Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2015

OR

 

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

For the transition period from                      to                     

Commission File Number: 001-15375

 

 

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Mississippi   64-0666512

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

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

601-656-4692

(Registrant’s telephone number, including area code)

 

 

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x   No

Number of shares outstanding of each of the issuer’s classes of common stock, as of November 6, 2015:

 

Title    Outstanding  

Common Stock, $0.20 par value

     4,872,570   

 

 

 


Table of Contents

CITIZENS HOLDING COMPANY

INTERIM FINANCIAL STATEMENTS FOR QUARTER ENDED SEPTEMBER 30, 2015

TABLE OF CONTENTS

 

PART I.     

FINANCIAL INFORMATION

     1   

    Item 1.

    

Consolidated Financial Statements.

     1   
    

Consolidated Statements of Condition September 30, 2015 (Unaudited) and December 31, 2014 (Audited)

     1   
    

Consolidated Statements of Income Three and Nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited)

     2   
    

Consolidated Statements of Comprehensive Income Three and nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited)

     3   
    

Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited)

     4   
    

Notes to Consolidated Financial Statements

     5   

    Item 2.

    

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

     30   

    Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk.

     43   

    Item 4.

    

Controls and Procedures.

     46   

PART II.

    

OTHER INFORMATION

     47   

    Item 1.

    

Legal Proceedings.*

  

    Item 1A.

    

Risk Factors.

     47   

    Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds.*

  

    Item 3.

    

Defaults Upon Senior Securities.*

  

    Item 4.

    

Mine Safety Disclosures.*

  

    Item 5.

    

Other Information.*

  

    Item 6.

    

Exhibits.

     49   

*  None or Not Applicable

     

SIGNATURES      50   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF CONDITION

 

     September 30,
2015
    December 31,
2014
 
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 20,349,539      $ 22,405,730   

Interest bearing deposits with other banks

     1,074,513        61,481,223   

Investment securities held to maturity, at amortized cost

     198,841,442        206,817,169   

Investment securities available for sale, at fair value

     249,115,059        179,745,130   

Loans, net of allowance for loan losses of $6,828,782 in 2015 and $6,542,326 in 2014

     425,116,389        384,417,508   

Premises and equipment, net

     18,730,587        19,240,230   

Other real estate owned, net

     3,529,381        4,051,561   

Accrued interest receivable

     4,675,717        3,869,937   

Cash value of life insurance

     22,853,541        22,347,601   

Intangible assets, net

     3,149,657        3,149,657   

Other assets

     13,459,367        13,534,935   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 960,895,192      $ 921,060,681   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 143,728,615      $ 145,729,932   

Interest-bearing NOW and money market accounts

     321,160,191        268,567,815   

Savings deposits

     69,866,627        60,253,788   

Certificates of deposit

     213,886,079        221,542,359   
  

 

 

   

 

 

 

Total deposits

     748,641,512        696,093,894   

Securities sold under agreement to repurchase

     89,570,169        114,426,770   

Federal Funds Purchased

     8,600,000        —     

Federal Home Loan Bank advances

     20,000,000        20,000,000   

Accrued interest payable

     181,687        190,717   

Deferred compensation payable

     7,613,147        7,209,694   

Other liabilities

     1,775,553        1,281,820   
  

 

 

   

 

 

 

Total liabilities

     876,382,068        839,202,895   

SHAREHOLDERS’ EQUITY

    

Common stock; $.20 par value, 22,500,000 shares authorized, 4,872,570 shares outstanding at September 30, 2015 and 4,877,614 at December 31, 2014

     974,514        975,482   

Additional paid-in capital

     3,849,332        3,861,717   

Retained earnings

     87,789,049        85,901,207   

Accumulated other comprehensive loss, net of tax benefit of $4,818,524 in 2015 and $5,283,048 in 2014

     (8,099,771     (8,880,620
  

 

 

   

 

 

 

Total shareholders’ equity

     84,513,124        81,857,786   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 960,895,192      $ 921,060,681   
  

 

 

   

 

 

 

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

 

1


Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     For the Three Months
Ended September 30,
     For the Nine Months
Ended September 30,
 
     2015      2014      2015      2014  

INTEREST INCOME

           

Loans, including fees

   $ 5,037,766       $ 4,998,738       $ 15,033,778       $ 15,110,093   

Investment securities

     2,736,657         2,822,783         8,095,751         8,570,907   

Other interest

     14,038         8,285         61,322         20,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     7,788,461         7,829,806         23,190,851         23,701,247   

INTEREST EXPENSE

           

Deposits

     468,565         450,901         1,350,490         1,291,067   

Other borrowed funds

     297,060         307,841         901,993         930,485   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     765,625         758,742         2,252,483         2,221,552   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     7,022,836         7,071,064         20,938,368         21,479,695   

PROVISION FOR LOAN LOSSES

     141,704         205,027         407,698         777,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     6,881,132         6,866,037         20,530,670         20,701,765   

OTHER INCOME

           

Service charges on deposit accounts

     1,036,964         1,043,505         2,877,841         2,937,062   

Other service charges and fees

     626,283         575,169         1,721,297         1,584,301   

Other income

     354,366         437,223         1,022,071         1,801,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

     2,017,613         2,055,897         5,621,209         6,322,999   
  

 

 

    

 

 

    

 

 

    

 

 

 

OTHER EXPENSES

           

Salaries and employee benefits

     3,341,356         3,242,294         10,038,040         9,850,501   

Occupancy expense

     1,356,655         1,360,039         3,952,914         3,904,096   

Other operating expense

     1,776,868         1,836,925         5,292,049         6,099,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expenses

     6,474,879         6,439,258         19,283,003         19,854,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

     2,423,866         2,482,676         6,868,876         7,170,648   

PROVISION FOR INCOME TAXES

     587,405         584,456         1,610,282         1,382,756   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 1,836,461       $ 1,898,220       $ 5,258,594       $ 5,787,892   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME PER SHARE -Basic

   $ 0.38       $ 0.39       $ 1.08       $ 1.19   
  

 

 

    

 

 

    

 

 

    

 

 

 

-Diluted

   $ 0.38       $ 0.39       $ 1.08       $ 1.19   
  

 

 

    

 

 

    

 

 

    

 

 

 

DIVIDENDS PAID PER SHARE

   $ 0.23       $ 0.22       $ 0.69       $ 0.66   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

2


Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2015     2014     2015     2014  

Net income

   $ 1,836,461      $ 1,898,220      $ 5,258,594      $ 5,787,892   

Other comprehensive income

        

Securities available-for-sale

        

Unrealized holding gains (losses)

     2,226,566        1,230,555        (781,509     33,198,668   

Income tax effect

     (830,509     (458,997     291,503        (12,383,103
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,396,057        771,558        (490,006     20,815,565   

Securities transferred from available-for-sale to held-to-maturity

        

Unrealized losses transferred to held-to-maturity

     —          —          —          (17,061,438

Amortization of net unrealized losses during the period

     539,239        494,536        2,013,183        908,444   

Income tax effect

     (201,136     (184,462     (750,917     6,025,067   
  

 

 

   

 

 

   

 

 

   

 

 

 
     338,103        310,074        1,262,266        (10,127,927

Reclassification adjustment for gains included in net income

     13,699        (5,436     13,699        (14,538

Income tax effect

     (5,110     2,028        (5,110     5,423   
  

 

 

   

 

 

   

 

 

   

 

 

 
     8,589        (3,408     8,589        (9,115
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     1,742,749        1,078,224        780,849        10,678,523   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,579,210      $ 2,976,444      $ 6,039,443      $ 16,466,415   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    

For the Nine Months

Ended September 30,

 
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net cash provided by operating activities

   $ 6,514,046      $ 7,248,415   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from maturities and calls of securities available for sale

     26,701,814        6,869,327   

Proceeds from sales of securities available for sale

     5,754,991        1,396,134   

Proceeds from maturities and calls of securities held to maturity

     10,000,000        —     

Purchases of investment securities available for sale

     (103,451,898     —     

Purchases of bank premises and equipment

     (271,777     (1,738,665

Decrease (increase) in interest bearing deposits with other banks

     60,406,710        (14,184,618

Proceeds from sale of other real estate

     1,102,141        1,640,220   

Redemption of Federal Home Loan Bank Stock

     150,700        1,292,600   

Net (increase) decrease in loans

     (41,787,893     709,323   
  

 

