Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

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

For the transition period from to

Commission File Number: 001-15375

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Mississippi		64-0666512
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

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

601-656-4692

(Registrant’s telephone number, including area code)

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

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

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

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of November 6, 2017:


Title		Outstanding
Common Stock, $0.20 par value		4,894,705

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	1

Item 1.	Consolidated Financial Statements	1

	Consolidated Statements of Condition September 30, 2017 (Unaudited) and December 31, 2016 (Audited)	1

	Consolidated Statements of Income for the Three and nine months ended September 30, 2017 (Unaudited) and 2016 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the Three and nine months ended September 30, 2017 (Unaudited) and 2016 (Unaudited)	3

	Consolidated Statements of Cash Flows for the Nine months ended September 30, 2017 (Unaudited) and 2016 (Unaudited)	4

	Notes to Consolidated Financial Statements	5

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures.	49

PART II.	OTHER INFORMATION	50

Item 1.	Legal Proceedings	50

Item 1A.	Risk Factors	50

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

Item 3.	Defaults Upon Senior Securities.*

Item 4.	Mine Safety Disclosures.*

Item 5.	Other Information.*

Item 6.	Exhibits.	51

	* None or Not Applicable

SIGNATURES		53

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF CONDITION


	September 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	20,791,594		$	21,688,557
Interest bearing deposits with other banks		29,640,509			48,603,182
Investment securities available for sale, at fair value		518,236,091			496,124,574
Loans, net of allowance for loan losses of $3,403,933 in 2017 and $3,902,796 in 2016		389,674,425			390,148,343
Premises and equipment, net		20,752,738			18,664,084
Other real estate owned, net		4,174,291			4,443,010
Accrued interest receivable		4,052,086			4,720,189
Cash surrender value of life insurance		24,338,620			23,890,333
Deferred tax assets, net		7,382,774			10,634,669
Other assets		7,081,369			6,294,966

TOTAL ASSETS	$	1,026,124,497		$	1,025,211,907

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	152,450,812		$	149,512,941
Interest-bearing NOW and money market accounts		338,083,326			340,180,286
Savings deposits		76,628,605			73,745,005
Certificates of deposit		187,605,623			196,714,108

Total deposits		754,768,366			760,152,340
Securities sold under agreement to repurchase		149,451,950			150,282,913
Federal Home Loan Bank advances		20,000,000			20,000,000
Accrued interest payable		176,973			199,368
Deferred compensation payable		8,513,978			8,209,427
Other liabilities		1,270,799			1,308,464

Total liabilities		934,182,066			940,152,512
SHAREHOLDERS’ EQUITY
Common stock; $0.20 par value, 22,500,000 shares authorized, 4,894,705 shares issued and outstanding at September 30, 2017 and 4,882,579 shares issued and outstanding at December 31, 2016		978,941			976,516
Additional paid-in capital		4,058,083			3,802,204
Retained earnings		92,305,609			90,999,689
Accumulated other comprehensive loss, net of tax benefit of $3,212,560 in 2017 and $6,376,702 in 2016		(5,400,202	)		(10,719,014	)

Total shareholders’ equity		91,942,431			85,059,395

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,026,124,497		$	1,025,211,907

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2017			2016		2017			2016
INTEREST INCOME
Loans, including fees	$	4,585,668		$	4,825,800	$	14,017,718		$	14,344,314
Investment securities		2,892,063			2,719,014		8,643,750			8,286,600
Other interest		66,633			28,813		194,266			147,781

Total interest income		7,544,364			7,573,627		22,855,734			22,778,695
INTEREST EXPENSE
Deposits		471,049			447,554		1,434,694			1,366,412
Other borrowed funds		353,968			305,934		1,027,587			911,213

Total interest expense		825,017			753,488		2,462,281			2,277,625

NET INTEREST INCOME		6,719,347			6,820,139		20,393,453			20,501,070
(REVERSAL OF) PROVISION FOR LOAN LOSSES		(73,808	)		184,018		(254,614	)		97,468

NET INTEREST INCOME AFTER (REVERSAL OF) PROVISION FOR LOAN LOSSES		6,793,155			6,636,121		20,648,067			20,403,602
OTHER INCOME
Service charges on deposit accounts		1,115,474			1,009,486		3,176,877			2,794,790
Other service charges and fees		702,686			658,644		1,992,929			1,852,141
Other operating income		308,012			411,528		1,013,818			1,156,554

Total other income		2,126,172			2,079,658		6,183,624			5,803,485

OTHER EXPENSES
Salaries and employee benefits		3,744,831			3,460,948		11,154,068			10,341,493
Occupancy expense		1,335,676			1,329,796		3,984,549			3,867,043
Other operating expense		1,806,713			1,766,669		5,768,370			5,648,661

Total other expenses		6,887,220			6,557,413		20,906,987			19,857,197

INCOME BEFORE PROVISION FOR INCOME TAXES		2,032,107			2,158,366		5,924,704			6,349,890
PROVISION FOR INCOME TAXES		424,638			406,076		1,096,457			1,292,427

NET INCOME	$	1,607,469		$	1,752,290	$	4,828,247		$	5,057,463

NET INCOME PER SHARE -Basic	$	0.33		$	0.36	$	0.99		$	1.04

-Diluted	$	0.33		$	0.36	$	0.99		$	1.04

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

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2017			2016			2017			2016
Net income	$	1,607,469		$	1,752,290		$	4,828,247		$	5,057,463
Other comprehensive (loss) income
Securities available-for-sale
Unrealized holding gains		(2,137,839	)		(556,424	)		8,378,246			2,882,502
Income tax effect		797,413			207,546			(3,125,086	)		(1,075,174	)

		(1,340,426	)		(348,878	)		5,253,160			1,807,328
Securities transferred from available-for-sale to held-to-maturity
Amortization of net unrealized losses during the period		—			6,183,648			—			11,305,439
Income tax effect		—			(2,306,501	)		—			(4,216,929	)

		—			3,877,147			—			7,088,510
Rclassification adjustment for gains included in net income		15,612			60,053			104,708			97,191
Income tax effect		(5,823	)		(22,400	)		(39,056	)		(36,252	)

		9,789			37,653			65,652			60,939

Total other comprehensive (loss) income		(1,330,637	)		3,565,922			5,318,812			8,956,777

