UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

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

For the quarterly period ended ~~March 31,~~September 30, 2019

☐	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)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading

Symbol(s)

Name of Each Exchange

on Which Registered

Common Stock, $0.20 par value

CIZN

NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller Reporting Company	☐☒

		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). ☐ Yes ☒ No

Number of shares outstanding of each of the issuer’s classes of common stock, as of ~~May 7,~~November 6, 2019:


Title		Outstanding
Common Stock, $0.20 par value		~~4,912,030~~5,578,131

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION		1

Item 1.	Consolidated Financial Statements.

	Consolidated Statements of Financial Condition, as of September 30, 2019 (Unaudited) and December 31, 2018 (Audited)		1

~~Consolidated Statements of Financial Condition, as of March 31, 2019 (Unaudited) and December 31, 2018 (Audited)~~				1

Consolidated Statements of Income for the Three and nine months ended ~~March 31,~~September 30, 2019 (Unaudited) and 2018 (Unaudited)		2

	Consolidated Statements of Comprehensive Income (Loss) for the Three and nine months ended ~~March 31,~~September 30, 2019 (Unaudited) and 2018 (Unaudited)		3

	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Nine months ended ~~March 31,~~September 30, 2019 (Unaudited) and 2018 (Unaudited)		4

	Notes to Consolidated Financial Statements (Unaudited)		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.		2930

Item 3.	Quantitative and Qualitative Disclosures About Market ~~Risk~~Risk.		4143

Item 4. ~~Controls and Procedures~~		44

~~PART II. OTHER INFORMATION~~Controls and Procedures.		45

PART II.	~~Item 1. Legal Proceedings~~OTHER INFORMATION		4546

Item ~~1A. Risk Factors~~1.	Legal Proceedings.		4546

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.		46

*	None or Not Applicable.

~~Item 6. Exhibits~~SIGNATURES			46

* None or Not Applicable.

~~SIGNATURES~~		47

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS.

~~ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.~~

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


							September 30,			December 31,
							2019			2018
	March 31, 2019 (Unaudited)			December 31, 2018 (Audited)			(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	12,462,550		$	12,592,130		$	21,106,679		$	12,592,130
Interest bearing deposits with other banks		27,122,108			8,079,742			61,234,815			8,079,742
Investment securities available for sale, at fair value		507,791,195			444,746,454			434,145,569			444,746,454
Loans, net of allowance for loan losses of $3,559,896 in 2019 and $3,371,695 in 2018		443,909,475			425,905,093
Loans, net of allowance for loan losses of $3,805,579 in 2019 and $3,371,695 in 2018								469,692,103			425,905,093
Premises and equipment, net		19,556,205			19,717,305			20,029,997			19,717,305
Other real estate owned, net		3,440,148			3,440,148			3,383,444			3,440,148
Accrued interest receivable		4,326,455			4,165,783			3,596,005			4,165,783
Cash surrender value of life insurance		25,532,529			25,383,931			25,866,655			25,383,931
Deferred tax assets, net		4,601,116			6,633,539			1,899,036			6,633,539
Other assets		8,650,695			7,965,952			8,649,342			7,965,952

TOTAL ASSETS	$	1,057,392,476		$	958,630,077		$	1,049,603,645		$	958,630,077

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	171,555,937		$	170,029,729		$	168,317,216		$	170,029,729
Interest-bearing NOW and money market accounts		369,049,299			298,220,430			326,982,928			298,220,430
Savings deposits		77,317,063			76,735,710			78,474,191			76,735,710
Certificates of deposit		222,237,684			211,235,641			220,539,672			211,235,641

Total deposits		840,159,983			756,221,510			794,314,007			756,221,510
Securities sold under agreement to repurchase		115,450,591			107,965,505			144,502,629			107,965,505
Accrued interest payable		650,685			470,710			685,777			470,710
Deferred compensation payable		9,135,798			9,052,972			9,336,912			9,052,972
Other liabilities		1,416,362			1,053,063			1,765,255			1,053,063

Total liabilities		966,813,419			874,763,760			950,604,580			874,763,760
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, 4,904,530 shares issued and outstanding at March 31, 2019 and December 31, 2018		980,906			980,906
Common stock, $0.20 par value, 22,500,000 shares authorized, 4,912,030 shares issued and outstanding at September 30, 2019 and 4,904,530 at December 31, 2018								982,406			980,906
Additionalpaid-in capital		4,339,843			4,298,499			4,419,406			4,298,499
Retained earnings		93,611,199			93,561,515			93,957,055			93,561,515
Accumulated other comprehensive loss, net of tax benefit of $2,776,877 at March 31, 2019 and $4,978,232 at December 31, 2018		(8,352,891	)		(14,974,603	)
Accumulated other comprehensive loss, net of tax benefit of $119,614 at September 30, 2019 and $4,978,232 at December 31, 2018								(359,802	)		(14,974,603	)

Total shareholders’ equity		90,579,057			83,866,317			98,999,065			83,866,317

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,057,392,476		$	958,630,077		$	1,049,603,645		$	958,630,077

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


						For the Three Months				For the Nine Months
	For the Three Months Ended March 31,					Ended September 30,				Ended September 30,
	2019		2018			2019		2018		2019		2018
INTEREST INCOME
Interest and fees on loans	$	5,449,535	$	4,716,419		$	5,940,805	$	5,166,554	$	17,220,751	$	14,867,465
Interest on securities
Taxable		2,082,005		2,204,959			1,945,053		2,074,424		6,252,649		6,320,482
Nontaxable		616,779		617,729			345,238		622,050		1,474,886		1,933,104
Other interest		235,106		60,284			212,319		24,291		529,098		144,635

Total interest income		8,383,425		7,599,391			8,443,415		7,887,319		25,477,384		23,265,686
INTEREST EXPENSE
Deposits		1,728,672		501,209			1,922,396		709,985		5,567,837		1,726,700
Other borrowed funds		445,027		293,431			602,730		458,039		1,575,580		1,062,505

Total interest expense		2,173,699		794,640			2,525,126		1,168,024		7,143,417		2,789,205

NET INTEREST INCOME		6,209,726		6,804,751			5,918,289		6,719,295		18,333,967		20,476,481
PROVISION FOR (REVERSAL OF) LOAN LOSSES		195,479		(236,773	)
PROVISION FOR LOAN LOSSES							11,738		288,576		472,036		140,765

NET INTEREST INCOME AFTER PROVISION FOR (REVERSAL OF) LOAN LOSSES		6,014,247		7,041,524
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES							5,906,551		6,430,719		17,861,931		20,335,716
OTHER INCOME
Service charges on deposit accounts		1,096,692		1,143,593			1,125,631		1,170,956		3,268,578		3,381,809
Other service charges and fees		683,640		668,464			863,407		761,935		2,316,715		2,147,452
Other operating income		266,579		288,373			516,862		287,683		1,039,696		870,153

Total other income		2,046,911		2,100,430			2,505,900		2,220,574		6,624,989		6,399,414

OTHER EXPENSES
Salaries and employee benefits		3,546,669		3,667,857			3,508,723		3,668,012		10,525,116		11,011,291
Occupancy expense		1,422,427		1,525,379			1,287,320		1,486,232		4,119,609		4,373,233
Other expense		1,670,121		1,854,446			2,071,595		1,739,780		5,185,179		5,505,070

Total other expenses		6,639,217		7,047,682			6,867,638		6,894,024		19,829,904		20,889,594

INCOME BEFORE PROVISION FOR INCOME TAXES		1,421,941		2,094,272			1,544,813		1,757,269		4,657,016		5,845,536
PROVISION FOR INCOME TAXES		195,170		321,885			211,925		260,475		726,615		888,215

NET INCOME	$	1,226,771	$	1,772,387		$	1,332,888	$	1,496,794	$	3,930,401	$	4,957,321

NET INCOME PER SHARE -Basic	$	0.25	$	0.36		$	0.27	$	0.31	$	0.80	$	1.01

-Diluted	$	0.25	$	0.36		$	0.27	$	0.31	$	0.80	$	1.01

DIVIDENDS PAID PER SHARE	$	0.24	$	0.24		$	0.24	$	0.24	$	0.72	$	0.72

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


							For the Three Months						For the Nine Months
	For the Three Months Ended March 31,						Ended September 30,						Ended September 30,
	2019			2018			2019			2018			2019			2018
Net income	$	1,226,771		$	1,772,387		$	1,332,888		$	1,496,794		$	3,930,401		$	4,957,321
Other comprehensive income (loss)
Securitiesavailable-for-sale
Unrealized holding gains (losses)		8,823,067			(9,416,226	)		3,311,002			(3,006,277	)		19,283,111			(13,656,532	)
Income tax effect		(2,201,355	)		2,349,348			(826,095	)		750,067			(4,811,136	)		3,407,305

		6,621,712			(7,066,878	)		2,484,907			(2,256,210	)		14,471,975			(10,249,227	)
Rclassification adjustment for gains included in net income		—			8,021
Reclassification adjustment for gains included in net income								244,457			11,047			190,308			11,047
Income tax effect		—			(2,001	)		(60,992	)		(2,756	)		(47,482	)		(2,756	)

		—			6,020			183,465			8,291			142,826			8,291

Total other comprehensive income (loss)		6,621,712			(7,060,858	)		2,668,372			(2,247,919	)		14,614,801			(10,240,936	)

Comprehensive income (loss)	$	7,848,483		$	(5,288,471	)	$	4,001,260		$	(751,125	)	$	18,545,202		$	(5,283,615	)

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

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


							For the Nine Months
	For the Three Months Ended March 31,						Ended September 30,
	2019			2018			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	1,978,070		$	2,567,892		$	8,867,757		$	8,832,306
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		8,335,984			10,181,801			39,516,994			32,579,774
Proceeds from sale of investment securities		—			14,752,618			96,171,622			17,609,890
Purchases of investment securities available for sale		(63,402,575	)		—			(108,814,987	)		(10,550,000	)
Purchases of bank premises and equipment		(45,304	)		(32,732	)		(955,550	)		(268,708	)
Decrease in interest bearing deposits with other banks		(19,042,366	)		(18,592,714	)
Proceeds from sales of bank premises and equipment								—			264,000
(Increase) decrease in interest bearing deposits with other banks								(53,155,073	)		180,675
Proceeds from sale of other real estate		—			667,253			170,356			802,372
Net increase in loans		(18,199,861	)		(2,929,881	)		(44,381,330	)		(29,407,770	)

Net cash (used in) provided by investing activities		(92,354,122	)		4,046,345			(71,447,968	)		11,210,233
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		83,938,473			64,941,584			38,092,497			36,694,834
Net change in securities sold under agreement to repurchase		7,485,086			(43,654,076	)
Increase (decrease) in securities sold under agreement to repurchase								36,537,124			(53,589,022	)
Increase in federal funds purchased		—			(1,500,000	)		—			5,000,000
Repayment of Federal Home Loan Bank advances		—			(30,000,000	)		—			(10,000,000	)
Proceeds from exercise of stock options								—			27,000
Payment of dividends		(1,177,087	)		(1,174,729	)		(3,534,861	)		(3,528,904	)

Net cash used in (provided by) financing activities		90,246,472			(11,387,221	)
Net cash provided by (used in) financing activities								71,094,760			(25,396,092	)

Net decrease in cash and due from banks		(129,580	)		(4,772,984	)
Net increase (decrease) in cash and due from banks								8,514,549			(5,353,553	)
Cash and due from banks, beginning of period		12,592,130			17,962,990			12,592,130			17,962,990

Cash and due from banks, end of period	$	12,462,550		$	13,190,006		$	21,106,679		$	12,609,437

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

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the ~~three~~nine months ended ~~March 31,~~September 30, 2019

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended ~~March 31,~~September 30, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

The interim consolidated financial statements of Citizens Holding Company (the “Company”) include the accounts of its wholly-owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with the Company, the “Corporation”). In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation.

