CITIZENS HOLDING CO /MS/ - FORM 10-K - EX-13

Attached files

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EX-32.2 - EX-32.2 - CITIZENS HOLDING CO /MS/	d98711dex322.htm
EX-21 - EX-21 - CITIZENS HOLDING CO /MS/	d98711dex21.htm
EX-23 - EX-23 - CITIZENS HOLDING CO /MS/	d98711dex23.htm
EX-32.1 - EX-32.1 - CITIZENS HOLDING CO /MS/	d98711dex321.htm
EX-31.2 - EX-31.2 - CITIZENS HOLDING CO /MS/	d98711dex312.htm
EX-31.1 - EX-31.1 - CITIZENS HOLDING CO /MS/	d98711dex311.htm
10-K - FORM 10-K - CITIZENS HOLDING CO /MS/	d98711d10k.htm

Exhibit 13

2016

Stockholders,

As we reflect on 2015, I am pleased to report your company’s accomplishments. We experienced growth in several financial areas, and I am proud of your company’s performance in 2015

To summarize our financial results, earnings increased 1.9% from the previous year. This equates to basic per share earnings of $1.56 compared to $1.53 in 2014. The bank’s total assets increased 5.7% to $973.5 million. In 2015, our deposits increased by 8.2% and net loans increased 10.1% from 2014. Shareholder dividends increased 4.5%.

In addition to positive financial growth, we continued to invest in our employees, technology systems, and products to better serve you and our customers. We constantly strive to make our operations more efficient to maximize your investment. While we did not expand to new markets or branches in 2015, we continued to see strong growth in some of our newer markets.

Our organization is positioned well to take advantage of any market growth opportunities the board and leadership deem prudent.

In 2015, we were once again named a “Top 200 Community Bank” in the United States by American Banker magazine. This recognition is one I am always proud to accept. We began as a community bank in 1908, and we continue to embrace that important aspect of service today. While we have expanded to new communities over the last 108 years, we remain committed to corporately and individually serving our communities through charitable efforts, civic and community organizations, and a promise to know customers by name. As technology evolves and continuously changes the banking industry, we are steadfast in our mission to serve the people who make up our communities—you and your family.

In closing, I have often said that a company needs great stockholders, great customers, and great employees to be successful, and we are blessed with all three. It is an honor to serve all of you, and I look forward to a strong 2016.

CITIZENS HOLDING COMPANY

Philadelphia, Mississippi

Consolidated Financial Statements

As of December 31, 2015 and 2014 and for the

Years Ended December 31, 2015, 2014 and 2013

CONTENTS


Report of Independent Registered Public Accounting Firm			1

Management’s Assessment of Internal Control over Financial Reporting			3

Consolidated Financial Statements

Consolidated Statements of Condition			4

Consolidated Statements of Income			5

Consolidated Statements of Comprehensive Income (Loss)			6

Consolidated Statements of Changes in Stockholders’ Equity			7

Consolidated Statements of Cash Flows			8 – 9

Notes to Consolidated Financial Statements			10 – 64

LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Citizens Holding Company

Philadelphia, Mississippi

We have audited the accompanying consolidated statements of condition of Citizens Holding Company and subsidiary (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. We have also audited the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

LOGO

To the Board of Directors and Stockholders

Citizens Holding Company

Page Two

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Ridgeland, Mississippi

March 8, 2016

Citizens Holding Company

Philadelphia, MS 39350

MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Citizens Holding Company (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Management, under the direction of the chief executive officer and chief financial officer, assessed the Company’s internal control over financial reporting as of December 31, 2015 based on the criteria for effective internal control over financial reporting established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this assessment, management believes that, as of December 31, 2015, the Company maintained effective internal control over financial reporting.

The Company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

HORNE LLP, the Company’s Independent Registered Public Accounting Firm, has audited the Company’s internal control over financial reporting as of December 31, 2015, as stated in their report, beginning on page 1, which expresses an unqualified opinion on the Company’s internal control over financial reporting as of December 31, 2015.



Greg L. McKee		Robert T. Smith
President and Chief Executive Officer		Treasurer and Chief Financial Officer

March 8, 2016

CITIZENS HOLDING COMPANY

Consolidated Statements of Condition

December 31, 2015 and 2014


ASSETS	2015			2014
Cash and due from banks	$	14,947,690		$	22,405,730
Interest bearing deposits with other banks		42,267,777			61,481,223
Securities available for sale, at fair value (amortized cost of $267,308,756 in 2015 and $178,392,462 in 2014)		267,264,403			179,745,130
Securities held to maturity, at book value (fair value of $169,045,835 in 2015 and $216,745,438 in 2014)		161,043,404			206,817,169
Loans, net of allowance for loan losses of $6,473,703 in 2015 and $6,542,326 in 2014		423,108,391			384,417,508
Bank premises, furniture, fixtures and equipment, net		18,655,691			19,240,230
Other real estate owned, net		3,572,744			4,051,561
Accrued interest receivable		3,928,106			3,869,937
Cash surrender value of life insurance		23,133,644			22,347,601
Deferred tax assets		9,165,417			10,128,741
Other assets		6,417,275			6,555,851


Total assets	$	973,504,542		$	921,060,681


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest bearing deposits	$	148,724,257		$	145,729,932
Interest bearing deposits		604,680,531			550,363,962


Total deposits		753,404,788			696,093,894

Securities sold under agreement to repurchase		104,298,182			114,426,770
Federal Home Loan Bank advances		20,000,000			20,000,000
Accrued interest payable		179,995			190,717
Deferred compensation payable		7,718,624			7,209,694

Other liabilities		1,477,617			1,281,820

Total liabilities		887,079,206			839,202,895


Stockholders’ equity
Common stock, $.20 par value, authorized 22,500,000 shares; 4,875,079 shares issued and outstanding at December 31, 2015 and 4,877,614 shares issued and outstanding at December 31, 2014		975,016			975,482
Additional paid-in capital		3,617,279			3,861,717
Accumulated other comprehensive loss, net of tax benefit of ($4,233,473) in 2015 and ($5,283,048) in 2014		(7,116,319	)		(8,880,620	)

Retained earnings		88,949,360			85,901,207

Total stockholders’ equity		86,425,336			81,857,786


Total liabilities and stockholders’ equity	$	973,504,542		$	921,060,681

The accompanying notes are an integral part of these statements.

CITIZENS HOLDING COMPANY

Consolidated Statements of Income

Years Ended December 31, 2015, 2014, and 2013


	2015			2014			2013
Interest income
Interest and fees on loans	$	20,040,315		$	20,081,852		$	20,610,580
Interest on securities
Taxable		8,026,808			8,226,508			7,949,437
Non-taxable		2,802,915			3,022,992			3,504,084
Other interest		94,721			49,398			51,994

Total interest income		30,964,759			31,380,750			32,116,095

Interest expense
Deposits		1,843,717			1,754,909			1,944,997
Other borrowed funds		1,233,162			1,263,386			2,135,460

Total interest expense		3,076,879			3,018,295			4,080,457

Net interest income		27,887,880			28,362,455			28,035,638

Provision for loan losses		(556,687	)		(923,397	)		(2,204,366	)

Net interest income after provision for loan losses		27,331,193			27,439,058			25,831,272

Non-interest income
Service charges on deposit accounts		3,866,537			3,932,691			3,884,997
Other service charges and fees		2,284,262			2,096,836			1,953,263
Net gains on sales of securities		17,503			14,542			423,388
Other income		2,159,407			2,118,435			1,554,454

Total non-interest income		8,327,709			8,162,504			7,816,102

Non-interest expense
Salaries and employee benefits		13,295,211			13,095,023			13,110,603
Occupancy expense		2,160,198			2,129,193			2,016,965
Equipment expense		3,065,042			3,065,842			2,379,167
Other expense		7,070,516			8,033,654			7,220,876

Total non-interest expense		25,590,967			26,323,712			24,727,611


Income before income taxes		10,067,935			9,277,850			8,919,763

Income tax expense		2,479,034			1,828,091			1,769,903

Net income	$	7,588,901		$	7,449,759		$	7,149,860

Net income per share – basic	$	1.56		$	1.53		$	1.47

Net income per share – diluted	$	1.56		$	1.53		$	1.47

Average shares outstanding
Basic		4,872,064			4,870,114			4,868,263

Diluted		4,874,141			4,870,749			4,869,767

The accompanying notes are an integral part of these statements.

CITIZENS HOLDING COMPANY

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31, 2015, 2014, and 2013


	2015			2014			2013
Net income	$	7,588,901		$	7,449,759		$	7,149,860

Other comprehensive income (loss)

Unrealized holding (losses) gains on available-for-sale securities		(1,379,518	)		35,256,397			(40,399,686	)
Income tax effect		514,561			(13,150,636	)		15,069,083

Net unrealized (losses) gains		(864,957	)		22,105,761			(25,330,603	)


Unrealized losses on securities transferred from available-for-sale to held-to-maturity		—			(17,061,438	)		—
Amortization of net unrealized losses transferred during the period		4,210,897			1,545,103			—
Income tax effect		(1,570,664	)		5,787,593			—

		2,640,233			(9,728,742	)		—


Reclassification adjustment for gains included in net income		(17,503	)		(14,542	)		(423,388	)
Income tax effect		6,528			5,424			157,924

Net gains included in net income		(10,975	)		(9,118	)		(265,464	)


Total other comprehensive income (loss)		1,764,301			12,367,901			(25,596,067	)


Comprehensive income (loss)	$	9,353,202		$	19,817,660		$	(18,446,207	)

The accompanying notes are an integral part of these statements.

CITIZENS HOLDING COMPANY

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2015, 2014, and 2013


	Number of Shares Issued			Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balance, December 31, 2012		4,861,411			972,282		$	3,620,967		$	4,347,546		$	79,928,035		$	88,868,830
Net income		—			—			—			—			7,149,860			7,149,860
Dividends paid ($0.88 per share)		—			—			—			—			(4,285,371	)		(4,285,371	)
Options exercised		8,703			1,700			127,250			—			—			128,950
Other comprehensive income, net		—			—			—			(25,596,067	)		—			(25,596,067	)

Balance, December 31, 2013		4,870,114			973,982			3,748,217			(21,248,521	)		82,792,524			66,266,202
Net income		—			—			—			—			7,449,759			7,449,759
Dividends paid ($0.89 per share)		—			—			—			—			(4,341,076	)		(4,341,076	)
Restricted Stock Granted		7,500			1,500			(1,500	)		—			—			—
Stock compensation Expense		—			—			115,000			—			—			115,000
Other comprehensive loss, net		—			—			—			12,367,901			—			12,367,901

Balance, December 31, 2014		4,877,614			975,482			3,861,717			(8,880,620	)		85,901,207			81,857,786
Net income		—			—			—			—			7,588,901			7,588,901
Dividends paid ($0.93 per share)		—			—			—			—			(4,540,748	)		(4,540,748	)
Stock Repurchased		(19,035	)		(3,807	)		(386,398	)								(390,205	)
Options Exercised		1,500			341			26,659			—			—			27,000
Excess Tax Benefits		—			—			1,001			—			—			1,001
Restricted stock granted		15,000			3,000			(3,000	)		—			—			—
Stock compensation expense		—			—			117,300			—			—			117,300
Other comprehensive income, net		—			—			—			1,764,301			—			1,764,301

Balance, December 31, 2015		4,875,079		$	975,016			3,617,279			(7,116,319	)		88,949,360		$	86,425,336

The accompanying notes are an integral part of these statements.

CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2015, 2014, and 2013


	2015			2014			2013
Cash flows from operating activities
Net income	$	7,588,901		$	7,449,759		$	7,149,860
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		1,040,207			1,190,393			1,140,753
Amortization of premiums and accretion of discounts on investment securities, net		1,208,954			405,017			717,749
Stock compensation expense		117,300			115,000			—
Provision for loan losses		556,687			923,397			2,204,366
Gain on sale of securities		(17,503	)		(14,542	)		(423,388	)
Federal Home Loan Bank stock dividends		(4,500	)		(8,400	)		(11,400	)
Deferred income tax (benefit) loss		(86,251	)		307,920			(850,100	)
Excess tax benefit on stock options		—			—			(14,566	)
Net writedown on other real estate owned		156,053			824,059			276,400
(Increase) decrease in accrued interest receivable		(58,124	)		262,116			533,815
Increase in cash surrender value life insurance		(786,043	)		(784,425	)		(1,017,032	)
Gain on BOLI death benefits		—			(623,774	)		—
Decrease in accrued interest payable		(10,722	)		(8,796	)		(121,959	)
Increase in deferred compensation liability		508,930			489,746			802,286
Net change in other operating assets and liabilities		188,128			(837,072	)		824,044


Net cash provided by operating activities		10,402,017			9,690,398			11,210,828


Cash flows from investing activities
Proceeds from calls, paydowns and maturities of securities available-for-sale		41,493,768			12,944,631			81,916,607
Proceeds from calls of securities held-to-maturity		47,853,733			—			—
Proceeds from sales of securities available-for-sale		5,758,795			18,004,518			41,974,017
Purchases of investment securities available-for-sale		(135,229,379	)		—			(142,276,646	)
Purchases of bank premises, furniture, fixtures and equipment		(455,668	)		(1,807,469	)		(338,615	)
Proceeds from sale of other real estate owned		1,192,328			1,749,721			2,091,610
Net decrease (increase) in interest bearing deposits with other banks		19,213,446			(60,797,123	)		15,544,647
Proceeds from redemption of Federal Home Loan Bank Stock		150,700			1,292,600			1,052,000
Purchases of Federal Home Loan Bank Stock		—			—			(438,600	)
Proceeds from death benefits of bank owned life insurance		—			1,269,560			—
Net increase in loans		(40,117,134	)		(4,110,312	)		(25,809,560	)

Net cash used by investing activities		(60,139,411	)		(31,453,874	)		(26,284,540	)

CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2015, 2014, and 2013

2 of 2


	2015			2014			2013
Cash flows from financing activities
Net increase in deposits	$	57,310,894		$	41,464,098		$	12,080,458
Net (decrease) increase in federal funds purchased		—			(27,500,000	)		27,500,000
Net change in securities sold under agreement to repurchase		(10,128,588	)		32,005,989			9,114,016
Proceeds from exercise of stock options		27,000			—			128,950
Stock repurchase		(390,205	)		—			—
Excess tax benefit on stock option exercises		1,001			—			14,566
Dividends paid to stockholders		(4,540,748	)		(4,341,076	)		(4,285,371	)
Federal Home Loan Bank advance proceeds		—			—			10,000,000
Federal Home Loan Bank advance payments		—			(13,500,000	)		(45,000,000	)


Net cash provided by financing activities		42,279,354			28,129,011			9,552,619


Net (decrease) increase in cash and due from banks		(7,458,040	)		6,365,535			(5,521,093	)

Cash and due from banks, beginning of year		22,405,730			16,040,195			21,561,288


Cash and due from banks, end of year	$	14,947,690		$	22,405,730		$	16,040,195


Supplemental disclosures of cash flow information

Cash paid for Interest	$	3,087,601		$	3,027,090		$	4,202,416


Income taxes	$	2,301,698		$	2,460,014		$	2,357,215

Noncash disclosures

Real estate acquired by foreclosure	$	869,564		$	2,874,173		$	1,436,923


Transfers from available-for-sale to held-to-maturity	$	—		$	222,322,423		$	—

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The accounting policies of Citizens Holding Company and its subsidiary conform to generally accepted accounting principles (“GAAP”) in the United States of America and to general practices within the banking industry. The consolidated financial statements of Citizens Holding Company include the accounts of its wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (collectively, the “Company”). All significant intercompany transactions have been eliminated in consolidation.

Nature of Business

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

Estimates

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

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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Cash, Due from Banks and Interest Bearing Deposits with Other Banks

For the purpose of reporting cash flows, cash and due from banks includes cash on hand and demand deposits. Cash flows from loans originated by the Company, deposits, and federal funds purchased and sold are reported net in the statement of cash flows. The Company is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The Company was not required to maintain an average reserve balance by the Federal Reserve Bank at December 31, 2015 and 2014.

Interest-bearing deposits with other banks mature within one year and are carried at cost.

Investment Securities

In accordance with the investments topic of the Accounting Standards Codification (“ASC”), securities are classified as “available-for-sale,” “held-to-maturity” or “trading”. Fair values for securities are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Gains or losses on the sale of securities are determined using the specific identification method. Currently, the Company has no trading securities.

Securities Available-for-Sale

Securities that are held for indefinite periods of time or used as part of the Company’s asset/liability management strategy and that may be sold in response to interest rate changes, changes in prepayment risk, the need to increase regulatory capital and other similar factors are classified as available-for-sale (“AFS”). Securities available-for-sale are reported at fair value, with unrealized gains and losses reported, net of related income tax effect, as a separate component of stockholders’ equity.

Securities Held to Maturity

Securities that are held-to-maturity (“HTM”) are those securities that the Company has the positive intent and ability to hold until maturity. These securities cannot be sold in response to the risk factors discussed above for available for sale securities. These securities are reported at book value. The securities currently classified as held to maturity were transferred from AFS in April 2014. Any unrealized loss at that time is being amortized over the remaining life of the securities at the same rate as the discount is being accreted on the new balance, resulting in a zero income effect.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. The amortization of premiums and accretion of discounts are recognized in interest income.

