10-Q
1
d736713d10q.htm
10-Q
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 March 31, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from to
Commission File Number: 001-15375
CITIZENS HOLDING COMPANY
(Exact name of registrant as specified in its charter)
Mississippi
64-0666512
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
521 Main Street, Philadelphia, MS
39350
(Address of principal executive offices)
(Zip Code)
601-656-4692
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange
on Which Registered
Common Stock, $0.20 par value
CIZN
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by
check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such
files). ☒ Yes ☐ No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, 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.
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 May 7, 2019:
Title
Outstanding
Common Stock, $0.20 par value
4,912,030
Table of Contents
CITIZENS HOLDING COMPANY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
1
Item 1. Consolidated Financial Statements
1
Consolidated Statements of Financial Condition, as of March
31, 2019 (Unaudited) and December 31, 2018 (Audited)
1
Consolidated Statements of Income for the Three months ended March
31, 2019 (Unaudited) and 2018 (Unaudited)
2
Consolidated Statements of Comprehensive Income (Loss) for the Three months ended
March 31, 2019 (Unaudited) and 2018 (Unaudited)
3
Condensed Consolidated Statements of Cash Flows for the Three months ended March 31,
2019 (Unaudited) and 2018 (Unaudited)
4
Notes to Consolidated Financial Statements (Unaudited)
5
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
29
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
41
Item 4. Controls and Procedures
44
PART II. OTHER INFORMATION
45
Item 1. Legal Proceedings
45
Item 1A. Risk Factors
45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.*
Item 3. Defaults Upon Senior Securities.*
Item 4. Mine Safety Disclosures.*
Item 5. Other Information.*
Item 6. Exhibits
46
* None or Not Applicable.
SIGNATURES
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2019
(Unaudited)
December 31, 2018
(Audited)
ASSETS
Cash and due from banks
$
12,462,550
$
12,592,130
Interest bearing deposits with other banks
27,122,108
8,079,742
Investment securities available for sale, at fair value
507,791,195
444,746,454
Loans, net of allowance for loan losses of $3,559,896 in 2019 and $3,371,695 in 2018
443,909,475
425,905,093
Premises and equipment, net
19,556,205
19,717,305
Other real estate owned, net
3,440,148
3,440,148
Accrued interest receivable
4,326,455
4,165,783
Cash surrender value of life insurance
25,532,529
25,383,931
Deferred tax assets, net
4,601,116
6,633,539
Other assets
8,650,695
7,965,952
TOTAL ASSETS
$
1,057,392,476
$
958,630,077
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand
$
171,555,937
$
170,029,729
Interest-bearing NOW and money market accounts
369,049,299
298,220,430
Savings deposits
77,317,063
76,735,710
Certificates of deposit
222,237,684
211,235,641
Total deposits
840,159,983
756,221,510
Securities sold under agreement to repurchase
115,450,591
107,965,505
Accrued interest payable
650,685
470,710
Deferred compensation payable
9,135,798
9,052,972
Other liabilities
1,416,362
1,053,063
Total liabilities
966,813,419
874,763,760
SHAREHOLDERS EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, 4,904,530 shares issued and
outstanding at March 31, 2019 and December 31, 2018
980,906
980,906
Additional paid-in capital
4,339,843
4,298,499
Retained earnings
93,611,199
93,561,515
Accumulated other comprehensive loss, net of tax benefit of $2,776,877 at March 31, 2019 and
$4,978,232 at December 31, 2018
(8,352,891
)
(14,974,603
)
Total shareholders equity
90,579,057
83,866,317
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
$
1,057,392,476
$
958,630,077
The accompanying notes are an integral part of these financial statements.
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Table of Contents
CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months
Ended March 31,
2019
2018
INTEREST INCOME
Interest and fees on loans
$
5,449,535
$
4,716,419
Interest on securities
Taxable
2,082,005
2,204,959
Nontaxable
616,779
617,729
Other interest
235,106
60,284
Total interest income
8,383,425
7,599,391
INTEREST EXPENSE
Deposits
1,728,672
501,209
Other borrowed funds
445,027
293,431
Total interest expense
2,173,699
794,640
NET INTEREST INCOME
6,209,726
6,804,751
PROVISION FOR (REVERSAL OF) LOAN LOSSES
195,479
(236,773
)
NET INTEREST INCOME AFTER PROVISION FOR (REVERSAL OF) LOAN LOSSES
6,014,247
7,041,524
OTHER INCOME
Service charges on deposit accounts
1,096,692
1,143,593
Other service charges and fees
683,640
668,464
Other operating income
266,579
288,373
Total other income
2,046,911
2,100,430
OTHER EXPENSES
Salaries and employee benefits
3,546,669
3,667,857
Occupancy expense
1,422,427
1,525,379
Other expense
1,670,121
1,854,446
Total other expenses
6,639,217
7,047,682
INCOME BEFORE PROVISION FOR INCOME TAXES
1,421,941
2,094,272
PROVISION FOR INCOME TAXES
195,170
321,885
NET INCOME
$
1,226,771
$
1,772,387
NET INCOME PER SHARE -Basic
$
0.25
$
0.36
-Diluted
$
0.25
$
0.36
DIVIDENDS PAID PER SHARE
$
0.24
$
0.24
The accompanying notes are an integral part of these financial statements.
2
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CITIZENS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For the Three Months
Ended March 31,
2019
2018
Net income
$
1,226,771
$
1,772,387
Other comprehensive income (loss)
Securities
available-for-sale
Unrealized holding gains (losses)
8,823,067
(9,416,226
)
Income tax effect
(2,201,355
)
2,349,348
6,621,712
(7,066,878
)
Rclassification adjustment for gains included in net income
8,021
Income tax effect
(2,001
)
6,020
Total other comprehensive income (loss)
6,621,712
(7,060,858
)
Comprehensive income (loss)
$
7,848,483
$
(5,288,471
)
The accompanying notes are an integral part of these financial statements.