 

   

 

 

 

Net cash used by investing activities

     (41,395,212     (4,015,679

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     52,547,618        40,661,413   

Net change in securities sold under agreement to repurchase

     (24,856,601     (102,334

Increase (decrease) in federal funds purchased

     8,600,000        (27,500,000

Repurchase of stock

     (123,292     —     

Decrease in Federal Home Loan Bank advances

     —          (10,000,000

Exercise of Stock Options

     27,000        —     

Excess tax benefits on stock options

     1,001        —     

Payment of dividends

     (3,370,751     (3,219,225
  

 

 

   

 

 

 

Net cash provided by (used by) financing activities

     32,824,975        (160,146
  

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (2,056,191     3,072,590   

Cash and due from banks, beginning of period

     22,405,730        16,040,195   
  

 

 

   

 

 

 

Cash and due from banks, end of period

   $ 20,349,539      $ 19,112,785   
  

 

 

   

 

 

 

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

 

4


Table of Contents

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three and nine months ended September 30, 2015

(Unaudited)

Note 1. 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 financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended September 30, 2015 are not necessarily indicative of the results that may be expected for any other interim periods or for the year as a whole.

The interim consolidated financial statements of Citizens Holding Company include the accounts of its wholly-owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with Citizens Holding Company, the “Corporation”). All significant intercompany transactions have been eliminated in consolidation.

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 13, 2015.

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 September 30, 2015, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $53,873,059 compared to an aggregate unused balance of $50,242,705 at December 31, 2014. There was $2,860,480 of letters of credit outstanding at September 30, 2015 and $2,855,480 at December 31, 2014. The fair value of such contracts 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 level of draws under its credit-related commitments into its asset and liability management program.

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

 

5


Table of Contents

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 using the treasury stock method. Net income per share was computed as follows:

 

    

For the Three Months

Ended September 30,

    

For the Nine Months

Ended September 30,

 
     2015      2014      2015      2014  

Basic weighted average shares outstanding

     4,877,614         4,870,114         4,872,092         4,870,114   

Dilutive effect of granted options

     1,170         605         904         550   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     4,878,784         4,870,719         4,872,996         4,870,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,836,461       $ 1,898,220       $ 5,258,594       $ 5,787,892   

Net income per share-basic

   $ 0.38       $ 0.39       $ 1.08       $ 1.19   

Net income per share-diluted

   $ 0.38       $ 0.39       $ 1.08       $ 1.19   

Note 4. Equity Compensation Plans

Prior to the adoption of the 2013 Plan, as defined below, the Corporation utilized two stock-based compensation plans, the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”) for directors, and prior to its expiration, the 1999 Employees’ Long-Term Incentive Plan (the “Employees’ Plan”) for employees.

The following table is a summary of the stock option activity for the nine months ended September 30, 2015.

 

     Directors’ Plan      Employees’ Plan      2013 Plan  
     Number
of
Shares
    Weighted
Average
Exercise
Price
     Number
of
Shares
    Weighted
Average
Exercise
Price
     Number
of
Shares
     Weighted
Average
Exercise
Price
 

Outstanding at December 31, 2014

     96,000      $ 21.23         46,500      $ 22.14         —         $ —     

Granted

     —          —           —          —           —           —     

Exercised

     —          —           (1,500     18.00         —           —     

Expired

     (9,000     20.00         (22,000     21.05         —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2015

     87,000      $ 21.36         23,000      $ 23.46         —         $ —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The intrinsic value of options granted under the Directors’ Plan at September 30, 2015, was $138,030, the intrinsic value of options granted under the Employees’ Plan at September 30, 2015, was $0, and since there were no options granted under the 2013 Plan, the intrinsic value for the 2013 Plan is $0 for an aggregate intrinsic value at September 30, 2015, of $138,030.

The Corporation has adopted the 2013 Incentive Compensation Plan (the “2013 Plan”), which the Corporation intends to use for all future equity grants to employees, directors or consultants until the termination or expiration of the 2013 Plan. During the quarter ended March 31, 2014, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock. These grants vested over a one-year period ending March 13, 2015 during which time the recipients had rights to vote the shares and to receive dividends. The grant date fair value of these shares was $138,000 and was recognized over the one-year restriction period at a cost of $11,500 per month less deferred taxes of $4,290 per month.

During the quarter ended June 30, 2015, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock. These grants vest over a one-year period ending April 29, 2016 during which time the recipients has rights to vote the shares and to receive dividends. The grant date fair value of these shares was $141,450 and will be recognized over the one-year restriction period at a cost of $11,788 per month less deferred taxes of $4,397 per month.

Note 5. Income Taxes

The income tax topic of the Accounting Standards Codification (“ASC”) defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This topic also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of September 30, 2015, the Corporation had no unrecognized tax benefits related to federal and state income tax matters. Therefore, the Corporation does not anticipate any material increase or decrease in the effective tax rate during 2015 relative to any tax positions taken. It is the Corporation’s policy to recognize interest or penalties related to income tax matters in income tax expense.

The Corporation files a consolidated United States federal income tax return. The Corporation is currently open to audit under the statute of limitations by the Internal Revenue Service for all tax years after 2011. The Corporation’s consolidated state income tax returns are also open to audit under the statute of limitations for the same period.

 

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Table of Contents

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:

 

September 30, 2015    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Securities available-for-sale

           

Obligations of U.S. Government agencies

   $ 68,004,770       $ 6,550       $ 910,122       $ 67,101,198   

Mortgage backed securities

     91,098,133         561,645         690,644         90,969,134   

State, County, Municipals

     86,482,999         2,310,546         646,554         88,146,991   

Other investments

     2,944,299         —           46,563         2,897,736   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 248,530,201       $ 2,878,741       $ 2,293,883       $ 249,115,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Securities available-for-sale

           

Obligations of U.S. Government agencies

   $ 77,996,980       $ —         $ 2,035,905       $ 75,961,075   

Mortgage backed securities

     12,501,990         824,844         —           13,326,834   

State, County, Municipals

     84,896,091         3,048,489         360,082         87,584,498   

Other investments

     2,997,401         —           124,678         2,872,723   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 178,392,462       $ 3,873,333       $ 2,520,665       $ 179,745,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended June 30, 2014, the Corporation transferred securities with an amortized cost of $222,322,423 from available-for-sale to held-to-maturity. This transfer was completed after consideration of the Corporation’s ability and intent to hold these securities to maturity.

The fair value of the securities transferred as of the date of transfer was $205,260,985 with a net unrealized loss of $17,061,438. In accordance with ASC 320-10-35-16, the discount on each security that resulted from this transfer is amortized over the remaining lives of the individual securities. Any unrealized holding losses on the date of the transfer are not recognized in net income but remain in accumulated other comprehensive loss. In accordance with ASC 320-10-15-10d, the unrealized loss amounts in accumulated other comprehensive loss are amortized simultaneously against interest income as the discount is accreted on the transferred securities. There is no effect on net income as the discount accretion offsets the accumulated other comprehensive loss amortization. The unamortized unrealized loss, before deferred taxes, was $13,503,152 and $15,516,336 at September 30, 2015 and December 31, 2014, respectively.