The Company periodically reviews its securities for impairment based upon a number of factors, including but not limited to, length of time and extent to which the fair value has been less than cost, the likelihood of the security’s ability to recover any decline in its fair value, financial condition of the underlying issuer, ability of the issuer to meet contractual obligations and ability to retain the security for a period of time sufficient to allow for recovery in fair value. Impairments on securities are recognized when management, based on its analysis, deems the impairment to be other-than-temporary. Disclosures about unrealized losses in the Company’s securities portfolio that have not been recognized as other-than-temporary impairments are provided in Note 3.

Loans and Allowance for Loan Losses

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of unearned income and an allowance for loan losses. The Company has no loans held-for-sale.

Unearned income includes deferred fees net of deferred direct incremental loan origination cost. Unearned income attributable to loans held with a maturity of more than one year is recognized as income or expense over the life of the loan.

Unearned discounts on installment loans are recognized as income over the terms of the loans by a method that approximates the interest method. Unearned income and interest on commercial loans are recognized based on the principal amount outstanding. For all other loans, interest is accrued daily on the outstanding balances. For impaired loans, interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower’s financial condition is such that collection of interest is doubtful. Cash collections on impaired loans are credited to the loan receivable balance, and no interest income is recognized on those loans until the principal balance has been collected. The Company generally discontinues the accrual of interest income when a loan becomes 90 days past due as to principal or interest; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Interest income on other nonaccrual loans is recognized only to the extent of interest payments. Upon discontinuance of the accrual of interest on a loan, any previously accrued but unpaid interest is reversed against interest income.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

A loan is impaired when management determines that it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

Troubled debt restructurings (“TDR”) are those for which concessions have been granted to the borrower due to a deterioration of the borrower’s financial condition. Such concessions may include reduction in interest rates or deferral of interest or principal payments. In evaluating whether to restructure a loan, management analyzes the long-term financial condition of the borrower, including guarantor and collateral support, to determine whether the proposed concessions will increase the likelihood of repayment of principal and interest. TDR are classified as performing, unless they are on nonaccrual status of 90 days or more delinquent, in which case they are considered nonperforming.

The allowance for loan losses is established through a provision for loan losses charged against net income. Loans determined to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. The allowance represents an amount, which, in management’s judgment, will be adequate to absorb estimated probable losses on existing loans that may become uncollectible. In order to determine an adequate level of allowance, management utilizes a model that calculates the allowance for loan loss by applying an average historical charge-off percentage by loan segment and over a 20 quarter period of time with the most current quarters weighted to show the effect of the most recent chargeoff activity to the current loan balances in the corresponding loan segment. Additionally, for loan balances over $100,000, specific reserves on an individual loan basis may be applied in addition to the allowance calculated using the model. This specific reserve is determined by an extensive review of the borrower’s credit history, capacity to pay, adequacy of collateral and general economic conditions related to the respective loan. This specific reserve will stay in place until such time that the borrower’s obligation is satisfied or the loan is greatly improved.

Large groups of small-balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Bank Premises, Furniture, Fixtures and Equipment

The Company’s premises, furniture, fixtures and equipment are stated at cost less accumulated depreciation computed by straight-line methods over the estimated useful lives of the assets, which range from three to forty years. Costs of major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Other Real Estate Owned

Other real estate owned (“OREO”) consists of properties repossessed by the Company on foreclosed loans. These assets are stated at fair value at the date acquired less estimated costs to sell. Losses arising from the acquisition of such property are charged against the allowance for loan losses. Declines in value resulting from subsequent revaluation of the property or losses resulting from disposition of such property are expensed as incurred. Revenue and expenses from operations of other real estate owned are reflected as other income (expense).

Cash Surrender Value of Life Insurance

The Company has purchased life insurance contracts on certain employees and directors. Certain of such policies were acquired to fund deferred compensation arrangements with employees and directors. The cash surrender value of the Company owned policies is carried at the actual cash surrender value of the policy at the balance sheet date. Changes in the value of the policies are classified in non-interest income.

Intangible Assets

Intangible assets include core deposits purchased and goodwill. Core deposit intangibles are amortized on a straight-line basis over their estimated economic lives ranging from 5 to 10 years. At December 31, 2015, all core deposit intangibles had been fully amortized. Goodwill and other intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Fair values are determined based on market valuation multiples for the Company and comparable businesses based on the assets and cash flow of the Bank, the Company’s only reportable segment. If impairment has occurred, the goodwill or other intangible asset is reduced to its estimated fair value through a charge to expense.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Trust Assets

Assets held by the trust department of the Company in its fiduciary or agency capacities are not assets of the Company and are not included in the consolidated financial statements.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable for the current year and the changes in deferred tax assets and liabilities, excluding components of other comprehensive income. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Comprehensive Income (Loss)

Comprehensive income includes net earnings reported in the consolidated statements of income, changes in unrealized gain (loss) on securities available-for-sale and changes in unrealized losses on securities transferred from AFS to HTM reported as a component of stockholders’ equity. Unrealized gain (loss) on securities available-for-sale and changes in unrealized losses on securities transferred from AFS to HTM, net of related income taxes, are the only components of accumulated other comprehensive income for the Company.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Net Income Per Share

Net income per share-basic is computed by dividing net income by the weighted average number of common shares outstanding during the year. Net income per share-diluted is based on the weighted average number of shares of common stock outstanding for the periods, including the dilutive effect of the Company’s outstanding stock options and restricted stock grants. The effect of the dilutive shares for the years 2015, 2014 and 2013 is illustrated in the following table.


	2015		2014		2013

Basic weighted average shares outstanding		4,872,064		4,870,114		4,868,263
Dilutive effect of stock options		2,077		635		1,504


Dilutive weighted average shares outstanding		4,874,141		4,870,749		4,869,767


Net income	$	7,588,901	$	7,449,759	$	7,149,860


Net income per share-basic	$	1.56	$	1.53	$	1.47
Net income per share-diluted	$	1.56	$	1.53	$	1.47

Advertising Costs

Advertising costs are charged to expense when incurred. Advertising expense was $793,282, $769,081 and $621,216 for the years ended December 31, 2015, 2014 and 2013, respectively.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were sold. Securities, generally United States Government, federal agency and state county municipal securities, pledged as collateral under these financing arrangements cannot be sold or re-pledged by the secured party.

Reclassifications

Certain information for 2013 and 2014 has been reclassified to conform to the financial presentation for 2015. Such reclassifications had no effect on net income or stockholders’ equity.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Stock-Based Compensation

At December 31, 2015, the Company had outstanding grants under three stock-based compensation plans, which are the 1999 Employees’ Long-Term Incentive Plan, which expired in 2009, the 1999 Directors’ Stock Compensation Plan and the 2013 Incentive Compensation Plan. Compensation expense for the option grants is determined based on the estimated fair value of the stock options on the applicable grant date. Compensation expense for grants of restricted stock is accounted for using the fair market value of the Company’s stock on the date the restricted shares are awarded. Further, compensation expense is based on an estimate of the number of grants expected to vest and is recognized over the grants’ implied vesting period of 6 months and 1 day. Expense associated with the Company’s stock based compensation is included in salaries and benefits on the Consolidated Statements of Income. The Company recognizes compensation expense for all share-based payments to employees in accordance with ASC 718, “Compensation – Stock Compensation.” See Note 18 for further details regarding the Company’s stock-based compensation.

Subsequent Events

The Company has evaluated, for consideration of recognition or disclosure, subsequent events that have occurred through the date of issuance of its financial statements, and has determined that no significant events occurred after December 31, 2015 but prior to the issuance of these financial statements that would have a material impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10)—Recognition and Measurement of Financial Assets and Financial Liabilities, which finalizes Proposed ASU Nos. 2013-220 and 2013-221 and seeks to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. Among the many targeted improvements to U.S. GAAP in ASU No. 2016-01 are (1) requiring equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net incomes; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; and (4) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Further, ASU No. 2016-01 applies to all entities that hold financial assets or owe financial liabilities. For public business entities, the amendments in ASU No. 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application by public business entities to financial statements of fiscal years or interim periods that have not

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

yet been issued or, by all other entities, that have not yet been made available for issuance of certain amendments identified in this Update are permitted as of the beginning of the fiscal year of adoption. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

FASB has issued an Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the balance sheet—the guidance in the ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. For public business entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

FASB has issued Accounting Standards Update (ASU) No. 2015-16, Business Combinations (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments, which finalizes Proposed ASU No. 2015-260, and simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. First, ASU No. 2015-16 requires that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer also should record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Second, for public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Moreover, the amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU, with earlier application permitted for financial statements that have not been issued. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Investment 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 at December 31, 2015 and 2014 were as follows:


2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized 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


2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

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


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

During the second quarter of 2014, the Company transferred securities with an amortized cost of $222,322,423 from the AFS classification to HTM. This transfer was completed after consideration of the Company’s ability and intent to hold these securities to maturity.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Continued

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 $11,305,438 and $15,516,336 at December 31, 2015 and 2014, respectively.

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


2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized 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


2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Securities held-to-maturity Obligations of U.S. Government agencies	$	206,817,169	$	9,928,269	$	—	$	216,745,438


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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Continued

The following tables show the gross unrealized losses and fair value of the Company’s investments classified as AFS and HTM investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2015 and 2014.

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


December 31, 2015	Less than 12 months				12 months or more				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Obligations of U.S.
Government agencies	$	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


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

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


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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Continued

Investment Securities.

The Company’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 Company has determined that none of the securities in this classification are other-than-temporarily impaired at December 31, 2015 or December 31, 2014.

Other investments.

The Company’s unrealized loss on other investments relates to an investment in a pooled trust preferred security. The decline in value of the pooled trust preferred security is related to the deterioration of the markets for these types of securities brought about by the lowered credit ratings and past deferrals and defaults of the underlying issuing financial institutions. However, due to the reductions in defaults and deferrals during the year, the unrealized losses have improved from $124,678 in 2014 to $15,425 in 2015. The Company owns a senior tranche of this security and therefore has a higher degree of which future deferrals and defaults would be required before the cash flow for the Company’s tranche is negatively impacted. The Company does not intend to sell this security and it is not more likely than not that the Company will be required to sell at a price less than amortized cost prior to maturity. Given these factors, the Company does not consider the investment to be other-than-temporarily impaired at December 31, 2015 or December 31, 2014. This security is not subject to any of the restrictions put forth under the Volcker Rule that was brought about by the passage of the Dodd-Frank Act.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Continued

The amortized cost and estimated fair value of securities at December 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


AFS	Amortized Cost		Fair Value
Securities AFS
Due in one year or less	$	3,008,448	$	3,028,887
Due after one year through five years		13,587,885		13,985,525
Due after five years through ten years		80,749,532		80,346,720
Due after ten years		169,962,891		169,903,271

Total	$	267,308,756	$	267,264,403


HTM	Amortized Cost		Fair Value
Securities HTM
Due after five years through ten years	$	37,052,187	$	38,528,059
Due after ten years		123,991,217		130,517,776

Total	$	161,043,404	$	169,045,835

Investment securities with fair values of $201,482,967 and $156,226,081 at December 31, 2015 and December 31, 2014, respectively, were pledged as collateral for public deposits.

Gross realized gains and losses are included in net gains on sales of securities. Total gross realized gains and gross realized losses from the sale of investment securities for each of the years ended December 31 were:


	2015		2014		2013
Gross realized gains	$	142,422	$	206,258	$	1,039,793
Gross realized losses		124,919		191,716		616,405

	$	17,503	$	14,542	$	423,388

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Federal Home Loan Bank Stock

The Company, as a member of the Federal Home Loan Bank of Dallas (“FHLB”) system, owns stock in the organization. No ready market exists for the stock, and it has no quoted market value. The Company’s investment in the FHLB is carried at cost of $1,202,900 and $1,347,600 at December 31, 2015 and December 31, 2014, respectively, and is included in other assets. The Company has had stock redeemed in 2015 and 2014 at the par value of $100 per share.

While the Federal Home Loan Banks have been negatively impacted by the current economic conditions, the Federal Home Loan Bank of Dallas reported profits for 2015 and 2014, as of 2015 and 2014, was in compliance with its regulatory capital and liquidity requirements, and in 2015 and 2014, continued to pay dividends on its stock and make redemptions at the par value. With consideration given to these factors, management concluded that the stock was not impaired at December 31, 2015 or December 31, 2014.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Loans

The composition of loans, net at December 31, 2015 and 2014 is as follows:


	2015			2014
	(In Thousands)
Real Estate:
Land Development and Construction	$	33,133		$	43,233
Farmland		23,293			26,463
1-4 Family Mortgages		104,046			104,170
Commercial Real Estate		180,691			151,746

Total Real Estate Loans		341,163			325,612


Business Loans:
Commercial and Industrial Loans		61,425			38,333
Farm Production and other Farm Loans		1,055			1,035

Total Business Loans		62,480			39,368


Consumer Loans:
Credit Cards		1,061			1,075
Other Consumer Loans		25,564			25,440

Total Consumer Loans		26,625			26,515


Total Gross Loans		430,268			391,495


Unearned income		(686	)		(535	)
Allowance for loan losses		(6,474	)		(6,542	)


Loans, net	$	423,108		$	384,418

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews these policies and procedures and submits them to the Company’s Board of Directors for its approval when needed, but no less frequently than annually. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of this review are presented to management with quarterly reports made to the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by the lenders and credit personnel, as well as the Company’s policies and procedures.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

Loans are made principally to customers in the Company’s market. The Company’s lending policy provides that loans collateralized by real estate are normally made with loan-to-value (“LTV”) ratios of 80 percent or less. Commercial loans are typically collateralized by property, equipment, inventories or receivables with LTV ratios from 50 percent to 80 percent. Real estate mortgage loans are collateralized by personal residences with LTV ratios of 80 percent or less. Consumer loans are typically collateralized by real estate, vehicles and other consumer durable goods. Approximately $37.3 million and $34.3 million of the loans outstanding at December 31, 2015 and December 31, 2014, respectively, were variable rate loans.

In the ordinary course of business, the Company has granted loans to certain directors and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans during 2015 is presented in the following table.


Balance outstanding at December 31, 2014	$	4,139,357

Principal additions		2,648,168

Principal reductions		(1,166,551	)


Balance outstanding at December 31, 2015	$	5,620,974

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.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

Year-end non-accrual loans, segregated by class of loans, were as follows:


	2015		2014
	(in thousands)
Real Estate:
Land Development and Construction	$	75	$	92
Farmland		158		222
1-4 Family Mortgages		2,464		1,905
Commercial Real Estate		11,662		9,444

Total Real Estate Loans		14,359		11,663


Business Loans:
Commercial and Industrial Loans		28		70

Total Business Loans		28		70


Consumer Loans:
Other Consumer Loans		36		133

Total Consumer Loans		36		133


Total Non-Accrual Loans	$	14,423	$	11,854

In the event that non-accrual loans had performed in accordance with their original terms, the Company would have recognized additional interest income of approximately $732,268, $819,524 and $813,710 in 2015, 2014 and 2013, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

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


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days Past		Total Past		Current		Total		Days
	Past Due		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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

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


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

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


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

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


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

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


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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all the amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. In determining which loans to evaluate for impairment, management looks at past due loans, bankruptcy filings and any situation that might lend itself to cause a borrower to be unable to repay the loan according to the original contract 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 as of December 31, by class of loans, are as follows (in thousands):


2015	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	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		11,662		1,409		10,253		11,662		2,685		10,552

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


Business Loans:
Commercial and Industrial Loans		28		28		—		28		—		49
Farm Production and other Farm Loans		—		—		—		—		—		—

Total Business Loans		28		28		—		28		—		49


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

Total Consumer Loans		36		36		—		36		—		78


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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued


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

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


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

Total Business Loans		70		30		40		70		40		1,147


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

Total Consumer Loans		121		121		—		121		—		120


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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

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


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


Total		3	$	4,871	$	3,858


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


Total		4	$	6,850	$	4,741

Changes in the Company’s troubled debt restructurings are set forth in the table below:


	Number of Loans		Recorded Investment
Totals at January 1, 2015		4	$	4,741
Additional loans with concessions
Reductions due to:
Charge-off		1		(349	)
Principal paydowns				(534	)


Total at December 31, 2015		3	$	3,858

The allocated allowance for loan losses attributable to restructured loans was $174,274 at December 31, 2015 and 2014.

