952 for the three months ended SeptemberJune 30, 2018, when compared to the three months ended September 30, 2017.

Interest bearing deposits averaged $600,863,780 for the nine months ended September 30, 2018. This represents2019, a decrease of $18,213,420 or 2.9%,$746,484 from the average of interest bearing deposits of $619,077,200 for the nine months ended September 30, 2017. This was due, in large part, to a decrease in interest-bearing NOW accounts and certificates of deposit partially offset by an increase in money market and savings accounts.

Other borrowed funds averaged $113,333,145 for the nine months ended September 30, 2018. This represents a decrease of $28,912,845, or 20.3%, over the other borrowed funds of $142,245,990 for the nine months ended September 30, 2017. This decrease in other borrowed funds was due to a decrease in the securities sold under agreements to repurchase partially offset by the increase in federal funds purchased for the nine months ended September 30, 2018, when compared to the nine months ended September 30, 2017.

Net interest income was $6,719,295$6,952,436 for the three months ended SeptemberJune 30, 2018, a decrease of $52 from $6,719,347 for the three months ended September 30, 2017, primarily due to a decreasean increase in earning assets.the rates paid on deposits from the same period in 2018. The changes in volume in earning assets, and in deposits and in borrowed funds are discussed above. As for changes in interest rates in the three months ended SeptemberJune 30, 2018,2019, the yields on earning assets increased and the rates paid on deposits and borrowed funds increased from the same period in 2017.2018. The yield on all interest-bearing assets increased 2510 basis points to 3.58%3.60% in the three months ended SeptemberJune 30, 20182019 from 3.33%3.50% for the same period in 2017.2018. At the same time, the rate paid on all interest-bearing liabilities for the three months ended SeptemberJune 30, 20182019 increased 2275 basis points to 0.66%1.21% from 0.44%0.46% in the same period in 2017.2018. As longer term interest bearinginterest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.decrease.

Net interest income was $20,476,481$12,415,678 for the ninesix months ended SeptemberJune 30, 2018, an increase2019, a decrease of $83,028$1,341,508 from $20,393,453$13,757,186 for the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to an increase in yields on earning assets in excess of the increase in rates paid on deposits and borrowed funds.from the same period in 2018. The changes in volume in earning assets, and in deposits and in borrowed funds are discussed above. As for changes in interest rates in the ninesix months ended SeptemberJune 30, 2018,2019, the yields on earning assets increased and the rates paid on deposits and borrowed funds increased from the same period in 2017.2018. The yield on all interest-bearing assets increased 1219 basis points to 3.50%3.66% in the ninesix months ended SeptemberJune 30, 20182019 from 3.38%3.47% for the same period in 2017.2018. At the same time, the rate paid on all interest-bearing liabilities for the ninesix months ended SeptemberJune 30, 20182019 increased 978 basis pointpoints to 0.52%1.23% from 0.43%0.45% in the same period in 2017.2018. As longer term interest bearinginterest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.decrease.

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

 

   

For the Three Months

Ended September 30,

  

For the Nine Months

Ended September 30,

 
   2018  2017  2018  2017 

Interest and Fees

  $5,166,554  $4,585,668  $14,867,465  $14,017,718 

Average Gross Loans

   422,551,745   392,016,275   413,851,534   394,201,872 

Annualized Yield

   4.89  4.68  4.79  4.74

   

For the Three Months

Ended June 30,

  

For the Six Months

Ended June 30,

 
   2019  2018  2019  2018 

Interest and Fees

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

Average Gross Loans

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

Annualized Yield

   5.10  4.84  5.06  4.74

CREDIT LOSS EXPERIENCE

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

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

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

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

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

 

  

Quarter Ended

September 30,

 

Year Ended

December 31,

 Amount of
Increase
   Percent of
Increase
 
  2018 2017 (Decrease)   (Decrease)   Quarter Ended
June 30,
2019
 Year Ended
December 31,
2018
 Amount of
Increase
(Decrease)
   Percent of
Increase
(Decrease)
 

BALANCES:

            