Comprehensive income	$	276,832		$	5,318,212		$	10,147,059		$	14,014,240

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

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Nine Months
	Ended September 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	8,034,077		$	18,157,449
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		31,045,728			112,497,410
Proceeds from maturities and calls of securities held to maturity		—			161,829,797
Proceeds from sale of investment securities		114,060,844			764,023
Purchases of investment securities available for sale		(160,967,616	)		(301,273,861	)
Purchases of bank premises and equipment		(2,844,102	)		(335,501	)
Increase (decrease) in interest bearing deposits with other banks		18,962,673			(36,901,945	)
Purchase of Federal Home Loan Bank Stock		(498,700	)		(3,600	)
Proceeds from sale of other real estate		127,722			790,032
Net decrease in loans		829,450			14,956,106

Net cash provided by (used by) investing activities		715,999			(47,677,539	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits		(5,386,374	)		27,058,666
Net change in securities sold under agreement to repurchase		(830,963	)		13,755,873
Proceeds from exercise of stock options		92,625			—
Payment of dividends		(3,522,327	)		(3,514,296	)

Net cash (used by) provided by financing activities		(9,647,039	)		37,300,243

Net (decrease) increase in cash and due from banks		(896,963	)		7,780,153
Cash and due from banks, beginning of period		21,688,557			14,947,690

Cash and due from banks, end of period	$	20,791,594		$	22,727,843

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

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three and nine months ended September 30, 2017

(Unaudited)

Note 1. Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended September 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

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

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 15, 2017.

Note 2. Commitments and Contingent Liabilities

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of September 30, 2017, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $38,122,030 compared to an aggregate unused balance of $37,194,220 at December 31, 2016. There were $2,713,880 of letters of credit outstanding at September 30, 2017 and $3,456,180 at December 31, 2016. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments and into its asset and liability management program.

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

Note 3. Net Income per Share

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


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2017		2016		2017		2016
Basic weighted average shares outstanding		4,882,705		4,869,079		4,877,338		4,864,924
Dilutive effect of granted options		10,443		8,614		17,412		8,316

Diluted weighted average shares outstanding		4,893,148		4,877,693		4,894,750		4,873,240

Net income	$	1,607,469	$	1,752,290	$	4,828,247	$	5,057,463
Net income per share-basic	$	0.33	$	0.36	$	0.99	$	1.04
Net income per share-diluted	$	0.33	$	0.36	$	0.99	$	1.04

Note 4. Equity Compensation Plans

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

Prior to the adoption of the 2013 Plan, the Corporation utilized two stock-based compensation plans, the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”) for directors, and the 1999 Employees’ Long-Term Incentive Plan (the “Employees’ Plan”) for employees, both of which have expired.

The following table is a summary of the stock option activity for the nine months ended September 30, 2017.


	Directors’ Plan					2013 Plan
				Weighted				Weighted
	Number			Average		Number		Average
	of			Exercise		of		Exercise
	Shares			Price		Shares		Price
Outstanding at December 31, 2016		78,000		$	21.08		—	$	—
Granted		—			—		—		—
Exercised		(6,000	)		20.94		—		—
Expired		(9,000	)		22.00		—		—

Outstanding at September 30, 2017		63,000		$	20.96		—	$	—

The intrinsic value of options previously granted under the Directors’ Plan at September 30, 2017, was $258,885 and since there were no options granted under the 2013 Plan during the three-month period ended September 30, 2017, the intrinsic value for the 2013 Plan at September 30, 2017 is $0, for an aggregate intrinsic value at September 30, 2017 of $258,885.

During the quarter ended September 30, 2017, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 26, 2018 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $180,225 and will be recognized over the one-year vesting period at a cost of $15,018 per month less deferred taxes of $5,602 per month. Also during the quarter ended September 30, 2017, there were 1,500 shares of restricted stock that vested pursuant to an incentive plan for senior management.

Note 5. Income Taxes

The Corporation files a consolidated United States federal income tax return. The Corporation is currently open to audit under the statute of limitations by the Internal Revenue Service for all tax years after 2013. The Corporation’s consolidated state income tax returns are also open to audit under the statute of limitations for the same period.

Note 6. Securities

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


			Gross		Gross
September 30, 2017	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	183,095,272	$	—	$	3,090,044	$	180,005,228
Mortgage backed securities		223,005,218		85,489		3,812,513		219,278,194
State, County, Municipals		117,883,069		1,003,224		2,972,681		115,913,612
Other investments		2,865,294		173,763		—		3,039,057

Total	$	526,848,853	$	1,262,476	$	9,875,238	$	518,236,091


			Gross		Gross
December 31, 2016	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	207,080,794	$	—	$	7,114,186	$	199,966,608
Mortgage backed securities		152,765,924		340,419		4,841,633		148,264,710
State, County, Municipals		150,503,811		1,269,356		6,851,017		144,922,150
Other investments		2,869,761		101,345		—		2,971,106

Total	$	513,220,290	$	1,711,120	$	18,806,836	$	496,124,574

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2017 and December 31, 2016 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.


	September 30, 2017				December 31, 2016
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available-for-sale
Due in one year or less	$	3,294,221	$	3,331,064	$	6,333,181	$	6,370,921
Due after one year through five years		64,109,627		63,563,038		30,059,503		30,278,557
Due after five years through ten years		65,862,472		65,246,785		126,336,589		122,562,724
Due after ten years		393,582,533		386,095,204		350,491,017		336,912,372

Total	$	526,848,853	$	518,236,091	$	513,220,290	$	496,124,574

The tables below show the Corporation’s gross unrealized losses and fair value of available-for-sale and held-to-maturity investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at September 30, 2017 and December 31, 2016.

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


September 30, 2017	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	161,875	$	2,654	$	18,130	$	436	$	180,005	$	3,090
Mortgage backed securities		163,292		2,548		47,507		1,264		210,799		3,812
State, County, Municipal		11,017		215		58,098		2,758		69,115		2,973

Total	$	336,184	$	5,417	$	123,735	$	4,458	$	459,919	$	9,875


December 31, 2016	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	195,363	$	6,753	$	4,604	$	362	$	199,967	$	7,115
Mortgage backed securities		117,438		4,183		24,353		658		141,791		4,841
State, County, Municipal		95,088		6,663		3,092		188		98,180		6,851

Total	$	407,889	$	17,599	$	32,049	$	1,208	$	439,938	$	18,807

The Corporation’s unrealized losses on its obligations of United States government agencies, mortgage backed securities and state, county and municipal bonds are the result of an upward trend in interest rates, mainly in the mid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at September 30, 2017 nor at December 31, 2016.

