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 June 30, 2014

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 August 8, 2014:

 

Title

 

Outstanding

Common Stock, $0.20 par value   4,877,614

 

 

 


Table of Contents

CITIZENS HOLDING COMPANY

INTERIM FINANCIAL STATEMENTS FOR QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS

 

PART I.

   

FINANCIAL INFORMATION

   1
 

Item 1.

 

Consolidated Financial Statements.

   1
   

Consolidated Statements of Condition

  
   

June 30, 2014 (Unaudited) and December 31, 2013 (Audited)

   1
   

Consolidated Statements of Income

  
   

Three and six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited)

   2
   

Consolidated Statements of Comprehensive Income (Loss)

  
   

Three and six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited)

   3
   

Condensed Consolidated Statements of Cash Flows

  
   

Six months ended June 30, 2014 (Unaudited) and 2013 (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.

   42
 

Item 4.

 

Controls and Procedures.

   45

PART II.

   

OTHER INFORMATION

   46
 

Item 1.

 

Legal Proceedings.*

  
 

Item 1A.

 

Risk Factors.

   46
 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.*

  
 

Item 3.

 

Defaults Upon Senior Securities.*

  
 

Item 4.

 

Mine Safety Disclosures.*

  
 

Item 5.

 

Other Information.*

  
 

Item 6.

 

Exhibits.

   48
 

*

  None or Not Applicable   
SIGNATURES    49


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF CONDITION

 

     June 30
2014
(Unaudited)
    December 31,
2013
(Audited)
 
ASSETS     

Cash and due from banks

   $ 22,135,487      $ 16,040,195   

Interest bearing deposits with other banks

     6,923,219        684,100   

Investment securities held to maturity, at book value

     205,717,189        —     

Investment securities available for sale, at fair value

     201,585,598        398,176,402   

Loans, net of allowance for loan losses of $8,539,428 in 2014 and $8,077,499 in 2013

     381,203,975        384,104,766   

Premises and equipment, net

     19,702,981        18,623,154   

Other real estate owned, net

     3,368,999        3,751,168   

Accrued interest receivable

     3,938,291        4,132,053   

Cash value of life insurance

     21,927,499        22,208,962   

Intangible assets, net

     3,149,657        3,149,657   

Other assets

     18,181,057        22,198,442   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 887,833,952      $ 873,068,899   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing demand

   $ 140,377,329      $ 120,424,895   

Interest-bearing NOW and money market accounts

     263,573,417        248,015,410   

Savings deposits

     59,378,201        53,745,787   

Certificates of deposit

     228,118,418        232,443,704   
  

 

 

   

 

 

 

Total deposits

     691,447,365        654,629,796   

Securities sold under agreement to repurchase

     76,701,609        82,420,781   

Federal funds purchased

     —          27,500,000   

Federal Home Loan Bank advances

     33,500,000        33,500,000   

Accrued interest payable

     183,395        199,513   

Deferred compensation payable

     7,093,713        6,719,948   

Other liabilities

     1,274,847        1,832,659   
  

 

 

   

 

 

 

Total liabilities

     810,200,929        806,802,697   

SHAREHOLDERS’ EQUITY

    

Common stock; $.20 par value, 22,500,000 shares authorized, 4,877,614 shares outstanding at June 30, 2014 and 4,870,114 shares outstanding at December 31, 2013

     975,482        974,023   

Additional paid-in capital

     3,769,717        3,748,176   

Retained earnings

     84,536,046        82,792,524   

Accumulated other comprehensive loss, net of tax benefit of $6,929,485 in 2014 and $12,640,667 in 2013

     (11,648,222     (21,248,521
  

 

 

   

 

 

 

Total shareholders’ equity

     77,633,023        66,266,202   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 887,833,952      $ 873,068,899   
  

 

 

   

 

 

 

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 June 30,

    

For the Six Months

Ended June 30,

 
     2014      2013      2014      2013  

INTEREST INCOME

           

Loans, including fees

   $ 5,067,445       $ 5,120,642       $ 10,111,355       $ 10,319,823   

Investment securities

     2,851,155         2,850,563         5,748,124         5,621,329   

Other interest

     6,913         19,714         11,962         37,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     7,925,513         7,990,919         15,871,441         15,978,566   

INTEREST EXPENSE

           

Deposits

     421,870         494,614         840,166         1,014,757   

Other borrowed funds

     312,081         690,468         622,644         1,402,551   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     733,951         1,185,082         1,462,810         2,417,308   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     7,191,562         6,805,837         14,408,631         13,561,258   

PROVISION FOR LOAN LOSSES

     211,535         574,595         572,903         749,104   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     6,980,027         6,231,242         13,835,728         12,812,154   

OTHER INCOME

           

Service charges on deposit accounts

     963,826         913,942         1,893,557         1,804,799   

Other service charges and fees

     524,695         473,586         1,009,132         926,513   

Other income

     995,101         541,342         1,364,413         878,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income

     2,483,622         1,928,870         4,267,102         3,609,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

OTHER EXPENSES

           

Salaries and employee benefits

     3,252,370         3,336,317         6,608,207         6,642,487   

Occupancy expense

     1,570,995         1,111,195         2,544,057         2,223,706   

Other operating expense

     2,222,630         1,699,519         4,262,594         3,838,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expenses

     7,045,995         6,147,031         13,414,858         12,704,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

     2,417,654         2,013,081         4,687,972         3,717,820   

PROVISION FOR INCOME TAXES

     325,135         409,337         798,300         699,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 2,092,519       $ 1,603,744       $ 3,889,672       $ 3,018,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME PER SHARE -Basic

   $ 0.43       $ 0.33       $ 0.80       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

                         -Diluted

   $ 0.43       $ 0.33       $ 0.80       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

DIVIDENDS PAID PER SHARE

   $ 0.22       $ 0.22       $ 0.44       $ 0.44   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30,

   

For the Six Months

Ended June 30,

 
     2014     2013     2014     2013  

Net income

   $ 2,092,519      $ 1,603,744      $ 3,889,672      $ 3,018,190   

Other comprehensive income (loss)

        

Securities available-for-sale

        

Unrealized holding gains (losses)

