10-Q
1
d596003d10q.htm
FORM 10-Q
Form 10-Q
Table of Contents
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 June 30, 2018
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
(Registrants telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of large accelerated filer, accelerated filer, smaller reporting company
and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting Company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). ☐Yes ☒ No
Number of shares outstanding of each of the
issuers classes of common stock, as of August 6, 2018:
Title
Outstanding
Common Stock, $0.20 par value
4,904,530
Table of Contents
CITIZENS HOLDING COMPANY
T ABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
1
Item 1.
Consolidated Financial Statements.
1
Consolidated Statements of Financial Condition, as of June 30, 2018 (Unaudited) and December 31, 2017 (Audited)
1
Consolidated Statements of Income for the Three and six months ended June 30, 2018 (Unaudited) and 2017 (Unaudited)
2
Consolidated Statements of Comprehensive (Loss) Income for the Three and six months ended June 30, 2018 (Unaudited) and 2017 (Unaudited)
3
Consolidated Statements of Cash Flows for the Six months ended June 30, 2018 (Unaudited) and 2017 (Unaudited)
4
Notes to Consolidated Financial Statements
5
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
44
Item 4.
Controls and Procedures.
47
PART II.
OTHER INFORMATION
48
Item 1.
Legal Proceedings.
48
Item 1A.
Risk Factors.
48
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.
49
*
None or Not Applicable.
SIGNATURES
50
Table of Contents
PART I. FINANCIAL INFORMATION
I TEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30
2018
December 31,
2017
(Unaudited)
(Audited)
ASSETS
Cash and due from banks
$
12,641,231
$
17,962,990
Interest bearing deposits with other banks
1,293,179
1,532,420
Investment securities available for sale, at fair value
463,752,185
505,046,377
Loans, net of allowance for loan losses of $3,027,950 in 2018 and $3,019,228 in 2017
417,589,558
402,390,574
Premises and equipment, net
19,894,685
20,571,551
Other real estate owned, net
3,312,484
3,980,127
Accrued interest receivable
4,297,013
4,450,723
Cash surrender value of life insurance
24,977,849
24,612,779
Deferred tax assets, net
7,518,048
5,362,750
Other assets
7,793,327
7,185,537
TOTAL ASSETS
$
963,069,559
$
993,095,828
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand
$
160,581,057
$
159,291,356
Interest-bearing NOW and money market accounts
333,739,645
306,047,053
Savings deposits
79,274,222
77,784,876
Certificates of deposit
191,016,056
177,562,214
Total deposits
764,610,980
720,685,499
Securities sold under agreement to repurchase
74,124,947
142,497,938
Federal Funds Purchased
12,500,000
1,500,000
Federal Home Loan Bank advances
20,000,000
30,000,000
Accrued interest payable
194,431
198,183
Deferred compensation payable
8,820,103
8,620,890
Other liabilities
1,137,728
1,142,278
Total liabilities
881,388,189
904,644,788
SHAREHOLDERS EQUITY
Common stock; $0.20 par value, 22,500,000 shares authorized, 4,904,530 shares issued and
outstanding at June 30, 2018 and 4,894,705 shares issued and outstanding at December 31, 2017
980,906
978,941
Additional paid-in capital
4,215,811
4,103,139
Retained earnings
92,703,089
91,594,379
Accumulated other comprehensive loss, net of tax benefit of $5,391,738 in 2018 and $2,734,500 in
2017
(16,218,436
)
(8,225,419
)
Total shareholders equity
81,681,370
88,451,040
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
$
963,069,559
$
993,095,828
The accompanying notes are an integral part of these financial statements.
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CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
2018
2017
2018
2017
INTEREST INCOME
Loans, including fees
$
4,984,492
$
4,863,971
$
9,700,911
$
9,432,050
Investment securities
2,734,424
2,919,236
5,557,112
5,751,687
Other interest
60,060
59,086
120,344
127,633
Total interest income
7,778,976
7,842,293
15,378,367
15,311,370
INTEREST EXPENSE
Deposits
515,506
486,003
1,016,715
963,645
Other borrowed funds
311,034
343,814
604,466
673,619
Total interest expense
826,540
829,817
1,621,181
1,637,264
NET INTEREST INCOME
6,952,436
7,012,476
13,757,186
13,674,106
PROVISION FOR (REVERSAL OF) LOAN LOSSES
88,962
(29,586
)
(147,811
)
(180,806
)
NET INTEREST INCOME AFTER PROVISION FOR (REVERSAL OF) LOAN LOSSES
6,863,474
7,042,062
13,904,997
13,854,912
OTHER INCOME
Service charges on deposit accounts
1,067,260
1,019,372
2,210,853
2,061,403
Other service charges and fees
717,053
673,471
1,385,517
1,290,243
Other operating income
294,097
430,349
582,470
705,806
Total other income
2,078,410
2,123,192
4,178,840
4,057,452
OTHER EXPENSES
Salaries and employee benefits
3,675,422
3,745,433
7,343,279
7,409,237
Occupancy expense
1,361,622
1,338,630
2,887,001
2,648,873
Other operating expense
1,910,845
1,826,548
3,765,290
3,961,657
Total other expenses
6,947,889
6,910,611
13,995,570
14,019,767
INCOME BEFORE PROVISION FOR INCOME TAXES
1,993,995
2,254,643
4,088,267
3,892,597
PROVISION FOR INCOME TAXES
305,855
471,190
627,740
671,819
NET INCOME
$
1,688,140
$
1,783,453
$
3,460,527
$
3,220,778
NET INCOME PER SHARE -Basic
$
0.35
$
0.37
$
0.71
$
0.66
-Diluted
$
0.35
$
0.36
$
0.71
$
0.66
DIVIDENDS PAID PER SHARE
$
0.24
$
0.24
$
0.48
$
0.48
The accompanying notes are an integral part of these financial statements.
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CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
2018
2017
2018
2017
Net income
$
1,688,140
$
1,783,453
$
3,460,527
$
3,220,778
Other comprehensive income (loss)
Securities
available-for-sale
Unrealized holding (losses) gains
(1,245,076
)
6,111,996
(10,661,302
)
10,516,085
Income tax effect
310,646
(2,279,774
)
2,659,994
(3,922,499
)
(934,430
)
3,832,222
(8,001,308
)
6,593,586
Rclassification adjustment for gains included in net income
3,026
89,096
11,047
89,096
Income tax effect
(755
)
(33,233
)
(2,756
)
(33,233
)
2,271
55,863
8,291
55,863
Total other comprehensive (loss) income
(932,159
)
3,888,085
(7,993,017
)
6,649,449
Comprehensive income (loss)
$
755,981
$
5,671,538
$
(4,532,490
)
$
9,870,227
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 Six Months
Ended June 30,
2018
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities
$
5,402,261
$
4,972,412
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale
21,903,064
21,382,709
Proceeds from sale of investment securities
17,609,891
24,502,095
Purchases of investment securities available for sale
(10,550,000
)
(70,927,550
)
Purchases of bank premises and equipment
(48,702
)
(2,139,487
)
Sales of bank premises and equipment
264,000
Decrease in interest bearing deposits with other banks
239,241
39,794,411
Purchase of Federal Home Loan Bank stock
(498,700
)
Proceeds from sale of other real estate
782,095
127,722
Net (increase) decrease in loans
(15,151,283
)
677,105
Net cash provided by investing activities
15,048,306
12,918,305
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
43,925,481
19,771,233
Net change in securities sold under agreement to repurchase
(68,372,991
)
(35,025,549
)
Increase in Federal Funds Purchased
11,000,000
Repayment of Federal Home Loan Bank advances
(10,000,000
)
Proceeds from exercise of stock options
27,000
92,625
Payment of dividends
(2,351,816
)
(2,347,598
)
Net cash used in financing activities
(25,772,326
)
(17,509,289
)
Net (decrease) increase in cash and due from banks
(5,321,759
)
381,428
Cash and due from banks, beginning of period
17,962,990
21,688,557
Cash and due from banks, end of period
$
12,641,231
$
22,069,985
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 six months ended June 30, 2018
(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 June 30, 2018 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 Citizens Holding Company, the
Corporation). 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 Corporations Annual Report on Form 10-K for the year ended
December 31, 2017, filed with the Securities and Exchange Commission on March 15, 2018.
