CITIZENS HOLDING CO /MS/ - Quarter Report: 2018 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-15375

 

 

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Mississippi		64-0666512
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
521 Main Street, Philadelphia, MS		39350
(Address of principal executive offices)		(Zip Code)

601-656-4692

(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.    ☒  Yes    ☐  No

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

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

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting Company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of August 6, 2018:

 

Title		Outstanding
Common Stock, $0.20 par value			4,904,530

 

 

 

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS

 

PART I.				FINANCIAL INFORMATION		1
		Item 1.		Consolidated Financial Statements.		1
				Consolidated Statements of Financial Condition, as of June 30, 2018 (Unaudited) and December 31, 2017 (Audited)		1
				Consolidated Statements of Income for the Three and six months ended June 30, 2018 (Unaudited) and 2017 (Unaudited)		2
				Consolidated Statements of Comprehensive (Loss) Income for the Three and six months ended June 30, 2018 (Unaudited) and 2017 (Unaudited)		3
				Consolidated Statements of Cash Flows for the Six months ended June 30, 2018 (Unaudited) and 2017 (Unaudited)		4
				Notes to Consolidated Financial Statements		5
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.		31
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk.		44
		Item 4.		Controls and Procedures.		47
PART II.				OTHER INFORMATION		48
		Item 1.		Legal Proceedings.		48
		Item 1A.		Risk Factors.		48
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.*
		Item 3.		Defaults Upon Senior Securities.*
		Item 4.		Mine Safety Disclosures.*
		Item 5.		Other Information.*
		Item 6.		Exhibits.		49
		*		None or Not Applicable.
SIGNATURES						50

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

		June 30 2018				December 31, 2017
		(Unaudited)				(Audited)
ASSETS
Cash and due from banks		$	12,641,231			$	17,962,990
Interest bearing deposits with other banks			1,293,179				1,532,420
Investment securities available for sale, at fair value			463,752,185				505,046,377
Loans, net of allowance for loan losses of $3,027,950 in 2018 and $3,019,228 in 2017			417,589,558				402,390,574
Premises and equipment, net			19,894,685				20,571,551
Other real estate owned, net			3,312,484				3,980,127
Accrued interest receivable			4,297,013				4,450,723
Cash surrender value of life insurance			24,977,849				24,612,779
Deferred tax assets, net			7,518,048				5,362,750
Other assets			7,793,327				7,185,537
TOTAL ASSETS		$	963,069,559			$	993,095,828
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand		$	160,581,057			$	159,291,356
Interest-bearing NOW and money market accounts			333,739,645				306,047,053
Savings deposits			79,274,222				77,784,876
Certificates of deposit			191,016,056				177,562,214
Total deposits			764,610,980				720,685,499
Securities sold under agreement to repurchase			74,124,947				142,497,938
Federal Funds Purchased			12,500,000				1,500,000
Federal Home Loan Bank advances			20,000,000				30,000,000
Accrued interest payable			194,431				198,183
Deferred compensation payable			8,820,103				8,620,890
Other liabilities			1,137,728				1,142,278
Total liabilities			881,388,189				904,644,788
SHAREHOLDERS’ EQUITY
Common stock; $0.20 par value, 22,500,000 shares authorized, 4,904,530 shares issued and outstanding at June 30, 2018 and 4,894,705 shares issued and outstanding at December 31, 2017			980,906				978,941
Additional paid-in capital			4,215,811				4,103,139
Retained earnings			92,703,089				91,594,379
Accumulated other comprehensive loss, net of tax benefit of $5,391,738 in 2018 and $2,734,500 in 2017			(16,218,436	)			(8,225,419	)
Total shareholders’ equity			81,681,370				88,451,040
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	963,069,559			$	993,095,828

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

 

