Citizens Holding (CIZN) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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 value	CIZN	NASDAQ Global Market

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

None

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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 6, 2019:

Title	Outstanding
Common Stock, $0.20 par value	5,578,131

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	1
Item 1.	Consolidated Financial Statements.
	Consolidated Statements of Financial Condition, as of September 30, 2019 (Unaudited) and December 31, 2018 (Audited)	1
	Consolidated Statements of Income for the Three and nine months ended September 30, 2019 (Unaudited) and 2018 (Unaudited)	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three and nine months ended September 30, 2019 (Unaudited) and 2018 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2019 (Unaudited) and 2018 (Unaudited)	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	43
Item 4.	Controls and Procedures.	45
PART II.	OTHER INFORMATION	46
Item 1.	Legal Proceedings.	46
Item 1A.	Risk Factors.	46
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.	46
*	None or Not Applicable.
SIGNATURES		47

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	September 30,			December 31,
	2019			2018
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	21,106,679		$	12,592,130
Interest bearing deposits with other banks		61,234,815			8,079,742
Investment securities available for sale, at fair value		434,145,569			444,746,454
Loans, net of allowance for loan losses of $3,805,579 in 2019 and $3,371,695 in 2018		469,692,103			425,905,093
Premises and equipment, net		20,029,997			19,717,305
Other real estate owned, net		3,383,444			3,440,148
Accrued interest receivable		3,596,005			4,165,783
Cash surrender value of life insurance		25,866,655			25,383,931
Deferred tax assets, net		1,899,036			6,633,539
Other assets		8,649,342			7,965,952
TOTAL ASSETS	$	1,049,603,645		$	958,630,077
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	168,317,216		$	170,029,729
Interest-bearing NOW and money market accounts		326,982,928			298,220,430
Savings deposits		78,474,191			76,735,710
Certificates of deposit		220,539,672			211,235,641
Total deposits		794,314,007			756,221,510
Securities sold under agreement to repurchase		144,502,629			107,965,505
Accrued interest payable		685,777			470,710
Deferred compensation payable		9,336,912			9,052,972
Other liabilities		1,765,255			1,053,063
Total liabilities		950,604,580			874,763,760
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, 4,912,030 shares issued and outstanding at September 30, 2019 and 4,904,530 at December 31, 2018		982,406			980,906
Additionalpaid-in capital		4,419,406			4,298,499
Retained earnings		93,957,055			93,561,515
Accumulated other comprehensive loss, net of tax benefit of $119,614 at September 30, 2019 and $4,978,232 at December 31, 2018		(359,802	)		(14,974,603	)
Total shareholders’ equity		98,999,065			83,866,317
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,049,603,645		$	958,630,077

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

1

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2019		2018		2019		2018
INTEREST INCOME
Interest and fees on loans	$	5,940,805	$	5,166,554	$	17,220,751	$	14,867,465
Interest on securities
Taxable		1,945,053		2,074,424		6,252,649		6,320,482
Nontaxable		345,238		622,050		1,474,886		1,933,104
Other interest		212,319		24,291		529,098		144,635
Total interest income		8,443,415		7,887,319		25,477,384		23,265,686
INTEREST EXPENSE
Deposits		1,922,396		709,985		5,567,837		1,726,700
Other borrowed funds		602,730		458,039		1,575,580		1,062,505
Total interest expense		2,525,126		1,168,024		7,143,417		2,789,205
NET INTEREST INCOME		5,918,289		6,719,295		18,333,967		20,476,481
PROVISION FOR LOAN LOSSES		11,738		288,576		472,036		140,765
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,906,551		6,430,719		17,861,931		20,335,716
OTHER INCOME
Service charges on deposit accounts		1,125,631		1,170,956		3,268,578		3,381,809
Other service charges and fees		863,407		761,935		2,316,715		2,147,452
Other operating income		516,862		287,683		1,039,696		870,153
Total other income		2,505,900		2,220,574		6,624,989		6,399,414
OTHER EXPENSES
Salaries and employee benefits		3,508,723		3,668,012		10,525,116		11,011,291
Occupancy expense		1,287,320		1,486,232		4,119,609		4,373,233
Other expense		2,071,595		1,739,780		5,185,179		5,505,070
Total other expenses		6,867,638		6,894,024		19,829,904		20,889,594
INCOME BEFORE PROVISION FOR INCOME TAXES		1,544,813		1,757,269		4,657,016		5,845,536
PROVISION FOR INCOME TAXES		211,925		260,475		726,615		888,215
NET INCOME	$	1,332,888	$	1,496,794	$	3,930,401	$	4,957,321
NET INCOME PER SHARE -Basic	$	0.27	$	0.31	$	0.80	$	1.01
-Diluted	$	0.27	$	0.31	$	0.80	$	1.01
DIVIDENDS PAID PER SHARE	$	0.24	$	0.24	$	0.72	$	0.72

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

2

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2019			2018			2019			2018
Net income	$	1,332,888		$	1,496,794		$	3,930,401		$	4,957,321
Other comprehensive income (loss)
Securitiesavailable-for-sale
Unrealized holding gains (losses)		3,311,002			(3,006,277	)		19,283,111			(13,656,532	)
Income tax effect		(826,095	)		750,067			(4,811,136	)		3,407,305
		2,484,907			(2,256,210	)		14,471,975			(10,249,227	)
Reclassification adjustment for gains included in net income		244,457			11,047			190,308			11,047
Income tax effect		(60,992	)		(2,756	)		(47,482	)		(2,756	)
		183,465			8,291			142,826			8,291
Total other comprehensive income (loss)		2,668,372			(2,247,919	)		14,614,801			(10,240,936	)
Comprehensive income (loss)	$	4,001,260		$	(751,125	)	$	18,545,202		$	(5,283,615	)