Nature of Business
The Bank operates under a state bank charter and provides general banking services. As a state bank, the Bank is subject to regulations of the Mississippi
Department of Banking and Consumer Finance and the Federal Deposit Insurance Company. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central and southern counties of Mississippi and the
surrounding areas. Services are provided at several branch offices.
Estimates
The preparation of 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 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 Companys allowance for loan losses and valuations of foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance or to make adjustments to the valuation based on their judgments
about information available to them at the time of their examination. Due to these factors, it is reasonably possible that the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.
Revenue from Contracts with Customers
The Company
records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Company must identify the
contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies
a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous or future periods.
The Companys primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments
that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is
presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged
either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the
determination of the amount and timing of revenue from contracts with customers.
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a
material impact on the Companys consolidated
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financial statements and related disclosures as the Companys primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial
instruments that are not within the scope of ASU 2014-09. The Companys revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including
but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition
method. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of
adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.
In January 2016,
the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU
2016-01). The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Company on January 1, 2018 and did not have a material impact on the Companys consolidated financial statements and related disclosures as the Company does not hold any
equity securities that are within the scope of ASU 2016-01. ASU 2016-01 also eliminates the disclosure of assumptions used to estimate fair value for financial
instruments measured at amortized cost and requires disclosure of an exit price notion in determining the fair value of certain financial instruments prior to its changing to the exit price upon adoption of this standard in the first quarter of
2018. This ASU did not have any other implications to the Company at the time of adoption.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows, including (1) debt prepayment or debt
extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the
borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including
bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance
principle. The ASU was effective for the Company on January 1, 2018 and only impacts the presentation of specific items within the Statement of Cash Flows and did not have a material impact to the Company.
In January 2017, FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition
of a Business (ASU 2017-01), that changes the definition of a business when evaluating whether transactions should be accounted for as the acquisition of assets or the acquisition
of a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the assets acquired are concentrated in a single asset or a group of similar identifiable assets; if so, the
acquired assets or group of similar identifiable assets is not considered a business. In addition, the guidance requires that, to be considered a business, the acquired assets must include an input and a substantive process that together
significantly contribute to the ability to create output. The ASU removes the evaluation of whether a market
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participant could replace any of the missing elements. ASU 2017-01 was effective for the Company on January 1, 2018 and is to the be applied under a
prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations.
In February 2018, FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income
(Topic 220) (ASU 2018-02). The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained
earnings to eliminate the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act. ASU 2018-02 will be effective for interim and annual periods beginning after
December 15, 2018. Early adoption is permitted, including adoption in any interim period, for public companies for reporting periods for which financial statements have not yet been issued. The Company early adopted ASU 2018-02 as of December 31, 2017 and, as a result, reclassified $1,588,198 from accumulated other comprehensive income to retained earnings as of December 31, 2017. The reclassification impacted the
Consolidated Statements of Financial Condition and the Consolidated Statements of Changes in Shareholders Equity as of and for the twelve months ended December 31, 2017.
Newly Issued, But Not Yet Effective Accounting Standards
On September 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). The update will significantly change the way entities recognize impairment on many financial assets by
requiring immediate recognition of estimated credit losses expected to occur over the assets remaining life. The FASB describes this impairment recognition model as the current expected credit loss (CECL) model and believes the
CECL model will result in more timely recognition of credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The scope of FASBs CECL model would include loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. For public business entities, this update becomes effective for
interim and annual periods beginning after December 15, 2019. Management is currently evaluating the impact this ASU will have on the Companys consolidated financial statements and will continue to monitor FASBs progress on this
topic.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 amends the accounting model and disclosure requirements for leases. The current accounting model for leases distinguishes between capital
leases, which are recognized on-balance sheet, and operating leases, which are not. Under the new standard, the lease classifications are defined as finance leases, which are similar to capital leases
under current GAAP, and operating leases. Further, a lessee will recognize a lease liability and a right-of-use asset for all leases with a term greater than
12 months on its balance sheet regardless of the leases classification, which may significantly increase reported assets and liabilities. The accounting model and disclosure requirements for lessors remains substantially unchanged from
current GAAP. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU
2016-02 will have on the Companys financial position and results of operations.
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In March 2017, the FASB issued ASU No. 2017-08, Receivables
- Nonrefundable Fees and Other Costs (Subtopic 310-20) (ASU 2017-08). ASU 2017-08 shortens the amortization
period for certain callable debt securities held at a premium. Specifically, amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount
continues to be amortized to maturity. The amendments in this update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities due to market participants pricing
securities to the call date that produces the worst yield when the coupon is above current market rates, and pricing securities to maturity when the coupon is below market rates in anticipation that the borrower will act in its economic best
interest. Therefore, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. ASU 2017-08 is effective for annual and
interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU 2017-08 will have on the Companys financial position and results of operations.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Subtopic 718):
Scope of Modification Accounting (ASU 2017-09). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based
payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 will be effective for interim and annual periods beginning after December 15, 2018. The Company is
evaluating the effect that ASU 2017-09 will have on its financial position, results of operations and its financial statement disclosures.
Note 2. 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 June 30, 2018, the Corporation had
entered into loan commitments with certain customers with an aggregate unused balance of $59,126,558 compared to an aggregate unused balance of $46,405,869 at December 31, 2017. There were $2,549,810 of letters of credit outstanding at
June 30, 2018 and $2,842,010 at December 31, 2017. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The
balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments and into its asset and
liability management program.
The Corporation is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are
being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provisions are made for anticipated losses whenever management believes that such losses are probable and can be
reasonably estimated. At the present time, management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not likely have a material impact on the Corporations consolidated financial
condition or results of operations.
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Note 3. 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
Ended June 30,
For the Six Months
Ended June 30,
2018
2017
2018
2017
Basic weighted average shares outstanding
4,889,772
4,878,986
4,886,258
4,874,565
Dilutive effect of granted options
5,020
11,064
7,729
18,777
Diluted weighted average shares outstanding
4,894,792
4,890,050
4,893,987
4,893,342
Net income
$
1,688,140
$
1,783,453
$
3,460,527
$
3,220,778
Net income per share-basic
$
0.35
$
0.37
$
0.71
$
0.66
Net income per share-diluted
$
0.35
$
0.36
$
0.71
$
0.66
Note 4. Equity Compensation Plans
The Corporation has adopted the 2013 Incentive Compensation Plan (the 2013 Plan), which the Corporation intends to use for all future equity grants
to employees, directors or consultants until the termination or expiration of the 2013 Plan.
Prior to the adoption of the 2013 Plan, the Corporation
utilized two stock-based compensation plans, the 1999 Directors Stock Compensation Plan (the Directors Plan) for directors, and the 1999 Employees Long-Term Incentive Plan (the Employees Plan) for
employees, both of which have expired.
The following table is a summary of the stock option activity for the six months ended June 30, 2018.
Directors Plan
2013 Plan
Number
of
Shares
Weighted
Average
Exercise
Price
Number
of
Shares
Weighted
Average
Exercise
Price
Outstanding at December 31, 2017
63,000
$
20.96
$
Granted
Exercised
(6,000
)
18.00
Expired
(4,500
)
18.00
Outstanding at June 30, 2018
52,500
$
21.55
$
10
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The intrinsic value of options outstanding under the Directors Plan at June 30, 2018, was
$141,570. No options were outstanding under the 2013 Plan or the Employees Plan as of June 30, 2018.
During the quarter ended June 30,
2018, the Corporations directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 25, 2019 during
which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $165,375 and will be recognized over the one-year vesting period at a cost of
$13,781 per month less deferred taxes of $3,438 per month.
Note 5. Income Taxes
The Tax Cuts and Jobs Act (the Tax Act), enacted on December 22, 2017, among other things, permanently lowered the statutory federal corporate
tax rate from 34% to 21%, effective for tax years including or beginning January 1, 2018. Under the guidance of ASC 740, Income Taxes (ASC 740), the Company revalued its net deferred tax assets on the date of
enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new legislation, the Companys revaluation of its net deferred tax assets was $2,558,859, which was included in
Provision for Income Taxes in the Consolidated Statements of Income at December 31, 2017. Although in the normal course of business the Company is required to make estimates and assumptions for certain tax items which cannot be
fully determined at period end, the Company did not identify items for which the income tax effects of the Tax Act had not been completed as of December 31, 2017 and, therefore, considered its accounting for the tax effects of the Tax Act on
its net deferred tax asset to have been completed as of December 31, 2017.