1

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2018				2017				2018				2017
INTEREST INCOME
Loans, including fees		$	4,984,492			$	4,863,971			$	9,700,911			$	9,432,050
Investment securities			2,734,424				2,919,236				5,557,112				5,751,687
Other interest			60,060				59,086				120,344				127,633
Total interest income			7,778,976				7,842,293				15,378,367				15,311,370
INTEREST EXPENSE
Deposits			515,506				486,003				1,016,715				963,645
Other borrowed funds			311,034				343,814				604,466				673,619
Total interest expense			826,540				829,817				1,621,181				1,637,264
NET INTEREST INCOME			6,952,436				7,012,476				13,757,186				13,674,106
PROVISION FOR (REVERSAL OF) LOAN LOSSES			88,962				(29,586	)			(147,811	)			(180,806	)
NET INTEREST INCOME AFTER PROVISION FOR (REVERSAL OF) LOAN LOSSES			6,863,474				7,042,062				13,904,997				13,854,912
OTHER INCOME
Service charges on deposit accounts			1,067,260				1,019,372				2,210,853				2,061,403
Other service charges and fees			717,053				673,471				1,385,517				1,290,243
Other operating income			294,097				430,349				582,470				705,806
Total other income			2,078,410				2,123,192				4,178,840				4,057,452
OTHER EXPENSES
Salaries and employee benefits			3,675,422				3,745,433				7,343,279				7,409,237
Occupancy expense			1,361,622				1,338,630				2,887,001				2,648,873
Other operating expense			1,910,845				1,826,548				3,765,290				3,961,657
Total other expenses			6,947,889				6,910,611				13,995,570				14,019,767
INCOME BEFORE PROVISION FOR INCOME TAXES			1,993,995				2,254,643				4,088,267				3,892,597
PROVISION FOR INCOME TAXES			305,855				471,190				627,740				671,819
NET INCOME		$	1,688,140			$	1,783,453			$	3,460,527			$	3,220,778
NET INCOME PER SHARE -Basic		$	0.35			$	0.37			$	0.71			$	0.66
-Diluted		$	0.35			$	0.36			$	0.71			$	0.66
DIVIDENDS PAID PER SHARE		$	0.24			$	0.24			$	0.48			$	0.48

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

 

2

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2018				2017				2018				2017
Net income		$	1,688,140			$	1,783,453			$	3,460,527			$	3,220,778
Other comprehensive income (loss)
Securities available-for-sale
Unrealized holding (losses) gains			(1,245,076	)			6,111,996				(10,661,302	)			10,516,085
Income tax effect			310,646				(2,279,774	)			2,659,994				(3,922,499	)
			(934,430	)			3,832,222				(8,001,308	)			6,593,586
Rclassification adjustment for gains included in net income			3,026				89,096				11,047				89,096
Income tax effect			(755	)			(33,233	)			(2,756	)			(33,233	)
			2,271				55,863				8,291				55,863
Total other comprehensive (loss) income			(932,159	)			3,888,085				(7,993,017	)			6,649,449
Comprehensive income (loss)		$	755,981			$	5,671,538			$	(4,532,490	)		$	9,870,227

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

 

3

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Six Months Ended June 30,
		2018				2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities		$	5,402,261			$	4,972,412
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale			21,903,064				21,382,709
Proceeds from sale of investment securities			17,609,891				24,502,095
Purchases of investment securities available for sale			(10,550,000	)			(70,927,550	)
Purchases of bank premises and equipment			(48,702	)			(2,139,487	)
Sales of bank premises and equipment			264,000				—
Decrease in interest bearing deposits with other banks			239,241				39,794,411
Purchase of Federal Home Loan Bank stock			—				(498,700	)
Proceeds from sale of other real estate			782,095				127,722
Net (increase) decrease in loans			(15,151,283	)			677,105
Net cash provided by investing activities			15,048,306				12,918,305
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits			43,925,481				19,771,233
Net change in securities sold under agreement to repurchase			(68,372,991	)			(35,025,549	)
Increase in Federal Funds Purchased			11,000,000				—
Repayment of Federal Home Loan Bank advances			(10,000,000	)			—
Proceeds from exercise of stock options			27,000				92,625
Payment of dividends			(2,351,816	)			(2,347,598	)
Net cash used in financing activities			(25,772,326	)			(17,509,289	)
Net (decrease) increase in cash and due from banks			(5,321,759	)			381,428
Cash and due from banks, beginning of period			17,962,990				21,688,557
Cash and due from banks, end of period		$	12,641,231			$	22,069,985

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

 

4

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, 2018

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended June 30, 2018 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

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

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 15, 2018.

Nature of Business

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

Estimates

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

 

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

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

Revenue from Contracts with Customers

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

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

Adoption of New Accounting Standards

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

 

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financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of OREO, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Company on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company does not hold any equity securities that are within the scope of ASU 2016-01. ASU 2016-01 also eliminates the disclosure of assumptions used to estimate fair value for financial instruments measured at amortized cost and requires disclosure of an exit price notion in determining the fair value of certain financial instruments prior to its changing to the exit price upon adoption of this standard in the first quarter of 2018. This ASU did not have any other implications to the Company at the time of adoption.