Gross Loans

  $  434,675,184  $  405,605,542  $  29,069,642    7.17  $ 465,754,828  $ 429,322,113  $ 36,432,715    8.49

Allowance for Loan Losses

   3,172,943  3,019,228  153,715    5.09   3,821,473  3,371,695  449,778    13.34

Nonaccrual Loans

   10,101,197  7,582,017  2,519,180    33.23   11,156,736  9,838,870  1,317,866    13.39

Ratios:

            

Allowance for loan losses to gross loans

   0.73 0.74      0.82 0.79   

Net loans charged off to allowance for loan losses

   -0.41 11.28   

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

   0.28 -0.55   

The provision for loan losses for the three months ended SeptemberJune 30, 20182019 was $288,576,$264,819, an increase of $362,384$175,857 from the negative $73,808 provision for loan losses of $88,962 for the same period in 2017.2018. The provision for loan losses for the ninesix months ended SeptemberJune 30, 2018,2019 was $140,765,$460,298, an increase of $395,379$608,109 from the negative $254,614reversal of provision for loan losses of $147,811 for the same period in 2017.2018. The change in the Corporation’s loan loss provisions for the three and ninesix months ended SeptemberJune 30, 20182019 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact caused by current local, national and international economic conditions coupled with an increase in loan demand. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans increased during this period due to new loans being added to nonaccrual status in excess of the amount of payments received and loans charged off.

For the three months ended SeptemberJune 30, 2018,2019, net loan losses charged to the allowance for loan losses totaled $144,015,$3,242, an increase of $115,750$216,789 from the $28,265 charged off$213,547 recovered in the same period in 2017.2018. The increase was primarily due to a several significant charge-offscharge-off during the thirdfirst quarter of 2018.

For the ninesix months ended SeptemberJune 30, 2018,2019, net loan losses charged to the allowance for loan losses totaled negative $12,950, a decrease$10,520, an increase of $257,199$167,053 from the $244,249 charged off$156,533 recovered in the same period in 2017.2018. The increase was primarily due to an unexpecteda significant recovery on a previously charged off loan.charge-off during the first quarter of 2018.

Management reviews quarterly with the Corporation’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the ninesix months ended SeptemberJune 30, 20182019 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

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 SeptemberJune 30, 20182019 was $2,220,574, an increase$2,072,178, a decrease of $94,402,$6,232, or 4.4%0.3%, from $2,126,172$2,078,410 in the same period in 2017.2018. Service charges on deposit accounts were $1,170,956$1,046,255 in the three months ended SeptemberJune 30, 2018,2019, compared to $1,115,474$1,067,260 for the same period in 2017.2018. Other service charges and fees increased by $59,249,$52,615, or 8.4%2.5%, to $761,935$769,668 in the three months ended SeptemberJune 30, 2018,2019, compared to $702,686$717,053 for the same period in 2017.2018. Other operating income not derived from service charges or fees decreased $20,329,$37,842, or 6.6%12.9% to $287,683$256,255 in the three months ended SeptemberJune 30, 2018,2019, compared to $308,012$294,097 for the same period in 2017.2018. This decrease was due mainly to a decreasean increase in incomelosses from security sales due to strategic investment decisions and a reduction in other income partially offset by an increasedecrease in mortgage loan origination income from long-term mortgage loans originated for sale toin the secondary market partially offset by an increase in other income.

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and incomeother revenue not derived from interest on bank owned life insurance.

earning assets. Other income for the ninesix months ended SeptemberJune 30, 20182019 was $6,399,414, an increase$4,119,089, a decrease of $215,790,$59,751, or 3.5%1.4%, from $6,183,624$4,178,840 in the same period in 2017.2018. Service charges on deposit accounts were $3,381,809$2,142,947 in the ninesix months ended SeptemberJune 30, 2018,2019, compared to $3,176,877$2,210,853 for the same period in 2017.2018. Other service charges and fees increased by $154,523,$67,791, or 7.8%4.9%, to $2,147,452$1,453,308 in the ninesix months ended SeptemberJune 30, 2018,2019, compared to $1,992,929$1,385,517 for the same period in 2017.2018. Other operating income not derived from service charges or fees decreased $143,665,$59,636, or 14.2%10.2% to $870,153$522,834 in the ninesix months ended SeptemberJune 30, 2018,2019, compared to $1,013,818$582,470 for the same period in 2017.2018. This decrease was due mainly to a decreasean increase in incomelosses from security sales due to strategic investment decisions and a reduction in other income partially offset by an increasedecrease in mortgage loan origination income from long-term mortgage loans originated for sale toin the secondary market and income on bank owned life insurance.partially offset by an increase in other income.