The effective tax rate for the three and six months ended June 30,
2018 and 2017 differ from the statutory federal income tax rates of 21% and 34%, respectively, due primarily to state income taxes offset by tax exempt interest income.
11
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Note 6. Securities
The amortized cost and estimated fair value of securities available-for-sale
and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
June 30, 2018
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Securities
available-for-sale
Obligations of U.S. Government agencies
$
99,566,635
$
$
4,269,911
$
95,296,724
Mortgage backed securities
278,584,218
6,438
12,561,575
266,029,081
State, County, Municipals
107,211,506
78,334
4,863,460
102,426,380
Total
$
485,362,359
$
84,772
$
21,694,946
$
463,752,185
December 31, 2017
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Securities
available-for-sale
Obligations of U.S. Government agencies
$
180,647,580
$
$
4,199,022
$
176,448,558
Mortgage backed securities
213,707,125
43,197
5,327,265
208,423,057
State, County, Municipals
118,786,297
849,364
2,535,126
117,100,535
Other investments
2,865,294
208,933
3,074,227
Total
$
516,006,296
$
1,101,494
$
12,061,413
$
505,046,377
During the 2 nd quarter of 2018, management reclassified Small
Business Administration Pools (SBAP) that are backed by mortgages from the Obligation of U.S. Government agencies portfolio to the Mortgage backed securities portfolio. This resulted in a reclassification of $76,518,180 in securities and
did not have an impact on shareholders equity or net income.
The amortized cost and estimated fair value of securities by contractual maturity at
June 30, 2018 and December 31, 2017 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.
June 30, 2018
December 31, 2017
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Available-for-sale
Due in one year or less
$
1,817,972
$
1,820,005
$
3,398,727
$
3,421,576
Due after one year through five years
97,858,493
94,124,451
75,887,288
74,589,829
Due after five years through ten years
31,088,580
29,855,611
55,691,854
54,740,055
Due after ten years
354,597,314
337,952,118
381,028,427
372,294,917
Total
$
485,362,359
$
463,752,185
$
516,006,296
$
505,046,377
The tables below show the Corporations gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2018 and December 31, 2017.
12
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A summary of unrealized loss information for securities available-for-sale, categorized by security type follows (in thousands):
June 30, 2018
Less than 12 months
12 months or more
Total
Description of Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Obligations of U.S. government agencies
$
15,119,779
$
647,021
$
80,176,945
$
3,622,890
$
95,296,724
$
4,269,911
Mortgage backed securities
93,958,426
3,434,432
171,878,931
9,127,143
265,837,357
12,561,575
State, County, Municipal
25,411,940
806,404
64,746,595
4,057,056
90,158,535
4,863,460
Total
$
134,490,145
$
4,887,857
$
316,802,471
$
16,807,089
$
451,292,616
$
21,694,946
December 31, 2017
Less than 12 months
12 months or more
Total
Description of Securities
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Obligations of U.S. government agencies
$
15,681,866
$
223,534
$
160,766,691
$
3,975,488
$
176,448,557
$
4,199,022
Mortgage backed securities
88,499,852
1,613,091
116,753,236
3,714,175
205,253,088
5,327,266
State, County, Municipal
7,117,600
59,041
66,973,174
2,476,084
74,090,774
2,535,125
Total
$
111,299,318
$
1,895,666
$
344,493,101
$
10,165,747
$
455,792,419
$
12,061,413
The Corporations 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, mainly in the mid-term sector. None of the unrealized losses disclosed in the previous table are related to credit
deterioration. The Corporation does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Corporation will be required to sell any such security prior to the recovery of it
amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as
scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at June 30, 2018 nor at December 31, 2017.
13
Table of Contents
Note 7. Loans
The composition of net loans (in thousands) at June 30, 2018 and December 31, 2017 was as follows:
June 30, 2018
December 31, 2017
Real Estate:
Land Development and Construction
$
37,360
$
25,923
Farmland
15,889
16,905
1-4 Family Mortgages
88,627
95,925
Commercial Real Estate
196,715
191,736
Total Real Estate Loans
338,591
330,489
Business Loans:
Commercial and Industrial Loans
66,382
58,204
Farm Production and Other Farm Loans
999
922
Total Business Loans
67,381
59,126
Consumer Loans:
Credit Cards
1,342
1,310
Other Consumer Loans
13,408
14,680
Total Consumer Loans
14,750
15,990
Total Gross Loans
420,722
405,605
Unearned Income
(105
)
(195
)
Allowance for Loan Losses
(3,028
)
(3,019
)
Loans, net
$
417,589
$
402,391
Loans are considered to be past due if the required principal and interest payments have not been received as of the date such
payments were due. Loans are placed on non-accrual status, when, in managements opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory
provisions. Loans may be placed on non-accrual 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.
14
Table of Contents
Period-end, non-accrual
loans (in thousands), segregated by class, were as follows:
June 30, 2018
December 31, 2017
Real Estate:
Land Development and Construction
$
420
$
Farmland
272
366
1-4 Family Mortgages
1,927
2,131
Commercial Real Estate
4,279
4,891
Total Real Estate Loans
6,898
7,388
Business Loans:
Commercial and Industrial Loans
83
78
Farm Production and Other Farm Loans
31
32
Total Business Loans
114
110
Consumer Loans:
Other Consumer Loans
71
84
Total Consumer Loans
71
84
Total Nonaccrual Loans
$
7,083
$
7,582
15
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An aging analysis of past due loans (in thousands), segregated by class, as of June 30, 2018, was as
follows:
Loans
30-89 Days
Past Due
Loans
90 or more
Days Past
Due
Total Past
Due
Loans
Current
Loans
Total
Loans
Accruing
Loans
90 or more
Days
Past Due
Real Estate:
Land Development and Construction
$
16
$
420
$
436
$
36,924
$
37,360
$
Farmland
294
32
326
15,563
15,889
1-4 Family Mortgages
1,978
255
2,233
86,394
88,627
Commercial Real Estate
2,635
1,150
3,785
192,930
196,715
Total Real Estate Loans
4,923
1,857
6,780
331,811
338,591
Business Loans:
Commercial and Industrial Loans
154
154
66,228
66,382
Farm Production and Other Farm Loans
999
999
Total Business Loans
154
154
67,227
67,381
Consumer Loans:
Credit Cards
40
10
50
1,292
1,342
10
Other Consumer Loans
311
58
369
13,039
13,408
8
Total Consumer Loans
351
68
419
14,331
14,750
18
Total Loans
$
5,428
$
1,925
$
7,353
$
413,369
$
420,722
$
18
16
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An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2017 was as
follows:
Loans
30-89 Days
Past Due
Loans
90 or more
Days Past
Due
Total
Past
Due
Loans
Current
Loans
Total
Loans
Accruing
Loans
90 or more
Days Past
Due
Real Estate:
Land Development and Construction
$
281
$
$
281
$
25,642
$
25,923
$
Farmland
93
93
16,812
16,905
1-4 Family Mortgages
2,657
2,657
93,268
95,925
Commercial Real Estate
2,585
862
3,447
188,289
191,736
807
Total Real Estate Loans
5,616
862
6,478
324,011
330,489
807
Business Loans:
Commercial and Industrial Loans
32
32
58,172
58,204
Farm Production and Other Farm Loans
19
19
903
922
Total Business Loans
51
51
59,075
59,126
Consumer Loans:
Credit Cards
25
6
31
1,279
1,310
6
Other Consumer Loans
422
422
14,258
14,680
Total Consumer Loans
447
6
453
15,537
15,990
6
Total Loans
$
6,114
$
868
$
6,982
$
398,623
$
405,605
$
813
Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to
collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at all loans over $100,000
that are past due loans, bankruptcy filings and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original agreement terms. If a loan is determined to be impaired and the collateral is deemed to
be insufficient to fully repay the loan, a specific reserve will be established. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is
recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.
