CITIZENS HOLDING CO /MS/ - Quarter Report: 2016 March (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 March 31, 2016

¨	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. (Check one):

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of May 6, 2016:


Title		Outstanding
Common Stock, $0.20 par value		4,875,079

CITIZENS HOLDING COMPANY

INTERIM FINANCIAL STATEMENTS FOR QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION		1

	Item 1.	Consolidated Financial Statements.	1

		Consolidated Statements of Condition March 31, 2016 (Unaudited) and December 31, 2015 (Audited)	1

		Consolidated Statements of Income Three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited)	2

		Consolidated Statements of Comprehensive Income Three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited)	3

		Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited)	4

		Notes to Consolidated Financial Statements	5

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

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	42

	Item 4.	Controls and Procedures.	45

PART II.	OTHER INFORMATION		46

	Item 1.	Legal Proceedings.*

	Item 1A.	Risk Factors.	46

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

	Item 3.	Defaults Upon Senior Securities.*

	Item 4.	Mine Safety Disclosures.*

	Item 5.	Other Information.*

	Item 6.	Exhibits.	47

	* None or Not Applicable

SIGNATURES			48

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION

(UNAUDITED)


	March 31,			December 31,
	2016			2015
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	26,580,832		$	14,947,690
Interest bearing deposits with other banks		885,772			42,267,777
Investment securities held to maturity, at amortized cost		151,878,035			161,043,404
Investment securities available for sale, at fair value		349,283,254			267,264,403
Loans, net of allowance for loan losses of $5,008,742 in 2016 and $6,473,703 in 2015		409,467,272			423,108,391
Premises and equipment, net		18,444,639			18,655,691
Other real estate owned, net		3,382,908			3,572,744
Accrued interest receivable		4,727,100			3,928,106
Cash value of life insurance		23,304,933			23,133,644
Deferred tax assets, net		7,692,152			9,165,417
Other assets		6,643,793			6,417,275

TOTAL ASSETS	$	1,002,290,690		$	973,504,542

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	151,934,846		$	148,724,257
Interest-bearing NOW and money market accounts		362,386,736			323,381,170
Savings deposits		72,461,071			70,534,886
Certificates of deposit		203,507,752			210,764,475

Total deposits		790,290,405			753,404,788
Securities sold under agreement to repurchase		94,836,191			104,298,182
Federal Funds Purchased		—			—
Federal Home Loan Bank advances		20,000,000			20,000,000
Accrued interest payable		175,948			179,995
Deferred compensation payable		7,838,385			7,718,624
Other liabilities		648,198			1,477,617

Total liabilities		913,789,127			887,079,206
SHAREHOLDERS’ EQUITY
Common stock; $.20 par value, 22,500,000 shares authorized, 4,875,079 shares outstanding at March 31, 2016 and December 31, 2015		975,016			975,016
Additional paid-in capital		3,652,642			3,617,279
Retained earnings		89,305,292			88,949,360
Accumulated other comprehensive loss, net of tax benefit of $3,231,113 in 2016 and $4,233,473 in 2015		(5,431,387	)		(7,116,319	)

Total shareholders’ equity		88,501,563			86,425,336

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,002,290,690		$	973,504,542

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME


	For the Three Months
	Ended March 31,
	2016		2015
INTEREST INCOME
Loans, including fees	$	4,784,505	$	5,007,560
Investment securities		2,715,730		2,668,472
Other interest		79,499		30,039

Total interest income		7,579,734		7,706,071
INTEREST EXPENSE
Deposits		468,458		432,153
Other borrowed funds		300,602		319,031

Total interest expense		769,060		751,184

NET INTEREST INCOME		6,810,674		6,954,887
PROVISION FOR LOAN LOSSES		60,498		184,176

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,750,176		6,770,711
OTHER INCOME
Service charges on deposit accounts		886,804		886,784
Other service charges and fees		586,422		531,853
Other income		342,462		333,108

Total other income		1,815,688		1,751,745

OTHER EXPENSES
Salaries and employee benefits		3,402,318		3,355,303
Occupancy expense		1,329,204		1,299,494
Other operating expense		1,912,793		1,832,177

Total other expenses		6,644,315		6,486,974

INCOME BEFORE PROVISION FOR INCOME TAXES		1,921,549		2,035,482
PROVISION FOR INCOME TAXES		395,379		441,936

NET INCOME	$	1,526,170	$	1,593,546

NET INCOME PER SHARE -Basic	$	0.31	$	0.33

-Diluted	$	0.31	$	0.33

DIVIDENDS PAID PER SHARE	$	0.24	$	0.23

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

CITIZENS HOLDING COMPANY AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	For the Three Months
	Ended March 31,
	2016			2015
Net income	$	1,526,170		$	1,593,546
Other comprehensive income
Securities available-for-sale
Unrealized holding gains		1,856,204			954,036
Income tax effect		(692,364	)		(355,856	)