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

 

   Three months   Nine months 
   Ended September 30,   Ended September 30, 

Other operating income

  2018   2017   2018   2017 

BOLI Income

  $124,666   $120,000   $375,101   $360,000 

Mortgage Loan Origination Income

   101,077    87,069    273,367    249,435 

Income from security sales, net

   —      15,612    11,047    104,708 

Other Income

   61,940    85,331    210,638    299,675 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income

  $287,683   $308,012   $870,153   $1,013,818 
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Other operating income

  2019   2018   2019   2018 

BOLI Income

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

Mortgage Loan Origination Income

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

Income from security sales, net

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

Other Income

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

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income

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

 

 

   

 

 

   

 

 

   

 

 

 

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregatenon-interest expenses for the three months ended SeptemberJune 30, 2019 and 2018 were $6,323,049 and 2017 were $6,894,024 and $6,887,220,$6,947,889, respectively, an increasea decrease of $6,804$624,840 or 0.1%9.0%. Salaries and benefits decreased to $3,668,012$3,469,724 for the three months ended SeptemberJune 30, 2018,2019, from $3,744,831$3,675,422 for the same period in 2017.2018. Occupancy expense increased by $150,556,$48,240, or 11.3%3.4%, to $1,486,232$1,409,862 for the three months ended SeptemberJune 30, 2018,2019, compared to $1,335,676$1,361,622 for the same period of 2017.2018. Other operating expenses decreased by $66,933,$467,382, or 3.7%24.5%, to $1,739,780$1,443,463 for the three months ended SeptemberJune 30, 2018,2019, compared to $1,806,713$1,910,845 for the same period of 2017.2018. This decrease was mainly due to a refund of prepaid postage and cost containment throughout the Company partially offset by an increase inone-time legal and consulting fees related to the acquisition of Charter.

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregatenon-interest expenses for the ninesix months ended SeptemberJune 30, 2019 and 2018 were $12,962,266 and 2017 were $20,889,594 and $20,906,987,$13,995,570, respectively, a decrease of $17,393$1,033,304 or 0.1%7.4%. Salaries and benefits decreased to $11,011,291$7,016,393 for the ninesix months ended SeptemberJune 30, 2018,2019, from $11,154,068$7,343,279 for the same period in 2017.2018. Occupancy expense increaseddecreased by $388,684,$54,712, or 9.8%1.9%, to $4,373,233$2,832,289 for the ninesix months ended SeptemberJune 30, 2018,2019, compared to $3,984,549$2,887,001 for the same period of 2017.2018. Other operating expenses decreased by $263,300,$651,706, or 4.6%17.3%, to $5,505,070$3,113,584 for the ninesix months ended SeptemberJune 30, 2018,2019, compared to $5,768,370$3,765,290 for the same period of 2017.2018.

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

 

  Three months   Nine months 
  Ended September 30,   Ended September 30,   

For the Three Months

Ended June 30,

   

For the Six Months

Ended June 30,

 

Other Operating Expense

  2018   2017   2018   2017   2019   2018   2019   2018 

Advertising

  $108,140   $142,032   $434,657   $532,292   $124,641   $170,471   $303,296   $326,517 

Office Supplies

   245,248    290,110    736,630    712,397    236,127    248,306    453,374    491,382 

Legal and Audit Fees

   181,036    135,403    425,905    400,483    279,982    135,512    413,270    244,869 

Telephone expense

   124,490    124,112    401,496    399,926    121,718    152,173    233,776    277,006 