17
Table of Contents
Impaired loans (in thousands) as of June 30, 2018, segregated by class, were as follows:
Unpaid
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Real Estate:
Land Development and Construction
$
420
$
$
420
$
420
$
112
$
321
Farmland
272
272
272
262
1-4 Family Mortgages
1,232
1,034
198
1,232
33
1,288
Commercial Real Estate
5,686
1,739
3,947
5,686
384
5,744
Total Real Estate Loans
7,610
3,045
4,565
7,610
529
7,615
Business Loans:
Farm Production and Other Farm Loans
25
Total Business Loans
25
Total Loans
$
7,610
$
3,045
$
4,565
$
7,610
$
529
$
7,640
Impaired loans (in thousands) as of December 31, 2017, segregated by class, were as follows:
Unpaid
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Total
Recorded
Investment
Related
Allowance
Average
Recorded
Investment
Real Estate:
Land Development and Construction
$
222
$
$
222
$
222
$
$
111
Farmland
252
252
252
126
1-4 Family Mortgages
1,344
1,141
203
1,344
46
906
Commercial Real Estate
5,801
1,763
4,038
5,801
397
4,994
Total Real Estate Loans
7,619
3,156
4,463
7,619
443
6,137
Business Loans:
Farm Production and Other Farm Loans
50
50
50
25
Total Business Loans
50
50
50
25
Total Loans
$
7,669
$
3,206
$
4,463
$
7,669
$
443
$
6,162
18
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The following table presents troubled debt restructurings (in thousands, except for number of loans),
segregated by class:
June 30, 2018
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Commercial real estate
3
$
4,871
$
2,998
Total
3
$
4,871
$
2,998
December 31, 2017
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Commercial real estate
3
$
4,871
$
3,047
Total
3
$
4,871
$
3,047
Changes in the Corporations 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
(49
)
Total at June 30, 2018
3
$
2,998
The allocated allowance for loan losses attributable to restructured loans was $174,274 at June 30, 2018 and
December 31, 2017. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructurings as of June 30, 2018.
19
Table of Contents
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 banks 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.
20
Table of Contents
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 managements most
updated judgment regarding grades at June 30, 2018.
The following table details the amount of gross loans (in thousands), segregated by loan grade
and class, as of June 30, 2018:
Satisfactory
1,2,3,4
Special
Mention
5,6
Substandard
7
Doubtful
8
Loss
9
Total
Loans
Real Estate:
Land Development and Construction
$
35,479
$
881
$
1,000
$
$
$
37,360
Farmland
14,488
367
1,034
15,889
1-4 Family Mortgages
78,362
2,482
7,783
88,627
Commercial Real Estate
157,962
28,584
10,169
196,715
Total Real Estate Loans
286,291
32,314
19,986
338,591
Business Loans:
Commercial and Industrial Loans
63,280
995
2,107
66,382
Farm Production and Other Farm Loans
958
5
36
999
Total Business Loans
64,238
1,000
2,143
67,381
Consumer Loans:
Credit Cards
1,332
10
1,342
Other Consumer Loans
13,167
84
99
58
13,408
Total Consumer Loans
14,499
84
109
58
14,750
Total Loans
$
365,028
$
33,398
$
22,238
$
58
$
$
420,722
21
Table of Contents
The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as
of December 31, 2017:
Satisfactory
1,2,3,4
Special
Mention
5,6
Substandard
7
Doubtful
8
Loss
9
Total
Loans
Real Estate:
Land Development and Construction
$
23,720
$
2,116
$
87
$
$
$
25,923
Farmland
15,496
377
1,032
16,905
1-4 Family Mortgages
82,227
5,615
8,083
95,925
Commercial Real Estate
143,271
41,833
6,632
191,736
Total Real Estate Loans
264,714
49,941
15,834
330,489
Business Loans:
Commercial and Industrial Loans
55,081
2,990
133
58,204
Farm Production and Other Farm Loans
853
9
60
922
Total Business Loans
55,934
2,999
193
59,126
Consumer Loans:
Credit Cards
1,304
6
1,310
Other Consumer Loans
14,414
71
137
58
14,680
Total Consumer Loans
15,718
71
143
58
15,990
Total Loans
$
336,366
$
53,011
$
16,170
$
58
$
$
405,605
The allowance for loan losses is established through a provision for loan losses charged to expense, which represents
managements 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.
22
Table of Contents
The following table details activity in the allowance for loan losses by portfolio segment for the six
months ended June 30, 2018:
June 30, 2018
Real
Estate
Business
Loans
Consumer
Total
Beginning Balance, January 1, 2018
$
2,151,715
$
346,781
$
520,732
$
3,019,228
Provision for (reversal of) loan losses
481,714
(410,727
)
(218,798
)
(147,811
)
Chargeoffs
98,644
15,347
59,355
173,346
Recoveries
82,114
197,321
50,444
329,879
Net chargeoffs (recoveries)
16,530
(181,974
)
8,911
(156,533
)
Ending Balance
$
2,616,899
$
118,028
$
293,023
$
3,027,950
Period end allowance allocated to:
Loans individually evaluated for impairment
$
528,937
$
$
$
528,937
Loans collectively evaluated for impairment
2,087,962
118,028
293,023
2,499,013
Ending Balance, June 30, 2018
$
2,616,899
$
118,028
$
293,023
$
3,027,950
The following table details activity in the allowance for loan losses by portfolio segment for the six months ended
June 30, 2017:
June 30, 2017
Real
Estate
Business
Loans
Consumer
Total
Beginning Balance, January 1, 2017
$
3,117,134
$
257,554
$
528,108
$
3,902,796
(Reversal of) provision for loan losses
(271,448
)
153,428
(62,786
)
(180,806
)
Chargeoffs
117,157
128,207
21,536
266,900
Recoveries
19,397
273
31,246
50,916
Net chargeoffs (recoveries)
97,760
127,934
(9,710
)
215,984
Ending Balance
$
2,747,926
$
283,048
$
475,032
$
3,506,006
Period end allowance allocated to:
Loans individually evaluated for impairment
$
547,621
$
$
$
547,621
Loans collectively evaluated for impairment
2,200,305
283,048
475,032
2,958,385
Ending Balance, June 30, 2017
$
2,747,926
$
283,048
$
475,032
$
3,506,006
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The Corporations recorded investment in loans as of June 30, 2018 and December 31, 2017
related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporations impairment methodology was as follows (in thousands):
June 30, 2018
Real
Estate
Business
Loans
Consumer
Total
Loans individually evaluated for specific impairment
$
7,610
$
$
$
7,610
Loans collectively evaluated for general impairment
330,981
67,381
14,750
413,112
$
338,591
$
67,381
$
14,750
$
420,722
December 31, 2017
Real
Estate
Business
Loans
Consumer
Total
Loans individually evaluated for specific impairment
$
4,396
$
$
$
4,396
Loans collectively evaluated for general impairment
326,093
59,126
15,990
401,209
$
330,489
$
59,126
$
15,990
$
405,605
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Note 8. Fair Value of Financial Instruments
The fair value topic of the ASC establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic
clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair
value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:
Level 1
Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2
Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets
or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or
Level 3
Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
The following table presents assets and liabilities that were measured at fair value on a recurring basis as
of June 30, 2018:
Fair Value Measurements
Using:
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Securities available for sale
Obligations of U.S.
Government Agencies
$
$
95,296,724
$
$
95,296,724
Mortgage-backed securities
266,029,081
266,029,081
State, county and municipal obligations
102,426,380
102,426,380
Total
$
$
463,752,185
$
$
463,752,185
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The following table presents assets and liabilities that were measured at fair value on a recurring basis as
of December 31, 2017:
Fair Value Measurements
Using:
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Securities available for sale
Obligations of U.S.
Government Agencies
$
$
176,448,558
$
$
176,448,558
Mortgage-backed securities
208,423,057
208,423,057
State, county and municipal obligations
117,100,535
117,100,535
Other investments
3,074,227
3,074,227
Total
$
$
501,972,150
$
3,074,227
$
505,046,377
The following table reports the activity in assets measured at fair value on a recurring basis using significant unobservable
inputs:
Fair Value Measurements Using:
Significant Unobservable Inputs
(Level 3)
Structured Financial Product
As of
June 30,
2018
2017
Beginning Balance
$
3,074,227
$
2,971,106
Sales
(2,865,294
)
Principal payments received
(5,067
)
Unrealized (loss) gains included in other comprehensive income
(208,933
)
39,303
Ending Balance
$
$
3,005,342
The Corporation recorded no gains or losses in earnings for the period ended June 30, 2018 or December 31, 2017 that
were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.