 

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Table of Contents

The amortized cost and estimated fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses were as follows:

 

September 30, 2015    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Securities held-to-maturity

           

Obligations of U.S. Government agencies

   $ 198,841,442       $ 9,849,446       $ —         $ 208,690,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 198,841,442       $ 9,849,446       $ —         $ 208,690,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Securities held-to-maturity

           

Obligations of U.S. Government agencies

   $ 206,817,169       $ 9,928,269       $ —         $ 216,745,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 206,817,169       $ 9,928,269       $ —         $ 216,745,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2015 and December 31, 2014 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

 

     September 30, 2015      December 31, 2014  
     Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
Available-for-sale            

Due in one year or less

   $ 5,051,473       $ 5,083,634       $ 3,619,965       $ 3,644,097   

Due after one year through five years

     14,695,697         15,152,756         11,886,005         12,165,884   

Due after five years through ten years

     76,477,244         76,599,942         73,014,502         72,750,584   

Due after ten years

     152,305,786         152,278,727         89,871,990         91,184,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 248,530,200       $ 249,115,059       $ 178,392,462       $ 179,745,130   
  

 

 

    

 

 

    

 

 

    

 

 

 
Held-to-maturity            

Due after five years through ten years

   $ 36,985,730       $ 38,711,680       $ 27,599,235       $ 28,395,635   

Due after ten years

     161,855,712         169,979,208         179,217,934         188,349,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 198,841,442       $ 208,690,888       $ 206,817,169       $ 216,745,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale and held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2015 and December 31, 2014.

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

 

September 30, 2015    Less than 12 months      12 months or more      Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Obligations of U. S. Government agencies

   $ 15,460       $ 36       $ 46,635       $ 874       $ 62,095       $ 910   

Mortgage backed securities

     70,391         691         —           —           70,391         691   

State, County, Municipal

     15,851         273         12,452         373         28,303         646   

Other investments

     —           —           2,898         47         2,898         47   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 101,702       $ 1,000       $ 61,985       $ 1,294       $ 163,687       $ 2,294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Less than 12 months      12 months or more      Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

Obligations of U. S. Government agencies

   $ —         $ —         $ 75,961       $ 2,036       $   75,961       $ 2,036   

Mortgage backed securities

     —           —           —           —           —           —     

State, County, Municipal

     697         3         14,980         357         15,677         360   

Other investments

     —           —           2,873         125         2,873         125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $        697       $        3       $ 93,814       $ 2,518       $ 94,511       $ 2,521   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s unrealized losses on its obligations of United States Government agencies, mortgage backed securities and state, county and municipal bonds are the result of an upward trend in interest rates, mainly in the mid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Corporation has determined that none of the securities in this classification are other-than-temporarily impaired at September 30, 2015 or at December 31, 2014.

The Corporation’s unrealized loss on other investments relates to an investment in a pooled trust preferred security. The decline in value of the pooled trust preferred security is related to the deterioration of the markets for these types of securities brought about by the lowered credit ratings and past deferrals and defaults of the underlying issuing financial institutions. The Corporation owns a senior tranche of this security and therefore has a higher degree of which future deferrals and defaults would be required before the cash flow for the Corporation’s tranche is negatively impacted. The Corporation does not intend to sell this security and it is not more likely than not that the Corporation will be required to sell at a price less than amortized cost prior to maturity. Given these factors, the Corporation does not consider the investment to be other-than-temporarily impaired at September 30, 2015 or December 31, 2014.

 

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Table of Contents

Note 7. Loans

The composition of net loans (in thousands) at September 30, 2015 and December 31, 2014 is as follows:

 

     September 30, 2015      December 31, 2014  

Real Estate:

     

Land Development and Construction

   $ 47,777       $ 43,233   

Farmland

     23,539         26,463   

1-4 Family Mortgages

     105,486         104,170   

Commercial Real Estate

     174,966         151,746   
  

 

 

    

 

 

 

Total Real Estate Loans

     351,768         325,612   

Business Loans:

     

Commercial and Industrial Loans

     53,801         38,333   

Farm Production and Other Farm Loans

     995         1,035   
  

 

 

    

 

 

 

Total Business Loans

     54,796         39,368   

Consumer Loans:

     

Credit Cards

     1,021         1,075   

Other Consumer Loans

     25,028         25,440   
  

 

 

    

 

 

 

Total Consumer Loans

     26,049         26,515   
  

 

 

    

 

 

 

Total Gross Loans

     432,613         391,495   

Unearned income

     (668      (535

Allowance for loan losses

     (6,829      (6,542
  

 

 

    

 

 

 

Loans, net

   $ 425,116       $ 384,418   
  

 

 

    

 

 

 

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 management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed 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.

 

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

 

     September 30, 2015      December 31, 2014  

Real Estate:

     

Land Development and Construction

   $ 80       $ 92   

Farmland

     166         222   

1-4 Family Mortgages

     2,640         1,905   

Commercial Real Estate

     12,138         9,444   
  

 

 

    

 

 

 

Total Real Estate Loans

     15,024         11,663   

Business Loans:

     

Commercial and Industrial Loans

     89         70   
  

 

 

    

 

 

 

Total Business Loans

     89         70   

Consumer Loans:

     

Other Consumer Loans

     48         133   
  

 

 

    

 

 

 

Total Consumer Loans

     48         133   
  

 

 

    

 

 

 

Total Non-Accrual Loans

   $ 15,161       $ 11,854   
  

 

 

    

 

 

 

 

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Table of Contents

An aging analysis of past due loans (in thousands), segregated by class, as of September 30, 2015, 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

   $ 424       $ —         $ 424       $ 47,353       $ 47,777       $ —     

Farmland

     345         25         370         23,169         23,539         25   

1-4 Family Mortgages

     5,149         848         5,997         99,489         105,486         48   

Commercial Real Estate

     6,754         4,153         10,907         164,059         174,966         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     12,672         5,026         17,698         334,070         351,768         73   

Business Loans:

                 

Commercial and Industrial Loans

     166         79         245         53,556         53,801         50   

Farm Production and Other Farm Loans

     6         —           6         989         995         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     172         79         251         54,545         54,796         50   

Consumer Loans:

                 

Credit Cards

     11         2         13         1,008         1,021         2   

Other Consumer Loans

     1,071         7         1,078         23,950         25,028         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     1,082         9         1,091         24,958         26,049         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 13,926       $ 5,114       $ 19,040       $ 413,573       $ 432,613       $ 132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2014 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

   $ 578       $ —         $ 578       $ 42,655       $ 43,233       $ —     

Farmland

     889         17         906         25,557         26,463         —     

1-4 Family Mortgages

     4,606         837         5,443         98,727         104,170         131   

Commercial Real Estate

     2,211         4,471         6,682         145,064         151,746         724   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     8,284         5,325         13,609         312,003         325,612         855   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Business Loans:

                 

Commercial and Industrial Loans

     115         3         118         38,215         38,333         3   

Farm Production and other Farm Loans

     22         —           22         1,013         1,035         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     137         3         140         39,228         39,368         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer Loans:

                 

Credit Cards

     27         6         33         1,042         1,075         6   

Other Consumer Loans

     1,179         53         1,232         24,208         25,440         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     1,206         59         1,265         25,250         26,515         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 9,627       $ 5,387       $ 15,014       $ 376,481       $ 391,495       $ 880   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 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.

 

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Table of Contents

Impaired loans (in thousands) as of September 30, 2015 and December 31, 2014, segregated by class, are as follows:

 

September 30, 2015

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

Real Estate:

                 

Land Development and Construction

   $ 80       $ —         $ 80       $ 80       $ 80       $ 81   

Farmland

     687         74         613         687         54         715   

1-4 Family Mortgages

     3,284         1,839         1,445         3,284         233         3,097   

Commercial Real Estate

     12,138         1,808         10,330         12,138         2,401         11,064   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     16,189         3,721         12,468         16,189         2,768         14,957   

Business Loans:

                 

Commercial and Industrial Loans

     89         61         28         89         25         112   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     89         61         28         89         25         112   

Consumer Loans:

                 

Other Consumer Loans

     49         49         —           49         —           61   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     49         49         —           49         —           61   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 16,327       $ 3,831       $ 12,496       $ 16,327       $ 2,793       $ 15,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

December 31, 2014

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

Real Estate:

                 

Land Development and Construction

   $ 92       $ —         $ 92       $ 92       $ 92       $ 114   

Farmland

     798         104         694         798         108         575   

1-4 Family Mortgages

     2,554         1,685         869         2,554         143         2,210   

Commercial Real Estate

     9,444         896         8,548         9,444         1,642         9,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     12,888         2,685         10,203         12,888         1,985         12,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Business Loans:

                 

Commercial and Industrial Loans

     70         30         40         70         40         1,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     70         30         40         70         40         1,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer Loans:

                 

Other Consumer Loans

     121         121         —           121         —           120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     121         121         —           121         —           120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 13,079       $ 2,836       $ 10,243       $ 13,079       $ 2,025       $ 13,335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

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

 

September 30, 2015    Number of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Commercial real estate

     4       $ 6,850       $ 4,460   
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 6,850       $ 4,460   
  

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Number of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Commercial real estate

     4       $ 6,850       $ 4,741   
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 6,850       $ 4,741   
  

 

 

    

 

 

    

 

 

 

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

 

     Number
of Loans
     Recorded
Investment
 

Totals at January 1, 2015

     4       $ 4,741   

Reductions due to:

     

Principal paydowns

        (281
  

 

 

    

 

 

 

Total at September 30, 2015

     4       $ 4,460   
  

 

 

    

 

 

 

The allocated allowance for loan losses attributable to restructured loans was $174,274 at September 30, 2015 and December 31, 2014. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructuring as of September 30, 2015.