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 15, 2019.

Nature of Business

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

Estimates

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

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

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

Adoption of New Accounting Standards

ASU2016-02 ~~“Leases”~~“Leases (Topic 842)” (“ASU2016-02”) requires lessees and lessors recognize lease assets and lease liabilities on the ~~balance sheet~~statement of financial condition and disclose key information about leasing arrangements. ASU2016-02 was effective for the Company on January 1, 2019. ASU2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply ASU2016-02 as of the beginning of the period of adoption (January 1, 2019) and ~~have~~has not restated comparative periods. Of the optional practical expedients available under ASU2016-02, all that apply have been adopted.

The Company’s operating leases relate primarily to branch properties and related equipment. As a result of implementing ASU2016-02, we recognized an operating leaseright-of-use (“ROU”) asset of $1.086 million and an operating lease liability of $1.086 million on January 1, 2019, with no impact on our consolidated statements of income or condensed consolidated ~~statement~~statements of cash flows compared to the prior lease accounting model. The ROU asset and liability are recorded in other assets and other liabilities, respectively, in the consolidated statements of condition. See Note 8.9. Premises and Equipment for additional information.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU2016-13”). ASU2016-13 makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition

to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with

similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU2016-13 are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU 2016-13 for certain companies. The new effective date for the Company ~~will adopt ASU2016-13~~ onis January 1, ~~2020. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018, however, the Company does not currently plan to early adopt the ASU.~~2023. ASU2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU2016-13 to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation of said models is required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

ASU2018-13 “Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement” (“ASU2018-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU2018-13 is effective for annual and interim periods beginning after December 15, 2019. Management is currently evaluating the impact this ASU will have on the Company’s financial statements.

Note 2. Mergers and Acquisitions

Merger with Charter Bank

Effective October 1, 2019, the Company completed its acquisition by merger of Charter Bank (“Charter”), in a transaction valued at approximately $19.7 million. The Company issued 666,099 shares of common stock and paid approximately $6.1 million in cash to Charter shareholders, excluding cash paid for fractional shares. At closing, Charter merged with and into the Bank, with the Bank the surviving corporation in the merger. Operations of Charter will be included in the consolidated financial statements of the Corporation for periods subsequent to the acquisition date.

Prior to any determination of purchase accounting adjustments, as a result of the acquisition, the Company acquired total assets of approximately $149 million, which include total loans of approximately $104 million, total deposits of approximately $126 million, and 4 banking locations on the Mississippi Gulf Coast. The Company is finalizing the fair value of assets acquired and liabilities assumed as part of the acquisition.

Note 2.3. Commitments and Contingent Liabilities

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of ~~March 31,~~September 30, 2019, the Corporation had entered into loan commitments

with certain customers with an aggregate unused balance of ~~$61,031,088~~$70,933,230 compared to an aggregate unused balance of $58,835,208 at December 31, 2018. There were ~~$2,474,810~~$2,435,810 of letters of credit outstanding at ~~March 31,~~September 30, 2019 and $2,516,810 at December 31, 2018. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments ~~and~~ into its asset and liability management program.

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

Note 3.4. Net Income per Share

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


	For the Three Months				For the Three Months				For the Nine Months
	Ended March 31,				Ended September 30,				Ended September 30,
	2019		2018		2019		2018		2019		2018
Basic weighted average shares outstanding		4,892,530		4,882,705		4,900,030		4,899,520		4,896,871		4,888,372
Dilutive effect of granted options		2,598		5,802		1,465		5,093		2,321		9,586

Diluted weighted average shares outstanding		4,895,128		4,888,507		4,901,495		4,904,613		4,899,192		4,897,958

Net income	$	1,226,771	$	1,772,387	$	1,332,888	$	1,496,794	$	3,930,401	$	4,957,321
Net income per share-basic	$	0.25	$	0.36	$	0.27	$	0.31	$	0.80	$	1.01
Net income per share-diluted	$	0.25	$	0.36	$	0.27	$	0.31	$	0.80	$	1.01

Note 4.5. Equity Compensation Plans

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

Prior to the adoption of the 2013 Plan, the Corporation issued awards to directors from the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”), which has expired.

The following table is a summary of the stock option activity for the ~~three~~nine months ended ~~March 31,~~September 30, 2019:


									Directors’ Plan					2013 Plan
												Weighted				Weighted
									Number			Average		Number		Average
	Directors’ Plan				2013 Plan				of			Exercise		of		Exercise
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Shares			Price		Shares		Price
Outstanding at December 31, 2018		52,500	$	21.55		—	$	—		52,500		$	21.55		—	$	—
Granted		—		—		—		—		—			—		—		—
Exercised		—		—		—		—		—			—		—		—
Expired		—		—		—		—		(12,000	)		21.75		—		—

Outstanding at March 31, 2019		52,500	$	21.55		—	$	—
Outstanding at September 30, 2019										40,500		$	21.49		—	$	—

The intrinsic value of options outstanding under the Directors’ Plan at ~~March 31,~~September 30, 2019, was ~~$69,810.~~$25,920. No options were outstanding under the 2013 Plan as of ~~March 31,~~September 30, 2019.

During ~~2018,~~2019, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over aone-year period ending April ~~25, 2019~~23, 2020 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was ~~$165,375~~$161,475 and will be ~~recognized~~expensed ratably over theone-year vesting ~~period at a cost of $13,781 per month less deferred taxes of $3,438 per month.~~period.

Note 5.6. Income Taxes

For the three months ended ~~March 31,~~September 30, 2019 and 2018, the Company recorded a provision for income taxes totaling ~~$195~~$212 thousand and ~~$322~~$260 thousand, respectively. The effective tax rate was 13.7% and 14.8% for the three months ending September 30, 2019 and 2018, respectively.

For the nine months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes totaling $727 thousand and $888 thousand, respectively. The effective tax rate was 15.6% and 15.2% for the nine months ending September 30, 2019 and 2018, respectively. The provision for income taxes includes both federal and state income taxes and differs from the statutory rate due to favorable permanent ~~differences. The effective~~differences primarily related to tax ~~rate was 13.7% and 15.4% for the three months ending March 31, 2019 and 2018, respectively.~~free municipal investments.

Note 6.7. Securities

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


			Gross		Gross						Gross		Gross
March 31, 2019	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value		Amortized		Unrealized		Unrealized		Estimated
September 30, 2019									Cost		Gains		Losses		Fair Value
Securitiesavailable-for-sale
Obligations of U.S.
Government agencies	$	98,911,462	$	—	$	1,606,054	$	97,305,408
Obligations of U.S. Government agencies									$	98,400,709	$	22,134	$	441,703	$	97,981,140
Mortgage backed securities		314,839,147		157,919		7,760,156		307,236,910		276,342,668		839,052		1,583,407		275,598,313
State, County, Municipals		105,170,354		220,375		2,141,852		103,248,877		59,881,608		744,167		59,659		60,566,116

Total	$	518,920,963	$	378,294	$	11,508,062	$	507,791,195	$	434,624,985	$	1,605,353	$	2,084,769	$	434,145,569


			Gross		Gross						Gross		Gross
									Amortized		Unrealized		Unrealized		Estimated
December 31, 2018	Amortized		Unrealized		Unrealized		Estimated		Cost		Gains		Losses		Fair Value
	Cost		Gains		Losses		Fair Value
Securitiesavailable-for-sale
Obligations of U.S.
Government agencies	$	99,365,930	$	—	$	3,388,147	$	95,977,783
Obligations of U.S. Government agencies									$	99,365,930	$	—	$	3,388,147	$	95,977,783
Mortgage backed securities		259,742,501		4,921		12,373,269		247,374,153		259,742,501		4,921		12,373,269		247,374,153
State, County, Municipals		105,590,858		67,888		4,264,228		101,394,518		105,590,858		67,888		4,264,228		101,394,518

Total	$	464,699,289	$	72,809	$	20,025,644	$	444,746,454	$	464,699,289	$	72,809	$	20,025,644	$	444,746,454

At ~~March 31,~~September 30, 2019 and December 31, 2018, securities with a carrying value of ~~$358,290,412~~$376,127,226 and $357,231,440, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

The amortized cost and estimated fair value of securities by contractual maturity at ~~March 31,~~September 30, 2019 and December 31, 2018 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.


	March 31, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Available-for-sale
Due in one year or less	$	2,639,867	$	2,642,681	$	1,875,288	$	1,877,665	$	345,000	$	344,200	$	1,875,288	$	1,877,665
Due after one year through five years		91,046,162		89,695,181		91,948,838		89,121,194		95,296,476		94,888,785		91,948,838		89,121,194
Due after five years through ten years		36,403,442		35,989,164		32,801,788		31,718,293		12,338,444		12,457,030		32,801,788		31,718,293
Due after ten years		73,992,345		72,227,259		78,330,873		74,655,149		50,302,397		50,857,242		78,330,873		74,655,149
Residential mortgage backed securities		245,120,416		239,721,466		187,776,954		179,235,806		217,007,709		216,247,964		187,776,954		179,235,806
Commercial mortgage backed securities		69,718,731		67,515,444		71,965,548		68,138,347		59,334,959		59,350,348		71,965,548		68,138,347

Total	$	518,920,963	$	507,791,195	$	464,699,289	$	444,746,454	$	434,624,985	$	434,145,569	$	464,699,289	$	444,746,454

The tables below show the Corporation’s gross unrealized losses and fair value ofavailable-for-sale investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at ~~March 31,~~September 30, 2019 and December 31, 2018.