The Company had no remaining availability under commitments to lend additional funds on these troubled debt restructurings at December 31, 2015.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

The Company 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 Company. 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 most of the loans held by the Company. 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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

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 that 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 December 31, 2015.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2015 (in thousands):


			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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2014:


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

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


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

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


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

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


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

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that will occur 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 five years with the most current years weighted to show the effect of the most recent chargeoff activity. This percentage is also adjusted for economic factors such as 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.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

Net chargeoffs (recoveries), segregated by class of loans, were as follows:


	2015			2014		2013
Real Estate:
Land Development and Construction	$	(8,700	)	$	241,853	$	(15,787	)
Farmland		(5,156	)		52,731		14,915
1-4 Family Mortgages		149,014			22,205		152,756
Commercial Real Estate		415,413			42,582		513,841

Total Real Estate Loans		550,571			359,371		665,725


Business Loans:
Commercial and Industrial Loans		1,585			2,038,953		350,740
Farm Production and other Farm Loans		—			—		(1,700	)

Total Business Loans		1,585			2,038,953		349,040


Consumer Loans:
Credit Cards		15,493			11,482		17,726
Other Consumer Loans		57,661			49,022		48,387

Total Consumer Loans		73,154			60,504		66,113


Total Net Chargeoffs	$	625,310		$	2,458,828	$	1,080,878

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2015, 2014 and 2013:


	Real		Business
2015	Estate		Loans			Consumer		Total

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

Provision for loan losses		587,315		(228,982	)		198,354		556,687

Chargeoffs		625,556		32,258			164,091		821,905

Recoveries		74,985		30,673			90,937		196,595


Net Chargeoffs		550,571		1,585			73,154		625,310


Ending Balance	$	5,238,895	$	643,248		$	591,560	$	6,473,703


Period end allowance allocated to:
Loans individually evaluated for impairment	$	2,996,708	$	—		$	—	$	2,996,708

Loans collectively evaluated for impairment		2,242,187		643,248			591,560		3,476,995


Ending Balance	$	5,238,895	$	643,248		$	591,560	$	6,473,703

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued


2014	Real Estate		Business Loans		Consumer			Total

Beginning Balance	$	4,706,011	$	2,767,409	$	604,337		$	8,077,757

Provision for loan losses		855,511		145,359		(77,473	)		923,397

Chargeoffs		560,298		2,050,939		121,093			2,732,330

Recoveries		200,927		11,986		60,589			273,502


Net Chargeoffs		359,371		2,038,953		60,504			2,458,828


Ending Balance	$	5,202,151	$	873,815	$	466,360		$	6,542,326


Period end allowance allocated to:
Loans individually evaluated for impairment	$	1,984,671	$	40,083	$	—		$	2,024,754

Loans collectively evaluated for impairment		3,217,480		833,732		466,360			4,517,572


Ending Balance	$	5,202,151	$	873,815	$	466,360		$	6,542,326

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued


2013	Real Estate		Business Loans		Consumer			Total

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

Provision for loan losses		742,177		1 ,561,751		(99,562	)		2,204,366

Chargeoffs		763,914		375,498		135,302			1,274,714

Recoveries		98,189		26,458		69,189			193,836


Net Chargeoffs		665,725		349,040		66,113			1,080,878


Ending Balance	$	4,706,011	$	2,767,409	$	604,337		$	8,077,757


Period end allowance allocated to:
Loans individually evaluated for impairment	$	1,224,874	$	1,071,729	$	—		$	2,296,603

Loans collectively evaluated for impairment		3,481,137		1,695,680		604,337			5,781,154


Ending Balance	$	4,706,011	$	2,767,409	$	604,337		$	8,077,757

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Continued

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


2015	Real Estate		Business Loans		Consumer		Total

Loans individually evaluated for impairment	$	15,519	$	28	$	36	$	15,583

Loans collectively evaluated for impairment		325,644		62,452		26,589		414,685


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


2014	Real Estate		Business Loans		Consumer		Total

Loans individually evaluated for impairment	$	12,888	$	70	$	121	$	13,079

Loans collectively evaluated for impairment		312,724		39,298		26,394		378,416


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

Note 5. Bank Premises, Furniture, Fixtures and Equipment

Bank premises, furniture, fixtures and equipment consist of the following at December 31, 2015 and December 31, 2014:


	2015		2014
Land and buildings	$	24,206,122	$	24,085,233
Furniture, fixtures and equipment		15,459,401		15,161,067

		39,665,523		39,246,300

Less accumulated depreciation		21,009,832		20,006,070


Total	$	18,655,691	$	19,240,230

Depreciation expense for the years ended December 31, 2015, 2014 and 2013, respectively, was $1,040,207, $1,190,393 and $1,140,753.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Deposits

The composition of deposits as of December 31, 2015 and December 31, 2014 is as follows:


	2015		2014
Non-interest bearing	$	148,724,257	$	145,729,932
NOW and money market accounts		323,381,170		268,567,815
Savings deposits		70,534,886		60,253,788
Time deposits, $100,000 or more		116,023,999		121,360,214
Other time deposits		94,740,476		100,182,145


Total	$	753,404,788	$	696,093,894

The scheduled maturities of time deposits at December 31, 2015 are as follows:


Year Ending December 31,	Amount
2015	$	163,727,234
2016		44,348,971
2017		2,459,254
2018		194,387
2019		34,629


	$	210,764,475

Interest expense for time deposits over $100,000 was approximately $626,000, $671,000 and $754,000 for the years ended December 31, 2015, 2014 and 2013, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Federal Home Loan Bank Advances

Pursuant to collateral agreements with the FHLB, advances are collateralized by all of the Bank’s FHLB stock ($1,202,900 included in other assets at December 31, 2015) and qualifying first mortgages and other loans. As of December 31, 2015, the balance in qualifying first mortgages and other loans was $166,840,812. At December 31, 2015 and December 31, 2014, advances from the FHLB, along with their rate and maturity date, consist of the following:

Advance Amount at

Interest
Rate

Final
Maturity

December 31,

2015

2014

$20,000,000

20,000,000

2.53

January 9, 2018

The scheduled payments for the next five years are as follows:


Year Due	Payment
2016		—
2017		—
2018	$	20,000,000
2019		—
2020		—

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Other Income and Other Expense

The following is a detail of the major income classifications that are included in other income under non-interest income on the income statement for the year ended December 31:


Other Income	2015		2014		2013
BOLI insurance	$	568,000	$	562,732	$	657,273
Mortgage loan origination fees		362,611		342,765		367,573
Other income		1,228,546		1,212,938		529,608


Total other income	$	2,159,157	$	2,118,435	$	1,554,454

The following is a detail of the major expense classifications that comprise the other expense line item in the income statement for the year ended December 31:


Other Expense	2015		2014		2013
Advertising	$	793,282	$	769,081	$	621,216
Office supplies		591,177		774,961		563,706
Legal and audit fees		408,066		416,339		393,997
FDIC and state assessments		751,979		771,097		69,282
Telephone expense		431,761		408,646		442,781
Loan collection expense		205,549		621,227		554,542
Other losses		243,172		930,401		462,475
Debit card / ATM expense		337,476		330,612		830,396
Travel and convention		247,416		184,723		200,684
Other expenses		3,060,638		2,826,567		3,081,797


Total other expense	$	7,070,516	$	8,033,654	$	7,220,876

Other losses in 2015, 2014 and 2013 include the write-down on OREO in the amount of $0, $694,207 and $276,400, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Income Taxes

The consolidated provision for income taxes consists of the following:


	2015			2014		2013
Currently payable
Federal	$	2,288,766		$	1,399,794	$	2,335,959
State		276,519			120,377		284,044

		2,565,285			1,520,171		2,620,003
Deferred (benefit) tax expense		(86,251	)		307,920		(850,100	)


Income tax expense	$	2,479,034		$	1,828,091	$	1,769,903

The differences between income taxes calculated at the federal statutory rate and income tax expense were as follows:


	2015			2014			2013
Federal taxes based on statutory rate	$	3,423,098		$	3,154,469		$	3,032,719
State income taxes, net of federal benefit		182,503			79,449			187,469
Tax-exempt investment interest		(928,246	)		(1,006,536	)		(1,159,571	)
Other, net		(198,321	)		(399,291	)		(290,714	)


Income tax expense	$	2,479,034		$	1,828,091		$	1,769,903

At December 31, 2015 and December 31, 2014, net deferred tax assets consist of the following:


	2015		2014
Deferred tax assets
Allowance for loan losses	$	2,414,691	$	2,440,150
Deferred compensation liability		3,187,914		3,005,808
Intangible assets		30,516		92,276
Unrealized loss on securities available-for-sale		16,544		—
Unrealized loss on securities transferred to HTM		4,216,929		5,787,593
Other		538,744		570,076


Total		10,405,338		11,895,903
Deferred tax liabilities
Premises and equipment		1,123,247		1,149,615
Unrealized gain on available-for-sale securities		—		504,545
Other		116,674		113,002


Total		1,239,921		1,767,162


Net deferred tax asset	$	9,165,417	$	10,128,741

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Continued

The net deferred tax asset of $9,165,417 and $10,128,741 at December 31, 2015 and 2014, respectively. The Company has evaluated the need for a valuation allowance related to the above deferred tax assets and, based on the weight of the available evidence, has determined that it is more likely than not that all deferred tax assets will be realized.

As of December 31, 2015, the Company has no unrecognized tax benefits related to federal and state income tax matters. As of December 31, 2015, the Company has not accrued for interest and penalties related to uncertain tax positions. It is the Company’s policy to recognize interest or penalties related to income tax matters in income tax expense.

The Company and the Bank file a consolidated United States federal income tax return. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2012 through 2015. The Company and Bank’s state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2012 through 2015.

Note 10. Summarized Financial Information of Citizens Holding Company

Summarized financial information of Citizens Holding Company, excluding the Bank, at December 31, 2015 and December 31, 2014, and for the years ended December 31, 2015, 2014 and 2013, is as follows:

Balance Sheets

December 31, 2015 and 2014


	2015		2014
Assets
Cash (1)	$	2,196,895	$	1,688,497
Investment in bank subsidiary (1)		83,753,973		79,797,988
Other assets (1)		474,468		371,301


Total assets	$	86,425,336	$	81,857,786


Liabilities
Other liabilities	$	—	$	—

Stockholders’ equity		86,425,336		81,857,786


Total liabilities and stockholders’ equity	$	86,425,336	$	81,857,786

(1)	Fully or partially eliminates in consolidation.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Continued

Income Statements

Years Ended December 31, 2015, 2014 and 2013


	2015			2014			2013
Interest income (1)	$	1,896		$	2,140		$	2,140


Other income
Dividends from bank subsidiary (1)		5,568,900			4,371,900			4,332,000
Equity in undistributed earnings of bank subsidiary (1)		2,191,684			3,241,870			2,898,509
Other income		—			1,676			—

Total other income		7,762,480			7,615,446			7,230,509

Other expense		275,744			263,598			136,317

Income before income taxes		7,486,736			7,351,848			7,096,332
Income tax benefit		(102,165	)		(97,610	)		(53,528	)

Net income	$	7,588,901		$	7,449,759		$	7,149,860

(1)	Eliminates in consolidation.

Statements of Cash Flows

Years Ended December 31, 2015, 2014 and 2013


	2015			2014			2013
Cash flows from operating activities
Net income	$	7,588,901		$	7,449,759		$	7,149,860
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed earnings of Bank		(2,191,684	)		(3,241,870	)		(2,898,509	)
Stock compensation expense		117,300			115,000			—
Increase in other assets		(103,168	)		(44,082	)		(1,032	)
Decrease in other liabilities		—			—			(400	)


Net cash provided by operating activities		5,411,349			4,278,807			4,249,919

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Continued


	2015			2014			2013
Cash flows from financing activities
Dividends paid to stockholders	$	(4,540,748	)	$	(4,341,076	)	$	(4,285,371	)
Repurchase of company stock		(390,205	)		—			—
Excess tax benefit from equity grants		1,001			—			—
Proceeds from stock option exercises		27,000			—			128,950

Net cash used by financing activities		(4,902,951	)		(4,341,076	)		(4,156,421	)

Net increase in cash		508,398			(62,269	)		93,498

Cash, beginning of year		1,688,497			1,750,766			1,657,268

Cash, end of year	$	2,196,895		$	1,688,497		$	1,750,766

The Bank is required to obtain approval from state regulators before paying dividends.

Note 11. Related Party Transactions

The Company had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, significant stockholders, principal officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly referred to as related parties). In management’s opinion, such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties, and do not involve more than the normal risk of collectability at the time of the transaction.

Activity in related party loans is detailed in tabular form in Note 5 of the notes to the Financial Statements.

Deposits from related parties at December 31, 2015 and December 31, 2014 approximated $7,934,526 and $6,587,915, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Off-Balance Sheet Financial Instruments, Commitments and Contingencies and Concentrations of Risks

Commitments to Extend Credit

In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of its customers. These commitments and contingent liabilities include commitments to extend credit and issue standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 2015 and December 31, 2014, commitments related to unused lines of credit were $44,358,972 and $50,242,705, respectively, and standby letters of credit were $2,860,480 and $2,855,480, respectively. The fair value of such commitments is not materially different than stated values. As some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed credit worthiness of the borrower. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties.

Interest Rate Risk

The Company is principally engaged in providing short-term and medium-term installment, commercial and agricultural loans with interest rates that are fixed or fluctuate with the prime lending rate. These assets are primarily funded through short-term demand deposits and long-term certificates of deposit with variable and fixed rates. Accordingly, the Company is exposed to interest rate risk because in changing interest rate environments interest rate adjustments on assets and liabilities may not occur at the same time or in the same amount. The Company manages the overall rate sensitivity and mix of its asset and liability portfolio and attempts to minimize the effects that interest rate fluctuations will have on its net interest margin.

Legal Proceedings

The Company is party to lawsuits and other claims that arise in the ordinary course of business. The lawsuits assert claims related to the general business activities of the Company. The cases are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provision is made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. While management believes that the final resolution of pending legal proceedings will not have a material impact on the Company’s business, prospects, financial position or results of operations, the final resolution of such proceedings could have a material adverse effect.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Continued

Concentration of Risk

The Company makes agricultural, agribusiness, commercial, residential and consumer loans primarily in eastern central and southern Mississippi. A substantial portion of the customers’ abilities to honor their contracts is dependent on their business and the agricultural economy in the area.

Although the Company’s loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company’s lending policies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans includes equipment, crops, livestock, and land. Credit losses from loans related to the agricultural economy are consistent with credit losses experienced in the portfolio as a whole. The concentration of credit in the regional agricultural economy is taken into consideration by management in determining the allowance for loan losses. See Note 5 for a summary of loans by type.

Note 13. Lease Commitment and Total Rental Expense

The Company has operating leases under non-cancellable operating lease agreements for banking facilities and equipment. Future minimum rental payments due under the leases are as follows:


Years Ending December 31,	Amounts
2016	$	285,808
2017		66,925
2018		26,721
2019		19,622
2020		19,306

	$	418,382

The total rental expense included in the income statements for the years ended December 31, 2015, 2014 and 2013 is $111,684, $104,384 and $150,333, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Benefit Plans

The Company provides its employees with a profit sharing and savings plan, which allows employees to direct a percentage of their compensation into a tax deferred retirement account, subject to statutory limitations. To encourage participation, the Company provides a 50 percent matching contribution for up to a maximum of 3 percent of each participant’s compensation, plus discretionary non-matching contributions. Employees are eligible after one year of service. For 2015, 2014 and 2013, the Company’s contributions were $496,363, $485,251 and $511,984, respectively.

Deferred Compensation Plans

The Company provides a deferred compensation plan covering its directors. Participants in the deferred compensation plan can defer a portion of their compensation for payment after attaining age 70. Life insurance contracts have been purchased which may be used to fund payments under the plan. Expenses related to this plan were $179,552, $174,509 and $157,017 for the plan years ended December 31, 2015, 2014 and 2013, respectively.

The Company has also entered into deferred compensation arrangements with certain officers that provide for payments to such officers or their survivors after retirement. Life insurance policies have been purchased that may be used to fund all or a portion of the payments under these arrangements. The obligations of the Company under both the directors and officers deferred compensation arrangements are expensed on a systematic basis over the remaining expected service period of the individual directors and officers. Expenses related to this plan were $640,291, $514,635 and $804,755 for the plan years ended December 31, 2015, 2014 and 2013, respectively.

Note 15. Regulatory Matters

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company.

Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines involving quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital and Tier I capital to risk-weighted assets (as defined in the regulations) and Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2015, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Continued

The FRB, FDIC and other federal banking agencies have established risk-based capital adequacy guidelines. These guidelines are intended to provide a measure of a bank’s capital adequacy that reflects the degree of risk associated with a bank’s operations.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%.

The Dodd-Frank Act requires the 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 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 Company. The capital framework under Basel III will replace the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

Beginning January 1, 2015 the Bank began to comply with the 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 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 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.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Continued

The Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the 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 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.

