Exhibit 13 – 2016 Annual Report to Shareholders

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Dear Valued Stockholder:

On behalf of the Board of Directors and management of The Citizens Bank, I am pleased to present for your review our Annual Report. Within these pages lies the financial story of your bank as we continue to grow and prosper. I believe you will find that our performance continues to reflect the sound banking principles on which we operate each day.

The year just concluded saw this institution move forward in numerous areas; We celebrated our 10^th anniversary of being listed on NASDAQ, a strategically important position for our corporate culture. A major milestone was achieved when our total assets exceeded the one billion dollar mark. We also received approval to relocate our branch in Biloxi which will open in mid-2017. We opened a Loan Production Office in Oxford designed to serve all of north Mississippi, although Lafayette County’s growth rate should certainly allow us to grow quickly in that market.

The Citizens Bank was once again named a Top 200 Community Bank in the United States, and the only Mississippi-based bank to have earned that honor. This rating is based on our three-year Return on Average Equity and signals our financial strength in support of service to our customers.

We continue to invest in our personnel to ensure that our bankers are well-trained and knowledgeable in every industry regard. We have added a Commercial Lender to serve in the origination, underwriting and servicing of all SBA Loan offerings, and other personnel continue receive training in regulatory issues, technology and security, products and customer service. This will allow our personnel, across the board, to better serve our customers and to create opportunities for promotions within the bank.

As you are aware, our sense of corporate citizenship remains ever-evolving. During 2016, we implemented a user-friendly technology called KnowBe4’s, which helps our customers protect their identity and the identities of their children. We are an active participant in the “Banker In Every Classroom” program and our Cash $tash debit card initiative raised more than $26,000 for schools within the markets we serve. In addition to that, The Citizens Bank provided $14,000 in scholarship funds to high school upperclassmen in 13 counties, and we were active in the Teacher Appreciation Week in honor of teachers and administrators.

With all of this being said, we know that 2017 will bring another fresh set of opportunities and challenges. Please know that your senior management team stands ready to address each as they arise. The Citizens Bank will continue to grow its footprint, prepare its bankers to succeed and to excel in our role as a true community bank.

Sincerely,

Greg McKee

President and CEO

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CITIZENS HOLDING COMPANY

Philadelphia, Mississippi

Consolidated Financial Statements

As of December 31, 2016 and 2015 and for the

Years Ended December 31, 2016, 2015 and 2014

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CONTENTS

 

Report of Independent Registered Public Accounting Firm			1 – 3
Management’s Assessment of Internal Control over Financial Reporting			4 – 5
Consolidated Financial Statements
Consolidated Statements of Condition			6
Consolidated Statements of Income			7
Consolidated Statements of Comprehensive Income (Loss)			8
Consolidated Statements of Changes in Shareholders’ Equity			9
Consolidated Statements of Cash Flows			10 – 11
Notes to Consolidated Financial Statements			12 – 65

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Citizens Holding Company

Philadelphia, Mississippi

We have audited the accompanying consolidated balance sheets of Citizens Holding Company and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2015, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework updated by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 8, 2017, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Ridgeland, MS

March 8, 2017

CONSTRUCTION | FINANCIAL INSTITUTIONS | FRANCHISE | GOVERNMENT SERVICES

HEALTH CARE | PUBLIC & MIDDLE MARKET | WEALTH ADVISORS

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To the Board of Directors and Shareholders

Citizens Holding Company

Philadelphia, Mississippi

We have audited Citizens Holding Company and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework updated by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

CONSTRUCTION | FINANCIAL INSTITUTIONS | FRANCHISE | GOVERNMENT SERVICES

HEALTH CARE | PUBLIC & MIDDLE MARKET | WEALTH ADVISORS

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To the Board of Directors and Shareholders

Citizens Holding Company

Page Two

 

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

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework updated by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016 and our report dated March 8, 2017 expressed an unqualified opinion.

 

Ridgeland, MS

March 8, 2017

 

3

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Citizens Holding Company

Philadelphia, MS 39350

Report on Management’s Assessment of Internal Control over Financial Reporting

Citizens Holding Company (the “Company”) is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with accounting principles generally accepted in the United States and necessarily include some amounts that are based on management’s best estimates and judgments.

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

The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

 

4

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Citizens Holding Company

Page Two

 

Management, with the participation of the Company’s principal executive officer and principal financial officer, conducted an assessment of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2016, based on criteria for effective internal control over financial reporting described in the “Internal Control – Integrated Framework,” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that, as of December 31, 2016, the Company’s system of internal control over financial reporting is effective and meets the criteria of the “Internal Control – Integrated Framework”. HORNE LLP, the Company’s independent registered public accounting firm that has audited the Company’s financial statements included in this annual report, has issued an attestation report on the Company’s internal control over financial reporting which is included herein.

 

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

March 8, 2017

 

5

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CITIZENS HOLDING COMPANY

Consolidated Statements of Condition

December 31, 2016 and 2015

 

ASSETS		2016				2015
Cash and due from banks		$	21,688,557			$	14,947,690
Interest bearing deposits with other banks			48,603,182				42,267,777
Securities available for sale, at fair value (amortized cost of $513,220,290 in 2016 and $267,308,756 in 2015)			496,124,574				267,264,403
Securities held to maturity, at book value (fair value of $0 in 2016 and $169,045,835 in 2015)			—				161,043,404
Loans, net of allowance for loan losses of $3,902,796 in 2016 and $6,473,703 in 2015			390,148,343				423,108,391
Bank premises, furniture, fixtures and equipment, net			18,664,084				18,655,691
Other real estate owned, net			4,443,010				3,572,744
Accrued interest receivable			4,720,189				3,928,106
Cash surrender value of life insurance			23,890,333				23,133,644
Deferred tax assets			10,634,669				9,165,417
Other assets			6,294,966				6,417,275
Total assets		$	1,025,211,907			$	973,504,542
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest bearing deposits		$	149,512,941			$	148,724,257
Interest bearing deposits			610,639,399				604,680,531
Total deposits			760,152,340				753,404,788
Securities sold under agreement to repurchase			150,282,913				104,298,182
Federal Home Loan Bank advances			20,000,000				20,000,000
Accrued interest payable			199,368				179,995
Deferred compensation payable			8,209,427				7,718,624
Other liabilities			1,308,464				1,477,617
Total liabilities			940,152,512				887,079,206
Stockholders’ equity
Common stock, $.20 par value, authorized 22,500,000 shares; 4,882,579 shares issued and outstanding at December 31, 2016 and 4,875,079 shares issued and outstanding at December 31, 2015			976,516				975,016
Additional paid-in capital			3,802,204				3,617,279
Accumulated other comprehensive loss, net of tax benefit of ($6,376,702) in 2016 and ($4,233,473) in 2015			(10,719,014	)			(7,116,319	)
Retained earnings			90,999,689				88,949,360
Total stockholders’ equity			85,059,395				86,425,336
Total liabilities and stockholders’ equity		$	1,025,211,907			$	973,504,542

The accompanying notes are an integral part of these statements.

 

6

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CITIZENS HOLDING COMPANY

Consolidated Statements of Income

Years Ended December 31, 2016, 2015, and 2014

 

		2016				2015				2014
Interest income
Interest and fees on loans		$	19,012,157			$	20,040,315			$	20,081,852
Interest on securities
Taxable			7,589,532				8,026,808				8,226,508
Non-taxable			3,382,064				2,802,915				3,022,992
Other interest			185,188				94,721				49,398
Total interest income			30,168,941				30,964,759				31,380,750
Interest expense
Deposits			1,843,983				1,843,717				1,754,909
Other borrowed funds			1,253,574				1,233,162				1,263,386
Total interest expense			3,097,557				3,076,879				3,018,295
Net interest income			27,071,384				27,887,880				28,362,455
Provision for loan losses			65,056				(556,687	)			(923,397	)
Net interest income after provision for loan losses			27,136,440				27,331,193				27,439,058
Non-interest income
Service charges on deposit accounts			3,788,984				3,866,537				3,932,691
Other service charges and fees			2,440,819				2,284,262				2,096,836
Net gains on sales of securities			112,881				17,503				14,542
Other income			1,348,916				2,159,407				2,118,435
Total non-interest income			7,691,600				8,327,709				8,162,504
Non-interest expense
Salaries and employee benefits			13,696,985				13,295,211				13,095,023
Occupancy expense			2,079,529				2,160,198				2,129,193
Equipment expense			3,028,654				3,065,042				3,065,842
Other expense			7,674,483				7,070,516				8,033,654
Total non-interest expense			26,479,651				25,590,967				26,323,712
Income before income taxes			8,348,389				10,067,935				9,277,850
Income tax expense			1,611,735				2,479,034				1,828,091
Net income		$	6,736,654			$	7,588,901			$	7,449,759
Net income per share – basic		$	1.38			$	1.56			$	1.53
Net income per share – diluted		$	1.38			$	1.56			$	1.53
Average shares outstanding
Basic			4,865,968				4,872,064				4,870,114
Diluted			4,875,638				4,874,141				4,870,749

The accompanying notes are an integral part of these statements.

 

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CITIZENS HOLDING COMPANY

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2016, 2015, and 2014

 

		2016				2015				2014
Net income		$	6,736,654			$	7,588,901			$	7,449,759
Other comprehensive income (loss)
Unrealized holding (losses) gains on available-for-sale securities			(16,938,482	)			(1,379,518	)			35,256,397
Income tax effect			6,318,053				514,561				(13,150,636	)
Net unrealized (losses) gains			(10,620,429	)			(864,957	)			22,105,761
Unrealized losses on securities transferred from available-for-sale to held-to-maturity			—				—				(17,061,438	)
Amortization of net unrealized losses transferred during the period			11,305,439				4,210,897				1,545,103
Income tax effect			(4,216,929	)			(1,570,664	)			5,787,593
			7,088,510				2,640,233				(9,728,742	)
Reclassification adjustment for gains included in net income			(112,881	)			(17,503	)			(14,542	)
Income tax effect			42,105				6,528				5,424
Net gains included in net income			(70,776	)			(10,975	)			(9,118	)
Total other comprehensive (loss) income			(3,602,695	)			1,764,301				12,367,901
Comprehensive income		$	3,133,959			$	9,353,202			$	19,817,660

The accompanying notes are an integral part of these statements.

 

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CITIZENS HOLDING COMPANY

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2016, 2015, and 2014

 

		Number of Shares Issued				Common Stock				Additional Paid-In Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Total
Balance, December 31, 2013			4,870,114			$	973,982			$	3,748,217			$	(21,248,521	)		$	82,792,524			$	66,266,202
Net income			—				—				—				—				7,449,759				7,449,759
Dividends paid ($0.89 per share)			—				—				—				—				(4,341,076	)			(4,341,076	)
Restricted stock granted			7,500				1,500				(1,500	)			—				—				—
Stock compensation expense			—				—				115,000				—				—				115,000
Other comprehensive income, net			—				—				—				12,367,901				—				12,367,901
Balance, December 31, 2014			4,877,614				975,482				3,861,717				(8,880,620	)			85,901,207				81,857,786
Net income			—				—				—				—				7,588,901				7,588,901
Dividends paid ($0.93 per share)			—				—				—				—				(4,540,748	)			(4,540,748	)
Stock repurchased			(19,035	)			(3,807	)			(386,398	)			—				—				(390,205	)
Options exercised			1,500				341				26,659				—				—				27,000
Excess tax benefits			—				—				1,001				—				—				1,001
Restricted stock granted			15,000				3,000				(3,000	)			—				—				—
Stock compensation expense			—				—				117,300				—				—				117,300
Other comprehensive loss, net			—				—				—				1,764,301				—				1,764,301
Balance, December 31, 2015			4,875,079				975,016				3,617,279				(7,116,319	)			88,949,360				86,425,336
Net income			—				—				—				—				6,736,654				6,736,654
Dividends paid ($0.96 per share)			—				—				—				—				(4,686,325	)			(4,686,325	)
Restricted stock granted			7,500				1,500				(1,500	)			—				—				—
Stock compensation expense			—				—				186,425				—				—				186,425
Other comprehensive income, net			—				—				—				(3,602,695	)			—				(3,602,695	)
Balance, December 31, 2016			4,882,579			$	976,516			$	3,802,204			$	(10,719,014	)		$	90,999,689			$	85,059,395

The accompanying notes are an integral part of these statements.

 

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CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2016, 2015, and 2014

 

		2016				2015				2014
Cash flows from operating activities
Net income		$	6,736,654			$	7,588,901			$	7,449,759
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			980,514				1,040,207				1,190,393
Amortization of premiums and accretion of discounts on investment securities, net			2,536,692				1,208,954				405,017
Stock compensation expense			186,425				117,300				115,000
Provision for loan losses			(65,056	)			556,687				923,397
Gain on sale of securities			(112,881	)			(17,503	)			(14,542	)
Federal Home Loan Bank stock dividends			(13,000	)			(4,500	)			(8,400	)
Deferred income tax expense (benefit)			673,977				(86,251	)			307,920
Net writedown on other real estate owned			226,828				156,053				824,059
(Increase) decrease in accrued interest receivable			(792,128	)			(58,124	)			262,116
Increase in cash surrender value life insurance			(756,689	)			(786,043	)			(784,425	)
Gain on BOLI death benefits			—				—				(623,774	)
Increase (decrease) in accrued interest payable			19,373				(10,722	)			(8,796	)
Increase in deferred compensation liability			490,803				508,930				489,746
Net change in other operating assets and liabilities			(32,599	)			188,128				(837,072	)
Net cash provided by operating activities			10,078,913				10,402,017				9,690,398
Cash flows from investing activities
Proceeds from calls, paydowns and maturities of securities available-for-sale			130,181,028				41,493,768				12,944,631
Proceeds from calls of securities held-to-maturity			172,359,945				47,853,733				—
Proceeds from sales of securities available-for-sale			764,023				5,758,795				18,004,518
Purchases of investment securities available-for-sale			(379,291,499	)			(135,229,379	)			—
Purchases of bank premises, furniture, fixtures and equipment			(988,907	)			(455,668	)			(1,807,469	)
Proceeds from sale of other real estate owned			1,090,031				1,192,328				1,749,721
Net (increase) decrease in interest bearing deposits with other banks			(6,335,405	)			19,213,446				(60,797,123	)
Proceeds from redemption of Federal Home Loan Bank Stock			—				150,700				1,292,600
Purchases of Federal Home Loan Bank Stock			(3,600	)			—				—
Proceeds from death benefits of bank owned life insurance			—				—				1,269,560
Net decrease (increase) in loans			30,837,979				(40,117,134	)			(4,110,312	)
Net cash used by investing activities			(51,386,405	)			(60,139,411	)			(31,453,874	)

 

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CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2016, 2015, and 2014

2 of 2

 

		2016				2015				2014
Cash flows from financing activities
Net increase in deposits		$	6,749,953			$	57,310,894			$	41,464,098
Net decrease in federal funds purchased			—				—				(27,500,000	)
Net change in securities sold under agreement to repurchase			45,984,731				(10,128,588	)			32,005,989
Proceeds from exercise of stock options			—				27,000				—
Stock repurchase			—				(390,205	)			—
Excess tax benefit on stock option exercises			—				1,001				—
Dividends paid to stockholders			(4,686,325	)			(4,540,748	)			(4,341,076	)
Federal Home Loan Bank advance payments			—				—				(13,500,000	)
Net cash provided by financing activities			48,048,359				42,279,354				28,129,011
Net increase (decrease) in cash and due from banks			6,740,867				(7,458,040	)			6,365,535
Cash and due from banks, beginning of year			14,947,690				22,405,730				16,040,195
Cash and due from banks, end of year		$	21,688,557			$	14,947,690			$	22,405,730
Supplemental disclosures of cash flow information
Cash paid for Interest		$	3,078,184			$	3,087,601			$	3,027,090
Income taxes		$	1,692,201			$	2,301,698			$	2,460,014
Noncash disclosures
Real estate acquired by foreclosure		$	2,187,125			$	869,564			$	2,874,173
Noncash investing activity
Transfers of securities from available-for-sale to held-to-maturity		$	—			$	—			$	222,322,423

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

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

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

Nature of Business

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

Estimates

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

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

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

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

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

For the purpose of reporting cash flows, cash and due from banks includes cash on hand and demand deposits. Cash flows from loans originated by the Company, deposits, and federal funds purchased and sold are reported net in the statement of cash flows. The Company is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The Company was not required to maintain an average reserve balance by the Federal Reserve Bank at December 31, 2016 and 2015.