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


March 31, 2019	Less than 12 months				12 months or more				Total
September 30, 2019													Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	—	$	—	$	97,305,408	$	1,606,054	$	97,305,408	$	1,606,054	$	38,652,471	$	308,973	$	20,367,270	$	132,730	$	59,019,741	$	441,703
Mortgage backed securities		40,619,235		231,534		233,209,022		7,528,622		273,828,257		7,760,156		32,441,833		187,039		108,373,816		1,396,368		140,815,649		1,583,407
State, County, Municipal		—		—		80,467,294		2,141,852		80,467,294		2,141,852		7,174,822		24,415		3,732,036		35,244		10,906,858		59,659

Total	$	40,619,235	$	231,534	$	410,981,724	$	11,276,528	$	451,600,959	$	11,508,062	$	78,269,126	$	520,427	$	132,473,122	$	1,564,342	$	210,742,248	$	2,084,769


December 31, 2018	Less than 12 months				12 months or more				Total				Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	—	$	—	$	95,977,783	$	3,388,147	$	95,977,783	$	3,388,147	$	—	$	—	$	95,977,783	$	3,388,147	$	95,977,783	$	3,388,147
Mortgage backed securities		12,257,636		179,281		234,928,705		12,193,988		247,186,341		12,373,269		12,257,636		179,281		234,928,705		12,193,988		247,186,341		12,373,269
State, County, Municipal		12,623,964		285,275		76,535,741		3,978,953		89,159,705		4,264,228		12,623,964		285,275		76,535,741		3,978,953		89,159,705		4,264,228

Total	$	24,881,600	$	464,556	$	407,442,229	$	19,561,088	$	432,323,829	$	20,025,644	$	24,881,600	$	464,556	$	407,442,229	$	19,561,088	$	432,323,829	$	20,025,644

The Corporation’s unrealized losses on its obligations of United States government agencies, mortgage backed securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in themid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Corporation does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Corporation will be required to sell any such security prior to the recovery of itits amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at ~~March 31,~~September 30, 2019 nor at December 31, 2018.

Note 7.8. Loans

The composition of net loans (in thousands) at ~~March 31,~~September 30, 2019 and December 31, 2018 was as follows:


	March 31, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Real Estate:
Land Development and Construction	$	47,492		$	41,134		$	63,491		$	41,134
Farmland		17,264			14,498			15,985			14,498
1-4 Family Mortgages		86,828			88,747			86,516			88,747
Commercial Real Estate		203,883			203,595			205,968			203,595

Total Real Estate Loans		355,467			347,974			371,960			347,974
Business Loans:
Commercial and Industrial Loans		77,585			66,421			87,480			66,421
Farm Production and Other Farm Loans		829			907			742			907

Total Business Loans		78,414			67,328			88,222			67,328
Consumer Loans:
Credit Cards		1,603			1,648			1,744			1,648
Other Consumer Loans		12,015			12,372			11,584			12,372

Total Consumer Loans		13,618			14,020			13,328			14,020

Total Gross Loans		447,499			429,322			473,510			429,322
Unearned Income		(30	)		(45	)		(12	)		(45	)
Allowance for Loan Losses		(3,560	)		(3,372	)		(3,806	)		(3,372	)

Loans, net	$	443,909		$	425,905		$	469,692		$	425,905

Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed onnon-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 onnon-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.

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


	March 31, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Real Estate:
Land Development and Construction	$	113	$	—	$	113	$	—
Farmland		196		200		246		200
1-4 Family Mortgages		1,996		1,831		2,057		1,831
Commercial Real Estate		7,503		7,612		9,484		7,612

Total Real Estate Loans		9,808		9,643		11,900		9,643
Business Loans:
Commercial and Industrial Loans		91		76		363		76
Farm Production and Other Farm Loans		31		31		31		31

Total Business Loans		122		107		394		107
Consumer Loans:
Other Consumer Loans		88		89		65		89

Total Consumer Loans		88		89		65		89

Total Nonaccrual Loans	$	10,018	$	9,839	$	12,359	$	9,839

An aging analysis of past due loans (in thousands), segregated by class, as of ~~March 31,~~September 30, 2019, was as follows:


																							Accruing
															Loans								Loans
													Loans		90 or more								90 or more
													30-89 Days		Days		Total Past		Current		Total		Days
	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		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	82	$	54	$	136	$	47,356	$	47,492	$	—	$	2,218	$	—	$	2,218	$	61,273	$	63,491	$	—
Farmland		438		15		453		16,811		17,264		—		339		—		339		15,646		15,985		—
1-4 Family Mortgages		1,945		334		2,279		84,549		86,828		—		1,832		912		2,744		83,772		86,516		220
Commercial Real Estate		773		3,047		3,820		200,063		203,883		10		1,688		2,335		4,023		201,945		205,968		—

Total Real Estate Loans		3,238		3,450		6,688		348,779		355,467		10		6,077		3,247		9,324		362,636		371,960		220
Business Loans:
Commercial and Industrial Loans		1,758		19		1,777		75,808		77,585		—		648		262		910		86,570		87,480		—
Farm Production and Other Farm Loans		5		—		5		824		829		—		—		31		31		711		742		—

Total Business Loans		1,763		19		1,782		76,632		78,414		—		648		293		941		87,281		88,222		—
Consumer Loans:
Credit Cards		31		10		41		1,562		1,603		10		18		47		65		1,679		1,744		47
Other Consumer Loans		161		17		178		11,837		12,015		—		141		5		146		11,438		11,584		—

Total Consumer Loans		192		27		219		13,399		13,618		10		159		52		211		13,117		13,328		47

Total Loans	$	5,193	$	3,496	$	8,689	$	438,810	$	447,499	$	20	$	6,884	$	3,592	$	10,476	$	463,034	$	473,510	$	267

An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2018 was as follows:


											Accruing												Accruing
			Loans								Loans				Loans								Loans
	Loans		90 or more								90 or more		Loans		90 or more								90 or more
	30-89 Days		Days		Total Past		Current		Total		Days		30-89 Days		Days		Total Past		Current		Total		Days
	Past Due		Past Due		Due Loans		Loans		Loans		Past Due		Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	1,494	$	54	$	1,548	$	39,586	$	41,134	$	54	$	1,494	$	54	$	1,548	$	39,586	$	41,134	$	54
Farmland		779		29		808		13,690		14,498		—		779		29		808		13,690		14,498		—
1-4 Family Mortgages		3,456		330		3,786		84,961		88,747		—		3,456		330		3,786		84,961		88,747		—
Commercial Real Estate		1,059		2,981		4,040		199,555		203,595		—		1,059		2,981		4,040		199,555		203,595		—

Total Real Estate Loans		6,788		3,394		10,182		337,792		347,974		54		6,788		3,394		10,182		337,792		347,974		54
Business Loans:
Commercial and Industrial Loans		1,672		21		1,693		64,728		66,421		—		1,672		21		1,693		64,728		66,421		—
Farm Production and Other Farm Loans		9		—		9		898		907		—		9		—		9		898		907		—

Total Business Loans		1,681		21		1,702		65,626		67,328		—		1,681		21		1,702		65,626		67,328		—
Consumer Loans:
Credit Cards		16		4		20		1,628		1,648		4		16		4		20		1,628		1,648		4
Other Consumer Loans		212		33		245		12,127		12,372		15		212		33		245		12,127		12,372		15

Total Consumer Loans		228		37		265		13,755		14,020		19		228		37		265		13,755		14,020		19

Total Loans	$	8,697	$	3,452	$	12,149	$	417,173	$	429,322	$	73	$	8,697	$	3,452	$	12,149	$	417,173	$	429,322	$	73

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

Impaired loans (in thousands) as of ~~March 31,~~September 30, 2019, segregated by class, were as follows:


			Recorded		Recorded										Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded		Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	113	$	59	$	54	$	113	$	18	$	56.50	$	113	$	59	$	54	$	113	$	17	$	57
Farmland		266		266		—		266		—		267.50		253		253		—		253		—	$	261
1-4 Family Mortgages		817		727		90		817		24		985		863		761		102		863		30	$	1,008
Commercial Real Estate		10,479		5,113		3,649		8,762		375		8,823		11,919		6,104		4,099		10,203		459	$	9,544

Total Real Estate Loans		11,675		6,165		3,793		9,958		417		10,132		13,148		7,177		4,255		11,432		506	$	10,869
Business Loans:
Commercial and Industrial Loans		5		—		5		5		5		3		144		—		144		144		72	$	72

Total Business Loans		5		—		5		5		5		3		144		—		144		144		72	$	72

Total Loans	$	11,680	$	6,165	$	3,798	$	9,963	$	422	$	10,135	$	13,292	$	7,177	$	4,399	$	11,576	$	578	$	10,941

Impaired loans (in thousands) as of December 31, 2018, segregated by class, were as follows:


			Recorded		Recorded										Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average		Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded		Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment		Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Farmland		269		269		—		269		—		135		269		269		—		269		—	$	135
1-4 Family Mortgages		1,153		1,062		91		1,153		27		728		1,153		1,062		91		1,153		27	$	728
Commercial Real Estate		10,601		5,209		3,675		8,884		374		6,489		10,601		5,209		3,675		8,884		374	$	6,489

Total Real Estate Loans		12,023		6,540		3,766		10,306		401		7,352		12,023		6,540		3,766		10,306		401	$	7,352
Total Loans	$	12,023	$	6,540	$	3,766	$	10,306	$	401	$	7,352	$	12,023	$	6,540	$	3,766	$	10,306	$	401	$	7,352

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


			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
March 31, 2019			Outstanding		Outstanding
	Number of		Recorded		Recorded				Outstanding		Outstanding
	Loans		Investment		Investment		Number of		Recorded		Recorded
September 30, 2019							Loans		Investment		Investment
Commercial real estate		3	$	4,871	$	2,748		3	$	4,871	$	2,607

Total		3	$	4,871	$	2,748		3	$	4,871	$	2,607


			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
December 31, 2018			Outstanding		Outstanding
	Number of		Recorded		Recorded				Outstanding		Outstanding
	Loans		Investment		Investment		Number of		Recorded		Recorded
December 31, 2018							Loans		Investment		Investment
Commercial real estate		3	$	4,871	$	2,782		3	$	4,871	$	2,782

Total		3	$	4,871	$	2,782		3	$	4,871	$	2,782

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


	Number		Recorded
	of Loans		Investment			Number of Loans		Recorded Investment
Totals at January 1, 2018		3	$	3,047			3	$	3,047
Reductions due to:
Principal paydowns				(265	)				(265	)

Totals at January 1, 2019		3	$	2,782			3	$	2,782
Reductions due to:
Principal paydowns				(34	)				(175	)

Total at March 31, 2019		3	$	2,748
Total at September 30, 2019							3	$	2,607

The allocated allowance for loan losses attributable to restructured loans was $174,274 at ~~March 31,~~September 30, 2019 and December 31, 2018. The Corporation had no ~~remaining availability under~~ commitments to lend additional funds on these troubled debt restructurings as of ~~March 31,~~September 30, 2019.

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

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

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

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

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

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

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

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

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at ~~March 31,~~September 30, 2019.