     22,449,569        (28,291,193     31,968,113        (26,037,912

Income tax effect

     (8,373,689     8,871,667        (11,924,106     9,712,141   
  

 

 

   

 

 

   

 

 

   

 

 

 
     14,075,880        (19,419,526     20,044,007        (16,325,771

Reclassification adjustment for gains included in net income

     (9,102     (154,655     (9,102     (154,655

Income tax effect

     3,395        57,686        3,395        57,686   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (5,707     (96,969     (5,707     (96,969

Securities held-to-maturity

        

Unrealized losses transferred to held-to-maturity

     (17,061,438     —          (17,061,438     —     

Amortization of net unrealized losses transferred during the period

     413,908        —          413,908        —     

Income tax effect

     6,209,529        —          6,209,529        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (10,438,001     —          (10,438,001     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     3,632,172        (19,516,495     9,600,299        (16,422,740
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 5,724,691      $ (17,912,751   $ 13,489,971      $ (13,404,550
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     For the Six Months  
     Ended June 30,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net cash provided by operating activities

   $ 3,850,163      $ 6,335,193   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from maturities and calls of securities available for sale

     4,609,491        74,355,294   

Proceeds from sales of securities available for sale

     1,381,596        37,061,134   

Purchases of investment securities available for sale

     —          (135,615,144

Purchases of bank premises and equipment

     (1,654,936     (101,530

(Decrease) increase in interest bearing deposits with other banks

     (6,239,119     12,690,510   

Proceeds from sale of other real estate

     339,934        1,032,649   

Redemption of Federal Home Loan Bank Stock

     449,700        —     

Net decrease in loans

     1,906,215        4,023,265   
  

 

 

   

 

 

 

Net cash provided by (used by) investing activities

     792,881        (6,553,822

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in deposits

     36,817,569        10,605,894   

Net change in securities sold under agreement to repurchase

     (5,719,172     (8,862,666

Proceeds from exercising stock options

     —          128,950   

Decrease in Federal Home Loan Bank advances

     —          (25,000,000

(Decrease) increase in federal funds purchased

     (27,500,000     23,500,000   

Payment of dividends

     (2,146,149     (2,142,520
  

 

 

   

 

 

 

Net cash provided (used by) by financing activities

     1,452,248        (1,770,342
  

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

     6,095,292        (1,988,971

Cash and due from banks, beginning of period

     16,040,195        21,561,288   
  

 

 

   

 

 

 

Cash and due from banks, end of period

   $ 22,135,487      $ 19,572,317   
  

 

 

   

 

 

 

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 six months ended June 30, 2014

(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 June 30, 2014 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, 2013, filed with the Securities and Exchange Commission on March 14, 2014.

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, 2014, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $57,418,522 compared to an aggregate unused balance of $40,701,380 at December 31, 2013. There was $2,753,980 of letters of credit outstanding at June 30, 2014 and $2,809,330 at December 31, 2013. 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      For the Six Months  
     Ended June 30,      Ended June 30,  
     2014      2013      2014      2013  

Basic weighted average shares outstanding

     4,870,114         4,868,977         4,870,114         4,866,237   

Dilutive effect of granted options

     704         588         535         3,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     4,870,818         4,869,565         4,870,649         4,869,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 2,092,519       $ 1,603,744       $ 3,889,672       $ 3,018,190   

Net income per share-basic

   $ 0.43       $ 0.33       $ 0.80       $ 0.62   

Net income per share-diluted

   $ 0.43       $ 0.33       $ 0.80       $ 0.62   

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 six months ended June 30, 2014.

 

     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, 2013

     103,500      $ 21.30         82,000      $ 22.06         —         $ —     

Granted

     —          —           —          —           —           —     

Exercised

     —          —           —          —           —           —     

Expired

     (7,500     22.25         (33,500     21.93         —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2014

     96,000      $ 21.23         48,500      $ 22.15         —         $ —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

6


Table of Contents

The intrinsic value of options granted under the Directors’ Plan at June 30, 2014, was $15,810, the intrinsic value of options granted under the Employees’ Plan at June 30, 2014, was $1,530 and since there were no options granted under the 2013 Plan, the intrinsic value for the 2013 Plan is $0 for a total intrinsic value at June 30, 2014, of $17,340.

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 first quarter of 2014, restricted stock grants were made totaling 7,500 shares of common stock. These grants have a vesting period of one year during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $138,000 and will be recognized over the twelve month restriction period at a cost of $11,500 per month less deferred taxes of $4,290 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 June 30, 2014, 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 2014 relative to any tax positions taken. It is the Corporation’s policy to recognize interest and/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 2010. The Corporation’s consolidated state income tax returns are also open to audit under the statute of limitations for the same period.

 

7


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:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

June 30, 2014

           

Securities available-for-sale

           

Obligations of U.S. Government agencies

   $ 93,991,752       $ 99,190       $ 4,761,448       $ 89,329,494   

Mortgage-backed securities

     14,855,723         962,027         —           15,817,750   

State, County, Municipals

     91,681,995         3,030,515         1,092,074         93,620,436   

Other investments

     3,025,100         —           207,182         2,817,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 203,554,570       $ 4,091,732       $ 6,060,704       $ 201,585,598   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

December 31, 2013

           

Securities available-for-sale

           

Obligations of U.S. Government agencies

   $ 316,305,125       $ 98,740       $ 33,587,465       $ 282,816,400   

Mortgage-backed securities

     16,476,430         719,825         29,861         17,166,394   

State, County, Municipals

     96,258,584         2,309,291         3,140,470         95,427,405   

Other investments

     3,025,451         —           259,248         2,766,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 432,065,590       $ 3,127,856       $ 37,017,044       $ 398,176,402   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the second quarter of 2014, the Corporation transferred securities with an amortized cost of $222,322,423 from the available for sale to the 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.

 

8


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:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
June 30, 2014            

Securities held-to-maturity

           

Obligations of U.S. Government agencies

   $ 205,717,189       $ 2,199,466       $ 441,768       $ 207,474,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 205,717,189       $ 2,199,466       $ 441,768       $ 207,474,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013, the Corporation had not classified any securities as held-to-maturity.