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

In January 2017, FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business” (“ASU 2017-01”), that changes the definition of a business when evaluating whether transactions should be accounted for as the acquisition of assets or the acquisition of a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the assets acquired are concentrated in a single asset or a group of similar identifiable assets; if so, the acquired assets or group of similar identifiable assets is not considered a business. In addition, the guidance requires that, to be considered a business, the acquired assets must include an input and a substantive process that together significantly contribute to the ability to create output. The ASU removes the evaluation of whether a market

 

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participant could replace any of the missing elements. ASU 2017-01 was effective for the Company on January 1, 2018 and is to the be applied under a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future acquisitions are considered business combinations.

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

Newly Issued, But Not Yet Effective Accounting Standards

On September 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The update will significantly change the way entities recognize impairment on many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. The FASB describes this impairment recognition model as the current expected credit loss (“CECL”) model and believes the CECL model will result in more timely recognition of credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The scope of FASB’s CECL model would include loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. For public business entities, this update becomes effective for interim and annual periods beginning after December 15, 2019. Management is currently evaluating the impact this ASU will have on the Company’s consolidated financial statements and will continue to monitor FASB’s progress on this topic.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 amends the accounting model and disclosure requirements for leases. The current accounting model for leases distinguishes between capital leases, which are recognized on-balance sheet, and operating leases, which are not. Under the new standard, the lease classifications are defined as finance leases, which are similar to capital leases under current GAAP, and operating leases. Further, a lessee will recognize a lease liability and a right-of-use asset for all leases with a term greater than 12 months on its balance sheet regardless of the lease’s classification, which may significantly increase reported assets and liabilities. The accounting model and disclosure requirements for lessors remains substantially unchanged from current GAAP. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU 2016-02 will have on the Company’s financial position and results of operations.

 

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In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) (“ASU 2017-08”). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities due to market participants pricing securities to the call date that produces the worst yield when the coupon is above current market rates, and pricing securities to maturity when the coupon is below market rates in anticipation that the borrower will act in its economic best interest. Therefore, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. ASU 2017-08 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU 2017-08 will have on the Company’s financial position and results of operations.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Subtopic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 will be effective for interim and annual periods beginning after December 15, 2018. The Company is evaluating the effect that ASU 2017-09 will have on its financial position, results of operations and its financial statement disclosures.

Note 2. Commitments and Contingent Liabilities

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of June 30, 2018, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $59,126,558 compared to an aggregate unused balance of $46,405,869 at December 31, 2017. There were $2,549,810 of letters of credit outstanding at June 30, 2018 and $2,842,010 at December 31, 2017. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments and into its asset and liability management program.

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

 

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Note 3. Net Income per Share

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

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2018				2017				2018				2017
Basic weighted average shares outstanding			4,889,772				4,878,986				4,886,258				4,874,565
Dilutive effect of granted options			5,020				11,064				7,729				18,777
Diluted weighted average shares outstanding			4,894,792				4,890,050				4,893,987				4,893,342
Net income		$	1,688,140			$	1,783,453			$	3,460,527			$	3,220,778
Net income per share-basic		$	0.35			$	0.37			$	0.71			$	0.66
Net income per share-diluted		$	0.35			$	0.36			$	0.71			$	0.66

Note 4. Equity Compensation Plans

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

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

The following table is a summary of the stock option activity for the six months ended June 30, 2018.

 

		Directors’ Plan								2013 Plan
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Outstanding at December 31, 2017			63,000			$	20.96				—			$	—
Granted			—				—				—				—
Exercised			(6,000	)			18.00				—				—
Expired			(4,500	)			18.00				—				—
Outstanding at June 30, 2018			52,500			$	21.55				—			$	—

 

10

The intrinsic value of options outstanding under the Directors’ Plan at June 30, 2018, was $141,570. No options were outstanding under the 2013 Plan or the Employee’s Plan as of June 30, 2018.

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

Note 5. Income Taxes

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

The effective tax rate for the three and six months ended June 30, 2018 and 2017 differ from the statutory federal income tax rates of 21% and 34%, respectively, due primarily to state income taxes offset by tax exempt interest income.