The following table details the amount of gross loans (in thousands), segregated by loan grade and class, as of ~~March 31,~~September 30, 2019:


			Special												Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total		Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans		1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	45,746	$	1,073	$	673	$	—	$	—	$	47,492	$	59,807	$	1,716	$	1,968	$	—	$	—	$	63,491
Farmland		15,942		346		976		—		—		17,264		14,747		379		859		—		—		15,985
1-4 Family Mortgages		77,791		1,902		7,120		—		15		86,828		77,590		1,924		7,002		—		—		86,516
Commercial Real Estate		168,873		21,879		13,131		—		—		203,883		165,914		22,631		17,423		—		—		205,968

Total Real Estate Loans		308,352		25,200		21,900		—		15		355,467		318,058		26,650		27,252		—		—		371,960
Business Loans:
Commercial and Industrial Loans		75,626		225		1,734		—		—		77,585		83,337		144		3,999		—		—		87,480
Farm Production and Other Farm Loans		798		—		31		—		—		829		707		—		4		—		31		742

Total Business Loans		76,424		225		1,765		—		—		78,414		84,044		144		4,003		—		31		88,222
Consumer Loans:
Credit Cards		1,562		—		41		—		—		1,603		1,679		—		65		—		—		1,744
Other Consumer Loans		11,830		62		72		51		—		12,015		11,380		50		113		41		—		11,584

Total Consumer Loans		13,392		62		113		51		—		13,618		13,059		50		178		41		—		13,328

Total Loans	$	398,168	$	25,487	$	23,778	$	51	$	15	$	447,499	$	415,161	$	26,844	$	31,433	$	41	$	31	$	473,510

The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as of December 31, 2018:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	39,726	$	840	$	568	$	—	$	—	$	41,134
Farmland		13,248		339		911		—		—		14,498
1-4 Family Mortgages		79,659		1,751		7,337		—		—		88,747
Commercial Real Estate		172,217		17,938		13,440		—		—		203,595

Total Real Estate Loans		304,850		20,868		22,256		—		—		347,974
Business Loans:
Commercial and Industrial Loans		63,994		81		2,346		—		—		66,421
Farm Production and Other Farm Loans		876		—		31		—		—		907

Total Business Loans		64,870		81		2,377		—		—		67,328
Consumer Loans:
Credit Cards		1,628		—		20		—		—		1,648
Other Consumer Loans		12,181		65		71		55		—		12,372

Total Consumer Loans		13,809		65		91		55		—		14,020

Total Loans	$	383,529	$	21,014	$	24,724	$	55	$	—	$	429,322

The allowance for loan losses is established through a provision for loan losses charged to expense, which represents 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 are adjusted when necessary.

The following table details activity in the allowance for loan losses by portfolio segment for the ~~three~~nine months ended ~~March 31,~~September 30, 2019:


	Real			Business						Real			Business
March 31, 2019	Estate			Loans		Consumer		Total
September 30, 2019										Estate			Loans		Consumer		Total
Beginning Balance, January 1, 2019	$	2,844,681		$	221,841	$	305,173	$	3,371,695	$	2,844,681		$	221,841	$	305,173	$	3,371,695
Provision for (reversal of) loan losses		(62,733	)		99,457		158,755		195,479
Provision for loan losses											(883	)		269,917		203,002		472,036
Chargeoffs		—			12,178		24,940		37,118		15,073			91,291		76,972		183,336
Recoveries		11,600			4,340		13,900		29,840		101,119			8,858		35,207		145,184

Net chargeoffs (recoveries)		(11,600	)		7,838		11,040		7,278
Net (recoveries) chargeoffs											(86,046	)		82,433		41,765		38,152

Ending Balance	$	2,793,548		$	313,460	$	452,888	$	3,559,896	$	2,929,844		$	409,325	$	466,410	$	3,805,579

Period end allowance allocated to:
Loans individually evaluated for impairment	$	417,033		$	5,084	$	—	$	422,117	$	506,560		$	71,962	$	—	$	578,522
Loans collectively evaluated for impairment		2,376,515			308,376		452,888		3,137,779		2,423,284			337,363		466,410		3,227,057

Ending Balance, March 31, 2019	$	2,793,548		$	313,460	$	452,888	$	3,559,896
Ending Balance, September 30, 2019										$	2,929,844		$	409,325	$	466,410	$	3,805,579

The following table details activity in the allowance for loan losses by portfolio segment for the ~~three~~nine months ended ~~March 31,~~September 30, 2018:


	Real			Business									Real		Business
March 31, 2018	Estate			Loans			Consumer			Total
September 30, 2018													Estate		Loans			Consumer			Total
Beginning Balance, January 1, 2018	$	2,151,715		$	346,781		$	520,732		$	3,019,228		$	2,151,715	$	346,781		$	520,732		$	3,019,228
(Reversal of) provision for loan losses		(65,925	)		(150,889	)		(19,959	)		(236,773	)
Provision for (reversal of) loan losses														615,927		(289,894	)		(185,268	)		140,765
Chargeoffs		83,045			15,347			30,845			129,237			202,352		31,236			117,401			350,989
Recoveries		45,114			861			26,248			72,223			91,071		203,777			69,091			363,939

Net chargeoffs (recoveries)		37,931			14,486			4,597			57,014			111,281		(172,541	)		48,310			(12,950	)

Ending Balance	$	2,047,859		$	181,406		$	496,176		$	2,725,441		$	2,656,361	$	229,428		$	287,154		$	3,172,943

Period end allowance allocated to:
Loans individually evaluated for impairment	$	459,359		$	—		$	—		$	459,359		$	409,496	$	—		$	—		$	409,496
Loans collectively evaluated for impairment		1,588,500			181,406			496,176			2,266,082			2,246,865		229,428			287,154			2,763,447

Ending Balance, March 31, 2018	$	2,047,859		$	181,406		$	496,176		$	2,725,441
Ending Balance, September 30, 2018													$	2,656,361	$	229,428		$	287,154		$	3,172,943

The Corporation’s recorded investment in loans as of ~~March 31,~~September 30, 2019 and December 31, 2018 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):


	Real		Business						Real		Business
March 31, 2019	Estate		Loans		Consumer		Total
September 30, 2019									Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	9,958	$	5	$	—	$	9,963	$	11,432	$	144	$	—	$	11,576
Loans collectively evaluated for general impairment		345,509		78,409		13,618		437,536		360,528		88,078		13,328		461,934

	$	355,467	$	78,414	$	13,618	$	447,499	$	371,960	$	88,222	$	13,328	$	473,510


	Real		Business						Real		Business
December 31, 2018	Estate		Loans		Consumer		Total		Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	10,306	$	—	$	—	$	10,306	$	10,306	$	—	$	—	$	10,306
Loans collectively evaluated for general impairment		337,668		67,328		14,020		419,016		337,668		67,328		14,020		419,016

	$	347,974	$	67,328	$	14,020	$	429,322	$	347,974	$	67,328	$	14,020	$	429,322

Note 8.9. Premises and Equipment

The Company ~~lease~~leases certain premises and equipment under operating leases. At ~~March 31,~~September 30, 2019, the Company had lease liabilities and ROU assets totaling ~~$1,086 million~~$851 thousand related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the ~~three~~nine months ended ~~March 31,~~September 30, 2019, the weighted average remaining lease term for operating leases was ~~1.6~~1.4 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.3%.

Lease costs were as follows:


	Three Months Ended		Three Months Ended		Nine Months Ended
	March 31, 2019		September 30, 2019		September 30, 2019
(in thousands)
Operating lease cost	$	96	$	92	$	277
Short-term lease cost		6		6		17
Variable lease cost		—		—		—

	$	102	$	98	$	294

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:


	Three Months Ended			Nine Months Ended
	March 31, 2019			September 30, 2019
(in thousands)
Lease payments due:
Within one year	$	362		$	348
After one year but within two years		362			324
After two years but within three years		320			194
After three year but within four years		76			21
After four years but within five years		25			—
After five years		—			—

Total undiscounted cash flows		1,145			887
Discount on cash flows		(59	)		(36	)

Total lease liability	$	1,086		$	851

Note 9.10. Shareholders’ Equity

The following summarizes the activity in the capital structure of the Company:


																							Accumulated
	Number				Additional		Accumulated Other									Number				Additional			Other
	of Shares		Common		Paid-In		Comprehensive			Retained						of Shares		Common		Paid-In			Comprehensive			Retained
	Issued		Stock		Capital		Income (Loss)			Earnings			Total			Issued		Stock		Capital			Income (Loss)			Earnings			Total
Balance, January 1, 2019		4,904,530	$	980,906	$	4,298,499	$	(14,974,603	)	$	93,561,515		$	83,866,317			4,904,530	$	980,906	$	4,298,499		$	(14,974,603	)	$	93,561,515		$	83,866,317
Net income		—		—		—		—			1,226,771			1,226,771			—		—		—			—			1,226,771			1,226,771
Dividends paid ($0.24 per share)		—		—		—		—			(1,177,087	)		(1,177,087	)		—		—		—			—			(1,177,087	)		(1,177,087	)
Options exercised		—		—		—		—			—			—			—		—		—			—			—			—
Restricted stock granted		—		—		—		—			—			—			—		—		—			—			—			—
Stock compensation expense		—		—		41,344		—			—			41,344			—		—		41,344			—			—			41,344
Other comprehensive income, net		—		—		—		6,621,712			—			6,621,712			—		—		—			6,621,712			—			6,621,712

Balance, March 31, 2019		4,904,530	$	980,906	$	4,339,843	$	(8,352,891	)	$	93,611,199		$	90,579,057			4,904,530	$	980,906	$	4,339,843		$	(8,352,891	)	$	93,611,199		$	90,579,057


							Accumulated
	Number				Additional		Other
	of Shares		Common		Paid-In		Comprehensive			Retained
	Issued		Stock		Capital		Income (Loss)			Earnings			Total
Balance, January 1, 2018		4,894,705	$	978,941	$	4,103,139	$	(8,225,419	)	$	91,594,379		$	88,451,040
Net income		—		—		—		—			1,772,387			1,772,387			—		—		—			—			1,370,742			1,370,742
Dividends paid ($0.24 per share)		—		—		—		—			(1,174,729	)		(1,174,729	)		—		—		—			—			(1,178,887	)		(1,178,887	)
Options exercised		—		—		—		—			—			—			—		—		—			—			—			—
Restricted stock granted		—		—		—		—			—			—			7,500		1,500		(1,500	)		—			—			—
Stock compensation expense		—		—		45,056		—			—			45,056			—		—		40,694			—			—			40,694
Other comprehensive income, net		—		—		—		(7,068,858	)		—			(7,068,858	)		—		—		—			5,324,717			—			5,324,717

Balance, March 31, 2018		4,894,705	$	978,941	$	4,148,195	$	(15,294,277	)	$	92,192,037		$	82,024,896
Balance, June 30, 2019																	4,912,030	$	982,406	$	4,379,037		$	(3,028,174	)	$	93,803,054		$	96,136,323
Net income																	—		—		—			—			1,332,888			1,332,888
Dividends paid ($0.24 per share)																	—		—		—			—			(1,178,887	)		(1,178,887	)
Options exercised																	—		—		—			—			—			—
Restricted stock granted																	—		—		—			—			—			—
Stock compensation expense																	—		—		40,369			—			—			40,369
Other comprehensive income, net																	—		—		—			2,668,372			—			2,668,372

Balance, September 30, 2019																	4,912,030	$	982,406	$	4,419,406		$	(359,802	)	$	93,957,055		$	98,999,065