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2014 and December 31, 2013 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

 

     June 30, 2014      December 31, 2013  
     Amortized      Estimated      Amortized      Estimated  
     Cost      Fair Value      Cost      Fair Value  

Available-for-sale

           

Due in one year or less

   $ 6,923,239       $ 7,025,050       $ 2,429,035       $ 2,448,452   

Due after one year through five years

     13,565,955         13,964,319         25,040,034         26,060,534   

Due after five years through ten years

     82,700,057         81,116,351         106,046,230         101,286,491   

Due after ten years

     100,365,319         99,479,878         298,550,291         268,380,925   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 203,554,570       $ 201,585,598       $ 432,065,590       $ 398,176,402   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-maturity

           

Due after five years through ten years

   $ 18,237,573       $ 18,396,756       $ —         $ —     

Due after ten years

     187,479,616         189,078,131         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 205,717,189       $ 207,474,887       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


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 June 30, 2014 and December 31, 2013.

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

 

June 30, 2014    Less than 12 months      12 months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

Description of Securities

   Value      Losses      Value      Losses      Value      Losses  

Obligations of U. S. Government agencies

   $ 9,784       $ 216       $ 78,446       $ 4,546       $ 88,230       $ 4,762   

State, County, Municipal

     842         4         20,345         1,088         21,187         1,092   

Other investments

     —           —           2,818         207         2,818         207   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,626       $ 220       $ 101,609       $ 5,841       $ 112,235       $ 6,061   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2013    Less than 12 months      12 months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

Description of Securities

   Value      Losses      Value      Losses      Value      Losses  

Obligations of U. S. Government agencies

   $ 255,350       $ 29,954       $ 26,367       $ 3,633       $ 281,717       $ 33,587   

Mortgage backed securities

     3,581         30         —           —           3,581         30   

State, County, Municipal

     20,131         1,461         10,014         1,680         30,145         3,141   

Other investments

     —           —           2,766         259         2,766         259   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 279,062       $ 31,445       $ 39,147       $ 5,572       $ 318,209       $ 37,017   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A summary of unrealized loss information for securities held-to-maturity categorized by security type follows (in thousands):

 

June 30, 2014    Less than 12 months      12 months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

Description of Securities

   Value      Losses      Value      Losses      Value      Losses  

Obligations of U. S. Government agencies

   $ 9,206       $ 60       $ 18,301       $ 382       $ 27,507       $ 442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,206       $ 60       $ 18,301       $ 382       $ 27,507       $ 442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no securities designated as held-to-maturity as of December 31, 2013.

 

10


Table of Contents

Note 7. Loans

The composition of net loans (in thousands) at June 30, 2014 and December 31, 2013 is as follows:

 

     June 30, 2014     December 31, 2013  

Real Estate:

    

Land Development and Construction

   $ 36,309      $ 27,224   

Farmland

     29,597        29,634   

1-4 Family Mortgages

     101,928        105,489   

Commercial Real Estate

     146,590        145,369   
  

 

 

   

 

 

 

Total Real Estate Loans

     314,424        307,716   

Business Loans:

    

Commercial and Industrial Loans

     48,616        55,813   

Farm Production and Other Farm Loans

     1,253        1,308   
  

 

 

   

 

 

 

Total Business Loans

     49,869        57,121   

Consumer Loans:

    

Credit Cards

     1,014        1,087   

Other Consumer Loans

     25,014        26,744   
  

 

 

   

 

 

 

Total Consumer Loans

     26,028        27,831   
  

 

 

   

 

 

 

Total Gross Loans

     390,321        392,668   

Unearned income

     (578     (485

Allowance for loan losses

     (8,539     (8,078
  

 

 

   

 

 

 

Loans, net

   $ 381,204      $ 384,105   
  

 

 

   

 

 

 

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.

 

11


Table of Contents

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

 

     June 30, 2014      December 31, 2013  

Real Estate:

     

Land Development and Construction

   $ 114       $ 136   

Farmland

     221         352   

1-4 Family Mortgages

     1,610         1,866   

Commercial Real Estate

     10,476         8,894   
  

 

 

    

 

 

 

Total Real Estate Loans

     12,421         11,248   

Business Loans:

     

Commercial and Industrial Loans

     2,117         2,224   
  

 

 

    

 

 

 

Total Business Loans

     2,117         2,224   

Consumer Loans:

     

Other Consumer Loans

     126         120   
  

 

 

    

 

 

 

Total Consumer Loans

     126         120   
  

 

 

    

 

 

 

Total Non-Accrual Loans

   $ 14,664       $ 13,592   
  

 

 

    

 

 

 

 

12


Table of Contents

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

   $ 298       $ 13       $ 311       $ 35,998       $ 36,309       $ —     

Farmland

     2,285         85         2,370         27,227         29,597         21   

1-4 Family Mortgages

     4,493         761         5,254         96,674         101,928         258   

Commercial Real Estate

     5,853         11,260         17,113         129,477         146,590         213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     12,929         12,119         25,048         289,376         314,424         492   

Business Loans:

                 

Commercial and Industrial Loans

     2,182         —           2,182         46,434         48,616         77   

Farm Production and Other Farm Loans

     —           —           —           1,253         1,253         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     2,182         —           2,182         47,687         49,869         77   

Consumer Loans:

                 

Credit Cards

     12         8         20         994         1,014         8   

Other Consumer Loans

     1,098         143         1,241         23,773         25,014         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     1,110         151         1,261         24,767         26,028         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 16,221       $ 12,270       $ 28,491       $ 361,830       $ 390,321       $ 587   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2013 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

   $ 170       $ —         $ 170       $ 27,054       $ 27,224       $ —     

Farmland

     419         69         488         29,146         29,634         —     

1-4 Family Mortgages

     4,234         1,088         5,322         100,167         105,489         335   

Commercial Real Estate

     3,308         9,316         12,624         132,745         145,369         1,750   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     8,131         10,473         18,604         289,112         307,716         2,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Business Loans:

                 

Commercial and Industrial Loans

     248         23         271         55,542         55,813         —     

Farm Production and other Farm Loans

     5         —           5         1,303         1,308         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     253         23         276         56,845         57,121         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer Loans:

                 

