CITIZENS HOLDING CO /MS/ - Quarter Report: 2015 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

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

For the transition period from to

Commission File Number: 001-15375

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

Mississippi

64-0666512

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)


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

601-656-4692

(Registrant’s telephone number, including area code)

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

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

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

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

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


Title		Outstanding
Common Stock, $0.20 par value		4,885,114

CITIZENS HOLDING COMPANY

INTERIM FINANCIAL STATEMENTS FOR QUARTER ENDED JUNE 30, 2015

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION	1

Item 1.	Consolidated Financial Statements.	1

	Consolidated Statements of Condition June 30, 2015 (Unaudited) and December 31, 2014 (Audited)	1

	Consolidated Statements of Income Three and Six months ended June 30, 2015 (Unaudited) and 2014 (Unaudited)	2

	Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2015 (Unaudited) and 2014 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2015 (Unaudited) and 2014 (Unaudited)	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	43

Item 4.	Controls and Procedures.	46

PART II.	OTHER INFORMATION	47

Item 1.	Legal Proceedings.*

Item 1A.	Risk Factors.	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.*

Item 3.	Defaults Upon Senior Securities.*

Item 4.	Mine Safety Disclosures.*

Item 5.	Other Information.*

Item 6.	Exhibits.	49

* None or Not Applicable

SIGNATURES		50

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF CONDITION


	June 30,			December 31,
	2015			2014
	(Unaudited)			(Audited)
ASSETS

Cash and due from banks	$	18,842,722		$	22,405,730
Interest bearing deposits with other banks		11,083,914			61,481,223
Investment securities held to maturity, at amortized cost		198,298,707			206,817,169
Investment securities available for sale, at fair value		232,272,884			179,745,130
Loans, net of allowance for loan losses of $6,692,914 in 2015 and $6,542,326 in 2014		400,622,906			384,417,508
Premises and equipment, net		18,782,171			19,240,230
Other real estate owned, net		3,590,367			4,051,561
Accrued interest receivable		3,794,505			3,869,937
Cash value of life insurance		22,699,665			22,347,601
Intangible assets, net		3,149,657			3,149,657
Other assets		13,862,768			13,534,935


TOTAL ASSETS	$	927,000,266		$	921,060,681


LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Deposits:
Noninterest-bearing demand	$	141,953,804		$	145,729,932
Interest-bearing NOW and money market accounts		296,965,294			268,567,815
Savings deposits		64,403,837			60,253,788
Certificates of deposit		217,815,290			221,542,359

Total deposits		721,138,225			696,093,894

Securities sold under agreement to repurchase		94,962,842			114,426,770
Federal Home Loan Bank advances		20,000,000			20,000,000
Accrued interest payable		56,352			190,717
Deferred compensation payable		7,419,986			7,209,694
Other liabilities		1,345,838			1,281,820

Total liabilities		844,923,243			839,202,895

SHAREHOLDERS’ EQUITY
Common stock; $.20 par value, 22,500,000 shares authorized, 4,875,270 shares outstanding at June 30, 2015 and 4,877,614 at December 31, 2014		975,054			975,482
Additional paid-in capital		3,866,599			3,861,717
Retained earnings		87,077,889			85,901,207
Accumulated other comprehensive loss, net of tax benefit of $5,855,279 in 2015 and $5,283,048 in 2014		(9,842,519	)		(8,880,620	)


Total shareholders’ equity		82,077,023			81,857,786


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	927,000,266		$	921,060,681

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 Six Months
	Ended June 30,				Ended June 30,
	2015		2014		2015		2014
INTEREST INCOME
Loans, including fees	$	4,988,452	$	5,067,445	$	9,996,012	$	10,111,355
Investment securities		2,690,622		2,851,155		5,359,094		5,748,124
Other interest		17,245		6,913		47,284		11,962


Total interest income		7,696,319		7,925,513		15,402,390		15,871,441

INTEREST EXPENSE
Deposits		449,772		421,870		881,925		840,166
Other borrowed funds		285,902		312,081		604,933		622,644


Total interest expense		735,674		733,951		1,486,858		1,462,810


NET INTEREST INCOME		6,960,645		7,191,562		13,915,532		14,408,631

PROVISION FOR LOAN LOSSES		81,818		211,535		265,994		572,903


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,878,827		6,980,027		13,649,538		13,835,728

OTHER INCOME
Service charges on deposit accounts		954,093		963,826		1,840,877		1,893,557
Other service charges and fees		563,161		524,695		1,095,014		1,009,132
Other income		334,597		995,101		667,705		1,364,413


Total other income		1,851,851		2,483,622		3,603,596		4,267,102


OTHER EXPENSES
Salaries and employee benefits		3,341,381		3,252,370		6,696,684		6,608,207
Occupancy expense		1,296,765		1,570,995		2,596,259		2,544,057
Other operating expense		1,683,004		2,222,630		3,515,181		4,262,594


Total other expenses		6,321,150		7,045,995		12,808,124		13,414,858


INCOME BEFORE PROVISION FOR INCOME TAXES		2,409,528		2,417,654		4,445,010		4,687,972

PROVISION FOR INCOME TAXES		580,941		325,135		1,022,877		798,300


NET INCOME	$	1,828,587	$	2,092,519	$	3,422,133	$	3,889,672


NET INCOME PER SHARE -Basic	$	0.37	$	0.43	$	0.70	$	0.80


-Diluted	$	0.37	$	0.43	$	0.70	$	0.80


DIVIDENDS PAID PER SHARE	$	0.23	$	0.22	$	0.46	$	0.44

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014

Net income	$	1,828,587		$	2,092,519		$	3,422,133		$	3,889,672

Other comprehensive income

Securities available-for-sale
Unrealized holding gains		2,054,039			5,349,883			3,008,075			14,868,427
Income tax effect		(766,156	)		(1,992,111	)		(1,122,012	)		(5,542,528	)

		1,287,883			3,357,772			1,886,063			9,325,899

Securities transferred from available-for-sale to held-to-maturity
Amortization of net unrealized losses during the period		529,915			—			1,473,944			—
Income tax effect		(197,660	)		—			(549,782	)		—