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

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CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months
	Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	8,867,757		$	8,832,306
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		39,516,994			32,579,774
Proceeds from sale of investment securities		96,171,622			17,609,890
Purchases of investment securities available for sale		(108,814,987	)		(10,550,000	)
Purchases of bank premises and equipment		(955,550	)		(268,708	)
Proceeds from sales of bank premises and equipment		—			264,000
(Increase) decrease in interest bearing deposits with other banks		(53,155,073	)		180,675
Proceeds from sale of other real estate		170,356			802,372
Net increase in loans		(44,381,330	)		(29,407,770	)
Net cash (used in) provided by investing activities		(71,447,968	)		11,210,233
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		38,092,497			36,694,834
Increase (decrease) in securities sold under agreement to repurchase		36,537,124			(53,589,022	)
Increase in federal funds purchased		—			5,000,000
Repayment of Federal Home Loan Bank advances		—			(10,000,000	)
Proceeds from exercise of stock options		—			27,000
Payment of dividends		(3,534,861	)		(3,528,904	)
Net cash provided by (used in) financing activities		71,094,760			(25,396,092	)
Net increase (decrease) in cash and due from banks		8,514,549			(5,353,553	)
Cash and due from banks, beginning of period		12,592,130			17,962,990
Cash and due from banks, end of period	$	21,106,679		$	12,609,437

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

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CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the nine months ended September 30, 2019

(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 September 30, 2019 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, 2018, filed with the Securities and Exchange Commission on March 15, 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 Corporation. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central and southern counties of Mississippi and the surrounding areas. Services are provided at several branch offices.

Estimates

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

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Estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. 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.

Adoption of New Accounting Standards

ASU2016-02 “Leases (Topic 842)” (“ASU2016-02”) requires lessees and lessors recognize lease assets and lease liabilities on the statement of financial condition and disclose key information about leasing arrangements. ASU2016-02 was effective for the Company on January 1, 2019. ASU2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure 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 has not restated comparative periods. Of the optional practical expedients available under ASU2016-02, all that apply have been adopted.

The Company’s operating leases relate primarily to branch properties and related equipment. As a result of implementing ASU2016-02, we recognized an operating leaseright-of-use (“ROU”) asset of $1.086 million and an operating lease liability of $1.086 million on January 1, 2019, with no impact on our consolidated statements of income or condensed consolidated statements of cash flows compared to the prior lease accounting model. The ROU asset and liability are recorded in other assets and other liabilities, respectively, in the consolidated statements of condition. See Note 9. Premises and Equipment for additional information.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU2016-13”). ASU2016-13 makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition

6

to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU2016-13 are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU 2016-13 for certain companies. The new effective date for the Company is January 1, 2023. 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 required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

ASU2018-13 “Fair 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

Effective October 1, 2019, the Company completed its acquisition by merger of Charter Bank (“Charter”), in a transaction valued at approximately $19.7 million. The Company issued 666,099 shares of common stock and paid approximately $6.1 million in cash to Charter shareholders, excluding cash paid for fractional shares. At closing, Charter merged with and into the Bank, with the Bank the surviving corporation in the merger. Operations of Charter will be included in the consolidated financial statements of the Corporation for periods subsequent to the acquisition date.

7

Prior to any determination of purchase accounting adjustments, as a result of the acquisition, the Company acquired total assets of approximately $149 million, which include total loans of approximately $104 million, total deposits of approximately $126 million, and 4 banking locations on the Mississippi Gulf Coast. The Company is finalizing the fair value of assets acquired and liabilities assumed as part of the acquisition.

Note 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 September 30, 2019, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $70,933,230 compared to an aggregate unused balance of $58,835,208 at December 31, 2018. There were $2,435,810 of letters of credit outstanding at September 30, 2019 and $2,516,810 at December 31, 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 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.

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Note 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,
	2019		2018		2019		2018
Basic weighted average shares outstanding		4,900,030		4,899,520		4,896,871		4,888,372
Dilutive effect of granted options		1,465		5,093		2,321		9,586
Diluted weighted average shares outstanding		4,901,495		4,904,613		4,899,192		4,897,958
Net income	$	1,332,888	$	1,496,794	$	3,930,401	$	4,957,321
Net income per share-basic	$	0.27	$	0.31	$	0.80	$	1.01
Net income per share-diluted	$	0.27	$	0.31	$	0.80	$	1.01

Note 5. Equity Compensation Plans

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

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

The following table is a summary of the stock option activity for the nine months ended September 30, 2019:

	Directors’ Plan					2013 Plan
				Weighted				Weighted
	Number			Average		Number		Average
	of			Exercise		of		Exercise
	Shares			Price		Shares		Price
Outstanding at December 31, 2018		52,500		$	21.55		—	$	—
Granted		—			—		—		—
Exercised		—			—		—		—
Expired		(12,000	)		21.75		—		—
Outstanding at September 30, 2019		40,500		$	21.49		—	$	—

The intrinsic value of options outstanding under the Directors’ Plan at September 30, 2019, was $25,920. No options were outstanding under the 2013 Plan as of September 30, 2019.

During 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 23, 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 $161,475 and will be expensed ratably over theone-year vesting period.

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Note 6. Income Taxes

For the three months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes totaling $212 thousand and $260 thousand, respectively. The effective tax rate was 13.7% and 14.8% for the three months ending September 30, 2019 and 2018, respectively.

For the nine months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes totaling $727 thousand and $888 thousand, respectively. The effective tax rate was 15.6% and 15.2% for the nine months ending September 30, 2019 and 2018, respectively. The provision for income taxes includes both federal and state income taxes and differs from the statutory rate due to favorable permanent differences primarily related to tax free municipal investments.