		1,163,840			598,180
Securities transferred from available-for-sale to held-to-maturity
Amortization of net unrealized losses during the period		831,088			944,029
Income tax effect		(309,996	)		(352,122	)

		521,092			591,907
Total other comprehensive income		1,684,932			1,190,087

Comprehensive income	$	3,211,102		$	2,783,633

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Three Months
	Ended March 31,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	792,198		$	1,448,541
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		27,129,213			11,369,636
Proceeds from maturities and calls of securities held to maturity		10,000,000			10,000,000
Purchases of investment securities available for sale		(107,664,521	)		(56,842,228	)
Purchases of bank premises and equipment		(29,244	)		(24,149	)
Decrease in interest bearing deposits with other banks		41,382,005			25,475,867
Proceeds from sale of other real estate		194,739			626,440
Redemption of Federal Home Loan Bank Stock		—			150,700
Net decrease (increase) in loans		13,575,364			(15,381,437	)

Net cash used by investing activities		(15,412,444	)		(24,625,171	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		36,885,617			20,679,970
Net change in securities sold under agreement to repurchase		(9,461,991	)		2,687,470
Payment of dividends		(1,170,238	)		(1,121,851	)

Net cash provided by (used by) financing activities		26,253,388			22,245,589

Net increase (decrease) in cash and due from banks		11,633,142			(931,041	)
Cash and due from banks, beginning of period		14,947,690			22,405,730

Cash and due from banks, end of period	$	26,580,832		$	21,474,689

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 months ended March 31, 2016

(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 interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 2016 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

The interim consolidated financial statements of Citizens Holding Company 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, 2015, filed with the Securities and Exchange Commission on March 15, 2016.

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 March 31, 2016, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $38,075,421 compared to an aggregate unused balance of $44,358,972 at December 31, 2015. There was $2,954,980 of letters of credit outstanding at March 31, 2016 and $2,860,480 at December 31, 2015. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments 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
	Ended March 31,
	2016		2015
Basic weighted average shares outstanding		4,875,079		4,876,114
Dilutive effect of granted options		10,061		599

Diluted weighted average shares outstanding		4,885,140		4,876,713

Net income	$	1,526,170	$	1,593,546
Net income per share-basic	$	0.31	$	0.33
Net income per share-diluted	$	0.31	$	0.33

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 three months ended March 31, 2016.


	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, 2015		87,000	$	21.35		23,000		$	23.46		—	$	—
Granted		—		—		—			—		—		—
Exercised		—		—		—			—		—		—
Expired		—		—		(23,000	)		23.46		—		—

Outstanding at March 31, 2016		87,000	$	21.35		—		$	—		—	$	—

The intrinsic value of options previously granted under the Directors’ Plan at March 31, 2016, was $99,060, the intrinsic value of options previously granted under the Employees’ Plan at March 31, 2016, 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 March 31, 2016, of $99,060.

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 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 have 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 de-recognition, 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 March 31, 2016, 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 2016 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 2012. 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:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
March 31, 2016	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	146,598,052	$	96,320	$	942,938	$	145,751,434
Mortgage backed securities		110,024,866		650,298		620,773		110,054,391
State, County, Municipals		87,930,739		2,773,676		153,173		90,551,242
Other investments		2,917,746		8,441		—		2,926,187

Total	$	347,471,403	$	3,528,735	$	1,716,884	$	349,283,254


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
December 31, 2015	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	83,826,411	$	1,100	$	1,577,145	$	82,250,366
Mortgage backed securities		92,602,875		467,693		1,348,603		91,721,965
State, County, Municipals		87,948,336		2,609,469		181,442		90,376,363
Other investments		2,931,134		—		15,425		2,915,709

Total	$	267,308,756	$	3,078,262	$	3,122,615	$	267,264,403

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 $10,474,351 and $11,305,438 at March 31, 2016 and December 31, 2015, 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:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
March 31, 2016	Cost		Gains		Losses		Fair Value
Securities held-to-maturity
Obligations of U.S.
Government agencies	$	151,878,035	$	9,769,573	$	—	$	161,647,608

Total	$	151,878,035	$	9,769,573	$	—	$	161,647,608


			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
December 31, 2015	Cost		Gains		Losses		Fair Value
Securities held-to-maturity
Obligations of U.S.
Government agencies	$	161,043,404	$	8,002,431	$	—	$	169,045,835

Total	$	161,043,404	$	8,002,431	$	—	$	169,045,835

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2016 and December 31, 2015 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.