		332,255			—			924,162			—

Reclassification adjustment for gains included in net income		—			(9,102	)		—			(9,102	)
Income tax effect		—			3,395			—			3,395

		—			(5,707	)		—			(5,707	)


Total other comprehensive income		955,628			3,352,065			961,901			9,320,192


Comprehensive income	$	2,784,215		$	5,444,584		$	4,384,034		$	13,209,864

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

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months
	Ended June 30,
	2015			2014

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities	$	4,796,043		$	3,850,163

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		20,373,502			4,609,491
Proceeds from sales of securities available for sale		—			1,381,596
Proceeds from maturities and calls of securities held to maturity		10,000,000			—
Purchases of investment securities available for sale		(76,439,560	)		—
Purchases of bank premises and equipment		(46,843	)		(1,654,936	)
Increase (decrease) in interest bearing deposits with other banks		50,397,309			(6,239,119	)
Proceeds from sale of other real estate		1,001,949			339,934
Redemption of Federal Home Loan Bank Stock		150,700			449,700
Net (increase) decrease in loans		(17,088,940	)		1,906,215


Net cash (used by) provided by investing activities		(11,651,883	)		792,881

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		25,044,331			36,817,569
Net change in securities sold under agreement to repurchase		(19,463,928	)		(5,719,172	)
Decrease in federal funds purchased		—			(27,500,000	)
Repurchase of stock		(70,122	)		—
Exercise of Stock Options		27,000			—
Excess tax benefits on stock options		1,001			—
Payment of dividends		(2,245,450	)		(2,146,149	)


Net cash provided by financing activities		3,292,832			1,452,248


Net (decrease) increase in cash and due from banks		(3,563,008	)		6,095,292

Cash and due from banks, beginning of period		22,405,730			16,040,195


Cash and due from banks, end of period	$	18,842,722		$	22,135,487

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 and six months ended June 30, 2015

(Unaudited)

Note 1.

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended June 30, 2015 are not necessarily indicative of the results that may be expected for any other interim periods or for the year as a whole.

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

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

Note 2.

Commitments and Contingent Liabilities

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of June 30, 2015, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $53,718,491 compared to an aggregate unused balance of $50,242,705 at December 31, 2014. There was $2,666,980 of letters of credit outstanding at June 30, 2015 and $2,855,480 at December 31, 2014. The fair value of such contracts is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the level of draws under its credit-related commitments into its asset and liability management program.

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

Note 3.

Net Income per Share

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


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2015		2014		2015		2014

Basic weighted average shares outstanding		4,877,614		4,870,114		4,873,097		4,870,114
Dilutive effect of granted options		1,170		704		907		535


Diluted weighted average shares outstanding		4,878,784		4,870,818		4,874,004		4,870,649


Net income	$	1,828,587	$	2,092,519	$	3,422,133	$	3,889,672
Net income per share-basic	$	0.37	$	0.43	$	0.70	$	0.80
Net income per share-diluted	$	0.37	$	0.43	$	0.70	$	0.80

Note 4.

Equity Compensation Plans

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

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


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

Outstanding at December 31, 2014		96,000		$	21.23		46,500		$	22.14		—	$	—
Granted		—			—		—			—		—		—
Exercised		—			—		(1,500	)		18.00		—		—
Expired		(9,000	)		20.00		(22,000	)		21.05		—		—


Outstanding at June 30, 2015		87,000		$	21.36		23,000		$	23.46		—	$	—

The intrinsic value of options granted under the Directors’ Plan at June 30, 2015, was $70,980, the intrinsic value of options granted under the Employees’ Plan at June 30, 2015, was $0, and since there were no options granted under the 2013 Plan, the intrinsic value for the 2013 Plan is $0 for an aggregate intrinsic value at June 30, 2015, of $70,980.

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

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

Note 5.

Income Taxes

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

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

Note 6.

Securities

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


June 30, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	68,002,206	$	—	$	2,366,887	$	65,635,319
Mortgage backed securities		78,350,589		755,577		1,123,361		77,982,805
State, County, Municipals		84,618,121		2,208,522		1,051,543		85,775,100
Other investments		2,957,375		—		77,715		2,879,660

Total	$	233,928,291	$	2,964,099	$	4,619,506	$	232,272,884


December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	77,996,980	$	—	$	2,035,905	$	75,961,075
Mortgage backed securities		12,501,990		824,844		—		13,326,834
State, County, Municipals		84,896,091		3,048,489		360,082		87,584,498
Other investments		2,997,401		—		124,678		2,872,723

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

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

The fair value of the securities transferred as of the date of transfer was $205,260,985 with a net unrealized loss of $17,061,438. In accordance with ASC 320-10-35-16, the discount on each security that resulted from this transfer is amortized over the remaining lives of the individual securities. Any unrealized holding losses on the date of the transfer are not recognized in net income but remain in accumulated other comprehensive loss. In accordance with ASC 320-10-15-10d, the unrealized loss amounts in accumulated other comprehensive loss are amortized simultaneously against interest income as the discount is accreted on the transferred securities. There is no effect on net income as the discount accretion offsets the accumulated other comprehensive loss amortization. The unamortized unrealized loss, before deferred taxes, was $14,042,392 and $15,516,336 at June 30, 2015 and December 31, 2014, respectively.