Note 7. Loans

The composition of net loans (in thousands) at September 30, 2017 and December 31, 2016 was as follows:


	September 30, 2017			December 31, 2016
Real Estate:
Land Development and Construction	$	22,342		$	23,793
Farmland		18,036			18,175
1-4 Family Mortgages		97,431			97,812
Commercial Real Estate		183,613			180,880

Total Real Estate Loans		321,422			320,660
Business Loans:
Commercial and Industrial Loans		54,154			53,761
Farm Production and Other Farm Loans		1,069			765

Total Business Loans		55,223			54,526
Consumer Loans:
Credit Cards		1,202			1,156
Other Consumer Loans		15,495			18,310

Total Consumer Loans		16,697			19,466

Total Gross Loans		393,342			394,652
Unearned Income		(264	)		(601	)
Allowance for Loan Losses		(3,404	)		(3,903	)

Loans, net	$	389,674		$	390,148

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

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


	September 30, 2017		December 31, 2016
Real Estate:
Land Development and Construction	$	42	$	133
Farmland		382		234
1-4 Family Mortgages		2,169		1,954
Commercial Real Estate		5,066		6,293

Total Real Estate Loans		7,659		8,614
Business Loans:
Commercial and Industrial Loans		82		239

Total Business Loans		82		239
Consumer Loans:
Other Consumer Loans		92		26

Total Consumer Loans		92		26

Total Nonaccrual Loans	$	7,833	$	8,879

An aging analysis of past due loans (in thousands), segregated by class, as of September 30, 2017, was as follows:


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days		Total Past		Current		Total		Days
	Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	54	$	—	$	54	$	22,288	$	22,342	$	—
Farmland		183		31		214		17,822		18,036		—
1-4 Family Mortgages		3,338		233		3,571		93,860		97,431		—
Commercial Real Estate		2,032		155		2,187		181,426		183,613		—

Total Real Estate Loans		5,607		419		6,026		315,396		321,422		—
Business Loans:
Commercial and Industrial Loans		254		247		501		53,653		54,154		247
Farm Production and Other Farm Loans		53		—		53		1,016		1,069		—

Total Business Loans		307		247		554		54,669		55,223		247
Consumer Loans:
Credit Cards		8		1		9		1,193		1,202		1
Other Consumer Loans		588		70		658		14,837		15,495		51

Total Consumer Loans		596		71		667		16,030		16,697		52

Total Loans	$	6,510	$	737	$	7,247	$	386,095	$	393,342	$	299

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


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days		Total Past		Current		Total		Days
	Past Due		Past Due		Due Loans		Loans		Loans		Past Due
Real Estate:
Land Development and Construction	$	208	$	78	$	286	$	23,507	$	23,793	$	—
Farmland		584		65		649		17,526		18,175		—
1-4 Family Mortgages		2,993		596		3,589		94,223		97,812		179
Commercial Real Estate		903		185		1,088		179,792		180,880		—

Total Real Estate Loans		4,688		924		5,612		315,048		320,660		179
Business Loans:
Commercial and Industrial Loans		66		186		252		53,509		53,761		—
Farm Production and Other Farm Loans		—		—		—		765		765		—

Total Business Loans		66		186		252		54,274		54,526		—
Consumer Loans:
Credit Cards		7		3		10		1,146		1,156		3
Other Consumer Loans		788		27		815		17,495		18,310		27

Total Consumer Loans		795		30		825		18,641		19,466		30

Total Loans	$	5,549	$	1,140	$	6,689	$	387,963	$	394,652	$	209

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

Impaired loans (in thousands) as of September 30, 2017, segregated by class, were as follows:


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Allowance
Real Estate:
1-4 Family Mortgages	$	468	$	—	$	468	$	468	$	136	$	167
Commercial Real Estate		4,186		—		4,186		4,186		402		417

Total Real Estate Loans		4,654		—		4,654		4,654		538		584
Business Loans:
Commercial and Industrial Loans		—		—		—		—		—		15

Total Business Loans		—		—		—		—		—		15
Total Loans	$	4,654	$	—	$	4,654	$	4,654	$	538	$	599


Impaired loans (in thousands) as of December 31, 2016, segregated by class, were as follows:
			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Allowance
Real Estate:
Land Development and Construction	$	—	$	—	$	—	$	—	$	—	$	43
Farmland		163		—		163		163		28		87
1-4 Family Mortgages		1,448		—		1,448		1,448		252		218
Commercial Real Estate		5,327		—		5,327		5,327		469		1,577

Total Real Estate Loans		6,938		—		6,938		6,938		749		1,925
Business Loans:
Commercial and Industrial Loans		126		—		126		126		38		19

Total Business Loans		126		—		126		126		38		19
Total Loans	$	7,064	$	—	$	7,064	$	7,064	$	787	$	1,944

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


			Pre-Modification		Post-Modification
September 30, 2017			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
Commercial real estate		3	$	4,871	$	3,160

Total		3	$	4,871	$	3,160


			Pre-Modification		Post-Modification
December 31, 2016			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
Commercial real estate		3	$	4,871	$	3,288

Total		3	$	4,871	$	3,288

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


	Number		Recorded
	of Loans		Investment
Totals at January 1, 2017		3	$	3,288
Reductions due to:
Principal paydowns				(128	)

Total at September 30, 2017		3	$	3,160

The allocated allowance for loan losses attributable to restructured loans was $174,274 at September 30, 2017 and December 31, 2016. The Corporation had no remaining availability under commitments to lend additional funds on these troubled debt restructurings as of September 30, 2017.

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

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

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

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

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

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

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

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

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at September 30, 2017.

The following table details the amount of gross loans (in thousands), segregated by loan grade and class, as of September 30, 2017:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	21,375	$	835	$	132	$	—	$	—	$	22,342
Farmland		16,599		641		796		—		—		18,036
1-4 Family Mortgages		83,316		5,454		8,661		—		—		97,431
Commercial Real Estate		154,274		22,259		7,080		—		—		183,613

Total Real Estate Loans		275,564		29,189		16,669		—		—		321,422
Business Loans:
Commercial and Industrial Loans		50,747		3,018		389		—		—		54,154
Farm Production and Other Farm Loans		986		12		71		—		—		1,069

Total Business Loans		51,733		3,030		460		—		—		55,223
Consumer Loans:
Credit Cards		1,201		—		1		—		—		1,202
Other Consumer Loans		15,158		73		264		—		—		15,495

Total Consumer Loans		16,359		73		265		—		—		16,697

Total Loans	$	343,656	$	32,292	$	17,394	$	—	$	—	$	393,342

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


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	23,038	$	186	$	569	$	—	$	—	$	23,793
Farmland		16,448		776		951		—		—		18,175
1-4 Family Mortgages		86,043		1,754		10,015		—		—		97,812
Commercial Real Estate		161,323		11,072		8,485		—		—		180,880