 

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Note 6. Securities

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

 

June 30, 2018		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies		$	99,566,635			$	—			$	4,269,911			$	95,296,724
Mortgage backed securities			278,584,218				6,438				12,561,575				266,029,081
State, County, Municipals			107,211,506				78,334				4,863,460				102,426,380
Total		$	485,362,359			$	84,772			$	21,694,946			$	463,752,185
December 31, 2017		Amortized Cost				Unrealized Gains				Unrealized Losses				Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies		$	180,647,580			$	—			$	4,199,022			$	176,448,558
Mortgage backed securities			213,707,125				43,197				5,327,265				208,423,057
State, County, Municipals			118,786,297				849,364				2,535,126				117,100,535
Other investments			2,865,294				208,933				—				3,074,227
Total		$	516,006,296			$	1,101,494			$	12,061,413			$	505,046,377

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

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2018 and December 31, 2017 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

 

		June 30, 2018								December 31, 2017
		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
Available-for-sale
Due in one year or less		$	1,817,972			$	1,820,005			$	3,398,727			$	3,421,576
Due after one year through five years			97,858,493				94,124,451				75,887,288				74,589,829
Due after five years through ten years			31,088,580				29,855,611				55,691,854				54,740,055
Due after ten years			354,597,314				337,952,118				381,028,427				372,294,917
Total		$	485,362,359			$	463,752,185			$	516,006,296			$	505,046,377

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2018 and December 31, 2017.

 

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

 

June 30, 2018		Less than 12 months								12 months or more								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S. government agencies		$	15,119,779			$	647,021			$	80,176,945			$	3,622,890			$	95,296,724			$	4,269,911
Mortgage backed securities			93,958,426				3,434,432				171,878,931				9,127,143				265,837,357				12,561,575
State, County, Municipal			25,411,940				806,404				64,746,595				4,057,056				90,158,535				4,863,460
Total		$	134,490,145			$	4,887,857			$	316,802,471			$	16,807,089			$	451,292,616			$	21,694,946
December 31, 2017		Less than 12 months								12 months or more								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S. government agencies		$	15,681,866			$	223,534			$	160,766,691			$	3,975,488			$	176,448,557			$	4,199,022
Mortgage backed securities			88,499,852				1,613,091				116,753,236				3,714,175				205,253,088				5,327,266
State, County, Municipal			7,117,600				59,041				66,973,174				2,476,084				74,090,774				2,535,125
Total		$	111,299,318			$	1,895,666			$	344,493,101			$	10,165,747			$	455,792,419			$	12,061,413

The 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 does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Corporation will be required to sell any such security prior to the recovery of it amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at June 30, 2018 nor at December 31, 2017.

 

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Note 7. Loans

The composition of net loans (in thousands) at June 30, 2018 and December 31, 2017 was as follows:

 

		June 30, 2018				December 31, 2017
Real Estate:
Land Development and Construction		$	37,360			$	25,923
Farmland			15,889				16,905
1-4 Family Mortgages			88,627				95,925
Commercial Real Estate			196,715				191,736
Total Real Estate Loans			338,591				330,489
Business Loans:
Commercial and Industrial Loans			66,382				58,204
Farm Production and Other Farm Loans			999				922
Total Business Loans			67,381				59,126
Consumer Loans:
Credit Cards			1,342				1,310
Other Consumer Loans			13,408				14,680
Total Consumer Loans			14,750				15,990
Total Gross Loans			420,722				405,605
Unearned Income			(105	)			(195	)
Allowance for Loan Losses			(3,028	)			(3,019	)
Loans, net		$	417,589			$	402,391

Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status, when, in 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:

 

		June 30, 2018				December 31, 2017
Real Estate:
Land Development and Construction		$	420			$	—
Farmland			272				366
1-4 Family Mortgages			1,927				2,131
Commercial Real Estate			4,279				4,891
Total Real Estate Loans			6,898				7,388
Business Loans:
Commercial and Industrial Loans			83				78
Farm Production and Other Farm Loans			31				32
Total Business Loans			114				110
Consumer Loans:
Other Consumer Loans			71				84
Total Consumer Loans			71				84
Total Nonaccrual Loans		$	7,083			$	7,582

 

15

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

 

		Loans 30-89 Days Past Due				Loans 90 or more Days Past Due				Total Past Due Loans				Current Loans				Total Loans				Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction		$	16			$	420			$	436			$	36,924			$	37,360			$	—
Farmland			294				32				326				15,563				15,889				—
1-4 Family Mortgages			1,978				255				2,233				86,394				88,627				—
Commercial Real Estate			2,635				1,150				3,785				192,930				196,715				—
Total Real Estate Loans			4,923				1,857				6,780				331,811				338,591				—
Business Loans:
Commercial and Industrial Loans			154				—				154				66,228				66,382				—
Farm Production and Other Farm Loans			—				—				—				999				999				—
Total Business Loans			154				—				154				67,227				67,381				—
Consumer Loans:
Credit Cards			40				10				50				1,292				1,342				10
Other Consumer Loans			311				58				369				13,039				13,408				8
Total Consumer Loans			351				68				419				14,331				14,750				18
Total Loans		$	5,428			$	1,925			$	7,353			$	413,369			$	420,722			$	18