								Accumulated
	Number				Additional			Other
	of Shares		Common		Paid-In			Comprehensive			Retained
	Issued		Stock		Capital			Income (Loss)			Earnings			Total
Balance, January 1, 2018		4,894,705	$	978,941	$	4,103,139		$	(8,225,419	)	$	91,594,379		$	88,451,040
Net income		—		—		—			—			1,772,387			1,772,387
Dividends paid ($0.24 per share)		—		—		—			—			(1,174,729	)		(1,174,729	)
Options exercised		—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—
Stock compensation expense		—		—		45,056			—			—			45,056
Other comprehensive income, net		—		—		—			(7,068,858	)		—			(7,068,858	)

Balance, March 31, 2018		4,894,705	$	978,941	$	4,148,195		$	(15,294,277	)	$	92,192,037		$	82,024,896
Net income		—		—		—			—			1,688,140			1,688,140
Dividends paid ($0.24 per share)		—		—		—			—			(1,177,087	)		(1,177,087	)
Options exercised		2,325		465		26,535			—			—			27,000
Restricted stock granted		7,500		1,500		(1,500	)		—			—			—
Stock compensation expense		—		—		42,581			—			—			42,581
Other comprehensive income, net		—		—		—			(924,159	)		—			(924,159	)

Balance, June 30, 2018		4,904,530	$	980,906	$	4,215,811		$	(16,218,436	)	$	92,703,090		$	81,681,371
Net income		—		—		—			—			1,496,794			1,496,794
Dividends paid ($0.24 per share)		—		—		—			—			(1,177,088	)		(1,177,088	)
Options exercised		—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—
Stock compensation expense		—		—		41,344			—			—			41,344
Other comprehensive income, net		—		—		—			(2,247,919	)		—			(2,247,919	)

Balance, September 30, 2018		4,904,530		980,906		4,257,155			(18,466,355	)		93,022,796			79,794,502

Note ~~10.~~11. Fair Value of Financial Instruments

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


Level 1		Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2		Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or

Level 3		Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of ~~March 31,~~September 30, 2019:

   Fair Value Measurements Using:
   Quoted Prices
   in Active    Significant
   Markets for    Other    Significant
   Identical    Observable    Unobservable
   Assets    Inputs    Inputs
   (Level 1)    (Level 2)    (Level 3)    Totals
Securities available for sale

Obligations of U.S.

Government Agencies
   $ —      $ 97,305,408    $ —      $ 97,305,408
Mortgage-backed securities
   —      307,236,910    —      307,236,910
State, county and municipal obligations
   —      103,248,877    —      103,248,877






��

Total
   $ —      $ 507,791,195    $ —      $ 507,791,195


	Fair Value Measurements Using:
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government Agencies	$	—	$	97,981,140	$	—	$	97,981,140
Mortgage-backed securities		—		275,598,313		—		275,598,313
State, county and municipal obligations		—		60,566,116		—		60,566,116

Total	$	—	$	434,145,569	$	—	$	434,145,569

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018:

   Fair Value Measurements Using:
   Quoted Prices
   in Active    Significant
   Markets for    Other    Significant
   Identical    Observable    Unobservable
   Assets    Inputs    Inputs
   (Level 1)    (Level 2)    (Level 3)    Totals
Securities available for sale

Obligations of U.S.

Government Agencies
   $ —      $ 95,977,783    $ —      $ 95,977,783
Mortgage-backed securities
   —      247,374,153    —      247,374,153
State, county and municipal obligations
   —      101,394,518    —      101,394,518








Total
   $ —      $ 444,746,454    $ —      $ 444,746,454

~~The following table reports the activity in assets measured at fair value on a recurring basis using significant unobservable inputs:~~
   Fair Value Measurements Using:
   Quoted Prices
   in Active    Significant
   Markets for    Other    Significant
   Identical    Observable    Unobservable
   Assets    Inputs    Inputs
   (Level 1)    (Level 2)    (Level 3)    Totals
Securities available for sale

Obligations of U.S. Government Agencies
   $ —      $ 95,977,783    $ —      $ 95,977,783
Mortgage-backed securities
   —      247,374,153    —      247,374,153
State, county and municipal obligations
   —      101,394,518    —    101,394,518








Total
   $ —      $ 444,746,454    $ —      $ 444,746,454

   Fair Value Measurements Using:
   Significant Unobservable Inputs
   (Level 3)
   Structured Financial Product
   As of March 31,
   2019    2018
Beginning Balance
   $ —      $ 3,074,227
Principal payments received
   —      —
Unrealized (loss) gains included in other comprehensive income
   —      8,630




Ending Balance
   $ —      $ 3,082,857

The Corporation recorded no gains or losses in earnings for the period ended ~~March 31,~~September 30, 2019 or December 31, 2018 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

Impaired Loans

Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling, closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

Other real estate owned

OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ~~ALLL.~~allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.

For assets measured at fair value on a nonrecurring basis during 2019 that were still held on the Corporation’s balance sheet at ~~March 31,~~September 30, 2019, the following table provides the hierarchy level and the fair value of the related assets:


	Fair Value Measurements Using:
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	3,819,908	$	3,819,908

Total	$	—	$	—	$	3,819,908	$	3,819,908

The following table presents information as of ~~March 31,~~September 30, 2019 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

Significant Unobservable Inputs

Range of
Inputs

Financial instrument

Fair Value

Valuation Technique

Significant Unobservable
Inputs

Range of
Inputs

Fair Value

Valuation Technique

Impaired loans

3,376,414

Appraised value of collateral
less estimated costs to sell

Estimated costs to sell

3,819,908

Appraised value of collateral less estimated costs to sell

Estimated costs to sell

25%

For assets measured at fair value on a nonrecurring basis during 2018 that were still held on the Corporation’s balance sheet at December 31, 2018, the following table provides the hierarchy level and the fair value of the related assets:


									Fair Value Measurements Using:
									Quoted Prices
									in Active		Significant
									Markets for		Other		Significant
	Fair Value Measurements Using:								Identical		Observable		Unobservable
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals		(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	3,364,538	$	3,364,538	$	—	$	—	$	3,364,538	$	3,364,538
Other real estate owned		—		—		188,609		188,609		—		—		188,609		188,609

Total	$	—	$	—	$	3,553,147	$	3,553,147	$	—	$	—	$	3,553,147	$	3,553,147

Impaired loans with a carrying value of ~~$3,376,414~~$4,398,430 and $3,364,538 had an allocated allowance for loan losses of ~~$422,117~~$578,522 and $401,347 at ~~March 31,~~September 30, 2019 and December 31, 2018, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of$-0- was necessary and recorded during the ~~three-month~~nine-month period ended ~~March 31,~~September 30, 2019 and the year ended December 31, 2018.

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

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at ~~March 31,~~September 30, 2019:


			Fair Value Measurements Using:										Fair Value Measurements Using:
March 31, 2019	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
													Quoted Prices
													in Active		Significant
													Markets for		Other		Significant		Total
											Carrying		Identical		Observable		Unobservable		Fair
September 30, 2019											Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)						(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	12,462,550	$	12,462,550	$	—	$	—	$	12,462,550	$	21,106,679	$	21,106,679	$	—	$	—	$	21,106,679
Interest bearing deposits with banks		27,122,108		27,122,108		—		—		27,122,108		61,234,815		61,234,815		—		—		61,234,815
Securitiesavailable-for-sale		507,791,195		—		507,791,195		—		507,791,195		434,145,569		—		434,145,569		—		434,145,569
Net loans		443,909,475		—		—		439,516,508		439,516,508		469,692,103		—		—		466,369,797		466,369,797
Financial liabilities
Deposits	$	840,159,983	$	617,922,299	$	223,144,296	$	—	$	841,066,595	$	794,314,007	$	573,774,335	$	222,487,675	$	—	$	796,262,010
Securities Sold under
Agreement to Repurchase		115,450,591		115,450,591		—		—		115,450,591
Securities sold under agreement to repurchase												144,502,629		144,502,629		—		—		144,502,629

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at December 31, 2018:


													Fair Value Measurements Using:
													Quoted Prices
													in Active		Significant
													Markets for		Other		Significant		Total
			Fair Value Measurements Using:								Carrying		Identical		Observable		Unobservable		Fair
December 31, 2018	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value		Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)						(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	12,592,130	$	12,592,130	$	—	$	—	$	12,592,130	$	12,592,130	$	12,592,130	$	—	$	—	$	12,592,130
Interest bearing deposits with banks		8,079,742		8,079,742		—		—		8,079,742		8,079,742		8,079,742		—		—		8,079,742
Securitiesavailable-for-sale		444,746,454		—		444,746,454		—		444,746,454		444,746,454		—		444,746,454		—		444,746,454
Net loans		425,905,093		—		—		420,992,074		420,992,074		425,905,093		—		—		420,992,074		420,992,074
Financial liabilities
Deposits	$	756,221,510	$	544,985,869	$	210,477,092	$	—	$	755,462,961	$	756,221,510	$	544,985,869	$	210,477,092	$	—	$	755,462,961
Securities Sold under
Agreement to Repurchase		107,965,505		107,965,505		—		—		107,965,505
Securities sold under agreement to repurchase												107,965,505		107,965,505		—		—		107,965,505

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 on Form10-Q (the “Quarterly Report”) contains statements that constituteforward-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 identifyforward-looking statements. These statements appear in a number of places in this Quarterly Report. The Corporation notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank” and collectively with the Company, the “Corporation”), include, but are not limited to, the following:

expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions;

adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan ~~losses;~~losses and our ability to foreclose on delinquent mortgages;

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates;

extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, ~~and~~or litigation;

increased competition from other financial institutions and the risk of failure to achieve our business strategies;

events affecting our business operations, including the effectiveness of our risk management framework, the accuracy of our estimates, our reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances;

our ability to maintain sufficient capital and to raise additional capital when needed;

our ability to maintain adequate liquidity to conduct business and meet our obligations;

events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people;

events that adversely affect our reputation, and the resulting potential adverse impact on our business operations;

~~expectations about overall economic strength and the performance of the economy in the Company’s market area;~~

risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and ~~the~~ provisions in our governing documents that may make it more difficult for another party to obtain control of us; and

other risks detailed fromtime-to-time in the Company’s filings with the Securities and Exchange Commission.

Except as required by law, the ~~Corporation~~Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.

Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Corporation. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report.

OVERVIEW

The Company is aone-bank holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of the Bank. The Company does not have any direct subsidiaries other than the Bank.

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At ~~March 31,~~September 30, 2019, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of ~~$1,057.392~~$1,052.111 million and total deposits of ~~$840.160~~$796.094 million.

In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601)656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The Corporation has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Corporation at ~~March 31,~~September 30, 2019, was ~~31.66%~~24.94% and at December 31, 2018, was 21.34%. The increase was due to an increase in short-term marketable assets at ~~March 31,~~September 30, 2019. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were ~~$840,159,983~~$794,314,007 at ~~March 31,~~September 30, 2019, and $756,221,510 at December 31, 2018. 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 ~~$507,791,195~~$434,145,569 invested inavailable-for-sale investment securities at ~~March 31,~~September 30, 2019, and $444,746,454 at December 31, 2018. This ~~increase~~decrease was due to ~~purchases~~paydowns, maturities, sales and calls in excess of ~~maturities, paydowns, sales and calls and~~purchases partially offset by an increase in the market value of the Corporation’s investment securities portfolio.