 

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 is as follows.

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

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

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

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

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

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

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

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

 

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Table of Contents

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at September 30, 2015.

The following table details the amount of gross loans (in thousands), segregated by loan grade and class, as of September 30, 2015:

 

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

Real Estate:

                    

Land Development and Construction

      $ 46,066       $ 266       $ 1,445       $ —         $ —         $ 47,777   

Farmland

        21,341         856         1,342         —           —           23,539   

1-4 Family Mortgages

        89,158         4,601         11,727         —           —           105,486   

Commercial Real Estate

        150,601         11,185         13,180         —           —           174,966   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

        307,166         16,908         27,694         —           —           351,768   

Business Loans:

                    

Commercial and Industrial Loans

        53,255         397         149         —           —           53,801   

Farm Production and Other Farm Loans

        995         —           —           —           —           995   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

        54,250         397         149         —           —           54,796   

Consumer Loans:

                    

Credit Cards

        1,019         —           2         —           —           1,021   

Other Consumer Loans

        24,714         114         192         8         —           25,028   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

        25,733         114         194         8         —           26,049   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

      $ 387,149       $ 17,419       $ 28,037       $ 8       $ —         $ 432,613   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as of December 31, 2014:

 

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

Real Estate:

                    

Land Development and Construction

      $ 41,431       $ 424       $ 1,378       $ —         $ —         $ 43,233   

Farmland

        23,993         708         1,762         —           —           26,463   

1-4 Family Mortgages

        86,969         5,351         11,850         —           —           104,170   

Commercial Real Estate

        126,881         13,558         11,307         —           —           151,746   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

        279,274         20,041         26,297         —           —           325,612   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Business Loans:

                    

Commercial and Industrial Loans

        37,890         232         211         —           —           38,333   

Farm Production and other Farm Loans

        1,035         0         —           —           —           1,035   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

        38,925         232         211         —           —           39,368   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer Loans:

                    

Credit Cards

        1,069         —           6         —           —           1,075   

Other Consumer Loans

        24,889         177         358         16         —           25,440   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

        25,958         177         364         16         —           26,515   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

      $ 344,157       $ 20,450       $ 26,872       $ 16       $ —         $ 391,495   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.

The allowance on the majority of the loan portfolio is calculated using a historical chargeoff percentage applied to the current loan balances by loan segment. This historical period is the average of the previous twenty quarters with the most current quarters weighted more heavily to show the effect of the most recent chargeoff activity. This percentage is also adjusted for economic factors such as local unemployment and general business conditions, both local and nationwide.

The group of loans that are considered to be impaired are individually evaluated for possible loss and a specific reserve is established to cover any loss contingency. Loans that are determined to be a loss with no benefit of remaining in the portfolio are charged off to the allowance. These specific reserves are reviewed periodically for continued impairment and adequacy of the specific reserve and adjusted when necessary.

 

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Table of Contents

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2015:

 

September 30, 2015    Real
Estate
     Business
Loans
     Consumer      Total  

Beginning Balance, January 1, 2015

   $ 5,202,151       $ 873,815       $ 466,360       $ 6,542,326   

Provision for possible loan losses

     338,668         (81,216      150,246         407,698   

Chargeoffs

     152,503         —           111,897         264,400   

Recoveries

     67,843         11,545         63,770         143,158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Chargeoffs

     84,660         (11,545      48,127         121,242   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 5,456,159       $ 804,144       $ 568,479       $ 6,828,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Period end allowance allocated to:

           

Loans individually evaluated for impairment

   $ 2,767,962       $ 25,000       $ —         $ 2,792,962   

Loans collectively evaluated for impairment

     2,688,197         779,144         568,479         4,035,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, September 30, 2015

   $ 5,456,159       $ 804,144       $ 568,479       $ 6,828,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014:

 

September 30, 2014    Real
Estate
     Business
Loans
     Consumer      Total  

Beginning Balance, January 1, 2014

   $ 4,705,753       $ 2,767,409       $ 604,337       $ 8,077,499   

Provision for possible loan losses

     69,710         736,437         (28,217      777,930   

Chargeoffs

     181,146         2,050,939         102,672         2,334,757   

Recoveries

     145,004         9,099         52,719         206,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Chargeoffs

     36,142         2,041,840         49,953         2,127,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, September 30, 2014

   $ 4,739,321       $ 1,462,006       $ 526,167       $ 6,727,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Period end allowance allocated to:

           

Loans individually evaluated for impairment

   $ 1,785,019       $ 40,619       $ —         $ 1,825,638   

Loans collectively evaluated for impairment

     2,954,302         1,421,387         526,167         4,901,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance, September 30, 2014

   $ 4,739,321       $ 1,462,006       $ 526,167       $ 6,727,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The Corporation’s recorded investment in loans as of September 30, 2015 and December 31, 2014 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):

 

September 30, 2015    Real
Estate
     Business
Loans
     Consumer      Total  

Loans individually evaluated for specific impairment

   $ 16,189       $ 89       $ 49       $ 16,327   

Loans collectively evaluated for general impairment

     335,579         54,707         26,000         416,286   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 351,768       $ 54,796       $ 26,049       $ 432,613   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Real
Estate
     Business
Loans
     Consumer      Total  

Loans individually evaluated for specific impairment

   $ 12,888       $ 70       $ 121       $ 13,079   

Loans collectively evaluated for general impairment

     312,724         39,298         26,394         378,416   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 325,612       $ 39,368       $ 26,515       $ 391,495   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 8. Fair Value of Financial Instruments

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

 

Level 1    Quoted prices in active markets for identical assets or liabilities;
Level 2    Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3    Unobservable inputs, 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 are measured at fair value on a recurring basis as of September 30, 2015:

 

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

Securities available for sale

           

Obligations of U. S. Government Agencies

   $ —         $ 67,101,198       $ —         $ 67,101,198   

Mortgage-backed securities

     —           90,969,134         —           90,969,134   

State, county and municipal obligations

     —           88,146,991         —           88,146,991   

Other investments

     —           —           2,897,736         2,897,736   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 246,217,323       $ 2,897,736       $ 249,115,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2014:

 

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

Securities available for sale

           

Obligations of U. S. Government Agencies

   $ —         $ 75,961,075       $ —         $ 75,961,075   

Mortgage-backed securities

     —           13,326,834         —           13,326,834   

State, county and municipal obligations

     —           87,584,498         —           87,584,498   

Other investments

     —           —           2,872,723         2,872,723   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 176,872,407       $ 2,872,723       $ 179,745,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reports the activity for 2015 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  

Balance at January 1, 2015

   $ 2,872,723   

Principal payments received

     (60,246

Unrealized gains included in other comprehensive income

     85,259   
  

 

 

 

Balance at September 30, 2015

   $ 2,897,736   
  

 

 

 

The Corporation recorded no gains or losses in earnings for the period that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

 

24


Table of Contents

For assets measured at fair value on a nonrecurring basis during 2015 that were still held in the balance sheet at September 30, 2015, the following table provides the hierarchy level and the fair value of the related assets:

 

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

Impaired loans

   $ —         $ —         $ 4,504,455       $ 4,504,455   

Other real estate owned

     —           —           429,052         429,052   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 4,933,507       $ 4,933,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

For assets measured at fair value on a nonrecurring basis during 2014 that were still held in the balance sheet at December 31, 2014, the following table provides the hierarchy level and the fair value of the related assets:

 

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

Impaired loans

   $ —         $ —         $ 8,782,923       $ 8,782,923   

Other real estate owned

     —           —           645,468         645,468   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 9,428,391       $ 9,428,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a carrying value of $12,495,636 and $10,243,082 had an allocated allowance for loan losses of $2,792,962 and $2,024,754 at September 30, 2015 and December 31, 2014, 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.