Credit Cards

     39         10         49         1,038         1,087         10   

Other Consumer Loans

     1,105         41         1,146         25,598         26,744         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     1,144         51         1,195         26,636         27,831         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 9,528       $ 10,547       $ 20,075       $ 372,593       $ 392,668       $ 2,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

14


Table of Contents

Impaired loans (in thousands) as of June 30, 2014 and December 31, 2013, segregated by class, are as follows:

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 
June 30, 2014                  

Real Estate:

                 

Land Development and Construction

   $ 114       $ 13       $ 101       $ 114       $ 101       $ 132   

Farmland

     221         95         126         221         24         329   

1-4 Family Mortgages

     1,610         1,296         314         1,610         47         1,721   

Commercial Real Estate

     10,476         2,796         7,680         10,476         896         9,683   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     12,421         4,200         8,221         12,421         1,068         11,865   

Business Loans:

                 

Commercial and Industrial Loans

     2,117         41         2,076         2,117         2,069         2,148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     2,117         41         2,076         2,117         2,069         2,148   

Consumer Loans:

                 

Other Consumer Loans

     126         126         —           126         —           163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     126         126         —           126         —           163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 14,664       $ 4,367       $ 10,297       $ 14,664       $ 3,137       $ 14,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Total
Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
 
December 31, 2013                  

Real Estate:

                 

Land Development and Construction

   $ 136       $ 25       $ 111       $ 136       $ 103       $ 278   

Farmland

     352         220         132         352         24         720   

1-4 Family Mortgages

     1,866         1,054         812         1,866         202         2,111   

Commercial Real Estate

     8,894         976         7,918         8,894         896         9,535   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     11,248         2,275         8,973         11,248         1,225         12,644   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Business Loans:

                 

Commercial and Industrial Loans

     2,224         118         2,106         2,224         1,072         1,195   

Farm Production and other Farm Loans

     —           —           —           —           —           2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     2,224         118         2,106         2,224         1,072         1,197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer Loans:

                 

Other Consumer Loans

     120         120         —           120         —           166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     120         120         —           120         —           166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 13,592       $ 2,513       $ 11,079       $ 13,592       $ 2,297       $ 14,007   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

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

 

     Number of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 
June 30, 2014         

Commercial real estate

     5       $ 9,261       $ 6,952   
  

 

 

    

 

 

    

 

 

 

Total

     5       $ 9,261       $ 6,952   
  

 

 

    

 

 

    

 

 

 

 

     Number of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 
December 31, 2013         

Commercial real estate

     5       $ 9,261       $ 7,119   
  

 

 

    

 

 

    

 

 

 

Total

     5       $ 9,261       $ 7,119   
  

 

 

    

 

 

    

 

 

 

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, 2014

     5       $  7,119   

Reductions due to:

     

Principal paydowns

        (167
  

 

 

    

 

 

 

Total at June 30, 2014

     5       $ 6,952   
  

 

 

    

 

 

 

The allocated allowance for loan losses attributable to restructured loans was $2,202,414 at June 30, 2014 and $1,196,274 at December 31, 2013. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructuring as of June 30, 2014.

 

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 majoprity 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

 

18


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 June 30, 2014.

The following table details the amount of gross loans (in thousands), segregated by loan grade and class, as of June 30, 2014:

 

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

Real Estate:

                 

Land Development and Construction

   $ 34,387       $ —         $ 1,922       $ —         $ —         $ 36,309   

Farmland

     25,230         825         3,542         —           —           29,597   

1-4 Family Mortgages

     85,080         4,334         12,514         —           —           101,928   

Commercial Real Estate

     127,810         5,754         13,026         —           —           146,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     272,507         10,913         31,004         —           —           314,424   

Business Loans:

                 

Commercial and Industrial Loans

     45,930         425         233         2,028         —           48,616   

Farm Production and Other Farm Loans

     1,253         —           —           —           —           1,253   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     47,183         425         233         2,028         —           49,869   

Consumer Loans:

                 

Credit Cards

     1,006         —           8         —           —           1,014   

Other Consumer Loans

     24,378         204         402         25         5         25,014   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     25,384         204         410         25         5         26,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 345,074       $ 11,542       $ 31,647       $ 2,053       $ 5       $ 390,321   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as of December 31, 2013:

 

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

Real Estate:

                 

Land Development and Construction

   $ 25,165       $ 192       $ 1,867       $ —         $ —         $ 27,224   

Farmland

     25,160         744         3,730         —           —           29,634   

1-4 Family Mortgages

     87,108         4,671         13,710         —           —           105,489   

Commercial Real Estate

     125,339         5,915         14,115         —           —           145,369   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Real Estate Loans

     262,772         11,522         33,422         —           —           307,716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Business Loans:

                 

Commercial and Industrial Loans

     52,871         426         416         2,100         —           55,813   

Farm Production and other Farm Loans

     1,298         8         2         —           —           1,308   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Loans

     54,169         434         418         2,100         —           57,121   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer Loans:

                 

Credit Cards

     1,077         —           10         —           —           1,087   

Other Consumer Loans

     25,942         193         564         42         3         26,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer Loans

     27,019         193         574         42         3         27,831   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans

   $ 343,960       $ 21,295       $ 34,414       $ 2,142       $ 3       $ 392,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

20


Table of Contents

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

 

     Real     Business               
     Estate     Loans      Consumer     Total  
June 30, 2014          

Beginning Balance, January 1, 2014

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

Provision for possible loan losses

     (172,350     764,154         (18,902     572,903   

Chargeoffs

     101,615        22,760         67,287        191,662   

Recoveries

     35,488        5,748         39,453        80,689   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Chargeoffs

     66,127        17,012         27,834        110,973   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 4,467,276      $ 3,514,551       $ 557,601      $ 8,539,428   
  

 

 

   

 

 

    

 

 

   

 

 

 

Period end allowance allocated to:

         

Loans individually evaluated for impairment

   $ 1,067,821      $ 2,068,759       $ —        $ 3,136,580   

Loans collectively evaluated for impairment

     3,399,455        1,445,792         557,601        5,402,848   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance, June 30, 2014

   $ 4,467,276      $ 3,514,551       $ 557,601      $ 8,539,428   
  

 