As of December 31, 2015 and 2014, the most recent regulatory notification categorized the Bank as well capitalized. There have been no conditions or events that would cause changes to the capital structure of the Company since this notification. To continue to be categorized as well capitalized under the regulatory framework for prompt corrective action, the Company would have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed below, in comparison with actual capital amounts and ratios (amounts in thousands):


											Minimum Capital
						Minimum Capital					Requirement to be
						Requirement to be					Adequately
	Actual					Well Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio

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		90,392		9.26	%		63,469		6.50	%		43,940		4.50	%
Tier 1 risk-based capital ratio		90,392		16.37	%		44,175		8.00	%		33,131		6.00	%
Total risk-based capital ratio		96,866		17.54	%		55,219		10.00	%		44,175		8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	87,721		8.99	%	$	48,800		5.00	%	$	39,040		4.00	%
Common Equity tier 1 capital ratio		87,721		8.99	%		63,440		6.50	%		43,920		4.50	%
Tier 1 risk-based capital ratio		87,721		15.89	%		44,150		8.00	%		33,113		6.00	%
Total risk-based capital ratio		94,194		17.07	%		55,188		10.00	%		44,150		8.00	%

December 31, 2014
Citizens Holding Company
Tier 1 leverage ratio	$	87,589		9.60	%	$	45,610		5.00	%	$	36,488		4.00	%
Common Equity tier 1 capital ratio		—		0.00	%		—		0.00	%		—		0.00	%
Tier 1 risk-based capital ratio		87,589		16.60	%		31,665		6.00	%		21,110		4.00	%
Total risk-based capital ratio		94,131		17.84	%		52,775		10.00	%		42,220		8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	85,529		9.71	%	$	44,059		5.00	%	$	35,247		4.00	%
Common Equity tier 1 capital ratio		—		0.00	%		—		0.00	%		—		0.00	%
Tier 1 risk-based capital ratio		85,529		16.22	%		31,643		6.00	%		21,095		4.00	%
Total risk-based capital ratio		92,071		17.46	%		52,738		10.00	%		42,190		8.00	%

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Fair Values of Financial Instruments

Under the authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions about risk and or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the three following categories:


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 fair value estimates, methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments were:

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 is considered to be three months or less at the time of purchase.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

Investment Securities

Fair values for investment securities, available-for-sale and held-to-maturity, 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 Company 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 Company 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 Company 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.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

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


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

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

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


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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

The following table reports the activity in assets measured at fair value on a recurring basis using significant unobservable inputs, during the years ended December 31, 2015 and December 31, 2014.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	2015			2014
Balance at January 1	$	2,872,723		$	2,766,203
Principal payments received		(75,182	)		(31,824	)
Unrealized gains included in other comprehensive income		118,168			138,344


Balance at December 31	$	2,915,709		$	2,872,723


The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at reporting date	$	—		$	—

As of December 31, 2015 and December 31, 2014, management determined, based on the current credit ratings, known defaults and deferrals by the underlying banks and the degree to which future defaults and deferrals would be required to occur before the cash flow for the Company’s tranche is negatively impacted, that no other-than-temporary impairment exists.

The Company 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.

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.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

Impaired Loans

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

Other real estate owned

OREO is comprised of commercial and residential real estate obtained in partial and total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is recorded at fair value of the real estate, less costs to sell. Subsequently, it may be necessary to record nonrecurring fair value adjustments for decline in fair value. Fair value, when recorded, is determined based on appraisals by qualified licensed appraisers and adjusted for management’s estimates of costs to sell. As such, values for OREO are classified as Level 3.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

The following table presents assets measured at fair value on a nonrecurring basis during December 31, 2015 and 2014 and were still held at those respective dates:


	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
December 31, 2015
Impaired loans	$	—	$	—	$	8,926,364	$	8,926,364
Other real estate owned		—		—		538,262		538,262

	$	—	$	—	$	9,464,626	$	9,464,626


December 31, 2014
Impaired loans	$	—	$	—	$	8,218,696	$	8,218,696
Other real estate owned		—		—		3,309,824		3,309,824


	$	—	$	—	$	11,528,520	$	11,528,520

Impaired loans with a carrying value of $12,286,822 and $10,243,082 had an allocated allowance for loan losses of $2,996,708 and $2,024,754 at December 31, 2015 and December 31, 2014, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairment after foreclosure, management determined that a fair value adjustment to OREO in the amount of $0 and $694,207 was necessary and was recorded during the year ended December 31, 2015 and December 31, 2014, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

Federal Funds Sold and Securities Sold Under Agreement to Repurchase

Due to the short term nature of these instruments, the carrying amount is equal to the fair value.

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 similar deposits to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank Borrowings

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

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

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

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


	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
2015			(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


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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. Stock Options

The Company has a directors’ stock compensation plan and had an employees’ long-term incentive plan. Under the directors’ plan, the Company may grant options for up to 210,000 shares of common stock. The price of each option is equal to the market price determined as of the option grant date. Options granted are exercisable after six months and expire after 10 years. The employee plan expired on April 13, 2009 and no options have been granted since this date. The options previously granted under the employee plan expire 10 years from the grant date. The exercise price is equal to the market price of the Company’s stock on the date of grant.

The fair value of each option granted is estimated on the date of the grant using the Black-Sholes option-pricing model. No options were granted in 2015 or 2014 therefore no calculations were required in 2015 or 2014 to determine fair values.

The Company has adopted the 2013 Incentive Compensation Plan (the “2013 Plan”), which the Company has used for all equity grants post the adoption and approval of the 2013 Plan.

During 2015, the Company’s directors received restricted stock grants totaling 7,500 shares of common stock at a then market value of $18.86 per share and in 2014 received 7,500 shares of common stock at a then market value of $18.40 per share. These grants vest over a one-year period during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares granted in 2015 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. The grant date fair value of the shares granted in 2014 was $138,000 and was recognized over the one-year restriction period at a cost of $11,500 per month less deferred taxes of $4,290 per month. During 2015 and 2014, the Company recorded expense of $117,300 and $115,000 and recorded deferred taxes in the amounts of $44,250 and $42,900, respectively, related to these restricted shares.

At December 31, 2015, there were 7,500 shares non-vested with $47,150 in unrecognized stock-based compensation expense related to the 2013 Plan.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. Continued

Following is a summary of the status of the stock options remaining under the plans for the years ending December 31, 2015, 2014 and 2013:


	Directors’ Plan					Employees’ Plan
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding at January 1, 2013		111,000		$	20.97		108,000		$	20.90
Granted		—			—		—			—
Exercised		(3,000	)		16.40		(7,000	)		14.91
Expired		(4,500	)		16.40		(19,000	)		18.11


Outstanding at December 31, 2013		103,500		$	20.97		82,000		$	20.90

Granted		—			—		—			—
Exercised		—			—		—			—
Expired		(7,500	)		22.25		(35,500	)		21.95


Outstanding at December 31, 2014		96,000		$	21.30		46,500		$	22.06

Granted		—			—		—			—
Exercised		—			—		(1,500	)		18.00
Expired		(9,000	)		20.00		(2,200	)		21.05


Outstanding at December 31, 2015		87,000		$	21.35		23,000		$	23.46


Options exercisable at:
December 31, 2015		87,000		$	21.35		23,000		$	23.46


Weighted average fair value of Options granted during years ended
December 31, 2013					$—					$—
December 31, 2014					$—					$—
December 31, 2015					$—					$—

CITIZENS HOLDING COMPANY

Years Ended December 31, 2015, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. Continued

The following table presents the outstanding stock options granted in relation to the option price and the weighted average maturity.


	Options		Weighted		Weighted Average
Range of Exercise Prices	Outstanding		Average Price		Life Remaining
$15.01 to $20.00		25,500		18.40	4 years, 5 months
$20.01 to $22.50		39,000		21.23	3 years, 1 month
$22.51 and above		45,500		24.18	1 years, 6 months

Total		110,000	$	21.79	2 years, 9 months

The intrinsic value of options granted under the Directors’ Plan at December 31, 2015 was $232,995 and the intrinsic value of the Employees’ Plan at December 31, 2015 was $5,980 for a total intrinsic value at December 31, 2015 of $238,975. Additionally, the total intrinsic value of options exercised during 2015 and 2014 was $1,950 and $0, respectively.

There were no options granted during 2015 under the 2013 Plan.

Management’s Discussion and Analysis of Financial Condition and Results of Operations as of

December 31, 2015, 2014 and 2013

OVERVIEW

The following information discusses the financial condition and results of operations of Citizens Holding Company (the “Company”) as of December 31, 2015, 2014 and 2013. In this discussion, all references to the activities, operations or financial performance of the Company reflect the Company’s activities, operations and financial performance through its wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank”), unless otherwise specifically noted. The Company’s financial statements and accompanying notes should be read in conjunction with this Management’s Discussion and Analysis.

Over the past three years, the Company has experienced growth in total assets and total deposits as management has capitalized on opportunities for organic growth within the Company’s market area and the addition of two branches in 2014. Total assets increased over the three-year period by $92.7 million or 10.5%. In the three-year period, net income increased every year in the three-year period ended December 31, 2015. Although the cost of deposits decreased in all three years, the interest received on earning assets decreased at a faster rate and the net interest margin decreased in all three years. Loan loss provisions in 2015 and 2014 decreased after increasing in 2013. Regardless of the decreases in the interest margins, management believes it has made appropriate provisions for loan losses.

During 2015 as compared to 2014, the Company’s total assets increased by $52,443,861, or 5.7%, loans increased by $38,690,883, or 10.1%, and total deposits increased by $57,310,894, or 8.2%. Loans increased in 2015 due to the Company’s expansion into new market areas that offset soft loan demand in other regions of the Company’s service area. Certificates of deposit ended 2015 at $210,764,475, or 4.9% lower than 2014. Demand, NOW, savings and money market accounts increased $68,088,778, or 14.4% from December 31, 2014 to $542,640,313 at December 31, 2015.

During 2014 as compared to 2013, the Company’s total assets increased by $47,991,781, or 5.5%, loans increased by $312,742, or 0.1% and total deposits increased by $41,464,098, or 6.3%. Loans increased in 2014 due to the Company’s expansion into new market areas that offset soft loan demand. Certificates of deposit ended 2014 at $221,542,359, or 4.7% lower than 2013. Demand, NOW, savings and money market accounts increased $52,365,443, or 12.4%, to $474,551,535 at December 31, 2014.

In 2015, the Company’s net income after taxes increased to $7,588,901, an increase of $139,142 from 2014. Net interest income decreased in 2015 primarily due to the reduction in interest income in both loans and investment securities. This decrease was offset by the decrease in non-interest expense and the increase in non-interest income. Net income for 2015 produced, on a fully diluted basis, earnings per share of $1.56 compared to $1.53 in 2014 and $1.47 for 2013.

In 2014, the Company’s net income after taxes increased to $7,449,759, an increase of $299,899 from 2013. Net interest income increased in 2014 primarily due to the reduction in

interest paid on FHLB advances. This increase was offset by the increase in non-interest expense in excess of the increase in non-interest income. Net income for 2014 produced, on a fully diluted basis, earnings per share of $1.53 compared to $1.47 in 2013 and $1.39 for 2012.

In 2013, the Company’s net income after taxes increased to $7,149,860, an increase of $365,861 from 2012. The decrease in rates on earning assets was greater than the decrease in rates paid on deposits in 2013. This decrease was offset by the increase in non-interest income and a decrease in other operating expenses. Net income for 2013 produced, on a fully diluted basis, earnings per share of $1.47 compared to $1.39 in 2012 and $1.49 for 2011.

The Company’s return on average assets (“ROA”) was 0.80% in 2015, compared to 0.84% in 2014 and 0.81% in 2013. The Company’s return on average equity (“ROE”) was 9.01% in 2015, 10.17% in 2014 and 9.00% in 2013. During these periods, leverage capital ratios (the ratio of equity to average total assets) decreased from 9.63% in 2013 to 9.60% in 2014 and decreased to 9.26% in 2015. The ROE in 2015, 2014 and 2013 is a function of the level of net income and equity balances during those years. The changes in ROA were also a result of the Company’s income increasing in 2013, 2014 and again in 2015 and also affected by the change in total assets during these time periods. The Company set the annual dividend payout rate to approximately 59.62% of 2015 earnings per share, as compared to 58.17% in 2014 and 59.86% in 2013. The leverage capital ratio of 9.26% in 2015 remains above the regulatory requirement of 5% to be considered “well capitalized” under applicable Federal Deposit Insurance Corporation (the “FDIC”) guidelines for the Bank.

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses

The accounting policy most important to the presentation of the Company’s financial statements relates to the allowance for loan loss and the related provision for loan losses. The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on a monthly analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment as recognized under ASC Subtopic 450-20, Loss Contingencies. The collective impairment is calculated based on loans grouped by similar risk characteristics. Another component of the allowance is losses on loans assessed as impaired under ASC Subtopic 310-10, Loan Impairments. The balance of these loans determined to be impaired under ASC Subtopic 310-10 and their related allowance is included in management’s estimation and analysis of the allowance for loan losses. For a discussion of other considerations in establishing the allowance for loan losses and the Company’s and the Bank’s loan policies and procedures for addressing credit risk, please refer to the disclosures in this Item under the heading “Provision for Loan Losses and Asset Quality.”

Other Than Temporary Impairment

The Company currently classifies a portion of its debt securities as AFS as they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income (loss), net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement; and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Other Real Estate

Real estate acquired through foreclosure on a loan or by surrender of the real estate in lieu of foreclosure is called “OREO”. OREO is initially recorded at the fair value of the property less estimated costs to sell, which establishes a new cost basis. OREO is subsequently accounted for at the lower of cost or fair value of the property less estimated costs. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Valuation adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Valuation adjustments are also required when the listing price to sell an OREO has had to be reduced below the current carrying value. If there is a decrease in the fair value of the property from the last valuation, the decrease in value is charged to noninterest expense. All income produced from, changes in fair values in, and gains and losses on OREOs is also included in noninterest expense. During the time the property is held, all related operating and maintenance costs are expensed as incurred.

Intangible Assets

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead reviewed for impairment when there is evidence to suggest that the estimated fair value of the net assets is lower than the carrying value, or at a minimum of once a year. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill was the only intangible asset with an indefinite life on the Company’s balance sheet. Other intangible assets consisted of core deposit and acquired customer relationship intangible assets arising from the Company’s acquisition of the Citizens Bank and Trust Company of Louisville, Mississippi. These assets are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which were determined to be 15 years.

Stock Based Compensation

The Company recognizes stock compensation expenses in accordance with FASB ASC Topic 718, Compensation-Stock Compensation. Generally, all options granted to employees and directors fully vest six months and one day after the date of grant, rather than vesting in tranches over a specified period. Given the limited historical amount of forfeited options, the Company has not reduced compensation expense for estimated forfeitures.

The Company utilizes the Black-Scholes valuation model to determine the fair value of stock options. The Black-Scholes model requires the use of certain assumptions, including the volatility of the Company’s stock price, the expected life of the option, the expected dividend rate and the discount rate. The Company does not currently expect to change the model or its methods for determining the assumptions underlying the valuation of future stock option grants. For more information on the Company’s stock options and the assumptions used to calculate the expense of such options, please refer to Note 1, “Summary of Significant Accounting Policies,” and Note 18, “Stock Options” to the Company’s Consolidated Financial Statements included in this Annual Report.

Income Taxes

The Company uses the asset and liability method, which recognizes the future tax consequences attributable to an event or a liability or asset that has been recognized in the consolidated financial statements. Due to tax regulations, several items of income and expense are recognized in different periods for tax return purposes than for financial reporting purposes. These items represent “temporary differences.” Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Deferred tax assets represent future deductions in the Company’s income tax return, while deferred tax liabilities represent future payments to tax authorities. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Please refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements of the Company included in this Annual Report for a detailed discussion of other significant accounting policies affecting the Company.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report contains statements which constitute forward-looking statements and information that are based on management’s beliefs, plans, expectations, 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 report that do not relate to historical facts are intended to identify forward-looking statements. The Company notes that a variety of factors could cause its actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the business of the Company and the Bank, include, but are not limited to, the following:

•

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

•

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

•

changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased operating expenses;

•

increased competition from other financial institutions;

•

the impact of technological advances;

•

changes in asset quality and loan demand;

•

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

•

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

The Company undertakes no obligation to update or revise any forward-looking statements subsequent to the date on which they are made.

SELECTED FINANCIAL DATA

The following selected financial data has been taken from the Company’s Consolidated Financial Statements and related notes included in this Annual Report and should be read in conjunction with such consolidated financial statements and related notes. Dollar references in all of the following tables are in thousands except for per share data.

The major components of the Company’s operating results for the past five years are summarized in Table 1 - Five Year Financial Summary of Consolidated Statements and Related Statistics.