Postage and Freight

   136,285    133,251    425,353    396,042    (447,286   152,151    (298,164   289,068 

Loan Collection Expense

   5,819    106,947    22,641    149,355    1,638    3,120    9,674    16,822 

Other Losses

   546    12,039    233,972    213,606    24,822    66,152    31,599    233,426 

Regulatory and related expense

   84,084    107,932    277,437    322,104    83,960    98,306    168,877    193,353 

Debit Card/ATM expense

   121,434    103,240    343,817    307,069    142,758    113,382    263,643    222,383 

Travel and Convention

   54,745    54,198    166,759    197,318    63,729    62,666    100,509    112,014 

Other expenses

   677,953    597,449    2,036,403    2,137,778    811,374    708,606    1,433,730    1,358,450 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Other Expense

  $1,739,780   $1,806,713   $5,505,070   $5,768,370   $ 1,443,463   $ 1,910,845   $ 3,113,584   $ 3,765,290 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The Corporation’s efficiency ratio for the three months ended SeptemberJune 30, 20182019 was 75.25%81.46%, compared to 75.67%77.65% for the same period in 2017.2018. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, the Corporation’s efficiency ratio was 75.79% and 76.35%79.95%, respectively.compared to 76.07% for the same period in 2018. The efficiency ratio is the ratio ofnon-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) andnon-interest income.

BALANCE SHEET ANALYSIS

 

  September 30,   December 31,   Amount of
Increase
   Percent of
Increase
 
  2018   2017   (Decrease)   (Decrease)   June 30,
2019
   December 31,
2018
   Amount of
Increase
(Decrease)
��  Percent of
Increase
(Decrease)
 

Cash and Due From Banks

  $12,609,437   $17,962,990   $(5,353,553)    -29.80  $21,754,884   $12,592,130   $9,162,754    72.77

Interest Bearing deposits with Other Banks

   1,351,745    1,532,420    (180,675   -11.79   1,193,764    8,079,742    (6,885,978   -85.23

Investment Securities

   449,254,631    505,046,377    (55,791,746   -11.05   483,906,292    444,746,454    39,159,838    8.80

Loans, net

   431,433,287    402,390,574    29,042,713    7.22   461,914,254    425,905,093    36,009,161    8.45

Premises and Equipment

   19,868,597    20,571,551    (702,954   -3.42   20,169,558    19,717,305    452,253    2.29

Total Assets

   962,967,946    993,095,828    (30,127,882   -3.03   1,034,030,940    958,630,077    75,400,863    7.87

Total Deposits

   757,380,333    720,685,499    36,694,834    5.09   794,858,320    756,221,510    38,636,810    5.11

Total Shareholders’ Equity

   79,794,502    88,451,040    (8,656,538   -9.79   96,136,323    83,866,317    12,270,006    14.63

CASH AND CASH EQUIVALENTS

Cash and cash equivalents,due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at SeptemberJune 30, 20182019 was $12,609,437,$21,754,884, which was a decreasean increase of $5,353,553$9,162,754 from the balance of $17,962,990$12,592,130 at December 31, 2017.2018. The decreaseincrease was due to a decreasean increase in the balances at correspondent banks due to a decreaseincrease in the amount of checks drawn on other banks in the normal process of clearing funds between these banks.

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Corporation’s investments securities portfolio at SeptemberJune 30, 2018, decreased2019 increased by $55,791,746,$39,159,838, or 11.1%8.8%, to $449,254,631$483,906,292 from $505,046,377$444,746,454 at December 31, 2017.2018. This decreaseincrease was due to maturities, paydowns, sales and calls in excess of purchases and decreasesincreases in the market value of the Corporation’s investment securities portfolio.portfolio in excess of maturities, paydowns, sales and calls.