Total Real Estate Loans		286,852		13,788		20,020		—		—		320,660
Business Loans:
Commercial and Industrial Loans		51,985		1,427		349		—		—		53,761
Farm Production and Other Farm Loans		727		28		10		—		—		765

Total Business Loans		52,712		1,455		359		—		—		54,526
Consumer Loans:
Credit Cards		1,153		—		3		—		—		1,156
Other Consumer Loans		18,027		149		132		2		—		18,310

Total Consumer Loans		19,180		149		135		2		—		19,466

Total Loans	$	358,744	$	15,392	$	20,514	$	2	$	—	$	394,652

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

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

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

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2017:


	Real			Business
September 30, 2017	Estate			Loans		Consumer			Total
Beginning Balance, January 1, 2017	$	3,117,134		$	257,554	$	528,108		$	3,902,796
(Reversal of) provision for loan losses		(482,980	)		199,355		29,011			(254,614	)
Chargeoffs		126,757			146,139		41,788			314,684
Recoveries		26,188			754		43,493			70,435

Net chargeoffs (recoveries)		100,569			145,385		(1,705	)		244,249

Ending Balance	$	2,533,585		$	311,524	$	558,824		$	3,403,933

Period end allowance allocated to:
Loans individually evaluated for impairment	$	537,897		$	—	$	—		$	537,897
Loans collectively evaluated for impairment		1,995,688			311,524		558,824			2,866,036

Ending Balance, September 30, 2017	$	2,533,585		$	311,524	$	558,824		$	3,403,933

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2016:


	Real		Business
September 30, 2016	Estate		Loans			Consumer			Total
Beginning Balance, January 1, 2016	$	5,238,895	$	643,248		$	591,560		$	6,473,703
(Reversal of) provision for loan losses		214,491		(93,733	)		(23,290	)		97,468
Chargeoffs		2,508,459		5,428			49,317			2,563,204
Recoveries		32,424		14,381			58,670			105,475

Net chargeoffs (recoveries)		2,476,035		(8,953	)		(9,353	)		2,457,729

Ending Balance	$	2,977,351	$	558,468		$	577,623		$	4,113,442

Period end allowance allocated to:
Loans individually evaluated for impairment	$	848,091	$	—		$	—		$	848,091
Loans collectively evaluated for impairment		2,129,260		558,468			577,623			3,265,351

Ending Balance, September 30, 2016	$	2,977,351	$	558,468		$	577,623		$	4,113,442

The Corporation’s recorded investment in loans as of September 30, 2017 and December 31, 2016 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology was as follows (in thousands):


	Real		Business
September 30, 2017	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	4,654	$	—	$	—	$	4,654
Loans collectively evaluated for general impairment		316,768		55,223		16,697		388,688

	$	321,422	$	55,223	$	16,697	$	393,342


	Real		Business
December 31, 2016	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	6,938	$	126	$	—	$	7,064
Loans collectively evaluated for general impairment		313,722		54,400		19,466		387,588

	$	320,660	$	54,526	$	19,466	$	394,652

Note 8. Fair Value of Financial Instruments

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


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

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

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

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

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2017:


	Fair Value Measurements Using:
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government Agencies	$	—	$	180,005,228	$	—	$	180,005,228
Mortgage-backed securities		—		219,278,194		—		219,278,194
State, county and municipal obligations		—		115,913,612		—		115,913,612
Other investments		—		—		3,039,057		3,039,057

Total	$	—	$	515,197,034	$	3,039,057	$	518,236,091

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2016:


	Fair Value Measurements Using:
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government Agencies	$	—	$	199,966,608	$	—	$	199,966,608
Mortgage-backed securities		—		148,264,710		—		148,264,710
State, county and municipal obligations		—		144,922,150		—		144,922,150
Other investments		—		—		2,971,106		2,971,106

Total	$	—	$	493,153,468	$	2,971,106	$	496,124,574

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


	Fair Value Measurements Using:
	Significant Unobservable Inputs
	(Level 3)
	Structured Financial Product
	As of September 30,
	2017			2016
Beginning Balance	$	2,971,106		$	2,915,709
Principal payments received		(5,067	)		(46,326	)
Unrealized gains included in other comprehensive income		73,018			71,576

Ending Balance	$	3,039,057		$	2,940,959

The Corporation recorded no gains or losses in earnings for the period ended September 30, 2017 or December 31, 2016 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

The following table presents information as of September 30, 2017 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a recurring basis:


Financial instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs
Trust preferred securities	$	3,039,057	Discounted cash flows	Default rate	0-100%

For assets measured at fair value on a nonrecurring basis during 2017 that were still held on the Corporation’s balance sheet at September 30, 2017, the following table provides the hierarchy level and the fair value of the related assets:


	Fair Value Measurements Using:
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	539,865	$	539,865

Total	$	—	$	—	$	539,865	$	539,865


Financial instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs
Impaired loans	$	539,865	Appraised value of collateral less estimated costs to sell	Estimated costs to sell	25%

For assets measured at fair value on a nonrecurring basis during 2016 that were still held on the Corporation’s balance sheet at December 31, 2016, the following table provides the hierarchy level and the fair value of the related assets:


	Fair Value Measurements Using:
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	3,591,516	$	3,591,516
Other real estate owned		—		—		1,893,949		1,893,949

Total	$	—	$	—	$	5,485,465	$	5,485,465

Impaired loans with a carrying value of $4,654,471 and $7,064,185 had an allocated allowance for loan losses of $537,897 and $786,893 at September 30, 2017 and December 31, 2016, 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.

Real estate acquired through foreclosure or deed in lieu, sometimes referred to as other real estate owned (“OREO”), during the nine-month period ended September 30, 2017, and recorded at fair value, less costs to sell, was $11,200, of which $11,200 was sold during this period. There were no writedowns during the period on properties owned. OREO acquired during 2016 and recorded at fair value, less costs to sell, was $2,187,125. There were $220,419 in additional writedowns during 2016 on OREO acquired in previous years.