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


June 30, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities held-to-maturity
Obligations of U.S. Government agencies	$	198,298,707	$	6,188,631	$	—	$	204,487,338

Total	$	198,298,707	$	6,188,631	$	—	$	204,487,338


December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities held-to-maturity
Obligations of U.S. Government agencies	$	206,817,169	$	9,928,269	$	—	$	216,745,438

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

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


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

Due in one year or less	$	6,134,852	$	6,204,469	$	3,619,965	$	3,644,097
Due after one year through five years		10,563,313		10,816,985		11,886,005		12,165,884
Due after five years through ten years		75,646,390		74,709,671		73,014,502		72,750,584
Due after ten years		141,583,736		140,541,759		89,871,990		91,184,565


Total	$	233,928,291	$	232,272,884	$	178,392,462	$	179,745,130


Held-to-maturity

Due after five years through ten years	$	36,920,537	$	37,859,713	$	27,599,235	$	28,395,635
Due after ten years		161,378,170		166,627,625		179,217,934		188,349,803


Total	$	198,298,707	$	204,487,338	$	206,817,169	$	216,745,438

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

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


June 30, 2015	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses

Obligations of U. S. Government agencies	$	10,295	$	201	$	55,340	$	2,166	$	65,635	$	2,367
Mortgage backed securities		66,391		1,123		—		—		66,391		1,123
State, County, Municipal		13,285		448		12,251		604		25,536		1,052
Other investments		—		—		2,880		78		2,880		78


Total	$	89,971	$	1,772	$	70,471	$	2,848	$	160,442	$	4,620


December 31, 2014	Less than 12 months				12 months or more				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Obligations of U. S. Government agencies	$	—	$	—	$	75,961	$	2,036	$	75,961	$	2,036
Mortgage backed securities		—		—		—		—		—		—
State, County, Municipal		697		3		14,980		357		15,677		360
Other investments		—		—		2,873		125		2,873		125


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

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

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

Note 7.

Loans

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


	June 30, 2015			December 31, 2014

Real Estate:
Land Development and Construction	$	45,581		$	43,233
Farmland		24,027			26,463
1-4 Family Mortgages		106,179			104,170
Commercial Real Estate		161,779			151,746

Total Real Estate Loans		337,566			325,612

Business Loans:
Commercial and Industrial Loans		44,235			38,333
Farm Production and Other Farm Loans		1,061			1,035

Total Business Loans		45,296			39,368

Consumer Loans:
Credit Cards		986			1,075
Other Consumer Loans		24,138			25,440

Total Consumer Loans		25,124			26,515


Total Gross Loans		407,986			391,495

Unearned income		(670	)		(535	)
Allowance for loan losses		(6,693	)		(6,542	)


Loans, net	$	400,623		$	384,418

Loans are considered to be past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status, when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether such loans are considered past due. When interest accruals are discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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


	June 30, 2015		December 31, 2014

Real Estate:
Land Development and Construction	$	82	$	92
Farmland		194		222
1-4 Family Mortgages		2,189		1,905
Commercial Real Estate		9,990		9,444

Total Real Estate Loans		12,455		11,663

Business Loans:
Commercial and Industrial Loans		135		70

Total Business Loans		135		70

Consumer Loans:
Other Consumer Loans		74		133

Total Consumer Loans		74		133


Total Non-Accrual Loans	$	12,664	$	11,854

An aging analysis of past due loans (in thousands), segregated by class, as of June 30, 2015, was as follows:


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	416	$	—	$	416	$	45,165	$	45,581	$	—
Farmland		251		17		268		23,759		24,027		—
1-4 Family Mortgages		3,825		813		4,638		101,541		106,179		52
Commercial Real Estate		2,056		3,948		6,004		155,775		161,779		—

Total Real Estate Loans		6,548		4,778		11,326		326,240		337,566		52

Business Loans:
Commercial and Industrial Loans		138		75		213		44,022		44,235		—
Farm Production and Other Farm Loans		—		—		—		1,061		1,061		—

Total Business Loans		138		75		213		45,083		45,296		—

Consumer Loans:
Credit Cards		23		—		23		963		986		—
Other Consumer Loans		769		37		806		23,332		24,138		17

Total Consumer Loans		792		37		829		24,295		25,124		17


Total Loans	$	7,478	$	4,890	$	12,368	$	395,618	$	407,986	$	69

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


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	578	$	—	$	578	$	42,655	$	43,233	$	—
Farmland		889		17		906		25,557		26,463		—
1-4 Family Mortgages		4,606		837		5,443		98,727		104,170		131
Commercial Real Estate		2,211		4,471		6,682		145,064		151,746		724

Total Real Estate Loans		8,284		5,325		13,609		312,003		325,612		855


Business Loans:
Commercial and Industrial Loans		115		3		118		38,215		38,333		3
Farm Production and other Farm Loans		22		—		22		1,013		1,035		—

Total Business Loans		137		3		140		39,228		39,368		3


Consumer Loans:
Credit Cards		27		6		33		1,042		1,075		6
Other Consumer Loans		1,179		53		1,232		24,208		25,440		16

Total Consumer Loans		1,206		59		1,265		25,250		26,515		22


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

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

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


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
June 30, 2015	Principal Balance		With No Allowance		With Allowance		Recorded Investment		Related Allowance		Recorded Investment
Real Estate:
Land Development and Construction	$	82	$	—	$	82	$	82	$	82	$	332
Farmland		743		81		662		743		108		751
1-4 Family Mortgages		2,910		1,976		934		2,910		210		2,833
Commercial Real Estate		9,990		1,865		8,125		9,990		1,981		9,545

Total Real Estate Loans		13,725		3,922		9,803		13,725		2,381		13,461

Business Loans:
Commercial and Industrial Loans		135		103		32		135		25		138

Total Business Loans		135		103		32		135		25		138

Consumer Loans:
Other Consumer Loans		74		74		—		74		—		84

Total Consumer Loans		74		74		—		74		—		84


Total Loans	$	14,238	$	4,099	$	9,835	$	13,934	$	2,406	$	13,683


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
December 31, 2014	Principal Balance		With No Allowance		With Allowance		Recorded Investment		Related Allowance		Recorded Investment
Real Estate:
Land Development and Construction	$	92	$	—	$	92	$	92	$	92	$	114
Farmland		798		104		694		798		108		575
1-4 Family Mortgages		2,554		1,685		869		2,554		143		2,210
Commercial Real Estate		9,444		895		8,549		9,444		1,642		9,169

Total Real Estate Loans		12,888		2,684		10,204		12,888		1,985		12,068


Business Loans:
Commercial and Industrial Loans		70		30		40		70		40		1,147

Total Business Loans		70		30		40		70		40		1,147


Consumer Loans:
Other Consumer Loans		121		121		—		121		—		120

Total Consumer Loans		121		121		—		121		—		120


Total Loans	$	13,079	$	2,835	$	10,244	$	13,079	$	2,025	$	13,335

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


June 30, 2015	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate		4	$	6,850	$	4,530

Total		4	$	6,850	$	4,530


December 31, 2014	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate		4	$	6,850	$	4,741

Total		4	$	6,850	$	4,741

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


	Number		Recorded
	of Loans		Investment
Totals at January 1, 2015		4	$	4,741
Reductions due to:
Principal paydowns				(211	)


Total at June 30, 2015		4	$	4,530

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

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

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

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

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

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

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

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

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

Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or

improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment.