LOANS

The Corporation’s loan balance increased by $29,042,713,$36,009,161, or 7.2%8.5%, during the ninesix months ended SeptemberJune 30, 2018,2019, to $431,433,287$461,914,254 from $402,390,574$425,905,093 at December 31, 2017.2018. Loan demand, especially in land development and construction, commercial and industrial, and commercial real estate categories, strengthened during the ninesix months ended SeptemberJune 30, 20182019 but competition for available loans continued to be strong during that period. No material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the ninesix months ended SeptemberJune 30, 2018,2019, the Corporation’s premises and equipment decreasedincreased by $702,954,$452,253, or 3.4%2.3%, to $19,868,597$20,169,558 from $20,571,551$19,717,305 at December 31, 2017.2018. The decreaseincrease was due to depreciation expense exceeding the amountpurchase of a piece of property and equipment purchased during the period.for expansion partially offset by depreciation expense.

DEPOSITS

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

 

  September 30,   December 31,   Amount of
Increase
   Percent of
Increase
 
  2018   2017   (Decrease)   (Decrease)   June 30, 2019   December 31,
2018
   Amount of
Increase
(Decrease)
   Percent of
Increase
(Decrease)
 

Noninterest-Bearing Deposits

  $162,832,452   $159,291,356   $3,541,096    2.22  $165,655,475   $170,029,729   $(4,374,254   -2.57

Interest-Bearing Deposits

   327,991,524    306,047,053    21,944,471    7.17   331,589,279    298,220,430    33,368,849    11.19

Savings Deposits

   81,085,547    77,784,876    3,300,671    4.24   77,686,521    76,735,710    950,811    1.24

Certificates of Deposit

   185,470,810    177,562,214    7,908,596    4.45   219,927,045    211,235,641    8,691,404    4.11
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total deposits

  $757,380,333   $720,685,499   $36,694,834    5.09  $794,858,320   $756,221,510   $38,636,810    5.11
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Non-interest-bearing, interest-bearing,Interest-bearing, savings and certificates of deposits increased during the ninesix months ended SeptemberJune 30, 2018.2019 while noninterest-bearing deposits decreased slightly. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management objectives. These rate adjustments impact deposit balances.

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 Corporation’soff-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

CONTRACTUAL OBLIGATIONS

There have been no material changes outside of the ordinary course of the Corporation’s business to the contractual obligations set forth in Note 12 to the Corporation’s financial statements contained in the Corporation’s Annual Report on Form10-K for the year ended December 31, 2017.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

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

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

We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so should the situation warrant. Based upon the nature of our operations, outlines specific risks that could affect the Corporation’s abilitywe are not subject to compete, change the Corporation’s risk profilematerial foreign exchange or eventually impact the Corporation’s financial condition or results. The risks the Corporation faces generally are similar to those experienced, to varying degrees, by all financial services companies.commodity price risk. We do not own any trading assets.

The Corporation’s strategies and its management’s abilityWe use an interest rate risk simulation model to react to changing competitive and economic environments have historically enabledtest the Corporation to compete effectively and manage risks to acceptable levels. The Corporation has outlined potential risks below that it presently believes could be important; however, other risks may prove tobe important in the future. New risks may emerge at any timeinterest rate sensitivity of net interest income and the Corporation cannot predict with certainty all potential developments that could affect the Corporation’s financial condition or results of operation. The following discussion highlights potential risks, which could intensify over time orbalance sheet. Instantaneous parallel rate shift dynamicallyscenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in a way that mightprojected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change the Corporation’s risk profile.

Competition Risks

The market in which the Corporation competes is saturated with community banks seekinginterest rates and use various assumptions, including, but not limited to, provide a service-oriented banking experience to individuals and businesses compared with what the Corporation believes is the more rigid and less friendly environment found in larger banks. This requires the Corporation to offer most, if not all, of the products and conveniences that are offered by the larger banks, but with a service differentiation. In doing so, it is imperative that the Corporation identify the lines of business that the Corporationcan excel in, prudently utilize the Corporation’s available capital to acquire the people and platforms required thereof, and executeprepayments on these strategies.