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

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at September 30, 2017:


			Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
September 30, 2017	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	20,791,594	$	20,791,594	$	—	$	—	$	20,791,594
Interest bearing deposits with banks		29,640,509		29,640,509		—		—		29,640,509
Securities available-for-sale		518,236,091		—		515,197,034		3,039,057		518,236,091
Net loans		389,674,425		—		—		390,351,005		390,351,005
Financial liabilities
Deposits	$	754,768,366	$	567,162,743	$	—	$	187,740,115	$	754,902,858
Federal Home Loan Bank advances		20,000,000		—		—		20,130,400		20,130,400
Securities Sold under Agreement to Repurchase		149,451,950		149,451,950		—		—		149,451,950

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at December 31, 2016:


			Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
December 31, 2016	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	21,688,557	$	21,688,557	$	—	$	—	$	21,688,557
Interest bearing deposits with banks		48,603,182		48,603,182		—		—		48,603,182
Securities available-for-sale		496,124,574		—		493,153,468		2,971,106		496,124,574
Net loans		390,148,343		—		—		391,106,337		391,106,337
Financial liabilities
Deposits	$	760,152,340	$	563,440,632	$	—	$	196,859,851	$	760,300,483
Federal Home Loan Bank advances		20,000,000		—		—		20,283,999		20,283,999
Securities Sold under Agreement to Repurchase		150,282,913		150,282,913		—		—		150,282,913

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

Cash and Due from Banks and Interest Bearing Deposits with Banks

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

Securities Available-for-Sale

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

The Corporation owns certain beneficial interests in one collateralized debt obligation secured by community bank trust preferred securities. These interests do not trade in a liquid market, and therefore, market quotes are not a reliable indicator of their ultimate realizability. The Corporation utilizes a discounted cash flow model using inputs of (1) market yields of trust-preferred securities as the discount rate and (2) expected cash flows which are estimated using assumptions related to defaults, deferrals and prepayments to determine the fair values of these

beneficial interests. Many of the factors that adjust the timing and extent of cash flows are based on judgment and not directly observable in the markets. Therefore, these fair values are classified as Level 3 valuations for accounting and disclosure purposes. Since observable transactions in these securities are rare, the Corporation uses assumptions that a market participant would use in valuing these instruments. These assumptions primarily include cash flow estimates and market discount rates. The cash flow estimates are sensitive to the assumptions related to the ability of the issuers to pay the underlying trust preferred securities according to their terms. The market discount rates depend on transactions, which are rare given the lack of interest of investors in these types of beneficial interests.

Net Loans

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

Deposits

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

Federal Home Loan Bank (“FHLB”) Borrowings

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

Securities Sold Under Agreement to Repurchase

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

Off-Balance Sheet Instruments

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

Note 9. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 provides guidance that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of this standard to annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact, if any, ASU 2014-09 will have on its financial position, results of operations, and its financial statement disclosures.

On September 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The update will significantly change the way entities recognize impairment on many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. The FASB describes this impairment recognition model as the current expected credit loss (“CECL”) model and believes the CECL model will result in more timely recognition of credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The scope of FASB’s CECL model would include loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. For public business entities, this update becomes effective for interim and annual periods beginning after December 15, 2019. Management is currently evaluating the impact this ASU will have on the Company’s consolidated financial statements and will continue to monitor FASB’s progress on this topic.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows, including (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance principle. For public business entities, this amendment becomes effective for interim and annual periods beginning after December 15, 2017. The ASU only impacts the presentation of specific items within the Statement of Cash Flows and is not expected to have a material impact to the Company.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 amends the accounting model and disclosure requirements for leases. The current accounting model for leases distinguishes between capital leases, which are recognized on-balance sheet, and operating leases, which are not. Under the new standard, the lease classifications are defined as finance leases, which are similar to capital leases under current GAAP, and operating leases. Further, a lessee will recognize a lease liability and a right-of-use asset for all leases with a term greater than 12 months on its balance sheet regardless of the

lease’s classification, which may significantly increase reported assets and liabilities. The accounting model and disclosure requirements for lessors remains substantially unchanged from current GAAP. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU 2016-02 will have on the Company’s financial position and results of operations.

In January 2017, FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business” (“ASU 2017-01”), that changes the definition of a business when evaluating whether transactions should be accounted for as the acquisition of assets or the acquisition of a business. ASU 2017-01 requires an entity to evaluate if substantially all of the fair value of the assets acquired are concentrated in a single asset or a group of similar identifiable assets; if so, the acquired assets or group of similar identifiable assets is not considered a business. In addition, the guidance requires that, to be considered a business, the acquired assets must include an input and a substantive process that together significantly contribute to the ability to create output. The ASU removes the evaluation of whether a market participant could replace any of the missing elements. ASU 2017-01 is effective for interim and annual periods beginning after December 15, 2017 and is not expected to have a material impact on the Company’s financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20) (“ASU 2017-08”). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this update more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities due to market participants pricing securities to the call date that produces the worst yield when the coupon is above current market rates, and pricing securities to maturity when the coupon is below market rates in anticipation that the borrower will act in its economic best interest. Therefore, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. ASU 2017-08 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU 2017-08 will have on the Company’s financial position and results of operations.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Subtopic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 will be effective for interim and annual periods beginning after December 15, 2018. The Company is evaluating the effect that ASU 2017-09 will have on its financial position, results of operations and its financial statement disclosures.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF F INANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report. The Corporation notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

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

•

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

•

adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan losses;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

The Corporation does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.

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

OVERVIEW

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

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At September 30, 2017, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1.026 billion and total deposits of $754.768 million

The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

LIQUIDITY

The Corporation has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Corporation at September 30, 2017, was 36.20% and at December 31, 2016, was 37.64%. The decrease was due to an decrease in short term marketable assets at September 30, 2017. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $754,768,366 at September 30, 2017, and $760,152,340 at December 31, 2016. Other sources of liquidity include investment securities, the Corporation’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Corporation had $518,236,091 invested in available-for-sale investment securities at September 30, 2017, and $496,124,574 at December 31, 2016. This increase is due to the Corporation investing its funds not needed for loan funding in longer term investments. The Corporation also had $29,640,509 in interest bearing deposits at other banks at September 30, 2017 and $48,603,182 at December 31, 2016. The decrease in interest bearing deposits was the result of these funds being invested in long term investments. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at both September 30, 2017 and December 31, 2016. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At September 30, 2017, the Corporation had unused and available $145,516,824 of its line of

credit with the FHLB and at December 31, 2016, the Corporation had unused and available $123,592,789 of its line of credit with the FHLB. The increase in the amount available under the Corporation’s line of credit with the FHLB from the end of 2016 to September 30, 2017, was the result of an increase in the amount of loans eligible for the collateral pool securing the Corporation’s line of credit with the FHLB. The Corporation had no federal funds purchased as of both September 30, 2017 and December 31, 2016. The Corporation may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

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

CAPITAL RESOURCES

Total shareholders’ equity was $91,942,431 at September 30, 2017, as compared to $85,059,395 at December 31, 2016. The increase in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment as well as the increase in earnings in excess of dividends paid. The market value adjustment, which was an increase was due to general market conditions, specifically the decrease in medium term interest rates, which caused an increase in the market price of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $3,522,327, or $0.72 per share, during the nine-month period ended September 30, 2017 compared to $0.72 per share for the same period in 2016.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of September 30, 2017, the Corporation meets all capital adequacy requirements to which it is subject and according to these requirements the Corporation is considered to be well capitalized.