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

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

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


				Special
		Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	Grades	1, 2, 3, 4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction		$	43,751	$	267	$	1,563	$	—	$	—	$	45,581
Farmland			21,605		841		1,581		—		—		24,027
1-4 Family Mortgages			89,269		4,556		12,354		—		—		106,179
Commercial Real Estate			134,949		13,578		13,252		—		—		161,779

Total Real Estate Loans			289,574		19,242		28,750		—		—		337,566

Business Loans:
Commercial and Industrial Loans			43,570		430		235		—		—		44,235
Farm Production and Other Farm Loans			1,061		—		—		—		—		1,061

Total Business Loans			44,631		430		235		—		—		45,296

Consumer Loans:
Credit Cards			986		—		—		—		—		986
Other Consumer Loans			23,708		136		262		29		3		24,138

Total Consumer Loans			24,694		136		262		29		3		25,124


Total Loans		$	358,899	$	19,808	$	29,247	$	29	$	3	$	407,986

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


				Special
		Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	Grades	1, 2, 3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction		$	41,431	$	424	$	1,378	$	—	$	—	$	43,233
Farmland			23,993		708		1,762		—		—		26,463
1-4 Family Mortgages			86,969		5,351		11,850		—		—		104,170
Commercial Real Estate			126,881		13,558		11,307		—		—		151,746

Total Real Estate Loans			279,274		20,041		26,297		—		—		325,612


Business Loans:
Commercial and Industrial Loans			37,890		232		211		—		—		38,333
Farm Production and other Farm Loans			1,035		0		—		—		—		1,035

Total Business Loans			38,925		232		211		—		—		39,368


Consumer Loans:
Credit Cards			1,069		—		6		—		—		1,075
Other Consumer Loans			24,889		177		358		16		—		25,440

Total Consumer Loans			25,958		177		364		16		—		26,515


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

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

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

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

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


	Real		Business
June 30, 2015	Estate		Loans			Consumer		Total

Beginning Balance, January 1, 2015	$	5,202,151	$	873,815		$	466,360	$	6,542,326

Provision for possible loan losses		149,095		23,189			93,710		265,994

Chargeoffs		125,374		—			93,915		219,289

Recoveries		42,758		7,658			53,467		103,883


Net Chargeoffs		82,616		(7,658	)		40,448		115,406


Ending Balance	$	5,268,630	$	904,662		$	519,622	$	6,692,914


Period end allowance allocated to:
Loans individually evaluated for impairment	$	2,381,267	$	25,000		$	—	$	2,406,267

Loans collectively evaluated for impairment		2,887,363		879,662			519,622		4,286,647


Ending Balance, March 31, 2015	$	5,268,630	$	904 662		$	519,622	$	6,692,914

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


	Real			Business
June 30, 2014	Estate			Loans		Consumer			Total

Beginning Balance, January 1, 2014	$	4,705,753		$	2,767,409	$	604,337		$	8,077,499

Provision for possible loan losses		(172,350	)		764,154		(18,902	)		572,903

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

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


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


Ending Balance, June 30, 2014	$	4,467,276		$	3,514,551	$	557,601		$	8,539,428


Period end allowance allocated to:
Loans individually evaluated for impairment	$	1,067,821		$	2,068,759	$	—		$	3,136,580

Loans collectively evaluated for impairment		3,399,455			1,445,792		557,601			5,402,848


Ending Balance, March 31, 2014	$	4,467,276		$	3,514,551	$	557,601		$	8,539,428

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


	Real		Business
June 30, 2015	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	13,725	$	135	$	74	$	13,934
Loans collectively evaluated for general impairment		323,841		45,161		25,050		394,052

	$	337,566	$	45,296	$	25,124	$	407,986


	Real		Business
December 31, 2014	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	12,888	$	70	$	121	$	13,079
Loans collectively evaluated for general impairment		312,724		39,298		26,394		378,416

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

Note 8.

Fair Value of Financial Instruments

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


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

Level 2		Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or

Level 3		Unobservable inputs, such as discounted cash flow models or valuations.

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

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2015:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U. S. Government Agencies	$	—	$	65,635,319	$	—	$	65,635,319
Mortgage-backed securities		—		77,982,805		—		77,982,805
State, county and municipal obligations		—		85,775,100		—		85,775,100
Other investments		—		—		2,879,660		2,879,660

Total	$	—	$	229,393,224	$	2,879,660	$	232,272,884

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


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U. S. Government Agencies	$	—	$	75,961,075	$	—	$	75,961,075
Mortgage-backed securities		—		13,326,834		—		13,326,834
State, county and municipal obligations		—		87,584,498		—		87,584,498
Other investments		—		—		2,872,723		2,872,723

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

The following table reports the activity for 2015 in assets measured at fair value on a recurring basis using significant unobservable inputs.