Other real estate owned (“OREO”) acquired during the nine-month period ended September 30, 2015, and recorded at fair value, less costs to sell, was $681,314, of which $252,262 was acquired and sold during this period. There were no writedowns during the period on properties owned. OREO acquired during 2014 and recorded at fair value, less costs to sell, was $2,874,173. Additional writedowns during 2014 on OREO acquired in previous years was $694,207.

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

 

25


Table of Contents

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. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation and may not be indicative of amounts that might ultimately be realized upon disposition or settlement of those assets and liabilities.

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at September 30, 2015, and December 31, 2014:

 

September 30, 2015    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

   $ 20,349,539       $ 20,349,539       $ —         $ —         $ 20,349,539   

Interest bearing deposits with banks

     1,074,513         1,074,513         —           —           1,074,513   

Securities held-to-maturity

     198,841,442            208,690,888            208,690,888   

Securities available-for-sale

     249,115,059         —           246,217,323         2,897,736         249,115,059   

Net loans

     425,116,389         —           —           427,298,527         427,298,527   

Financial liabilities

              

Deposits

   $ 748,641,512       $ 534,755,433       $ —         $ 214,023,200       $ 748,778,633   

Federal Home Loan Bank advances

     20,000,000         —           —           20,753,304         20,753,304   

Securities Sold under Agreement to Repurchase

     89,570,169         89,570,169         —           —           89,570,169   

 

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Table of Contents
December 31, 2014    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

   $ 22,405,730       $ 22,405,730       $ —         $ —         $ 22,405,730   

Interest bearing deposits with banks

     61,481,223         61,481,223         —           —           61,481,223   

Securities available-for-sale

     179,745,130         —           176,872,407         2,872,723         179,745,130   

Securities held-to-maturity

     206,817,168         —           216,745,438         —           216,745,438   

Net loans

     384,417,508         —           —           386,206,117         386,206,117   

Financial liabilities

              

Deposits

   $ 696,093,894       $ 474,551,535       $ —         $ 221,685,000       $ 696,236,535   

Federal Home Loan Bank advances

     20,000,000         —           —           20,804,047         20,804,047   

Securities Sold under Agreement to Repurchase

     114,426,770         114,426,770         —           —           114,426,770   

The fair value estimates, methods and assumptions used by the Corporation in estimating its fair value disclosures for financial statements were as follows:

Cash and Due from Banks and Interest Bearing Deposits with Banks

The carrying amounts reported in the balance sheet for these instruments approximate fair value because of their immediate and shorter-term maturities, which are considered to be three months or less when purchased.

Securities Held-to-Maturity

Securities held-to-maturity consists of debt securities such as obligations of states and other political subdivisions. Where quoted market prices in active markets are available, securities are classified within Level 1 of the fair value hierarchy. If quoted prices from active markets are not available, fair values are based on quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active, or model-based valuation techniques where all significant assumptions are observable in the market. Such instruments are classified within Level 2 of the fair value hierarchy. When assumptions used in model-based valuation techniques are not observable in the market, the assumptions used by management reflect estimates of assumptions used by other market participants in determining fair value. When there is limited transparency around the inputs to the valuation, the instruments are classified within Level 3 of the fair value hierarchy.

 

27


Table of Contents

Securities Available-for-Sale

Fair values for investment securities are based on quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments (Level 2). When neither quoted prices nor comparable instruments are available, unobservable inputs are needed to form an expected future cash flow analysis to establish fair values (Level 3).

The Corporation owns certain beneficial interests in one collateralized debt obligation secured by community bank trust preferred securities. These interests do not trade in a liquid market, and therefore, market quotes are not a reliable indicator of their ultimate realizability. The Corporation utilizes a discounted cash flow model using inputs of (1) market yields of trust-preferred securities as the discount rate and (2) expected cash flows which are estimated using assumptions related to defaults, deferrals and prepayments to determine the fair values of these beneficial interests. Many of the factors that adjust the timing and extent of cash flows are based on judgment and not directly observable in the markets. Therefore, these fair values are classified as Level 3 valuations for accounting and disclosure purposes. Since observable transactions in these securities are extremely rare, the Corporation uses assumptions that a market participant would use in valuing these instruments. These assumptions primarily include cash flow estimates and market discount rates. The cash flow estimates are sensitive to the assumptions related to the ability of the issuers to pay the underlying trust preferred securities according to their terms. The market discount rates depend on transactions, which are rare given the lack of interest of investors in these types of beneficial interests.

Net Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans (i.e., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans, and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits

The fair values for demand deposits, NOW and money market accounts and savings accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and time deposits approximate their fair values at the reporting date. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank (“FHLB”) Borrowings

The fair value of FHLB advances is based on a discounted cash flow analysis.

 

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Table of Contents

Securities Sold Under Agreement to Repurchase

Due to the short term nature of these instruments, which is generally three months or less, the carrying amount is equal to the fair value.

Off-Balance Sheet Instruments

The fair value of commitments to extend credit and letters of credit are estimated using fees currently charged to enter into similar agreements. The fees associated with these financial instruments are not material.

 

29


Table of Contents

CITIZENS HOLDING COMPANY

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD LOOKING STATEMENTS

In addition to historical information, this Quarterly Report contains statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report, including, but not limited to, statements found in Item 1, “Notes to Consolidated Financial Statements” and in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 Corporation’s business include, but are not limited to, the following: (a) the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Corporation operates; (b) changes in the legislative and regulatory environment that negatively impact the Corporation through increased operating expenses; (c) increased competition from other financial institutions; (d) the impact of technological advances; (e) expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions; (f) changes in asset quality and loan demand; (g) expectations about overall economic strength and the performance of the economies in the Corporation’s market area; and (h) other risks detailed from time to time in the Corporation’s filings with the Securities and Exchange Commission. The Corporation does not undertake any obligation to update or revise any forward-looking statements subsequent to the date on which they are made.

 

30


Table of Contents

Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of Citizens Holding Company and its wholly owned subsidiary, The Citizens Bank of Philadelphia (the “Bank,” and collectively with Citizens Holding Company, the “Corporation”). The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report.

LIQUIDITY

The Corporation has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Corporation at September 30, 2015, was 30.89% and at December 31, 2014, was 37.72%. The decrease was due to a decrease in short term marketable assets at September 30, 2015. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $748,641,512 at September 30, 2015, and $696,093,894 at December 31, 2014. Other sources of liquidity include investment securities, the Corporation’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Corporation had $249,115,059 invested in available-for-sale investment securities at September 30, 2015, and $179,745,130 at December 31, 2014. The Corporation also had $1,074,513 in interest bearing deposits at other banks at September 30, 2015 and $61,481,223 at December 31, 2014. The decrease in interest bearing deposits was the result of funds being invested in longer term investments, including certain mortgage backed products, which are expected to produce more interest income. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at September 30, 2015 and December 31, 2014. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At September 30, 2015, the Corporation had unused and available $146,075,257 of its line of credit with the FHLB and at December 31, 2014, the Corporation had unused and available $142,313,563 of its line of credit with the FHLB. The increase in the amount available under the Corporation’s line of credit with the FHLB from the end of 2014 to September 30, 2015, was the result of an increase in the amount of loans eligible for the collateral pool. The Corporation had $8,600,000 in federal funds purchased as of September 30, 2015 and December 31, 2014. The Corporation usually purchases 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 accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to insure rate flexibility and to meet loan funding and liquidity needs. When deposits decline or do not grow sufficiently to fund loan demand, management will seek funding either through federal funds purchased or advances from the FHLB.