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

Investment Securities

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

Securities Available-for-Sale

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

Securities Held to Maturity

Securities that are held-to-maturity (“HTM”) are those securities that the Company has the positive intent and ability to hold until maturity. These securities cannot be sold in response to the risk factors discussed above for available for sale securities. These securities are reported at book value. Securities that were classified as held to maturity were transferred from AFS in April 2014. Unrealized loss at that time was amortized over the remaining life of the securities at the same rate as the discount is being accreted on the new balance, resulting in a zero income effect. As of December 31, 2016, all securities classified as HTM have been called.

 

13

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

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

The Company periodically reviews its securities for impairment based upon a number of factors, including but not limited to, length of time and extent to which the fair value has been less than cost, the likelihood of the security’s ability to recover any decline in its fair value, financial condition of the underlying issuer, ability of the issuer to meet contractual obligations and ability to retain the security for a period of time sufficient to allow for recovery in fair value. Impairments on securities are recognized when management, based on its analysis, deems the impairment to be other-than-temporary. Disclosures about unrealized losses in the Company’s securities portfolio that have not been recognized as other-than-temporary impairments are provided in Note 2.

Loans and Allowance for Loan Losses

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

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

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

 

14

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

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

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

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

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

 

15

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

Bank Premises, Furniture, Fixtures and Equipment

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

Other Real Estate Owned

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

Cash Surrender Value of Life Insurance

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

Intangible Assets

Intangible assets include core deposits purchased and goodwill. Core deposit intangibles are amortized on a straight-line basis over their estimated economic lives ranging from 5 to 10 years. At December 31, 2016, all core deposit intangibles had been fully amortized. Goodwill and other intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Fair values are determined based on market valuation multiples for the Company and comparable businesses based on the assets and cash flow of the Bank, the Company’s only reportable segment. If impairment has occurred, the goodwill or other intangible asset is reduced to its estimated fair value through a charge to expense.

 

16

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

Trust Assets

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

Income Taxes

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

Comprehensive Income (Loss)

Comprehensive income includes net earnings reported in the consolidated statements of income, changes in unrealized gain (loss) on securities available-for-sale and changes in unrealized losses on securities transferred from AFS to HTM reported as a component of shareholders’ equity. Unrealized gain (loss) on securities available-for-sale and changes in unrealized losses on securities transferred from AFS to HTM, net of related income taxes, were the only components of accumulated other comprehensive income for the Company. At December 31, 2016, all HTM securities had been called and therefore there were no remaining unrealized losses on securities transferred from AFS to HTM.

 

17

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

Net Income Per Share

Net income per share-basic is computed by dividing net income by the weighted average number of common shares outstanding during the year. Net income per share-diluted is based on the weighted average number of shares of common stock outstanding for the periods, including the dilutive effect of the Company’s outstanding stock options and restricted stock grants. The effect of the dilutive shares for the years 2016, 2015 and 2014 is illustrated in the following table.

 

		2016				2015				2014
Basic weighted average shares outstanding			4,865,968				4,872,064				4,870,114
Dilutive effect of stock options			9,670				2,077				635
Dilutive weighted average shares outstanding			4,875,638				4,874,141				4,870,749
Net income		$	6,736,654			$	7,588,901			$	7,449,759
Net income per share-basic		$	1.38			$	1.56			$	1.53
Net income per share-diluted		$	1.38			$	1.56			$	1.53

Advertising Costs

Advertising costs are charged to expense when incurred. Advertising expense was $783,303, $793,282 and $769,081 for the years ended December 31, 2016, 2015 and 2014, respectively.

Securities Sold Under Agreements to Repurchase

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

Reclassifications

Certain information for 2014 and 2015 has been reclassified to conform to the financial presentation for 2016. Such reclassifications had no effect on net income or shareholders’ equity.

 

18

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

Stock-Based Compensation

At December 31, 2016, the Company had outstanding grants under two stock-based compensation plans, which are the 1999 Directors’ Stock Compensation Plan and the 2013 Incentive Compensation Plan. Compensation expense for the option grants is determined based on the estimated fair value of the stock options on the applicable grant date. Compensation expense for grants of restricted stock is accounted for using the fair market value of the Company’s stock on the date the restricted shares are awarded. Further, compensation expense is based on an estimate of the number of grants expected to vest and is recognized over the grants’ implied vesting period of 6 months and 1 day. Expense associated with the Company’s stock based compensation is included in salaries and benefits on the Consolidated Statements of Income. The Company recognizes compensation expense for all share-based payments to employees in accordance with ASC 718, “Compensation – Stock Compensation.” See Note 17 for further details regarding the Company’s stock-based compensation.

Subsequent Events

The Company has evaluated, for consideration of recognition or disclosure, subsequent events that have occurred through the date of issuance of its financial statements, and has determined that no significant events occurred after December 31, 2016 but prior to the issuance of these financial statements that would have a material impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

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

 

19

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

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

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

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU is intended to simplify various aspects of accounting for share-based compensation arrangements, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For example, the new guidance requires all excess tax benefits and tax deficiencies related to share-based payments to be recognized in income tax expense, and for those excess tax benefits to be recognized regardless of whether it reduces current taxes payable. The ASU also allows an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The adoption is not expected to have a material impact on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which creates a new credit impairment standard for financial instruments. The existing incurred loss model will be replaced with a current expected credit loss (“CECL”) model for both originated and acquired financial instruments carried at amortized cost and off-balance sheet credit exposures, including loans, loan commitments, held-to-maturity debt securities, financial guarantees, net investment in

 

20

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1. Continued

 

leases, and most receivables. Recognized amortized cost financial assets will be presented at the net amount expected to be collected through an allowance for credit losses. Expected credit losses on off-balance sheet credit exposures will be recognized through a liability. Expected credit losses on available-for-sale (“AFS”) debt securities will also be recognized through an allowance, however the allowance for an individual AFS debt security will be limited to the amount by which fair value is below amortized cost. Unlike current guidance, which requires certain favorable changes in expected cash flows to be accreted into interest income, both favorable and unfavorable changes in expected credit losses (and therefore the allowance) will be recognized through credit loss expense as they occur. With the exception of purchased financial assets with a more than insignificant amount of credit deterioration since origination, for which the initial allowance will be added to the purchase price of the assets, the initial allowance on financial assets subject to the scope (whether originated or acquired) will be recognized through credit loss expense. Expanded disclosures will also be required. Transition will generally be on a modified retrospective basis, with certain prospective application transition provisions for securities for which other-than-temporary impairment had previously been recognized and for assets that had previously been accounted for in accordance with Subtopic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality. The ASU is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company does not intend to early adopt. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements and does not expect the impact to be significant.

 

21

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 2. Investment Securities

The amortized cost and estimated fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income at December 31, 2016 and 2015 were as follows:

 

2016		Amortized Cost				Gross Unrealized Gains				Gross Unrealized 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
2015		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Securities available-for-sale Obligations of U.S. Government agencies		$	83,826,411			$	1,100			$	1,577,145			$	82,250,366
Mortgage-backed securities			92,602,875				467,693				1,348,603				91,721,965
State, County, Municipals			87,948,336				2,609,469				181,442				90,376,363
Other investments			2,931,134				—				15,425				2,915,709
Total		$	267,308,756			$	3,078,262			$	3,122,615			$	267,264,403

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

 

22

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 2. Continued

 

The fair value of the securities transferred as of the date of transfer was $205,260,985 with a net unrealized loss of $17,061,438. In accordance with ASC 320-10-35-16, the discount on each security that resulted from this transfer is amortized over the remaining lives of the individual securities. Any unrealized holding losses on the date of the transfer are not recognized in net income but remain in accumulated other comprehensive loss. In accordance with ASC 320-10-15-10d, the unrealized loss amounts in accumulated other comprehensive loss are amortized simultaneously against interest income as the discount is accreted on the transferred securities. There is no effect on net income as the discount accretion offsets the accumulated other comprehensive loss amortization. The unamortized unrealized loss, before deferred taxes, was $-0- and $11,305,438 at December 31, 2016 and 2015, respectively.

There were no HTM securities as of December 31, 2016. The amortized cost and estimated fair value of HTM securities and the corresponding amounts of gross unrecognized gains and losses for December 31, 2015 were as follows:

 

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

 

23

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 2. Continued

 

The following tables show the gross unrealized losses and fair value of the Company’s investments classified as AFS investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2016 and 2015.

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

 

December 31, 2016		Less than 12 months								12 months or more								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S.
Government agencies		$	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			$	178,183			$	18,807
December 31, 2015		Less than 12 months								12 months or more								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Obligations of U.S.
Government agencies		$	50,915			$	716			$	26,335			$	861			$	77,250			$	1,577
Mortgage backed securities			83,001				1,349				—				—				83,001				1,349
State, County, Municipal			2,393				10				12,623				172				15,016				182
Other investments			—				—				2,916				15				2,916				15
Total		$	136,309			$	2,075			$	41,874			$	1,048			$	178,183			$	3,123

 

24

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 2. Continued

 

Investment Securities.

The Company’s unrealized losses on its Obligations of United States Government agencies, Mortgage backed securities and State, County and Municipal bonds are the result of an upward trend in interest rates, mainly in the mid-term sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Company has determined that none of the securities in this classification are other-than-temporarily impaired at December 31, 2016.

Other Investments.

The Company’s unrealized loss on other investments at December 31, 2015 related to an investment in a pooled trust preferred security. The decline in value of the pooled trust preferred security is related to the deterioration of the markets for these types of securities brought about by the lowered credit ratings and past deferrals and defaults of the underlying issuing financial institutions. However, due to the reductions in defaults and deferrals during the year, the unrealized gain or loss has improved from a $15,425 loss in 2015 to a $101,345 gain in 2016. The Company owns a senior tranche of this security and therefore has a higher degree of which future deferrals and defaults would be required before the cash flow for the Company’s tranche is negatively impacted. The Company does not intend to sell this security and it is not more likely than not that the Company will be required to sell at a price less than amortized cost prior to maturity. Given these factors, the Company does not consider the investment to be other-than-temporarily impaired at December 31, 2016 or December 31, 2015. This security is not subject to any of the restrictions put forth under the Volcker Rule that was brought about by the passage of the Dodd-Frank Act.

 

25

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 2. Continued

 

The amortized cost and estimated fair value of securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

AFS		Amortized Cost				Fair Value
Securities AFS
Due in one year or less		$	6,333,181			$	6,370,921
Due after one year through five years			30,059,503				30,278,557
Due after five years through ten years			126,336,589				122,562,724
Due after ten years			350,491,017				336,912,372
Total		$	513,220,290			$	496,124,574

Investment securities with fair values of $226,633,330 and $201,482,967 at December 31, 2016 and December 31, 2015, respectively, were pledged as collateral for public deposits.

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

 

		2016				2015				2014
Gross realized gains		$	112,881			$	142,422			$	206,258
Gross realized losses			—				124,919				191,716
		$	112,881			$	17,503			$	14,542

 

26

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 3. Federal Home Loan Bank Stock

The Company, as a member of the Federal Home Loan Bank of Dallas (“FHLB”) system, owns stock in the organization. No ready market exists for the stock, and it has no quoted market value. The Company’s investment in the FHLB is carried at cost of $1,219,500 and $1,202,900 at December 31, 2016 and December 31, 2015, respectively, and is included in other assets. The Company has had stock redeemed in 2015 at the par value of $100 per share.

 

27

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Loans

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

 

		2016				2015
Real Estate:
Land Development and Construction		$	23,793			$	33,133
Farmland			18,175				23,293
1-4 Family Mortgages			97,812				104,046
Commercial Real Estate			180,880				180,691
Total Real Estate Loans			320,660				341,163
Business Loans:
Commercial and Industrial Loans			53,761				61,425
Farm Production and Other Farm Loans			765				1,055
Total Business Loans			54,526				62,480
Consumer Loans:
Credit Cards			1,156				1,061
Other Consumer Loans			18,310				25,564
Total Consumer Loans			19,466				26,625
Total Gross Loans			394,652				430,268
Unearned Income			(601	)			(686	)
Allowance for Loan Losses			(3,903	)			(6,474	)
Loans, net		$	390,148			$	423,108

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

 

28

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

Loans are made principally to customers in the Company’s market. The Company’s lending policy provides that loans collateralized by real estate are normally made with loan-to-value (“LTV”) ratios of 80 percent or less. Commercial loans are typically collateralized by property, equipment, inventories or receivables with LTV ratios from 50 percent to 80 percent. Real estate mortgage loans are collateralized by personal residences with LTV ratios of 80 percent or less. Consumer loans are typically collateralized by real estate, vehicles and other consumer durable goods. Approximately $38.0 million and $37.3 million of the loans outstanding at December 31, 2016 and December 31, 2015, respectively, were variable rate loans.