Note 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, 2019	Cost		Gains		Losses		Fair Value
Securitiesavailable-for-sale
Obligations of U.S. Government agencies	$	98,400,709	$	22,134	$	441,703	$	97,981,140
Mortgage backed securities		276,342,668		839,052		1,583,407		275,598,313
State, County, Municipals		59,881,608		744,167		59,659		60,566,116
Total	$	434,624,985	$	1,605,353	$	2,084,769	$	434,145,569
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
December 31, 2018	Cost		Gains		Losses		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 September 30, 2019 and December 31, 2018, securities with a carrying value of $376,127,226 and $357,231,440, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

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The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2019 and December 31, 2018 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

	September 30, 2019				December 31, 2018
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available-for-sale
Due in one year or less	$	345,000	$	344,200	$	1,875,288	$	1,877,665
Due after one year through five years		95,296,476		94,888,785		91,948,838		89,121,194
Due after five years through ten years		12,338,444		12,457,030		32,801,788		31,718,293
Due after ten years		50,302,397		50,857,242		78,330,873		74,655,149
Residential mortgage backed securities		217,007,709		216,247,964		187,776,954		179,235,806
Commercial mortgage backed securities		59,334,959		59,350,348		71,965,548		68,138,347
Total	$	434,624,985	$	434,145,569	$	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 September 30, 2019 and December 31, 2018.

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

September 30, 2019	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	38,652,471	$	308,973	$	20,367,270	$	132,730	$	59,019,741	$	441,703
Mortgage backed securities		32,441,833		187,039		108,373,816		1,396,368		140,815,649		1,583,407
State, County, Municipal		7,174,822		24,415		3,732,036		35,244		10,906,858		59,659
Total	$	78,269,126	$	520,427	$	132,473,122	$	1,564,342	$	210,742,248	$	2,084,769
December 31, 2018	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	—	$	—	$	95,977,783	$	3,388,147	$	95,977,783	$	3,388,147
Mortgage backed securities		12,257,636		179,281		234,928,705		12,193,988		247,186,341		12,373,269
State, County, Municipal		12,623,964		285,275		76,535,741		3,978,953		89,159,705		4,264,228
Total	$	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 its amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at September 30, 2019 nor at December 31, 2018.

11

Note 8. Loans

The composition of net loans (in thousands) at September 30, 2019 and December 31, 2018 was as follows:

	September 30, 2019			December 31, 2018
Real Estate:
Land Development and Construction	$	63,491		$	41,134
Farmland		15,985			14,498
1-4 Family Mortgages		86,516			88,747
Commercial Real Estate		205,968			203,595
Total Real Estate Loans		371,960			347,974
Business Loans:
Commercial and Industrial Loans		87,480			66,421
Farm Production and Other Farm Loans		742			907
Total Business Loans		88,222			67,328
Consumer Loans:
Credit Cards		1,744			1,648
Other Consumer Loans		11,584			12,372
Total Consumer Loans		13,328			14,020
Total Gross Loans		473,510			429,322
Unearned Income		(12	)		(45	)
Allowance for Loan Losses		(3,806	)		(3,372	)
Loans, net	$	469,692		$	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.

12

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

	September 30, 2019		December 31, 2018
Real Estate:
Land Development and Construction	$	113	$	—
Farmland		246		200
1-4 Family Mortgages		2,057		1,831
Commercial Real Estate		9,484		7,612
Total Real Estate Loans		11,900		9,643
Business Loans:
Commercial and Industrial Loans		363		76
Farm Production and Other Farm Loans		31		31
Total Business Loans		394		107
Consumer Loans:
Other Consumer Loans		65		89
Total Consumer Loans		65		89
Total Nonaccrual Loans	$	12,359	$	9,839

13

An aging analysis of past due loans (in thousands), segregated by class, as of September 30, 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
Real Estate:
Land Development and Construction	$	2,218	$	—	$	2,218	$	61,273	$	63,491	$	—
Farmland		339		—		339		15,646		15,985		—
1-4 Family Mortgages		1,832		912		2,744		83,772		86,516		220
Commercial Real Estate		1,688		2,335		4,023		201,945		205,968		—
Total Real Estate Loans		6,077		3,247		9,324		362,636		371,960		220
Business Loans:
Commercial and Industrial Loans		648		262		910		86,570		87,480		—
Farm Production and Other Farm Loans		—		31		31		711		742		—
Total Business Loans		648		293		941		87,281		88,222		—
Consumer Loans:
Credit Cards		18		47		65		1,679		1,744		47
Other Consumer Loans		141		5		146		11,438		11,584		—
Total Consumer Loans		159		52		211		13,117		13,328		47
Total Loans	$	6,884	$	3,592	$	10,476	$	463,034	$	473,510	$	267

14

An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2018 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
Real Estate:
Land Development and Construction	$	1,494	$	54	$	1,548	$	39,586	$	41,134	$	54
Farmland		779		29		808		13,690		14,498		—
1-4 Family Mortgages		3,456		330		3,786		84,961		88,747		—
Commercial Real Estate		1,059		2,981		4,040		199,555		203,595		—
Total Real Estate Loans		6,788		3,394		10,182		337,792		347,974		54
Business Loans:
Commercial and Industrial Loans		1,672		21		1,693		64,728		66,421		—
Farm Production and Other Farm Loans		9		—		9		898		907		—
Total Business Loans		1,681		21		1,702		65,626		67,328		—
Consumer Loans:
Credit Cards		16		4		20		1,628		1,648		4
Other Consumer Loans		212		33		245		12,127		12,372		15
Total Consumer Loans		228		37		265		13,755		14,020		19
Total Loans	$	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 that 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.

