CITIZENS HOLDING CO /MS/ (Form: 10-Q, Received: 05/10/2017 11:43:03)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

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

For the transition period from to

Commission File Number: 001-15375

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)

Mississippi

64-0666512

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)


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

601-656-4692

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

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

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of May 5, 2017:


Title		Outstanding
Common Stock, $0.20 par value		4,894,579

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION	1

Item 1.	Consolidated Financial Statements.	1

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

	Consolidated Statements of Income for the Three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the Three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited)	3

	Consolidated Statements of Cash Flows for the Three months ended March 31, 2017 (Unaudited) and 2016 (Unaudited)	4

	Notes to Consolidated Financial Statements	5

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	44

Item 4.	Controls and Procedures.	47

PART II.	OTHER INFORMATION	48

Item 1.	Legal Proceedings.	48

Item 1A.	Risk Factors.	48

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

Item 3.	Defaults Upon Senior Securities.*

Item 4.	Mine Safety Disclosures.*

Item 5.	Other Information.*

Item 6.	Exhibits.	49

*	None or Not Applicable.

SIGNATURES		50

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF CONDITION


	March 31,			December 31,
	2017			2016
	(Unaudited)			(Audited)
ASSETS

Cash and due from banks	$	27,706,912		$	21,688,557
Interest bearing deposits with other banks		73,714,719			48,603,182
Investment securities available for sale, at fair value		489,941,021			496,124,574
Loans, net of allowance for loan losses of $3,701,914 in 2017 and $3,902,796 in 2016		389,183,439			390,148,343
Premises and equipment, net		19,451,561			18,664,084
Other real estate owned, net		4,352,609			4,443,010
Accrued interest receivable		4,410,732			4,720,189
Cash surrender value of life insurance		24,020,672			23,890,333
Deferred tax assets, net		9,000,890			10,634,669
Other assets		6,226,193			6,294,966


TOTAL ASSETS	$	1,048,008,748		$	1,025,211,907


LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Deposits:
Noninterest-bearing demand	$	154,378,785		$	149,512,941
Interest-bearing NOW and money market accounts		364,334,436			340,180,286
Savings deposits		76,393,262			73,745,005
Certificates of deposit		194,108,393			196,714,108

Total deposits		789,214,876			760,152,340

Securities sold under agreement to repurchase		141,098,287			150,282,913
Federal Home Loan Bank advances		20,000,000			20,000,000
Accrued interest payable		194,140			199,368
Deferred compensation payable		8,331,957			8,209,427
Other liabilities		951,346			1,308,464

Total liabilities		959,790,606			940,152,512

SHAREHOLDERS’ EQUITY
Common stock; $0.20 par value, 22,500,000 shares authorized, 4,887,079 shares issued and outstanding at March 31, 2017 and 4,882,579 shares issued and outstanding at December 31, 2016		977,416			976,516
Additional paid-in capital		3,934,261			3,802,204
Retained earnings		91,264,115			90,999,689
Accumulated other comprehensive loss, net of tax benefit of $4,733,977 in 2017 and $6,376,702 in 2016		(7,957,650	)		(10,719,014	)


Total shareholders’ equity		88,218,142			85,059,395


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,048,008,748		$	1,025,211,907

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Ended March 31,
	2017			2016
INTEREST INCOME
Loans, including fees	$	4,568,079		$	4,784,505
Investment securities		2,832,451			2,715,730
Other interest		68,547			79,499

Total interest income		7,469,077			7,579,734

INTEREST EXPENSE
Deposits		477,642			468,458
Other borrowed funds		329,805			300,602

Total interest expense		807,447			769,060


NET INTEREST INCOME		6,661,630			6,810,674

(REVERSAL OF) PROVISION FOR LOAN LOSSES		(151,220	)		60,498


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,812,850			6,750,176

OTHER INCOME
Service charges on deposit accounts		1,042,031			886,804
Other service charges and fees		616,772			586,422
Other operating income		275,457			342,462