In the ordinary course of business, the Company has granted loans to certain directors and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans during 2016 is presented in the following table.

 

Balance outstanding at December 31, 2015		$	2,396,191
Principal additions			155,000
Principal reductions			(2,230,765	)
Balance outstanding at December 31, 2016		$	320,426

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.

 

29

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

 

		2016				2015
Real Estate:
Land Development and Construction		$	133			$	75
Farmland			234				158
1-4 Family Mortgages			1,954				2,464
Commercial Real Estate			6,293				11,662
Total Real Estate Loans			8,614				14,359
Business Loans:
Commercial and Industrial Loans			239				28
Total Business Loans			239				28
Consumer Loans:
Other Consumer Loans			26				36
Total Consumer Loans			26				36
Total Nonaccrual Loans		$	8,879			$	14,423

In the event that non-accrual loans had performed in accordance with their original terms, the Company would have recognized additional interest income of approximately $651,560, $732,268 and $819,524 in 2016, 2015 and 2014, respectively.

 

30

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

 

																						Accruing
						Loans																Loans
		Loans				90 or more																90 or more
		30-89 Days Past Due				Days Past Due				Total Past Due Loans				Current Loans				Total Loans				Days Past Due
Real Estate:
Land Development and Construction		$	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			6,491				185				6,676				174,204				180,880				—
Total Real Estate Loans			10,276				924				11,200				309,460				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				—
Other Consumer Loans			788				27				815				17,495				18,310				27
Total Consumer Loans			795				30				825				18,641				19,466				27
Total Loans		$	11,137			$	1,140			$	12,277			$	382,375			$	394,652			$	206

 

31

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

 

																						Accruing
						Loans																Loans
		Loans				90 or more																90 or more
		30-89 Days Past Due				Days Past Due				Total Past Due Loans				Current Loans				Total Loans				Days Past Due
Real Estate:
Land Development and Construction		$	1,126			$	21			$	1,147			$	31,986			$	33,133			$	21
Farmland			947				4				951				22,342				23,293				4
1-4 Family Mortgages			5,131				573				5,704				98,342				104,046				—
Commercial Real Estate			4,015				6,748				10,763				169,928				180,691				—
Total Real Estate Loans			11,219				7,346				18,565				322,598				341,163				25
Business Loans:
Commercial and Industrial Loans			245				12				257				61,168				61,425				12
Farm Production and Other Farm Loans			12				—				12				1,043				1,055				—
Total Business Loans			257				12				269				62,211				62,480				12
Consumer Loans:
Credit Cards			12				9				21				1,040				1,061				9
Other Consumer Loans			1,017				30				1,047				24,517				25,564				30
Total Consumer Loans			1,029				39				1,068				25,557				26,625				39
Total Loans		$	12,505			$	7,397			$	19,902			$	410,366			$	430,268			$	76

 

32

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

Impaired loans as of December 31, by class of loans, are as follows (in thousands):

 

2016		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance				Average Recorded Investment
Real Estate:
Land Development and Construction		$	—			$	—			$	—			$	—			$	—			$	—
Farmland			163				—				163				163				28				119
1-4 Family Mortgages			1,448				—				1,448				1,448				252				2,276
Commercial Real Estate			5,327				—				5,327				5,327				469				8,495
Total Real Estate Loans			6,938				—				6,938				6,938				749				10,890
Business Loans:
Commercial and Industrial Loans			126				—				126				126				38				33
Farm Production and Other Farm Loans			—				—				—				—				—				—
Total Business Loans			126				—				126				126				38				33
Total Loans		$	7,064			$	—			$	7,064			$	7,064			$	787			$	10,923

 

33

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

2015		Unpaid Principal Balance				Recorded Investment With No Allowance				Recorded Investment With Allowance				Total Recorded Investment				Related Allowance				Average Recorded Investment
Real Estate:
Land Development and Construction		$	75			$	—			$	75			$	75			$	75			$	85
Farmland			679				69				610				679				54				739
1-4 Family Mortgages			3,103				1,754				1,349				3,103				183				2,829
Commercial Real Estate			11,662				1,409				10,253				11,662				2,685				10,552
Total Real Estate Loans			15,519				3,232				12,287				15,519				2,997				14,205
Business Loans:
Commercial and Industrial Loans			28				28				—				28				—				49
Farm Production and Other Farm Loans			—				—				—				—				—				—
Total Business Loans			28				28				—				28				—				49
Consumer Loans:
Credit Cards			—				—				—				—				—				—
Other Consumer Loans			36				36				—				36				—				78
Total Consumer Loans			36				36				—				36				—				78
Total Loans		$	15,583			$	3,296			$	12,287			$	15,583			$	2,997			$	14,332

 

34

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

 

December 31, 2016		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial real estate			3			$	4,871			$	3,288
Total			3			$	4,871			$	3,288
December 31, 2015		Number of Loans				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Commercial real estate			3			$	4,871			$	3,858
Total			3			$	4,871			$	3,858

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

 

		Number of Loans				Recorded Investment
Totals at January 1, 2016			3			$	3,858
Additional loans with concessions
Reductions due to:
Principal paydowns							(570	)
Total at December 31, 2016			3			$	3,288

The allocated allowance for loan losses attributable to restructured loans was $174,274 at December 31, 2016 and 2015.

The Company had no remaining availability under commitments to lend additional funds on these troubled debt restructurings at December 31, 2016.

 

35

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

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

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

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

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

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

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

Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the

 

36

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at December 31, 2016.

 

37

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

 

						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

 

38

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

 

						Special
		Satisfactory				Mention				Substandard				Doubtful				Loss				Total
		1,2,3,4				5,6				7				8				9				Loans
Real Estate:
Land Development and Construction		$	31,889			$	202			$	1,042			$	—			$	—			$	33,133
Farmland			21,084				989				1,220				—				—				23,293
1-4 Family Mortgages			88,425				4,874				10,747				—				—				104,046
Commercial Real Estate			155,898				12,286				12,507				—				—				180,691
Total Real Estate Loans			297,296				18,351				25,516				—				—				341,163
Business Loans:
Commercial and Industrial Loans			60,918				377				130				—				—				61,425
Farm Production and Other Farm Loans			1,055				—				—				—				—				1,055
Total Business Loans			61,973				377				130				—				—				62,480
Consumer Loans:
Credit Cards			1,052				—				9				—				—				1,061
Other Consumer Loans			24,666				111				777				7				3				25,564
Total Consumer Loans			25,718				111				786				7				3				26,625
Total Loans		$	384,987			$	18,839			$	26,432			$	7			$	3			$	430,268

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

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

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

 

39

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

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

 

		2016				2015				2014
Real Estate:
Land Development and Construction		$	(17,677	)		$	(8,700	)		$	241,853
Farmland			(934	)			(5,156	)			52,731
1-4 Family Mortgages			154,387				149,014				22,205
Commercial Real Estate			2,387,956				415,413				42,582
Total Real Estate Loans			2,523,732				550,571				359,371
Business Loans:
Commercial and Industrial Loans			(8,230	)			1,585				2,038,953
Farm Production and other Farm Loans			—				—				—
Total Business Loans			(8,230	)			1,585				2,038,953
Consumer Loans:
Credit Cards			9,285				15,493				11,482
Other Consumer Loans			(18,936	)			57,661				49,022
Total Consumer Loans			(9,651	)			73,154				60,504
Total Net Chargeoffs		$	2,505,851			$	625,310			$	2,458,828

 

40

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2016, 2015 and 2014:

 

		Real				Business
2016		Estate				Loans				Consumer				Total
Beginning Balance		$	5,238,895			$	643,248			$	591,560			$	6,473,703
Provision for possible loan losses			401,971				(393,924	)			(73,103	)			(65,056	)
Chargeoffs			2,567,499				8,035				65,311				2,640,845
Recoveries			43,767				16,265				74,962				134,994
Net chargeoffs			2,523,732				(8,230	)			(9,651	)			2,505,851
Ending Balance		$	3,117,134			$	257,554			$	528,108			$	3,902,796
Period end allowance allocated to:
Loans individually evaluated for impairment		$	749,090			$	37,803			$	—			$	786,893
Loans collectively evaluated for impairment			2,368,044				219,751				528,108				3,115,903
Ending Balance		$	3,117,134			$	257,554			$	528,108			$	3,902,796

 

		Real				Business
2015		Estate				Loans				Consumer				Total
Beginning Balance		$	5,202,151			$	873,815			$	466,360			$	6,542,326
Provision for possible loan losses			587,315				(228,982	)			198,354				556,687
Chargeoffs			625,556				32,258				164,091				821,905
Recoveries			74,985				30,673				90,937				196,595
Net chargeoffs			550,571				1,585				73,154				625,310
Ending Balance		$	5,238,895			$	643,248			$	591,560			$	6,473,703
Period end allowance allocated to:
Loans individually evaluated for impairment		$	2,996,708			$	—			$	—			$	2,996,708
Loans collectively evaluated for impairment			2,242,187				643,248				591,560				3,476,995
Ending Balance		$	5,238,895			$	643,248			$	591,560			$	6,473,703

 

41

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4. Continued

 

2014		Real Estate				Business Loans				Consumer				Total
Beginning Balance		$	4,706,011			$	2,767,409			$	604,337			$	8,077,757
Provision for possible loan losses			855,511				145,359				(77,473	)			923,397
Chargeoffs			560,298				2,050,939				121,093				2,732,330
Recoveries			200,927				11,986				60,589				273,502
Net chargeoffs			359,371				2,038,953				60,504				2,458,828
Ending Balance		$	5,202,151			$	873,815			$	466,360			$	6,542,326
Period end allowance allocated to:
Loans individually evaluated for impairment		$	1,984,671			$	40,083			$	—			$	2,024,754
Loans collectively evaluated for impairment			3,217,480				833,732				466,360				4,517,572
Ending Balance		$	5,202,151			$	873,815			$	466,360			$	6,542,326

The Company’s recorded investment in loans as of December 31, 2016 and 2015 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows (in thousands):

 

2016		Real Estate				Business 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

 

2015		Real Estate				Business Loans				Consumer				Total
Loans individually evaluated for specific impairment		$	15,519			$	28			$	36			$	15,583
Loans collectively evaluated for general impairment			325,644				62,452				26,589				414,685
		$	341,163			$	62,480			$	26,625			$	430,268

 

42

---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 5. Bank Premises, Furniture, Fixtures and Equipment

Bank premises, furniture, fixtures and equipment consist of the following at December 31, 2016 and December 31, 2015:

 

		2016				2015
Land and buildings		$	25,022,259			$	24,206,122
Furniture, fixtures and equipment			15,632,170				15,459,401
			40,654,429				39,665,523
Less accumulated depreciation			21,990,345				21,009,832
Total		$	18,664,084			$	18,655,691

Depreciation expense for the years ended December 31, 2016, 2015 and 2014, respectively, was $980,514, $1,040,207 and $1,190,393.

Note 6. Deposits

The composition of deposits as of December 31, 2016 and December 31, 2015 is as follows:

 

		2016				2015
Non-interest bearing		$	149,512,941			$	148,724,257
NOW and money market accounts			340,180,286				323,381,170
Savings deposits			73,745,005				70,534,886
Time deposits, $250,000 or more			43,060,799				44,479,055
Other time deposits			153,653,309				166,285,420
Total		$	760,152,340			$	753,404,788

The scheduled maturities of time deposits at December 31, 2016 are as follows:

 

Year Ending December 31,		Amount
2017		$	158,732,838
2018			35,638,287
2019			2,262,553
2020			55,801
2021			24,629
		$	196,714,108

Interest expense for time deposits over $250,000 was approximately $236,000, $240,000 and $250,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

 

43

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 7. Federal Home Loan Bank Advances

Pursuant to collateral agreements with the FHLB, advances are collateralized by all of the Bank’s FHLB stock ($1,219,500 included in other assets at December 31, 2016) and qualifying first mortgages and other loans. As of December 31, 2016, the balance in qualifying first mortgages and other loans was $123,592,789. At December 31, 2016 and December 31, 2015, advances from the FHLB, along with their rate and maturity date, consist of the following:

 

Advance Amount at						Interest Rate				Final Maturity
December 31,
2016		2015
$20,000,000		$	20,000,000				2.53				January 9, 2018

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

 

Year Due		Payment
2017			—
2018		$	20,000,000
2019			—
2020			—
2021			—

 

44

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 8. Other Income and Other Expense

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

 

Other Income		2016				2015				2014
BOLI Insurance		$	511,854			$	568,000			$	562,732
Mortgage Loan Origination Income			451,476				362,611				342,765
Other Income			385,586				1,228,796				1,212,938
Total Other Income		$	1,348,916			$	2,159,407			$	2,118,435

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

 

Other Operating Expense		2016				2015				2014
Advertising		$	783,303			$	793,282			$	769,081
Office Supplies			702,705				591,177				774,961
Legal and Audit Fees			497,986				408,066				416,339
FDIC and State Assessment			702,705				751,979				771,097
Telephone Expense			446,628				431,761				408,646
Postage and Freight			499,611				478,764				466,360
Loan Collection Expense			380,093				205,549				621,227
Other Losses			445,792				243,172				930,401
Debit Card/ATM expense			378,748				337,476				330,612
Travel and Convention			254,229				247,416				184,723
Other expenses			2,582,683				2,581,874				2,360,207
Total Other Expense		$	7,674,483			$	7,070,516			$	8,033,654

Other losses in 2016, 2015 and 2014 include the write-down on OREO in the amount of $220,419, $0 and $694,207, respectively.