	March 31, 2016				December 31, 2015
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available-for-sale
Due in one year or less	$	4,204,000	$	4,257,219	$	3,008,448	$	3,028,887
Due after one year through five years		23,678,630		24,102,941		13,587,885		13,985,525
Due after five years through ten years		107,334,268		107,780,960		80,749,532		80,346,720
Due after ten years		212,254,504		213,142,134		169,962,891		169,903,271

Total	$	347,471,402	$	349,283,254	$	267,308,756	$	267,264,403

Held-to-maturity
Due after five years through ten years	$	37,118,407	$	39,123,393	$	37,052,187	$	38,528,059
Due after ten years		114,759,628		122,524,215		123,991,217		130,517,776

Total	$	151,878,035	$	161,647,608	$	161,043,404	$	169,045,835

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 March 31, 2016 and December 31, 2015.

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


	Less than 12 months				12 months or more				Total
March 31, 2016	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U. S. government agencies	$	70,734	$	748	$	13,888	$	195	$	84,622	$	943
Mortgage backed securities		39,825		302		35,118		319		74,943		621
State, County, Municipal		2,928		17		8,854		136		11,782		153

Total	$	113,487	$	1,067	$	57,860	$	650	$	171,347	$	1,717


	Less than 12 months				12 months or more				Total
December 31, 2015	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U. S. government agencies	$	50,915	$	716	$	26,335	$	861	$	77,250	$	1,577
Mortgage backed securities		83,001		1,349		—		—		83,001		1,349
State, County, Municipal		2,393		10		12,623		172		15,016		182
Other investments		—		—		2,916		15		2,916		15

Total	$	136,309	$	2,075	$	41,874	$	1,048	$	178,183	$	3,123

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 March 31, 2016 or at December 31, 2015.

Note 7. Loans

The composition of net loans (in thousands) at March 31, 2016 and December 31, 2015 is as follows:


	March 31, 2016			December 31, 2015
Real Estate:
Land Development and Construction	$	26,545		$	33,133
Farmland		20,591			23,293
1-4 Family Mortgages		102,135			104,046
Commercial Real Estate		184,931			180,691

Total Real Estate Loans		334,202			341,163
Business Loans:
Commercial and Industrial Loans		53,889			61,425
Farm Production and Other Farm Loans		987			1,055

Total Business Loans		54,876			62,480
Consumer Loans:
Credit Cards		941			1,061
Other Consumer Loans		25,312			25,564

Total Consumer Loans		26,253			26,625

Total Gross Loans		415,331			430,268
Unearned income		(855	)		(686	)
Allowance for loan losses		(5,009	)		(6,474	)

Loans, net	$	409,467		$	423,108

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:


	March 31, 2016		December 31, 2015
Real Estate:
Land Development and Construction	$	147	$	75
Farmland		548		158
1-4 Family Mortgages		2,421		2,464
Commercial Real Estate		9,659		11,662

Total Real Estate Loans		12,775		14,359
Business Loans:
Commercial and Industrial Loans		93		28

Total Business Loans		93		28
Consumer Loans:
Other Consumer Loans		45		36

Total Consumer Loans		45		36

Total Non-Accrual Loans	$	12,913	$	14,423

An aging analysis of past due loans (in thousands), segregated by class, as of March 31, 2016, was as follows:


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days		Total Past		Current		Total		Days
	Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	274	$	366	$	640	$	25,905	$	26,545	$	288
Farmland		286		395		681		19,910		20,591		—
1-4 Family Mortgages		2,982		871		3,853		98,282		102,135		24
Commercial Real Estate		996		2,808		3,804		181,127		184,931		15

Total Real Estate Loans		4,538		4,440		8,978		325,223		334,202		327
Business Loans:
Commercial and Industrial Loans		102		90		192		53,697		53,889		9
Farm Production and Other Farm Loans		—		—		—		987		987		—

Total Business Loans		102		90		192		54,684		54,876		9
Consumer Loans:
Credit Cards		12		—		12		929		941		—
Other Consumer Loans		673		—		673		24,639		25,312		—

Total Consumer Loans		685		—		685		25,568		26,253		—

Total Loans	$	5,325	$	4,530	$	9,855	$	405,476	$	415,331	$	336

An aging analysis of past due loans (in thousands), segregated by class, as of December 31, 2015 was as follows:


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days		Total Past		Current		Total		Days
	Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	1,126	$	21	$	1,147	$	31,986	$	33,133	$	21
Farmland		947		4		951		22,342		23,293		4
1-4 Family Mortgages		5,131		573		5,704		98,342		104,046		—
Commercial Real Estate		4,015		6,748		10,763		169,928		180,691		—

Total Real Estate Loans		11,219		7,346		18,565		322,598		341,163		25

Business Loans:
Commercial and Industrial Loans		245		12		257		61,168		61,425		12
Farm Production and other Farm Loans		12		—		12		1,043		1,055		—

Total Business Loans		257		12		269		62,211		62,480		12

Consumer Loans:
Credit Cards		12		9		21		1,040		1,061		9
Other Consumer Loans		1,017		30		1,047		24,517		25,564		30