 

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CAPITAL RESOURCES

Total shareholders’ equity was $84,513,124 at September 30, 2015, as compared to $81,857,786 at December 31, 2014. 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 as well as the increase in the amount of earnings in excess of dividends paid. The market value increase was due to general market conditions, specifically the decrease in medium term interest rates, which caused an increase in the market price of the investment portfolio.

Aggregate cash dividends in the amount of $3,370,751, or $0.69 per share, have been paid during the nine-month period ended September 30, 2015.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of September 30, 2015, the Corporation meets all capital adequacy requirements to which it is subject.

 

     Actual    

For Capital

Adequacy Purposes

   

To Be Well

Capitalized Under

Prompt Corrective

Actions Provisions

 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2015

               

Total Capital

   $ 96,292,019         17.44   $ 44,158,099         >8.00   $ 55,197,624         >10.00

(to Risk-Weighted Assets)

               

Tier 1 Capital

     89,463,238         16.21     22,079,050         >4.00     33,118,574         >6.00

(to Risk-Weighted Assets)

               

Tier 1 Capital

     89,463,238         9.49     37,723,712         >4.00     47,154,641         >5.00

( to Average Assets)

               

The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the 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 Corporation. The capital framework under Basel III will replace the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

Beginning January 1, 2015, the Corporation and the Bank was required to comply with the final Basel III rules, although the rules will not be fully phased-in until January 1, 2019. Among other things, the final Basel III rules will impact regulatory capital ratios of banking organizations in the following manner, when fully phased in:

 

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

 

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

 

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

 

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

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

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

Management believes that, as of September 30, 2015, the Corporation and the Bank would meet all capital adequacy requirements under Basel III and the banking agencies’ proposals on a fully phased-in basis if such requirements were currently effective. The changes to the calculation of risk-weighted assets did not have a material impact on the Corporation’s capital ratios as presented. Management will continue to monitor these and any future proposals submitted by the Corporation’s and Bank’s regulators.

 

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RESULTS OF OPERATIONS

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

 

    

For the Three Months

Ended September 30,

    

For the Nine Months

Ended September 30,

 
     2015      2014      2015      2014  

Interest Income, including fees

   $ 7,788,461       $ 7,829,806       $ 23,190,851       $ 23,701,247   

Interest Expense

     765,625         758,742         2,252,483         2,221,552   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     7,022,836         7,071,064         20,938,368         21,479,695   

Provision for Loan Losses

     141,704         205,027         407,698         777,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income after Provision for Loan Losses

     6,881,132         6,866,037         20,530,670         20,701,765   

Other Income

     2,017,613         2,055,897         5,621,209         6,322,999   

Other Expense

     6,474,879         6,439,258         19,283,003         19,854,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Provision For Income Taxes

     2,423,866         2,482,676         6,868,876         7,170,648   

Provision for Income Taxes

     587,405         584,456         1,610,282         1,382,756   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 1,836,461       $ 1,898,220       $ 5,258,594       $ 5,787,892   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Per share - Basic

   $ 0.38       $ 0.39       $ 1.08       $ 1.19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Per Share - Diluted

   $ 0.38       $ 0.39       $ 1.08       $ 1.19   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Annualized return on average equity (“ROE”) was 8.78% for the three months ended September 30, 2015, and 11.79% for the corresponding period in 2014. For the nine months ended September 30, 2015, ROE was 8.39% compared to 11.62% for the nine months ended September 30, 2014. In the nine-months comparison, the decrease in ROE was caused by other income in the second quarter of 2014 that was the result of net proceeds from bank owned life insurance that were received after the death of an insured bank officer.

The book value per share increased to $17.30 at September 30, 2015, compared to $16.78 at December 31, 2014. The increase in book value per share reflects the amount of earnings in excess of dividends and by a decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities. Average assets for the nine months ended September 30, 2015, were $933,701,675 compared to $884,687,654 for the year ended December 31, 2014.

 

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NET INTEREST INCOME / NET INTEREST MARGIN

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

The annualized net interest margin was 3.34% for the quarter ended September 30, 2015 compared to 3.62% for the corresponding period of 2014. For the nine months ended September 30, 2015, annualized net interest margin was 3.39% compared to 3.65% for the nine months ended September 30, 2014. The decrease in net interest margin for both periods ended September 30, 2015, when compared to the same period in 2014, was the result of the decrease in yields on earning assets exceeding the decrease in rates paid on deposits and borrowed funds, as detailed below. Earning assets averaged $864,545,788 for the three months ended September 30, 2015. This represents an increase of $85,993,071, or 11.0%, over average earning assets of $778,552,717 for the three months ended September 30, 2014. Earning assets averaged $852,487,031 for the nine months ended September 30, 2015. This represents an increase of $67,480,363, or 8.6%, over average earning assets of $785,006,668 for the nine months ended September 30, 2014. The increase in average earning assets for the three and nine months ended September 30, 2015, is the result of an increase in investment securities and loans.

Interest bearing deposits averaged $589,510,995 for the three months ended September 30, 2015. This represents an increase of $37,331,838, or 6.8%, from the average of interest bearing deposits of $552,179,157 for the three months ended September 30, 2014. This was due, in large part, to an increase in interest-bearing NOW, money market accounts and savings accounts partially offset by a decrease in certificates of deposit.

Other borrowed funds averaged $119,199,924 for the three months ended September 30, 2015. This represents an increase of $12,756,174, or 12.0%, over the other borrowed funds of $106,443,750 for the three months ended September 30, 2014. This increase in other borrowed funds was due to a $19,060,109 increase in the securities sold under agreement to repurchase, a $40,892 decrease in the Agribusiness Enterprise Loan Liability, a $263,043 decrease in Federal Funds Purchased and a decrease in the FHLB advances of $6,000,000 for the three months ended September 30, 2015, when compared to the three months ended September 30, 2014.

Interest bearing deposits averaged $576,939,428 for the nine months ended September 30, 2015. This represents an increase of $30,033,592, or 5.5%, from the average of interest bearing deposits of $546,905,836 for the nine months ended September 30, 2014. This was due, in large part, to an increase in interest-bearing NOW, money market accounts and savings accounts partially offset by a decrease in certificates of deposit.

Other borrowed funds averaged $123,093,269 for the nine months ended September 30, 2015. This represents an increase of $2,978,007, or 2.5%, over the other borrowed funds of $120,115,262 for the nine months ended September 30, 2014. This increase in other borrowed funds was due to a $25,438,932 increase in the securities sold under agreement to repurchase, a

 

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$51,035 decrease in the Agribusiness Enterprise Loan Liability, a $2,536,264 decrease in Federal Funds Purchased and a decrease in the FHLB advances of $19,873,626 for the nine months ended September 30, 2015, when compared to the nine months ended September 30, 2014.

Net interest income was $7,022,836 for the three months ended September 30, 2015, a decrease of $48,228 from $7,071,064 for the three months ended September 30, 2014, primarily due to a decrease in rate partially offset by an increase in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As to changes in rate in the three months ended September 30, 2015, the yields on earning assets decreased more than the rates paid on deposits and borrowed funds decreased from the same period in 2014. The yield on all interest bearing assets decreased 30 basis points to 3.69% in the three months ended September 30, 2015 from 3.99% for the same period in 2014. At the same time, the rate paid on all interest bearing liabilities for the three months ended September 30, 2015 dropped 3 basis points to 0.43% from 0.46% in the same period in 2014. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

Net interest income was $20,938,368 for the nine months ended September 30, 2015, a decrease of $541,327 from $21,479,695 for the nine months ended September 30, 2014, primarily due to a decrease in rate partially offset by an increase in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As to changes in rate in the nine months ended September 30, 2015, the yields on earning assets decreased more than the rates paid on deposits and borrowed funds decreased from the same period in 2014. The yield on all interest bearing assets decreased 28 basis points to 3.73% in the nine months ended September 30, 2015 from 4.01% for the same period in 2014. At the same time, the rate paid on all interest bearing liabilities for the nine months ended September 30, 2015 dropped 1 basis point to 0.43% from 0.44% in the same period in 2014. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

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

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2015     2014     2015     2014  

Interest and Fees

   $ 5,037,766      $ 4,998,738      $ 15,033,778      $ 15,110,093   

Average Gross Loans

     417,299,195        390,440,555        408,254,701        391,326,417   

Annualized Yield

     4.83     5.12     4.91     5.15

The decrease in interest rates in the three and nine months ended September 30, 2015, reflects the decrease in all loan interest rates for both new and refinanced loans in the period.