											Minimum Capital
						Minimum Capital					Requirement to be Adequately Capitalized
						Requirement to be
	Actual					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2017
Citizens Holding Company
Tier 1 leverage ratio	$	94,193		9.33	%	$	50,496		5.00	%	$	40,397		4.00	%
Common Equity tier 1 capital ratio		94,193		9.33	%		65,645		6.50	%		45,446		4.50	%
Tier 1 risk-based capital ratio		94,193		18.36	%		41,050		8.00	%		30,788		6.00	%
Total risk-based capital ratio		97,597		19.02	%		51,313		10.00	%		41,050		8.00	%
December 31, 2016
Citizens Holding Company
Tier 1 leverage ratio	$	92,629		9.22	%	$	50,258		5.00	%	$	40,207		4.00	%
Common Equity tier 1 capital ratio		92,629		9.22	%		65,336		6.50	%		45,232		4.50	%
Tier 1 risk-based capital ratio		92,629		17.92	%		41,354		8.00	%		31,016		6.00	%
Total risk-based capital ratio		96,532		18.67	%		51,693		10.00	%		41,354		8.00	%

The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II 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 Company and the Bank were required to comply with the final Basel III rules, although the rules will not be fully phased-in until January 1, 2019. Among other things, the final Basel III rules will impact regulatory capital ratios of banking organizations in the following manner, when fully phased-in:

•

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

•

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

•

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

•

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

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

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

Management believes that, as of September 30, 2017, the Company and the Bank would meet all capital adequacy requirements under Basel III and the banking agencies’ proposals on a fully phased-in basis, if such requirements were currently effective. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporation’s capital ratios as presented. Management will continue to monitor these and any future proposals submitted by the Corporation’s and Bank’s regulators.

RESULTS OF OPERATIONS

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


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2017			2016		2017			2016
Interest Income, including fees	$	7,544,364		$	7,573,627	$	22,855,734		$	22,778,695
Interest Expense		825,017			753,488		2,462,281			2,277,625

Net Interest Income		6,719,347			6,820,139		20,393,453			20,501,070
Provision for Loan Losses		(73,808	)		184,018		(254,614	)		97,468

Net Interest Income after Provision for Loan Losses		6,793,155			6,636,121		20,648,067			20,403,602
Other Income		2,126,172			2,079,658		6,183,624			5,803,485
Other Expense		6,887,220			6,557,413		20,906,987			19,857,197

Income Before Provision For Income Taxes		2,032,107			2,158,366		5,924,704			6,349,890
Provision for Income Taxes		424,638			406,076		1,096,457			1,292,427

Net Income	$	1,607,469		$	1,752,290	$	4,828,247		$	5,057,463

Net Income Per share - Basic	$	0.33		$	0.36	$	0.99		$	1.04

Net Income Per Share - Diluted	$	0.33		$	0.36	$	0.99		$	1.04

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

Annualized return on average equity (“ROE”) was 7.42% for the three months ended September 30, 2017, and 7.64% for the corresponding period in 2016. For the nine months ended September 30, 2017, ROE was 7.18% compared to 7.40% for the nine months ended September 30, 2016. In both instances, the decrease in ROE was caused by the increase in equity balances for both periods.

Book value per share increased to $18.78 at September 30, 2017, compared to $17.42 at December 31, 2016. The increase in book value per share reflects earnings in excess of dividends and a decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities. Average assets for the nine months ended September 30, 2017, were $1,009,780,775 compared to $996,266,145 for the year ended December 31, 2016. This increase was due mainly to an increase in available-for-sale securities offset by a decrease in interest bearing due from bank accounts.

NET INTEREST INCOME / NET INTEREST MARGIN

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

The annualized net interest margin was 2.98% for the quarter ended September 30, 2017 compared to 3.10% for the corresponding period of 2016. For the nine months ended September 30, 2017, annualized net interest margin was 3.03% compared to 3.11% for the nine months ended September 30, 2016. The decrease in net interest margin for both periods ended September 30, 2017, when compared to the same periods in 2016, was the result of the decrease in yields on earning assets and a small increase in rates paid on deposits and borrowed funds, as detailed below. Earning assets averaged $934,204,576 for the three months ended September 30, 2017. This represents an increase of $11,200,285, or 1.2%, over average earning assets of $923,004,291 for the three months ended September 30, 2016. The increase in average earning assets for the three months ended September 30, 2017, is the result of an increase in investment securities offset by a decrease in loans and interest bearing due from bank accounts.

Interest bearing deposits averaged $613,556,724 for the three months ended September 30, 2017. This represents a decrease of $7,855,457, or 1.3%, from the average of interest bearing deposits of $621,412,181 for the three months ended September 30, 2016. This was due, in large part, to a decrease in interest-bearing NOW, money market accounts and certificates of deposit partially offset by an increase in savings accounts.

Other borrowed funds averaged $144,026,510 for the three months ended September 30, 2017. This represents an increase of $20,297,790, or 16.4%, over the other borrowed funds of $123,728,720 for the three months ended September 30, 2016. This increase in other borrowed funds was due to a $16,173,285 increase in the securities sold under agreements to repurchase and a $4,260,870 increase in FHLB advances partially offset by a $11,365 decrease in the Agribusiness Enterprise Loan Liability and a $125,000 decrease in Federal Funds Purchased for the three months ended September 30, 2017, when compared to the three months ended September 30, 2016.

Interest bearing deposits averaged $619,077,200 for the nine months ended September 30, 2017. This represents a decrease of $3,190,650, or 0.5%, from the average of interest bearing deposits of $622,267,850 for the nine months ended September 30, 2016. This was due, in large part, to an increase in interest-bearing NOW, money market accounts and savings accounts partially offset by a decrease in certificates of deposit.

Other borrowed funds averaged $142,245,990 for the nine months ended September 30, 2017. This represents an increase of $18,477,609, or 15.1%, over the other borrowed funds of $123,678,381 for the nine months ended September 30, 2016. This increase in other borrowed funds was due to a $16,502,061 increase in the securities sold under agreements to repurchase and a $2,051,282 increase in FHLB advances partially offset by a $12,595 decrease in the Agribusiness Enterprise Loan Liability and a $63,139 decrease in Federal Funds Purchased for the nine months ended September 30, 2017, when compared to the nine months ended September 30, 2016.