26
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For assets measured at fair value on a nonrecurring basis during 2018 that were still held on the
Corporations balance sheet at June 30, 2018, the following table provides the hierarchy level and the fair value of the related assets:
Fair Value Measurements
Using:
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Impaired loans
$
$
$
305,297
$
305,297
Total
$
$
$
305,297
$
305,297
The following table presents information as of June 30, 2018 about significant unobservable inputs (Level 3) used in the
valuation of assets and liabilities measured at fair value on a nonrecurring basis:
Financial instrument
Fair Value
Valuation Technique
Significant Unobservable
Inputs
Range of
Inputs
Impaired loans
$305,297
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 2017 that were still held on the Corporations balance
sheet at December 31, 2017, the following table provides the hierarchy level and the fair value of the related assets:
Fair Value Measurements
Using:
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Impaired loans
$
$
$
544,502
$
544,502
Other real estate owned
1,307,250
1,307,250
Total
$
$
$
1,851,752
$
1,851,752
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Impaired loans with a carrying value of $7,609,500 and $7,668,908 had an allocated allowance for loan losses
of $528,937 and $442,589 at June 30, 2018 and December 31, 2017, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.
Real estate acquired through foreclosure or deed in lieu, sometimes referred to as other real estate owned (OREO), during the six-month period ended June 30, 2018, and recorded at fair value, less costs to sell, was $100,109. There were no writedowns during the period on properties owned. OREO acquired during 2017 and recorded at fair
value, less costs to sell, was $88,579. There were $413,740 in additional writedowns during 2017 on OREO acquired in previous years.
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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Table of Contents
The following represents the carrying value and estimated fair value of the Corporations financial
instruments at June 30, 2018:
Fair Value Measurements
Using:
June 30, 2018
Carrying
Value
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Total
Fair
Value
(Level 1)
(Level 2)
(Level 3)
Financial assets
Cash and due from banks
$
12,641,231
$
12,641,231
$
$
$
12,641,231
Interest bearing deposits with banks
1,293,179
1,293,179
1,293,179
Securities
available-for-sale
463,752,185
463,752,185
463,752,185
Net loans
417,589,558
413,544,127
413,544,127
Financial liabilities
Deposits
$
764,610,980
$
$
764,674,148
$
$
764,674,148
Federal Funds Purchased
12,500,000
12,500,000
12,500,000
Federal Home Loan Bank advances
20,000,000
20,000,000
20,000,000
Securities Sold under Agreement to Repurchase
74,124,947
74,124,947
74,124,947
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The following represents the carrying value and estimated fair value of the Corporations financial
instruments at December 31, 2017:
Fair Value Measurements
Using:
December 31, 2017
Carrying
Value
Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
Total
Fair
Value
(Level 1)
(Level 2)
(Level 3)
Financial assets
Cash and due from banks
$
17,962,990
$
17,962,990
$
$
$
17,962,990
Interest bearing deposits with banks
1,532,420
1,532,420
1,532,420
Securities
available-for-sale
505,046,377
501,972,150
3,074,227
505,046,377
Net loans
402,390,574
401,706,081
401,706,081
Financial liabilities
Deposits
$
720,685,499
$
543,123,284
$
$
177,698,280
$
720,821,564
Federal Home Loan Bank advances
30,000,000
30,005,541
30,005,541
Securities Sold under Agreement to Repurchase
142,497,938
142,497,938
142,497,938
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ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q (the Quarterly Report) contains
statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which are based on managements beliefs, plans, expectations and assumptions and on information currently available to management. The words may, should, expect, anticipate,
intend, plan, continue, believe, seek, estimate and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report. The Corporation 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 Companys wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the Bank), include,
but are not limited to, the following:
expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve
Board in response to changing economic conditions;
adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan
losses;
the risk of adverse changes in business conditions in the banking industry generally and in the specific markets
in which the Company operates;
extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company
and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, and litigation;
increased competition from other financial institutions and the risk of failure to achieve our business
strategies;
events affecting our business operations, including the effectiveness of our risk management framework, our
reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances;
our ability to maintain sufficient capital and to raise additional capital when needed;
our ability to maintain adequate liquidity to conduct business and meet our obligations;
events that adversely affect our reputation, and the resulting potential adverse impact on our business
operations;
expectations about overall economic strength and the performance of the economy in the Companys market
area;
risks arising from owning our common stock, such as volatility and trading volume, our ability to pay dividends,
the regulatory limitations on stock ownership, and the provisions in our governing documents that may make it more difficult for another party to obtain control of us; and
31
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other risks detailed from
time-to-time in the Companys filings with the Securities and Exchange Commission.
The Corporation does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if
earlier, the date on which such statements were made.
Managements 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 a
one-bank holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of the Bank. The Company does not have any 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 June 30, 2018, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total
assets of $963.070 million and total deposits of $764.611 million.
The principal executive offices of both the Company and the Bank are located
at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Company reflect the Companys
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 June 30, 2018, was 26.50% and at December 31, 2017, was
28.59%. The decrease was due to a decrease in short term marketable assets at June 30, 2018. Management believes it maintains adequate liquidity for the Corporations current needs.
The Corporations primary source of liquidity is customer deposits, which were $764,610,980 at June 30, 2018, and $720,685,499 at December 31,
2017. Other sources of liquidity include investment securities, the Corporations line of credit with the Federal Home Loan Bank (FHLB) and federal funds lines with correspondent banks. The Corporation had $463,752,185
32
Table of Contents
invested in available-for-sale investment securities at June 30, 2018, and $505,046,377 at December 31,
2017. This decrease was due to maturities, sales and calls in excess of purchases and decreases in the market value of the Corporations investment securities portfolio. The Corporation also had $1,293,179 in interest bearing deposits at other
banks at June 30, 2018 and $1,532,420 at December 31, 2017. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at both June 30, 2018 and December 31, 2017. In
addition, the Corporation has the ability to draw on its line of credit with the FHLB. At June 30, 2018, the Corporation had unused and available $136,065,182 of its line of credit with the FHLB and at December 31, 2017, the Corporation
had unused and available $169,925,797 of its line of credit with the FHLB. The decrease in the amount available under the Corporations line of credit with the FHLB from the end of 2017 to June 30, 2018, was the result of a decrease in the
amount of loans eligible for the collateral pool securing the Corporations line of credit with the FHLB coupled with an increase in borrowings. The Corporation had federal funds purchased of $12,500,000 as of June 30, 2018 and $1,500,000
as of December 31, 2017. 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 managements 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
$81,681,370 at June 30, 2018, as compared to $88,451,040 at December 31, 2017. The decrease in shareholders equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities
market value adjustment partially offset by the increase in earnings in excess of dividends paid. The market value adjustment, which was a decrease was due to general market conditions, specifically the increase in medium term interest rates, caused
a decrease in the market price of the Corporations investment portfolio.
The Corporation paid aggregate cash dividends in the amount of $2,351,816,
or $0.48 per share, during the six-month period ended June 30, 2018 compared to $2,347,598, or $0.48 per share, for the same period in 2017.
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 June 30, 2018, 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.
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Table of Contents
Actual
Minimum Capital
Requirement to be
Well
Capitalized
Minimum Capital
Requirement to be
Adequately
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2018
Citizens Holding Company
Tier 1 leverage ratio
$
94,750
9.77
%
$
48,487
5.00
%
$
38,790
4.00
%
Common Equity tier 1 capital ratio
94,750
9.77
%
63,033
6.50
%
43,638
4.50
%
Tier 1 risk-based capital ratio
94,750
17.49
%
43,346
8.00
%
32,509
6.00
%
Total risk-based capital ratio
97,778
18.05
%
54,182
10.00
%
43,346
8.00
%
December 31, 2017
Citizens Holding Company
Tier 1 leverage ratio
$
93,527
9.17
%
$
51,005
5.00
%
$
40,804
4.00
%
Common Equity tier 1 capital ratio
93,527
9.17
%
66,307
6.50
%
45,905
4.50
%
Tier 1 risk-based capital ratio
93,527
17.93
%
41,737
8.00
%
31,303
6.00
%
Total risk-based capital ratio
96,546
18.51
%
52,171
10.00
%
41,737
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 for non-core banks and bank holding companies, such as the Bank and the Company. The capital framework under Basel III will replace the existing regulatory capital
rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.
Beginning January 1, 2015, the Company and the Bank were required to comply with the final Basel III rules, although the rules will not be fully phased-in until January 1, 2019. Among other things, the final Basel III rules will impact regulatory capital ratios of banking organizations in the following manner, when fully phased-in:
Create a new requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not
less than 4.5%;
Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking
organizations);
Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and
Maintain the minimum total risk-based capital ratio at 8%.