	Fair Value Measurements Using Significant Unobservable Inputs
	(Level 3)
	Structured Financial Product

Balance at January 1, 2015	$	2,872,723

Principal payments received		(45,411	)
Unrealized gains included in other comprehensive income		52,348


Balance at June 30, 2015	$	2,879,660

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

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


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

Impaired loans	$	—	$	—	$	7,350,163	$	7,350,163
Other real estate owned		—		—		437,847	$	437,847


Total	$	—	$	—	$	7,788,010	$	7,788,010

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


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

Impaired loans	$	—	$	—	$	8,782,923	$	8,782,923
Other real estate owned		—		—		645,468		645,468


Total	$	—	$	—	$	9,428,391	$	9,428,391

Impaired loans with a carrying value of $9,833,430 and $10,243,082 had an allocated allowance for loan losses of $2,406,267 and $2,024,754 at June 30, 2015 and December 31, 2014, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

Other real estate owned (“OREO”) acquired during the six-month period ended June 30, 2015, and recorded at fair value, less costs to sell, was $617,548, of which $179,702 was acquired and sold during this period. There were no writedowns during the period on properties owned. OREO acquired during 2014 and recorded at fair value, less costs to sell, was $2,874,173. Additional writedowns during 2014 on OREO acquired in previous years was $694,207.

The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using

present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation and may not be indicative of amounts that might ultimately be realized upon disposition or settlement of those assets and liabilities.

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


			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
June 30, 2015	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	18,842,722	$	18,842,722	$	—	$	—	$	18,842,722
Interest bearing deposits with banks		11,083,914		11,083,914		—		—		11,083,914
Securities held-to-maturity		198,298,707				204,487,338				204,487,338
Securities available-for-sale		232,272,884		—		229,393,224		2,879,660		232,272,884
Net loans		400,622,906		—		—		402,890,374		402,890,374

Financial liabilities
Deposits	$	721,138,225	$	503,322,935	$	—	$	217,955,255	$	721,278,190
Federal Home Loan Bank advances		20,000,000		—		—		20,770,705		20,770,705
Securities Sold under Agreement to Repurchase		94,962,842		94,962,842		—		—		94,962,842


			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
December 31, 2014	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	22,405,730	$	22,405,730	$	—	$	—	$	22,405,730
Interest bearing deposits with banks		61,481,223		61,481,223		—		—		61,481,223
Securities available-for-sale		179,745,130		—		176,872,407		2,872,723		179,745,130
Securities held-to-maturity		206,817,168		—		216,745,438		—		216,745,438
Net loans		384,417,508		—		—		386,206,117		386,206,117

Financial liabilities
Deposits	$	696,093,894	$	474,551,535	$	—	$	221,685,000	$	696,236,535
Federal Home Loan Bank advances		20,000,000		—		—		20,804,047		20,804,047
Securities Sold under Agreement to Repurchase		114,426,770		114,426,770		—		—		114,426,770

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

Cash and Due from Banks and Interest Bearing Deposits with Banks

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

Securities Held-to-Maturity

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

Securities Available-for-Sale

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

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

Net Loans

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

Deposits

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

Federal Home Loan Bank (FHLB) Borrowings

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

Securities Sold Under Agreement to Repurchase

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

Off-Balance Sheet Instruments

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

CITIZENS HOLDING COMPANY

ITEM 2.

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

FORWARD LOOKING STATEMENTS

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

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

LIQUIDITY

The Corporation has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Corporation at June 30, 2015, was 33.11% and at December 31, 2014, was 37.72%. The decrease was due to a decrease in short term marketable assets at June 30, 2015. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $721,138,225 at June 30, 2015, and $696,093,894 at December 31, 2014. Other sources of liquidity include investment securities, the Corporation’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Corporation had $232,272,884 invested in available-for-sale investment securities at June 30, 2015, and $179,745,130 at December 31, 2014. The Corporation also had $11,083,914 in interest bearing deposits at other banks at June 30, 2015 and $61,481,223 at December 31, 2014. The decrease in interest bearing deposits was the result of funds being invested in longer term investments, including certain mortgage backed products, which are expected to produce more interest income. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at June 30, 2015 and December 31, 2014. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At June 30, 2015, the Corporation had unused and available $147,193,132 of its line of credit with the FHLB and at December 31, 2014, the Corporation had unused and available $142,313,563 of its line of credit with the FHLB. The increase in the amount available under the Corporation’s line of credit with the FHLB from the end of 2014 to June 30, 2015, was the result of an increase in the amount of loans eligible for the collateral pool. The Corporation had $0 in federal funds purchased as of June 30, 2015 and December 31, 2014. The Corporation usually purchases federal funds from correspondent banks on a temporary basis to meet short term funding needs.

When the Corporation has more funds than it needs for its reserve requirements or short-term liquidity needs, the Corporation increases its investment portfolio, increases the balances in interest bearing due from accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to insure rate flexibility and to meet loan funding and liquidity needs. When deposits decline or do not grow sufficiently to fund loan demand, management will seek funding either through federal funds purchased or advances from the FHLB.

CAPITAL RESOURCES

Total shareholders’ equity was $82,077,023 at June 30, 2015, as compared to $81,857,786 at December 31, 2014. The reason for the increase in shareholders’ equity was the decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment as well as the increase in the amount of earnings in excess of dividends paid. The market value increase was due to general market conditions, specifically the decrease in medium term interest rates, which caused an increase in the market price of the investment portfolio.

Aggregate cash dividends in the amount of $2,245,450, or $0.46 per share, have been paid during the six-month period ended June 30, 2015.

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


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

As of June 30, 2015
Total Capital (to Risk-Weighted Assets)	$	95,342,314		18.14	%	$	42,053,906		>8.00	%	$	52,567,383		>10.00	%

Tier 1 Capital (to Risk-Weighted Assets)		88,769,885		16.89	%		21,026,953		>4.00	%		31,540,430		>6.00	%

Tier 1 Capital ( to Average Assets)		88,769,885		9.61	%		36,959,318		>4.00	%		46,199,147		>5.00	%

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

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

•

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

•

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

•

Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and Maintain the minimum total risk-based capital ratio at 8%.