15

Impaired loans (in thousands) as of September 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	$	17	$	57
Farmland		253		253		—		253		—	$	261
1-4 Family Mortgages		863		761		102		863		30	$	1,008
Commercial Real Estate		11,919		6,104		4,099		10,203		459	$	9,544
Total Real Estate Loans		13,148		7,177		4,255		11,432		506	$	10,869
Business Loans:
Commercial and Industrial Loans		144		—		144		144		72	$	72
Total Business Loans		144		—		144		144		72	$	72
Total Loans	$	13,292	$	7,177	$	4,399	$	11,576	$	578	$	10,941

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	$	—	$	—	$	—	$	—	$	—	$	—
Farmland		269		269		—		269		—	$	135
1-4 Family Mortgages		1,153		1,062		91		1,153		27	$	728
Commercial Real Estate		10,601		5,209		3,675		8,884		374	$	6,489
Total Real Estate Loans		12,023		6,540		3,766		10,306		401	$	7,352
Total Loans	$	12,023	$	6,540	$	3,766	$	10,306	$	401	$	7,352

16

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

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
September 30, 2019	Loans		Investment		Investment
Commercial real estate		3	$	4,871	$	2,607
Total		3	$	4,871	$	2,607
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
December 31, 2018	Loans		Investment		Investment
Commercial real estate		3	$	4,871	$	2,782
Total		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 of Loans		Recorded Investment
Totals at January 1, 2018		3	$	3,047
Reductions due to:
Principal paydowns				(265	)
Totals at January 1, 2019		3	$	2,782
Reductions due to:
Principal paydowns				(175	)
Total at September 30, 2019		3	$	2,607

The allocated allowance for loan losses attributable to restructured loans was $174,274 at September 30, 2019 and December 31, 2018. The Corporation had no commitments to lend additional funds on these troubled debt restructurings as of September 30, 2019.

17

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

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

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

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

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

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

18

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at September 30, 2019.

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

			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	59,807	$	1,716	$	1,968	$	—	$	—	$	63,491
Farmland		14,747		379		859		—		—		15,985
1-4 Family Mortgages		77,590		1,924		7,002		—		—		86,516
Commercial Real Estate		165,914		22,631		17,423		—		—		205,968
Total Real Estate Loans		318,058		26,650		27,252		—		—		371,960
Business Loans:
Commercial and Industrial Loans		83,337		144		3,999		—		—		87,480
Farm Production and Other Farm Loans		707		—		4		—		31		742
Total Business Loans		84,044		144		4,003		—		31		88,222
Consumer Loans:
Credit Cards		1,679		—		65		—		—		1,744
Other Consumer Loans		11,380		50		113		41		—		11,584
Total Consumer Loans		13,059		50		178		41		—		13,328
Total Loans	$	415,161	$	26,844	$	31,433	$	41	$	31	$	473,510

19

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

			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	39,726	$	840	$	568	$	—	$	—	$	41,134
Farmland		13,248		339		911		—		—		14,498
1-4 Family Mortgages		79,659		1,751		7,337		—		—		88,747
Commercial Real Estate		172,217		17,938		13,440		—		—		203,595
Total Real Estate Loans		304,850		20,868		22,256		—		—		347,974
Business Loans:
Commercial and Industrial Loans		63,994		81		2,346		—		—		66,421
Farm Production and Other Farm Loans		876		—		31		—		—		907
Total Business Loans		64,870		81		2,377		—		—		67,328
Consumer Loans:
Credit Cards		1,628		—		20		—		—		1,648
Other Consumer Loans		12,181		65		71		55		—		12,372
Total Consumer Loans		13,809		65		91		55		—		14,020
Total Loans	$	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.

20

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

	Real			Business
September 30, 2019	Estate			Loans		Consumer		Total
Beginning Balance, January 1, 2019	$	2,844,681		$	221,841	$	305,173	$	3,371,695
Provision for loan losses		(883	)		269,917		203,002		472,036
Chargeoffs		15,073			91,291		76,972		183,336
Recoveries		101,119			8,858		35,207		145,184
Net (recoveries) chargeoffs		(86,046	)		82,433		41,765		38,152
Ending Balance	$	2,929,844		$	409,325	$	466,410	$	3,805,579
Period end allowance allocated to:
Loans individually evaluated for impairment	$	506,560		$	71,962	$	—	$	578,522
Loans collectively evaluated for impairment		2,423,284			337,363		466,410		3,227,057
Ending Balance, September 30, 2019	$	2,929,844		$	409,325	$	466,410	$	3,805,579

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

	Real		Business
September 30, 2018	Estate		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
Chargeoffs		202,352		31,236			117,401			350,989
Recoveries		91,071		203,777			69,091			363,939
Net chargeoffs (recoveries)		111,281		(172,541	)		48,310			(12,950	)
Ending Balance	$	2,656,361	$	229,428		$	287,154		$	3,172,943
Period end allowance allocated to:
Loans individually evaluated for impairment	$	409,496	$	—		$	—		$	409,496
Loans collectively evaluated for impairment		2,246,865		229,428			287,154			2,763,447
Ending Balance, September 30, 2018	$	2,656,361	$	229,428		$	287,154		$	3,172,943

21

The Corporation’s recorded investment in loans as of September 30, 2019 and December 31, 2018 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):

	Real		Business
September 30, 2019	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	11,432	$	144	$	—	$	11,576
Loans collectively evaluated for general impairment		360,528		88,078		13,328		461,934
	$	371,960	$	88,222	$	13,328	$	473,510
	Real		Business
December 31, 2018	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	10,306	$	—	$	—	$	10,306
Loans collectively evaluated for general impairment		337,668		67,328		14,020		419,016
	$	347,974	$	67,328	$	14,020	$	429,322

Note 9. Premises and Equipment

The Company leases certain premises and equipment under operating leases. At September 30, 2019, the Company had lease liabilities and ROU assets totaling $851 thousand related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the nine months ended September 30, 2019, the weighted average remaining lease term for operating leases was 1.4 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		Nine Months Ended
	September 30, 2019		September 30, 2019
(in thousands)
Operating lease cost	$	92	$	277
Short-term lease cost		6		17
Variable lease cost		—		—
	$	98	$	294

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

22

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

	Nine Months Ended
	September 30, 2019
(in thousands)
Lease payments due:
Within one year	$	348
After one year but within two years		324
After two years but within three years		194
After three year but within four years		21
After four years but within five years		—
After five years		—
Total undiscounted cash flows		887
Discount on cash flows		(36	)
Total lease liability	$	851