CREDIT LOSS EXPERIENCE

As a natural corollary to the Corporation’s lending activities, some loan losses are to be expected. The risk of loss varies with the type of loan being made and the overall creditworthiness of the

 

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borrower over the term of the loan. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and for various types of loans. The Corporation attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures.

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

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

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

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

 

     Quarter Ended
September 30,
2015
    Year Ended
December 31,
2014
    Amount of
Increase
(Decrease)
     Percent of
Increase
(Decrease)
 

BALANCES:

         

Gross Loans

   $ 432,612,894      $ 391,494,584      $ 41,118,310         10.50

Allowance for Loan Losses

     6,828,782        6,542,326        286,456         4.38

Nonaccrual Loans

     15,160,977        11,854,274        3,306,703         27.89

Ratios:

         

Allowance for loan losses to gross loans

     1.58     1.67     

Net loans charged off to allowance for loan losses

     1.78     37.58     

 

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The provision for loan losses for the three months ended September 30, 2015, was $141,704, a decrease of $63,323 from the $205,027 provision for the same period in 2014. The provision for loan losses for the nine months ended September 30, 2015, was $407,698, a decrease of $370,232 from the $777,930 provision for the same period in 2014. The change in our loan loss provisions for the three and nine months is a result of management’s assessment of inherent loss in the loan portfolio, including the impact caused by current local, national and international economic conditions. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans increased during this period due to the amount of new loans being added to the nonaccrual loan list exceeded payments received.

For the three months ended September 30, 2015, net loan losses charged to the allowance for loan losses totaled $5,836, a decrease of $2,011,126 from the $2,016,962 charged off in the same period in 2014. For the nine months ended September 30, 2015, net loan losses charged to the allowance for loan losses totaled $121,242, a decrease of $2,006,693 from the $2,127,935 charged off in the same period in 2014.

Management reviews quarterly with the Corporation’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three and nine months ended September 30, 2015 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

 

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OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended September 30, 2015 was $2,017,613, a decrease of $38,284, or 1.9%, from the same period in 2014. Service charges on deposit accounts decreased by $6,541, or 0.6%, to $1,036,964 in the three months ended September 30, 2015, compared to $1,043,505 for the same period in 2014. Other service charges and fees increased by $51,114, or 8.9%, to $626,283 in the three months ended September 30, 2015, compared to $575,169 for the same period in 2014. Other income decreased $82,857, or 19.0% to $354,366 in the three months ended September 30, 2015, compared to $437,223 for the same period of 2014. The decrease in service charges on deposit accounts was the result of a decrease in service charges on checking accounts and overdraft charges and not a direct result of fee changes.

Other income for the nine months ended September 30, 2015 was $5,621,209, a decrease of $701,790, or 11.1%, compared to $6,322,999 the same period in 2014. Service charges on deposit accounts decreased by $59,221, or 2.0%, to $2,877,841 in the nine months ended September 30, 2015, compared to $2,937,062 for the same period in 2014. Other service charges and fees increased by $136,996, or 8.6%, to $1,721,297 in the nine months ended September 30, 2015, compared to $1,584,301 for the same period in 2014. Other income decreased $779,565 in the nine months ended September 30, 2015 from the same period in 2014 due to the net proceeds of bank owned life insurance as a result of the death of an insured bank officer. The decrease in service charges on deposit accounts was the result of a decrease in service charges on checking accounts and overdraft charges and not a direct result of fee changes.

The following is a detail of the other major income classifications that are included in Other Income on the income statement:

 

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

Other Income

   2015      2014      2015      2014  

BOLI Insurance

   $ 144,000       $ 144,000       $ 432,000       $ 432,000   

Mortgage Loan Origination Income

     87,025         97,870         269,413         240,604   

Income from security sales, net

     13,699         5,436         13,699         14,538   

Other Income

     109,642         189,917         306,959         1,114,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Income

   $ 354,366       $ 437,223       $ 1,022,071       $ 1,801,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended September 30, 2015 and 2014 were $6,474,879 and $6,439,258, respectively, an increase of $35,621, or 0.6%. Salaries and benefits increased slightly to $3,341,356 for the three months ended September 30, 2015, from $3,242,294 for the same period in 2014. Occupancy expense decreased by $3,384, or

 

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0.2%, to $1,356,655 for the three months ended September 30, 2015, compared to $1,360,039 for the same period of 2014. Other operating expenses decreased by $60,057 to $1,776,868 for the three months ended September 30, 2015, compared to $1,836,925 for the same period of 2014. This decrease is due mainly to lower loan collection costs, supply costs and write downs on other real estate owned. A detail of the major expense classifications is set forth below.

Total non-interest expenses for the nine months ended September 30, 2015 and 2014 were $19,283,003 and $19,854,116, respectively, a decrease of $57,113, or 0.3%. Salaries and benefits increased to $10,038,040 for the nine months ended September 30, 2015, from $9,850,501 for the same period in 2014. Occupancy expense increased by $48,818, or 1.3%, to $3,952,914 for the nine months ended September 30, 2015, compared to $3,904,096 for the same period of 2014. Other operating expenses decreased by $807,470 to $5,292,049 for the nine months ended September 30, 2015, compared to $6,099,519 for the same period of 2014. This decrease is due mainly to lower loan collection costs, supply costs and insurance costs. A detail of the major expense classifications is set forth below.

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

 

    

Three months

ended September 30,

    

Nine months

ended September 30,

 

Other Operating Expense

   2015      2014      2015      2014  

Advertising

     213,644         187,998         603,051         552,038   

Office Supplies

     124,615         196,880         399,168         577,695   

Legal and Audit Fees

     97,274         121,901         311,334         268,212   

Telephone expense

     118,891         99,105         330,992         309,418   

Postage and Freight

     117,253         106,677         349,389         355,728   

Loan Collection Expense

     57,282         123,870         148,628         522,386   

Other Losses

     47,262         64,818         229,010         686,393   

Regulatory and related expense

     188,348         193,751         569,326         581,829   

Debit Card/ATM expense

     55,957         85,787         253,801         251,992   

Travel and Convention

     68,152         42,032         209,391         148,774   

Other expenses

     688,190         614,106         1,887,959         1,845,054   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Expense

   $ 1,776,868       $ 1,836,925       $ 5,292,049       $ 6,099,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s efficiency ratio for the three months ended September 30, 2015, was 68.30% compared to the 68.54% for the same period in 2014. For the nine months ended September 30, 2015 and 2014, the Corporation’s efficiency ratio was 70.19% and 69.41%, respectively. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.

 

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BALANCE SHEET ANALYSIS

 

     September 30,
2015
     December 31,
2014
     Amount of
Increase
(Decrease)
     Percent of
Increase
(Decrease)
 

Cash and Due From Banks

   $ 20,349,539       $ 22,405,730       $ (2,056,191      -9.18

Interest Bearing deposits with Other Banks

     1,074,513         61,481,223         (60,406,710      -98.25

Investment Securities

     447,956,501         386,562,299         61,394,202         15.88

Loans, net

     425,116,389         384,417,508         40,698,881         10.59

Premises and Equipment

     18,730,587         19,240,230         (509,643      -2.65

Total Assets

     960,895,192         921,060,681         39,834,511         4.32

Total Deposits

     748,641,512         696,093,894         52,547,618         7.55

Total Stockholders’ Equity

     84,513,124         81,857,786         2,655,338         3.24

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which consist of cash, balances at correspondent banks and items in process of collection, balance at September 30, 2015 was $20,349,539, which was a decrease of $2,056,191 from the balance of $22,405,730 at December 31, 2014. The decrease was due to a decrease in the balances at correspondent banks due to a decrease in the amount of the month ending cash letter.