3
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CITIZENS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities
$
1,978,070
$
2,567,892
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale
8,335,984
10,181,801
Proceeds from sale of investment securities
14,752,618
Purchases of investment securities available for sale
(63,402,575
)
Purchases of bank premises and equipment
(45,304
)
(32,732
)
Decrease in interest bearing deposits with other banks
(19,042,366
)
(18,592,714
)
Proceeds from sale of other real estate
667,253
Net increase in loans
(18,199,861
)
(2,929,881
)
Net cash (used in) provided by investing activities
(92,354,122
)
4,046,345
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
83,938,473
64,941,584
Net change in securities sold under agreement to repurchase
7,485,086
(43,654,076
)
Increase in federal funds purchased
(1,500,000
)
Repayment of Federal Home Loan Bank advances
(30,000,000
)
Payment of dividends
(1,177,087
)
(1,174,729
)
Net cash used in (provided by) financing activities
90,246,472
(11,387,221
)
Net decrease in cash and due from banks
(129,580
)
(4,772,984
)
Cash and due from banks, beginning of period
12,592,130
17,962,990
Cash and due from banks, end of period
$
12,462,550
$
13,190,006
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 three months ended March 31, 2019
(Unaudited)
Note 1. Summary of Significant
Accounting Policies
Basis of Presentation
These
interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). However, these interim consolidated financial statements do not include all
of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary
for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 2019
are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.
The interim consolidated
financial statements of Citizens Holding Company (the Company) include the accounts of its wholly-owned subsidiary, The Citizens Bank of Philadelphia (the Bank and collectively with the Company, the Corporation).
In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation.
For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company
included in the Corporations Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 15, 2019.
Nature of Business
The Bank operates under a state bank
charter and provides general banking services. As a state bank, the Bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance 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.
Adoption of New Accounting Standards
ASU 2016-02 Leases (Topic 842) (ASU 2016-02) requires lessees and lessors recognize lease assets and lease liabilities on the balance sheet and
disclose key information about leasing arrangements. ASU 2016-02 was effective for the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective
transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical
expedients. The Company has elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. Of the optional practical expedients
available under ASU 2016-02, all that apply have been adopted.
The Companys operating leases relate
primarily to branch properties and related equipment. As a result of implementing ASU 2016-02, we recognized an operating lease
right-of-use (ROU) asset of $1.086 million and an operating lease liability of $1.086 million on January 1, 2019, with no impact on our
consolidated statements of income or condensed consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and liability are recorded in other assets and other liabilities, respectively, in the consolidated
statements of condition. See Note 8. Premises and Equipment for additional information.
Newly Issued, But Not Yet Effective Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 makes significant changes to the accounting for credit losses on
financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and
supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets
with
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similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected
lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. The Company will adopt ASU 2016-13 on January 1, 2020. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018, however, the Company does not currently plan to early
adopt the ASU. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Companys circumstances, as long as they are applied consistently over time and faithfully
estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD)
method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects
ASU 2016-13 to have a significant impact on the Companys accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and
has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation of said models is required to determine the impact that adoption of this standard will have on
the financial condition and results of operations of the Company.
ASU 2018-13 Fair Value Measurement
(Topic 820) Changes in the Disclosure Requirements for Fair Value Measurement (ASU 2018-13) removes the requirement to disclose the amount of and reasons for transfers between
Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized
gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop
Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the
distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Management is currently
evaluating the impact this ASU will have on the Companys financial statements.
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 March 31, 2019, the Corporation had entered into loan commitments
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with certain customers with an aggregate unused balance of $61,031,088 compared to an aggregate unused balance of $58,835,208 at December 31, 2018. There were $2,474,810 of letters of credit
outstanding at March 31, 2019 and $2,516,810 at December 31, 2018. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they
expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments 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.
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 March 31,
2019
2018
Basic weighted average shares outstanding
4,892,530
4,882,705
Dilutive effect of granted options
2,598
5,802
Diluted weighted average shares outstanding
4,895,128
4,888,507
Net income
$
1,226,771
$
1,772,387
Net income per share-basic
$
0.25
$
0.36
Net income per share-diluted
$
0.25
$
0.36
Note 4. Equity Compensation Plans
The Corporation has adopted the 2013 Incentive Compensation Plan (the 2013 Plan), which the Corporation intends to use for future equity grants to
employees, directors or consultants until the termination or expiration of the 2013 Plan.
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Prior to the adoption of the 2013 Plan, the Corporation issued awards to directors from the 1999
Directors Stock Compensation Plan (the Directors Plan), which has expired.
The following table is a summary of the stock option
activity for the three months ended March 31, 2019:
Directors Plan
2013 Plan
Number
of
Shares
Weighted
Average
Exercise
Price
Number
of
Shares
Weighted
Average
Exercise
Price
Outstanding at December 31, 2018
52,500
$
21.55
$
Granted
Exercised
Expired
Outstanding at March 31, 2019
52,500
$
21.55
$
The intrinsic value of options outstanding under the Directors Plan at March 31, 2019, was $69,810. No options were
outstanding under the 2013 Plan as of March 31, 2019.
During 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
For the three months ended
March 31, 2019 and 2018, the Company recorded a provision for income taxes totaling $195 thousand and $322 thousand, respectively. The provision for income taxes includes both federal and state income taxes and differs from the
statutory rate due to favorable permanent differences. The effective tax rate was 13.7% and 15.4% for the three months ending March 31, 2019 and 2018, respectively.
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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:
Gross
Gross
March 31, 2019
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Securities
available-for-sale
Obligations of U.S.
Government agencies
$
98,911,462
$
$
1,606,054
$
97,305,408
Mortgage backed securities
314,839,147
157,919
7,760,156
307,236,910
State, County, Municipals
105,170,354
220,375
2,141,852
103,248,877
Total
$
518,920,963
$
378,294
$
11,508,062
$
507,791,195
Gross
Gross
December 31, 2018
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Securities
available-for-sale
Obligations of U.S.
Government agencies
$
99,365,930
$
$
3,388,147
$
95,977,783
Mortgage backed securities
259,742,501
4,921
12,373,269
247,374,153
State, County, Municipals
105,590,858
67,888
4,264,228
101,394,518
Total
$
464,699,289
$
72,809
$
20,025,644
$
444,746,454
At March 31, 2019 and December 31, 2018, securities with a carrying value of $358,290,412 and $357,231,440,
respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.