 

45

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 9. Income Taxes

The consolidated provision for income taxes consists of the following:

 

		2016				2015				2014
Currently payable
Federal		$	884,743			$	2,288,766			$	1,399,794
State			53,015				276,519				120,377
			937,758				2,565,285				1,520,171
Deferred tax expense (benefit)			673,977				(86,251	)			307,920
Income tax expense		$	1,611,735			$	2,479,034			$	1,828,091

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

 

		2016				2015				2014
Federal taxes based on statutory rate		$	2,838,452			$	3,423,098			$	3,154,469
State income taxes, net of federal benefit			46,972				182,503				79,449
Tax-exempt investment interest			(1,133,970	)			(928,246	)			(1,006,536	)
Other, net			(139,720	)			(198,321	)			(399,291	)
Income tax expense		$	1,611,735			$	2,479,034			$	1,828,091

At December 31, 2016 and December 31, 2015, net deferred tax assets consist of the following:

 

		2016				2015
Deferred tax assets
Allowance for loan losses		$	1,455,743			$	2,414,691
Deferred compensation liability			3,375,924				3,187,914
Intangible assets			—				30,516
Unrealized loss on securities available-for-sale			6,376,702				16,544
Unrealized loss on securities transferred to HTM			—				4,216,929
Other			576,946				538,744
Total			11,785,315				10,405,338
Deferred tax liabilities
Premises and equipment			1,042,833				1,123,247
Other			107,813				116,674
Total			1,150,646				1,239,921
Net deferred tax asset		$	10,634,669			$	9,165,417

 

46

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 9. Continued

 

The net deferred tax asset was $10,634,669 and $9,165,417 at December 31, 2016 and 2015, respectively. The Company has evaluated the need for a valuation allowance related to the above deferred tax assets and, based on the weight of the available evidence, has determined that it is more likely than not that all deferred tax assets will be realized.

As of December 31, 2016, the Company has no unrecognized tax benefits related to federal and state income tax matters. As of December 31, 2016, the Company has not accrued for interest and penalties related to uncertain tax positions. It is the Company’s policy to recognize interest or penalties related to income tax matters in income tax expense.

The Company and the Bank file a consolidated United States federal income tax return. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2013 through 2016. The Company and Bank’s state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2013 through 2016.

Note 10. Summarized Financial Information of Citizens Holding Company

Summarized financial information of Citizens Holding Company, excluding the Bank, at December 31, 2016 and December 31, 2015, and for the years ended December 31, 2016, 2015 and 2014, is as follows:

Balance Sheets

December 31, 2016 and 2015

 

		2016				2015
Assets
Cash (1)		$	1,444,895			$	2,196,895
Investment in bank subsidiary (1)			82,996,430				83,753,973
Other assets (1)			618,070				474,468
Total assets		$	85,059,395			$	86,425,336
Liabilities
Other liabilities		$	—			$	—
Shareholders’ equity			85,059,395				86,425,336
Total liabilities and shareholders’ equity		$	85,059,395			$	86,425,336

 

(1)	Fully or partially eliminates in consolidation.

 

47

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 10. Continued

 

Income Statements

Years Ended December 31, 2016, 2015 and 2014

 

		2016				2015				2014
Interest income (1)		$	2,379			$	1,896			$	2,140
Other income
Dividends from bank subsidiary (1)			4,104,001				5,568,900				4,371,900
Equity in undistributed earnings of bank subsidiary (1)			2,845,152				2,191,684				3,241,870
Other income			—				—				1,676
Total other income			6,951,532				7,762,480				7,615,446
Other expense			355,256				275,744				263,598
Income before income taxes			6,596,276				7,486,736				7,351,848
Income tax benefit			(140,378	)			(102,165	)			(97,610	)
Net income		$	6,736,654			$	7,588,901			$	7,449,759

 

(1)	Eliminates in consolidation.

Statements of Cash Flows

Years Ended December 31, 2016, 2015 and 2014

 

		2016				2015				2014
Cash flows from operating activities
Net income		$	6,736,654			$	7,588,901			$	7,449,759
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed earnings of Bank			(2,845,152	)			(2,191,684	)			(3,241,870	)
Stock compensation expense			186,425				117,300				115,000
Increase in other assets			(143,602	)			(103,168	)			(44,082	)
Net cash provided by operating activities			3,934,325				5,411,349				4,278,807

 

48

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 10. Continued

 

		2016				2015				2014
Cash flows from financing activities
Dividends paid to shareholders		$	(4,686,325	)		$	(4,540,748	)		$	(4,341,076	)
Repurchase of company stock			—				(390,205	)			—
Excess tax benefit from equity grants			—				1,001				—
Proceeds from stock option exercises			—				27,000				—
Net cash used by financing activities			(4,686,325	)			(4,902,951	)			(4,341,076	)
Net increase in cash			(752,000	)			508,398				(62,269	)
Cash, beginning of year			2,196,895				1,688,497				1,750,766
Cash, end of year		$	1,444,895			$	2,196,895			$	1,688,497

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

Note 11. Related Party Transactions

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

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

Deposits from related parties at December 31, 2016 and December 31, 2015 approximated $7,755,582 and $7,934,526, respectively.

 

49

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

Commitments to Extend Credit

In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of its customers. These commitments and contingent liabilities include commitments to extend credit and issue standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 2016 and December 31, 2015, commitments related to unused lines of credit were $37,194,220 and $44,358,972, respectively, and standby letters of credit were $3,456,180 and $2,860,480, respectively. The fair value of such commitments is not materially different than stated values. As some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed credit worthiness of the borrower. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties.

Interest Rate Risk

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

Legal Proceedings

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

 

50

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 12. Continued

 

Concentration of Risk

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

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

Note 13. Lease Commitment and Total Rental Expense

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

 

Years Ending December 31,		Amounts
2017		$	252,922
2018			189,903
2019			189,410
2020			163,162
2021			163,162
		$	958,559

The total rental expense included in the income statements for the years ended December 31, 2016, 2015 and 2014 is $118,805, $111,684 and $104,384, respectively.

 

51

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 14. Benefit Plans

The Company provides its employees with a profit sharing and savings plan, which allows employees to direct a percentage of their compensation into a tax deferred retirement account, subject to statutory limitations. To encourage participation, the Company provides a 50 percent matching contribution for up to a maximum of 3 percent of each participant’s compensation, plus discretionary non-matching contributions. Employees are eligible after one year of service. For 2016, 2015 and 2014, the Company’s contributions were $520,488, $496,363 and $485,251, respectively.

Deferred Compensation Plans

The Company provides a deferred compensation plan covering its directors. Participants in the deferred compensation plan can defer a portion of their compensation for payment after attaining age 70. Life insurance contracts have been purchased which may be used to fund payments under the plan. Expenses related to this plan were $183,824, $179,552 and $174,509 for the plan years ended December 31, 2016, 2015 and 2014, respectively.

The Company has also entered into deferred compensation arrangements with certain officers that provide for payments to such officers or their survivors after retirement. Life insurance policies have been purchased that may be used to fund all or a portion of the payments under these arrangements. The obligations of the Company under both the directors and officers deferred compensation arrangements are expensed on a systematic basis over the remaining expected service period of the individual directors and officers. Expenses related to this plan were $584,319, $640,291 and $514,635 for the plan years ended December 31, 2016, 2015 and 2014, respectively.

Note 15. Regulatory Matters

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

Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines involving quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital and Tier I capital to risk-weighted assets (as defined in the regulations) and Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2016, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

52

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 15. Continued

 

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

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

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

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

 

•

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

 

•

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

 

•

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

 

•

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

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

 

53

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 15. Continued

 

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

As of December 31, 2016 and 2015, the most recent regulatory notification categorized the Bank as well capitalized. There have been no conditions or events that would cause changes to the capital structure of the Company since this notification. To continue to be categorized as well capitalized under the regulatory framework for prompt corrective action, the Company would have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed below, in comparison with actual capital amounts and ratios (amounts in thousands):

 

																		Minimum Capital
										Minimum Capital								Requirement to be
										Requirement to be								Adequately
		Actual								Well Capitalized								Capitalized
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 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 Citizens Bank of Philadelphia
Tier 1 leverage ratio		$	90,566				9.02	%		$	50,229				5.00	%		$	40,183				4.00	%
Common Equity tier 1 capital ratio			90,566				9.02	%			65,298				6.50	%			45,206				4.50	%
Tier 1 risk-based capital ratio			90,566				17.53	%			41,329				8.00	%			30,997				6.00	%
Total risk-based capital ratio			94,469				18.29	%			51,661				10.00	%			41,329				8.00	%
December 31, 2015
Citizens Holding Company
Tier 1 leverage ratio		$	90,392				9.26	%		$	48,822				5.00	%		$	39,058				4.00	%
Common Equity tier 1 capital ratio			90,392				9.26	%			63,469				6.50	%			43,940				4.50	%
Tier 1 risk-based capital ratio			90,392				16.37	%			44,175				8.00	%			33,131				6.00	%
Total risk-based capital ratio			96,866				17.54	%			55,219				10.00	%			44,175				8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio		$	87,721				8.99	%		$	48,800				5.00	%		$	39,040				4.00	%
Common Equity tier 1 capital ratio			87,721				8.99	%			63,440				6.50	%			43,920				4.50	%
Tier 1 risk-based capital ratio			87,721				15.89	%			44,150				8.00	%			33,113				6.00	%
Total risk-based capital ratio			94,194				17.07	%			55,188				10.00	%			44,150				8.00	%

 

54

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Fair Values of Financial Instruments

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

 

Level 1		Quoted prices in active markets for identical assets or liabilities;
Level 2		Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3		Unobservable inputs, such as discounted cash flow models or valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value estimates, methods and assumptions used by the Company in estimating its fair value disclosures for financial instruments were:

Cash and Due from Banks and Interest Bearing Deposits with Banks

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

 

55

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Continued

 

Investment Securities

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

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

 

56

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Continued

 

The following table presents investment securities that are measured at fair value on a recurring basis as of December 31, 2016:

 

		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)				Totals
Securities available for sale
Obligations of U.S.
Government agencies		$	—			$	199,966,608			$	—			$	199,966,608
Mortgage-backed securities			—				148,264,710				—				148,264,710
State, County, Municipals			—				144,922,150				—				144,922,150
Other Investments			—				—				2,971,106				2,971,106
		$	—			$	493,153,468			$	2,971,106			$	496,124,574

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

 

		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)				Totals
Securities available for sale
Obligations of U.S.
Government agencies		$	—			$	82,250,366			$	—			$	82,250,366
Mortgage-backed securities			—				91,721,965				—				91,721,965
State, County, Municipals			—				90,376,363				—				90,376,363
Other Investments			—				—				2,915,709				2,915,709
		$	—			$	264,348,694			$	2,915,709			$	267,264,403

 

57

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Continued

 

The following table reports the activity in assets measured at fair value on a recurring basis using significant unobservable inputs, during the years ended December 31, 2016 and December 31, 2015.

 

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		2016				2015
Balance at January 1		$	2,915,709			$	2,872,723
Principal payments received			(69,631	)			(75,182	)
Unrealized gains included in other comprehensive income			125,028				118,168
Balance at December 31		$	2,971,106			$	2,915,709

As of December 31, 2016 and December 31, 2015, management determined, based on the current credit ratings, known defaults and deferrals by the underlying banks and the degree to which future defaults and deferrals would be required to occur before the cash flow for the Company’s tranche is negatively impacted, that no other-than-temporary impairment exists.

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

Net Loans

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

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Continued

 

Impaired Loans

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

Other real estate owned

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

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Continued

 

The following table presents assets measured at fair value on a nonrecurring basis during December 31, 2016 and 2015 and were still held at those respective dates:

 

		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)				Totals
December 31, 2016
Impaired loans		$	—			$	—			$	3,591,516			$	3,591,516
Other real estate owned			—				—				1,893,949				1,893,949
		$	—			$	—			$	5,485,465			$	5,485,465
December 31, 2015
Impaired loans		$	—			$	—			$	8,926,364			$	8,926,364
Other real estate owned			—				—				538,262				538,262
		$	—			$	—			$	9,464,626			$	9,464,626

Impaired loans with a carrying value of $7,064,185 and $12,286,822 had an allocated allowance for loan losses of $786,893 and $2,996,708 at December 31, 2016 and December 31, 2015, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairment after foreclosure, management determined that a fair value adjustment to OREO in the amount of $220,419 and $0 was necessary and was recorded during the year ended December 31, 2016 and December 31, 2015, respectively.

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Continued

 

Federal Funds Sold and Securities Sold Under Agreement to Repurchase

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

Deposits

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

Federal Home Loan Bank Borrowings

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

Off-Balance Sheet Instruments

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

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 16. Continued

 

The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2016 and December 31, 2015:

 

		Carrying Value				Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Total Fair Value
2016						(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

 

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

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 17. Stock Options

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

The fair value of each option granted is estimated on the date of the grant using the Black-Sholes option-pricing model. No options were granted in 2016 or 2015, therefore no calculations were required in 2016 or 2015 to determine fair values.

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

During 2016, the Company’s directors received restricted stock grants totaling 7,500 shares of common stock at a then market value of $21.51 per share and in 2015 received 7,500 shares of common stock at a then market value of $18.86 per share. These grants vest over a one-year period during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares granted in 2016 was $161,325 and will be recognized over the one-year restriction period at a cost of $13,444 per month less deferred taxes of $4,397 per month. The grant date fair value of the shares granted in 2015 was $141,450 and was recognized over the one-year restriction period at a cost of $11,788 per month less deferred taxes of $5,016 per month.

During 2015, 7,500 shares of restricted stock was granted to the Chief Executive Officer (CEO) that would vest according to a stock performance schedule over the next five years. The stock performance for the Company met the goal for the first year and the CEO became vested in 20%, or 1,500 shares of the restricted stock at an expense of $31,725.

During 2016 and 2015, the Company recorded expense of $186,425 and $117,300 and recorded deferred taxes in the amounts of $57,700 and $44,250, respectively, related to all of the restricted shares.

At December 31, 2016, there were 13,500 shares non-vested with $53,775 in unrecognized stock-based compensation expense related to the 2013 Plan.

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 17. Continued

 

Following is a summary of the status of the stock options remaining under the plans for the years ending December 31, 2016, 2015 and 2014:

 

		Directors’ Plan								Employees’ Plan
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
Outstanding at January 1, 2014			103,500			$	20.97				82,000			$	20.90
Granted			—				—				—				—
Exercised			—				—				—				—
Expired			(7,500	)			16.40				(35,500	)			21.95
Outstanding at December 31, 2014			96,000			$	21.30				46,500			$	22.06
Granted			—				—				—				—
Exercised			—				—				(1,500	)			18.00
Expired			(9,000	)			20.00				(22,000	)			21.95
Outstanding at December 31, 2015			87,000			$	21.35				23,000			$	23.46
Granted			—				—				—				—
Exercised			—				—				—				—
Expired			(9,000	)			23.70				(23,000	)			23.46
Outstanding at December 31, 2016			78,000			$	21.08				—			$	—
Options exercisable at:
December 31, 2016			78,000			$	21.08				—			$	—
Weighted average fair value of Options granted during years ended
December 31, 2014							$—								$—
December 31, 2015							$—								$—
December 31, 2016							$—								$—

 

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2016, 2015 and 2014

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 17. Continued

 

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

 

		Options				Weighted				Weighted Average
Range of Exercise Prices		Outstanding				Average Price				Life Remaining
$15.01 to $20.00			25,500				18.40			3 years, 5 months
$20.01 to $22.50			39,000				21.23			2 years, 1 month
$22.51 and above			13,500				25.72			3 years, 4 months
Total			78,000			$	21.08			2 years, 9 months

The intrinsic value of options granted under the Directors’ Plan at December 31, 2016 was $372,060 and the intrinsic value of the Employees’ Plan at December 31, 2016 was $0 for a total intrinsic value at December 31, 2016 of $372,060. Additionally, the total intrinsic value of options exercised during 2016 and 2015 was $0 and $1,950, respectively.