The Corporation also had ~~$27,122,108~~$61,234,815 in interest bearing deposits at other banks at ~~March 31,~~September 30, 2019 and $8,079,742 at December 31, 2018. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at both ~~March 31,~~September 30, 2019 and December 31, 2018. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At ~~March 31,~~September 30, 2019, the Corporation had unused and available ~~$172,312,015~~$183,897,221 of its line of credit with the FHLB and at December 31, 2018, the Corporation had unused and available $171,252,131 of its line of credit with the FHLB. The increase in the amount available under the Corporation’s line of credit with the FHLB from the end of 2018 to ~~March 31,~~September 30, 2019, was the result of an increase in the amount of loans eligible for the collateral pool securing the Corporation’s line of credit with the FHLB. The Corporation had federal funds purchased of$-0- as of ~~March 31,~~September 30, 2019 and~~$-0-~~ ~~as of~~ December 31, 2018. The Corporation may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

When the Corporation has more funds than it needs for its reserve requirements or short-term liquidity needs, the Corporation increases its investment portfolio, increases the balances in interest bearing due from bank accounts or sells federal funds. It is 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.

CAPITAL RESOURCES

Total shareholders’ equity was ~~$90,579,057~~$98,999,065 at ~~March 31,~~September 30, 2019, as compared to $83,866,317 at December 31, 2018. The increase in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment coupled with the increase in earnings in excess of dividends paid. The market value adjustment, which was an increase due to general market conditions, specifically the decrease in medium term interest rates, caused an increase in the market price of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of ~~$1,177,087,~~$3,534,861, or ~~$0.24~~$0.72 per share, during the ~~three-month~~nine-month period ended ~~March 31,~~September 30, 2019 compared to ~~$1,174,729,~~$3,528,904, or ~~$0.24~~$0.72 per share, for the same period in 2018.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of ~~March 31,~~September 30, 2019, the Corporation meets all capital adequacy requirements to which it is subject and according to these requirements the Corporation is considered to be well capitalized.


											Minimum Capital															Minimum Capital
						Minimum Capital					Requirement to be										Minimum Capital					Requirement to be
						Requirement to be					Adequately										Requirement to be					Adequately
	Actual					Well Capitalized					Capitalized					Actual					Well Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2019
September 30, 2019
Citizens Holding Company
Tier 1 leverage ratio	$	95,782		9.55	%	$	50,167		5.00	%	$	40,133		4.00	%	$	96,209		9.27	%	$	51,917		5.00	%	$	41,534		4.00	%
Common Equity tier 1 capital ratio		95,782		9.55	%		65,217		6.50	%		45,150		4.50	%		96,209		15.91	%		67,492		6.50	%		46,725		4.50	%
Tier 1 risk-based capital ratio		95,782		16.54	%		46,320		8.00	%		34,740		6.00	%		96,209		15.91	%		48,381		8.00	%		36,286		6.00	%
Total risk-based capital ratio		99,342		17.16	%		57,900		10.00	%		46,320		8.00	%		100,015		16.54	%		60,476		10.00	%		48,381		8.00	%
December 31, 2018
Citizens Holding Company
Tier 1 leverage ratio	$	95,691		9.93	%	$	48,191		5.00	%	$	38,553		4.00	%	$	95,691		9.93	%	$	48,191		5.00	%	$	38,553		4.00	%
Common Equity tier 1 capital ratio		95,691		9.93	%		62,648		6.50	%		43,372		4.50	%		95,691		17.40	%		62,648		6.50	%		43,372		4.50	%
Tier 1 risk-based capital ratio		95,691		17.40	%		43,986		8.00	%		32,990		6.00	%		95,691		17.40	%		43,986		8.00	%		32,990		6.00	%
Total risk-based capital ratio		99,063		18.02	%		54,983		10.00	%		43,986		8.00	%		99,063		18.02	%		54,983		10.00	%		43,986		8.00	%

The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II fornon-core banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

Beginning January 1, 2015, the Company and the Bank began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner:

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

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

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

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

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

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

Management believes that, as of ~~March 31,~~September 30, 2019, the Company and the Bank ~~meet~~met all capital adequacy requirements under Basel III. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporation’s capital ratios as presented.

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 Three Months				For the Nine Months
	Ended March 31,					Ended September 30,				Ended September 30,
	2019		2018			2019		2018		2019		2018
Interest Income, including fees	$	8,383,425	$	7,599,391		$	8,443,415	$	7,887,319	$	25,477,384	$	23,265,686
Interest Expense		2,173,699		794,640			2,525,126		1,168,024		7,143,417		2,789,205

Net Interest Income		6,209,726		6,804,751			5,918,289		6,719,295		18,333,967		20,476,481
Provision for (reversal of) loan losses		195,479		(236,773	)
Provision for loan losses							11,738		288,576		472,036		140,765

Net Interest Income after
Provision for (reversal of) loan losses		6,014,247		7,041,524
Provision for loan losses							5,906,551		6,430,719		17,861,931		20,335,716
Other Income		2,046,911		2,100,430			2,505,900		2,220,574		6,624,989		6,399,414
Other Expense		6,639,217		7,047,682			6,867,638		6,894,024		19,829,904		20,889,594

Income Before Provision For
Income Taxes		1,421,941		2,094,272			1,544,813		1,757,269		4,657,016		5,845,536
Provision for Income Taxes		195,170		321,885			211,925		260,475		726,615		888,215

Net Income	$	1,226,771	$	1,772,387		$	1,332,888	$	1,496,794	$	3,930,401	$	4,957,321

Net Income Per share - Basic	$	0.25	$	0.36		$	0.27	$	0.31	$	0.80	$	1.01

Net Income Per Share-Diluted	$	0.25	$	0.36		$	0.27	$	0.31	$	0.80	$	1.01

See Note 34 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 ~~5.70%~~5.52% for the three months ended ~~March 31,~~September 30, 2019, and ~~8.03%~~7.31% for the corresponding period in 2018. For the nine months ended September 30, 2019, ROE was 5.77% compared to 7.81% for the nine months ended September 30, 2018. The decrease in ROE for the three and nine months ended ~~March 31,~~September 30, 2019 was caused by the increase in equity balances and a decrease in net income compared to the same period in 2018.

Book value per share increased to ~~$18.47~~$20.15 at ~~March 31,~~September 30, 2019, compared to $17.09 at December 31, 2018. The increase in book value per share reflects earnings in excess of dividends coupled with a decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities. Average assets for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 were ~~$1,006,484,037~~$1,026,700,163 compared to ~~$971,893,427~~$973,552,832 for the year ended December 31, 2018. This increase was due mainly to an increase in loans~~available-for-sale~~ ~~securities~~ and interest bearing due from ~~bank accounts.~~accounts partially offset by a decrease in investment securities.

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 ~~2.72%~~2.59% for the ~~quarter~~three months ended ~~March 31,~~September 30, 2019 compared to ~~3.03%~~3.07% for the corresponding period of 2018. For the nine months ended September 30, 2019, annualized net interest margin was 2.62% compared to 3.10% for the nine months ended September 30, 2018. The decrease in net interest margin for the three and nine months ended ~~March 31,~~September 30, 2019, when compared to the same period in 2018, was the result of the increase in rates paid on deposits in excess of the increase in yields on earning assets, as detailed below. Earning assets averaged ~~$929,676,890~~$967,972,563 for the three months ended ~~March 31,~~September 30, 2019. This represents an increase of ~~$20,603,983,~~$85,396,240, or ~~2.3%~~9.7%, over average earning assets of ~~$909,072,907~~$882,576,323 for the three months ended ~~March 31,~~September 30, 2018. For the nine months ended September 30, 2019, earning assets averaged $951,520,484. This represents an increase of $57,489,453, or 6.4%, over average earning assets of $894,031,031 for the nine months ended September 30, 2018.

Interest bearing deposits averaged ~~$633,961,993~~$634,978,452 for the three months ended ~~March 31,~~September 30, 2019. This represents aan increase of ~~$31,084,110,~~$39,364,580, or ~~5.2%~~6.6%, from the average of ~~interest bearing~~interest-bearing deposits of ~~$602,877,883~~$595,613,872 for the three months ended ~~March 31,~~September 30, 2018. This was due ~~in large part,~~ to aan increase in interest-bearing NOW and money market accounts, savings and certificates of ~~deposit partially offset by an decrease in savings and money market accounts.~~deposit.

Other borrowed funds averaged ~~$106,789,440~~$131,268,828 for the three months ended ~~March 31,~~September 30, 2019. This represents ~~a decrease~~an increase of ~~$13,252,844,~~$20,987,455, or ~~11.0%~~19.0%, over the other borrowed funds of ~~$120,042,284~~$110,281,373 for the three months ended ~~March 31,~~September 30, 2018. This ~~decrease~~increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase partially offset by a decrease in federal funds purchased and FHLB advances ~~partially offset by~~for the three months ended September 30, 2019, when compared to the three months ended September 30, 2018.

Interest bearing deposits averaged $639,908,371 for the nine months ended September 30, 2019. This represents an increase of $39,044,591, or 6.5%, from the average of interest-bearing deposits of $600,863,780 for the nine months ended September 30, 2018. This was due to an increase in interest-bearing NOW and money market accounts, savings and certificates of deposit.

Other borrowed funds averaged $117,403,793 for the nine months ended September 30, 2019. This represents a decrease of $4,070,648, or 3.6%, over the other borrowed funds of $113,333,145 for the nine months ended September 30, 2018. This increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase partially offset by a decrease in federal funds purchased and FHLB advances for the nine months ended September 30, 2019, when compared to the nine months ended September 30, 2018.

Net interest income was $5,918,289 for the three months ended ~~March 31,~~September 30, 2019, ~~when compared to the three months ended March 31, 2018.~~

~~Net interest income was $6,209,726~~a decrease of $801,006 from $6,719,295 for the three months ended ~~March 31, 2019, a decrease of $595,025 from $6,804,751 for the three months ended March 31,~~September 30, 2018, primarily due to an increase in the rates paid on deposits from the same period in 2018. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the three months ended ~~March 31,~~September 30, 2019, the yields on earning assets decreased and the rates paid on deposits increased from the same period in 2018. The yield on all interest-bearing assets decreased 1 basis point to 3.57% in the three months ended September 30, 2019 from 3.58% for the same period in 2018. At the same time, the rate paid on all interest-bearing liabilities for the three months ended September 30, 2019 increased 59 basis points to 1.25% from 0.66% in the same period in 2018. As longer term interest-bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both decrease.