Net interest income was $6,719,347 for the three months ended September 30, 2017, a decrease of $100,792 from $6,820,139 for the three months ended September 30, 2016, primarily due to an increase in interest rates paid on earning assets and by an increase in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As for changes in interest rates in the three months ended September 30, 2017, the yields on earning assets decreased and the rates paid on deposits and borrowed funds increased from the same period in 2016. The yield on all interest-bearing assets decreased 10 basis points to 3.33% in the three months ended September 30, 2017 from 3.43% for the same period in 2016. At the same time, the rate paid on all interest-bearing liabilities for the three months ended September 30, 2017 increased 4 basis points to 0.44% from 0.40% in the same period in 2016. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

Net interest income was $20,393,453 for the nine months ended September 30, 2017, a decrease of $107,617 from $20,501,070 for the nine months ended September 30, 2016, primarily due to a decrease in interest rates paid on earning assets partially offset by an increase in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As for changes in interest rates in the nine months ended September 30, 2017, the yields on earning assets decreased and the rates paid on deposits and borrowed funds increased from the same period in 2016. The yield on all interest-bearing assets decreased 6 basis points to 3.38% in the nine months ended September 30, 2017 from 3.44% for the same period in 2016. At the same time, the rate paid on all interest-bearing liabilities for the nine months ended September 30, 2017 increased 3 basis points to 0.43% from 0.40% in the same period in 2016. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

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


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2017			2016			2017			2016
Interest and Fees	$	4,585,668		$	4,825,800		$	14,017,718		$	14,344,314
Average Gross Loans		392,016,275			409,041,715			394,201,872			412,566,347
Annualized Yield		4.68	%		4.72	%		4.74	%		4.64	%

The decrease in interest rates on loan accounts in the three months and the increase for the nine months ended September 30, 2017, reflects the increase in all loan interest rates for both new and refinanced loans in the period.

CREDIT LOSS EXPERIENCE

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

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

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

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

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


	Quarter Ended			Year Ended			Amount of			Percent of
	September 30,			December 31,			Increase			Increase
	2017			2016			(Decrease)			(Decrease)
BALANCES:
Gross Loans	$	393,342,557		$	394,051,139		$	(708,582	)		-0.18	%
Allowance for Loan Losses		3,403,933			3,902,796			(498,863	)		-12.78	%
Nonaccrual Loans		7,832,726			8,879,393			(1,046,667	)		-11.79	%
Ratios:
Allowance for loan losses to gross loans		0.87	%		0.99	%
Net loans charged off to allowance for loan losses		7.18	%		64.21	%

The provision for loan losses for the three months ended September 30, 2017 was negative $73,808, a decrease of $257,826 from the $184,018 provision for the same period in 2016. The provision for loan losses for the nine months ended September 30, 2017, was a negative $254,614, a decrease of $352,082 from the $97,468 provision for the same period in 2016. The change in the Corporation’s loan loss provisions for the three and nine months ended September 30, 2017 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact caused by current local, national and international economic conditions. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to the amount of payments received and loans charged off in excess of new loans being added to the nonaccrual loan list.

For the three months ended September 30, 2017, net loan losses charged to the allowance for loan losses totaled $28,265, an increase of $851,306 from the $879,571 charged off in the same period in 2016. The decrease was mainly due to a charge off on a single loan in the amount of $815,907 on commercial real estate in 2016.

For the nine months ended September 30, 2017, net loan losses charged to the allowance for loan losses totaled $244,250, a decrease of $2,213,479 from the $2,457,729 charged off in the same period in 2016. The net loan losses for the nine-month period ended September 30, 2016 contained $2,339,308 in losses on two long-term commercial real estate loans that the Corporation has previously provided for a specific reserve against this loss through the provision for loan loss.

Management reviews quarterly with the Corporation’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the nine months ended September 30, 2017 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended September 30, 2017 was $2,126,172, an increase of $46,514, or 2.2%, from $2,079,658 the same period in 2016. Service charges on deposit accounts were $1,115,474 in the three months ended September 30, 2017, compared to $1,009,486 for the same period in 2016. Other service charges and fees increased by $44,042, or 6.7%, to $702,686 in the three months ended September 30, 2017, compared to $658,644 for the same period in 2016. Other operating income not derived from service charges or fees decreased $103,516, or 25.2% to $308,012 in the three months ended September 30, 2017, compared to $411,528 for the same period in 2016. This decrease was due mainly to a reduction in income from security sales and a decrease in mortgage loan origination income from long-term mortgage loans originated for sale to the secondary market and income on bank owned life insurance.

Other income for the nine months ended September 30, 2017 was $6,183,624, an increase of $380,139, or 6.6%, from $5,803,485 the same period in 2016. Service charges on deposit accounts were $3,176,877 in the nine months ended September 30, 2017, compared to $2,794,790 for the same period in 2016. Other service charges and fees increased by $140,788 or 7.6%, to $1,992,929 in the nine months ended September 30, 2017, compared to $1,852,141 for the same period in 2016. Other operating income not derived from service charges or fees decreased $142,736, or 12.3% to $1,013,818 in the nine months ended September 30, 2017, compared to $1,156,554 for the same period in 2016. This decrease was due mainly to a decrease in mortgage loan origination income from long-term mortgage loans originated for sale to the secondary market and income on bank owned life insurance partially offset by an increase in income from security sales and other income.

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


	Three months				Nine months
	Ended September 30,				Ended September 30,
Other operating income	2017		2016		2017		2016
BOLI Income	$	120,000	$	144,000	$	360,000	$	424,000
Mortgage Loan Origination Income		87,069		117,186		249,435		359,815
Income from security sales, net		15,612		60,053		104,708		97,191
Other Income		85,331		90,289		299,675		275,548

Total Other Income	$	308,012	$	411,528	$	1,013,818	$	1,156,554

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended September 30, 2017 and 2016 were $6,887,220 and $6,557,413, respectively, an increase of $329,807 or 5.0%. Salaries and benefits increased to $3,744,831 for the three months ended September 30, 2017, from $3,460,948 for the same period in 2016. Occupancy expense increased by $5,880, or 0.4%,

to $1,335,676 for the three months ended September 30, 2017, compared to $1,329,796 for the same period of 2016. Other operating expenses increased by $40,044 to $1,806,713 for the three months ended September 30, 2017, compared to $1,766,669 for the same period of 2016. A detail of the major expense classifications is set forth below.