The amortized cost and estimated
fair value of securities by contractual maturity at March 31, 2019 and December 31, 2018 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.
March 31, 2019
December 31, 2018
Amortized
Estimated
Amortized
Estimated
Cost
Fair Value
Cost
Fair Value
Available-for-sale
Due in one year or less
$
2,639,867
$
2,642,681
$
1,875,288
$
1,877,665
Due after one year through five years
91,046,162
89,695,181
91,948,838
89,121,194
Due after five years through ten years
36,403,442
35,989,164
32,801,788
31,718,293
Due after ten years
73,992,345
72,227,259
78,330,873
74,655,149
Residential mortgage backed securities
245,120,416
239,721,466
187,776,954
179,235,806
Commercial mortgage backed securities
69,718,731
67,515,444
71,965,548
68,138,347
Total
$
518,920,963
$
507,791,195
$
464,699,289
$
444,746,454
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 March 31, 2019 and December 31, 2018.
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A summary of unrealized loss information for securities available-for-sale, categorized by security type follows (in thousands):
March 31, 2019
Less than 12 months
12 months or more
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
Obligations of U.S. government agencies
$
$
$
97,305,408
$
1,606,054
$
97,305,408
$
1,606,054
Mortgage backed securities
40,619,235
231,534
233,209,022
7,528,622
273,828,257
7,760,156
State, County, Municipal
80,467,294
2,141,852
80,467,294
2,141,852
Total
$
40,619,235
$
231,534
$
410,981,724
$
11,276,528
$
451,600,959
$
11,508,062
December 31, 2018
Less than 12 months
12 months or more
Total
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Description of Securities
Value
Losses
Value
Losses
Value
Losses
Obligations of U.S. government agencies
$
$
$
95,977,783
$
3,388,147
$
95,977,783
$
3,388,147
Mortgage backed securities
12,257,636
179,281
234,928,705
12,193,988
247,186,341
12,373,269
State, County, Municipal
12,623,964
285,275
76,535,741
3,978,953
89,159,705
4,264,228
Total
$
24,881,600
$
464,556
$
407,442,229
$
19,561,088
$
432,323,829
$
20,025,644
The 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 since purchase, 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 March 31, 2019 nor at December 31, 2018.
11
Table of Contents
Note 7. Loans
The composition of net loans (in thousands) at March 31, 2019 and December 31, 2018 was as follows:
March 31, 2019
December 31, 2018
Real Estate:
Land Development and Construction
$
47,492
$
41,134
Farmland
17,264
14,498
1-4 Family Mortgages
86,828
88,747
Commercial Real Estate
203,883
203,595
Total Real Estate Loans
355,467
347,974
Business Loans:
Commercial and Industrial Loans
77,585
66,421
Farm Production and Other Farm Loans
829
907
Total Business Loans
78,414
67,328
Consumer Loans:
Credit Cards
1,603
1,648
Other Consumer Loans
12,015
12,372
Total Consumer Loans
13,618
14,020
Total Gross Loans
447,499
429,322
Unearned Income
(30
)
(45
)
Allowance for Loan Losses
(3,560
)
(3,372
)
Loans, net
$
443,909
$
425,905
Loans are considered to be past due if the required principal and interest payments have not been received as of the date such
payments were due. Loans are placed 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.
12
Table of Contents
Period-end, non-accrual
loans (in thousands), segregated by class, were as follows:
March 31, 2019
December 31, 2018
Real Estate:
Land Development and Construction
$
113
$
Farmland
196
200
1-4 Family Mortgages
1,996
1,831
Commercial Real Estate
7,503
7,612
Total Real Estate Loans
9,808
9,643
Business Loans:
Commercial and Industrial Loans
91
76
Farm Production and Other Farm Loans
31
31
Total Business Loans
122
107
Consumer Loans:
Other Consumer Loans
88
89
Total Consumer Loans
88
89
Total Nonaccrual Loans
$
10,018
$
9,839
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An aging analysis of past due loans (in thousands), segregated by class, as of March 31, 2019, 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
$
82
$
54
$
136
$
47,356
$
47,492
$
Farmland
438
15
453
16,811
17,264
1-4 Family Mortgages
1,945
334
2,279
84,549
86,828
Commercial Real Estate
773
3,047
3,820
200,063
203,883
10
Total Real Estate Loans
3,238
3,450
6,688
348,779
355,467
10
Business Loans:
Commercial and Industrial Loans
1,758
19
1,777
75,808
77,585
Farm Production and Other Farm Loans
5
5
824
829
Total Business Loans
1,763
19
1,782
76,632
78,414
Consumer Loans:
Credit Cards
31
10
41
1,562
1,603
10
Other Consumer Loans
161
17
178
11,837
12,015
Total Consumer Loans
192
27
219
13,399
13,618
10
Total Loans
$
5,193
$
3,496
$
8,689
$
438,810
$
447,499
$
20
14
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An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2018 was as
follows:
Accruing
Loans
Loans
Loans
90 or more
90 or more
30-89 Days
Days
Total Past
Current
Total
Days
Past Due
Past Due
Due Loans
Loans
Loans
Past Due
Real Estate:
Land Development and Construction
$
1,494
$
54
$
1,548
$
39,586
$
41,134
$
54
Farmland
779
29
808
13,690
14,498
1-4 Family Mortgages
3,456
330
3,786
84,961
88,747
Commercial Real Estate
1,059
2,981
4,040
199,555
203,595
Total Real Estate Loans
6,788
3,394
10,182
337,792
347,974
54
Business Loans:
Commercial and Industrial Loans
1,672
21
1,693
64,728
66,421
Farm Production and Other Farm Loans
9
9
898
907
Total Business Loans
1,681
21
1,702
65,626
67,328
Consumer Loans:
Credit Cards
16
4
20
1,628
1,648
4
Other Consumer Loans
212
33
245
12,127
12,372
15
Total Consumer Loans
228
37
265
13,755
14,020
19
Total Loans
$
8,697
$
3,452
$
12,149
$
417,173
$
429,322
$
73
Loans are considered impaired when, based on current information and events, it is probable 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.