Total Consumer Loans		1,029		39		1,068		25,557		26,625		39

Total Loans	$	12,505	$	7,397	$	19,902	$	410,366	$	430,268	$	76

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

Impaired loans (in thousands) as of March 31, 2016 and December 31, 2015, segregated by class, are as follows:


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
March 31, 2016	Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	—	$	—	$	—	$	—	$	—	$	40
Farmland		—		—		—		—		—		343
1-4 Family Mortgages		2,227		—		2,227		2,227		242		2,756
Commercial Real Estate		8,899		—		8,899		8,899		1,138		10,519

Total Real Estate Loans		11,126		—		11,126		11,126		1,380		13,658
Business Loans:
Commercial and Industrial Loans		—		—		—		—		—		—

Total Business Loans		—		—		—		—		—		—
Consumer Loans:
Other Consumer Loans		—		—		—		—		—		—

Total Consumer Loans		—		—		—		—		—		—

Total Loans	$	11,126	$	—	$	11,126	$	11,126	$	1,380	$	13,658

During the first quarter of 2016, management reviewed the impaired loan listing according to the Corporation’s policy of reviewing individual loans for impairment over $100,000. During this review, 97 loans under that threshold in the amount of $2,731,121 and 6 loans in the amount of $1,651,023 that were over the threshold but were determined to not be impaired at March 31, 2016, were removed from the impaired loan listing. Management believes this more accurately reflects the amount of impaired loans evaluated for impairment as part of the computation of the allowance for loan losses.


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
December 31, 2015	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	75	$	—	$	75	$	75	$	75	$	85
Farmland		679		69		610		679		54		739
1-4 Family Mortgages		3,103		1,754		1,349		3,103		183		2,829
Commercial Real Estate		11,661		1,409		10,253		11,662		2,685		10,552

Total Real Estate Loans		15,518		3,232		12,287		15,519		2,997		14,205

Business Loans:
Commercial and Industrial Loans		28		28		—		28		—		49

Total Business Loans		28		28		—		28		—		49

Consumer Loans:
Other Consumer Loans		35		36		—		36		—		78

Total Consumer Loans		35		36		—		36		—		78

Total Loans	$	15,581	$	3,296	$	12,287	$	15,583	$	2,997	$	14,332

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


			Pre-Modification		Post-Modification
March 31, 2016			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
Commercial real estate		3	$	6,850	$	3,607

Total		3	$	6,850	$	3,607


			Pre-Modification		Post-Modification
December 31, 2015			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
Commercial real estate		3	$	4,871	$	3,858

Total		3	$	4,871	$	3,858

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, 2016		3	$	3,858
Reductions due to:
Principal paydowns				(251	)

Total at March 31, 2016		3	$	3,607

The allocated allowance for loan losses attributable to restructured loans was $174,274 at March 31, 2016 and December 31, 2015. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructurings as of March 31, 2016.

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 September 30, 2015.

The following table details the amount of gross loans (in thousands), segregated by loan grade and class, as of March 31, 2016:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
Grades	1, 2, 3, 4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	24,903	$	325	$	1,317	$	—	$	—	$	26,545
Farmland		18,369		872		1,350		—		—		20,591
1-4 Family Mortgages		87,213		3,382		11,540		—		—		102,135
Commercial Real Estate		162,746		8,898		13,287		—		—		184,931

Total Real Estate Loans		293,231		13,477		27,494		—		—		334,202
Business Loans:
Commercial and Industrial Loans		53,319		352		218		—		—		53,889
Farm Production and Other Farm Loans		987		—		—		—		—		987

Total Business Loans		54,306		352		218		—		—		54,876
Consumer Loans:
Credit Cards		941		—		—		—		—		941
Other Consumer Loans		25,044		129		132		6		1		25,312

Total Consumer Loans		25,985		129		132		6		1		26,253

Total Loans	$	373,522	$	13,958	$	27,844	$	6	$	1	$	415,331

The following table details the amount of gross loans (in thousands) segregated by loan grade and class, as of December 31, 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	$	31,889	$	202	$	1,042	$	—	$	—	$	33,133
Farmland		21,084		989		1,220		—		—		23,293
1-4 Family Mortgages		88,425		4,874		10,747		—		—		104,046
Commercial Real Estate		155,898		12,286		12,507		—		—		180,691

Total Real Estate Loans		297,296		18,351		25,516		—		—		341,163

Business Loans:
Commercial and Industrial Loans		60,918		377		130		—		—		61,425
Farm Production and other Farm Loans		1,055		—		—		—		—		1,055

Total Business Loans		61,973		377		130		—		—		62,480

Consumer Loans:
Credit Cards		1,052		—		9		—		—		1,061
Other Consumer Loans		24,666		111		777		7		3		25,564

Total Consumer Loans		25,718		111		786		7		3		26,625

Total Loans	$	384,987	$	18,839	$	26,432	$	7	$	3	$	430,268

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 three months ended March 31, 2016:


	Real			Business
March 31, 2016	Estate			Loans			Consumer			Total
Beginning Balance, January 1, 2016	$	5,238,895		$	643,248		$	591,560		$	6,473,703
Provision for possible loan losses		(5,593	)		(39,517	)		105,608			60,498
Chargeoffs		1,557,871			79			12,361			1,570,311
Recoveries		8,806			6,005			30,041			44,852

Net Chargeoffs		1,549,065			(5,926	)		(17,680	)		1,525,459

Ending Balance	$	3,684,237		$	609,657		$	714,848		$	5,008,742

Period end allowance allocated to:
Loans individually evaluated for impairment	$	1,379,937		$	—		$	—		$	1,379,937
Loans collectively evaluated for impairment		2,304,300			609,657			714,848			3,628,805

Ending Balance, March 31, 2016	$	3,684,237		$	609,657		$	714,848		$	5,008,742

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015:


	Real			Business
March 31, 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		(70,244	)		161,169			93,251		184,176
Chargeoffs		95,199			—			56,127		151,326
Recoveries		32,298			3,974			14,374		50,646

Net Chargeoffs		62,901			(3,974	)		41,753		100,680

Ending Balance, March 31, 2015	$	5,069,006		$	1,038,958		$	517,858	$	6,625,822

Period end allowance allocated to:
Loans individually evaluated for impairment	$	2,005,196		$	25,000		$	—	$	2,030,196
Loans collectively evaluated for impairment		3,063,810			1,013,958			517,858		4,595,626

Ending Balance, March 31, 2015	$	5,069,006		$	1,038,958		$	517,858	$	6,625,822

The Corporation’s recorded investment in loans as of March 31, 2016 and December 31, 2015 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
March 31, 2016	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	11,126	$	—	$	—	$	11,126
Loans collectively evaluated for general impairment		323,076		54,876		26,253		404,205

	$	334,202	$	54,876	$	26,253	$	415,331


	Real		Business
December 31, 2015	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	15,519	$	28	$	36	$	15,583
Loans collectively evaluated for general impairment		325,644		62,452		26,589		414,685

	$	341,163	$	62,480	$	26,625	$	430,268

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 March 31, 2016:


	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U. S.
Government Agencies	$	—	$	145,751,434	$	—	$	145,751,434
Mortgage-backed securities		—		110,054,390		—		110,054,390
State, county and municipal obligations		—		90,551,243		—		90,551,243
Other investments		—		—		2,926,187		2,926,187

Total	$	—	$	346,357,067	$	2,926,187	$	349,283,254

The following table presents assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2015:


	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U. S.
Government Agencies	$	—	$	82,250,366	$	—	$	82,250,366
Mortgage-backed securities		—		91,721,965		—		91,721,965
State, county and municipal obligations		—		90,376,363		—		90,376,363
Other investments		—		—		2,915,709		2,915,709

Total	$	—	$	264,348,694	$	2,915,709	$	267,264,403

The following table reports the activity for 2016 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, 2016	$	2,915,709
Principal payments received		(15,190	)
Unrealized gains included in other comprehensive income		25,668

Balance at March 31, 2016	$	2,926,187

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 2016 that were still held in the balance sheet at March 31, 2016, the following table provides the hierarchy level and the fair value of the related assets:


	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	7,768,597	$	7,768,597
Other real estate owned		—		—		5,257		5,257

Total	$	—	$	—	$	7,773,854	$	7,773,854

For assets measured at fair value on a nonrecurring basis during 2015 that were still held in the balance sheet at December 31, 2015, the following table provides the hierarchy level and the fair value of the related assets:


	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	8,926,364	$	8,926,364
Other real estate owned		—		—		538,262		538,262

Total	$	—	$	—	$	9,464,626	$	9,464,626

Impaired loans with a carrying value of $11,126,314 and $12,286,822 had an allocated allowance for loan losses of $1,379,937 and $2,996,708 at March 31, 2016 and December 31, 2015, 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 three-month period ended March 31, 2016, and recorded at fair value, less costs to sell, was $5,257, of which $0 was acquired and sold during this period. There were no writedowns during the period on properties owned. OREO acquired during 2015 and recorded at fair value, less costs to sell, was $869,564. There were no additional writedowns during 2015 on OREO acquired in previous years.