Net interest income was $18,333,967 for the nine months ended September 30, 2019, a decrease of $2,142,514 from $20,476,481 for the nine months ended September 30, 2018, primarily due to an increase in the rates paid on deposits from the same period in 2018. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the nine months ended September 30, 2019, the yields on earning assets increased and the rates paid on deposits increased from the same period in 2018. The yield on all interest-bearing assets increased 2311 basis points to ~~3.67%~~3.61% in the ~~three~~nine months ended ~~March 31,~~September 30, 2019 from ~~3.44%~~3.50% for the same period in 2018. At the same time, the rate paid on all interest-bearing liabilities for the ~~three~~nine months ended ~~March 31,~~September 30, 2019 increased 7574 basis points to ~~1.19%~~1.26% from ~~0.44%~~0.52% in the same period in 2018. As longer term ~~interest bearing~~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.~~decrease.

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


	For the Three Months						For the Three Months						For the Nine Months
	Ended March 31,						Ended September 30,						Ended September 30,
	2019			2018			2019			2018			2019			2018
Interest and Fees	$	5,449,535		$	4,716,419		$	5,940,805		$	5,166,554		$	17,220,751		$	14,867,465
Average Gross Loans		435,069,864			407,008,135			468,309,743			422,551,745			453,528,704			413,851,534
Annualized Yield		5.01	%		4.64	%		5.07	%		4.89	%		5.06	%		4.79	%

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 management and Board of Directors.

The Corporation charges off that portion of any loan that the Corporation’s management and Board of Directors has determined to be a loss. A loan is generally considered by management to represent a loss, in whole or in part, when exposure beyond the collateral value is apparent, servicing of the unsecured portion has been discontinued or collection is not anticipated based on the 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. The Board of Directors determines the amount of the allowance. Among the factors considered in determining the allowance for loan losses are the current financial condition of the Corporation’s borrowers and the value of security, if any, for their loans. Estimates of future economic conditions and their impact on various industries and individual borrowers are also taken into consideration, as are the Corporation’s historical loan loss experience and reports of banking regulatory authorities. As these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether the Corporation will sustain loan losses in excess or below its allowance or that subsequent evaluation of the loan portfolio may not require material increases or decreases in such allowance.

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


	Quarter Ended			Year Ended			Amount of		Percent of			Quarter Ended			Year Ended			Amount of		Percent of
	March 31,			December 31,			Increase		Increase			September 30,			December 31,			Increase		Increase
	2019			2018			(Decrease)		(Decrease)			2019			2018			(Decrease)		(Decrease)
BALANCES:
Gross Loans	$	447,499,786		$	429,322,113		$	18,177,673		4.23	%	$	473,509,900		$	429,322,113		$	44,187,787		10.29	%
Allowance for Loan Losses		3,559,896			3,371,695			188,201		5.58	%		3,805,579			3,371,695			433,884		12.87	%
Nonaccrual Loans		10,017,647			9,838,870			178,777		1.82	%		12,358,742			9,838,870			2,519,872		25.61	%
Ratios:
Allowance for loan losses to gross loans		0.80	%		0.79	%							0.80	%		0.79	%
Net loans charged off (recovered) to allowance for loan losses		0.20	%		-0.55	%							1.00	%		-0.55	%

The provision for loan losses for the three months ended ~~March 31,~~September 30, 2019 was ~~$195,479, an increase~~$11,738, a decrease of ~~$432,252~~$276,838 from the ~~reversal of~~ provision for loan losses of ~~$236,773~~$288,576 for the same period in 2018. The provision for loan losses for the nine months ended September 30, 2019 was $472,036, an increase of $331,271 from the provision for loan losses of $140,765 for the same period in 2018. The change in the Corporation’s loan loss provisions for the three and nine months ended ~~March 31,~~

September 30, 2019 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 coupled with an increase in loan demand. 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 new loans being added to nonaccrual status in excess of the amount of payments received and loans charged off.

For the three months ended ~~March 31,~~September 30, 2019, net loan losses charged to the allowance for loan losses totaled ~~$7,278,~~$27,632, a decrease of ~~$49,736~~$116,383 from the ~~$57,014~~$144,015 charged off in the same period in 2018. The decrease was primarily due to aseveral significant~~charge-off~~ charge-offs during the ~~first~~third quarter of 2018.

For the nine months ended September 30, 2019, net loan losses charged to the allowance for loan losses totaled $38,152, an increase of $51,102 from the $12,950 recovered in the same period in 2018. The increase was primarily due to a significant recovery during the second quarter of 2018.

Management reviews quarterly with the Corporation’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended ~~March 31,~~September 30, 2019 was ~~$2,046,911, a decrease~~$2,505,900, an increase of ~~$53,519,~~$285,326, or ~~2.5%~~12.9%, from ~~$2,100,430~~$2,220,574 in the same period in 2018. Service charges on deposit accounts were ~~$1,096,692~~$1,125,631 in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$1,143,593~~$1,170,956 for the same period in 2018. Other service charges and fees ~~decreased~~increased by ~~$15,176,~~$101,472, or ~~2.3%~~13.3%, to ~~$683,640~~$863,407 in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$668,464~~$761,935 for the same period in 2018. Other operating income not derived from service charges or fees ~~decreased $21,795,~~increased $229,179, or ~~7.6%~~79.7% to ~~$266,578~~$516,862 in the three months ended ~~March 31,~~September 30, 2019, compared to ~~$288,373~~$287,683 for the same period in 2018. This ~~decrease~~increase was due mainly to ~~a decrease~~an increase in ~~income~~gains from security sales due to strategic investment decisions and an increase in other income partially offset by a decrease in mortgage loan origination income from long-term mortgage loans originated for sale toin the secondary ~~market~~market.

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 nine months ended September 30, 2019 was $6,624,989, an increase of $225,575, or 3.5%, from $6,399,414 in the same period in 2018. Service charges on deposit accounts were $3,268,578 in the nine months ended September 30, 2019, compared to $3,381,809 for the same period in

2018. Other service charges and fees increased by $169,263, or 7.9%, to $2,316,715 in the nine months ended September 30, 2019, compared to $2,147,452 for the same period in 2018. Other operating income not derived from service charges or fees increased $169,543, or 19.5% to $1,039,696 in the nine months ended September 30, 2019, compared to $870,153 for the same period in 2018. This increase was due mainly to an increase in gains from security sales due to strategic investment decisions and other income partially offset by ~~an increase~~a decrease in ~~other income.~~mortgage loan origination income from long-term mortgage loans originated for sale in the secondary market.

The following is a detail of the other major income classifications that were included in other operation income on the income statement:


	For the Three Months				For the Three Months				For the Nine Months
	Ended March 31,				Ended September 30,				Ended September 30,
Other operating income	2019		2018		2019		2018		2019		2018
BOLI Income	$	126,000	$	126,000	$	120,000	$	124,666	$	366,000	$	375,101
Mortgage Loan Origination Income		48,028		72,523		72,640		101,077		179,239		273,367
Income from security sales, net		—		8,021		244,457		—		190,308		11,047
Other Income		92,551		81,829		79,765		61,940		304,149		210,638

Total Other Income	$	266,579	$	288,373	$	516,862	$	287,683	$	1,039,696	$	870,153

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregatenon-interest expenses for the three months ended ~~March 31,~~September 30, 2019 and 2018 were ~~$6,639,217~~$6,867,638 and ~~$7,047,682,~~$6,894,024, respectively, a decrease of ~~$408,465~~$26,386 or ~~5.8%~~0.4%. Salaries and benefits decreased to ~~$3,546,669~~$3,508,723 for the three months ended ~~March 31,~~September 30, 2019, from ~~$3,667,857~~$3,668,012 for the same period in 2018. Occupancy expense decreased by ~~$102,952,~~$198,912, or ~~6.7%~~13.4%, to ~~$1,422,427~~$1,287,320 for the three months ended ~~March 31,~~September 30, 2019, compared to ~~$1,525,379~~$1,486,232 for the same period of 2018. Other operating expenses increased by $331,815, or 19.1%, to $2,071,585 for the three months ended September 30, 2019, compared to $1,739,780 for the same period of 2018. This increase was mainly due to an increase inone-time legal and consulting fees of approximately $175 thousand related to the acquisition of Charter.

Aggregatenon-interest expenses for the nine months ended September 30, 2019 and 2018 were $19,829,904 and $20,889,594, respectively, a decrease of $1,059,690 or 5.1%. Salaries and benefits decreased to $10,525,116 for the nine months ended September 30, 2019, from $11,011,291 for the same period in 2018. Occupancy expense decreased by $253,624, or 5.8%, to $4,119,609 for the nine months ended September 30, 2019, compared to $4,373,233 for the same period of 2018. Other operating expenses decreased by ~~$184,325,~~$319,891, or ~~10.0%~~5.8%, to ~~$1,670,121~~$5,185,179 for the ~~three~~nine months ended ~~March 31,~~September 30, 2019, compared to ~~$1,854,446~~$5,505,070 for the same period of 2018. This decrease was mainly due to overall cost containment of the Company coupled with aone-time refund of prepaid postage partially offset byone-time legal and consulting fees related to the acquisition of Charter of approximately $323 thousand.

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


	For the Three Months				For the Three Months				For the Nine Months
	Ended March 31,				Ended September 30,				Ended September 30,
Other Operating Expense	2019		2018		2019		2018		2019			2018
Advertising	$	178,655	$	156,046	$	127,647	$	108,140	$	430,943		$	434,657
Office Supplies		217,247		243,076		265,073		245,248		718,447			736,630
Legal and Audit Fees		133,288		211,854
Professional Fees						442,413		181,036		1,114,122			425,905
Telephone expense		112,058		124,833		118,971		124,490		352,747			401,496
Postage and Freight		149,122		136,917		121,307		136,285		(176,857	)		425,353
Loan Collection Expense		8,036		13,702		186,612		5,819		196,286			22,641
Other Losses		6,777		167,274
Regulatory and related expense		84,917		95,047		90,434		84,084		259,311			277,437
Debit Card/ATM expense		120,885		109,001		172,166		121,434		408,809			343,817
Travel and Convention		36,780		49,348		78,705		54,745		179,214			166,759
Other expenses		622,356		547,348		468,267		678,499		1,702,157			2,270,375

Total Other Expense	$	1,670,121	$	1,854,446	$	2,071,595	$	1,739,780	$	5,185,179		$	5,505,070

The Corporation’s efficiency ratio for the three months ended ~~March 31,~~September 30, 2019 was ~~76.34%~~75.19%, compared to ~~74.47%~~75.25% for the same period in 2018. For the nine months ended September 30, 2019, the Corporation’s efficiency ratio was 78.03%, compared to 75.79% for the same period in 2018. The efficiency ratio is the ratio ofnon-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) andnon-interest income.