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
Net income		—		—		—			—			1,332,888			1,332,888
Dividends paid ($0.24 per share)		—		—		—			—			(1,178,887	)		(1,178,887	)
Options exercised		—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—
Stock compensation expense		—		—		40,369			—			—			40,369
Other comprehensive income, net		—		—		—			2,668,372			—			2,668,372
Balance, September 30, 2019		4,912,030	$	982,406	$	4,419,406		$	(359,802	)	$	93,957,055		$	98,999,065

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								Accumulated
	Number				Additional			Other
	of Shares		Common		Paid-In			Comprehensive			Retained
	Issued		Stock		Capital			Income (Loss)			Earnings			Total
Balance, January 1, 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
Net income		—		—		—			—			1,496,794			1,496,794
Dividends paid ($0.24 per share)		—		—		—			—			(1,177,088	)		(1,177,088	)
Options exercised		—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—
Stock compensation expense		—		—		41,344			—			—			41,344
Other comprehensive income, net		—		—		—			(2,247,919	)		—			(2,247,919	)
Balance, September 30, 2018		4,904,530		980,906		4,257,155			(18,466,355	)		93,022,796			79,794,502

Note 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.

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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, 2019:

	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	$	—	$	97,981,140	$	—	$	97,981,140
Mortgage-backed securities		—		275,598,313		—		275,598,313
State, county and municipal obligations		—		60,566,116		—		60,566,116
Total	$	—	$	434,145,569	$	—	$	434,145,569

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018:

	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

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The Corporation recorded no gains or losses in earnings for the period ended September 30, 2019 or December 31, 2018 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 allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.

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For assets measured at fair value on a nonrecurring basis during 2019 that were still held on the Corporation’s balance sheet at September 30, 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
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	3,819,908	$	3,819,908
Total	$	—	$	—	$	3,819,908	$	3,819,908

The following table presents information as of September 30, 2019 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

				Significant Unobservable Inputs	Range of Inputs
Financial instrument	Fair Value		Valuation Technique
Impaired loans	$	3,819,908	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 2018 that were still held on the Corporation’s balance sheet at December 31, 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
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	3,364,538	$	3,364,538
Other real estate owned		—		—		188,609		188,609
Total	$	—	$	—	$	3,553,147	$	3,553,147

Impaired loans with a carrying value of $4,398,430 and $3,364,538 had an allocated allowance for loan losses of $578,522 and $401,347 at September 30, 2019 and December 31, 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.

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After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of$-0- was necessary and recorded during the nine-month period ended September 30, 2019 and the 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.

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The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at September 30, 2019:

			Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
September 30, 2019	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	21,106,679	$	21,106,679	$	—	$	—	$	21,106,679
Interest bearing deposits with banks		61,234,815		61,234,815		—		—		61,234,815
Securitiesavailable-for-sale		434,145,569		—		434,145,569		—		434,145,569
Net loans		469,692,103		—		—		466,369,797		466,369,797
Financial liabilities
Deposits	$	794,314,007	$	573,774,335	$	222,487,675	$	—	$	796,262,010
Securities sold under agreement to repurchase		144,502,629		144,502,629		—		—		144,502,629

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

			Fair Value Measurements Using:
			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)
Financial assets
Cash and due from banks	$	12,592,130	$	12,592,130	$	—	$	—	$	12,592,130
Interest bearing deposits with banks		8,079,742		8,079,742		—		—		8,079,742
Securitiesavailable-for-sale		444,746,454		—		444,746,454		—		444,746,454
Net loans		425,905,093		—		—		420,992,074		420,992,074
Financial liabilities
Deposits	$	756,221,510	$	544,985,869	$	210,477,092	$	—	$	755,462,961
Securities sold under agreement to repurchase		107,965,505		107,965,505		—		—		107,965,505

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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” and collectively with the Company, the “Corporation”), include, but are not limited to, the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Corporation. 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 direct subsidiaries other than the Bank.

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At September 30, 2019, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,052.111 million and total deposits of $796.094 million. In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601)656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The Corporation 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 September 30, 2019, was 24.94% and at December 31, 2018, was 21.34%. The increase was due to an increase in short-term marketable assets at September 30, 2019. Management believes it maintains adequate liquidity for the Corporation’s current needs.

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The Corporation’s primary source of liquidity is customer deposits, which were $794,314,007 at September 30, 2019, and $756,221,510 at December 31, 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 $434,145,569 invested inavailable-for-sale investment securities at September 30, 2019, and $444,746,454 at December 31, 2018. This decrease was due to paydowns, maturities, sales and calls in excess of purchases partially offset by an increase in the market value of the Corporation’s investment securities portfolio.

The Corporation also had $61,234,815 in interest bearing deposits at other banks at September 30, 2019 and $8,079,742 at December 31, 2018. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at both September 30, 2019 and December 31, 2018. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At September 30, 2019, the Corporation had unused and available $183,897,221 of its line of credit with the FHLB and at December 31, 2018, the Corporation had unused and available $171,252,131 of its line of credit with the FHLB. The increase in the amount available under the Corporation’s line of credit with the FHLB from the end of 2018 to September 30, 2019, was the result of an increase in the amount of loans eligible for the collateral pool securing the Corporation’s line of credit with the FHLB. The Corporation had federal funds purchased of$-0- as of September 30, 2019 and December 31, 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 $98,999,065 at September 30, 2019, as compared to $83,866,317 at December 31, 2018. The increase in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment coupled with the increase in earnings in excess of dividends paid. The market value adjustment, which was an increase due to general market conditions, specifically the decrease in medium term interest rates, caused an increase in the market price of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $3,534,861, or $0.72 per share, during the nine-month period ended September 30, 2019 compared to $3,528,904, or $0.72 per share, for the same period in 2018.