Credit Risks

Like all lenders, the Corporation faces the risk that the Corporation’s customers may not repay their loans and thatsecurities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. We also analyze the realizableeconomic value of collateral may be insufficient to avoidequity as a loss of principal. In the Corporation’s business, some level of credit loss is unavoidable and overall levels of credit loss can vary over time. The Corporation’s ability to manage credit risk depends primarily upon the Corporation’s ability to assess the creditworthiness of customers and the value of collateral, including real estate. The Corporation controls credit risk by diversifying the Corporation’s loan portfolio and managing its composition, and by recording and managing an allowance for expected loan losses in accordance with applicable accounting rules. At the end of September 30, 2018, the Corporation had approximately $3.2 million of available reserves to cover such losses. The models and approaches the Corporation uses to originate and manage loans are regularly reviewed, if necessary or advisable, updated to consider changes in the competitive environment, in real estate prices and other collateral values, and in the economy, among other things, based on the Corporation’s experience originating loans and servicing loan portfolios.

Financing, Funding and Liquidity Risks

One of the most important aspects of management’s efforts to sustain long-term profitability for the Corporation is the managementsecondary measure of interest rate risk. Management’s goalThis is a complementary measure to maximize net interest income within acceptable levelswhere the calculated value is the result of interest-ratethe 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 liquidity.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 June 30, 2019 and December 31, 2018:

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

+400 basis points

   0.5  9.7  -3.6  6.2

+300 basis points

   2.8  9.9  -1.8  5.7

+200 basis points

   4.5  9.2  -0.4  4.9

+100 basis points

   3.2  5.6  0.5  3.2

Flat rates

   —     —     —     —   

-100 basis points

   -8.5  -7.6  -1.7  -1.1

-200 basis points

   -16.2  -17.2  -11.5  -9.5

The following table presents the change in our economic value of equity as of June 30, 2019 and December 31, 2018, assuming immediate parallel shifts in interest rates:

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

+400 basis points

   1.9  -5.3

+300 basis points

   4.7  -3.0

+200 basis points

   6.2  -1.2

+100 basis points

   4.6  -0.1

Flat rates

   —     —   

-100 basis points

   -17.6  -9.4

-200 basis points

   -40.7  -27.1

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.

The Corporation’s assets and liabilities are principally financial in nature and the resulting earnings thereon are subject to significant variability due to the timing and extent to which the Corporation can reprice the yields on interest-earning assets and the costs of interest bearing liabilities as a result of changes in market interest rates. Interest rates in the financial markets affect the Corporation’s decisions on pricing its assets and liabilities, which impacts net interest income, an important cash flow stream for the Corporation. As a result, a substantial part of our asset/liability management strategy, our management has emphasized the Corporation’s risk-management activities are devotedorigination of shorter duration loans as well as variable rate loans to managing interest-rate risk. Currently,limit the Corporation does not have any significant risks relatednegative exposure to foreign currency exchange, commoditiesa rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or equity risk exposures.

Interest Rate and Yield Curve Risks

A significant portion of the Corporation’s business involves borrowing and lending money. Accordingly,low interest bearingnon-maturity deposit accounts, whose cost is less sensitive to changes in interest rates directly impact the Corporation’s revenues and expenses, and potentially could compress the Corporation’s net interest margin. The Corporation actively manages its balance sheet to control the risks of a reduction in net interest margin brought about by ordinary fluctuations in rates.

Like all financial services companies, the Corporation faces the risk of abnormalities in the yield curve. The yield curve shows the interest rates applicable to short and long term debt. The curve is steep when short-term rates are much lower than long-term rates, it is flat when short-term rates are equal, or nearly equal, to long-term rates, and it is inverted when short-term rates exceed long-term rates. Historically, the yield curve has been positively sloped. A flat or inverted yield curve tends to decrease net interest margin, as funding costs increase relative to the yield on assets. Currently, the yield curve is flat.