Total other income		1,934,260			1,815,688


OTHER EXPENSES
Salaries and employee benefits		3,663,804			3,402,318
Occupancy expense		1,310,243			1,329,204
Other operating expense		2,135,109			1,912,793

Total other expenses		7,109,156			6,644,315


INCOME BEFORE PROVISION FOR INCOME TAXES		1,637,954			1,921,549

PROVISION FOR INCOME TAXES		200,629			395,379


NET INCOME	$	1,437,325		$	1,526,170


NET INCOME PER SHARE -Basic	$	0.29		$	0.31


-Diluted	$	0.29		$	0.31


DIVIDENDS PAID PER SHARE	$	0.24		$	0.24

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Ended March 31,
	2017			2016

Net income	$	1,437,325		$	1,526,170

Other comprehensive income

Securities available-for-sale
Unrealized holding gains		4,404,089			1,856,204
Income tax effect		(1,642,725	)		(692,364	)

		2,761,364			1,163,840

Securities transferred from available-for-sale to held-to-maturity
Amortization of net unrealized losses during the period		—			831,088
Income tax effect		—			(309,996	)

		—			521,092

Total other comprehensive income		2,761,364			1,684,932


Comprehensive income	$	4,198,689		$	3,211,102

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Ended March 31,
	2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES

Net cash provided by operating activities	$	2,350,831		$	792,198

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		11,142,246			27,129,213
Proceeds from maturities and calls of securities held to maturity		—			10,000,000
Purchases of investment securities available for sale		(1,322,106	)		(107,664,521	)
Purchases of bank premises and equipment		(1,023,788	)		(29,244	)
(Increase) decrease in interest bearing deposits with other banks		(25,111,537	)		41,382,005
Proceeds from sale of other real estate		82,550			194,739
Net decrease in loans		1,104,924			13,575,364


Net cash used by investing activities		(15,127,711	)		(15,412,444	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		29,060,135			36,885,617
Net change in securities sold under agreement to repurchase		(9,184,626	)		(9,461,991	)
Exercise of stock options		92,625			—
Payment of dividends		(1,172,899	)		(1,170,238	)


Net cash provided by financing activities		18,795,235			26,253,388


Net increase in cash and due from banks		6,018,355			11,633,142

Cash and due from banks, beginning of period		21,688,557			14,947,690


Cash and due from banks, end of period	$	27,706,912		$	26,580,832

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

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three months ended March 31, 2017

(Unaudited)

Note 1.

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

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

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

Note 2.

Commitments and Contingent Liabilities

In the ordinary course of business, the Corporation enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of March 31, 2017, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $35,517,643 compared to an aggregate unused balance of $37,194,220 at December 31, 2016. There were $3,370,180 of letters of credit outstanding at March 31, 2017 and $3,456,180 at December 31, 2016. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Corporation does incorporate expectations about the utilization under its credit-related commitments and into its asset and liability management program.

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

Note 3.

Net Income per Share

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


	For the Three Months
	Ended March 31,
	2017		2016
Basic weighted average shares outstanding		4,883,679		4,875,079
Dilutive effect of granted options		14,214		10,061


Diluted weighted average shares outstanding		4,897,893		4,885,140


Net income	$	1,437,325	$	1,526,170
Net income per share-basic	$	0.29	$	0.31
Net income per share-diluted	$	0.29	$	0.31

Note 4.

Equity Compensation Plans

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

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

The following table is a summary of the stock option activity for the three months ended March 31, 2017.


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

Outstanding at December 31, 2016		78,000		$	21.08		—	$	—		—	$	—
Granted		—			—		—		—		—		—
Exercised		(4,500	)		20.58		—		—		—		—
Expired		—			—		—		—		—		—


Outstanding at March 31, 2017		73,500		$	21.11		—	$	—		—	$	—

The intrinsic value of options previously granted under the Directors’ Plan at March 31, 2017, was $268,800, the intrinsic value of options previously granted under the Employees’ Plan at March 31, 2017, was $0, and since there were no options granted under the 2013 Plan during the three-month period ended March 31, 2017, the current intrinsic value for the 2013 Plan at March 31, 2017 is $0, for an aggregate intrinsic value at March 31, 2017, of $268,800.