15
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Impaired loans (in thousands) as of March 31, 2019, segregated by class, were as follows:
Recorded
Recorded
Unpaid
Investment
Investment
Total
Average
Principal
With No
With
Recorded
Related
Recorded
Balance
Allowance
Allowance
Investment
Allowance
Investment
Real Estate:
Land Development and Construction
$
113
$
59
$
54
$
113
$
18
$
56.50
Farmland
266
266
266
267.50
1-4 Family Mortgages
817
727
90
817
24
985
Commercial Real Estate
10,479
5,113
3,649
8,762
375
8,823
Total Real Estate Loans
11,675
6,165
3,793
9,958
417
10,132
Business Loans:
Commercial and Industrial Loans
5
5
5
5
3
Total Business Loans
5
5
5
5
3
Total Loans
$
11,680
$
6,165
$
3,798
$
9,963
$
422
$
10,135
Impaired loans (in thousands) as of December 31, 2018, segregated by class, were as follows:
Recorded
Recorded
Unpaid
Investment
Investment
Total
Average
Principal
With No
With
Recorded
Related
Recorded
Balance
Allowance
Allowance
Investment
Allowance
Investment
Real Estate:
Land Development and Construction
$
$
$
$
$
$
Farmland
269
269
269
135
1-4 Family Mortgages
1,153
1,062
91
1,153
27
728
Commercial Real Estate
10,601
5,209
3,675
8,884
374
6,489
Total Real Estate Loans
12,023
6,540
3,766
10,306
401
7,352
Total Loans
$
12,023
$
6,540
$
3,766
$
10,306
$
401
$
7,352
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The following table presents troubled debt restructurings (in thousands, except for number of loans),
segregated by class:
Pre-Modification
Post-Modification
March 31, 2019
Outstanding
Outstanding
Number of
Recorded
Recorded
Loans
Investment
Investment
Commercial real estate
3
$
4,871
$
2,748
Total
3
$
4,871
$
2,748
Pre-Modification
Post-Modification
December 31, 2018
Outstanding
Outstanding
Number of
Recorded
Recorded
Loans
Investment
Investment
Commercial real estate
3
$
4,871
$
2,782
Total
3
$
4,871
$
2,782
Changes in the Corporations troubled debt restructurings (in thousands, except for number of loans) are set forth in the
table below:
Number
Recorded
of Loans
Investment
Totals at January 1, 2018
3
$
3,047
Reductions due to:
Principal paydowns
(265
)
Totals at January 1, 2019
3
$
2,782
Reductions due to:
Principal paydowns
(34
)
Total at March 31, 2019
3
$
2,748
The allocated allowance for loan losses attributable to restructured loans was $174,274 at March 31, 2019 and
December 31, 2018. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructurings as of March 31, 2019.
17
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.
18
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 March 31, 2019.
The following table details the amount of gross loans (in thousands), segregated by loan grade
and class, as of March 31, 2019:
Special
Satisfactory
Mention
Substandard
Doubtful
Loss
Total
1,2,3,4
5,6
7
8
9
Loans
Real Estate:
Land Development and Construction
$
45,746
$
1,073
$
673
$
$
$
47,492
Farmland
15,942
346
976
17,264
1-4 Family Mortgages
77,791
1,902
7,120
15
86,828
Commercial Real Estate
168,873
21,879
13,131
203,883
Total Real Estate Loans
308,352
25,200
21,900
15
355,467
Business Loans:
Commercial and Industrial Loans
75,626
225
1,734
77,585
Farm Production and Other Farm Loans
798
31
829
Total Business Loans
76,424
225
1,765
78,414
Consumer Loans:
Credit Cards
1,562
41
1,603
Other Consumer Loans
11,830
62
72
51
12,015
Total Consumer Loans
13,392
62
113
51
13,618
Total Loans
$
398,168
$
25,487
$
23,778
$
51
$
15
$
447,499
19
Table of Contents
The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as
of December 31, 2018:
Special
Satisfactory
Mention
Substandard
Doubtful
Loss
Total
1,2,3,4
5,6
7
8
9
Loans
Real Estate:
Land Development and Construction
$
39,726
$
840
$
568
$
$
$
41,134
Farmland
13,248
339
911
14,498
1-4 Family Mortgages
79,659
1,751
7,337
88,747
Commercial Real Estate
172,217
17,938
13,440
203,595
Total Real Estate Loans
304,850
20,868
22,256
347,974
Business Loans:
Commercial and Industrial Loans
63,994
81
2,346
66,421
Farm Production and Other Farm Loans
876
31
907
Total Business Loans
64,870
81
2,377
67,328
Consumer Loans:
Credit Cards
1,628
20
1,648
Other Consumer Loans
12,181
65
71
55
12,372
Total Consumer Loans
13,809
65
91
55
14,020
Total Loans
$
383,529
$
21,014
$
24,724
$
55
$
$
429,322
The allowance for loan losses is established through a provision for loan losses charged to expense, which represents
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.