 

   

 

 

    

 

 

   

 

 

 

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2013:

 

     Real      Business               
     Estate      Loans      Consumer     Total  
June 30, 2013           

Beginning Balance, January 1, 2013

   $ 4,629,559       $ 1,554,698       $ 770,012      $ 6,954,269   

Provision for possible loan losses

     640,104         262,487         (153,487     749,104   

Chargeoffs

     606,296         345,651         75,725        1,027,672   

Recoveries

     72,133         13,311         41,898        127,342   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Chargeoffs

     534,163         332,340         33,827        900,330   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance, June 30, 2013

   $ 4,735,500       $ 1,484,845       $ 582,698      $ 6,803,043   
  

 

 

    

 

 

    

 

 

   

 

 

 

Period end allowance allocated to:

          

Loans individually evaluated for impairment

   $ 1,244,809       $ 54,706       $ —        $ 1,299,515   

Loans collectively evaluated for impairment

     3,490,691         1,430,139         582,698        5,503,528   
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance, June 30, 2013

   $ 4,735,500       $ 1,484,845       $ 582,698      $ 6,803,043   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

The Corporation’s recorded investment in loans as of June 30, 2014 and December 31, 2013 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):

 

     Real      Business                
     Estate      Loans      Consumer      Total  
June 30, 2014            

Loans individually evaluated for specific impairment

   $ 12,421       $ 2,117       $ 126       $ 14,664   

Loans collectively evaluated for general impairment

     302,003         47,752         25,902         375,657   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 314,424       $ 49,869       $ 26,028       $ 390,321   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Real      Business                
     Estate      Loans      Consumer      Total  
December 31, 2013            

Loans individually evaluated for specific impairment

   $ 11,248       $ 2,224       $ 120       $ 13,592   

Loans collectively evaluated for general impairment

     296,468         54,897         27,711         379,076   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 307,716       $ 57,121       $ 27,831       $ 392,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


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 June 30, 2014:

 

     Quoted Prices
in Active
Markets for
Identical
Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
        
     (Level 1)      (Level2)      (Level 3)      Totals  

Securities available for sale

           

Obligations of U. S. Government Agencies

   $ —         $ 89,329,494       $ —         $ 89,329,494   

Mortgage-backed securities

     —           15,817,750         —           15,817,750   

State, county and municipal obligations

     —           93,620,436         —           93,620,436   

Other investments

     —           —           2,817,918         2,817,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 198,767,680       $ 2,817,918       $ 201,585,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013:

 

     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

   $ —         $ 282,816,400       $ —         $ 282,816,400   

Mortgage-backed securities

     —           17,166,394         —           17,166,394   

State, county and municipal obligations

     —           95,427,405      

 

—  

  

     95,427,405   

Other investments

     —           —           2,766,203         2,766,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 395,410,199       $ 2,766,203       $ 398,176,402   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reports the activity for 2014 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, 2014

   $ 2,766,203   

Unrealized losses included in other comprehensive income

     51,716   
  

 

 

 

Balance at June 30, 2014

   $ 2,817,919   
  

 

 

 

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 2014 that were still held in the balance sheet at June 30, 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

   $ —         $ —         $ 7,160,015       $ 7,160,015   

Other real estate owned

     —           —           2,173,075         2,173,075   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 9,333,090       $ 9,333,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

For assets measured at fair value on a nonrecurring basis during 2013 that were still held in the balance sheet at December 31, 2013, 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 $10,296,595 and $11,079,526 had an allocated allowance for loan losses of $3,136,580 and $2,296,603 at June 30, 2014 and December 31, 2013, 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 six-month period ended June 30, 2014, and recorded at fair value, less costs to sell, was $421,673, of which $8,099 was acquired and sold during this period. There were writedowns in the amount of $463,908 during the period on ten properties valued at $1,759,501. OREO acquired during 2013 and recorded at fair value, less costs to sell, was $1,697,450. Additional writedowns during 2013 on OREO acquired in previous years was $276,400 on four properties valued at $645,468.

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

 

25


Table of Contents

where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. 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 June 30, 2014, and December 31, 2013:

 

     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)     
June 30, 2014               

Financial assets

              

Cash and due from banks

   $ 22,135,487       $ 22,135,487       $ —         $ —         $ 22,135,487   

Interest bearing deposits with banks

     6,923,219         6,923,219         —           —           6,923,219   

Securities held-to-maturity

     205,717,189            207,474,887            207,474,887   

Securities available-for-sale

     201,585,598         —           198,767,680         2,817,918         201,585,598   

Net loans

     381,203,975         —           —           382,676,030         382,676,030   

Financial liabilities

              

Deposits

   $ 691,447,365       $ 463,328,947       $ —         $ 228,261,848       $ 691,590,795   

Federal Home Loan Bank advances

     33,500,000         —           —           34,557,435         34,557,435   

Securities Sold under Agreement to Repurchase

     76,701,609         76,701,609         —           —           76,701,609   

 

26


Table of Contents
     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)     
December 31, 2013               

Financial assets

              

Cash and due from banks

   $ 16,040,195       $ 16,040,195       $ —         $ —         $ 16,040,195   

Interest bearing deposits with banks

     684,100         684,100         —           —           684,100   

Securities available-for-sale

     432,065,590         —           395,410,199         2,766,203         398,176,402   

Net loans

     384,104,766         —           —           385,646,132         385,646,132   

Financial liabilities

              

Deposits

   $ 654,629,796       $ 422,186,092       $ —         $ 232,602,224       $ 654,788,316   

Federal Home Loan Bank advances

     33,500,000         —           —           34,622,359         34,622,359   

Securities Sold under Agreement to Repurchase

     82,420,781         82,420,781         —           —           82,420,781   

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.