During the quarter ended June 30, 2016, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 27, 2017 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $161,325 and will be recognized over the one-year vesting period at a cost of $13,444 per month less deferred taxes of $5,016 per month. Also during the quarter ended June 30, 2016, there were 1,500 shares of restricted stock that vested pursuant to an incentive plan for senior management.

Note 5.

Income Taxes

The income tax topic of the Accounting Standards Codification (“ASC”) defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. This topic also provides guidance on the de-recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods. As of March 31, 2017, the Corporation had no unrecognized tax benefits related to federal and state income tax matters. Therefore, the Corporation does not anticipate any material increase or decrease in the effective tax rate during 2016 relative to any tax positions taken. It is the Corporation’s policy to recognize interest or penalties related to income tax matters in income tax expense.

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

Note 6.

Securities

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


March 31, 2017			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	204,424,326	$	—	$	4,872,074	$	199,552,252
Mortgage backed securities		147,072,647		334,610		3,841,670		143,565,587
State, County, Municipals		148,270,381		1,305,634		5,738,592		143,837,423
Other investments		2,865,293		120,466		—		2,985,759

Total	$	502,632,647	$	1,760,710	$	14,452,336	$	489,941,021


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

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

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


	March 31, 2017				December 31, 2016
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available-for-sale
Due in one year or less	$	5,356,998	$	5,372,879	$	6,333,181	$	6,370,921
Due after one year through five years		52,866,510		52,817,589		30,059,503		30,278,557
Due after five years through ten years		103,343,414		101,454,474		126,336,589		122,562,724
Due after ten years		341,065,725		330,296,079		350,491,017		336,912,372

Total	$	502,632,647	$	489,941,021	$	513,220,290	$	496,124,574

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

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


March 31, 2017	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	194,896	$	4,562	$	4,656	$	310	$	199,552	$	4,872
Mortgage backed securities		114,363		3,314		23,050		527		137,413		3,841
State, County, Municipal		88,822		5,594		3,381		145		92,203		5,739

Total	$	398,081	$	13,470	$	31,087	$	982	$	429,168	$	14,452


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

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

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

Note 7.

Loans

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


	March 31, 2017			December 31, 2016
Real Estate:
Land Development and Construction	$	26,757		$	23,793
Farmland		17,288			18,175
1-4 Family Mortgages		96,040			97,812
Commercial Real Estate		178,466			180,880

Total Real Estate Loans		318,551			320,660

Business Loans:
Commercial and Industrial Loans		55,728			53,761
Farm Production and Other Farm Loans		866			765

Total Business Loans		56,594			54,526

Consumer Loans:
Credit Cards		1,125			1,156
Other Consumer Loans		17,063			18,310

Total Consumer Loans		18,188			19,466


Total Gross Loans		393,333			394,652

Unearned Income		(448	)		(601	)
Allowance for Loan Losses		(3,702	)		(3,903	)


Loans, net	$	389,183		$	390,148

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

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


	March 31, 2017		December 31, 2016
Real Estate:
Land Development and Construction	$	128	$	133
Farmland		298		234
1-4 Family Mortgages		2,246		1,954
Commercial Real Estate		6,061		6,293

Total Real Estate Loans		8,733		8,614

Business Loans:
Commercial and Industrial Loans		153		239

Total Business Loans		153		239

Consumer Loans:
Other Consumer Loans		100		26

Total Consumer Loans		100		26


Total Nonaccrual Loans	$	8,986	$	8,879

An aging analysis of past due loans (in thousands), segregated by class, as of March 31, 2017, was as follows:


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	151	$	78	$	229	$	26,528	$	26,757	$	—
Farmland		358		62		420		16,868		17,288		—
1-4 Family Mortgages		1,782		208		1,990		94,050		96,040		1
Commercial Real Estate		1,601		305		1,906		176,560		178,466		15