There were no options granted during 2016 under the 2013 Plan.

 

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

December 31, 2016, 2015 and 2014

OVERVIEW

The following information discusses the financial condition and results of operations of Citizens Holding Company (the “Company”) as of December 31, 2016, 2015 and 2014. In this discussion, all references to the activities, operations or financial performance of the Company reflect the Company’s activities, operations and financial performance through its wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank”), unless otherwise specifically noted. The Company’s financial statements and accompanying notes should be read in conjunction with this Management’s Discussion and Analysis.

Over the past three years, the Company has experienced growth in total assets and total deposits as management has capitalized on opportunities for organic growth within the Company’s market area and the addition of two branches in 2014 and a loan production office in 2016. Total assets increased over the three-year period by $152.143 million or 17.4%. In the three-year period, net income increased the first two years of the three-year period ended December 31, 2016 before decreasing in 2016. Although the cost of deposits decreased in all three years, the interest received on earning assets decreased at a faster rate and the net interest margin decreased in all three years. Loan loss provisions decreased in all three years from 2014 to 2016. Regardless of the decreases in the interest margins, management believes it has made appropriate provisions for loan losses.

During 2016 as compared to 2015, the Company’s total assets increased by $51,707,365, or 5.3%, loans decreased by $32,960,048, or 7.8%, and total deposits increased by $6,747,552, or 0.9%. Loans decreased in 2016 due to payments on large loans and soft loan demand in the Company’s service area. Certificates of deposit ended 2016 at $196,714,108, or 6.7% lower than 2015. Demand, NOW, savings and money market accounts increased $20,797,919, or 3.8% from December 31, 2015 to $563,438,232 at December 31, 2016.

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

In 2016, the Company’s net income after taxes decreased to $6,736,654, a decrease of $852,247 from 2015. Net interest income decreased in 2016 primarily due to the reduction in interest income on loans. A decrease in non-interest income and the increase in non-interest expense also contributed to the decrease in net income for 2016. Net income for 2016 produced, on a fully diluted basis, earnings per share of $1.38 compared to $1.56 in 2015 and $1.53 for 2014.

 

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

In 2014, the Company’s net income after taxes increased to $7,449,759, an increase of $299,899 from 2013. Net interest income increased in 2014 primarily due to the reduction in interest paid on FHLB advances. This increase was offset by the increase in non-interest expense in excess of the increase in non-interest income. Net income for 2014 produced, on a fully diluted basis, earnings per share of $1.53 compared to $1.47 in 2013 and $1.39 for 2012.

The Company’s return on average assets (“ROA”) was 0.68% in 2016, compared to 0.80% in 2015 and 0.84% in 2014. The Company’s return on average equity (“ROE”) was 7.34% in 2016, 9.01% in 2015 and 10.17% in 2014. During these periods, leverage capital ratios (the ratio of equity to average total assets) decreased from 9.60% in 2014 to 9.26% in 2015 and decreased to 9.22% in 2016. The ROE in 2016, 2015 and 2014 is a function of the level of net income and equity balances during those years. The changes in ROA were also a result of the Company’s income increasing in 2014 and in 2015 before decreasing in 2016 and also affected by the increase in total assets during these time periods. The Company set the annual dividend payout rate to approximately 69.57% of 2016 earnings per share, as compared to 59.62% in 2015 and 58.17% in 2014. The leverage capital ratio of 9.22% in 2016 remains above the regulatory requirement of 5% to be considered “well capitalized” under applicable Federal Deposit Insurance Corporation (the “FDIC”) guidelines for the Bank.

The Company’s net sales, revenues and income from continuing operations are not directly affected by inflation and changing prices although these factors could influence our customers’ ability to repay loans or cause them to withdraw deposits. The impact of a slowdown in loan repayments could be felt in both liquidity and income. It could affect liquidity by reducing the amount of cash available for new loans and income by increasing the amount of the provision for loan loss expense due to loans that are charged off.

Liquidity is discussed in more detail beginning on page 90 of this report under the heading, Liquidity and Rate Sensitivity. The Company did not have any commitments at December 31, 2016 that would require a material expenditure of capital resources.

The Company is not aware of any developments that would have material impact on its revenues or net income. Interest rate increases are being projected for 2017 and beyond but it is difficult to know the frequency and size of these increases. A measured increase in interest rates could have the effect of increasing revenues and net income.

 

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CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses

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

Other Than Temporary Impairment

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

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

 

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Other Real Estate

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

Intangible Assets

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

Stock Based Compensation

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

The Company utilizes the Black-Scholes valuation model to determine the fair value of stock options. The Black-Scholes model requires the use of certain assumptions, including the volatility of the Company’s stock price, the expected life of the option, the expected dividend rate

 

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and the discount rate. The Company does not currently expect to change the model or its methods for determining the assumptions underlying the valuation of future stock option grants. For more information on the Company’s stock options and the assumptions used to calculate the expense of such options, please refer to Note 1, “Summary of Significant Accounting Policies,” and Note 18, “Stock Options” to the Company’s Consolidated Financial Statements included in this Annual Report.

Income Taxes

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

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

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

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains statements that constitute forward-looking statements 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, that are based on management’s beliefs, plans, expectations, assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this report, including, but not limited to, statements found in Item 1, “Business,” and in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Citizens Holding Company (the “Company”) notes that a variety of factors could cause its actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the business of the Company and the 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 and litigation;

 

•

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

 

•

events affecting our business operation, 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;

 

•

expectations about overall economic strength and the performance of the economy in the Company’s market area 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 volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and the provisions in our governing documents that may make it more difficult for another party to obtain control of us; and

 

•

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

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

 

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SELECTED FINANCIAL DATA

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

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

 

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TABLE 1 - FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED

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

 

		2016				2015				2014				2013				2012
Summary of Earnings
Total Interest Income		$	30,169			$	30,965			$	31,380			$	32,116			$	34,388
Total Interest Expense			3,098				3,077				3,018				4,080				5,709
Provision for loan losses			(65	)			556				923				2,204				1,546
Non-interest income			7,692				8,327				8,163				7,816				7,402
Non-interest expense			26,480				25,591				26,324				24,728				26,100
Income tax expense			1,612				2,479				1,828				1,770				1,651
Net Income			6,737				7,589				7,450				7,150				6,784
Per Share Data
Earnings-basic		$	1.38			$	1.56			$	1.53			$	1.47			$	1.40
Earnings-diluted			1.38				1.56				1.53				1.47				1.39
Cash dividends			0.96				0.93				0.89				0.88				0.88
Book value at year end			17.42				17.73				16.78				13.61				18.28
Selected Year End Actual Balances
Loans, net of unearned income		$	394,051			$	429,582			$	390,960			$	392,183			$	368,891
Allowance for loan losses			3,903				6,474				6,542				8,077				6,954
Investment Securities			496,125				428,308				386,562				398,176				420,908
Earning assets			935,957				894,765				833,845				785,592				802,220
Total assets			1,025,212				973,505				921,061				873,069				880,840
Deposits			760,152				753,405				696,094				654,630				642,549
Long term borrowings			20,000				20,000				20,000				33,626				68,674
Shareholders’ equity			85,059				86,425				81,858				66,266				88,869
Selected Year End Average Balances
Loans, net of unearned income		$	409,367			$	412,161			$	389,720			$	371,200			$	381,597
Allowance for loan losses			5,051				6,637				7,902				7,078				7,056
Investment securities			475,714				421,729				396,806				419,461				360,721
Earning assets			917,366				863,830				798,432				801,549				766,663
Total assets			996,266				945,270				884,688				882,285				842,456
Deposits			766,264				725,116				682,444				650,931				592,723
Long term borrowings			20,042				20,056				35,593				58,192				72,553
Shareholders’ equity			91,766				84,250				73,219				79,458				87,972

 

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		2016				2015				2014				2013				2012
Selected Ratios
Return on average assets			0.68	%			0.80	%			0.84	%			0.81	%			0.81	%
Return on average equity			7.34	%			9.01	%			10.17	%			9.00	%			7.71	%
Dividend payout ratio			69.57	%			59.62	%			58.17	%			59.86	%			62.86	%
Equity to year end assets			8.30	%			8.88	%			8.89	%			7.59	%			10.09	%
Total risk-based capital to risk-adjusted assets			18.67	%			17.54	%			17.84	%			17.49	%			18.22	%
Leverage capital ratio			9.22	%			9.26	%			9.60	%			9.63	%			9.58	%
Efficiency ratio			71.49	%			68.69	%			70.09	%			67.52	%			70.73	%

NET OPERATING INCOME

Net operating income for 2016 decreased by 11.2% to $6,736,656 or $1.38 per share-basic and -diluted, from $7,588,901 or $1.56 per share-basic and -diluted for 2015. The provision for loan losses for 2016 was a negative $65,056 as compared to positive $556,687 in 2015. The decrease in the loan loss provision for 2016 was mainly due to management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions and the decrease in the balance of loans outstanding. Non-interest income decreased by $636,109, or 7.6%, and non-interest expense increased by $888,684 or 3.5%, in 2016. Non-interest income for 2016 decreased primarily due to a decrease in gains from the sale of repossessed assets offset partially by an increase in other service charges and fees. Non-interest expense increased due to a increase in salaries and benefits writedowns on other real estate, loan collection expense, office supplies and increases in.

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

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

 

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owned life insurance. Non-interest expense increased due to increased writedowns on other real estate, an increase in regulatory and compliance costs, an increase in banking equipment related service costs and an increase in office supplies.

NET INTEREST INCOME

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

Net interest income on a tax equivalent basis was $28,299,000, $28,879,000 and $29,411,000 for the years 2016, 2015 and 2014, respectively. Net interest margin was 3.07%, 3.33% and 3.60% for the same periods. During 2016, the yields on interest earning assets declined more than the rates paid on interest bearing deposits. In 2016 as compared to 2015, interest-bearing assets increased by $51.3 million, or 5.9% and interest bearing liabilities increased by $39.6 million, or 5.6%. For the year ended December 31, 2016, the average yield on earnings assets was 3.40%, a decrease of 28 basis points compared to the average yield at December 31, 2015. The average rate paid on interest-bearing liabilities was 0.41%, a decrease of 2 basis points compared to the average rate at December 31, 2015.

During 2015, the yields on interest earning assets declined less than the rates paid on interest bearing deposits with the largest decrease occurring in the rates paid on certificates of deposit. In 2015 as compared to 2014, interest-bearing assets increased by $50.4 million, or 6.2% and interest bearing liabilities increased by $41.088 million, or 6.2%. For the year ended December 31, 2015, the average yield on earnings assets was 3.68%, a decrease of 28 basis points compared to the average yield at December 31, 2014. The average rate paid on interest-bearing liabilities was 0.43%, a decrease of 2 basis points compared to the average rate at December 31, 2014.

During 2014, the yields on interest earning assets declined slightly less than the rates paid on interest bearing deposits with the largest decrease occurring in the rates paid on certificates of deposit. In 2014 as compared to 2013, interest-bearing assets increased by $1.8 million, or 0.2% and interest-bearing liabilities declined by $6.1 million, or 0.9%. For the year ended December 31, 2014, the average yield on earning assets was 3.96%, a decrease of 12 basis points compared to the average yield of 4.08% at December 31, 2013. The average rate paid on interest-bearing liabilities was 0.45%, a decrease of 15 basis points compared to the average rate of 0.60% at December 31, 2013.

During this three-year period, loans outstanding increased in 2015 and declined in both 2014 and 2016. Loans generally provide the Company with yields that are greater than the yields on typical investment securities.

 

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Table 2 – Average Balance Sheets and Interest Rates sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the fiscal years ended December 31, 2016, 2015 and 2014.

 

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TABLE 2 – AVERAGE BALANCE SHEETS AND INTEREST RATES

(in thousands)

 

		Average Balance												Income/Expense												Average Yield/Rate
		2016				2015				2014				2016				2015				2014				2016				2015				2014
Loans:
Loans, net of unearned(1)		$	408,922			$	411,687			$	389,217			$	19,012			$	20,040			$	20,082				4.65	%			5.16	%			5.16	%
Investment Securities
Taxable			353,794				335,538				318,850				7,590				8,027				8,227				2.15	%			2.39	%			2.58	%
Tax-exempt			121,358				85,597				91,933				4,581				3,770				4,071				3.77	%			4.40	%			4.43	%
Total Investment Securities			475,152				421,135				410,783				12,171				11,797				12,298				2.56	%			2.80	%			2.99	%
Federal Funds Sold and Other			36,071				35,336				17,806				185				95				49				0.51	%			0.27	%			0.28	%
Total Interest Earning Assets(1)(2)			920,145				868,158				817,806				31,368				31,932				32,429				3.40	%			3.68	%			3.97	%
Non-Earning Assets			76,121				77,112				66,882
Total Assets		$	996,266			$	945,270			$	884,688
Deposits:
Interest-bearing Demand
Deposits (3)		$	345,438			$	300,636			$	262,142			$	730			$	693			$	550				0.21	%			0.23	%			0.21	%
Savings			72,127				64,967				58,053				122				111				100				0.12	%			0.17	%			0.17	%
Time			202,261				216,488				227,390				992				1,040				1,105				0.49	%			0.48	%			0.49	%
Total Deposits			619,826				582,091				547,585				1,844				1,844				1,755				0.30	%			0.32	%			0.32	%
Borrowed Funds
Short-term Borrowings			108,884				106,988				84,813				740				720				573				0.68	%			0.67	%			0.68	%
Long-term Borrowings			20,000				20,000				35,593				514				513				690				2.53	%			2.53	%			1.94	%
Total Borrowed Funds			128,884				126,988				120,406				1,254				1,233				1,263				0.97	%			0.97	%			1.05	%
Total Interest-Bearing
Liabilities (3)			748,710				709,079				667,991				3,098				3,077				3,018				0.41	%			0.43	%			0.45	%
Non-Interest Bearing Liabilities
Demand Deposits			146,438				142,322				134,859
Other Liabilities			9,352				9,619				8,619
Shareholders’ Equity			91,766				84,250				73,219
Total Liabilities and Shareholders’ Equity		$	996,266			$	945,270			$	884,688
Interest Rate Spread																											2.99	%			3.24	%			3.51	%
Net Interest Margin														$	28,270			$	28,855			$	29,411				3.07	%			3.33	%			3.60	%
Less
Tax Equivalent Adjustment															1,199				967				1,048
Net Interest Income														$	27,071			$	27,888			$	28,363

 

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

 

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

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

Table 3 – Net Average Interest Earning Assets illustrates net interest earning assets and liabilities for 2016, 2015, and 2014.