In addition, the final Basel III rules, when fully phased-in, will subject a banking organization to certain limitations on capital distributions and
discretionary bonus payments to executive officers if the organization did not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital
conservation buffer, when fully phased-in, will be to increase 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 June 30, 2018, the Company and the
Bank would meet all capital adequacy requirements under Basel III and the banking agencies proposals on a fully phased-in basis, if such requirements were currently effective. The changes to the
calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporations capital ratios as presented. Management will continue to monitor these and any future proposals submitted by the Corporations
and Banks regulators.
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Table of Contents
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Corporation and the related changes
between those periods:
For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
2018
2017
2018
2017
Interest Income, including fees
$
7,778,976
$
7,842,293
$
15,378,367
$
15,311,370
Interest Expense
826,540
829,817
1,621,181
1,637,264
Net Interest Income
6,952,436
7,012,476
13,757,186
13,674,106
Provision for (reversal of) loan losses
88,962
(29,586
)
(147,811
)
(180,806
)
Net Interest Income after
Provision for (reversal of) loan losses
6,863,474
7,042,062
13,904,997
13,854,912
Other Income
2,078,410
2,123,192
4,178,840
4,057,452
Other Expense
6,947,889
6,910,611
13,995,570
14,019,767
Income Before Provision For
Income Taxes
1,993,995
2,254,643
4,088,267
3,892,597
Provision for Income Taxes
305,855
471,190
627,740
671,819
Net Income
$
1,688,140
$
1,783,453
$
3,460,527
$
3,220,778
Net Income Per share - Basic
$
0.35
$
0.37
$
0.71
$
0.66
Net Income Per Share-Diluted
$
0.35
$
0.36
$
0.71
$
0.66
See Note 3 to the Corporations Consolidated Financial Statements for an explanation regarding the Corporations
calculation of Net Income Per Share - basic and - diluted.
Annualized return on average equity (ROE) was 8.06% for the three months ended
June 30, 2018, and 7.92% for the corresponding period in 2017. For the six months ended June 30, 2018, ROE was 8.05% compared to 7.31% for the six months ended June 30, 2017. In both instances, the increase in ROE was caused by the
decrease in equity balances and an increase in net income compared to the same period in 2017.
Book value per share decreased to $16.65 at June 30,
2018, compared to $18.07 at December 31, 2017. The decrease in book value per share reflects earnings in excess of dividends offset by an increase in other comprehensive loss due to the decrease in fair value of the Corporations
investment securities. Average assets for the six months ended June 30, 2018, were $979,713,922 compared to $996,266,145 for the year ended December 31, 2017. This decrease was due mainly to a decrease in available-for-sale securities and interest bearing due from bank accounts partially offset by an increase in loans.
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Table of Contents
NET INTEREST INCOME / NET INTEREST MARGIN
One component of the Corporations earnings is net interest income, which is the difference between the interest and fees earned on loans and investments
and the interest paid for deposits and borrowed funds. The net interest margin is net interest income expressed as a percentage of average earning assets.
The annualized net interest margin was 3.14% for the quarter ended June 30, 2018 compared to 3.08% for the corresponding period of 2017. For the six
months ended June 30, 2018, annualized net interest margin was 3.12% compared to 3.06% for the six months ended June 30, 2017. The increase in net interest margin for the period ended June 30, 2018, when compared to the same period in
2017, was the result of the increase in yields on earning assets in excess of the increase in rates paid on deposits and borrowed funds, as detailed below. Earning assets averaged $890,735,036 for the three months ended June 30, 2018. This
represents a decrease of $49,758,233, or 5.3%, over average earning assets of $940,493,269 for the three months ended June 30, 2017. For the six months ended June 30, 2018, earning assets averaged $915,940,478. This
represents a decrease of $23,836,472 or 2.5%, over average earning assets of $939,776,950 for the six months ended June 30, 2017. The decrease in average earning assets for the three and six months ended June 30, 2018, is the result of a
decrease in investment securities and interest bearing due from bank accounts partially offset by an increase in loans.
Interest bearing deposits
averaged $604,179,409 for the three months ended June 30, 2018. This represents a decrease of $20,668,859, or 3.3%, from the average of interest bearing deposits of $624,847,268 for the three months ended June 30, 2018. This was due, in
large part, to a decrease in interest-bearing NOW accounts and certificates of deposit partially offset by an increase in savings accounts.
Other borrowed funds averaged $109,719,039 for the three months ended June 30, 2018. This represents a decrease of $32,528,586, or 22.9%, over the other
borrowed funds of $142,247,625 for the three months ended June 30, 2017. This decrease in other borrowed funds was due to a decrease in the securities sold under agreements to repurchase partially offset by the increase in federal funds
purchased for the three months ended June 30, 2018, when compared to the three months ended June 30, 2017.
Interest bearing deposits averaged
$602,818,667 for the six months ended June 30, 2018. This represents a decrease of $19,064,521 or 3.1%, from the average of interest bearing deposits of $621,883,188 for the six months ended June 30, 2017. This was due, in large part, to a
decrease in interest-bearing NOW accounts partially offset by an increase in money market and savings accounts.
Other borrowed
funds averaged $114,862,422 for the six months ended June 30, 2018. This represents a decrease of $26,478,553, or 18.7%, over the other borrowed funds of $141,340,975 for the six months ended June 30, 2017. This decrease in other borrowed
funds was due to a decrease in the securities sold under agreements to repurchase partially offset by the increase in federal funds purchased for the three months ended June 30, 2018, when compared to the three months ended June 30, 2017.
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Net interest income was $6,952,436 for the three months ended June 30, 2018, a decrease of $60,040 from
$7,012,476 for the three months ended June 30, 2017, primarily due to a decrease in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As for changes in interest rates in the three
months ended June 30, 2018, the yields on earning assets increased and the rates paid on deposits and borrowed funds increased from the same period in 2017. The yield on all interest-bearing assets increased 7 basis points to 3.50% in the three
months ended June 30, 2018 from 3.43% for the same period in 2017. At the same time, the rate paid on all interest-bearing liabilities for the three months ended June 30, 2018 increased 3 basis points to 0.46% from 0.43% in the same period
in 2017. 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 increase.
Net interest income was $13,757,186 for the six months ended June 30, 2018, a decrease of $83,080 from $13,674,106 for the six months ended June 30,
2017, primarily due to a decrease in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As for changes in interest rates in the six months ended June 30, 2018, the yields on
earning assets increased and the rates paid on deposits and borrowed funds increased from the same period in 2017. The yield on all interest-bearing assets increased 6 basis points to 3.47% in the six months ended June 30, 2018 from 3.41% for
the same period in 2017. At the same time, the rate paid on all interest-bearing liabilities for the six months ended June 30, 2018 increased 2 basis point to 0.45% from 0.43% in the same period in 2017. 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 increase.
The following table shows the interest and fees and corresponding yields for loans only.
For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
2018
2017
2018
2017
Interest and Fees
$
4,984,492
$
4,863,971
$
9,700,911
$
9,432,050
Average Gross Loans
411,823,914
396,361,935
409,429,328
395,312,784
Annualized Yield
4.84
%
4.91
%
4.74
%
4.77
%
CREDIT LOSS EXPERIENCE
As a natural corollary to the Corporations 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.
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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 Corporations management and Board of
Directors.
The Corporation charges off that portion of any loan that the Corporations 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 borrowers financial condition. The general economic conditions in the borrowers industry influence this determination. The principal amount of any loan that is declared a loss is charged against the Corporations allowance for
loan losses.
The Corporations 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 Corporations 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 Corporations 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 Corporations allowance for loan losses for the dates indicated:
Quarter Ended
June 30,
2018
Year Ended
December 31,
2017
Amount of
Increase
(Decrease)
Percent of
Increase
(Decrease)
BALANCES:
Gross Loans
$
420,722,416
$
405,605,542
$
15,116,874
3.73
%
Allowance for Loan Losses
3,027,950
3,019,228
8,722
0.29
%
Nonaccrual Loans
7,083,600
7,582,017
(498,417
)
-6.57
%
Ratios:
Allowance for loan losses to gross loans
0.72
%
0.74
%
Net loans charged off to allowance for loan losses
-5.17
%
11.28
%
The provision for loan losses for the three months ended June 30, 2018 was $88,529, an increase of $118,115 from the
negative $29,586 provision for the same period in 2017. The provision for loan losses for the six months ended June 30, 2018, was a negative $147,811, an increase of
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$32,995 from the negative $180,806 for the same period in 2017. The change in the Corporations loan loss provisions for the three and six months ended June 30, 2018 is a result of
managements 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 Corporations 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 decreased during this period
due to the amount of payments received and loans charged off in excess of new loans being added to nonaccrual status.