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

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

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

RESULTS OF OPERATIONS

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


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2015		2014		2015		2014

Interest Income, including fees	$	7,696,319	$	7,925,513	$	15,402,390	$	15,871,441
Interest Expense		735,674		733,951		1,486,858		1,462,810


Net Interest Income		6,960,645		7,191,562		13,915,532		14,408,631
Provision for Loan Losses		81,818		211,535		265,994		572,903


Net Interest Income after Provision for Loan Losses		6,878,827		6,980,027		13,649,538		13,835,728
Other Income		1,851,851		2,483,622		3,603,596		4,267,102
Other Expense		6,321,150		7,045,995		12,808,124		13,414,858


Income Before Provision For Income Taxes		2,409,528		2,417,654		4,445,010		4,687,972
Provision for Income Taxes		580,941		325,135		1,022,877		798,300


Net Income	$	1,828,587	$	2,092,519	$	3,422,133	$	3,889,672


Net Income Per share - Basic	$	0.37	$	0.43	$	0.70	$	0.80


Net Income Per Share-Diluted	$	0.37	$	0.43	$	0.70	$	0.80

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

Annualized return on average equity (“ROE”) was 8.71% for the three months ended June 30, 2015, and 12.55% for the corresponding period in 2014. For the six months ended June 30, 2015, ROE was 8.20% compared to 11.50% for the six months ended June 30, 2014. In both instances, the decrease in ROE was caused by other income in the second quarter of 2014 that was the result of net proceeds from bank owned life insurance that were received after the death of an insured bank officer.

The book value per share increased to $16.80 at June 30, 2015, compared to $16.78 at December 31, 2014. The increase in book value per share reflects the amount of earnings in excess of dividends offset slightly by an increase in other comprehensive loss due to the decrease in fair value of the Corporation’s investment securities. Average assets for the six months ended June 30, 2015, were $927,327,349 compared to $884,687,654 for the year ended December 31, 2014.

NET INTEREST INCOME / NET INTEREST MARGIN

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

The annualized net interest margin was 3.39% for the quarter ended June 30, 2015 compared to 3.68% for the corresponding period of 2014. For the six months ended June 30, 2015, annualized net interest margin was 3.41% compared to 3.67% for the six months ended June 30, 2014. The decrease in net interest margin for both periods ended June 30, 2015, when compared to the same period in 2014, was the result of the decrease in yields on earning assets exceeding the decrease in rates paid on deposits and borrowed funds, as detailed below. Earning assets averaged $847,083,069 for the three months ended June 30, 2015. This represents an increase of $61,176,762, or 7.8%, over average earning assets of $785,906,307 for the three months ended June 30, 2014. The increase in average earning assets for the three months ended June 30, 2015, is the result of an increase in investment securities and loans.

Interest bearing deposits averaged $580,740,250 for the three months ended June 30, 2015. This represents an increase of $34,031,409, or 6.2%, from the average of interest bearing deposits of $546,708,481 for the three months ended June 30, 2014. This was due, in large part, to an increase in interest-bearing NOW, money market accounts and savings accounts partially offset by a decrease in certificates of deposit.

Other borrowed funds averaged $115,178,114 for the three months ended June 30, 2015. This represents a decrease of $6,017,019, or 5.0%, over the other borrowed funds of $121,195,133 for the three months ended June 30, 2014. This decrease in other borrowed funds was due to a $18,057,259 increase in the securities sold under agreement to repurchase, a $54,498 decrease in the Agribusiness Enterprise Loan Liability, a $2,607,692 decrease in Federal Funds Purchased and a decrease in the FHLB advances of $21,412,088 for the three months ended June 30, 2015, when compared to the three months ended June 30, 2014.

Interest bearing deposits averaged $570,549,460 for the six months ended June 30, 2015. This represents an increase of $26,323,986, or 4.8%, from the average of interest bearing deposits of $544,225,474 for the six months ended June 30, 2014. This was due, in large part, to an increase in interest-bearing NOW, money market accounts and savings accounts partially offset by a decrease in certificates of deposit.

Other borrowed funds averaged $125,072,207 for the six months ended June 30, 2015. This represents a decrease of $1,992,110, or 1.6%, over the other borrowed funds of $127,064,317 for the six months ended June 30, 2014. This decrease in other borrowed funds was due to a $28,681,208 increase in the securities sold under agreement to repurchase, a $56,191 decrease in the Agribusiness Enterprise Loan Liability, a $3,691,713 decrease in Federal Funds Purchased and a decrease in the FHLB advances of $26,925,414 for the six months ended June 30, 2015, when compared to the six months ended June 30, 2014.

Net interest income was $6,960,645 for the three months ended June 30, 2015, a decrease of $230,917 from $7,191,562 for the three months ended June 30, 2014, primarily due to a decrease in rate partially offset by an increase in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As to changes in rate in the three months ended June 30, 2015, the yields on earning assets decreased more than the rates paid on deposits and borrowed funds decreased from the same period in 2014. The yield on all interest bearing assets decreased 31 basis points to 3.73% in the three months ended June 30, 2015 from 4.04% for the same period in 2014. At the same time, the rate paid on all interest bearing liabilities for the three months ended June 30, 2015 dropped 1 basis point to 0.43% from 0.44% in the same period in 2014. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

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


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2015			2014			2015			2014
Interest and Fees	$	4,988,452		$	5,067,445		$	9,996,012		$	10,111,355
Average Gross Loans		406,060,056			392,156,742			403,657,500			391,776,690
Annualized Yield		4.91	%		5.17	%		4.95	%		5.16	%

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

CREDIT LOSS EXPERIENCE

As a natural corollary to the Corporation’s lending activities, some loan losses are to be expected. The risk of loss varies with the type of loan being made and the overall creditworthiness of the borrower over the term of the loan. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and for various types of loans. The Corporation attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures.

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

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

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

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


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

BALANCES:
Gross Loans	$	407,985,639		$	391,494,584		$	16,491,055		4.21	%
Allowance for Loan Losses		6,692,914			6,542,326			150,588		2.30	%
Nonaccrual Loans		12,664,110			11,854,274			809,836		6.83	%
Ratios:
Allowance for loan losses to gross loans		1.64	%		1.67	%
Net loans charged off to allowance for loan losses		1.72	%		37.58	%

The provision for loan losses for the three months ended June 30, 2015, was $81,818, a decrease of $129,717 from the $211,535 provision for the same period in 2014. The provision for loan losses for the six months ended June 30, 2015, was $265,994, a decrease of $306,909 from the $572,903 provision for the same period in 2014. The change in our loan loss provisions for the three and six months is a result of management’s assessment of inherent loss in the loan portfolio, including the impact caused by current local, national and international economic conditions. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans increased during this period due to the amount of new loans being added to the list exceeded payments received.