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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 September 30, 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
						Requirement to be					Adequately
	Actual					Well Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2019
Citizens Holding Company
Tier 1 leverage ratio	$	96,209		9.27	%	$	51,917		5.00	%	$	41,534		4.00	%
Common Equity tier 1 capital ratio		96,209		15.91	%		67,492		6.50	%		46,725		4.50	%
Tier 1 risk-based capital ratio		96,209		15.91	%		48,381		8.00	%		36,286		6.00	%
Total risk-based capital ratio		100,015		16.54	%		60,476		10.00	%		48,381		8.00	%
December 31, 2018
Citizens Holding Company
Tier 1 leverage ratio	$	95,691		9.93	%	$	48,191		5.00	%	$	38,553		4.00	%
Common Equity tier 1 capital ratio		95,691		17.40	%		62,648		6.50	%		43,372		4.50	%
Tier 1 risk-based capital ratio		95,691		17.40	%		43,986		8.00	%		32,990		6.00	%
Total risk-based capital ratio		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 replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

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

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

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

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

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

In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.

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

Management believes that, as of September 30, 2019, the Company and the Bank met all capital adequacy requirements under Basel III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporation’s capital ratios as presented.

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RESULTS OF OPERATIONS

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

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2019		2018		2019		2018
Interest Income, including fees	$	8,443,415	$	7,887,319	$	25,477,384	$	23,265,686
Interest Expense		2,525,126		1,168,024		7,143,417		2,789,205
Net Interest Income		5,918,289		6,719,295		18,333,967		20,476,481
Provision for loan losses		11,738		288,576		472,036		140,765
Net Interest Income after
Provision for loan losses		5,906,551		6,430,719		17,861,931		20,335,716
Other Income		2,505,900		2,220,574		6,624,989		6,399,414
Other Expense		6,867,638		6,894,024		19,829,904		20,889,594
Income Before Provision For
Income Taxes		1,544,813		1,757,269		4,657,016		5,845,536
Provision for Income Taxes		211,925		260,475		726,615		888,215
Net Income	$	1,332,888	$	1,496,794	$	3,930,401	$	4,957,321
Net Income Per share - Basic	$	0.27	$	0.31	$	0.80	$	1.01
Net Income Per Share-Diluted	$	0.27	$	0.31	$	0.80	$	1.01

See Note 4 to the Corporation’s Consolidated Financial Statements for an explanation regarding the Corporation’s calculation of Net Income Per Share - basic and - diluted.

Annualized return on average equity (“ROE”) was 5.52% for the three months ended September 30, 2019, and 7.31% for the corresponding period in 2018. For the nine months ended September 30, 2019, ROE was 5.77% compared to 7.81% for the nine months ended September 30, 2018. The decrease in ROE for the three and nine months ended September 30, 2019 was caused by the increase in equity balances and a decrease in net income compared to the same period in 2018.

Book value per share increased to $20.15 at September 30, 2019, compared to $17.09 at December 31, 2018. The increase in book value per share reflects earnings in excess of dividends coupled with a decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities. Average assets for the nine months ended September 30, 2019 were $1,026,700,163 compared to $973,552,832 for the year ended December 31, 2018. This increase was due mainly to an increase in loans and interest bearing due from accounts partially offset by a decrease in investment securities.

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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 2.59% for the three months ended September 30, 2019 compared to 3.07% for the corresponding period of 2018. For the nine months ended September 30, 2019, annualized net interest margin was 2.62% compared to 3.10% for the nine months ended September 30, 2018. The decrease in net interest margin for the three and nine months ended September 30, 2019, when compared to the same period in 2018, was the result of the increase in rates paid on deposits in excess of the increase in yields on earning assets, as detailed below. Earning assets averaged $967,972,563 for the three months ended September 30, 2019. This represents an increase of $85,396,240, or 9.7%, over average earning assets of $882,576,323 for the three months ended September 30, 2018. For the nine months ended September 30, 2019, earning assets averaged $951,520,484. This represents an increase of $57,489,453, or 6.4%, over average earning assets of $894,031,031 for the nine months ended September 30, 2018.

Interest bearing deposits averaged $634,978,452 for the three months ended September 30, 2019. This represents an increase of $39,364,580, or 6.6%, from the average of interest-bearing deposits of $595,613,872 for the three months ended September 30, 2018. This was due to an increase in interest-bearing NOW and money market accounts, savings and certificates of deposit.    

Other borrowed funds averaged $131,268,828 for the three months ended September 30, 2019. This represents an increase of $20,987,455, or 19.0%, over the other borrowed funds of $110,281,373 for the three months ended September 30, 2018. This increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase partially offset by a decrease in federal funds purchased and FHLB advances for the three months ended September 30, 2019, when compared to the three months ended September 30, 2018.

Interest bearing deposits averaged $639,908,371 for the nine months ended September 30, 2019. This represents an increase of $39,044,591, or 6.5%, from the average of interest-bearing deposits of $600,863,780 for the nine months ended September 30, 2018. This was due to an increase in interest-bearing NOW and money market accounts, savings and certificates of deposit.

Other borrowed funds averaged $117,403,793 for the nine months ended September 30, 2019. This represents a decrease of $4,070,648, or 3.6%, over the other borrowed funds of $113,333,145 for the nine months ended September 30, 2018. This increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase partially offset by a decrease in federal funds purchased and FHLB advances for the nine months ended September 30, 2019, when compared to the nine months ended September 30, 2018.

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Net interest income was $5,918,289 for the three months ended September 30, 2019, a decrease of $801,006 from $6,719,295 for the three months ended September 30, 2018, primarily due to an increase in the rates paid on deposits from the same period in 2018. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the three months ended September 30, 2019, the yields on earning assets decreased and the rates paid on deposits increased from the same period in 2018. The yield on all interest-bearing assets decreased 1 basis point to 3.57% in the three months ended September 30, 2019 from 3.58% for the same period in 2018. At the same time, the rate paid on all interest-bearing liabilities for the three months ended September 30, 2019 increased 59 basis points to 1.25% from 0.66% in the same period in 2018. As longer term interest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both decrease.