TABLE 3 – NET AVERAGE INTEREST EARNING ASSETS

 

		(in thousands)
		2016				2015				2014
Average interest earning assets		$	920,145			$	868,158			$	817,806
Average interest bearing liabilities			748,710				709,079				667,991
Net average interest earning assets		$	171,435			$	159,079			$	149,815

 

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Table 4 – Volume/Rate Analysis depicts the effect on interest income and interest expense of changes in volume and changes in rate from 2014 through 2016. Variances, which were attributable to both volume and rate, are allocated proportionately between rate and volume using the absolute values of each for a basis for the allocation. Non-accruing loans are included in the average loan balances used in determining the yields. Interest income on tax-exempt securities and loans has been adjusted to a tax equivalent basis using a federal income tax rate of 34%.

TABLE 4 – VOLUME/RATE ANALYSIS

(in thousands)

 

		2016 Change from 2015												2015 Change from 2014
		Volume				Rate				Total				Volume				Rate				Total
INTEREST INCOME
Loans		$	(129	)			(899	)		$	(1,028	)		$	1,094			$	(1,121	)		$	(27	)
Taxable Securities			392				(829	)			(437	)			399				(599	)			(200	)
Non-Taxable Securities			1,350				(539	)			811				(278	)			(37	)			(315	)
Federal Funds Sold and Other			4				86				90				44				(3	)			41
TOTAL INTEREST INCOME		$	1,617			$	(2,181	)		$	(564	)		$	1,259			$	(1,760	)		$	(501	)
INTEREST EXPENSE
Interest-bearing demand deposits		$	95				(58	)			37			$	89			$	54				143
Savings Deposits			9				2				11				8				(25	)			(17	)
Time Deposits			(70	)			22				(48	)			(52	)			(13	)			(65	)
Short-term borrowings			13				7				20				149				(2	)			147
Long-term borrowings			—				1				1				(395	)			218				(177	)
TOTAL INTEREST EXPENSE		$	46			$	(25	)			21			$	(201	)		$	232				31
NET INTEREST INCOME		$	1,570			$	(2,155	)		$	(585	)		$	1,460			$	(1,992	)		$	(532	)

 

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LOANS

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

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

 

•

to make loans after sound and thorough credit analysis;

 

•

to properly document all loans;

 

•

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

 

•

to seek good relationships with the customer;

 

•

to avoid undue concentrations of loans; and

 

•

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

Loan demand in the Company’s market improved in 2014 and 2015 after economic conditions began to show some improvement before becoming soft again in 2016. Although the Company continues to face intense competition for available loans from other financial institutions and the current economic conditions have improved slightly, the Company was able in 2014 and 2015 to increase the amount of loans outstanding. The impact on the housing market caused by the opening of a casino on the nearby Choctaw Indian Reservation in 1995 has lessened. Real estate mortgage loans originated by the Company decreased by 6.0%, or $6,233,615 in 2016, by 0.1%, or $124,295, in 2015 and by 1.3%, or $1,319,331, in 2014 when compared to the prior year. The decrease in mortgage loans in all years reflects the weakness in the local housing markets after seeing normal growth in the previous years.

Real estate construction loans decreased by $9,340,302, or 28.19% in 2016 to $23,792,518 when compared to the $33,132,820 at December 31, 2015. Real estate construction loans are usually short term in nature and are dependent on construction activity in the Company’s service area. There is also a large amount of demand for these types of loans.

Commercial and agricultural loans decreased by $12,882,886, or 4.9% in 2016, increased by $48,886,679 or 22.5% in 2015 and decreased by $16,054,858, or 6.9% in 2014. Commercial, financial and agricultural loans are the largest segment of the loan portfolio and, by nature, bear a

 

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higher degree of risk. Management believes the lending practices, policies and procedures applicable to this loan category are adequate to manage any risk represented by the growth of the loans in this category.

Consumer loans decreased by $7,159,006, or 26.9% in 2016 after increasing $110,443, or 0.4% in 2015 and decreasing $192,299, or 0.7% in 2014, compared to the prior year. The Company believes that changes in consumer purchasing habits and the increase in loan sources have affected the growth of this segment of loans.

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

TABLE 5 – LOANS OUTSTANDING

(in thousands)

 

		AT DECEMBER 31,
		2016				2015				2014				2013				2012
Commercial, financial and agricultural		$	253,581			$	266,464			$	217,577			$	233,632			$	211,746
Real estate - construction			23,793				33,133				43,233				27,224				12,755
Real estate - mortgage			97,812				104,046				104,170				105,489				115,837
Consumer			19,466				26,625				26,515				26,323				28,800
TOTAL LOANS		$	394,652			$	430,268			$	391,495			$	392,668			$	369,138

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

TABLE 6 – LOAN LIQUIDITY

LOAN MATURITIES AT DECEMBER 31, 2016

 

		1 YEAR OR LESS				1 - 5 YEARS				OVER 5 YEARS				Total
Commercial, financial and agricultural		$	48,469			$	186,793			$	18,319			$	253,581
Real estate - construction			8,147				15,497				149			$	23,793
Real estate - mortgage			16,528				64,378				16,906			$	97,812
Consumer			7,053				11,904				509			$	19,466
Total loans		$	80,197			$	278,572			$	35,883			$	394,652

 

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SENSITIVITY TO CHANGES IN INTEREST RATES

 

		1 - 5 YEARS				OVER 5 YEARS
Fixed rates		$	259,410			$	20,546
Variable rates			19,162				15,337
Total loans		$	278,572			$	35,883

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

PROVISION FOR LOAN LOSSES AND ASSET QUALITY

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

The allowance for loan losses is established through a provision for loan losses charged against net income. This expense is determined by a number of factors, including historical loan losses, assessment of specific credit weaknesses within the portfolio, assessment of the prevailing economic climate, and other factors that may affect the overall condition of the loan portfolio. Management utilized these factors to determine the provision for loan losses for each of 2014, 2015 and 2016. The ratio of net loans charged off to average loans was 0.61% in 2016, 0.15% in 2015 and 0.63% in 2014. The chargeoffs in 2014, 2015 and 2016 reflect the weakness of the economy and the continuing local and national high unemployment. Management evaluates the adequacy of the allowance for loan loss on a monthly basis and makes adjustments to the allowance based on this analysis.

The provision for loan losses in 2016 was a negative $65,056 compared to $556,687 in 2015 and $923,397 in 2014. The decrease in the provision for 2016 and 2015 was mainly due to management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions. The Company uses a model that takes into

 

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account historical charge-offs and recoveries and applies that to certain loan segments of the Company’s portfolio. At the end of 2016, the total allowance for loan losses was $3,902,796, an amount that management believes to be sufficient to cover estimated probable losses in the loan portfolio.

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

TABLE 7 – ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

(in thousands except for percentage amounts)

 

		2016				2015				2014				2013				2012
BALANCE AT BEGINNING OF YEAR		$	6,474			$	6,542			$	8,078			$	6,954			$	6,681
LOANS CHARGED-OFF
Commercial, financial and agricultural			2,397				457				2,213				915				920
Real estate - construction			—				—				249				1				99
Real estate - mortgage			179				201				149				223				250
Consumer			65				164				121				135				235
TOTAL CHARGE-OFFS			2,641				822				2,732				1,274				1,504
CHARGE-OFFS RECOVERED
Commercial, financial and agricultural			18				45				79				38				69
Real estate - construction			18				9				7				16				11
Real estate - mortgage			24				52				126				71				29
Consumer			75				91				61				69				122
TOTAL RECOVERIES			135				197				273				194				231
Net loans charged-off			2,506				625				2,459				1,080				1,273
Additions charged to operating expense			(65	)			557				923				2,204				1,546
BALANCE AT END OF YEAR		$	3,903			$	6,474			$	6,542			$	8,078			$	6,954
Loans, net of unearned, at year end		$	394,051			$	429,582			$	390,960			$	392,183			$	368,891
Ratio of allowance to loans at year end			0.99	%			1.51	%			1.67	%			2.06	%			1.89	%
Average loans - net of unearned		$	409,367			$	412,172			$	389,720			$	371,200			$	381,597
Ratio of net loans charged-off to average loans			0.61	%			0.15	%			0.63	%			0.29	%			0.33	%

 

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ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

(in thousands)

 

		AT DECEMBER 31,
		2016				2015				2014				2013				2012
Commercial, financial and agricultural		$	2,434			$	4,710			$	4,352			$	5,565			$	3,965
Real estate - construction			120				402				806				495				351
Real estate - mortgage			821				770				918				1,413				1,868
Consumer			528				592				466				604				770
Total		$	3,903			$	6,474			$	6,542			$	8,077			$	6,954

COMPOSITION OF LOAN PORTFOLIO BY TYPE

 

		AT DECEMBER 31,
		2016				2015				2014				2013				2012
Commercial, financial and agricultural			64.25	%			61.93	%			55.58	%			59.50	%			57.36	%
Real estate - construction			6.03	%			7.70	%			11.04	%			6.93	%			3.46	%
Real estate - mortgage			24.78	%			24.18	%			26.61	%			26.86	%			31.38	%
Consumer			4.93	%			6.19	%			6.77	%			6.70	%			7.80	%
			100.00	%			100.00	%			100.00	%			100.00	%			100.00	%

Loan balances outstanding, as illustrated in Table 5, decreased in 2016 as the Company maintained tight credit standards, loan demand remained weak and the competition for loans was strong. In 2015 as compared to 2014, loans increased due to an in commercial, financial and agricultural loans. During 2016, loans in all classifications decreased. The allowance for loan losses is allocated to the various categories based on the historical loss percentage for each segment of loan and any specific reserves that might be assigned to those loans.

Non-performing assets and the relative percentages of such assets to loan balances are presented in Table 8 – Non-performing Assets. Non-performing loans include non-accrual loans, loans delinquent 90 days or more based on contractual terms and troubled debt restructurings. Management classifies loans as non-accrual when it believes that collection of interest is doubtful. This typically occurs when payments are past due over 90 days, unless the loans are well secured and in the process of collection. Another measurement of asset quality is OREO, which represents properties acquired by the Company through foreclosure following loan defaults by customers. The percentage of OREO to total loans at December 31, 2016 was 1.13% compared to 0.83% in 2015. OREO increased in 2016 after decreasing in 2015 due to more foreclosures in 2016 partially offset by the sale of several parcels that were acquired in foreclosure in previous years.

Loans on non-accrual status amounted to $8,879,393 in 2016 as compared to $14,422,613 in 2015 and $11,854,274 in 2014. Interest income forgone on loans classified as non-accrual in 2016 was $651,560 as compared to $732,268 in 2015 and $819,524 in 2014. Upon the classification of a loan as non-accrual, all interest accrued on the loan prior to the time it is classified as non-accrual is reversed and interest accruals are suspended until such time that the loan is in compliance with its terms and deemed collectable.

 

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TABLE 8 – NON-PERFORMING ASSETS

(in thousands, except percentages)

 

		As of December 31,
		2016				2015				2014				2013				2012
PRINCIPAL BALANCE
Non-accrual		$	8,879			$	14,423			$	11,854			$	13,592			$	14,142
Accruing loans 90 days or more past due			206				76				880				2,095				609
Troubled debt restructurings			3,288				3,858				4,741				7,119				5,602
TOTAL NON-PERFORMING LOANS		$	12,373			$	18,357			$	17,475			$	22,806			$	20,353
Income on non-accrual loans not recorded		$	652			$	732			$	820			$	814			$	771
Non-performing as a percent of loans			3.14	%			4.26	%			4.46	%			5.81	%			5.51	%
Other real estate owned		$	4,443			$	3,573			$	4,052			$	3,751			$	4,682
OREO as a percent of loans			1.13	%			0.83	%			1.04	%			0.96	%			1.27	%
Allowance as a percent of non-performing loans			31.54	%			35.27	%			37.44	%			35.42	%			34.17	%

ASC Subtopic 310-10, Loan Impairments outlines the guidance for evaluating impaired loans. These statements changed the methods of estimating the loan loss allowance for problem loans. In general, when management determines that principal and interest due under the contractual terms of a loan are not fully collectible, management must value the loan using discounted future expected cash flows. Management evaluates the Company’s loans for impairment under ASC Subtopic 310-10. The balances of impaired (including non-accruals) loans for the years 2016, 2015 and 2014 were $7,064,185, $15,581,418 and $13,079,337, respectively.

 

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

 

		AT DECEMBER 31,
		2016				2015				2014
Commercial, financial and agricultural		$	5,615,902			$	12,368,556			$	10,312,674
Real estate - construction			—				75,070				91,540
Real estate - mortgage			1,448,283				3,102,372				2,554,284
Consumer			—				35,420				120,839
Total loans		$	7,064,185			$	15,581,418			$	13,079,337

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

At December 31, 2016, loans totaling $23,720,295 were included on the Company’s watch list compared to $30,932,030 at December 31, 2015. The majority of these loans are real estate loans that, although adequately collateralized, have experienced frequent delinquencies in scheduled payments. The inclusion of loans on this list does not indicate a greater risk of loss; rather it indicates that the loan possesses one of the several characteristics described above warranting increased oversight by management.

SECURITIES

At December 31, 2016, the Company classified its securities as AFS. AFS securities are reported at fair value, with unrealized gains and losses included as a separate component of equity, net of tax. The Company does not hold any securities classified as held to maturity or held for trading purposes.

Table 9 – Securities and Securities Maturity Schedule summarizes the amortized cost of securities from 2014 through 2016 and the maturity distribution at December 31, 2016, by classification.