20
Table of Contents
The following table details activity in the allowance for loan losses by portfolio segment for the three
months ended March 31, 2019:
Real
Business
March 31, 2019
Estate
Loans
Consumer
Total
Beginning Balance, January 1, 2019
$
2,844,681
$
221,841
$
305,173
$
3,371,695
Provision for (reversal of) loan losses
(62,733
)
99,457
158,755
195,479
Chargeoffs
12,178
24,940
37,118
Recoveries
11,600
4,340
13,900
29,840
Net chargeoffs (recoveries)
(11,600
)
7,838
11,040
7,278
Ending Balance
$
2,793,548
$
313,460
$
452,888
$
3,559,896
Period end allowance allocated to:
Loans individually evaluated for impairment
$
417,033
$
5,084
$
$
422,117
Loans collectively evaluated for impairment
2,376,515
308,376
452,888
3,137,779
Ending Balance, March 31, 2019
$
2,793,548
$
313,460
$
452,888
$
3,559,896
The following table details activity in the allowance for loan losses by portfolio segment for the three months ended
March 31, 2018:
Real
Business
March 31, 2018
Estate
Loans
Consumer
Total
Beginning Balance, January 1, 2018
$
2,151,715
$
346,781
$
520,732
$
3,019,228
(Reversal of) provision for loan losses
(65,925
)
(150,889
)
(19,959
)
(236,773
)
Chargeoffs
83,045
15,347
30,845
129,237
Recoveries
45,114
861
26,248
72,223
Net chargeoffs (recoveries)
37,931
14,486
4,597
57,014
Ending Balance
$
2,047,859
$
181,406
$
496,176
$
2,725,441
Period end allowance allocated to:
Loans individually evaluated for impairment
$
459,359
$
$
$
459,359
Loans collectively evaluated for impairment
1,588,500
181,406
496,176
2,266,082
Ending Balance, March 31, 2018
$
2,047,859
$
181,406
$
496,176
$
2,725,441
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The Corporations recorded investment in loans as of March 31, 2019 and December 31, 2018
related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporations impairment methodology was as follows (in thousands):
Real
Business
March 31, 2019
Estate
Loans
Consumer
Total
Loans individually evaluated for specific impairment
$
9,958
$
5
$
$
9,963
Loans collectively evaluated for general impairment
345,509
78,409
13,618
437,536
$
355,467
$
78,414
$
13,618
$
447,499
Real
Business
December 31, 2018
Estate
Loans
Consumer
Total
Loans individually evaluated for specific impairment
$
10,306
$
$
$
10,306
Loans collectively evaluated for general impairment
337,668
67,328
14,020
419,016
$
347,974
$
67,328
$
14,020
$
429,322
Note 8. Premises and Equipment
The Company lease certain premises and equipment under operating leases. At March 31, 2019, the Company had lease liabilities and ROU assets totaling
$1,086 million related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the three months ended March 31, 2019, the weighted average remaining lease term for operating
leases was 1.6 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.3%.
Lease costs were as follows:
Three Months Ended
March 31, 2019
(in thousands)
Operating lease cost
$
96
Short-term lease cost
6
Variable lease cost
$
102
There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the three
months ended March 31, 2019.
22
Table of Contents
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the
total operating lease liability is as follows:
Three Months Ended
March 31, 2019
(in thousands)
Lease payments due:
Within one year
$
362
After one year but within two years
362
After two years but within three years
320
After three year but within four years
76
After four years but within five years
25
After five years
Total undiscounted cash flows
1,145
Discount on cash flows
(59
)
Total lease liability
$
1,086
Note 9. Shareholders Equity
The following summarizes the activity in the capital structure of the Company:
Number
Additional
Accumulated
Other
of Shares
Common
Paid-In
Comprehensive
Retained
Issued
Stock
Capital
Income (Loss)
Earnings
Total
Balance, January 1, 2019
4,904,530
$
980,906
$
4,298,499
$
(14,974,603
)
$
93,561,515
$
83,866,317
Net income
1,226,771
1,226,771
Dividends paid ($0.24 per share)
(1,177,087
)
(1,177,087
)
Options exercised
Restricted stock granted
Stock compensation expense
41,344
41,344
Other comprehensive income, net
6,621,712
6,621,712
Balance, March 31, 2019
4,904,530
$
980,906
$
4,339,843
$
(8,352,891
)
$
93,611,199
$
90,579,057
Accumulated
Number
Additional
Other
of Shares
Common
Paid-In
Comprehensive
Retained
Issued
Stock
Capital
Income (Loss)
Earnings
Total
Balance, January 1, 2018
4,894,705
$
978,941
$
4,103,139
$
(8,225,419
)
$
91,594,379
$
88,451,040
Net income
1,772,387
1,772,387
Dividends paid ($0.24 per share)
(1,174,729
)
(1,174,729
)
Options exercised
Restricted stock granted
Stock compensation expense
45,056
45,056
Other comprehensive income, net
(7,068,858
)
(7,068,858
)
Balance, March 31, 2018
4,894,705
$
978,941
$
4,148,195
$
(15,294,277
)
$
92,192,037
$
82,024,896
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Note 10. 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 March 31, 2019:
Fair Value Measurements Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Securities available for sale
Obligations of U.S.
Government Agencies
$
$
97,305,408
$
$
97,305,408
Mortgage-backed securities
307,236,910
307,236,910
State, county and municipal obligations
103,248,877
103,248,877
Total
$
$
507,791,195
$
$
507,791,195
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Table of Contents
The following table presents assets and liabilities that were measured at fair value on a recurring basis as
of December 31, 2018:
Fair Value Measurements Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Securities available for sale
Obligations of U.S.
Government Agencies
$
$
95,977,783
$
$
95,977,783
Mortgage-backed securities
247,374,153
247,374,153
State, county and municipal obligations
101,394,518
101,394,518
Total
$
$
444,746,454
$
$
444,746,454
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 March 31,
2019
2018
Beginning Balance
$
$
3,074,227
Principal payments received
Unrealized (loss) gains included in other comprehensive income
8,630
Ending Balance
$
$
3,082,857
The Corporation recorded no gains or losses in earnings for the period ended March 31, 2019 or December 31, 2018
that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.
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Impaired Loans
Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated
selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The
fair value of the business assets is generally based on amounts reported on the businesss financial statements. Appraised and reported values may be adjusted based on managements historical knowledge, changes in market conditions from
the time of valuation and management knowledge of the client and the clients business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary
depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling,
closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously
identified.
Other real estate owned
OREO is
primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the
fair value less expected selling costs charged to the ALLL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to
third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.
For assets measured at fair value on a nonrecurring basis during 2019 that were still held on the Corporations balance sheet at March 31, 2019, the
following table provides the hierarchy level and the fair value of the related assets:
Fair Value Measurements Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Impaired loans
$
$
$
3,376,414
$
3,376,414
Total
$
$
$
3,376,414
$
3,376,414
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The following table presents information as of March 31, 2019 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
$
3,376,414
Appraised value of collateral
less estimated costs to sell
Estimated costs to sell
25
%
For assets measured at fair value on a nonrecurring basis during 2018 that were still held on the Corporations balance
sheet at December 31, 2018, the following table provides the hierarchy level and the fair value of the related assets:
Fair Value Measurements Using:
Quoted Prices
in Active
Markets for
Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Level 1)
(Level 2)
(Level 3)
Totals
Impaired loans
$
$
$
3,364,538
$
3,364,538
Other real estate owned
188,609
188,609
Total
$
$
$
3,553,147
$
3,553,147
Impaired loans with a carrying value of $3,376,414 and $3,364,538 had an allocated allowance for loan losses of $422,117 and
$401,347 at March 31, 2019 and December 31, 2018, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.