Net interest income was $18,333,967 for the nine months ended September 30, 2019, a decrease of $2,142,514 from $20,476,481 for the nine months ended September 30, 2018, primarily due to an increase in the rates paid on deposits from the same period in 2018. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the nine months ended September 30, 2019, the yields on earning assets increased and the rates paid on deposits increased from the same period in 2018. The yield on all interest-bearing assets increased 11 basis points to 3.61% in the nine months ended September 30, 2019 from 3.50% for the same period in 2018. At the same time, the rate paid on all interest-bearing liabilities for the nine months ended September 30, 2019 increased 74 basis points to 1.26% from 0.52% in the same period in 2018. As longer term interest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both decrease.

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

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2019			2018			2019			2018
Interest and Fees	$	5,940,805		$	5,166,554		$	17,220,751		$	14,867,465
Average Gross Loans		468,309,743			422,551,745			453,528,704			413,851,534
Annualized Yield		5.07	%		4.89	%		5.06	%		4.79	%

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.

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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			Year Ended			Amount of		Percent of
	September 30,			December 31,			Increase		Increase
	2019			2018			(Decrease)		(Decrease)
BALANCES:
Gross Loans	$	473,509,900		$	429,322,113		$	44,187,787		10.29	%
Allowance for Loan Losses		3,805,579			3,371,695			433,884		12.87	%
Nonaccrual Loans		12,358,742			9,838,870			2,519,872		25.61	%
Ratios:
Allowance for loan losses to gross loans		0.80	%		0.79	%
Net loans charged off (recovered) to allowance for loan losses		1.00	%		-0.55	%

The provision for loan losses for the three months ended September 30, 2019 was $11,738, a decrease of $276,838 from the provision for loan losses of $288,576 for the same period in 2018. The provision for loan losses for the nine months ended September 30, 2019 was $472,036, an increase of $331,271 from the provision for loan losses of $140,765 for the same period in 2018. The change in the Corporation’s loan loss provisions for the three and nine months ended

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September 30, 2019 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 September 30, 2019, net loan losses charged to the allowance for loan losses totaled $27,632, a decrease of $116,383 from the $144,015 charged off in the same period in 2018. The decrease was primarily due to several significant charge-offs during the third quarter of 2018.

For the nine months ended September 30, 2019, net loan losses charged to the allowance for loan losses totaled $38,152, an increase of $51,102 from the $12,950 recovered in the same period in 2018. The increase was primarily due to a significant recovery during the second 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 nine months ended September 30, 2019 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 September 30, 2019 was $2,505,900, an increase of $285,326, or 12.9%, from $2,220,574 in the same period in 2018. Service charges on deposit accounts were $1,125,631 in the three months ended September 30, 2019, compared to $1,170,956 for the same period in 2018. Other service charges and fees increased by $101,472, or 13.3%, to $863,407 in the three months ended September 30, 2019, compared to $761,935 for the same period in 2018. Other operating income not derived from service charges or fees increased $229,179, or 79.7% to $516,862 in the three months ended September 30, 2019, compared to $287,683 for the same period in 2018. This increase was due mainly to an increase in gains from security sales due to strategic investment decisions and an increase in other income partially offset by a decrease in mortgage loan origination income from long-term mortgage loans originated for sale in the secondary market.

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 nine months ended September 30, 2019 was $6,624,989, an increase of $225,575, or 3.5%, from $6,399,414 in the same period in 2018. Service charges on deposit accounts were $3,268,578 in the nine months ended September 30, 2019, compared to $3,381,809 for the same period in

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2018. Other service charges and fees increased by $169,263, or 7.9%, to $2,316,715 in the nine months ended September 30, 2019, compared to $2,147,452 for the same period in 2018. Other operating income not derived from service charges or fees increased $169,543, or 19.5% to $1,039,696 in the nine months ended September 30, 2019, compared to $870,153 for the same period in 2018. This increase was due mainly to an increase in gains from security sales due to strategic investment decisions and other income partially offset by a decrease in mortgage loan origination income from long-term mortgage loans originated for sale in the secondary market.

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

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
Other operating income	2019		2018		2019		2018
BOLI Income	$	120,000	$	124,666	$	366,000	$	375,101
Mortgage Loan Origination Income		72,640		101,077		179,239		273,367
Income from security sales, net		244,457		—		190,308		11,047
Other Income		79,765		61,940		304,149		210,638
Total Other Income	$	516,862	$	287,683	$	1,039,696	$	870,153

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregatenon-interest expenses for the three months ended September 30, 2019 and 2018 were $6,867,638 and $6,894,024, respectively, a decrease of $26,386 or 0.4%. Salaries and benefits decreased to $3,508,723 for the three months ended September 30, 2019, from $3,668,012 for the same period in 2018. Occupancy expense decreased by $198,912, or 13.4%, to $1,287,320 for the three months ended September 30, 2019, compared to $1,486,232 for the same period of 2018. Other operating expenses increased by $331,815, or 19.1%, to $2,071,585 for the three months ended September 30, 2019, compared to $1,739,780 for the same period of 2018. This increase was mainly due to an increase inone-time legal and consulting fees of approximately $175 thousand related to the acquisition of Charter.

Aggregatenon-interest expenses for the nine months ended September 30, 2019 and 2018 were $19,829,904 and $20,889,594, respectively, a decrease of $1,059,690 or 5.1%. Salaries and benefits decreased to $10,525,116 for the nine months ended September 30, 2019, from $11,011,291 for the same period in 2018. Occupancy expense decreased by $253,624, or 5.8%, to $4,119,609 for the nine months ended September 30, 2019, compared to $4,373,233 for the same period of 2018. Other operating expenses decreased by $319,891, or 5.8%, to $5,185,179 for the nine months ended September 30, 2019, compared to $5,505,070 for the same period of 2018. This decrease was mainly due to overall cost containment of the Company coupled with aone-time refund of prepaid postage partially offset byone-time legal and consulting fees related to the acquisition of Charter of approximately $323 thousand.