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. Investments securities portfolio at September 30, 2015, increased by $61,394,202, or 15.9%, to $447,956,501 from $386,562,299 at December 31, 2014. This increase is due to additional purchases of mortgage backed securities offset by changes in the market value of the securities portfolio.

LOANS

The Corporation’s loan balance increased by $40,698,881 during the nine months ended September 30, 2015, to $425,116,389 from $384,417,508 at December 31, 2014. Loan demand, especially in business loan and consumer loan categories, strengthened and competition for available loans continued to be strong during the nine months ended September 30, 2015. No material changes were made to the loan products offered by the Corporation during this period.

 

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PREMISES AND EQUIPMENT

During the nine months ended September 30, 2015, the Corporation’s premises and equipment decreased by $509,643, or 2.7%, to $18,730,587 when compared to $19,240,230 at December 31, 2014. The decrease was due to depreciation expense exceeding the amount of property and equipment added for the period.

DEPOSITS

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

DEPOSITS

 

     September 30,
2015
     December 31,
2014
     Amount of
Increase
(Decrease)
     Percent of
Increase
(Decrease)
 

Noninterest-Bearing Deposits

   $ 143,728,615       $ 145,729,932       $ (2,001,317      -1.37

Interest-Bearing Deposits

     321,160,191         268,567,815         52,592,376         19.58

Savings Deposits

     69,866,627         60,253,788         9,612,839         15.95

Certificates of Deposit

     213,886,079         221,542,359         (7,656,280      -3.46
  

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $ 748,641,512       $ 696,093,894       $ 52,547,618         7.55
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest-bearing deposits and savings increased while certificates of deposit and noninterest-bearing deposits decreased during the nine months ended September 30, 2015. 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. These rate adjustments impact deposit balances.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to Note 2 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Corporation’s 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 Corporation’s business to the contractual obligations set forth in Note 12 to the Corporation’s financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The following discussion of operations outlines specific risks that could affect the Corporation’s ability to compete, change the Corporation’s risk profile or eventually impact the Corporation’s financial condition or results. The risks the Corporation faces generally are similar to those experienced, to varying degrees, by all financial services companies.

The Corporation’s strategies and its management’s 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 Corporation’s 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 Corporation’s 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 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 Corporation’s available capital to acquire the people and platforms required thereof, and execute on the strategy.

Credit Risks

Like all lenders, the Corporation faces the risk that the Corporation’s customers may not repay their loans and that the realizable value of collateral may be insufficient to avoid a loss of principal. In the Corporation’s business, some level of credit loss is unavoidable and overall levels of credit loss can vary over time. The Corporation’s ability to manage credit risk depends primarily upon the Corporation’s ability to assess the creditworthiness of customers and the value of collateral, including real estate. The Corporation controls credit risk by diversifying the Corporation’s loan portfolio and managing its composition, and by recording and managing an allowance for expected loan losses in accordance with applicable accounting rules. At the end of September 30, 2015, the Corporation had approximately $6.8 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 take into account changes in the competitive environment, in real estate prices and other collateral values, and in the economy, among other things, based on the Corporation’s experience originating loans and servicing loan portfolios.

 

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Financing, Funding and Liquidity Risks

One of the most important aspects of management’s efforts to sustain long-term profitability for the Corporation is the management of interest rate risk. Management’s goal is to maximize net interest income within acceptable levels of interest-rate risk and liquidity.

The Corporation’s assets and liabilities are principally financial in nature and the resulting earnings thereon are subject to significant variability due to the timing and extent to which the Corporation can reprice the yields on interest-earning assets and the costs of interest bearing liabilities as a result of changes in market interest rates. Interest rates in the financial markets affect the Corporation’s decisions on pricing its assets and liabilities, which impacts net interest income, an important cash flow stream for the Corporation. As a result, a substantial part of the Corporation’s risk-management activities is 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 Corporation’s business involves borrowing and lending money. Accordingly, changes in interest rates directly impact the Corporation’s revenues and expenses, and potentially could compress the Corporation’s net interest margin. The Corporation actively manages its balance sheet to control the risks of a reduction in net interest margin brought about by ordinary fluctuations in rates.

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

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 NASDAQ. Failure to comply with applicable regulations could result in financial or operational penalties. In addition, efforts to comply with applicable regulations may increase the Corporation’s costs and, or limit the Corporation’s ability to pursue certain business opportunities. Federal and state regulations significantly limit the types of activities in which the Corporation, as a financial institution, may engage. In addition, the Corporation is subject to a wide array of other regulations that govern other aspects of how the Corporation conducts business, such as in the areas of employment and intellectual property. Federal and state legislative and regulatory authorities occasionally consider changing these regulations or adopting new ones. Such actions could limit the amount of interest or fees the Corporation can charge, could restrict the Corporation’s ability to collect

 

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loans or realize on collateral or could materially affect us in other ways. Additional federal and state consumer protection regulations also could expand the privacy protections afforded to customers of financial institutions, restricting the Corporation’s ability to share or receive customer information and increasing the Corporation’s costs. In addition, changes in accounting rules can significantly affect how the Corporation records and reports assets, liabilities, revenues, expenses and earnings.

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

Accounting Estimate Risks

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

Expense Control

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

 

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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 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Corporation’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of September 30, 2015 (the end of the period covered by this Quarterly Report on Form 10-Q).

There were no changes to the Corporation’s internal control over financial reporting that occurred in the three months ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS.

The Corporation is supplementing the risk factors that appear in Part I, Item 1A., “Risk Factors,” of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 13, 2015, to include the following:

Changes in interest rates could make it difficult to maintain our current interest income spread and could result in reduced earnings.

Our earnings are largely derived from net interest income, which is interest income and fees earned on loans and investments, less interest paid on deposits and other borrowings. Interest rates are highly sensitive to many factors that are beyond the control of our management, such as general economic conditions and the policies of various governmental and regulatory authorities. An unanticipated rapid decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore on the level of net interest income. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth than previously experienced.

Recently adopted changes to capital requirements for bank holding companies and depository institutions may negatively impact the Corporation’s results of operations.

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Corporation. The final rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

Under these recently adopted rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing the Basel III regulatory capital reforms became effective as to the Corporation on January 1, 2015 and include new minimum risk-based capital and leverage ratios. Moreover, these rules refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation buffer” of 2.5% (to be phased in over three years) above the new regulatory minimum capital ratios, and result in the following minimum ratios once the capital conservation buffer is fully phased in: (i) a common equity Tier 1 risk-based capital ratio of 7.0%; (ii) a Tier 1 risk-based capital ratio of 8.5%; and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital levels fall below the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

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The application of these more stringent capital requirements to the Corporation could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if the Corporation was to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of the final rules regarding Basel III could result in the Corporation having to lengthen the term of their funding, restructure their business models or increase their holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers could result in management modifying its business strategy and could limit the Corporation’s ability to make distributions, including paying dividends or buying back shares.

 

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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   The following financial information from Citizens Holding Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2015, filed with the SEC on November 9, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of September 30, 2015 (Unaudited) and December 31, 2014 (Audited); (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited); and (v) Notes to Consolidated Financial Statements, tagged as blocks of text (Unaudited).

 

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SIGNATURES

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

 

CITIZENS HOLDING COMPANY
BY:  

/s/ Greg L. McKee

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

/s/ Robert T. Smith

Robert T. Smith
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
DATE: November 9, 2015

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

  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   The following financial information from Citizens Holding Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2015, filed with the SEC on November 9, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of September 30, 2015 (Unaudited) and December 31, 2014 (Audited); (ii) the Consolidated Statements of Income for the three and nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 (Unaudited) and 2014 (Unaudited); and (v) Notes to Consolidated Financial Statements, tagged as blocks of text (Unaudited).

 

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