After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in
the amount of $-0- was necessary and recorded during the three-month period ended March 31, 2019 and the year ended December 31, 2018.
The financial instruments topic of the ASC requires disclosure of financial instruments fair values, as well as the methodology and significant
assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of
the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements.
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Table of Contents
The following represents the carrying value and estimated fair value of the Corporations financial
instruments at March 31, 2019:
Fair Value Measurements Using:
March 31, 2019
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
$
12,462,550
$
12,462,550
$
$
$
12,462,550
Interest bearing deposits with banks
27,122,108
27,122,108
27,122,108
Securities
available-for-sale
507,791,195
507,791,195
507,791,195
Net loans
443,909,475
439,516,508
439,516,508
Financial liabilities
Deposits
$
840,159,983
$
617,922,299
$
223,144,296
$
$
841,066,595
Securities Sold under
Agreement to Repurchase
115,450,591
115,450,591
115,450,591
The following represents the carrying value and estimated fair value of the Corporations financial instruments at
December 31, 2018:
Fair Value Measurements Using:
December 31, 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
$
12,592,130
$
12,592,130
$
$
$
12,592,130
Interest bearing deposits with banks
8,079,742
8,079,742
8,079,742
Securities
available-for-sale
444,746,454
444,746,454
444,746,454
Net loans
425,905,093
420,992,074
420,992,074
Financial liabilities
Deposits
$
756,221,510
$
544,985,869
$
210,477,092
$
$
755,462,961
Securities Sold under
Agreement to Repurchase
107,965,505
107,965,505
107,965,505
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ITEM 2.
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
other risks detailed from
time-to-time in the Companys filings with the Securities and Exchange Commission.
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Table of Contents
Except as required by law, the Corporation does not undertake any obligation to update or revise any
forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.
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 March 31, 2019, the Bank was the largest bank headquartered in Neshoba County, Mississippi,
with total assets of $1,057.392 million and total deposits of $840.160 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 March 31, 2019, was 31.66% and at December 31, 2018, was 21.34%. The increase was due to an increase in short-term marketable assets at March 31, 2019. Management believes it maintains adequate
liquidity for the Corporations current needs.
The Corporations primary source of liquidity is customer deposits, which were $840,159,983 at
March 31, 2019, and $756,221,510 at December 31, 2018. 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 $507,791,195 invested in available-for-sale investment securities at March 31, 2019, and $444,746,454 at December 31,
2018. This increase was due to purchases in excess of maturities, paydowns, sales and calls and an increase in the market value of the Corporations investment securities portfolio.
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Table of Contents
The Corporation also had $27,122,108 in interest bearing deposits at other banks at March 31, 2019 and
$8,079,742 at December 31, 2018. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at both March 31, 2019 and December 31, 2018. In addition, the Corporation has the
ability to draw on its line of credit with the FHLB. At March 31, 2019, the Corporation had unused and available $172,312,015 of its line of credit with the FHLB and at December 31, 2018, the Corporation had unused and available
$171,252,131 of its line of credit with the FHLB. The increase in the amount available under the Corporations line of credit with the FHLB from the end of 2018 to March 31, 2019, was the result of an increase in the amount of loans
eligible for the collateral pool securing the Corporations line of credit with the FHLB. The Corporation had federal funds purchased of $-0- as of March 31,
2019 and $-0- as of December 31, 2018. The Corporation may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.
When the Corporation has more funds than it needs for its reserve requirements or short-term liquidity needs, the Corporation increases its investment
portfolio, increases the balances in interest bearing due from bank accounts or sells federal funds. It is 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
$90,579,057 at March 31, 2019, as compared to $83,866,317 at December 31, 2018. The increase in shareholders equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities
market value adjustment coupled with the increase in earnings in excess of dividends paid. The market value adjustment, which was an increase due to general market conditions, specifically the decrease in medium term interest rates, caused an
increase in the market price of the Corporations investment portfolio.
The Corporation paid aggregate cash dividends in the amount of $1,177,087,
or $0.24 per share, during the three-month period ended March 31, 2019 compared to $1,174,729, or $0.24 per share, for the same period in 2018.
Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total
and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of March 31, 2019, the Corporation meets all capital adequacy
requirements to which it is subject and according to these requirements the Corporation is considered to be well capitalized.
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Table of Contents
Minimum Capital
Minimum Capital
Requirement to be
Requirement to be
Adequately
Actual
Well Capitalized
Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
March 31, 2019
Citizens Holding Company
Tier 1 leverage ratio
$
95,782
9.55
%
$
50,167
5.00
%
$
40,133
4.00
%
Common Equity tier 1 capital ratio
95,782
9.55
%
65,217
6.50
%
45,150
4.50
%
Tier 1 risk-based capital ratio
95,782
16.54
%
46,320
8.00
%
34,740
6.00
%
Total risk-based capital ratio
99,342
17.16
%
57,900
10.00
%
46,320
8.00
%
December 31, 2018
Citizens Holding Company
Tier 1 leverage ratio
$
95,691
9.93
%
$
48,191
5.00
%
$
38,553
4.00
%
Common Equity tier 1 capital ratio
95,691
9.93
%
62,648
6.50
%
43,372
4.50
%
Tier 1 risk-based capital ratio
95,691
17.40
%
43,986
8.00
%
32,990
6.00
%
Total risk-based capital ratio
99,063
18.02
%
54,983
10.00
%
43,986
8.00
%
The Dodd-Frank Act requires the Federal Reserve Bank (FRB), the Office of the Comptroller of the Currency
(OCC) and the Federal Deposit Insurance Corporation (FDIC) to adopt regulations imposing a continuing floor on the risk based capital requirements. In December 2010, the Basel Committee released a final framework
for a strengthened set of capital requirements, known as Basel III. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the
standardized approach of Basel II for non-core banks and bank holding companies, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital
rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.