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


	Three months				Nine months
	ended September 30,				ended September 30,
Other Operating Expense	2017		2016		2017		2016
Advertising	$	142,032	$	161,329	$	532,292	$	597,711
Office Supplies		290,110		215,304		712,397		500,176
Legal and Audit Fees		135,403		143,828		400,483		371,005
Telephone expense		124,112		119,070		399,926		337,127
Postage and Freight		133,251		128,086		396,042		365,463
Loan Collection Expense		106,947		42,496		149,355		332,342
Other Losses		12,039		7,871		213,606		219,005
Regulatory and related expense		107,932		200,887		322,104		620,087
Debit Card/ATM expense		103,240		160,526		307,069		348,253
Travel and Convention		54,198		60,909		197,318		199,224
Other expenses		597,449		526,363		2,137,778		1,758,268

Total Other Expense	$	1,806,713	$	1,766,669	$	5,768,370	$	5,648,661

The Corporation’s efficiency ratio for the three months ended September 30, 2017 was 75.67%, compared to 65.70% for the same period in 2016. For the nine months ended September 30, 2017 and 2016, the Corporation’s efficiency ratio was 76.35% and 71.26%, respectively. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.

BALANCE SHEET ANALYSIS


					Amount of			Percent of
	September 30,		December 31,		Increase			Increase
	2017		2016		(Decrease)			(Decrease)
Cash and Due From Banks	$	20,791,594	$	21,688,557	$	(896,963	)		-4.14	%
Interest Bearing deposits with Other Banks		29,640,509		48,603,182		(18,962,673	)		-39.02	%
Investment Securities		518,236,091		496,124,574		22,111,517			4.46	%
Loans, net		389,674,425		390,148,343		(473,918	)		-0.12	%
Premises and Equipment		20,752,738		18,664,084		2,088,654			11.19	%
Total Assets		1,026,124,497		1,025,211,907		912,590			0.09	%
Total Deposits		754,768,366		760,152,340		(5,383,974	)		-0.71	%
Total Shareholders’ Equity		91,942,431		85,059,395		6,883,036			8.09	%

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which consist of cash, balances at correspondent banks and items in process of collection, balance at September 30, 2017 was $20,791,594, which was a decrease of $896,963 from the balance of $21,688,557 at December 31, 2016. The decrease was due to an increase in the balances at correspondent banks due to an increase in the amount of checks drawn on other banks in the normal process of clearing funds between these banks.

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Corporation’s investments securities portfolio at September 30, 2017, increased by $22,111,517, or 4.5%, to $518,236,091 from $496,124,574 at December 31, 2016. This increase was due to purchases in excess of maturities, sales and calls and increases in the market value of the Corporation’s investment securities portfolio.

LOANS

The Corporation’s loan balance decreased by $473,918 during the nine months ended September 30, 2017, to $389,674,425 from $390,148,343 at December 31, 2016. Loan growth for the nine months ended September 30, 2017 was adversely impacted by weak demand for loans that meet our underwriting standards and increased competition for available loans that do. No material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the nine months ended September 30, 2017, the Corporation’s premises and equipment increased by $2,088,654, or 11.2%, to $20,752,738 from $18,664,084 at December 31, 2016. The increase was due to costs related to the new branch construction in Biloxi partially offset by depreciation expense for the period.

DEPOSITS

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

DEPOSITS


					Amount of			Percent of
	September 30,		December 31,		Increase			Increase
	2017		2016		(Decrease)			(Decrease)
Noninterest-Bearing Deposits	$	152,450,812	$	149,512,941	$	2,937,871			1.96	%
Interest-Bearing Deposits		338,083,326		340,180,286		(2,096,960	)		-0.62	%
Savings Deposits		76,628,605		73,745,005		2,883,600			3.91	%
Certificates of Deposit		187,605,623		196,714,108		(9,108,485	)		-4.63	%

Total deposits	$	754,768,366	$	760,152,340	$	(5,383,974	)		-0.71	%

Non-interest-bearing and savings increased while certificates of deposit and interest-bearing deposits decreased during the nine months ended September 30, 2017. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management objectives. These rate adjustments impact deposit balances.

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS

There have been no material changes outside of the ordinary course of the Corporation’s business to the contractual obligations set forth in Note 12 to the Corporation’s financial statements contained in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM	3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

Competition Risks

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

Credit Risks

Like all lenders, the Corporation faces the risk that the Corporation’s customers may not repay their loans and that the realizable value of collateral may be insufficient to avoid a loss of principal. In the Corporation’s business, some level of credit loss is unavoidable and overall levels of credit loss can vary over time. The Corporation’s ability to manage credit risk depends primarily upon the Corporation’s ability to assess the creditworthiness of customers and the value of collateral, including real estate. The Corporation controls credit risk by diversifying the Corporation’s loan portfolio and managing its composition, and by recording and managing an allowance for expected loan losses in accordance with applicable accounting rules. At the end of September 30, 2017, the Corporation had approximately $3.4 million of available reserves to cover such losses. The models and approaches the Corporation uses to originate and manage loans are regularly reviewed, if necessary or advisable, updated to consider changes in the competitive environment, in real estate prices and other collateral values, and in the economy, among other things, based on the Corporation’s experience originating loans and servicing loan portfolios.

Financing, Funding and Liquidity Risks

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

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

Interest Rate and Yield Curve Risks

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

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

Regulatory and Legal Risks

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

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

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

Accounting Estimate Risks

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

Expense Control

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

ITEM 4. CONTROLS AND PROCEDURES.

The management of the Corporation, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Corporation’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of September 30, 2017 (the end of the period covered by this Quarterly Report).

There were no changes to the Corporation’s internal control over financial reporting that occurred in the three months ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1A. RISK FACTORS.

The Corporation’s business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2016, which the Corporation filed with the Securities and Exchange Commission on March 15, 2017. Additional information regarding some of those risks and uncertainties is contained in the notes to the condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016, the Corporation’s quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Corporation’s business, financial condition and results of operations in the future.

There have been no material changes to the risk factors as disclosed in the Corporation’s Annual Report on Form 10-K for the Corporation’s year ended December 31, 2016.

ITEM 6. EXHIBITS.

Exhibits



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

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

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

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

101		Financial Statements submitted in XBRL format.

EXHIBIT INDEX


Exhibit Number		Description of Exhibit

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

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

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

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

101		Financial Statements submitted in XBRL format.

SIGNATURES

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


CITIZENS HOLDING COMPANY

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

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

		DATE: November 9, 2017