 

28


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 June 30, 2014, was 33.19% and at December 31, 2013, was 29.44%, which increased due to an increase in core deposits at June 30, 2014. Despite this increase, management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $691,447,365 at June 30, 2014, and $654,629,796 at December 31, 2013. 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 $407,302,787 invested in investment securities at June 30, 2014, and $398,176,402 at December 31, 2013. The Corporation also had $6,923,219 in interest bearing deposits at other banks at June 30, 2014 and $684,100 at December 31, 2013. The increase in interest bearing deposits was the result of funds being invested in these short term investments. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at June 30, 2014 and $50,000,000 at December 31, 2013. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At June 30, 2014, the Corporation had unused and available $118,218,917 of its line of credit with the FHLB and at December 31, 2013, the Corporation had unused and available $111,782,544 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 2013 to June 30, 2014, was the result of an increase in the amount of loans eligible for the collateral pool. The Corporation had $0 in federal funds purchased as of June 30, 2014 and $27,500,000 at December 31, 2013. The Corporation usually purchases 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.

 

 

31


Table of Contents

CAPITAL RESOURCES

The total shareholders’ equity was $77,633,023 at June 30, 2014, as compared to $66,266,202 at December 31, 2013. The reason for the increase in shareholders’ equity was the decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment. 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. This decrease was in addition to the increase in the amount of earnings in excess of dividends paid.

Aggregate cash dividends in the amount of $2,146,149, or $0.44 per share, have been paid as of the end of the second quarter ended June 30, 2014.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of June 30, 2014, the Corporation meets all capital adequacy requirements to which it is subject.

 

                               To Be Well  
                               Capitalized Under  
                  For Capital     Prompt Corrective  
     Actual     Adequacy Purposes     Actions Provisions  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of June 30, 2014

               

Total Capital
(to Risk-Weighted Assets)

   $ 92,647,622         17.84   $ 41,540,743         >8.00   $ 51,925,928         >10.00

Tier 1 Capital
(to Risk-Weighted Assets)

     86,131,588         16.59     20,770,371         >4.00     31,155,557         >6.00

Tier 1 Capital
( to Average Assets)

     86,131,588         9.89     34,832,890         >4.00     43,541,112         >5.00

 

32


Table of Contents

RESULTS OF OPERATIONS

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

 

     For the Three Months      For the Six Months  
     Ended June 30,      Ended June 30,  
     2014      2013      2014      2013  

Interest Income, including fees

   $ 7,925,513       $ 7,990,919       $ 15,871,441       $ 15,978,566   

Interest Expense

     733,951         1,185,082         1,462,810         2,417,308   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

     7,191,562         6,805,837         14,408,631         13,561,258   

Provision for Loan Losses

     211,535         574,595         572,903         749,104   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income after

           

Provision for Loan Losses

     6,980,027         6,231,242         13,835,728         12,812,154   

Other Income

     2,483,622         1,928,870         4,267,102         3,609,861   

Other Expense

     7,045,995         6,147,031         13,414,858         12,704,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income Before Provision For

           

Income Taxes

     2,417,654         2,013,081         4,687,972         3,717,820   

Provision for Income Taxes

     325,135         409,337         798,300         699,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 2,092,519       $ 1,603,744       $ 3,889,672       $ 3,018,190   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Per share - Basic

   $ 0.43       $ 0.33       $ 0.80       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income Per Share-Diluted

   $ 0.43       $ 0.33       $ 0.80       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 12.55% for the three months ended June 30, 2014, and 7.30% for the corresponding period in 2013. For the six months ended June 30, 2014, ROE was 11.50% compared to 6.59% for the six months ended June 30, 2013. In both instances, the increase in ROE was caused by a decrease in average equity that occurred as a result of the decrease in accumulated other comprehensive loss and increased income.

The book value per share increased to $15.92 at June 30, 2014, compared to $13.61 at December 31, 2013. The increase in book value per share reflects the decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities in addition to the amount of earnings in excess of dividends. Average assets for the six months ended June 30, 2014, were $876,416,138 compared to $882,285,119 for the year ended December 31, 2013.

 

33


Table of Contents

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 3.68% for the second quarter of 2014 compared to 3.48% for the corresponding period of 2013. For the six months ended June 30, 2014, annualized net interest margin was 3.67% compared to 3.50% for the six months ended June 30, 2013. The increase in net interest margin from 2013 to 2014 is the result of the decrease in rates paid on deposits and borrowed funds exceeding the decrease in yields on earning assets, partially offset by a decrease in average earning assets, as detailed below. Earning assets averaged $785,906,307 for the three months ended June 30, 2014. This represents a decrease of $22,748,878, or 2.8%, over average earning assets of $808,655,185 for the three-month period ended June 30, 2013. The decrease in average earning assets for the three months ended June 30, 2014, is the result of a decrease in investment securities and a decrease in loans due to payments on existing loans exceeding new loans.

Interest bearing deposits averaged $546,708,481 for the three months ended June 30, 2014. This represents an increase of $11,037,358, or 2.1%, from the average of interest bearing deposits of $535,671,123 for the three-month period ended June 30, 2013. 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 $121,195,133 for the three months ended June 30, 2014. This represents a decrease of $23,029,918, or 16.0%, over the other borrowed funds of $144,225,051 for the three-month period ended June 30, 2013. This decrease in other borrowed funds was due to a $3,374,259 increase in the securities sold under agreement to repurchase, a $36,045 decrease in the Agribusiness Enterprise Loan Liability, a $1,972,528 decrease in Federal Funds Purchased and a decrease in the FHLB advances of $24,395,604 for the three-month period ended June 30 2014, when compared to the three-month period ended June 30, 2013.

Interest bearing deposits averaged $544,225,474 for the six months ended June 30, 2014. This represents an increase of $7,068,170, or 1.3%, from the average of interest bearing deposits of $537,157,304 for the six-month period ended June 30, 2013. 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 $127,064,317 for the six months ended June 30, 2014. This represents a decrease of $14,707,159, or 10.4%, over the other borrowed funds of $141,771,476 for the six-month period ended June 30, 2013. This decrease in other borrowed funds was due to a $4,164,099 increase in the securities sold under agreement to repurchase, a $39,213 decrease in the Agribusiness Enterprise Loan Liability, a $1,388,950 increase in Federal Funds Purchased and a decrease in the FHLB advances of $20,220,995 for the six-month period ended June 30 2014, when compared to the six-month period ended June 30, 2013.