Beginning January 1, 2015, the Company and the Bank began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other
things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner:
Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not
less than 4.5%;
Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain
banking organizations);
Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and
Maintain the minimum total risk-based capital ratio at 8%.
In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to
executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the
minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and
discretionary bonus payments to executive officers.
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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 March 31, 2019, the Company and the
Bank meet all capital adequacy requirements under Basel III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporations capital ratios as presented.
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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 March 31,
2019
2018
Interest Income, including fees
$
8,383,425
$
7,599,391
Interest Expense
2,173,699
794,640
Net Interest Income
6,209,726
6,804,751
Provision for (reversal of) loan losses
195,479
(236,773
)
Net Interest Income after
Provision for (reversal of) loan losses
6,014,247
7,041,524
Other Income
2,046,911
2,100,430
Other Expense
6,639,217
7,047,682
Income Before Provision For
Income Taxes
1,421,941
2,094,272
Provision for Income Taxes
195,170
321,885
Net Income
$
1,226,771
$
1,772,387
Net Income Per share - Basic
$
0.25
$
0.36
Net Income Per Share-Diluted
$
0.25
$
0.36
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 5.70% for the three months ended
March 31, 2019, and 8.03% for the corresponding period in 2018. The decrease in ROE for the three months ended March 31, 2019 was caused by the increase in equity balances and a decrease in net income compared to the same period in 2018.
Book value per share increased to $18.47 at March 31, 2019, compared to $17.09 at December 31, 2018. The increase in book value per share
reflects earnings in excess of dividends coupled with a decrease in other comprehensive loss due to the increase in fair value of the Corporations investment securities. Average assets for the three months ended March 31, 2019 were
$1,006,484,037 compared to $971,893,427 for the year ended December 31, 2018. This increase was due mainly to an increase in loans, available-for-sale securities
and interest bearing due from bank accounts.
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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 2.72% for the quarter ended March 31, 2019 compared to 3.03% for the corresponding period of 2018. The decrease in
net interest margin for the three months ended March 31, 2019, when compared to the same period in 2018, was the result of the increase in rates paid on deposits in excess of the increase in yields on earning assets, as detailed below. Earning
assets averaged $929,676,890 for the three months ended March 31, 2019. This represents an increase of $20,603,983, or 2.3%, over average earning assets of $909,072,907 for the three months ended March 31, 2018.
Interest bearing deposits averaged $633,961,993 for the three months ended March 31, 2019. This represents a increase of $31,084,110, or 5.2%, from the
average of interest bearing deposits of $602,877,883 for the three months ended March 31, 2018. This was due, in large part, to a increase in interest-bearing NOW accounts and certificates of deposit partially offset by an decrease in savings
and money market accounts.
Other borrowed funds averaged $106,789,440 for the three months ended March 31, 2019. This represents a decrease of
$13,252,844, or 11.0%, over the other borrowed funds of $120,042,284 for the three months ended March 31, 2018. This decrease in other borrowed funds was due to a decrease in federal funds purchased and FHLB advances partially offset by an
increase in securities sold under agreements to repurchase for the three months ended March 31, 2019, when compared to the three months ended March 31, 2018.
Net interest income was $6,209,726 for the three months ended March 31, 2019, a decrease of $595,025 from $6,804,751 for the three months ended
March 31, 2018, primarily due to an increase in the rates paid on deposits from the same period in 2018. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the three
months ended March 31, 2019, the yields on earning assets increased and the rates paid on deposits increased from the same period in 2018. The yield on all interest-bearing assets increased 23 basis points to 3.67% in the three months ended
March 31, 2019 from 3.44% for the same period in 2018. At the same time, the rate paid on all interest-bearing liabilities for the three months ended March 31, 2019 increased 75 basis points to 1.19% from 0.44% in the same period in 2018.
As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.
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Table of Contents
The following table shows the interest and fees and corresponding yields for loans only.
For the Three Months
Ended March 31,
2019
2018
Interest and Fees
$
5,449,535
$
4,716,419
Average Gross Loans
435,069,864
407,008,135
Annualized Yield
5.01
%
4.64
%
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.
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.
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Table of Contents
The following table summarizes the Corporations allowance for loan losses for the dates indicated:
Quarter Ended
Year Ended
Amount of
Percent of
March 31,
December 31,
Increase
Increase
2019
2018
(Decrease)
(Decrease)
BALANCES:
Gross Loans
$
447,499,786
$
429,322,113
$
18,177,673
4.23
%
Allowance for Loan Losses
3,559,896
3,371,695
188,201
5.58
%
Nonaccrual Loans
10,017,647
9,838,870
178,777
1.82
%
Ratios:
Allowance for loan losses to gross loans
0.80
%
0.79
%
Net loans charged off (recovered) to allowance for loan losses
0.20
%
-0.55
%
The provision for loan losses for the three months ended March 31, 2019 was $195,479, an increase of $432,252 from the
reversal of provision for loan losses of $236,773 for the same period in 2018. The change in the Corporations loan loss provisions for the three months ended March 31, 2019 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 increased during this period due to new loans being added to nonaccrual
status in excess of the amount of payments received and loans charged off.
For the three months ended March 31, 2019, net loan losses charged to the
allowance for loan losses totaled $7,278, a decrease of $49,736 from the $57,014 charged off in the same period in 2018. The decrease was primarily due to a significant charge-off during the first quarter of
2018.
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 three months ended March 31, 2019 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.
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Table of Contents
OTHER INCOME
Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning
assets. Other income for the three months ended March 31, 2019 was $2,046,911, a decrease of $53,519, or 2.5%, from $2,100,430 in the same period in 2018. Service charges on deposit accounts were $1,096,692 in the three months ended
March 31, 2019, compared to $1,143,593 for the same period in 2018. Other service charges and fees decreased by $15,176, or 2.3%, to $683,640 in the three months ended March 31, 2019, compared to $668,464 for the same period in 2018. Other
operating income not derived from service charges or fees decreased $21,795, or 7.6% to $266,578 in the three months ended March 31, 2019, compared to $288,373 for the same period in 2018. This decrease was due mainly to a decrease in income
from security sales and a decrease in mortgage loan origination income from long-term mortgage loans originated for sale to the secondary market partially offset by an increase in other income.