TABLE 1 - FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED

STATISTICS (in thousands, except per share and ratio amounts)


	2015		2014		2013		2012		2011
Summary of Earnings

Total Interest Income	$	30,965	$	31,380	$	32,116	$	34,388	$	36,974
Total Interest Expense		3,077		3,018		4,080		5,709		6,642
Provision for loan losses		556		923		2,204		1,546		2,995
Non-interest income		8,327		8,163		7,816		7,402		7,442
Non-interest expense		25,591		26,324		24,728		26,100		26,244
Income tax expense		2,479		1,828		1,770		1,651		1,317
Net Income		7,589		7,450		7,150		6,784		7,218

Per Share Data

Earnings-basic	$	1.56	$	1.53	$	1.47	$	1.40	$	1.49
Earnings-diluted		1.56		1.53		1.47		1.39		1.49
Cash dividends		0.93		0.89		0.88		0.88		0.88
Book value at year end		17.73		16.78		13.61		18.28		17.77

Selected Year End Actual Balances

Loans, net of unearned income	$	429,582	$	390,960	$	392,183	$	368,891	$	389,262
Allowance for loan losses		6,474		6,542		8,077		6,954		6,681
Investment Securities		428,308		386,562		398,176		420,908		374,508
Earning assets		894,765		833,845		785,592		802,220		760,744
Total assets		973,505		921,061		873,069		880,840		853,945
Deposits		753,405		696,094		654,630		642,549		572,338
Long term borrowings		20,000		20,000		33,626		68,674		68,677
Shareholders’ equity		86,425		81,858		66,266		88,869		86,079

Selected Year End Average Balances

Loans, net of unearned income	$	412,161	$	389,720	$	371,200	$	381,597	$	407,748
Allowance for loan losses		6,637		7,902		7,078		7,056		6,594
Investment securities		421,729		396,806		419,461		360,721		325,179
Earning assets		863,830		798,432		801,549		766,663		753,042
Total assets		945,270		884,688		882,285		842,456		829,177
Deposits		725,116		682,444		650,931		592,723		543,711
Long term borrowings		20,056		35,593		58,192		72,553		82,576
Shareholders’ equity		84,250		73,219		79,458		87,972		82,254


	2015			2014			2013			2012			2011

Selected Ratios

Return on average assets		0.80	%		0.84	%		0.81	%		0.81	%		0.87	%
Return on average equity		9.01	%		10.17	%		9.00	%		7.71	%		8.78	%
Dividend payout ratio		59.62	%		58.17	%		59.86	%		62.86	%		59.06	%
Equity to year end assets		8.88	%		8.89	%		7.59	%		10.09	%		10.08	%
Total risk-based capital to risk-adjusted assets		17.54	%		17.84	%		17.49	%		18.22	%		17.53	%
Leverage capital ratio		9.26	%		9.60	%		9.63	%		9.58	%		9.47	%
Efficiency ratio		68.69	%		70.09	%		67.52	%		70.73	%		68.51	%

NET OPERATING INCOME

Net operating income for 2015 increased by 1.9% to $7,588,901 or $1.56 per share-basic and -diluted, from $7,449,759, or $1.53 per share-basic and -diluted for 2014. The provision for loan losses for 2015 was $556,687 as compared to $923,397 in 2014. The decrease in the loan loss provision for 2015 was mainly due to management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions. Non-interest income increased by $164,955, or 2.0%, and non-interest expense decreased by $732,745 or 2.8%, in 2015. Non-interest income for 2015 increased primarily due to an increase in ATM transaction service charges offset partially by a decrease in overdraft charges. Non-interest expense decreased due to a decrease in writedowns on other real estate, loan collection expense, depreciation expense, office supplies and increases in salaries and benefits.

Net operating income for 2014 increased by 4.2% to $7,449,759 or $1.53 per share-basic and -diluted, from $7,149,860, or $1.47 per share-basic and -diluted for 2013. The provision for loan losses for 2014 was $923,397 as compared to $2,204,366 in 2013. The decrease in the loan loss provision for 2014 was mainly due to management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions. Non-interest income increased by $346,402, or 4.4%, and non-interest expense increased by $1,596,101 or 6.5%, in 2014. Non-interest income for 2014 increased primarily due to an increase in service fees on deposit accounts and other service charges and the receipt of insurance proceeds that was the result of the death of a bank officer that was insured with bank owned life insurance. Non-interest expense increased due to increased writedowns on other real estate, an increase in regulatory and compliance costs, an increase in banking equipment related service costs and an increase in office supplies.

Net operating income for 2013 increased by 6.0% to $7,149,860 or $1.47 per share-basic and -diluted, from $6,783,999, or $1.40 per share-basic and $1.39 per share-diluted for 2012. The provision for loan losses for 2013 was $2,204,366 compared to the provision of $1,545,797 in 2012. The increase in the loan loss provision for 2013 was mainly due to management’s assessment of inherent losses in the loan portfolio including the impact caused by current local and national economic conditions. Non-interest income increased by $414,323, or 5.6%, and non-interest expense decreased by $1,372,356 or 5.3%, in 2013. Non-interest income for 2013 increased primarily due to an increase in service fees on deposit accounts and other service

charges. Non-interest expense decreased due to a decrease in salaries and benefits and a decrease in regulatory costs. The decrease in salaries and benefits is related to a reduction in the number of employees and the reduction in 401(k) matching for officers and employees.

NET INTEREST INCOME

Net interest income is the most significant component of the Company’s earnings. Net interest income is the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest margin is this difference expressed as a percentage of average earning assets. Net interest income is affected by several factors, including the volume of earning assets and liabilities, the mix of earning assets and liabilities, and interest rates. The discussion below is presented on a tax equivalent basis which management believes to be the best way to analyze net interest income.

Net interest income on a tax equivalent basis was $28,879,000, $29,411,000 and $29,195,000 for the years 2015, 2014 and 2013, respectively. Net interest margin was 3.33%, 3.60% and 3.58% for the same periods. During 2015, the yields on interest earning assets declined less than the rates paid on interest bearing deposits with the largest decrease occurring in the rates paid on certificates of deposit. In 2015 as compared to 2014, interest-bearing assets increased by $50.4 million, or 6.2% and interest bearing liabilities increased by $41.088 million, or 6.2%. For the year ended December 31, 2015, the average yield on earnings assets was 3.68%, a decrease of 28 basis points compared to the average yield at December 31, 2014. The average rate paid on interest-bearing liabilities was 0.43%, a decrease of 2 basis points compared to the average rate at December 31, 2014.

During 2014, the yields on interest earning assets declined slightly less than the rates paid on interest bearing deposits with the largest decrease occurring in the rates paid on certificates of deposit. In 2014 as compared to 2013, interest-bearing assets increased by $1.8 million, or 0.2% and interest bearing liabilities declined by $6.1 million, or 0.9%. For the year ended December 31, 2014, the average yield on earnings assets was 3.96%, a decrease of 12 basis points compared to the average yield at December 31, 2013. The average rate paid on interest-bearing liabilities was 0.45%, a decrease of 15 basis points compared to the average rate at December 31, 2013.

For the year ended December 31, 2013, the average yield on earnings assets was 4.08%, a decrease of 58 basis points compared to the average yield at December 31, 2012. The average rate paid on interest-bearing liabilities was 0.60%, a decrease of 28 basis points compared to the average rate at December 31, 2012. The volume of earning assets increased 6.9% while the volume of interest-bearing liabilities increased 5.2% in 2013.

During this three-year period, loan demand improved in all periods. Loans generally provide the Company with yields that are greater than the yields on typical investment securities.

During 2003, the Company purchased $11.4 million of additional bank-owned life insurance. The income received by the Company on these policies increased the Company’s

total investment to approximately $22.2 million at December 31, 2013, $22.3 million at December 31, 2014 and $23.1 million at December 31, 2015. The additional purchases were made to provide a future funding source for certain of the Company’s deferred compensation arrangements. Such insurance also offers more attractive yields than other investment securities.

Table 2 – Average Balance Sheets and Interest Rates sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the fiscal years ended December 31, 2015, 2014 and 2013.

TABLE 2 – AVERAGE BALANCE SHEETS AND INTEREST RATES

(in thousands)


	Average Balance						Income/Expense						Average Yield/Rate
	2015		2014		2013		2015		2014		2013		2015			2014			2013
Loans:
Loans, net of unearned⁽¹⁾	$	411,687	$	389,217	$	370,769	$	20,055	$	20,082	$	20,611		4.87	%		5.16	%		5.56	%

Investment Securities
Taxable		335,538		318,850		328,797		8,027		8,227		7,949		2.39	%		2.58	%		2.42	%
Tax-exempt		85,597		91,933		101,543		3,756		4,071		4,697		4.39	%		4.43	%		4.63	%

Total Investment Securities		421,135		410,783		430,340		11,783		12,298		12,646		2.80	%		2.99	%		2.94	%

Federal Funds Sold and Other		35,336		17,806		14,882		90		49		52		0.25	%		0.23	%		0.35	%


Total Interest Earning Assets⁽¹⁾⁽²⁾		868,158		817,806		815,991		31,928		32,429		33,309		3.68	%		3.96	%		4.08	%


Non-Earning Assets		77,112		66,882		66,294


Total Assets	$	945,270	$	884,688	$	882,285

Deposits:
Interest-bearing Demand
Deposits⁽³⁾	$	300,636	$	262,142	$	240,524	$	693	$	550	$	561		0.23	%		0.21	%		0.23	%
Savings		64,967		58,053		50,846		83		100		111		0.12	%		0.17	%		0.22	%
Time		216,488		227,390		239,104		1,040		1,105		1,307		0.48	%		0.49	%		0.55	%

Total Deposits		582,091		547,585		530,474		1,816		1,755		1,979		0.31	%		0.32	%		0.37	%

Borrowed Funds
Short-term Borrowings		106,988		84,813		85,804		720		573		666		0.67	%		0.68	%		0.78	%
Long-term Borrowings		20,000		35,593		58,048		513		690		1,469		2.53	%		1.94	%		2.53	%

Total Borrowed Funds		126,988		120,406		143,852		1,233		1,263		2,135		0.97	%		1.05	%		1.48	%

Total Interest-Bearing
Liabilities ⁽³⁾		709,079		667,991		674,326		3,049		3,018		4,114		0.43	%		0.45	%		0.61	%

Non-Interest Bearing Liabilities
Demand Deposits		142,322		134,859		120,457
Other Liabilities		9,619		8,619		8,044
Shareholders’ Equity		84,250		73,219		79,458

Total Liabilities and Shareholders’ Equity	$	945,270	$	884,688	$	882,285

Interest Rate Spread														3.25	%		3.51	%		3.47	%

Net Interest Margin							$	28,879	$	29,411	$	29,195		3.33	%		3.60	%		3.58	%


Less
Tax Equivalent Adjustment								967		1,048		1,193


Net Interest Income							$	27,912	$	28,363	$	28,002

⁽¹⁾	Overdrafts on demand deposit accounts are not included in the average volume calculation as they are not considered interest earning assets by the Company. They are included in the “Non-Earning Assets” balance above.

⁽²⁾	Earning Assets in Table 2 does not include the dividend paying stock of the Federal Home Loan Bank.

⁽³⁾	Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the non-interest bearing liabilities section above.

Table 3 – Net Average Interest Earning Assets illustrates net interest earning assets and liabilities for 2015, 2014, and 2013.

TABLE 3 – NET AVERAGE INTEREST EARNING ASSETS


	(in thousands)

	2015		2014		2013
Average interest earning assets	$	868,158	$	817,806	$	815,991
Average interest bearing liabilities		709,079		667,991		674,326

Net average interest earning assets	$	159,079	$	149,815	$	141,665

Table 4 – Volume/Rate Analysis depicts the effect on interest income and interest expense of changes in volume and changes in rate from 2013 through 2015. Variances, which were attributable to both volume and rate, are allocated proportionately between rate and volume using the absolute values of each for a basis for the allocation. Non-accruing loans are included in the average loan balances used in determining the yields. Interest income on tax-exempt securities and loans has been adjusted to a tax equivalent basis using a federal income tax rate of 34%.

TABLE 4 – VOLUME/RATE ANALYSIS

(in thousands)


	2015 Change from 2014									2014 Change from 2013
	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME

Loans	$	1,094			(1,121	)	$	(27	)	$	(582	)	$	(2,053	)	$	(2,635	)
Taxable Securities		399			(599	)		(200	)		1,734			(1,111	)		623
Non-Taxable Securities		(278	)		(37	)		(315	)		(97	)		(235	)		(332	)
Federal Funds Sold and Other		44			(3	)		41			(17	)		6			(11	)


TOTAL INTEREST INCOME	$	1,259		$	(1,760	)	$	(501	)	$	1,038		$	(3,393	)	$	(2,355	)


INTEREST EXPENSE

Interest-bearing demand deposits	$	89			54			143		$	106		$	(318	)		(212	)
Savings Deposits		8			(25	)		(17	)		8			(31	)		(23	)
Time Deposits		(52	)		(13	)		(65	)		(53	)		(478	)		(531	)
Short-term borrowings		149			(2	)		147			53			(141	)		(88	)
Long-term borrowings		(395	)		218			(177	)		(435	)		(340	)		(775	)


TOTAL INTEREST EXPENSE	$	(201	)	$	232			31		$	(321	)	$	(1,308	)		(1,629	)


NET INTEREST INCOME	$	1,460		$	(1,992	)	$	(532	)	$	1,359		$	(2,085	)	$	(726	)

LOANS

The loan portfolio constitutes the major earning asset of the Company and, in the opinion of management, offers the best alternative for maximizing net interest margin. The Company’s loan personnel have the authority to extend credit under guidelines established and approved by the Board of Directors. Any aggregate credit that exceeds the authority of the loan officer is forwarded to the Board’s loan committee for approval. The loan committee is composed of certain directors, including the Chairman of the Board of Directors. All aggregate loans that exceed the loan committee’s lending authority are presented to the full Board of Directors for ultimate approval or denial. The loan committee not only acts as an approval body to ensure consistent application of the Company’s loan policy but also provides valuable insight through communication and pooling of knowledge, judgment, and experience of its members.

The Company has stated in its loan policy the following objectives for its loan portfolio:

•

to make loans after sound and thorough credit analysis;

•

to properly document all loans;

•

to eliminate loans from the portfolio that are under-priced, high risk or difficult and costly to administer;

•

to seek good relationships with the customer;

•

to avoid undue concentrations of loans; and

•

to keep non-accrual loans to a minimum by aggressive collection policies.

Loan demand in the Company’s market improved in 2013, 2014 and 2015 after economic conditions began to show some improvement. Although the Company continues to face intense competition for available loans from other financial institutions and the current economic conditions have improved slightly, the Company was able in 2014 and 2015 to increase the amount of loans outstanding. The impact on the housing market caused by the opening of a casino on the nearby Choctaw Indian Reservation in 1995 has lessened. Real estate mortgage loans originated by the Company decreased by 0.1%, or $124,295 in 2015, by 1.3%, or $1,319,331, in 2014 and by 8.9%, or $10,347,060, in 2013 when compared to the prior year. The decrease in mortgage loans in all years reflects the weakness in the local housing markets after seeing normal growth in the previous years.

Commercial and agricultural loans increased by $48,886,679, or 22.5% in 2015, decreased by $16,054,858 or 6.9% in 2014 and increased by $21,885,761, or 10.3% in 2013. Commercial, financial and agricultural loans are the largest segment of the loan portfolio and, by nature, bear a higher degree of risk. Management believes the lending practices, policies and procedures applicable to this loan category are adequate to manage any risk represented by the growth of the loans in this category.

Consumer loans increased by $110,443, or 0.4% in 2015 after declining $192,299, or 0.7% in 2014 and $2,477,767, or 8.6% in 2013, compared to the prior year. The Company believes that changes in consumer purchasing habits and the increase in loan sources have affected the growth of this segment of loans.

Table 5 – Loans Outstanding reflects outstanding balances by loan type for the past five years. Additional loan information is presented in Note 5, “Loans,” to the Company’s Consolidated Financial Statements included in this Annual Report.

TABLE 5 – LOANS OUTSTANDING

(in thousands)


	AT DECEMBER 31,
	2015		2014		2013		2012		2011
Commercial, financial and agricultural	$	266,464	$	217,577	$	233,632	$	211,746	$	203,458
Real estate - construction		33,133		43,233		27,224		12,755		13,481
Real estate - mortgage		104,046		104,170		105,489		115,837		133,987
Consumer		26,625		26,515		26,323		28,800		38,540


TOTAL LOANS	$	430,268	$	391,495	$	392,668	$	369,138	$	389,466

Table 6 – Loan Liquidity and Sensitivity to Changes in Interest Rates reflects the maturity schedule or repricing frequency of all loans. Also presented are fixed and variable rate loans maturing after one year.

TABLE 6 – LOAN LIQUIDITY

LOAN MATURITIES AT DECEMBER 31, 2015


	1 YEAR OR LESS		1 - 5 YEARS		OVER 5 YEARS		Total
Commercial, financial and agricultural	$	75,930	$	183,246	$	7,288	$	266,464
Real estate - construction		7,900		24,848		385	$	33,133
Real estate - mortgage		22,079		66,917		15,050	$	104,046
Consumer		12,907		13,092		626	$	26,625


Total loans	$	118,816	$	288,103	$	23,349	$	430,268

SENSITIVITY TO CHANGES IN INTEREST RATES


	1 - 5 YEARS		OVER 5 YEARS
Fixed rates	$	275,630	$	9,372
Variable rates		12,473		13,977


Total loans	$	288,103	$	23,349

Each loan the Company makes either has a stated maturity as to when the loan is to be repaid or is subject to an agreement between the Company and the customer governing its progressive reduction. The Company’s policy is that every loan is to be repaid by its stated maturity and not carried as a continuing debt. Generally, the Company requires that principal reductions on a loan must have begun prior to the second renewal date of the loan.

PROVISION FOR LOAN LOSSES AND ASSET QUALITY

The allowance for loan losses represents an amount that in management’s judgment will be adequate to absorb estimated probable losses within the existing loan portfolio. Loans that management determines to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of specific loans and prior loss experience. Other factors considered by management include specific economic events, general economic conditions and trends, and loan portfolio mix and growth. The allowance for loan losses is subject to close regulatory review from the FDIC and the Mississippi Department of Banking and Consumer Finance and is also a factor in each agency’s determination of the Company’s capital adequacy. The estimation of losses in the Company’s loan portfolio is susceptible to changes resulting from changes in the financial condition of individual borrowers and economic conditions in the Company’s market area.