 

34


Table of Contents

Net interest income was $7,191,562 for the three-month period ended June 30, 2014, an increase of $385,725 from $6,805,837 for the three-month period ended June 30, 2013, primarily due to an increase in volume partially offset by a decrease in rate. 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-month period ended June 30, 2014, the rates paid on deposits and borrowed funds decreased more than the yield on earning assets decreased from the same period in 2013. The yield on all interest bearing assets decreased 2 basis points to 4.04% in the second quarter of 2014 from 4.06% for the same period in 2013. At the same time, the rate paid on all interest bearing liabilities for the second quarter of 2014 decreased by 26 basis points to 0.44% from 0.70% in the same period of 2013. 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 $14,408,631 for the six-month period ended June 30, 2014, an increase of $847,373 from $13,561,258 for the six-month period ended June 30, 2013, primarily due to an increase in volume partially offset by a decrease in rate. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As to changes in rate in the six-month period ended June 30, 2014, the rates paid on deposits and borrowed funds decreased more than the yield on earning assets decreased from the same period in 2013. The yield on all interest bearing assets decreased 7 basis points to 4.03% in the six-month period ended June 30, 2014 from 4.10% for the same period in 2013. At the same time, the rate paid on all interest bearing liabilities for the six-month period ended June 30, 2014 decreased by 27 basis points to 0.44% from 0.71% in the same period of 2013. 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.

 

35


Table of Contents

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

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  
     2014     2013     2014     2013  

Interest and Fees

   $ 5,067,445      $ 5,120,642      $ 10,111,355      $ 10,319,823   

Average Gross Loans

     392,156,742        365,045,290        391,776,690        367,932,362   

Annualized Yield

     5.17     5.61     5.16     5.61

The decrease in interest rates in the three and six-month periods ended June 30, 2014, 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 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.

 

36


Table of Contents

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

 

     Quarter Ended     Year Ended     Amount of     Percent of  
     June 30,     December 31,     Increase     Increase  
     2014     2013     (Decrease)     (Decrease)  

BALANCES:

        

Gross Loans

   $ 390,320,889      $ 392,667,601      $ (2,346,712     -0.60

Allowance for Loan Losses

     8,539,428        8,077,499        461,929        5.72

Nonaccrual Loans

     14,664,486        13,591,793        1,072,693        7.89

Ratios:

        

Allowance for loan losses to gross loans

     2.19     2.06    

Net loans charged off to allowance for loan losses

     1.30     13.38    

The provision for loan losses for the three months ended June 30, 2014, was $211,535, a decrease of $363,060 from the $574,595 provision for the same period in 2013. The provision for loan losses was $572,903 for the six-month period ended June 30, 2014, compared to a provision of $749,104 for the six months ended June 30, 2013. The change in our loan loss provisions for the three- and six-month periods 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 list exceeded payments received.

For the three months ended June 30, 2014, net loan losses charged to the allowance for loan losses totaled $33,679, a decrease of $572,448 from the $606,127 charged off in the same period in 2013. For the six months ended June 30, 2014, net loan losses charged to the allowance for loan losses totaled $110,973, a decrease of $789,357 from the $900,330 charged off in the same period in 2013. This decrease was due to an overall decrease in the number of charge offs in 2014 when compared to the same period in 2013 and not the result of any one loan segment.

Management reviews quarterly with the 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 first six months of 2014 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, in light of overall economic conditions in the Corporation’s geographic area, the nation and internationally, as a whole, it is possible that additional provisions for loan loss may be required.

 

 

37


Table of Contents

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended June 30, 2014 was $2,483,622, an increase of $554,752, or 28.8%, from the same period in 2013. Service charges on deposit accounts increased by $49,884, or 5.5%, to $963,826 in the three months ended June 30, 2014, compared to $913,942 for the same period in 2013. Other service charges and fees increased by $51,109, or 10.8%, in the three months ended June 30, 2014, compared to the same period in 2013. The increase in fee income was the result of an increase in demand for these services and not a direct result of fee changes.

Other income for the six months ended June 30, 2014 was $4,267,102, an increase of $657,241, or 18.2%, from the same period in 2013. Service charges on deposit accounts increased by $88,758, or 4.9%, to $1,893,557 in the six months ended June 30, 2014, compared to $1,804,799 for the same period in 2013. Other service charges and fees increased by $82,619, or 8.9%, in the six months ended June 30, 2014, compared to the same period in 2013. The increase in fee income was the result of an increase in demand for these services 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             Six months         
     Ended June 30,             Ended June 30,         
     2014      2013      2014      2013  

Other Income

           

BOLI Insurance

   $ 144,000       $ 120,000       $ 288,000       $ 240,000   

Mortgage Loan Origination Income

     73,315         110,593         142,734         230,837   

Income from Security Sales, net

     9,102         154,655         9,102         154,655   

Other Income

     768,684         156,094         924,577         253,057   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Income

   $ 995,101       $ 541,342       $ 1,364,413       $ 878,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three-month period ended June 30, 2014 and 2013 were $7,045,995 and $6,147,031, respectively, an increase of $898,964, or 14.6%, from 2013 to 2014. Salaries and benefits decreased to $3,252,370 for the three months ended June 30, 2014, from $3,336,317 for the same period in 2013. This represents a decrease of $83,947, or 2.5%. This decrease was the result of a decrease in the number of employees brought about by consolidation of job responsibilities. Occupancy expense increased by $459,800, or 41.3%, to $1,570,995 for the three months ended June 30, 2014, when compared to the same period of 2013. This increase is due in part to an increase in equipment rental and service contracts. Other operating expenses increased by $523,111 from 2013 to 2014. This increase is due mainly to higher loan collection costs, supply costs, increased regulatory and related expenses and write-downs on other real estate. A detail of the major expense classifications is set forth below.

 

38


Table of Contents

Total non-interest expenses for the six-month periods ended June 30, 2014 and 2013 were $13,414,858 and $12,704,195, respectively, an increase of $710,663, or 5.6% from 2013 to 2014. Salaries and benefits decreased to $6,608,207 for the six months ended June 30, 2014 from $6,642,487 for the same period in 2013. This represents a decrease of $34,280, or 0.5%. This decrease was the result of a reduction in the number of employees in the period. Occupancy expense increased $320,351, or 14.4%, to $2,544,057 in the six months ended June 30, 2014 when compared to the same period in 2013. This increase is due in part to an increase in equipment rental and service costs. Other operating expenses increased by $424,592. This increase is due mainly to higher loan collection costs, supply costs, increased regulatory and related expenses and write-downs on other real estate.