For the three months ended June 30, 2015, net loan losses charged to the allowance for loan losses totaled $14,726, a decrease of $18,953 from the $33,679 charged off in the same period in 2014. For the six months ended June 30, 2015, net loan losses charged to the allowance for loan losses totaled $115,406, an increase of $4,433 from the $110,973 charged off in the same period in 2014.

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

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended June 30, 2015 was $1,851,851, a decrease of $631,771, or 25.4%, from the same period in 2014. Service charges on deposit accounts decreased by $9,733, or 1.0%, to $954,093 in the three months ended June 30, 2015, compared to $963,826 for the same period in 2014. Other service charges and fees increased by $38,466, or 7.3%, to $563,161 in the three months ended June 30, 2015, compared to the same period in 2014. Other income decreased $660,504 in the three months ended June 30, 2015 from the same period in 2014 due to the net proceeds of bank owned life insurance as a result of the death of a insured bank officer. The increase in service charges on deposit accounts was the result of a increase in demand for these services and not a direct result of fee changes.

Other income for the six months ended June 30, 2015 was $3,603,596, a decrease of $663,506, or 15.5%, from the same period in 2014. Service charges on deposit accounts decreased by $52,680, or 2.8%, to $1,840,877 in the six months ended June 30, 2015, compared to $1,893,557 for the same period in 2014. Other service charges and fees increased by $85,882, or 8.5%, to $1,095,014 in the six months ended June 30, 2015, compared to the same period in 2014. Other income decreased $696,708 in the six months ended June 30, 2015 from the same period in 2014 due to the net proceeds of bank owned life insurance as a result of the death of a insured bank officer. The increase in service charges on deposit accounts was the result of a increase in demand for these services and not a direct result of fee changes.

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


	Three months Ended June 30,				Six months Ended June 30,
Other Income	2015		2014		2015		2014

BOLI Insurance	$	144,000	$	144,000	$	288,000	$	288,000
Mortgage Loan Origination Income		78,234		73,315		182,388		142,734
Income from security sales, net		—		9,102		—		9,102
Other Income		112,363		768,684		197,317		924,577


Total Other Income	$	334,597	$	995,101	$	667,705	$	1,364,413

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended June 30, 2015 and 2014 were $6,321,150 and $7,045,995, respectively, a decrease of $724,845, or 10.3%, from 2014 to 2015. Salaries and benefits increased slightly to $3,341,381 for the three months ended June 30, 2015, from $3,252,370 for the same period in 2014. Occupancy expense decreased by $274,230, or 17.5%, to $1,296,765 for the three months ended June 30, 2015, when compared to

the same period of 2014. Other operating expenses decreased by $539,626 to $1,683,004 for the three months ended June 30, 2015, when compared to the same period of 2014. This decrease is due mainly to lower loan collection costs, supply costs and insurance costs. A detail of the major expense classifications is set forth below.

Total non-interest expenses for the six months ended June 30, 2015 and 2014 were $12,808,124 and $13,414,858, respectively, a decrease of $606,734, or 4.5%, from 2014 to 2015. Salaries and benefits increased slightly to $6,696,684 for the six months ended June 30, 2015, from $6,608,207 for the same period in 2014. Occupancy expense increased by $52,202, or 2.1%, to $2,596,259 for the six months ended June 30, 2015, when compared to the same period of 2014. Other operating expenses decreased by $747,413 to $3,515,181 for the six months ended June 30, 2015, when compared to the same period of 2014. This decrease is due mainly to lower loan collection costs, supply costs and insurance costs. A detail of the major expense classifications is set forth below.

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


	Three months				Six months
	ended June 30,				ended June 30,
Other Operating Expense	2015		2014		2015		2014

Advertising		179,984		212,056		389,407		364,040
Office Supplies		116,302		202,860		274,553		380,815
Legal and Audit Fees		14,173		41,657		214,060		146,311
Telephone expense		105,670		101,877		212,101		210,313
Postage and Freight		117,888		126,660		232,136		249,051
Loan Collection Expense		44,019		328,656		91,346		398,516
Other Losses		16,494		396,082		181,748		621,575
Regulatory and related expense		192,798		196,492		380,978		388,078
Debit Card/ATM expense		112,020		1,183		197,844		166,205
Travel and Convention		75,546		69,909		141,239		106,742
Other expenses		708,110		545,198		1,199,769		1,230,948


Total Other Expense	$	1,683,004	$	2,222,630	$	3,515,181	$	4,262,594

The Corporation’s efficiency ratio for the three months ended June 30, 2015, was 69.80% compared to the 70.95% for the same period in 2014. For the six months ended June 30, 2015 and 2014, the Corporation’s efficiency ratio was 71.15% and 69.84%, respectively. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.

BALANCE SHEET ANALYSIS


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

Cash and Due From Banks	$	18,842,722	$	22,405,730	$	(3,563,008	)		-15.90	%
Interest Bearing deposits with Other Banks		11,083,914		61,481,223		(50,397,309	)		-81.97	%
Investment Securities		430,571,591		386,562,299		44,009,292			11.38	%
Loans, net		400,622,906		384,417,508		16,205,398			4.22	%
Premises and Equipment		18,782,171		19,240,230		(458,059	)		-2.38	%
Total Assets		927,000,266		921,060,681		5,939,585			0.64	%

Total Deposits		721,138,225		696,093,894		25,044,331			3.60	%

Total Stockholders’ Equity		82,077,023		81,857,786		219,237			0.27	%

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash, balances at correspondent banks and items in process of collection. The balance at June 30, 2015 was $18,842,722, a decrease of $3,563,008 from the balance of $22,405,730 at December 31, 2014, due to a decrease in the balances at correspondent banks due to a decrease in the amount of the month ending cash letter.