The allowance for loan losses is established through a provision for loan losses charged against net income. This expense is determined by a number of factors, including historical loan losses, assessment of specific credit weaknesses within the portfolio, assessment of the prevailing economic climate, and other factors that may affect the overall condition of the loan portfolio. Management utilized these factors to determine the provision for loan losses for each of 2013, 2014 and 2015. The ratio of net loans charged off to average loans was 0.15% in 2015, 0.63% in 2014 and 0.29% in 2013. The chargeoffs in 2013, 2014 and 2015 reflect the weakness of the economy and the continuing local and national high unemployment. Management evaluates the adequacy of the allowance for loan loss on a monthly basis and makes adjustments to the allowance based on this analysis.

The provision for loan losses in 2015 was $556,687 compared to $923,397 in 2014 and $2,204,366 in 2013. The decrease in the provision for 2015 and 2014 was mainly due to management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions. The Company uses a model that takes into

account historical charge-offs and recoveries and applies that to certain loan segments of the Company’s portfolio. At the end of 2015, the total allowance for loan losses was $6,473,703, an amount that management believes to be sufficient to cover estimated probable losses in the loan portfolio.

Activity in the allowance for loan losses is reflected in Table 7 – Analysis of Allowance for Loan Losses. The Company’s policy is to charge-off loans when in management’s opinion the loan is deemed uncollectible. Even after it is charged off, however, the Company makes concerted efforts to maximize recovery of such loan.

TABLE 7 – ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

(in thousands except for percentage amounts)


	2015			2014			2013			2012			2011
BALANCE AT BEGINNING OF YEAR	$	6,542		$	8,078		$	6,954		$	6,681		$	6,379

LOANS CHARGED-OFF

Commercial, financial and agricultural		457			2,213			915			920			1,523
Real estate - construction		—			249			1			99			67
Real estate - mortgage		201			149			223			250			922
Consumer		164			121			135			235			306


TOTAL CHARGE-OFFS		822			2,732			1,274			1,504			2,818


CHARGE-OFFS RECOVERED

Commercial, financial and agricultural		45			79			38			69			21
Real estate - construction		9			7			16			11			6
Real estate - mortgage		52			126			71			29			11
Consumer		91			61			69			122			87


TOTAL RECOVERIES		197			273			194			231			125


Net loans charged-off		625			2,459			1,080			1,273			2,693
Additions charged to operating expense		557			923			2,204			1,546			2,995


BALANCE AT END OF YEAR	$	6,474		$	6,542		$	8,078		$	6,954		$	6,681


Loans, net of unearned, at year end	$	429,582		$	390,960		$	392,183		$	368,891		$	389,262

Ratio of allowance to loans at year end		1.51	%		1.67	%		2.06	%		1.89	%		1.72	%

Average loans - net of unearned	$	412,172		$	389,720		$	371,200		$	381,597		$	407,748

Ratio of net loans charged-off to average loans		0.15	%		0.63	%		0.29	%		0.33	%		0.66	%

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

(in thousands)


	AT DECEMBER 31,
	2015		2014		2013		2012		2011
Commercial, financial and agricultural	$	4,710	$	4,352	$	5,565	$	3,965	$	3,453
Real estate - construction		402		806		495		351		285
Real estate - mortgage		770		918		1,413		1,868		2,111
Consumer		592		466		604		770		832


Total	$	6,474	$	6,542	$	8,077	$	6,954	$	6,681

COMPOSITION OF LOAN PORTFOLIO BY TYPE


	AT DECEMBER 31,
	2015			2014			2013			2012			2011
Commercial, financial and agricultural		61.93	%		55.58	%		59.50	%		57.36	%		52.24	%
Real estate - construction		7.70	%		11.04	%		6.93	%		3.46	%		3.46	%
Real estate - mortgage		24.18	%		26.61	%		26.86	%		31.38	%		34.40	%
Consumer		6.19	%		6.77	%		6.70	%		7.80	%		9.90	%


		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

Loan balances outstanding, as illustrated in Table 5, increased in 2015 even though the Company maintained tight credit standards, loan demand remained weak and the competition for loans was strong. In 2014 as compared to 2013, loans decreased due to increased competition for available loans and the Company’s rigorous credit standards. The highest percentage increase in 2015 occurred in the commercial real estate category, primarily due to an increase in the demand in this market. The allowance for loan losses is allocated to the various categories based on the historical loss percentage for each segment of loan and any specific reserves that might be assigned to those loans.

Non-performing assets and the relative percentages of such assets to loan balances are presented in Table 8 – Non-performing Assets. Non-performing loans include non-accrual loans, loans delinquent 90 days or more based on contractual terms and troubled debt restructurings. Management classifies loans as non-accrual when it believes that collection of interest is doubtful. This typically occurs when payments are past due over 90 days, unless the loans are well secured and in the process of collection. Another measurement of asset quality is OREO, which represents properties acquired by the Company through foreclosure following loan defaults by customers. The percentage of OREO to total loans at December 31, 2015 was 0.90% compared to 1.04% in 2014. OREO decreased in 2015 after increasing in 2014 due to fewer foreclosures in 2015 and the sale of several parcels that were acquired in foreclosure in previous years.

Loans on non-accrual status amounted to $14,422,613 in 2015 as compared to $11,854,274 in 2014 and $13,591,793 in 2013. Interest income forgone on loans classified as non-accrual in 2015 was $732,268 as compared to $819,524 in 2014 and $813,710 in 2013. Upon the classification of a loan as non-accrual, all interest accrued on the loan prior to the time it is classified as non-accrual is reversed and interest accruals are suspended until such time that the loan is in compliance with its terms and deemed collectable.

TABLE 8 – NON-PERFORMING ASSETS

(in thousands, except percentages)


	As of December 31,
	2015			2014			2013			2012			2011
PRINCIPAL BALANCE

Non-accrual	$	14,423		$	11,854		$	13,592		$	14,142		$	11,299
Accruing loans 90 days or more past due		76			880			2,095			609			269
Troubled debt restructurings		3,858			4,741			7,119			5,602			1,459


TOTAL NON-PERFORMING LOANS	$	18,357		$	17,475		$	22,806		$	20,353		$	13,027


Income on non-accrual loans not recorded	$	732		$	820		$	814		$	771		$	674

Non-performing as a percent of loans		4.26	%		4.46	%		5.81	%		5.51	%		3.34	%

Other real estate owned	$	3,573		$	4,052		$	3,751		$	4,682		$	4,869

OREO as a percent of loans		0.90	%		1.04	%		0.96	%		1.27	%		1.25	%

Allowance as a percent of non-performing loans		35.29	%		37.44	%		35.42	%		34.17	%		51.29	%

ASC Subtopic 310-10, Loan Impairments outlines the guidance for evaluating impaired loans. These statements changed the methods of estimating the loan loss allowance for problem loans. In general, when management determines that principal and interest due under the contractual terms of a loan are not fully collectible, management must value the loan using discounted future expected cash flows. Management considers the Company’s nonaccrual loans as being impaired under ASC Subtopic 310-10. The balances of impaired (including non-accruals) loans for the years 2015, 2014 and 2013 were $15,581,418, $13,079,337 and $13,591,793, respectively.

This table details the impaired loans by category for years ending 2015, 2014 and 2013.


	AT DECEMBER 31,
	2015		2014		2013
Commercial, financial and agricultural	$	12,368,556	$	10,312,674	$	11,469,394
Real estate - construction		75,070		91,540		136,271
Real estate - mortgage		3,102,372		2,554,284		1,865,718
Consumer		35,420		120,839		120,410


Total loans	$	15,581,418	$	13,079,337	$	13,591,793

Management monitors any loans that are classified under FDIC regulations as loss, doubtful or substandard, even if management has not classified the loans as non-performing or impaired. In addition to loans classified for regulatory purposes, management also designates certain loans for internal monitoring purposes in a “watch” category. Loans may be placed on management’s watch list as a result of delinquent status, management’s concern about the borrower’s financial condition or the value of the collateral securing the loan, a substandard classification during regulatory examinations, or simply as a result of management’s desire to monitor more closely a borrower’s financial condition and performance. Watch category loans may include loans that are still performing and accruing interest and may be current under the terms of the loan agreement but which management has a significant degree of concern about the borrowers’ ability to continue to perform according to the terms of the loan agreement. Watch category loans may also include loans, which, although adequately secured and performing, reflect a past delinquency problem or unfavorable financial trends exhibited by the borrower. Loss exposure on these loans is typically evaluated based primarily upon the estimated liquidation value of the collateral securing the loan.

At December 31, 2015, loans totaling $30,932,030 were included on the Company’s watch list compared to $31,921,730 at December 31, 2014. The majority of these loans are real estate loans that, although adequately collateralized, have experienced frequent delinquencies in scheduled payments. The inclusion of loans on this list does not indicate a greater risk of loss; rather it indicates that the loan possesses one of the several characteristics described above warranting increased oversight by management.

SECURITIES

At December 31, 2015, the Company classified its securities as AFS or HTM. AFS securities are reported at fair value, with unrealized gains and losses included as a separate component of equity, net of tax. HTM Securities are reported at amortized book value. The Company does not hold any securities classified as held for trading purposes.

Table 9 – Securities and Securities Maturity Schedule summarizes the amortized cost of securities from 2013 through 2015 and the maturity distribution at December 31, 2015, by classification.

TABLE 9 – SECURITIES

(in thousands)


	2015		2014		2013
SECURITIES AVAILABLE-FOR-SALE
U. S. Government Agencies	$	82,250	$	77,997	$	316,305
Mortgage Backed Securities		91,722		12,502		16,476
State, County and Muncipal Obligations		90,376		84,896		96,259
Other Securities		2,916		2,997		3,026


TOTAL SECURITIES AVAILABLE-FOR-SALE	$	267,264	$	178,392	$	432,066


	2015		2014		2013
SECURITIES HELD-TO-MATURITY
U. S. Government Agencies	$	161,043	$	206,817	$	—


TOTAL SECURITIES HELD-TO-MATURITY	$	161,043	$	206,817	$	—

SECURITIES MATURITY SCHEDULE


	1 year or less					1 to 5 years					5 to 10 years					over 10 years
	Actual Balance		Average Yield			Actual Balance		Average Yield			Actual Balance		Average Yield			Actual Balance		Average Yield
AVAILABLE-FOR-SALE
U. S. Government Agencies(1)	$	—		0.00	%	$	—		0.00	%	$	52,476		2.31	%	$	29,774		2.59	%
Mortgage Backed Securities		—		0.00	%		—		0.00	%		5,010		2.32	%		86,712		2.25	%
State, County and Municipal(2)		3,029		4.42	%		13,985		5.05	%		22,861		5.17	%		50,501		4.42	%
Other Securities		—		0.00	%		—		0.00	%		—		0.00	%		2,916		6.85	%


TOTAL AVAILABLE-FOR-SALE	$	3,029		4.42	%	$	13,985		5.05	%	$	80,347		3.12	%	$	169,903		3.04	%


HELD-TO-MATURITY
U. S. Government Agencies(1)	$	—		0.00	%	$	—		0.00	%	$	37,052		3.12	%	$	123,991		3.81	%


TOTAL HELD-TO-MATURITY	$	—		0.00	%	$	—		0.00	%	$	37,052		3.12	%	$	123,991		3.81	%

(1)	The maturities for the mortgage backed securities included in this line item are based on final maturity.

(2)	Average yields were calculated on tax equivalent basis using a marginal federal income tax rate of 34% and a state tax rate of 5%.

The change in the carrying value of the AFS portfolio is due to market value fluctuations resulting from the changing interest rate environment during 2015. This change is not used in the Tier 1 capital calculation.

As detailed in Table 9, the security portfolio increased $43.1 million or 11.2% in 2015, decreased $46.9 million or 10.8% in 2014 and increased $18.1 million or 4.4% in 2013. The Company strives to maximize the yields on its portfolio while balancing pledging needs and managing risk. The Company seeks to invest most of its funds not needed for loan demand or the reduction of other borrowings in higher yielding securities and not in the lower yielding federal funds sold.

DEPOSITS

The Company offers a wide variety of deposit services to individual and commercial customers, such as non-interest-bearing and interest-bearing checking accounts, savings accounts, money market deposit accounts and time deposits. The deposit base is the Company’s major funding source for earning assets. Time deposits decreased in 2015 and 2014 due to customers desiring to stay short and liquid with their deposits. During this time, all other segments of deposits increased.

A three-year schedule of average deposits by type and maturities of time deposits greater than $100,000 is presented in Table 10 – Deposit Information.

TABLE 10 – DEPOSIT INFORMATION


	(in thousands, except percentages)
	2015					2014					2013
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing	$	148,724				$	134,859				$	120,457
Interest-bearing demand		323,381		0.21	%		262,142		0.21	%		240,524		0.22	%
Savings		70,535		0.12	%		58,053		0.12	%		50,846		0.15	%
Time deposits		210,765		0.49	%		227,390		0.49	%		239,104		0.55	%


	$	753,405		0.25	%	$	682,444		0.25	%	$	650,931		0.30	%

MATURITY RANGES OF TIME DEPOSITS

OF $100,000 OR MORE


	AS OF DECEMBER 31, 2015
3 months or less	$	30,940
3 through 12 months		62,585
1 year to 3 years		22,499
over 3 years		0


	$	116,024

The Company, in its normal course of business, will acquire large time deposits, generally from public entities, with a variety of maturities. These funds are acquired on a bid basis and are considered to be part of the deposit base of the Company.

BORROWINGS

Aside from the core deposit base and large denomination time deposits mentioned above, the remaining funding sources utilized by the Company include short-term and long-term borrowings. Short-term borrowings consist of Federal Funds Purchased from other financial institutions on an overnight basis, short-term advances from the FHLB and securities sold under agreement to repurchase. Long-term borrowings are advances from the FHLB with an initial maturity of greater than one year.

TABLE 11 - SHORT-TERM BORROWINGS

(in thousands)


	As of December 31,
	2015			2014			2013
Short-term borrowings
Year-end balance	$	104,298		$	114,427		$	82,421
Weighted average rate		0.68	%		0.68	%		0.67	%

Maximum month-end balance	$	136,833		$	118,622		$	151,929

Year to date average balance	$	106,928		$	82,856		$	80,393
Weighted average rate		0.66	%		0.66	%		0.77	%

The Company borrows funds for short periods from the FHLB as an alternative to Federal Funds Purchased. The Company foresees short-term borrowings to be a continued source of liquidity and likely will continue to use these borrowings as a method to fund short-term needs. At December 31, 2015, the Company had the capacity to borrow up to $166,840,812 from the FHLB and other financial institutions in the form of Federal Funds Purchased. The Company generally will use these types of borrowings if loan demand is greater than the growth in deposits. In 2015, the Company retained its borrowings from the FHLB at $20,000,000 and its Federal Funds Purchased at $0. In 2014, the Company reduced its borrowing to $20,000,000 from the FHLB and decreased its Federal Funds Purchased to $0. In 2015, the balances in Securities Sold Under Agreement to Repurchase decreased $10,128,588, or 8.9% to $104,298,182. In 2014, these balances increased to $114,426,770, an increase of $32,005,989, or 38.8%.

At the end of 2015, the Company had long-term debt in the amount of $20,000,000 to the FHLB for advances and $48,017 payable to the State of Mississippi for advances under the Mississippi Agribusiness Enterprise Loan Program. This program provides interest-free loans to banks to fund loans to qualifying farmers. Farmers that qualify for the program receive 20% of their loan at zero interest. When the loan is repaid, the State of Mississippi receives 20% of the principal payment, which is equal to the amount advanced by the state, and the Company retains the balance of the principal payment.

The remaining maturity schedule of the long-term debt at December 31, 2015 is listed below.


	(in thousands)
	2015
Less than one year	$	—
One year to three years		20,003
Over three years		45


Total long-term borrowings	$	20,048

NON-INTEREST INCOME AND EXPENSE

Table 12 - Non-Interest Income and Expense illustrates the Company’s non-interest income and expense from 2013 through 2015 and percentage changes between such years.

TABLE 12 - NON-INTEREST INCOME & EXPENSE

(in thousands)


	% CHANGE							% CHANGE
	2015		FROM ‘14			2014		FROM ‘13			2013
NON-INTEREST INCOME
Service charges on deposit accounts	$	3,867		-1.68	%	$	3,933		1.24	%	$	3,885
Other operating income		4,460		5.44	%		4,230		7.61	%		3,931


TOTAL NON-INTEREST INCOME	$	8,327		2.01	%	$	8,163		4.44	%	$	7,816


NON-INTEREST EXPENSE
Salaries and employee benefits	$	13,295		1.53	%	$	13,095		-0.12	%	$	13,111
Occupancy expense, including equipment		5,225		0.58	%		5,195		18.18	%		4,396
Other operating expense		7,071		-11.99	%		8,034		11.26	%		7,221


TOTAL NON-INTEREST EXPENSE	$	25,591		-2.78	%	$	26,324		6.45	%	$	24,728

Non-interest income typically consists of service charges on checking accounts, including debit card fees, and other financial services. With continued pressure on interest rates, the Company has sought to increase its non-interest income through the expansion of fee income and the development of new services. Currently, the Company’s main sources of non-interest income are service charges on checking accounts, safe deposit box rentals, credit life insurance premiums and title insurance service fees.

During 2015 as compared to 2014, non-interest income increased by $164,955, or 2.01%, when compared to 2014. An increase in other income partially offset a decrease in service charge income from checking accounts.