 

16

An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2017 was as follows:

 

		Loans 30-89 Days Past Due				Loans 90 or more Days Past Due				Total Past Due Loans				Current Loans				Total Loans				Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction		$	281			$	—			$	281			$	25,642			$	25,923			$	—
Farmland			93				—				93				16,812				16,905				—
1-4 Family Mortgages			2,657				—				2,657				93,268				95,925				—
Commercial Real Estate			2,585				862				3,447				188,289				191,736				807
Total Real Estate Loans			5,616				862				6,478				324,011				330,489				807
Business Loans:
Commercial and Industrial Loans			32				—				32				58,172				58,204				—
Farm Production and Other Farm Loans			19				—				19				903				922				—
Total Business Loans			51				—				51				59,075				59,126				—
Consumer Loans:
Credit Cards			25				6				31				1,279				1,310				6
Other Consumer Loans			422				—				422				14,258				14,680				—
Total Consumer Loans			447				6				453				15,537				15,990				6
Total Loans		$	6,114			$	868			$	6,982			$	398,623			$	405,605			$	813

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

 

17

Impaired loans (in thousands) as of June 30, 2018, segregated by class, were as follows:

 

		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance				Average Recorded Investment
Real Estate:
Land Development and Construction		$	420			$	—			$	420			$	420			$	112			$	321
Farmland			272				272				—				272				—				262
1-4 Family Mortgages			1,232				1,034				198				1,232				33				1,288
Commercial Real Estate			5,686				1,739				3,947				5,686				384				5,744
Total Real Estate Loans			7,610				3,045				4,565				7,610				529				7,615
Business Loans:
Farm Production and Other Farm Loans			—				—				—				—				—				25
Total Business Loans			—				—				—				—				—				25
Total Loans		$	7,610			$	3,045			$	4,565			$	7,610			$	529			$	7,640

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

 

		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance				Average Recorded Investment
Real Estate:
Land Development and Construction		$	222			$	—			$	222			$	222			$	—			$	111
Farmland			252				252				—				252				—				126
1-4 Family Mortgages			1,344				1,141				203				1,344				46				906
Commercial Real Estate			5,801				1,763				4,038				5,801				397				4,994
Total Real Estate Loans			7,619				3,156				4,463				7,619				443				6,137
Business Loans:
Farm Production and Other Farm Loans			50				50				—				50				—				25
Total Business Loans			50				50				—				50				—				25
Total Loans		$	7,669			$	3,206			$	4,463			$	7,669			$	443			$	6,162

 

18

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

 

June 30, 2018		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial real estate			3			$	4,871			$	2,998
Total			3			$	4,871			$	2,998
December 31, 2017		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial real estate			3			$	4,871			$	3,047
Total			3			$	4,871			$	3,047

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

 

		Number of Loans				Recorded Investment
Totals at January 1, 2018			3			$	3,047
Reductions due to:
Principal paydowns							(49	)
Total at June 30, 2018			3			$	2,998

The allocated allowance for loan losses attributable to restructured loans was $174,274 at June 30, 2018 and December 31, 2017. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructurings as of June 30, 2018.

 

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

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

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

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

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

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

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

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

 

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at June 30, 2018.

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

 

		Satisfactory 1,2,3,4				Special Mention 5,6				Substandard 7				Doubtful 8				Loss 9				Total Loans
Real Estate:
Land Development and Construction		$	35,479			$	881			$	1,000			$	—			$	—			$	37,360
Farmland			14,488				367				1,034				—				—				15,889
1-4 Family Mortgages			78,362				2,482				7,783				—				—				88,627
Commercial Real Estate			157,962				28,584				10,169				—				—				196,715
Total Real Estate Loans			286,291				32,314				19,986				—				—				338,591
Business Loans:
Commercial and Industrial Loans			63,280				995				2,107				—				—				66,382
Farm Production and Other Farm Loans			958				5				36				—				—				999
Total Business Loans			64,238				1,000				2,143				—				—				67,381
Consumer Loans:
Credit Cards			1,332				—				10				—				—				1,342
Other Consumer Loans			13,167				84				99				58				—				13,408
Total Consumer Loans			14,499				84				109				58				—				14,750
Total Loans		$	365,028			$	33,398			$	22,238			$	58			$	—			$	420,722

 

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