BALANCE SHEET ANALYSIS


					Amount of			Percent of							Amount of			Percent of
	March 31,		December 31,		Increase			Increase			September 30,		December 31,		Increase			Increase
	2019		2018		(Decrease)			(Decrease)			2019		2018		(Decrease)			(Decrease)
Cash and Due From Banks	$	12,462,550	$	12,592,130	$	(129,580	)		-1.03	%	$	21,106,679	$	12,592,130	$	8,514,549			67.62	%
Interest Bearing deposits with Other Banks		27,122,108		8,079,742		19,042,366			235.68	%		61,234,815		8,079,742		53,155,073			657.88	%
Investment Securities		507,791,195		444,746,454		63,044,741			14.18	%		434,145,569		444,746,454		(10,600,885	)		-2.38	%
Loans, net		443,909,475		425,905,093		18,004,382			4.23	%		469,692,103		425,905,093		43,787,010			10.28	%
Premises and Equipment		19,556,205		19,717,305		(161,100	)		-0.82	%		20,029,997		19,717,305		312,692			1.59	%
Total Assets		1,057,392,476		958,630,077		98,762,399			10.30	%		1,049,603,645		958,630,077		90,973,568			9.49	%
Total Deposits		840,159,983		756,221,510		83,938,473			11.10	%		794,314,007		756,221,510		38,092,497			5.04	%
Total Shareholders’ Equity		90,579,057		83,866,317		6,712,740			8.00	%		98,999,065		83,866,317		15,132,748			18.04	%

CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at ~~March 31,~~September 30, 2019 was ~~$12,462,550,~~$21,106,679, which was ~~a decrease~~an increase of ~~$129,580~~$8,514,549 from the balance of $12,592,130 at December 31, 2018. The ~~decrease~~increase was due to ~~a decrease~~an increase in the balances at correspondent banks due to ~~a decrease~~an increase in the amount of checks drawn on other banks in the normal process of clearing funds between these banks.

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Corporation’s investments securities portfolio at ~~March 31,~~September 30, 2019 ~~increased~~decreased by ~~$63,044,741,~~$10,600,885, or ~~14.2%~~2.4%, to ~~$507,791,195~~$434,145,569 from $444,746,454 at December 31, 2018. This ~~increase~~decrease was due to sales, maturities, paydowns and calls in excess of purchases and increases in the market value of the Corporation’s investment securities ~~portfolio in excess of maturities, paydowns, sales and calls.~~portfolio.

LOANS

The Corporation’s loan balance increased by ~~$18,004,382,~~$43,787,010, or ~~4.2%~~10.3%, during the ~~three~~nine months ended ~~March 31,~~September 30, 2019, to ~~$443,909,475~~$469,692,103 from $425,905,093 at December 31, 2018. Loan demand, especially in land development and construction, commercial and industrial, and commercial real estate categories, strengthened during the ~~three~~nine months ended ~~March 31,~~September 30, 2019 but competition for available loans continued to be strong during that period. No material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the ~~three~~nine months ended ~~March 31,~~September 30, 2019, the Corporation’s premises and equipment ~~decreased~~increased by ~~$161,100,~~$312,692, or ~~0.8%~~1.6%, to ~~$19,556,205~~$20,029,997 from $19,717,305 at December 31, 2018. The ~~decrease~~increase was due to ~~depreciation expense exceeding~~ the ~~amount~~purchase of a piece of property ~~and equipment purchased during the period.~~for expansion partially offset by depreciation expense.

DEPOSITS

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


					Amount of		Percent of							Amount of			Percent of
	March 31,		December 31,		Increase		Increase			September 30,		December 31,		Increase			Increase
	2019		2018		(Decrease)		(Decrease)			2019		2018		(Decrease)			(Decrease)
Noninterest-Bearing Deposits	$	171,555,937	$	170,029,729	$	1,526,208		0.90	%	$	168,317,216	$	170,029,729	$	(1,712,513	)		-1.01	%
Interest-Bearing Deposits		369,049,299		298,220,430		70,828,869		23.75	%		326,982,928		298,220,430		28,762,498			9.64	%
Savings Deposits		77,317,063		76,735,710		581,353		0.76	%		78,474,191		76,735,710		1,738,481			2.27	%
Certificates of Deposit		222,237,684		211,235,641		11,002,043		5.21	%		220,539,672		211,235,641		9,304,031			4.40	%

Total deposits	$	840,159,983	$	756,221,510	$	83,938,473		11.10	%	$	794,314,007	$	756,221,510	$	38,092,497			5.04	%

~~Non-interest-bearing,~~ ~~interest-bearing,~~Interest-bearing, savings and certificates of deposits increased during the ~~three~~nine months ended ~~March 31, 2019.~~September 30, 2019 while noninterest-bearing deposits decreased slightly. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management objectives. These rate adjustments impact deposit balances.

OFF-BALANCE SHEET ARRANGEMENTS

Please refer to Note 2 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Corporation’soff-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, 2018.~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

~~The Corporation’s strategies~~Asset/Liability Management 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 tobe important in the future. New risks may emerge at any time and the Corporation cannot predict with certainty all potential developments that could affect the Corporation’s financial condition or results of operation. The following discussion highlights potential risks, which could intensify over time or shift dynamically in a way that might change the Corporation’s risk profile.

~~Competition Risks~~Interest Rate Risk

The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors of the Bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.

As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest-bearing liabilities, other than those which ~~the Corporation competes is saturated with community banks seeking~~have a short term to ~~provide a service-oriented banking experience to individuals and businesses compared with what the Corporation believes~~maturity. Interest rate risk is the ~~more rigid and less friendly environment found in larger banks. This requires the Corporation~~potential of economic losses due to offer most, if not all, of the products and conveniences that are offered by the larger banks, but with a service differentiation. In doing so, it is imperative that the Corporation identify the lines of business that the Corporationcan excel in, prudently utilize the Corporation’s available capital to acquire the people and platforms required thereof, and execute on these strategies.

~~Credit Risks~~

~~Like all lenders, the Corporation faces the risk that the Corporation’s customers may not repay their loans and that the realizable value of collateral may~~future interest rate changes. These economic losses can be ~~insufficient to avoid~~reflected as a loss of ~~principal. In~~future net interest income and/or a loss of current fair values.

We manage our exposure to interest rates primarily by structuring our balance sheet in the ~~Corporation’s business, some level~~ordinary course of ~~credit loss~~business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so should the situation warrant. Based upon the nature of our operations, we are not subject to material foreign exchange or commodity price risk. We do not own any trading assets.

We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in projected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is ~~unavoidable~~a complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is a longer-term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and ~~overall levels of credit loss can vary over time. The Corporation’s ability to manage credit risk depends~~is used in conjunction with the analyses on net interest income.

~~primarily upon~~The following table summarizes the ~~Corporation’s ability to assess~~simulated change in net interest income assuming a static balance sheet versus unchanged rates as of September 30, 2019 and December 31, 2018:


	September 30, 2019						December 31, 2018
	Following			Months			Following			Months
	12 months			13-24			12 months			13-24
+400 basis points		11.7	%		23.2	%		-3.6	%		6.2	%
+300 basis points		10.8	%		19.4	%		-1.8	%		5.7	%
+200 basis points		9.3	%		14.8	%		-0.4	%		4.9	%
+100 basis points		4.9	%		7.6	%		0.5	%		3.2	%
Flat rates		—			—			—			—
-100 basis points		-8.5	%		-7.7	%		-1.7	%		-1.1	%
-200 basis points		-14.0	%		-15.3	%		-11.5	%		-9.5	%

The following table presents the ~~creditworthiness of customers and the~~change in our economic value of ~~collateral, including real estate. The Corporation controls credit risk by diversifying~~equity as of September 30, 2019 and December 31, 2018, assuming immediate parallel shifts in interest rates:


	Economic Value of Equity at Risk (%)
	September 30, 2019			December 31, 2018
+400 basis points		15.1	%		-5.3	%
+300 basis points		15.1	%		-3.0	%
+200 basis points		13.4	%		-1.2	%
+100 basis points		8.3	%		-0.1	%
Flat rates		—			—
-100 basis points		-21.3	%		-9.4	%
-200 basis points		-47.1	%		-27.1	%

Many assumptions are used to calculate 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 March 31, 2019, the Corporation had approximately $3.6 million of available reserves to cover such losses. The models and approaches the Corporation uses to originate and manage loans are regularly reviewed, if necessary or advisable, updated to consider changes in the competitive environment, in real estate prices and other collateral values, and in the economy, among other things, based on the Corporation’s experience originating loans and servicing loan portfolios.

~~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~~impact of interest rate ~~risk. Management’s goal is~~fluctuations. Actual results may be significantly different than our projections due 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~~several factors, including the timing and ~~extent to which the Corporation can reprice the yields on interest-earning assets~~frequency of rate changes, market conditions and the ~~costs~~shape of the yield curve. The computations of interest ~~bearing liabilities as a result of changes~~rate risk shown above do not include actions that our management may undertake to manage the risks 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 devotedresponse 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,~~anticipated 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~~actual results may also differ due to ~~control the risks of a reduction~~any actions taken in ~~net interest margin brought about by ordinary fluctuations in rates.~~

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

As part of our asset/liability management strategy, our management has emphasized the ~~yield curve is flat.~~

~~Regulatory and Legal Risks~~

~~The Corporation operates in a heavily regulated industry and therefore is subject to many banking, deposit, and consumer lending laws~~origination of shorter duration loans as well as variable rate loans to limit the ~~rules and regulations promulgated by the FDIC, FRB, Securities and Exchange Commission and the NASDAQ stock market. Failure~~negative exposure to ~~comply with applicable regulations could result~~a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest bearingnon-maturity deposit accounts, whose cost is less sensitive to changes in ~~financial or operational penalties. In~~interest rates.

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 loans or realize on collateral or could materially affect us in other ways. Additional federal and state consumer protection regulations could also expand the privacy protections afforded to customers of financial institutions, restricting the 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 previously made.

~~Expense Control~~

Expenses and other costs directly affect the Corporation’s earnings. The Corporation’sability 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.

ITEM 4.

CONTROLS AND PROCEDURES.

The management of the ~~Corporation,~~Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the ~~Corporation’s~~Company’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 ~~March 31,~~September 30, 2019 (the end of the period covered by this Quarterly Report).

There were no changes to the ~~Corporation’s~~Company’s internal control over financial reporting that occurred in the three months ended ~~March 31,~~September 30, 2019, that have materially affected, or are reasonably likely to materially affect, the ~~Corporation’s~~Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

ITEM 1A.

RISK FACTORS.

The Corporation’s business, futurefinancial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form10-K for the year ended December 31, 2018, which the Corporation filed with the Securities and Exchange Commission on March 15, 2019. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Corporation’s Annual Report on Form10-K for the year ended December 31, 2018, the Corporation’s quarterly reports on Form10-Q and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Corporation’s business, financial condition and results of operations in the future.

There have been no material changes to the risk factors as disclosed in the Corporation’s Annual Report on Form10-K for the Corporation’s year ended December 31, 2018.

ITEM 6.

EXHIBITS.


Exhibits

31(a)		Certification of the Chief Executive Officer pursuant to Rule13a-14(a)/15d-14(a).

31(b)		Certification of the Chief Financial Officer pursuant to Rule13a-14(a)/15d-14(a).

32(a)		Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.

32(b)		Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.

101		Financial Statements submitted in XBRL format.

SIGNATURES

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


CITIZENS HOLDING COMPANY

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

BY:	/s/ Robert T. Smith
		Robert T. Smith
	Treasurer and Chief Financial Officer
	(Principal Financial Officer and Chief Accounting Officer)

DATE: ~~May 10,~~November 8, 2019