During 2014 as compared to 2013, non-interest income increased by $346,402, or 4.44%, when compared to 2013. An increase in other income and service charge income from checking accounts was partially offset by a decrease in proceeds from gains on sales of investment securities. Other income increased mainly due to the receipt of proceeds of an insurance policy that insured the life of a bank officer that died in 2014.

During 2013, non-interest income increased by $414,323, or 5.59%, when compared to 2012. An increase in other income and service charge income from checking accounts was partially offset by a decrease in proceeds from gains on sales of investment securities.

Non-interest expenses consist of salaries and benefits, occupancy expense and other overhead expenses incurred by the Company in the transaction of its business. In 2015 as compared to 2014, non-interest expense decreased by $732,745, or 2.8%, to $25,590,967. Included in this decrease was a reduction in other expense in the amount of $963,138, or 12.0% partially offset by an increase in salaries and benefits in the amount of $200,188, or 1.5% and an increase in occupancy expense in the amount of $30,205, or 0.6%. The increase in occupancy expense is related to increased banking equipment service costs and the decrease in other expense was in large part due to decreased loan collection expense and writedowns on other real estate.

In 2014 as compared to 2013, non-interest expense increased by $1,596,101, or 6.5%, to $26,323,712. Included in this increase was a reduction in salaries and benefits in the amount of $15,580, or 0.1%, an increase in occupancy expense in the amount of $798,903, or 18.2% and an increase in other expense in the amount of $812,778, or 11.3%. The increase in occupancy expense is related to increased banking equipment service costs and the increase in other expense was in large part due to increased regulatory and compliance costs.

In 2013, non-interest expense decreased by $1,372,356, or 5.3%, to $24,727,611. Included in this decrease was a reduction in salaries and benefits in the amount of $626,336, or 4.6% and a decrease in occupancy expense in the amount of $91,704, or 2.0%. The decrease in occupancy expense is related to cost savings and the closing of a branch in Meridian, Mississippi in 2013.

In 2015, the Company’s efficiency ratio was 68.69%, compared to 70.09% in 2014 and 67.52% in 2013. The efficiency ratio is calculated to measure the cost of generating one dollar of revenue. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income, on a fully tax equivalent basis, and non-interest income.

INCOME TAXES

The Company records a provision for income taxes currently payable, along with a provision for deferred taxes to be realized in the future. Such deferred taxes arise from differences in timing of certain items for financial statement reporting rather than income tax reporting. The deferred tax amount of $9,165,417 is considered realizable without the use of extraordinary tax planning strategies.

The Company’s effective tax rate was 24.62%, 19.70% and 19.84% in 2015, 2014 and 2013, respectively. The major difference between the effective tax rate applied to the Company’s financial statement income and the federal statutory rate of 34% is interest on tax-exempt securities and loans. Further tax information is disclosed in Note 10, “Income Taxes” to the Company’s Consolidated Financial Statements included in this Annual Report.

LIQUIDITY AND RATE SENSITIVITY

Liquidity management is the process by which the Company ensures that adequate liquid funds are available to meet its financial commitments on a timely basis. These commitments include honoring withdrawals by depositors, funding credit obligations to borrowers, servicing long-term obligations, making shareholder dividend payments, paying operating expenses, funding capital expenditures and maintaining reserve requirements.

The Company’s predominant sources of funding include: core deposits (consisting of both commercial and individual deposits); proceeds from maturities of securities; repayments of loan principal and interest; Federal Funds Purchased; and short-term and long-term borrowing from the FHLB. In 2015 as compared to 2014, the Company experienced an increase in deposits and an increase in loans outstanding. The increase in investment securities is mainly the result of the desire to invest funds not needed for funding current loan obligations. The Company relies upon non-core sources of funding, such as Federal Funds Purchased and short and long term borrowings from the FHLB, when deposit growth is not adequate to meet its short term needs. While the strategy of using these wholesale funding sources is adequate to cover liquidity deficiencies in the short term, the Company’s goal is to increase core deposits as a source of long term funding. Management does not intend to rely on borrowings from the FHLB as the first choice as a source of funds but prefers to increase core deposits through increased competition for available deposits. Management believes that core deposits can continue to be increased by offering competitive rates and superior service to the Bank’s customers.

The Company maintained its $20,000,000 of FHLB advances that will mature during 2018 and will continue to use advances if they are needed to maintain the Company’s liquidity position.

The deposit base is diversified between individual and commercial accounts, which the Company believes helps it avoid dependence on large concentrations of funds. The Company does not solicit certificates of deposit from brokers. The primary sources of liquidity on the asset side of the balance sheet are federal funds sold and securities classified as AFS. Approximately 62%, or $267,264,403 of the investment securities portfolio is classified in the AFS category, and is available to be sold, should liquidity needs arise. Management, through its Asset Liability Committee (“ALCO”), and the Board review the Company’s liquidity position on a monthly basis. At December 31, 2015, both the ALCO and the Board of Directors determined that the Company’s liquidity position was adequate.

Table 13 - Funding Uses and Sources details the main components of cash flows for 2015 and 2014.

TABLE 13 - FUNDING USES AND SOURCES

(in thousands)


	2015								2014
	Average		Increase/(decrease)						Average		Increase/(decrease)
	Balance		Amount			Percent			Balance		Amount			Percent
FUNDING USES

Loans, net of unearned income	$	411,687	$	22,470			5.77	%	$	389,217	$	18,448			4.98	%
Taxable securities		335,537		16,687			5.23	%		318,850		(9,947	)		-3.03	%
Tax-exempt securities		85,597		(6,336	)		-6.89	%		91,933		(9,610	)		-9.46	%
Federal funds sold and other		35,336		17,530			98.45	%		17,806		2,925			19.66	%


TOTAL USES	$	868,157	$	50,351			6.16	%	$	817,806	$	1,816			0.22	%


FUNDING SOURCES

Noninterest-bearing deposits	$	142,322	$	7,463			5.53	%	$	134,859	$	14,402			11.96	%
Interest-bearing demand and savings deposits		365,603		46,129			14.44	%		319,474		29,017			9.99	%
Time deposits		216,488		(10,902	)		-4.79	%		227,390		(11,714	)		-4.90	%
Short-term borrowings		60		(1,897	)		-96.93	%		1,957		(3,454	)		-63.83	%
Commercial repo		106,928		24,072			29.05	%		82,856		2,463			3.06	%
Long-term debt		20,048		(15,545	)		-43.67	%		35,593		(22,455	)		38.68	%


TOTAL SOURCES	$	851,449	$	49,320			6.15	%	$	802,129	$	8,259			1.10	%

The Company’s liquidity depends substantially on the ability of the Bank to transfer funds to the Company in the form of dividends. The information under the heading “Market Price and Dividend Information” in this Annual Report discusses federal and state statutory and regulatory restrictions on the ability of the Bank to transfer funds to the Company in the form of dividends.

CAPITAL RESOURCES

The Company and Bank are subject to various regulatory capital guidelines as required by federal and state banking agencies. These guidelines define the various components of core capital and assign risk weights to various categories of assets.

The Federal Deposit Insurance Corporation Improvement Act of 1991, as amended (“FDICIA”), required federal regulatory agencies to define capital tiers. These tiers are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under FDICIA, a “well-capitalized” institution must achieve a Tier 1 risk-based capital ratio of at least 6.00%, a total capital ratio of at least 10.00%, a leverage ratio of at least 5.00% and not be under a capital directive order. These ratios generally measure the percentage of a bank’s capital to all or certain categories of assets. Failure to meet capital requirements can initiate regulatory action that could have a direct material effect on the Company’s financial statements. If a bank is only adequately capitalized, regulatory approval is required before the bank may accept brokered deposits. If undercapitalized, capital distributions, asset growth, and expansion are limited, and the institution is required to submit a capital restoration plan.

During 2015 as compared to 2014, total capital increased primarily due to earnings that were in excess of dividends.

Management believes the Company and the Bank meet all the capital requirements to be well-capitalized under the guidelines established by FDICIA as of December 31, 2015, as noted below in Table 14 - Capital Ratios. To be classified as well-capitalized, the Company and Bank must maintain the ratios described above.

TABLE 14 – CAPITAL RATIOS

(in thousands, except percentage amounts)


	At December 31,
	2015			2014			2013
Tier 1 capital
Shareholders’ equity	$	86,425		$	81,858		$	66,266
Less: Intangibles		(3,150	)		(3,150	)		(3,150	)
Add/less: Unrealized loss/(gain) on securities		7,117			8,881			21,249


TOTAL TIER 1 CAPITAL	$	90,392		$	87,589		$	84,365


Total capital
Tier 1 capital	$	90,392		$	87,589		$	84,365
Allowable allowance for loan losses		6,474			6,542			6,517


TOTAL CAPITAL	$	96,866		$	94,131		$	90,882


RISK WEIGHTED ASSETS	$	552,186		$	527,749		$	519,766


AVERAGE ASSETS (FOURTH QUARTER)	$	976,448		$	912,195		$	875,659


TIER 1 LEVERAGE RATIO		9.26	%		9.60	%		9.63	%


COMMON EQUITY TIER 1 CAPITAL RATIO		9.26	%		—			—


TIER 1 RISK-BASED CAPITAL RATIO		16.37	%		16.60	%		16.23	%


TOTAL RISK-BASED CAPITAL RATIO		17.54	%		17.84	%		17.49	%

Management’s strategy with respect to capital levels is to maintain a sufficient amount of capital to allow the Company to respond to growth and acquisition opportunities in the Bank’s service area. Over the past three years, the Company has been able to increase the amount of its capital, through retention of earnings, while still maintaining the dividend payout ratio to approximately 60% of earnings per share. The Company does not currently have any commitments for capital expenditures that would require the Company to raise additional capital by means other than retained earnings. The Company does not plan to change this strategy unless needed to support future acquisition activity.

OFF-BALANCE SHEET ARRANGEMENTS

CONTRACTUAL OBLIGATIONS

The following table summarizes the contractual obligations, excluding deposits, of the Company as of December 31, 2015.


	Payments Due by Period
	(in thousands)
			Less than		1-3		3-5		Over 5
Contractual Obligations	Total		1 year		Years		Years		Years

Long Term Debt	$	20,000	$	—	$	20,000	$	—	$	—
Operating Leases		419		286		94		39		—
Other Long-term Liabilities		48		—		3		45		—


Total	$	20,467	$	286	$	20,097	$	84	$	—

Long-term debt obligations represent borrowings from the FHLB that have an original maturity in excess of one year. Operating leases are primarily for the lease of ATM machines and other leases for mailing equipment. The equipment leases are for various terms. The other long-term liabilities are those obligations of the Company under the Agribusiness Enterprise Loan Program of the State of Mississippi.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

OVERVIEW

The definition of market risk is the possibility of loss that could result from adverse changes in market prices or interest rates. The Company has taken steps to assess the amount of risk that is associated with its asset and liability structure. The Company measures the potential risk on a regular basis and makes changes to its strategies to manage these risks. The Board of Directors reviews important policy limits each month, with a more detailed risk analysis completed on a quarterly basis. These measurement tools are important in allowing the Company to manage market risk and to plan effective strategies to respond to any adverse changes in risk. The Company does not participate in some of the financial instruments that are inherently subject to substantial market risk. All of the financial instruments entered into by the Company are for purposes other than trading.

MARKET/INTEREST RATE RISK MANAGEMENT

Interest rate risk is the primary market risk that management must address. Interest rate risk is the exposure of Company earnings and capital to changes in interest rates. All financial institutions assume interest rate risk as an integral part of normal operations.

The primary purpose in managing interest rate risk is to effectively invest capital and preserve the value created by the core banking business of the Company. The Company utilizes an investment portfolio to manage the interest rate risk naturally created through its business activities. The process of managing interest rate risk generally involves both reducing the exposure of the Company’s net interest margin to swings in interest rates and concurrently ensuring that there is sufficient capital and liquidity to support balance sheet growth. The Company uses a quarterly interest rate risk report to evaluate its exposure to interest rate risk, project earnings and manage the composition of the balance sheet and its growth.

In addition to the quarterly interest rate risk report, the Company employs a number of tools to measure interest rate risk. One tool is static gap analysis, which matches assets with specified maturities to liabilities with corresponding maturities. Although management believes that this does not provide a complete picture of the Company’s exposure to interest rate risk, it does highlight significant short-term repricing volume mismatches. The following table presents the Company’s rate sensitivity static gap analysis at December 31, 2015 ($ in thousands):


	Interest Sensitive Within
	90 days			One year

Total rate sensitive assets	$	325,280		$	75,798
Total rate sensitive liabilities		551,863			110,079


Net gap	$	(226,583	)	$	(34,281	)

The analysis shows a negative gap position over the next three-month period, which indicates that the Company would benefit somewhat from a decrease in market interest rates in the very short term. Although rate increases would be detrimental to the interest rate risk of the Company, management believes there is adequate flexibility to alter the overall rate sensitivity structure as necessary to minimize exposure to these changes.

Management believes that static gap analysis does not fully capture the impact of interest rate movements on interest sensitive assets and liabilities. Thus, the Company also measures interest rate risk by analyzing interest rate sensitivity and the rate sensitivity gap. Table 15 - Interest Rate Sensitivity provides additional information about the financial instruments that are sensitive to changes in interest rates. This tabular disclosure is limited by its failure to depict accurately the effect on assumptions of significant changes in the economy or interest rates or changes in management’s expectations or intentions relating to the Company’s financial statements. The information in the interest rate sensitivity table below reflects contractual interest rate pricing dates and contractual maturity dates. For indeterminate maturity deposit

products (money market, NOW and savings accounts), the tables present principal cash flows in the shortest term. Although these deposits may not reprice within this time frame, the depositors of such funds have the ability to reprice. Weighted average floating rates are based on the rate for that product as of December 31, 2015 and December 31, 2014.

TABLE 15 - INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 2015

(in thousands)


	2016			2017			2018			2019			2020			Thereafter			Carrying Value			Fair Value
Loans
Fixed Rate	$	107,985		$	52,320		$	48,199		$	97,077		$	78,034		$	9,372		$	392,987		$	394,289
Average Int Rate		5.37	%		5.59	%		5.22	%		4.90	%		4.58	%		4.86	%		5.06	%
Floating Rate	$	10,832		$	891		$	3,032		$	6,819		$	1,730		$	13,977		$	37,281		$	37,281
Average Int Rate		3.62	%		4.25	%		4.52	%		3.45	%		5.36	%		4.85	%		4.22	%
Investment securities
Fixed Rate	$	3,008		$	2,828		$	3,173		$	4,400		$	56,780		$	355,232		$	425,421		$	433,394
Average Int Rate		4.42	%		4.76	%		5.15	%		4.54	%		2.25	%		3.44	%		3.32	%
Floating Rate																$	2,931		$	2,931		$	2,916
Average Int Rate																	4.08	%		4.08	%
Other earning assets
Fixed Rate	$	42,268																	$	42,268		$	42,268
Average Int Rate		0.50	%																	0.50	%
Floating Rate
Average Int Rate
Interest-bearing deposits
Fixed Rate	$	557,644		$	44,349		$	2,459		$	194		$	35		$	0		$	604,681		$	604,806
Average Int Rate		0.28	%		0.57	%		0.56	%		0.55	%		0.55	%		0.00	%		0.31	%
Floating Rate
Average Int Rate
Other int-bearing liabilities
Fixed Rate							$	20,000											$	20,000		$	20,535
Average Int Rate								2.53	%											2.53	%
Floating Rate	$	104,298																	$	104,298		$	104,298
Average Int Rate		0.68	%																	0.68	%

AS OF DECEMBER 31, 2014

(in thousands)


	2015			2016			2017			2018			2019			Thereafter			Carrying Value			Fair Value
Loans
Fixed Rate	$	68,076		$	65,820		$	51,163		$	41,910		$	103,831		$	26,398		$	357,198		$	359,427
Average Int Rate		5.37	%		5.59	%		5.22	%		4.90	%		4.58	%		4.86	%		5.06	%
Floating Rate	$	4,185		$	4,282		$	863		$	2,462		$	9,571		$	12,934		$	34,297		$	34,297
Average Int Rate		4.41	%		3.79	%		4.26	%		4.33	%		3.33	%		4.97	%		4.23	%
Investment securities
Fixed Rate	$	3,081		$	4,219		$	6,186		$	5,986		$	7,997		$	354,743		$	382,212		$	393,618
Average Int Rate		4.88	%		4.56	%		3.83	%		5.27	%		4.21	%		3.64	%		3.73	%
Floating Rate																$	2,997		$	2,997		$	2,873
Average Int Rate																	7.71	%		7.71	%
Other earning assets
Fixed Rate	$	61,481																	$	61,481		$	61,481
Average Int Rate		0.25	%																	0.25	%
Floating Rate
Average Int Rate
Interest-bearing deposits
Fixed Rate	$	495,154		$	38,921		$	2,716		$	198		$	168		$	0		$	537,157		$	537,315
Average Int Rate		0.29	%		0.59	%		0.55	%		0.55	%		0.55	%		0.00	%		0.41	%
Floating Rate
Average Int Rate
Other int-bearing liabilities
Fixed Rate										$	20,000								$	20,000		$	20,804
Average Int Rate											2.53	%								2.53	%
Floating Rate	$	114,427																	$	114,427		$	114,427
Average Int Rate		0.68	%																	0.68	%

Rate sensitivity gap analysis is another tool management uses to measure interest rate risk. The rate sensitivity gap is the difference between the repricing of interest-earning assets and the repricing of interest-bearing liabilities within certain defined time frames. The Company’s interest rate sensitivity position is influenced by the distribution of interest-earning assets and interest-bearing liabilities among the maturity categories. Table 16 - Rate Sensitivity Gap reflects interest-earning assets and interest-bearing liabilities by maturity distribution as of December 31, 2015. Product lines repricing in time periods predetermined by contractual agreements are included in the respective maturity categories.