The following is a detail of the other major income classifications that were included in other operation income on the income statement:
For the Three Months
Ended March 31,
Other operating income
2019
2018
BOLI Income
$
126,000
$
126,000
Mortgage Loan Origination Income
48,028
72,523
Income from security sales, net
8,021
Other Income
92,551
81,829
Total Other Income
$
266,579
$
288,373
OTHER EXPENSES
Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate
non-interest expenses for the three months ended March 31, 2019 and 2018 were $6,639,217 and $7,047,682, respectively, a decrease of $408,465 or 5.8%. Salaries and benefits decreased to $3,546,669 for the
three months ended March 31, 2019, from $3,667,857 for the same period in 2018. Occupancy expense decreased by $102,952, or 6.7%, to $1,422,427 for the three months ended March 31, 2019, compared to $1,525,379 for the same period of 2018.
Other operating expenses decreased by $184,325, or 10.0%, to $1,670,121 for the three months ended March 31, 2019, compared to $1,854,446 for the same period of 2018.
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The following is a detail of the major expense classifications that make up the other operating expense line
item in the income statement:
For the Three Months
Ended March 31,
Other Operating Expense
2019
2018
Advertising
$
178,655
$
156,046
Office Supplies
217,247
243,076
Legal and Audit Fees
133,288
211,854
Telephone expense
112,058
124,833
Postage and Freight
149,122
136,917
Loan Collection Expense
8,036
13,702
Other Losses
6,777
167,274
Regulatory and related expense
84,917
95,047
Debit Card/ATM expense
120,885
109,001
Travel and Convention
36,780
49,348
Other expenses
622,356
547,348
Total Other Expense
$
1,670,121
$
1,854,446
The Corporations efficiency ratio for the three months ended March 31, 2019 was 76.34%, compared to 74.47% for the
same period in 2018. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and
non-interest income.
BALANCE SHEET ANALYSIS
Amount of
Percent of
March 31,
December 31,
Increase
Increase
2019
2018
(Decrease)
(Decrease)
Cash and Due From Banks
$
12,462,550
$
12,592,130
$
(129,580
)
-1.03
%
Interest Bearing deposits with Other Banks
27,122,108
8,079,742
19,042,366
235.68
%
Investment Securities
507,791,195
444,746,454
63,044,741
14.18
%
Loans, net
443,909,475
425,905,093
18,004,382
4.23
%
Premises and Equipment
19,556,205
19,717,305
(161,100
)
-0.82
%
Total Assets
1,057,392,476
958,630,077
98,762,399
10.30
%
Total Deposits
840,159,983
756,221,510
83,938,473
11.10
%
Total Shareholders Equity
90,579,057
83,866,317
6,712,740
8.00
%
CASH AND CASH EQUIVALENTS
Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at March 31, 2019 was
$12,462,550, which was a decrease of $129,580 from the balance of $12,592,130 at December 31, 2018. 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.
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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 March 31, 2019 increased by $63,044,741, or 14.2%, to $507,791,195 from $444,746,454 at December 31, 2018. This increase was due to purchases
and increases in the market value of the Corporations investment securities portfolio in excess of maturities, paydowns, sales and calls.
LOANS
The Corporations loan balance
increased by $18,004,382, or 4.2%, during the three months ended March 31, 2019, to $443,909,475 from $425,905,093 at December 31, 2018. Loan demand, especially in land development and construction, commercial and industrial, and
commercial real estate categories, strengthened during the three months ended March 31, 2019 but competition for available loans continued to be strong during that period. No material changes were made to the loan products offered by the
Corporation during this period.
PREMISES AND EQUIPMENT
During the three months ended March 31, 2019, the Corporations premises and equipment decreased by $161,100, or 0.8%, to $19,556,205 from
$19,717,305 at December 31, 2018. The decrease was due to depreciation expense exceeding the amount of property and equipment purchased during the period.
DEPOSITS
The following table shows the balance
and percentage change in the various deposits:
Amount of
Percent of
March 31,
December 31,
Increase
Increase
2019
2018
(Decrease)
(Decrease)
Noninterest-Bearing Deposits
$
171,555,937
$
170,029,729
$
1,526,208
0.90
%
Interest-Bearing Deposits
369,049,299
298,220,430
70,828,869
23.75
%
Savings Deposits
77,317,063
76,735,710
581,353
0.76
%
Certificates of Deposit
222,237,684
211,235,641
11,002,043
5.21
%
Total deposits
$
840,159,983
$
756,221,510
$
83,938,473
11.10
%
Non-interest-bearing, interest-bearing, savings and certificates of deposits increased
during the three months ended March 31, 2019. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management
objectives. These rate adjustments impact deposit balances.
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OFF-BALANCE SHEET ARRANGEMENTS
Please refer to Note 2 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the
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, 2018.
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.
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
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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 March 31, 2019, the Corporation had
approximately $3.6 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. A flat or inverted yield curve tends to decrease net interest margin, as funding costs increase relative to the yield on assets. Currently, the yield curve is flat.
Regulatory and Legal Risks
The Corporation operates in a
heavily regulated industry and therefore is subject to many banking, deposit, and consumer lending laws as well as the rules and regulations promulgated by the FDIC, FRB, Securities and Exchange Commission and the NASDAQ stock market. Failure to
comply with applicable regulations could result in financial or operational penalties. In
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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.
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.
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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 March 31, 2019 (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
March 31, 2019, 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
ITEM 1.
LEGAL PROCEEDINGS.
The Corporation is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are being vigorously contested. In the
regular course of business, management evaluates estimated losses or costs related to litigation, and provisions are made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the
present time, management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not likely have a material impact on the 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, 2018, which the Corporation filed with the Securities and Exchange
Commission on March 15, 2019. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in
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, 2018, 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, 2018.
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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: May 10, 2019
47
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.