 

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TABLE 9 – SECURITIES

(in thousands)

 

		2016				2015				2014
SECURITIES AVAILABLE-FOR-SALE
U. S. Government Agencies		$	207,081			$	83,826			$	77,997
Mortgage Backed Securities			152,766				92,603				12,502
State, County and Municipal Obligations			150,504				87,948				84,896
Other Securities			2,870				2,931				2,997
TOTAL SECURITIES AVAILABLE-FOR-SALE		$	513,221			$	267,308			$	178,392
		2016				2015				2014
SECURITIES HELD-TO-MATURITY
U. S. Government Agencies		$	—			$	161,043			$	206,817
TOTAL SECURITIES HELD-TO-MATURITY		$	—			$	161,043			$	206,817

SECURITIES MATURITY SCHEDULE

 

		1 year or less								1 to 5 years								5 to 10 years								over 10 years
		Actual Balance				Average Yield				Actual Balance				Average Yield				Actual Balance				Average Yield				Actual Balance				Average Yield
AVAILABLE-FOR-SALE
U. S. Government Agencies(1)		$	—				0.00	%		$	10,000				1.75	%		$	102,895				1.93	%		$	94,186				2.31	%
Mortgage Backed Securities			—				0.00	%			—				0.00	%			5,077				2.20	%			147,689				2.28	%
State, County and Municipal(2)			6,333				5.13	%			20,060				5.42	%			18,365				4.50	%			105,746				3.29	%
Other Securities			—				0.00	%			—				0.00	%			—				0.00	%			2,870				2.08	%
TOTAL AVAILABLE-FOR-SALE		$	6,333				5.13	%		$	30,060				5.05	%		$	126,337				3.12	%		$	350,491				3.04	%
HELD-TO-MATURITY
U. S. Government Agencies(1)		$	—				0.00	%		$	—				0.00	%		$	—				0.00	%		$	—				0.00	%
TOTAL HELD-TO-MATURITY		$	—				0.00	%		$	—				0.00	%		$	—				0.00	%		$	—				0.00	%

 

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

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

The change in the carrying value of the AFS portfolio is due to market value fluctuations resulting from the changing interest rate environment during 2016. This change is not used in the Tier 1 capital calculation.

 

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As detailed in Table 9, the security portfolio increased $84.9 million or 19.8% in 2016, increased $43.1 million or 11.2% in 2015 and decreased $46.9 million or 10.8% in 2014. The Company strives to maximize the yields on its portfolio while balancing pledging needs and managing risk. The Company seeks to invest most of its funds not needed for loan demand or the reduction of other borrowings in higher yielding securities and not in the lower yielding federal funds sold.

DEPOSITS

The Company offers a wide variety of deposit services to individual and commercial customers, such as non-interest-bearing and interest-bearing checking accounts, savings accounts, money market deposit accounts and time deposits. The deposit base is the Company’s major funding source for earning assets. Time deposits decreased in 2016 and 2015 due to customers desiring to stay short and liquid with their deposits. During this time, all other segments of deposits increased.

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

TABLE 10 – DEPOSIT INFORMATION

 

		(in thousands, except percentages)
		2016								2015								2014
		Average Balance				Average Rate				Average Balance				Average Rate				Average Balance				Average Rate
Noninterest-bearing		$	146,438							$	142,322							$	134,859
Interest-bearing demand			345,438				0.21	%			300,636				0.23	%			262,142				0.21	%
Savings			71,127				0.12	%			65,670				0.13	%			58,053				0.17	%
Time deposits			202,261				0.49	%			216,488				0.48	%			227,390				0.49	%
		$	765,264				0.25	%		$	725,116				0.25	%		$	682,444				0.25	%

MATURITY RANGES OF TIME DEPOSITS

OF $100,000 OR MORE

 

		AS OF DECEMBER 31, 2016
3 months or less		$	27,033
3 through 12 months			60,731
1 year to 3 years			19,076
over 3 years			0
		$	106,840

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

 

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BORROWINGS

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

TABLE 11 - SHORT-TERM BORROWINGS

(in thousands)

 

		As of December 31,
		2016				2015				2014
Short-term borrowings
Year-end balance		$	150,283			$	104,298			$	114,427
Weighted average rate			0.68	%			0.68	%			0.68	%
Maximum month-end balance		$	203,549			$	136,833			$	118,622
Year to date average balance		$	108,884			$	106,928			$	82,856
Weighted average rate			0.68	%			0.66	%			0.66	%

The Company borrows funds for short periods from the FHLB as an alternative to Federal Funds Purchased. The Company foresees short-term borrowings to be a continued source of liquidity and likely will continue to use these borrowings as a method to fund short-term needs. At December 31, 2016, the Company had the capacity to borrow up to $168,592,789 from the FHLB and other financial institutions in the form of Federal Funds Purchased. The Company generally will use these types of borrowings if loan demand is greater than the growth in deposits. At December 31, 2016 and 2015, the Company retained its borrowings from the FHLB at $20,000,000 and its Federal Funds Purchased at $0. In 2016, the balances in Securities Sold Under Agreement to Repurchase increased $45,984,730, or 44.1% to $150,282,913. In 2015, these balances decreased to $104,298,182, a decrease of $10,128,588, or 8.9%.

At the end of 2016, the Company had long-term debt in the amount of $20,000,000 to the FHLB for advances and $35,069 payable to the State of Mississippi for advances under the Mississippi Agribusiness Enterprise Loan Program. This program provides interest-free loans to banks to fund loans to qualifying farmers. Farmers that qualify for the program receive 20% of their loan at zero interest. When the loan is repaid, the State of Mississippi receives 20% of the principal payment, which is equal to the amount advanced by the state, and the Company retains the balance of the principal payment.

 

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The remaining maturity schedule of the long-term debt at December 31, 2016 is listed below.

 

		(in thousands)
		2016
Less than one year		$	—
One year to three years			20,000
Over three years			35
Total long-term borrowings		$	20,035

NON-INTEREST INCOME AND EXPENSE

Table 12 - Non-Interest Income and Expense illustrates the Company’s non-interest income and expense from 2014 through 2016 and percentage changes between such years.

TABLE 12 - NON-INTEREST INCOME & EXPENSE

(in thousands)

 

		% CHANGE												% CHANGE
		2016				FROM ‘15				2015				FROM ‘14				2014
NON-INTEREST INCOME
Service charges on deposit accounts		$	3,789				-2.02	%		$	3,867				-1.68	%		$	3,933
Other operating income			3,903				-12.49	%			4,460				5.44	%			4,230
TOTAL NON-INTEREST INCOME		$	7,692				-7.63	%		$	8,327				2.01	%		$	8,163
NON-INTEREST EXPENSE
Salaries and employee benefits		$	13,697				3.02	%		$	13,295				1.53	%		$	13,095
Occupancy expense, including equipment			5,108				-2.24	%			5,225				0.58	%			5,195
Other operating expense			7,675				8.54	%			7,071				-11.99	%			8,034
TOTAL NON-INTEREST EXPENSE		$	26,480				3.47	%		$	25,591				-2.78	%		$	26,324

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

During 2016 as compared to 2015, non-interest income decreased by $649,394, or 7.79%, when compared to 2015. A decrease in other income and service charges on deposit accounts was partially offset by an increase in other service charges and fees and net gains on the sale of securities. Other income was down primarily due to a large recovery on the sale of repossessed assets in 2015 was not duplicated in 2016.

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

 

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

Non-interest expenses consist of salaries and benefits, occupancy expense and other overhead expenses incurred by the Company in the transaction of its business. In 2016 as compared to 2015, non-interest expense increased by $888,683, or 3.5%, to $26,479,650. Included in this increase was an increase in salaries and benefits in the amount of $401,774, or 3.0% and in other expense in the amount of $603,966, or 8.5% partially offset by a decrease in occupancy expense in the amount of $117,057, or 2.2%. The increase in other expense was in large part due to increased loan collection expense and writedowns on other real estate.

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

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

In 2016, the Company’s efficiency ratio was 71.49%, compared to 68.69% in 2015 and 70.09% in 2014. The efficiency ratio is calculated to measure the cost of generating one dollar of revenue. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income, on a fully tax equivalent basis, and non-interest income.

INCOME TAXES

The Company records a provision for income taxes currently payable, along with a provision for deferred taxes to be realized in the future. Such deferred taxes arise from differences in timing of certain items for financial statement reporting rather than income tax reporting. The deferred tax amount of $10,634,669 is considered realizable without the use of extraordinary tax planning strategies.

The Company’s effective tax rate was 19.31%, 24.62% and 19.70% in 2016, 2015 and 2014, respectively. The major difference between the effective tax rate applied to the Company’s financial statement income and the federal statutory rate of 34% is interest on tax-exempt securities and loans. Further tax information is disclosed in Note 10, “Income Taxes” to the Company’s Consolidated Financial Statements included in this Annual Report.

 

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LIQUIDITY AND RATE SENSITIVITY

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

The Company’s predominant sources of funding include: core deposits (consisting of both commercial and individual deposits); proceeds from maturities of securities; repayments of loan principal and interest; Federal Funds Purchased; and short-term and long-term borrowing from the FHLB. In 2016 as compared to 2015, the Company experienced an increase in deposits and a decrease in loans outstanding. The increase in investment securities is mainly the result of the desire to invest funds not needed for funding current loan obligations. The Company relies upon non-core sources of funding, such as Federal Funds Purchased and short and long term borrowings from the FHLB, when deposit growth is not adequate to meet its short term needs. While the strategy of using these wholesale funding sources is adequate to cover liquidity deficiencies in the short term, the Company’s goal is to increase core deposits as a source of long term funding. Management does not intend to rely on borrowings from the FHLB as the first choice as a source of funds but prefers to increase core deposits through increased competition for available deposits. Management believes that core deposits can continue to be increased by offering competitive rates and superior service to the Bank’s customers.

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

The deposit base is diversified between individual and commercial accounts, which the Company believes helps it avoid dependence on large concentrations of funds. The Company does not solicit certificates of deposit from brokers. The primary sources of liquidity on the asset side of the balance sheet are federal funds sold and securities classified as AFS. All of the $496,124,574 in the investment securities portfolio is classified in the AFS category, and is available to be sold, should liquidity needs arise. Management, through its Asset Liability Committee (“ALCO”), and the Board review the Company’s liquidity position on a monthly basis. At December 31, 2016, both the ALCO and the Board of Directors determined that the Company’s liquidity position was adequate.

 

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Table 13 - Funding Uses and Sources details the main components of cash flows for 2016 and 2015.

TABLE 13 - FUNDING USES AND SOURCES

(in thousands)

 

		2016												2015
		Average				Increase/(decrease)								Average				Increase/(decrease)
		Balance				Amount				Percent				Balance				Amount				Percent
FUNDING USES
Loans, net of unearned income		$	409,367			$	(2,320	)			-0.56	%		$	411,687			$	22,470				5.77	%
Taxable securities			352,611				17,074				5.09	%			335,537				16,687				5.23	%
Tax-exempt securities			123,103				37,506				43.82	%			85,597				(6,336	)			-6.89	%
Federal funds sold and other			36,071				735				2.08	%			35,336				17,530				98.45	%
TOTAL USES		$	921,152			$	52,995				6.10	%		$	868,157			$	50,351				6.16	%
FUNDING SOURCES
Noninterest-bearing deposits		$	146,438			$	4,116				2.89	%		$	142,322			$	7,463				5.53	%
Interest-bearing demand and savings deposits			395,565				29,962				8.20	%			365,603				46,129				14.44	%
Time deposits			202,261				(14,227	)			-6.57	%			216,488				(10,902	)			-4.79	%
Short-term borrowings			47				(13	)			-21.67	%			60				(1,897	)			-96.93	%
Commercial repo			108,884				1,956				1.83	%			106,928				24,072				29.05	%
Long-term debt			20,042				(6	)			-0.03	%			20,048				(15,545	)			-43.67	%
TOTAL SOURCES		$	873,237			$	21,788				2.56	%		$	851,449			$	49,320				6.15	%

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

CAPITAL RESOURCES

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

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

 

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During 2016 as compared to 2015, total capital increased primarily due to earnings that were in excess of dividends.

Management believes the Company and the Bank meet all the capital requirements to be well-capitalized under the guidelines established by FDICIA as of December 31, 2016, as noted below in Table 14 - Capital Ratios. To be classified as well-capitalized, the Company and Bank must maintain the ratios described above.

TABLE 14 – CAPITAL RATIOS

(in thousands, except percentage amounts)

 

		At December 31,
		2016				2015				2014
Tier 1 capital
Shareholders’ equity		$	85,060			$	86,425			$	81,858
Less: Intangibles			(3,150	)			(3,150	)			(3,150	)
Add/less: Unrealized loss/(gain) on securities			10,719				7,117				8,881
TOTAL TIER 1 CAPITAL		$	92,629			$	90,392			$	87,589
Total capital
Tier 1 capital		$	92,629			$	90,392			$	87,589
Allowable allowance for loan losses			3,903				6,474				6,542
TOTAL CAPITAL		$	96,532			$	96,866			$	94,131
RISK WEIGHTED ASSETS		$	516,925			$	552,186			$	527,749
AVERAGE ASSETS (FOURTH QUARTER)		$	1,005,163			$	976,448			$	912,195
TIER 1 LEVERAGE RATIO			9.22	%			9.26	%			9.60	%
COMMON EQUITY TIER 1 CAPITAL RATIO			9.22	%			9.26	%			—
TIER 1 RISK-BASED CAPITAL RATIO			17.92	%			16.37	%			16.60	%
TOTAL RISK-BASED CAPITAL RATIO			18.67	%			17.54	%			17.84	%

Management’s strategy with respect to capital levels is to maintain a sufficient amount of capital to allow the Company to respond to growth and acquisition opportunities in the Bank’s service area. Over the past three years, the Company has been able to increase the amount of its capital, through retention of earnings, while still maintaining the dividend payout ratio to approximately 62% of earnings per share. The Company does not currently have any commitments for capital expenditures that would require the Company to raise additional capital by means other than retained earnings. The Company does not plan to change this strategy unless needed to support future acquisition activity.

 

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OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of its customers. These commitments and contingent liabilities include commitments to extend credit and issue standby letters of credit. These off-balance sheet arrangements are further detailed in Note 13, “Off-Balance Sheet Financial Instruments, Commitments and Contingencies and Concentrations of Risks,” in the notes to the Company’s Consolidated Financial Statements included in this Annual Report.

CONTRACTUAL OBLIGATIONS

The following table summarizes the contractual obligations, excluding deposits, of the Company as of December 31, 2016.     