TABLE 16 - RATE SENSITIVITY GAP AT DECEMBER 31, 2015

(in thousands, except percentage amounts)


	1 - 90 Days			91 - 365 Days			1 - 5 Years			Over 5 years			Total
INTEREST EARNING ASSETS

Loans	$	46,655		$	72,161		$	288,103		$	23,349		$	430,268
Investment securities		236,357			3,637			99,745			88,613			428,352
Interest Bearing Due From Bank Accounts		42,268			—			—			—			42,268


TOTAL INTEREST BEARING ASSETS	$	325,280		$	75,798		$	387,848		$	111,962		$	900,888


INTEREST BEARING LIABILITIES

Interest bearing demand deposits	$	300,857		$	—		$	—		$	—		$	300,857
Savings and Money Market deposits		93,060			—			—			—			93,060
Time deposits		53,648			110,079			47,037			—			210,764
Short term borrowings		104,298			—			—			—			104,298
Long term borrowings		—			—			20,048			—			20,048


TOTAL INTEREST BEARING LIABILITIES	$	551,863		$	110,079		$	67,085		$	—		$	729,027


Rate sensitive gap	$	(226,583	)	$	(34,281	)	$	320,763		$	111,962		$	171,861
Rate sensitive cumulative gap		(226,583	)		(260,864	)		59,899			171,861			—
Cumulative gap as a percentage of total earning assets		-25.15	%		-28.96	%		6.65	%		19.08	%

The purpose of the above table is to measure interest rate risk utilizing the repricing intervals of interest sensitive assets and liabilities. Rate sensitive gaps constantly change as funds are acquired and invested and as rates change. Rising interest rates are likely to increase net interest income in a positive gap position while falling interest rates are beneficial in a negative gap position.

The above rate sensitivity analysis places interest-bearing demand and savings deposits in the shortest maturity category because these liabilities do not have defined maturities. If these deposits were placed in a maturity distribution representative of the Company’s deposit base history, the shortfall of the negative rate sensitive gap position would be reduced in the 1-to-90 day time frame. It is the goal of the Company to achieve a cumulative gap ratio of plus or minus 15% for all periods under one year, with maximum acceptable limits of plus or minus 20%. Quarterly, management discusses with the ALCO and the board of directors the gap position in relation to the established goals, highlights any reasons for variances from the goals and suggests changes to better align the Company’s position with the established goals. When reviewing the

Company’s position, impacting factors and suggested changes, the board of directors also considers other corporate objectives, including increasing core deposits and increasing profitability, before implementing changes intended to align the Company’s position with the established goals. While the board of directors continues to closely monitor the Company’s negative gap position, at this time, management does not anticipate making any significant changes to the Company’s operating practices in order to mitigate the negative gap position.

The rate sensitivity gap table illustrates that the Company had a large negative cumulative gap position for the 1 to 90-day period as of December 31, 2015. This negative gap position was mainly due to: (1) a largest amount of investment securities that have call dates within that period; (2) the interest-bearing and savings deposits being classified in the 1-90-day category; (3) approximately 77.7% of certificates of deposit maturing during the next twelve months; and (4) a significant portion of the Company’s loans maturing after one year.

The interest rate sensitivity and rate sensitivity gap tables, taken together, indicate that the Company continues to be in a asset sensitive position when evaluating the maturities of interest-bearing items. Thus, a decline in the interest rate environment would enhance earnings, while an increase in interest rates would have the opposite effect on the Company’s earnings. The Company has attempted to mitigate the impact of its interest rate position by increasing the amount of its variable rate loans and also by structuring deposit rates to entice customers to shorten the maturities of their time deposits. The effect of any changes in interest rates on the Company would be mitigated by the fact that interest-bearing demand and savings deposits may not be immediately affected by changes in general interest rates.

Short term interest rates have remained low in 2013, 2014 and most of 2015 in connection with decreases in the target Federal Funds rate by the Federal Reserve Bank. In December 2015, the Federal Reserve Bank increased its target Federal Funds rate to 50 basis points. During 2013, medium term interest rates increased in anticipation of the ending of bond buying program by the Federal Reserve Bank before decreasing again in 2014. After the rate increase in 2015, medium term rates began to decline again. Overall, the effect on the Company was marginal. The Company’s net interest margin in 2015 was 3.33% and in 2014 was 3.60%.

Quarterly Financial Trends


	(in thousands, except per share amounts) 2015
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Interest Income	$	7,706	$	7,696	$	7,789	$	7,774
Interest Expense		751		736		765		825

Net Interest Income		6,955		6,960		7,024		6,949
Provision for Loan Losses		184		82		142		148
Non-interest Income		1,752		1,852		2,017		2,706
Non-interest Expense		6,487		6,321		6,475		6,308
Income Taxes		442		581		587		869

Net Income	$	1,594	$	1,828	$	1,837	$	2,330

Per common share:
Basic	$	0.33	$	0.37	$	0.38	$	0.48
Diluted	$	0.33	$	0.37	$	0.38	$	0.48

Cash Dividends	$	0.23	$	0.23	$	0.23	$	0.24

	2014
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Interest Income	$	7,946	$	7,926	$	7,829	$	7,679
Interest Expense		729		734		758		797

Net Interest Income		7,217		7,192		7,071		6,882
Provision for Loan Losses		361		212		205		145
Non-interest Income		1,783		2,484		2,056		1,840
Non-interest Expense		6,369		7,046		6,439		6,470
Income Taxes		473		325		585		445

Net Income	$	1,797	$	2,093	$	1,898	$	1,662

Per common share:
Basic	$	0.37	$	0.43	$	0.39	$	0.34
Diluted	$	0.37	$	0.43	$	0.39	$	0.34

Cash Dividends	$	0.22	$	0.22	$	0.22	$	0.23

100

Market Price and Dividend Information

MARKET PRICE INFORMATION

The Company’s common stock trades on the NASDAQ Global Market (“NASDAQ”) under the symbol “CIZN”. On March 2, 2016, the common stock’s closing price on NASDAQ was $22.95. The following table sets forth the high and low sales prices for the common stock as reported on NASDAQ, as well as the dividends declared, in each quarter in the past two fiscal years.


2014	High		Low		Dividends Declared (per common share)
January - March	$	19.34	$	17.94		0.22
April - June		19.94		18.25		0.22
July - September		19.50		18.28		0.22
October - December		19.75		18.54		0.23

2015	High		Low		Dividends Declared (per common share)
January - March	$	19.72	$	17.10		0.23
April - June		22.85		17.70		0.23
July - September		22.25		19.06		0.23
October - December		23.72		20.51		0.24

On March 2, 2016, shares of the Company’s common stock were held of record by approximately 445 shareholders.

DIVIDENDS

Dividends totaled $0.93 per share for 2015 and $0.89 per share for 2014.

If funds are available, the Board of Directors of the Company typically declares dividends on a quarterly basis in March, June, September and December with payment following at the end of the month in which the dividend was declared. Funds for the payment by the Company of cash dividends are obtained from dividends, loans or advances received by the Company from the Bank. Accordingly, the declaration and payment of dividends by the Company depend upon the Bank’s earnings and financial condition, general economic conditions, compliance with regulatory requirements, and other factors. The Bank must also receive the approval of the Mississippi Department of Banking and Consumer Finance prior to the payment of a dividend.

101

The following chart shows the Company repurchases of shares for the three-month period ended December 31, 2015:

Company Purchases of Equity Securities


	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs ⁽¹⁾
October 1, 2015 - October 31, 2015		—	$	—		—		180,965
November 1, 2015 - November 30, 2015		—		—		—		180,965
December 1, 2015 - December 31, 2015		—		—		—		180,965

Total		—	$	—		—		180,965

⁽¹⁾	This number reflects the amount of shares of the Company’s common stock that were available for purchase under its 200,000 share repurchase program authorized by the Company’s Board of Directors in August 2014.

102

STOCK PERFORMANCE GRAPH

The following performance graph compares the performance of the Company’s common stock to the NASDAQ Composite Index and the Morningstar Regional Bank index (a peer group of other regional bank holding companies) for the Company’s reporting period. The graph assumes that the value of the investment in the Company’s common stock and each index was $100 at December 31, 2010 and that all dividends were reinvested.

Performance Graph

December 31, 2010 - December 31, 2015

LOGO


	2010		2011		2012		2013		2014		2015
Citizens Holding Company		100.00		86.92		100.99		101.25		110.88		141.95
NASDAQ Market Index		100.00		99.17		116.48		163.21		187.27		200.31
Morningstar Regional Banks		100.00		90.02		106.94		148.37		159.97		167.70

There can be no assurance that the Company’s common stock performance will continue in the future with the same or similar trends depicted in the performance graph above. The Company does not and will not make or endorse any predictions as to future stock performance.

103

THE CITIZENS BANK OFFICERS

Greg McKee

President and CEO

Robert T. Smith

Senior Vice President, CFO

Erdis Chaney

Vice President, Senior Deposit Officer

Ledale Reynolds

Vice President and CIO

Ray Stone

Vice President, Senior Credit Officer

Mark Taylor

Vice President, COO, Trust Officer

Randy Cheatham

Vice President, Security Officer

Jackie Hester

Vice President, Marketing Officer

Darrel Bates

Vice President

Jean T. Fulton

Vice President, Internal Auditor

Gayle Sharp

Vice President, Loan Operations Manager

Brad Copeland

Vice President

Mark Majure

Vice President, Loan Review Officer

Vicki Brown

Vice President, BSA Officer

Bob Posey

Vice President

Mike Chandler

Vice President

Stacy Arnold

Vice President, Compliance Officer

Joshua Sullivan

Vice President, Senior Credit Analyst

Elizabeth Owen

Vice President, Director of

Human Resources, Chief Risk Officer

Sommer Vick

Assistant Vice President

Assistant Trust Officer

Beth Branning

Assistant Vice President

Mitch Peden

Assistant Vice President,

Information Services Manager

Mark Flake

Assistant Vice President,

Network Services Manager

Pat Stokes

Assistant Vice President

Operations Officer

Scott Lewis

Assistant Vice President

Information Security Officer

Sam Mars

Assistant Vice President

Ashley Peebles

Assistant Vice President

Director of Deposit Services

Tammy Pope

Accounting Officer

Greg Jackson

Accounting Officer

Deborah Ladd

Item Processing Officer

Sandra Curtis

Assistant Cashier, Teller Administrator

Temika Triplett

Assistant Cashier, Electronic Services Officer

Carthage Branch

Mike Brooks

President

Billy Cook

Vice President

Sue Fisher

Assistant Vice President

Deposit Operations Officer

Sebastopol Branch

Connie Comans

President

Union and Decatur Branches

Camp Keith

Vice President, Senior Consumer

Credit Officer

Marianne Strickland

Assistant Cashier, Branch Operations Officer

Kosciusko Branch

Teresa Patterson

Vice President

David Blair, Mortgage Loan Officer

Vice President

Scooba and DeKalb Branches

Reggie Moore

Assistant Vice President

Jan White

Branch Operations Officer

Forest Branch

Richard Latham

Vice President

Louisville Branch

Bruce Lee

President

Lynn Graham

Assistant Vice President

Branch Operations Officer

Starkville Branch

Jay Hines

Vice President, Regional Commercial Lender

Charles Byrd

Vice President, Appraisal Review Officer

Rhonda Edmonson

Assistant Vice President

Branch Operations Officer

Collinsville Branch

Mike Shelby

Vice President

Meridian Eastgate

Charles Young

Vice President, Regional Commercial Lender

Vikki Gunter

Assistant Vice President

Branch Operations Officer

Meridian Broadmoor

Annette Brooks

Assistant Cashier, Branch Operations Officer

Hattiesburg Branch

Travis Moore

Regional President

Chad Hill

Vice President, Branch Manager

Tammy McAlpin

Commercial Loan Portfolio Manager

Flowood Branch

David Peters

Vice President, Mortgage Loan Officer

Biloxi Cedar Lake

Brandon Sherwood

Gulf Coast President

Sharon Pollina

Assistant Vice President

Loan Administration Officer

Tammy Warren

Assistant Vice President

Mortgage Loan Officer

Biloxi Lemoyne

Katie Hancock

Assistant Vice President, Branch Manager

Mortgage Loan Department

Charlene Deweese

Assistant Vice President

Mortgage Loan Officer

104

BOARD OF DIRECTORS


Don Fulton		Craig Dungan, MD
Corporate PERT Coordinator		Physician
W. G. Yates and Sons Construction Co.		Meridian Gastroenterology PLLC

Donald L. Kilgore		Greg L. McKee
Special Assistant Attorney General		President & Chief Executive Officer
State of Mississippi		Citizens Holding Company and The Citizens Bank

David A. King		David P. Webb
Proprietor		Attorney
Philadelphia Motor Company		Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

Herbert A. King		A. T. Williams
Civil Engineer		Certified Public Accountant
King Engineering Associates, Inc.		A. T. Williams, CPA

Adam Mars		Terrell E. Winstead
Business Manager		Chief Financial Officer
Mars, Mars, Mars & Chalmers		Molpus Woodlands Group

CITIZENS HOLDING COMPANY OFFICERS

Herbert A. King

Chairman

Greg L. McKee

President and Chief Executive Officer

Mark Taylor

Secretary

Robert T. Smith

Treasurer and Chief Financial Officer

105

BANKING LOCATIONS


Philadelphia Main Office	Collinsville Branch	Decatur Branch
521 Main Street	9065 Collinsville Road	15330 Hwy 15 South
Philadelphia, MS 39350	Collinsville, MS 39325	Decatur, MS 39327
601.656.4692	601.626.7608	601.635.2321

Westside Branch	Flowood Branch	Forest Branch
912 West Beacon Street	5419 Hwy 25 Ste. Q	247 Woodland Drive North
Philadelphia, MS 39350	Flowood, MS 39232	Forest, MS 39074
601.656.4692	601.992.7688	601.469.3424

Northside Branch	Sebastopol Branch	Louisville-Main Branch
802 Pecan Avenue	24 Pine Street	l00 East Main Street
Philadelphia, MS 39350	Sebastopol, MS 39359	Louisville, MS 39339
601.656.4692	601.625.7447	662.773.6261

Eastside Branch	DeKalb Branch	Noxapater Branch
599 East Main Street	176 Main Avenue	45 East Main Street
Philadelphia, MS 39350	DeKalb, MS 39328	Noxapater, MS 39346
601.656.4692	601.743.2115	662.724.4261

Union Branch	Kosciusko Branch	Louisville-Industrial Branch
502 Bank Street	775 North Jackson Street	803 South Church Street
Union, MS 39365	Kosciusko, MS 39090	Louisville, MS 39339
601.774.9231	662.289.4356	662.773.6261

Starkville Branch	Scooba Branch	Biloxi Lemoyne Boulevard
201 Highway 12 West	27597 Highway 16 East	15309 Lemoyne Boulevard
Starkville, MS 39759	Scooba, MS 39358	Biloxi, MS 39532
662.323.1420	662.476.8431	228.207.2343

Carthage Main Office	Meridian Eastgate	Meridian Broadmoor
301 West Main Street	1825 Hwy 39 North	5015 Highway 493
Carthage, MS 39051	Meridian, MS 39301	Meridian. MS 39305
601.257.4525	601.693.8367	601.581.1541

Biloxi Cedar Lakes	Hattiesburg Branch	Flowood Branch
1765 Popps Ferry Road	6222 Highway 98	5419 Highway 25, Suite Q
Biloxi, MS 39532	Hattiesburg, MS 39402	Flowood, MS 39232
228.594.6913	601.264.4425	601.992.7688

Phone Teller	Internet Banking
1.800.397.0344	http://www.thecitizensbankphila.com

106

FINANCIAL INFORMATION

CORPORATE HEADQUARTERS

521 Main Street

P.O. Box 209

Philadelphia, MS 39350

601.656.4692

ANNUAL STOCKHOLDER MEETING

The Annual Stockholder meeting of the Citizens Holding Company, Inc. will be held Tuesday, April 26, 2016, at 4:30 P.M. in the lobby of the main office of The Citizens Bank, 521 Main Street, Philadelphia, Mississippi.

STOCK REGISTRAR AND TRANSFER AGENT

American Stock Transfer & Trust Company

59 Maiden Lane

New York, NY 10038

FORM 10-K

The Company’s most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission, is available without charge to stockholder’s upon request to the Treasurer of the Citizens Holding Company.

FINANCIAL CONTACT

Robert T. Smith

Treasurer and Chief Financial Officer

P.O. 209

Philadelphia, Mississippi 39350

Additional information can be obtained from the Company’s website at www.citizensholdingcompany.com.

107

CITIZENS HOLDING CO /MS/ - FORM 10-K - EX-13 - March 15, 2016

Attached files

CITIZENS HOLDING CO /MS/ Reports