For the three months ended
June 30, 2018, net loan losses charged to the allowance for loan losses totaled negative $213,547, a decrease of $379,869 from the $166,322 charged off in the same period in 2017. Primarily due to an unexpected significant recovery on a
previously charged off loan.
For the six months ended June 30, 2018, net loan losses charged to the allowance for loan losses totaled negative
$156,533, a decrease of $372,517 from the $215,984 charged off in the same period in 2017. Primarily due to an unexpected significant recovery on a previously charged off loan.
Management reviews quarterly with the Corporations 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 six months ended June 30, 2018 that have not been charged off. Management also believes that the
Corporations allowance will be adequate to absorb probable losses inherent in the Corporations 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 June 30, 2018 was $2,078,410, a decrease of $44,782, or 2.1%, from
$2,123,192 the same period in 2017. Service charges on deposit accounts were $1,067,260 in the three months ended June 30, 2018, compared to $1,019,372 for the same period in 2017. Other service charges and fees increased by $43,582, or 6.5%,
to $717,053 in the three months ended June 30, 2018, compared to $673,471 for the same period in 2017. Other operating income not derived from service charges or fees decreased $136,252, or 3.2% to $294,097 in the three months ended
June 30, 2018, compared to $430,349 for the same period in 2017. This decrease was due mainly to a decrease in income from security sales and a reduction in other income partially offset by an increase in mortgage loan origination income from
long-term mortgage loans originated for sale to the secondary market and income on bank owned life insurance.
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 six months ended June 30, 2018 was $4,178,840, an increase of $121,388, or 3.0%, from $4,057,452
the same period in 2017. Service charges on deposit accounts were $2,210,853 in the six months
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ended June 30, 2018, compared to $2,061,403 for the same period in 2017. Other service charges and fees increased by $95,274, or 7.4%, to $1,385,517 in the six months ended June 30,
2018, compared to $1,290,243 for the same period in 2017. Other operating income not derived from service charges or fees decreased $123,336, or 17.5% to $582,470 in the six months ended June 30, 2018, compared to $705,806 for the same period
in 2017. This decrease was due mainly to a decrease in income from security sales and a reduction in other income partially offset by an increase in mortgage loan origination income from long-term mortgage loans originated for sale to the secondary
market and income on bank owned life insurance.
The following is a detail of the other major income classifications that were included in other operation
income on the income statement:
Three months
Ended June 30,
Six months
Ended June 30,
2018
2017
2018
2017
Other operating income
BOLI Income
$
124,435
$
120,000
$
250,435
$
240,000
Mortgage Loan Origination Income
99,767
65,140
172,290
162,366
Income from security sales, net
3,026
89,096
11,047
89,096
Other Income
66,869
156,113
148,698
214,344
Total Other Income
$
294,097
$
430,349
$
582,470
$
705,806
OTHER EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate
non-interest expenses for the three months ended June 30, 2018 and 2017 were $6,947,889 and $6,910,611, respectively, an increase of $37,278 or 0.5%. Salaries and benefits increased to $3,675,422 for the
three months ended June 30, 2018, from $3,745,433 for the same period in 2017. Occupancy expense increased by $22,992, or 1.7%, to $1,361,622 for the three months ended June 30, 2018, compared to $1,338,630 for the same period of 2017.
Other operating expenses increased by $84,297, or 4.6%, to $1,910,845 for the three months ended June 30, 2018, compared to $1,826,548 for the same period of 2017. A detail of the major expense classifications is set forth below.
Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate
non-interest expenses for the six months ended June 30, 2018 and 2017 were $13,995,570 and $14,019,767, respectively, a decrease of $24,197 or 0.2%. Salaries and benefits increased to $7,343,279 for the
six months ended June 30, 2018, from $7,409,237 for the same period in 2017. Occupancy expense increased by $238,128, or 9.0%, to $2,887,001 for the six months ended June 30, 2018, compared to $2,648,873 for the same period of 2017. Other
operating expenses decreased by $196,367, or 5.0%, to $3,765,290 for the six months ended June 30, 2018, compared to $3,961,657 for the same period of 2017. A detail of the major expense classifications is set forth below.
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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:
Three months
Ended June 30,
Six months
Ended June 30,
2018
2017
2018
2017
Other Operating Expense
Advertising
$
170,471
$
179,802
$
326,517
$
390,260
Office Supplies
248,306
225,741
491,382
422,287
Legal and Audit Fees
135,512
128,011
244,869
265,080
Telephone expense
152,173
122,698
277,006
275,814
Postage and Freight
152,151
131,857
289,068
262,791
Loan Collection Expense
3,120
1,769
16,822
42,408
Other Losses
66,152
44,556
233,426
201,567
Regulatory and related expense
98,306
94,415
193,353
214,172
Debit Card/ATM expense
113,382
110,327
222,383
203,829
Travel and Convention
62,666
72,304
112,014
143,120
Other expenses
708,606
715,068
1,358,450
1,540,329
Total Other Expense
$
1,910,845
$
1,826,548
$
3,765,290
$
3,961,657
The Corporations efficiency ratio for the three months ended June 30, 2018 was 77.65%, compared to 73.99% for the
same period in 2017. For the six months ended June 30, 2018 and 2017, the Corporations efficiency ratio was 76.07% and 76.68%, respectively. The efficiency ratio is the ratio of non-interest
expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.
BALANCE SHEET ANALYSIS
June 30,
2018
December 31,
2017
Amount of
Increase
(Decrease)
Percent of
Increase
(Decrease)
Cash and Due From Banks
$
12,641,231
$
17,962,990
$
(5,321,759
)
-29.63
%
Interest Bearing deposits with Other Banks
1,293,179
1,532,420
(239,241
)
-15.61
%
Investment Securities
463,752,185
505,046,377
(41,294,192
)
-8.18
%
Loans, net
417,589,558
402,390,574
15,198,984
3.78
%
Premises and Equipment
19,894,685
20,571,551
(676,866
)
-3.29
%
Total Assets
963,069,559
993,095,828
(30,026,269
)
-3.02
%
Total Deposits
764,610,980
720,685,499
43,925,481
6.09
%
Total Shareholders Equity
81,681,370
88,451,040
(6,769,670
)
-7.65
%
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CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist of cash, balances at correspondent banks and items in process of collection, balance at June 30, 2018 was
$12,641,231, which was a decrease of $5,321,759 from the balance of $17,962,990 at December 31, 2017. The decrease was due to a decrease in the balances at correspondent banks due to a decrease in the amount of checks drawn on other banks in
the normal process of clearing funds between these banks.
INVESTMENT SECURITIES
The Corporations investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of
states, counties and municipalities. The Corporations investments securities portfolio at June 30, 2018, decreased by $41,294,192, or 8.2%, to $463,752,185 from $505,046,377 at December 31, 2017. This decrease was due to maturities,
sales and calls in excess of purchases and decreases in the market value of the Corporations investment securities portfolio.
LOANS
The Corporations loan balance increased by $15,198,984, or 3.8%, during the six months ended June 30, 2018, to $417,589,558 from $402,390,574
at December 31, 2017. Loan demand, especially in land development and construction, commercial and industrial, and commercial real estate categories, strengthened during the six months ended June 30, 2018 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 six months
ended June 30, 2018, the Corporations premises and equipment decreased by $676,866, or 3.3%, to $19,894,685 from $20,571,551 at December 31, 2017. The decrease was due to depreciation expense exceeding the amount of property and
equipment added for the period.
DEPOSITS
The following table shows the balance and percentage change in the various deposits:
June 30,
2018
December 31,
2017
Amount of
Increase
(Decrease)
Percent of
Increase
(Decrease)
Noninterest-Bearing Deposits
$
160,581,057
$
159,291,356
$
1,289,701
0.81
%
Interest-Bearing Deposits
333,739,645
306,047,053
27,692,592
9.05
%
Savings Deposits
79,274,222
77,784,876
1,489,346
1.91
%
Certificates of Deposit
191,016,056
177,562,214
13,453,842
7.58
%
Total deposits
$
764,610,980
$
720,685,499
$
43,925,481
6.09
%
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Non-interest-bearing, interest-bearing, savings and certificates of
deposits increased during the six months ended June 30, 2018. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and
liability management objectives. These rate adjustments impact deposit balances.