INVESTMENT SECURITIES

The investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. Investments at June 30, 2015, increased by $44,009,292, or 11.4%, to $430,571,591 from $386,562,299 at December 31, 2014. This increase is due to additional purchases of mortgage backed securities offset by changes in the market value of the securities portfolio.

LOANS

The loan balance increased by $16,205,398 during the six months ended June 30, 2015, to $400,622,906 from $384,417,508 at December 31, 2014. Loan demand, especially in business loan and consumer loan categories, strengthened and competition for available loans continued to be strong during the six months ended June 30, 2015. No material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the six months ended June 30, 2015, premises and equipment decreased by $458,059, or 2.4%, to $18,782,171 when compared to $19,240,230 at December 31, 2014. The decrease was due to depreciation expense exceeding the amount of property and equipment added for the period.

DEPOSITS

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

DEPOSITS


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

Noninterest-Bearing Deposits	$	141,953,804	$	145,729,932	$	(3,776,128	)		-2.59	%
Interest-Bearing Deposits		296,965,294		268,567,815		28,397,479			10.57	%
Savings Deposits		64,403,837		60,253,788		4,150,049			6.89	%
Certificates of Deposit		217,815,290		221,542,359		(3,727,069	)		-1.68	%


Total Deposits	$	721,138,225	$	696,093,894	$	25,044,331			3.60	%

Interest-bearing deposits and savings increased while certificates of deposit and noninterest-bearing deposits decreased during the six months ended June 30, 2015. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management. These rate adjustments impact deposit balances.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to Note 2 to the consolidated financial statements included in this Quarterly Report for a discussion of the nature and extent of the Corporation’s off-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

CONTRACTUAL OBLIGATIONS

There have been no material changes outside of the ordinary course of the Corporation’s business to the contractual obligations set forth in Note 12 to the Corporation’s financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

The Corporation’s strategies and its management’s ability to react to changing competitive and economic environments have historically enabled the Corporation to compete effectively and manage risks to acceptable levels. The Corporation has outlined potential risks below that it presently believes could be important; however, other risks may prove to be important in the future. New risks may emerge at any time and the Corporation cannot predict with certainty all potential developments that could affect the Corporation’s financial condition or results of operation. The following discussion highlights potential risks, which could intensify over time or shift dynamically in a way that might change the Corporation’s risk profile.

Competition Risks

The market in which the Corporation competes is saturated with community banks seeking to provide a service-oriented banking experience to individuals and businesses compared with what the Corporation believes is the more rigid and less friendly environment found in larger banks. This requires the Corporation to offer most, if not all, of the products and conveniences that are offered by the larger banks with a service differentiation. In doing so, it is imperative that the Corporation identify the lines of business that the Corporation can excel in, prudently utilize the Corporation’s available capital to acquire the people and platforms required thereof, and execute on the strategy.

Credit Risks

Like all lenders, the Corporation faces the risk that the Corporation’s customers may not repay their loans and that the realizable value of collateral may be insufficient to avoid a loss of principal. In the Corporation’s business, some level of credit loss is unavoidable and overall levels of credit loss can vary over time. The Corporation’s ability to manage credit risk depends primarily upon the Corporation’s ability to assess the creditworthiness of customers and the value of collateral, including real estate. The Corporation controls credit risk by diversifying the Corporation’s loan portfolio and managing its composition, and by recording and managing an allowance for expected loan losses in accordance with applicable accounting rules. At the end of June 30, 2015, the Corporation had approximately $6.6 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 take into account changes in the competitive environment, in real estate prices and other collateral values, and in the economy, among other things, based on the Corporation’s experience originating loans and servicing loan portfolios.

Financing, Funding and Liquidity Risks

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

The Corporation’s assets and liabilities are principally financial in nature and the resulting earnings thereon are subject to significant variability due to the timing and extent to which the Corporation can reprice the yields on interest-earning assets and the costs of interest bearing liabilities as a result of changes in market interest rates. Interest rates in the financial markets affect the Corporation’s decisions on pricing its assets and liabilities, which impacts net interest income, an important cash flow stream for the Corporation. As a result, a substantial part of the Corporation’s risk-management activities are devoted to managing interest-rate risk. Currently, the Corporation does not have any significant risks related to foreign currency exchange, commodities or equity risk exposures.

Interest Rate and Yield Curve Risks

A significant portion of the Corporation’s business involves borrowing and lending money. Accordingly, changes in interest rates directly impact the Corporation’s revenues and expenses, and potentially could compress the Corporation’s net interest margin. The Corporation actively manages its balance sheet to control the risks of a reduction in net interest margin brought about by ordinary fluctuations in rates.

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

Regulatory and Legal Risks

The Corporation operates in a heavily regulated industry and therefore is subject to many banking, deposit, and consumer lending as well as the rules and regulations promulgated by the Securities and Exchange Commission and the NASDAQ. Failure to comply with applicable regulations could result in financial or operational penalties. In addition, efforts to comply with applicable regulations may increase the Corporation’s costs and, or limit the Corporation’s ability to pursue certain business opportunities. Federal and state regulations significantly limit the types of activities in which the Corporation, as a financial institution, may engage. In addition, the Corporation is subject to a wide array of other regulations that govern other aspects of how the Corporation conducts business, such as in the areas of employment and intellectual property. Federal and state legislative and regulatory authorities occasionally consider changing these regulations or adopting new ones. Such actions could limit the amount of interest or fees the Corporation can charge, could restrict the Corporation’s ability to collect loans or realize on

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

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

Accounting Estimate Risks

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

Expense Control

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

ITEM 4.

CONTROLS AND PROCEDURES.

The management of the Corporation, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Corporation’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of June 30, 2015 (the end of the period covered by this Quarterly Report on Form 10-Q).

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

PART II. OTHER INFORMATION

ITEM 1A.

RISK FACTORS.

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

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

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

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

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

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

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

ITEM 6.

EXHIBITS.

Exhibits


31(a)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

31(b)		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

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

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

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

SIGNATURES

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


CITIZENS HOLDING COMPANY

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

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

DATE: August 6, 2015

EXHIBIT INDEX


Exhibit Number		Description of Exhibit

31(a)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)

31(b)		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)

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

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

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