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 March 31, 2016, and December 31, 2015:


			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
March 31, 2016	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	26,580,832	$	26,580,832	$	—	$	—	$	26,580,832
Interest bearing deposits with banks		885,772		885,772		—		—		885,772
Securities held-to-maturity		151,878,035				161,647,608				161,647,608
Securities available-for-sale		349,283,254		—		346,357,067		2,926,187		349,283,254
Net loans		409,467,272		—		—		411,200,310		411,200,310
Financial liabilities
Deposits	$	790,290,405	$	586,782,653	$	—	$	203,645,742	$	790,428,395
Federal Home Loan Bank advances		20,000,000		—		—		20,585,185		20,585,185
Securities Sold under Agreement to Repurchase		94,836,191		94,836,191		—		—		94,836,191


			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
December 31, 2015	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	14,947,690	$	14,947,690	$	—	$	—	$	14,947,690
Interest bearing deposits with banks		42,267,777		42,267,777		—		—		42,267,777
Securities available-for-sale		267,264,403		—		264,348,694		2,915,709		267,264,403
Securities held-to-maturity		161,043,404		—		169,045,835		—		169,045,835
Net loans		423,108,391		—		—		425,096,569		425,096,569
Financial liabilities
Deposits	$	753,404,788	$	542,640,313	$	—	$	210,890,430	$	753,530,743
Federal Home Loan Bank advances		20,000,000		—		—		20,534,935		20,534,935
Securities Sold under Agreement to Repurchase		104,298,182		104,298,182		—		—		104,298,182

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”, in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Item 3,“Quantitive and Qualitative Disclosure and Market Risk.” 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 March 31, 2016, was 37.39% and at December 31, 2015, was 32.73%. The increase was due to an increase in short term marketable assets at March 31, 2016. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $790,290,405 at March 31, 2016, and $753,404,788 at December 31, 2015. 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 $349,283,254 invested in available-for-sale investment securities at March 31, 2016, and $267,264,403 at December 31, 2015. The Corporation also had $885,772 in interest bearing deposits at other banks at March 31, 2016 and $42,267,777 at December 31, 2015. 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 March 31, 2016 and December 31, 2015. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At March 31, 2016, the Corporation had unused and available $144,577,713 of its line of credit with the FHLB and at December 31, 2015, the Corporation had unused and available $146,840,812 of its line of credit with the FHLB. The decrease in the amount available under the Corporation’s line of credit with the FHLB from the end of 2015 to March 31, 2016, was the result of a decrease in the amount of loans eligible for the collateral pool. The Corporation had no federal funds purchased as of March 31, 2016 and December 31, 2015. 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 $88,501,563 at March 31, 2016, as compared to $86,425,336 at December 31, 2015. The increase in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment as well as the increase in the amount of earnings in excess of dividends paid. The market value increase was due to general market conditions, specifically the decrease in medium term interest rates, which caused an increase in the market price of the investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $1,170,238, or $0.24 per share, during the three-month period ended March 31, 2016.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of March 31, 2016, the Corporation meets all capital adequacy requirements to which it is subject.


											Minimum Capital
						Minimum Capital					Requirement to be
						Requirement to be					Adequately
	Actual					Well Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2016
Citizens Holding Company
Tier 1 leverage ratio	$	90,783		9.26	%	$	48,999		5.00	%	$	39,199		4.00	%
Common Equity tier 1 capital ratio		90,783		9.26	%		63,698		6.50	%		44,099		4.50	%
Tier 1 risk-based capital ratio		90,783		16.82	%		43,181		8.00	%		32,386		6.00	%
Total risk-based capital ratio		95,792		17.75	%		53,977		10.00	%		43,181		8.00	%
December 31, 2015
Citizens Holding Company
Tier 1 leverage ratio	$	90,392		9.26	%	$	48,822		5.00	%	$	39,058		4.00	%
Common Equity tier 1 capital ratio		96,866		9.26	%		63,469		6.50	%		43,940		4.50	%
Tier 1 risk-based capital ratio		90,392		16.37	%		33,131		6.00	%		22,087		4.00	%
Total risk-based capital ratio		96,866		17.54	%		55,219		10.00	%		44,175		8.00	%

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

•

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

•

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 March 31, 2016, 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
	Ended March 31,
	2016		2015
Interest Income, including fees	$	7,579,734	$	7,706,071
Interest Expense		769,060		751,184

Net Interest Income		6,810,674		6,954,887
Provision for Loan Losses		60,498		184,176

Net Interest Income after
Provision for Loan Losses		6,750,176		6,770,711
Other Income		1,815,688		1,751,745
Other Expense		6,644,315		6,486,974

Income Before Provision For
Income Taxes		1,921,549		2,035,482
Provision for Income Taxes		395,379		441,936

Net Income	$	1,526,170	$	1,593,546

Net Income Per share - Basic	$	0.31	$	0.33

Net Income Per Share-Diluted	$	0.31	$	0.33

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 7.69% for the three months ended March 31, 2016, and March 31, 2015

The book value per share increased to $18.15 at March 31, 2016, compared to $17.73 at December 31, 2015. The increase in book value per share reflects the amount of earnings in excess of dividends and by a decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities. Average assets for the three months ended March 31, 2016, were $983,129,715 compared to $945,269,885 for the year ended December 31, 2015.