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

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
Other Operating Expense	2019		2018		2019			2018
Advertising	$	127,647	$	108,140	$	430,943		$	434,657
Office Supplies		265,073		245,248		718,447			736,630
Professional Fees		442,413		181,036		1,114,122			425,905
Telephone expense		118,971		124,490		352,747			401,496
Postage and Freight		121,307		136,285		(176,857	)		425,353
Loan Collection Expense		186,612		5,819		196,286			22,641
Regulatory and related expense		90,434		84,084		259,311			277,437
Debit Card/ATM expense		172,166		121,434		408,809			343,817
Travel and Convention		78,705		54,745		179,214			166,759
Other expenses		468,267		678,499		1,702,157			2,270,375
Total Other Expense	$	2,071,595	$	1,739,780	$	5,185,179		$	5,505,070

The Corporation’s efficiency ratio for the three months ended September 30, 2019 was 75.19%, compared to 75.25% for the same period in 2018. For the nine months ended September 30, 2019, the Corporation’s efficiency ratio was 78.03%, compared to 75.79% 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

					Amount of			Percent of
	September 30,		December 31,		Increase			Increase
	2019		2018		(Decrease)			(Decrease)
Cash and Due From Banks	$	21,106,679	$	12,592,130	$	8,514,549			67.62	%
Interest Bearing deposits with Other Banks		61,234,815		8,079,742		53,155,073			657.88	%
Investment Securities		434,145,569		444,746,454		(10,600,885	)		-2.38	%
Loans, net		469,692,103		425,905,093		43,787,010			10.28	%
Premises and Equipment		20,029,997		19,717,305		312,692			1.59	%
Total Assets		1,049,603,645		958,630,077		90,973,568			9.49	%
Total Deposits		794,314,007		756,221,510		38,092,497			5.04	%
Total Shareholders’ Equity		98,999,065		83,866,317		15,132,748			18.04	%

CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at September 30, 2019 was $21,106,679, which was an increase of $8,514,549 from the balance of $12,592,130 at December 31, 2018. The increase was due to an increase in the balances at correspondent banks due to an increase in the amount of checks drawn on other banks in the normal process of clearing funds between these banks.

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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 September 30, 2019 decreased by $10,600,885, or 2.4%, to $434,145,569 from $444,746,454 at December 31, 2018. This decrease was due to sales, maturities, paydowns and calls in excess of purchases and increases in the market value of the Corporation’s investment securities portfolio.

LOANS

The Corporation’s loan balance increased by $43,787,010, or 10.3%, during the nine months ended September 30, 2019, to $469,692,103 from $425,905,093 at December 31, 2018. Loan demand, especially in land development and construction, commercial and industrial, and commercial real estate categories, strengthened during the nine months ended September 30, 2019 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 nine months ended September 30, 2019, the Corporation’s premises and equipment increased by $312,692, or 1.6%, to $20,029,997 from $19,717,305 at December 31, 2018. The increase was due to the purchase of a piece of property for expansion partially offset by depreciation expense.

DEPOSITS

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

					Amount of			Percent of
	September 30,		December 31,		Increase			Increase
	2019		2018		(Decrease)			(Decrease)
Noninterest-Bearing Deposits	$	168,317,216	$	170,029,729	$	(1,712,513	)		-1.01	%
Interest-Bearing Deposits		326,982,928		298,220,430		28,762,498			9.64	%
Savings Deposits		78,474,191		76,735,710		1,738,481			2.27	%
Certificates of Deposit		220,539,672		211,235,641		9,304,031			4.40	%
Total deposits	$	794,314,007	$	756,221,510	$	38,092,497			5.04	%

Interest-bearing, savings and certificates of deposits increased during the nine months ended September 30, 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.

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OFF-BALANCE SHEET ARRANGEMENTS

Please refer to Note 2 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Corporation’soff-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

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

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

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

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

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The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of September 30, 2019 and December 31, 2018:

	September 30, 2019						December 31, 2018
	Following			Months			Following			Months
	12 months			13-24			12 months			13-24
+400 basis points		11.7	%		23.2	%		-3.6	%		6.2	%
+300 basis points		10.8	%		19.4	%		-1.8	%		5.7	%
+200 basis points		9.3	%		14.8	%		-0.4	%		4.9	%
+100 basis points		4.9	%		7.6	%		0.5	%		3.2	%
Flat rates		—			—			—			—
-100 basis points		-8.5	%		-7.7	%		-1.7	%		-1.1	%
-200 basis points		-14.0	%		-15.3	%		-11.5	%		-9.5	%

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

	Economic Value of Equity at Risk (%)
	September 30, 2019			December 31, 2018
+400 basis points		15.1	%		-5.3	%
+300 basis points		15.1	%		-3.0	%
+200 basis points		13.4	%		-1.2	%
+100 basis points		8.3	%		-0.1	%
Flat rates		—			—
-100 basis points		-21.3	%		-9.4	%
-200 basis points		-47.1	%		-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.

As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest bearingnon-maturity deposit accounts, whose cost is less sensitive to changes in interest rates.

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ITEM 4. CONTROLS AND PROCEDURES.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of September 30, 2019 (the end of the period covered by this Quarterly Report).

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

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PART II. OTHER INFORMATION

ITEM 1. 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, 2018, which the Corporation filed with the Securities and Exchange Commission on March 15, 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, 2018, the Corporation’s quarterly reports on Form10-Q and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Corporation’s 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, 2018.

ITEM 6. EXHIBITS.

Exhibits
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.

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SIGNATURES

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

CITIZENS HOLDING COMPANY
BY:	/s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer
(Principal Executive Officer)
BY:	/s/ Robert T. Smith
Robert T. Smith
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
DATE: November 8, 2019

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