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      Six months  
     ended June 30,      ended June 30,  
     2014      2013      2014      2013  

Other Operating Expense

           

Advertising

     212,056         151,188         364,040         297,356   

Office Supplies

     202,860         99,891         380,815         234,362   

Legal and Audit Fees

     41,657         104,885         146,311         204,135   

Telephone expense

     101,877         129,755         210,313         240,522   

Postage and Freight

     126,660         104,508         249,051         222,151   

Loan Collection Expense

     328,656         89,621         398,516         310,232   

Other Losses

     396,082         24,486         621,575         178,518   

Regulatory and related expense

     196,492         10,703         388,078         342,098   

Debit Card/ATM expense

     1,183         184,107         166,205         353,658   

Travel and Convention

     69,909         69,212         106,742         114,607   

Other expenses

     545,198         731,163         1,230,948         1,340,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Expense

   $ 2,222,630       $ 1,699,519       $ 4,262,594       $ 3,838,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s efficiency ratio for the three months ended June 30, 2014, was 70.95% compared to the 68.02% for the same period in 2013. For the six months ended June 30, 2014 and 2013, the Corporation’s efficiency ratio was 69.84% and 71.43%, 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.

 

39


Table of Contents

BALANCE SHEET ANALYSIS

 

     June 30,
2014
     December 31,
2013
     Amount of
Increase
(Decrease)
    Percent of
Increase
(Decrease)
 

Cash and Due From Banks

   $ 22,135,487       $ 16,040,195       $ 6,095,292        38.00

Interest Bearing deposits with Other Banks

     6,923,219         684,100         6,239,119        912.02

Investment Securities

     407,302,787         398,176,402         9,126,385        2.29

Loans, net

     381,203,975         384,104,766         (2,900,791     -0.76

Total Assets

     887,833,952         873,068,899         14,765,053        1.69

Total Deposits

     691,447,365         654,629,796         36,817,569        5.62

Total Stockholders’ Equity

     77,633,023         66,266,202         11,366,821        17.15

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash, balances at correspondent banks and items in process of collection. The balance at June 30, 2014 was $22,135,487, an increase of $6,095,292 from the balance of $16,040,195 at December 31, 2013, due to an increase in the balances at correspondent banks due to an increase in the amount of the month ending cash letter.

PREMISES AND EQUIPMENT

During the period ended June 30, 2014, premises and equipment increased by $1,079,827, or 5.8%, to $19,702,981 when compared to $18,623,154 at December 31, 2013. The increase was due to the addition of property and equipment exceeding the amount of depreciation for the period.

INVESTMENT SECURITIES

The investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. Investments at June 30, 2014, increased by $10,884,084, or 2.7%, to $407,302,787 from $398,176,402 at December 31, 2013. This increase is due to changes in the market value of the securities portfolio offset by redemptions of investment securities.

LOANS

The loan balance decreased by $2,900,791 during the six months ended June 30, 2014, to $381,203,975 from $384,104,766 at December 31, 2013. Loan demand, especially in business loan and consumer loan categories, remained weak and competition for available loans was great during the first six months of 2014. No material changes were made to the loan products offered by the Corporation during this period.

 

 

40


Table of Contents

DEPOSITS

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

 

     June 30,
2014
     December 31,
2013
     Amount of
Increase
(Decrease)
    Percent of
Increase
(Decrease)
 

Noninterest-Bearing Deposits

   $ 140,377,329       $ 120,424,895       $ 19,952,434        16.57

Interest-Bearing Deposits

     263,573,417         248,015,410         15,558,007        6.27

Savings Deposits

     59,378,201         53,745,787         5,632,414        10.48

Certificates of Deposit

     228,118,418         232,443,704         (4,325,286     -1.86
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Deposits

   $ 691,447,365       $ 654,629,796       $ 36,817,569        5.62
  

 

 

    

 

 

    

 

 

   

 

 

 

Interest-bearing deposits, noninterest-bearing deposits and savings increased while certificates of deposit decreased during the six months ended June 30, 2014. 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, 2013.

 

41


Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The following discussion 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 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 performance. 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 June 30, 2014, the Corporation had approximately $8.5 million of available reserves to cover such losses. The models and approaches the Corporation uses to originate and manage loans are regularly 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.

 

42


Table of Contents

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 are devoted to managing interest-rate risk. Currently, the Corporation does not have any significant risks related to foreign currency exchange, commodities or equity risk exposures.

Interest Rate and Yield Curve Risks

A significant portion of the 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 simply 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 is 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 as well as the rules and regulations promulgated by the Securities and Exchange Commission and the NASDAQ. Failure to comply with applicable regulations could result in financial, structural, and 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

 

43


Table of Contents

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.

 

44


Table of Contents
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 June 30, 2014 (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 June 30, 2014, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

45


Table of Contents

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, 2013 filed with the Securities and Exchange Commission on March 14, 2014, 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 will become 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.

 

46


Table of Contents

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 and/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 and/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.

 

47


Table of Contents
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 June 30, 2014, filed with the SEC on August 11, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of June 30, 2014 (Unaudited) and December 31, 2013 (Audited); (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited); and (v) Notes to Consolidated Financial Statements, tagged as blocks of text (Unaudited).

 

48


Table of Contents

SIGNATURES

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

 

CITIZENS HOLDING COMPANY

 

BY:  

/s/ Greg L. McKee

Greg L. McKee
President and Chief Executive Officer

(Principal Executive Officer)

 

BY:  

/s/ Robert T. Smith

Robert T. Smith
Treasurer and Chief Financial Officer

(Principal Financial Officer and Chief Accounting Officer)

 

DATE: August 8, 2014

 

49


Table of Contents

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 June 30, 2014, filed with the SEC on August 11, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of June 30, 2014 (Unaudited) and December 31, 2013 (Audited); (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 (Unaudited) and 2013 (Unaudited); and (v) Notes to Consolidated Financial Statements, tagged as blocks of text (Unaudited).

 

50