OFF-BALANCE
SHEET ARRANGEMENTS
Please refer to Note 2 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and
extent of the Corporations off-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.
CONTRACTUAL OBLIGATIONS
There have been no
material changes outside of the ordinary course of the Corporations business to the contractual obligations set forth in Note 12 to the Corporations financial statements contained in the Corporations Annual Report on Form 10-K for the year ended December 31, 2017.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion of operations outlines specific risks that could affect the Corporations ability to compete, change the Corporations risk
profile or eventually impact the Corporations financial condition or results. The risks the Corporation faces generally are similar to those experienced, to varying degrees, by all financial services companies.
The Corporations strategies and its managements ability to react to changing competitive and economic environments have historically enabled the
Corporation to compete effectively and manage risks to acceptable levels. The Corporation has outlined potential risks below that it presently believes could be important; however, other risks may prove to be important in the future. New
risks may emerge at any time and the Corporation cannot predict with certainty all potential developments that could affect the Corporations financial condition or results of operation. The following discussion highlights potential risks,
which could intensify over time or shift dynamically in a way that might change the Corporations risk profile.
Competition Risks
The market in which the Corporation competes is saturated with community banks seeking to provide a service-oriented banking experience to individuals and
businesses compared with what the Corporation believes is the more rigid and less friendly environment found in larger banks. This requires the Corporation to offer most, if not all, of the products and conveniences that are offered by the larger
banks, but with a service differentiation. In doing so, it is imperative that the Corporation identify the lines of business that the Corporation can excel in, prudently utilize the Corporations available capital to acquire the people
and platforms required thereof, and execute on these strategies.
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Credit Risks
Like all lenders, the Corporation faces the risk that the Corporations customers may not repay their loans and that the realizable value of collateral
may be insufficient to avoid a loss of principal. In the Corporations business, some level of credit loss is unavoidable and overall levels of credit loss can vary over time. The Corporations ability to manage credit risk depends
primarily upon the Corporations ability to assess the creditworthiness of customers and the value of collateral, including real estate. The Corporation controls credit risk by diversifying the Corporations loan portfolio and managing its
composition, and by recording and managing an allowance for expected loan losses in accordance with applicable accounting rules. At the end of June 30, 2018, the Corporation had approximately $2.7 million of available reserves to cover
such losses. The models and approaches the Corporation uses to originate and manage loans are regularly reviewed, if necessary or advisable, updated to consider changes in the competitive environment, in real estate prices and other collateral
values, and in the economy, among other things, based on the Corporations experience originating loans and servicing loan portfolios.
Financing,
Funding and Liquidity Risks
One of the most important aspects of managements efforts to sustain long-term profitability for the Corporation is
the management of interest rate risk. Managements goal is to maximize net interest income within acceptable levels of interest-rate risk and liquidity.
The Corporations assets and liabilities are principally financial in nature and the resulting earnings thereon are subject to significant variability
due to the timing and extent to which the Corporation can reprice the yields on interest-earning assets and the costs of interest bearing liabilities as a result of changes in market interest rates. Interest rates in the financial markets affect the
Corporations decisions on pricing its assets and liabilities, which impacts net interest income, an important cash flow stream for the Corporation. As a result, a substantial part of the Corporations risk-management activities are
devoted to managing interest-rate risk. Currently, the Corporation does not have any significant risks related to foreign currency exchange, commodities or equity risk exposures.
Interest Rate and Yield Curve Risks
A significant
portion of the Corporations business involves borrowing and lending money. Accordingly, changes in interest rates directly impact the Corporations revenues and expenses, and potentially could compress the Corporations net interest
margin. The Corporation actively manages its balance sheet to control the risks of a reduction in net interest margin brought about by ordinary fluctuations in rates.
Like all financial services companies, the Corporation faces the risk of abnormalities in the yield curve. The yield curve shows the interest rates applicable
to short and long term debt. The curve is steep when short-term rates are much lower than long-term rates, it is flat when short-term rates are equal, or nearly equal, to long-term rates, and it is inverted when short-term rates exceed long-term
rates. Historically, the yield curve has been positively sloped. A flat or inverted yield curve tends to decrease net interest margin, as funding costs increase relative to the yield on assets. Currently, the yield curve is flat.
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Regulatory and Legal Risks
The Corporation operates in a heavily regulated industry and therefore is subject to many banking, deposit, and consumer lending laws as well as the rules and
regulations promulgated by the FDIC, FRB, Securities and Exchange Commission and the NASDAQ stock market. Failure to comply with applicable regulations could result in financial or operational penalties. In addition, efforts to comply with
applicable regulations may increase the Corporations costs and/or limit the Corporations ability to pursue certain business opportunities. Federal and state regulations significantly limit the types of activities in which the
Corporation, as a financial institution, may engage. In addition, the Corporation is subject to a wide array of other regulations that govern other aspects of how the Corporation conducts business, such as in the areas of employment and intellectual
property. Federal and state legislative and regulatory authorities occasionally consider changing these regulations or adopting new ones. Such actions could limit the amount of interest or fees the Corporation can charge, could restrict the
Corporations ability to collect loans or realize on collateral or could materially affect us in other ways. Additional federal and state consumer protection regulations could also expand the privacy protections afforded to customers of
financial institutions, restricting the Corporations ability to share or receive customer information and increasing the Corporations costs. In addition, changes in accounting rules can significantly affect how the Corporation records
and reports assets, liabilities, revenues, expenses and earnings.
The Corporation also faces litigation risks from customers (individually or in class
actions) and from federal or state regulators. Litigation is an unavoidable part of doing business, and the Corporation manages those risks through internal controls, personnel training, insurance, litigation management, the Corporations
compliance and ethics processes and other means. However, the commencement, outcome and magnitude of litigation cannot be predicted or controlled with any certainty.
Accounting Estimate Risks
The preparation of the
Corporations consolidated financial statements in conformity with GAAP requires management to make significant estimates that affect the financial statements. The Corporations most critical estimate is the level of the allowance for
credit losses. However, other estimates occasionally become highly significant, especially in volatile situations such as litigation and other loss contingency matters. Estimates are made at specific points in time as actual events unfold, estimates
are adjusted accordingly. Due to the inherent nature of these estimates, it is possible that, at some time in the future, the Corporation may significantly increase the allowance for credit losses or sustain credit losses that are significantly
higher than the provided allowance, or the Corporation may make some other adjustment that will differ materially from the estimates that the Corporation previously made.
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Expense Control
Expenses and other costs directly affect the Corporations earnings. The Corporations ability to successfully manage expenses is important to
its long-term profitability. Many factors can influence the amount of the Corporations expenses, as well as how quickly they grow. As the Corporations businesses change or expand, additional expenses can arise from asset purchases,
structural reorganization, evolving business strategies, and changing regulations, among other things. The Corporation manages expense growth and risk through a variety of means, including actual versus budget management, imposition of expense
authorization, and procurement coordination and processes.
ITEM 4.
CONTROLS AND PROCEDURES.
The management of the Corporation, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness
of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms, including ensuring that such information is accumulated and communicated to the Corporations 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 June 30, 2018 (the end of the period covered by this
Quarterly Report).
There were no changes to the Corporations internal control over financial reporting that occurred in the three months ended
June 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Corporations internal control over financial reporting.
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PART II. OTHER INFORMATION
ITE M 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 Corporations consolidated financial condition or results of
operations.
ITEM 1A.
RISK FACTORS.
The Corporations business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which
are disclosed in Item 1A, Risk Factors, in Part I of our Annual Report on Form 10-K for the year ended December 31, 2017, which the Corporation filed with the Securities and Exchange
Commission on March 15, 2018. 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
Managements 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 Corporations Annual Report on Form 10-K for the year ended December 31, 2017, the Corporations quarterly
reports on Form 10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Corporations business, financial condition and results of operations
in the future.
There have been no material changes to the risk factors as disclosed in the Corporations Annual Report on Form 10-K for the Corporations year ended December 31, 2017.
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ITEM 6.
EXHIBITS.
Exhibits
31(a)
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31(b)
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32(a)
Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.
32(b)
Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.
101
Financial Statements submitted in 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: August 9, 2018
50
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.