 

 

 

		Payments Due by Period
		(in thousands)
						Less than				1-3				3-5				Over 5
Contractual Obligations		Total				1 year				Years				Years				Years
Long Term Debt		$	20,000			$	—			$	20,000			$	—			$	—
Operating Leases			958				253				379				326				—
Other Long-term Liabilities			35				—				—				6				29
Total		$	20,993			$	253			$	20,379			$	332			$	29

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

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

OVERVIEW

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

 

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MARKET/INTEREST RATE RISK MANAGEMENT

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

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

In addition to the quarterly interest rate risk report, the Company employs a number of tools to measure interest rate risk. One tool is static gap analysis, which matches assets with specified maturities to liabilities with corresponding maturities. Although management believes that this does not provide a complete picture of the Company’s exposure to interest rate risk, it does highlight significant short-term repricing volume mismatches. The following table presents the Company’s rate sensitivity static gap analysis at December 31, 2016 ($ in thousands):

 

		Interest Sensitive Within
		90 days				One year
Total rate sensitive assets		$	175,540			$	93,455
Total rate sensitive liabilities			307,717				109,534
Net gap		$	(132,177	)		$	(16,079	)

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

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

 

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products (money market, NOW and savings accounts), the tables present principal cash flows in the shortest term. Although these deposits may not reprice within this time frame, the depositors of such funds have the ability to reprice. Weighted average floating rates are based on the rate for that product as of December 31, 2016 and December 31, 2015.

TABLE 15 - INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 2016

(in thousands)

 

		2017				2018				2019				2020				2021				Thereafter				Carrying Value				Fair Value
Loans
Fixed Rate		$	76,690			$	38,268			$	74,886			$	70,308			$	75,947			$	20,546			$	356,645			$	353,099
Average Int Rate			4.64	%			5.37	%			4.82	%			4.58	%			4.42	%			3.37	%			4.62	%
Floating Rate		$	3,508			$	2,000			$	4,749			$	1,200			$	11,213			$	15,337			$	38,007			$	38,007
Average Int Rate			3.76	%			4.28	%			3.39	%			4.94	%			2.49	%			4.90	%			3.86	%
Investment securities
Fixed Rate		$	2,422			$	2,602			$	2,554			$	12,762			$	66,778			$	423,232			$	510,350			$	493,154
Average Int Rate			2.66	%			3.04	%			3.61	%			2.74	%			1.90	%			2.25	%			2.23	%
Floating Rate																						$	2,971			$	2,971			$	2,971
Average Int Rate																							2.08	%			2.08	%
Other earning assets
Fixed Rate		$	48,603																							$	48,603			$	48,603
Average Int Rate			0.50	%																							0.50	%
Floating Rate
Average Int Rate
Interest-bearing deposits
Fixed Rate		$	572,657			$	35,638			$	2,263			$	56			$	25			$	0			$	610,639			$	610,785
Average Int Rate			0.27	%			0.62	%			0.59	%			0.55	%			0.55	%			0.00	%			0.29	%
Floating Rate
Average Int Rate
Other int-bearing liabilities
Fixed Rate						$	20,000																			$	20,000			$	20,284
Average Int Rate											2.53	%															2.53	%
Floating Rate		$	150,283																							$	150,283			$	150,283
Average Int Rate			0.68	%																							0.68	%

 

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AS OF DECEMBER 31, 2015

(in thousands)

 

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

Rate sensitivity gap analysis is another tool management uses to measure interest rate risk. The rate sensitivity gap is the difference between the repricing of interest-earning assets and the repricing of interest-bearing liabilities within certain defined time frames. The Company’s interest rate sensitivity position is influenced by the distribution of interest-earning assets and interest-bearing liabilities among the maturity categories. Table 16 - Rate Sensitivity Gap reflects interest-earning assets and interest-bearing liabilities by maturity distribution as of December 31, 2016. Product lines repricing in time periods predetermined by contractual agreements are included in the respective maturity categories.

 

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TABLE 16 - RATE SENSITIVITY GAP AT DECEMBER 31, 2016

(in thousands, except percentage amounts)

 

		1 - 90 Days				91 - 365 Days				1 - 5 Years				Over 5 years				Total
INTEREST EARNING ASSETS
Loans		$	34,334			$	55,740			$	263,554			$	27,112			$	380,740
Investment securities			92,603				37,715				93,944				271,863				496,125
Interest Bearing Due From Bank Accounts			48,603				—				—				—				48,603
TOTAL INTEREST BEARING ASSETS		$	175,540			$	93,455			$	357,498			$	298,975			$	925,468
INTEREST BEARING LIABILITIES
Interest bearing demand deposits		$	78,782			$	—			$	105,042			$	131,303			$	315,127
Savings and Money Market deposits			29,388				—				51,220				18,190				98,798
Time deposits			49,264				109,534				37,916				—				196,714
Short term borrowings			150,283				—				—				—				150,283
Long term borrowings			—				—				20,036				—				20,036
TOTAL INTEREST BEARING LIABILITIES		$	307,717			$	109,534			$	214,214			$	149,493			$	780,958
Rate sensitive gap		$	(132,177	)		$	(16,079	)		$	143,284			$	149,482			$	144,510
Rate sensitive cumulative gap			(132,177	)			(148,256	)			(4,972	)			144,510				—
Cumulative gap as a percentage of total earning assets			-14.28	%			-16.02	%			-0.54	%			15.61	%

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

The above rate sensitivity analysis places interest-bearing demand and savings deposits in the shortest maturity category because these liabilities do not have defined maturities. If these deposits were placed in a maturity distribution representative of the Company’s deposit base history, the shortfall of the negative rate sensitive gap position would be reduced in the 1-to-90 day time frame. It is the goal of the Company to achieve a cumulative gap ratio of plus or minus 15% for all periods under one year, with maximum acceptable limits of plus or minus 20%. Quarterly, management discusses with the ALCO and the board of directors the gap position in relation to the established goals, highlights any reasons for variances from the goals and suggests changes to better align the Company’s position with the established goals. When reviewing the Company’s position, impacting factors and suggested changes, the board of directors also considers other corporate objectives, including increasing core deposits and increasing profitability, before implementing changes intended to align the Company’s position with the established goals. While the board of directors continues to closely monitor the Company’s negative gap position, at this time, management does not anticipate making any significant changes to the Company’s operating practices in order to mitigate the negative gap position.

 

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The rate sensitivity gap table illustrates that the Company had a large negative cumulative gap position for the 1 to 90-day period as of December 31, 2016. This negative gap position was mainly due to: (1) a largest amount of investment securities that have call dates within that period; (2) the commercial repurchase accounts being classified in the 1 to 90 day category; (3) approximately 80.7% of certificates of deposit maturing during the next twelve months; and (4) a significant portion of the Company’s loans maturing after one year.

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

Short term interest rates have remained low in 2014, 2015 and most of 2016 in connection with the target Federal Funds rate by the Federal Reserve Bank. In December 2015, the Federal Reserve Bank increased its target Federal Funds rate to 50 basis points and again in December 2016 to 75 basis points. After the rate increase in 2015, medium term rates began to decline but rose again after the presidential election in November 2016. Overall, the effect on the Company has been marginal. The Company’s net interest margin in 2016 was 3.07% and in 2015 was 3.33%.

 

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Quarterly Financial Trends

 

		(in thousands, except per share amounts) 2016
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Interest Income		$	7,580			$	7,625			$	7,574			$	7,390
Interest Expense			769				755				754				820
Net Interest Income			6,811				6,870				6,820				6,570
Provision for Loan Losses			61				(147	)			184				(163	)
Non-interest Income			1,815				1,908				2,080				1,889
Non-interest Expense			6,644				6,655				6,558				6,622
Income Taxes			395				491				406				320
Net Income		$	1,526			$	1,779			$	1,752			$	1,680
Per common share:
Basic		$	0.31			$	0.36			$	0.36			$	0.34
Diluted		$	0.31			$	0.36			$	0.36			$	0.34
Cash Dividends		$	0.24			$	0.24			$	0.24			$	0.24
		2015
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Interest Income		$	7,706			$	7,696			$	7,789			$	7,774
Interest Expense			751				736				765				825
Net Interest Income			6,955				6,960				7,024				6,949
Provision for Loan Losses			184				82				142				148
Non-interest Income			1,752				1,852				2,017				2,706
Non-interest Expense			6,487				6,321				6,475				6,308
Income Taxes			442				581				587				869
Net Income		$	1,594			$	1,828			$	1,837			$	2,330
Per common share:
Basic		$	0.33			$	0.37			$	0.38			$	0.48
Diluted		$	0.33			$	0.37			$	0.38			$	0.48
Cash Dividends		$	0.23			$	0.23			$	0.23			$	0.24

 

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Market Price and Dividend Information

MARKET PRICE INFORMATION

The Company’s common stock trades on the NASDAQ Global Market (“NASDAQ”) under the symbol “CIZN”. On March 2, 2017, the common stock’s closing price on NASDAQ was $24.50. The following table sets forth the high and low sales prices for the common stock as reported on NASDAQ, as well as the dividends declared, in each quarter in the past two fiscal years.

 

2015		High				Low				Dividends Declared (per common share)
January - March		$	19.72			$	17.10				0.23
April - June			22.85				17.70				0.23
July - September			22.25				19.06				0.23
October - December			23.72				20.51				0.24
2016		High				Low				Dividends Declared (per common share)
January - March		$	25.42			$	20.76				0.24
April - June			22.85				21.04				0.24
July - September			25.35				21.21				0.24
October - December			25.85				22.70				0.24

On March 2, 2017, shares of the Company’s common stock were held of record by approximately 446 shareholders.

DIVIDENDS

Dividends totaled $0.96 per share for 2016 and $0.93 per share for 2015.

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

 

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STOCK PERFORMANCE GRAPH

The following performance graph compares the performance of the Company’s common stock to the NASDAQ Composite Index and the Morningstar Regional Bank index (a peer group of other regional bank holding companies) for the Company’s reporting period. The graph assumes that the value of the investment in the Company’s common stock and each index was $100 at December 31, 2011 and that all dividends were reinvested.

Performance Graph

December 31, 2011 - December 31, 2016

 

 

		2011				2012				2013				2014				2015				2016
Citizens Holding Company			100.00				116.19				116.49				127.56				163.31				185.48
NASDAQ Market Index			100.00				117.45				164.57				188.84				201.98				219.89
Morningstar Regional Banks			100.00				118.79				164.82				177.71				186.29				252.37

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

 

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THE CITIZENS BANK OFFICERS

 

 

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BOARD OF DIRECTORS

 

Don Fulton		Craig Dungan, MD
Corporate PERT Coordinator		Physician
W. G. Yates and Sons Construction Co.		Meridian Gastroenterology PLLC
Donald L. Kilgore		Greg L. McKee
Special Assistant Attorney General		President & Chief Executive Officer
State of Mississippi		Citizens Holding Company and The Citizens Bank
David A. King		David P. Webb
Proprietor		Attorney
Philadelphia Motor Company		Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Herbert A. King		A. T. Williams
Civil Engineer		Certified Public Accountant
King Engineering Associates, Inc.		A. T. Williams, CPA
Adam Mars		Terrell E. Winstead
Business Manager		Chief Financial Officer
Mars, Mars, Mars & Chalmers		Molpus Woodlands Group

CITIZENS HOLDING COMPANY OFFICERS

Herbert A. King

Chairman

Greg L. McKee

President and Chief Executive Officer

Mark Taylor

Secretary

Robert T. Smith

Treasurer and Chief Financial Officer

 

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BANKING LOCATIONS

 

Philadelphia Main Office		Collinsville Branch		Decatur Branch
521 Main Street		9065 Collinsville Road		15330 Hwy 15 South
Philadelphia, MS 39350		Collinsville, MS 39325		Decatur, MS 39327
601.656.4692		601.626.7608		601.635.2321
Westside Branch		Flowood Branch		Forest Branch
912 West Beacon Street		5419 Hwy 25 Ste. Q		247 Woodland Drive North
Philadelphia, MS 39350		Flowood, MS 39232		Forest, MS 39074
601.656.4692		601.992.7688		601.469.3424
Northside Branch		Sebastopol Branch		Louisville-Main Branch
802 Pecan Avenue		24 Pine Street		l00 East Main Street
Philadelphia, MS 39350		Sebastopol, MS 39359		Louisville, MS 39339
601.656.4692		601.625.7447		662.773.6261
Eastside Branch		DeKalb Branch		Noxapater Branch
599 East Main Street		176 Main Avenue		45 East Main Street
Philadelphia, MS 39350		DeKalb, MS 39328		Noxapater, MS 39346
601.656.4692		601.743.2115		662.724.4261
Union Branch		Kosciusko Branch		Louisville-Industrial Branch
502 Bank Street		775 North Jackson Street		803 South Church Street
Union, MS 39365		Kosciusko, MS 39090		Louisville, MS 39339
601.774.9231		662.289.4356		662.773.6261
Starkville Branch		Scooba Branch		Biloxi Lemoyne Boulevard
201 Highway 12 West		27597 Highway 16 East		15309 Lemoyne Boulevard
Starkville, MS 39759		Scooba, MS 39358		Biloxi, MS 39532
662.323.1420		662.476.8431		228.207.2343
Carthage Main Office		Meridian Eastgate		Meridian Broadmoor
301 West Main Street		1825 Hwy 39 North		5015 Highway 493
Carthage, MS 39051		Meridian, MS 39301		Meridian. MS 39305
601.257.4525		601.693.8367		601.581.1541
Biloxi Cedar Lakes		Hattiesburg Branch		Flowood Branch
1765 Popps Ferry Road		6222 Highway 98		5419 Highway 25, Suite Q
Biloxi, MS 39532		Hattiesburg, MS 39402		Flowood, MS 39232
228.594.6913		601.264.4425		601.992.7688
Oxford Loan Production		Phone Teller		Internet Banking
304 Enterprise Dr., Ste A		1.800.397.0344		http://www.thecitizensbankphila.com
Oxford, MS 38655

 

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FINANCIAL INFORMATION

CORPORATE HEADQUARTERS

521 Main Street

P.O. Box 209

Philadelphia, MS 39350

601.656.4692

ANNUAL SHAREHOLDER MEETING

The Annual Shareholder meeting of the Citizens Holding Company, Inc. will be held Tuesday, April 25, 2017, at 4:30 P.M. in the lobby of the main office of The Citizens Bank, 521 Main Street, Philadelphia, Mississippi.

STOCK REGISTRAR AND TRANSFER AGENT

American Stock Transfer & Trust Company

59 Maiden Lane

New York, NY 10038

FORM 10-K

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

FINANCIAL CONTACT

Robert T. Smith

Treasurer and Chief Financial Officer

P.O. 209

Philadelphia, Mississippi 39350

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

 

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