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 3.12% for the quarter ended March 31, 2016 compared to 3.42% for the corresponding period of 2015. The decrease in net interest margin for the period ended March 31, 2016, when compared to the same period in 2015, 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 $900,989,704 for the three months ended March 31, 2016. This represents an increase of $55,365,395, or 6.5%, over average earning assets of $845,624,309 for the three months ended March 31, 2015. The increase in average earning assets for the three months ended March 31, 2016, is the result of an increase in investment securities.

Interest bearing deposits averaged $618,285,369 for the three months ended March 31, 2016. This represents an increase of $58,039,929, or 10.4%, from the average of interest bearing deposits of $560,245,440 for the three months ended March 31, 2015. 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 $122,714,079 for the three months ended March 31, 2016. This represents a decrease of $12,362,155, or 9.2%, over the other borrowed funds of $135,076,234 for the three months ended March 31, 2015. This decrease in other borrowed funds was due to a $12,353,727 decrease in the securities sold under agreement to repurchase, a $15,021 decrease in the Agribusiness Enterprise Loan Liability offset by a $6,593 increase in Federal Funds Purchased for the three months ended March 31, 2016, when compared to the three months ended March 31, 2015.

Net interest income was $6,810,674 for the three months ended March 31, 2016, a decrease of $144,213 from $6,954,887 for the three months ended March 31, 2015, 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 March 31, 2016, the yields on earning assets decreased more than the rates paid on deposits and borrowed funds decreased from the same period in 2015. The yield on all interest bearing assets decreased 32 basis points to 3.46% in the three months ended March 31, 2016 from 3.78% for the same period in 2015. At the same time, the rate paid on all interest bearing liabilities for the three months ended March 31, 2016 dropped 3 basis points to 0.41% from 0.44% in the same period in 2015. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

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


	For the Three Months
	Ended March 31,
	2016			2015
Interest and Fees	$	4,784,505		$	5,007,560
Average Gross Loans		419,804,332			401,228,249
Annualized Yield		4.56	%		4.99	%

The decrease in interest rates in the three months ended March 31, 2016, 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
	March 31,			December 31,			Increase			Increase
	2016			2015			(Decrease)			(Decrease)
BALANCES:
Gross Loans	$	415,331,361		$	430,267,746		$	(14,936,385	)		-3.47	%
Allowance for Loan Losses		5,008,742			6,473,703			(1,464,961	)		-22.63	%
Nonaccrual Loans		12,912,358			14,422,613			(1,510,255	)		-10.47	%
Ratios:
Allowance for loan losses to gross loans		1.21	%		1.50	%
Net loans charged off to allowance for loan losses		30.46	%		9.66	%

The provision for loan losses for the three months ended March 31, 2016, was $60,498, a decrease of $123,678 from the $184,176 provision for the same period in 2015. The change in The Corporation’s loan loss provisions for the three 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 decreased during this period due to the amount of payments received and loans charged off in excess of new loans being added to the nonaccrual loan list.

For the three months ended March 31, 2016, net loan losses charged to the allowance for loan losses totaled $1,525,459, an increase of $1,424,779 from the $100,680 charged off in the same period in 2015. The net loan losses for the period ended March 31, 2016 contained a $1,523,401 loss on a single, long-term commercial real estate loan that the Corporation had previously provided for a specific reserve against this loss through the provision for loan loss.

Management reviews quarterly with the Corporation’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three months ended March 31, 2016 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended March 31, 2016 was $1,815,688, an increase of $63,943, or 3.7%, from the same period in 2015. Service charges on deposit accounts was $886,804 in the three months ended March 31, 2016, compared to $886,784 for the same period in 2015. Other service charges and fees increased by $54,569, or 10.3%, to $586,422 in the three months ended March 31, 2016, compared to $531,853 for the same period in 2015. Other income increased $9,354, or 2.8% to $342,462 in the three months ended March 31, 2016, compared to $333,108 for the same period of 2015.

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


	Three months
	Ended March 31,
Other Income	2016		2015
BOLI Insurance	$	136,000	$	144,000
Mortgage Loan Origination Income		99,816		104,154
Other Income		106,646		84,954

Total Other Income	$	342,462	$	333,108

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 March 31, 2016 and 2015 were $6,644,315 and $6,486,974, respectively, an increase of $157,341, or 2.4%. Salaries and benefits increased slightly to $3,402,318 for the three months ended March 31, 2016, from $3,355,303 for the same period in 2015. Occupancy expense increased by $29,710, or 2.3%, to $1,329,204 for the three months ended March 31, 2016, compared to $1,299,494 for the same period of 2015. Other operating expenses increased by $80,616 to $1,912,793 for the three months ended March 31, 2016, compared to $1,832,177 for the same period of 2015. A detail of the major expense classifications is set forth below.