Regulatory and Legal Risks

The Corporation operates in a heavily regulated industry and therefore is subject to many banking, deposit, and consumer lending laws as well as the rules and regulations promulgated by the FDIC, FRB, Securities and Exchange Commission and the NASDAQ stock market. Failure to comply with applicable regulations could result in financial or operational penalties. Inaddition, efforts to comply with applicable regulations may increase the Corporation’s costs and/or limit the Corporation’s ability to pursue certain business opportunities. Federal and state regulations significantly limit the types of activities in which the Corporation, as a financial institution, may engage. In addition, the Corporation is subject to a wide array of other regulations that govern other aspects of how the Corporation conducts business, such as in the areas of employment and intellectual property. Federal and state legislative and regulatory authorities occasionally consider changing these regulations or adopting new ones. Such actions could limit the amount of interest or fees the Corporation can charge, could restrict the Corporation’s ability to collect loans or realize on collateral or could materially affect us in other ways. Additional federal and state consumer protection regulations could also expand the privacy protections afforded to customers of financial institutions, restricting the Corporation’s ability to share or receive customer information and increasing the Corporation’s costs. In addition, changes in accounting rules can significantly affect how the Corporation records and reports assets, liabilities, revenues, expenses and earnings.

The Corporation also faces litigation risks from customers (individually or in class actions) and from federal or state regulators. Litigation is an unavoidable part of doing business, and the Corporation manages those risks through internal controls, personnel training, insurance, litigation management, the Corporation’s compliance and ethics processes and other means. However, the commencement, outcome and magnitude of litigation cannot be predicted or controlled with any certainty.

Accounting Estimate Risks

The preparation of the Corporation’s consolidated financial statements in conformity with GAAP requires management to make significant estimates that affect the financial statements. The Corporation’s most critical estimate is the level of the allowance for credit losses. However, other estimates occasionally become highly significant, especially in volatile situations such as litigation and other loss contingency matters. Estimates are made at specific points in time as actual events unfold, estimates are adjusted accordingly. Due to the inherent nature of these estimates, it is possible that, at some time in the future, the Corporation may significantly increase the allowance for credit losses or sustain credit losses that are significantly higher than the provided allowance, or the Corporation may make some other adjustment that will differ materially from the estimates that the Corporation previously made.

Expense Control

Expenses and other costs directly affect the Corporation’s earnings. The Corporation’sability to successfully manage expenses is important to its long-term profitability. Many factors can influence the amount of the Corporation’s expenses, as well as how quickly they grow. As the Corporation’s businesses change or expand, additional expenses can arise from asset purchases, structural reorganization, evolving business strategies, and changing regulations, among other things. The Corporation manages expense growth and risk through a variety of means, including actual versus budget management, imposition of expense authorization, and procurement coordination and processes.

 

ITEM 4.

CONTROLS AND PROCEDURES.

The management of the Corporation, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Corporation’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 SeptemberJune 30, 20182019 (the end of the period covered by this Quarterly Report).

There were no changes to the Corporation’s internal control over financial reporting that occurred in the three months ended SeptemberJune 30, 2018,2019, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

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

 

ITEM 1A.

RISK FACTORS.

The Corporation’s business, futurefinancial 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 Form10-K for the year ended December 31, 2017,2018, which the Corporation filed with the Securities and Exchange Commission on March 15, 2018.2019. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Corporation’s Annual Report on Form10-K for the year ended December 31, 2017,2018, the Corporation’s quarterly reports on Form10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Corporation’s business, financial condition and results of operations in the future.

There have been no material changes to the risk factors as disclosed in the Corporation’s Annual Report on Form10-K for the Corporation’s year ended December 31, 2017.

2018.

ITEM 6.

EXHIBITS.

Exhibits

 

Exhibits
2.1Agreement and Plan of Merger, dated as of May  21, 2019, by and among Citizens Holding Company, The Citizens Bank of Philadelphia and Charter Bank (incorporated by reference to Exhibit 2.1 to Form8-K filed by Citizens Holding Company on May 21, 2019)
31(a) Certification of the Chief Executive Officer pursuant to Rule13a-14(a)/15d-14(a).
31(b) Certification of the Chief Financial Officer pursuant to Rule13a-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 XBRL format.

SIGNATURES

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

 

CITIZENS HOLDING COMPANY
BY: 

/s/ Greg L. McKee

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

/s/ Robert T. Smith

Robert T. Smith
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
DATE: November 7, 2018August 9, 2019

 

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