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


	Three months
	ended March 31,
Other Operating Expense	2016		2015
Advertising		252,562		209,423
Office Supplies		157,783		158,251
Legal and Audit Fees		112,897		199,887
Telephone expense		100,715		106,431
Postage and Freight		130,506		114,248
Loan Collection Expense		44,710		47,327
Other Losses		166,729		165,254
Regulatory and related expense		209,321		188,180
Debit Card/ATM expense		88,520		78,842
Travel and Convention		76,521		65,693
Other expenses		572,529		498,641

Total Other Expense	$	1,912,793	$	1,832,177

The Corporation’s efficiency ratio for the three months ended March 31, 2016, was 74.89% compared to the 72.51% for the same period in 2015. 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


					Amount of			Percent of
	March 31,		December 31,		Increase			Increase
	2016		2015		(Decrease)			(Decrease)
Cash and Due From Banks	$	26,580,832	$	14,947,690	$	11,633,142			77.83	%
Interest Bearing deposits with Other Banks		885,772		42,267,777		(41,382,005	)		-97.90	%
Investment Securities		501,161,289		428,307,807		72,853,482			17.01	%
Loans, net		409,467,272		423,108,391		(13,641,119	)		-3.22	%
Premises and Equipment		18,444,639		18,655,691		(211,052	)		-1.13	%
Total Assets		1,002,290,690		973,504,542		28,786,148			2.96	%
Total Deposits		790,290,405		753,404,788		36,885,617			4.90	%
Total Stockholders’ Equity		88,501,563		86,425,336		2,076,227			2.40	%

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which consist of cash, balances at correspondent banks and items in process of collection, balance at March 31, 2016 was $26,580,832, which was an increase of $11,633,142 from the balance of $14,947,690 at December 31, 2015. The increase was due to an increase in the balances at correspondent banks due to an increase in the amount of the month ending cash letter.

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. Investments securities portfolio at March 31, 2016, increased by $72,853,482, or 17.0%, to $501,161,289 from $428,307,807 at December 31, 2015. This increase is due to additional purchases of mortgage backed securities, which was partially funded by decreasing the balances at correspondent banks and by changes in the market value of the securities portfolio.

LOANS

The Corporation’s loan balance decreased by $13,641,119 during the three months ended March 31, 2016, to $409,467,272 from $423,108,391 at December 31, 2015. Loan demand, especially in business loan and consumer loan categories, weakened and competition for available loans continued to be strong during the three months ended March 31, 2016. No material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the three months ended March 31, 2016, the Corporation’s premises and equipment decreased by $211,052, or 1.1%, to $18,444,639 when compared to $18,655,691 at December 31, 2015. 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


					Amount of			Percent of
	March 31,		December 31,		Increase			Increase
	2016		2015		(Decrease)			(Decrease)
Noninterest-Bearing Deposits	$	151,934,846	$	148,724,257	$	3,210,589			2.16	%
Interest-Bearing Deposits		362,386,736		323,381,170		39,005,566			12.06	%
Savings Deposits		72,461,071		70,534,886		1,926,185			2.73	%
Certificates of Deposit		203,507,752		210,764,475		(7,256,723	)		-3.44	%

Total deposits	$	790,290,405	$	753,404,788	$	36,885,617			4.90	%

Interest-bearing and noninterest-bearing deposits and savings increased while certificates of deposit decreased during the three months ended March 31, 2016. 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, 2015.

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 March 31, 2016, the Corporation had approximately $5.0 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 is devoted to managing interest-rate risk. Currently, the Corporation does not have any significant risks related to foreign currency exchange, commodities or equity risk exposures.

Interest Rate and Yield Curve Risks

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

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

Regulatory and Legal Risks

The Corporation operates in a heavily regulated industry and therefore is subject to many banking, deposit, and consumer lending laws as well as the rules and regulations promulgated by the FDIC, FRB, Securities and Exchange Commission and the NASDAQ stock market. 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 previously made.

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 March 31, 2016 (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 March 31, 2016, 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’s business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2015, which the Corporation filed with the SEC on March 15, 2016. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Corporation’s Annual Report on Form 10-K, the Corporation’s quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Corporation’s business, financial condition and results of operations in the future.

There have been no material changes to the risk factors as disclosed in the Corporation’s Annual Report on Form 10-K for the Corporation’s year ended December 31, 2015.

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 March 31, 2016, filed with the SEC on May 10, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of March 31, 2016 (Unaudited) and December 31, 2015 (Audited); (ii) the Consolidated Statements of Income for the three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2016 (Unaudited) and 2015 (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: May 6, 2016

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 March 31, 2016, filed with the SEC on May 10, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition as of March 31, 2016 (Unaudited) and December 31, 2015 (Audited); (ii) the Consolidated Statements of Income for the three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited); (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited); (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2016 (Unaudited) and 2015 (Unaudited); and (v) Notes to Consolidated Financial Statements, tagged as blocks of text (Unaudited).