Total Real Estate Loans		3,892		653		4,545		314,006		318,551		16

Business Loans:
Commercial and Industrial Loans		207		61		268		55,460		55,728		—
Farm Production and Other Farm Loans		9		—		9		857		866		—

Total Business Loans		216		61		277		56,317		56,594		—

Consumer Loans:
Credit Cards		17		5		22		1,103		1,125		5
Other Consumer Loans		485		43		528		16,535		17,063		43

Total Consumer Loans		502		48		550		17,638		18,188		48


Total Loans	$	4,610	$	762	$	5,372	$	387,961	$	393,333	$	64

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


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

Total Real Estate Loans		4,688		924		5,612		315,048		320,660		179

Business Loans:
Commercial and Industrial Loans		66		186		252		53,509		53,761		—
Farm Production and Other Farm Loans		—		—		—		765		765		—

Total Business Loans		66		186		252		54,274		54,526		—

Consumer Loans:
Credit Cards		7		3		10		1,146		1,156		3
Other Consumer Loans		788		27		815		17,495		18,310		27

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


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

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

Impaired loans (in thousands) as of March 31, 2017, segregated by class, were as follows:


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Allowance
Real Estate:
Land Development and Construction	$	—	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—		14
1-4 Family Mortgages		684		—		684		684		171		211
Commercial Real Estate		5,241		—		5,241		5,241		479		474

Total Real Estate Loans		5,925		—		5,925		5,925		650		699

Business Loans:
Commercial and Industrial Loans		61		—		61		61		61		50
Farm Production and Other Farm Loans		—		—		—		—		—		—

Total Business Loans		61		—		61		61		61		50

Total Loans	$	5,986	$	—	$	5,986	$	5,986	$	711	$	749

Impaired loans (in thousands) as of December 31, 2016, segregated by class, were as follows:


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Allowance
Real Estate:
Land Development and Construction	$	—	$	—	$	—	$	—	$	—	$	43
Farmland		163		—		163		163		28		87
1-4 Family Mortgages		1,448		—		1,448		1,448		252		218
Commercial Real Estate		5,327		—		5,327		5,327		469		1,577

Total Real Estate Loans		6,938		—		6,938		6,938		749		1,925

Business Loans:
Commercial and Industrial Loans		126		—		126		126		38		19
Farm Production and Other Farm Loans		—		—		—		—		—		—

Total Business Loans		126		—		126		126		38		19

Total Loans	$	7,064	$	—	$	7,064	$	7,064	$	787	$	1,944

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


			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
March 31, 2017	Loans		Investment		Investment

Commercial real estate		3	$	4,871	$	3,272


Total		3	$	4,871	$	3,272


			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
December 31, 2016	Loans		Investment		Investment

Commercial real estate		3	$	4,871	$	3,288


Total		3	$	4,871	$	3,288

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


	Number		Recorded
	of Loans		Investment
Totals at January 1, 2017		3	$	3,288
Reductions due to:
Principal paydowns				(16	)


Total at March 31, 2017		3	$	3,272

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

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

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

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

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

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

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

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

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

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at March 31, 2017.

The following table details the amount of gross loans (in thousands), segregated by loan grade and class, as of March 31, 2017:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	26,082	$	333	$	342	$	—	$	—	$	26,757
Farmland		15,780		604		904		—		—		17,288
1-4 Family Mortgages		84,941		2,116		8,983		—		—		96,040
Commercial Real Estate		159,175		11,089		8,202		—		—		178,466

Total Real Estate Loans		285,978		14,142		18,431		—		—		318,551

Business Loans:
Commercial and Industrial Loans		54,004		1,459		204		—		61		55,728
Farm Production and Other Farm Loans		832		25		9		—		—		866

Total Business Loans		54,836		1,484		213		—		61		56,594

Consumer Loans:
Credit Cards		1,120		—		5		—		—		1,125
Other Consumer Loans		16,692		70		300		1		—		17,063

Total Consumer Loans		17,812		70		305		1		—		18,188


Total Loans	$	358,626	$	15,696	$	18,949	$	1	$	61	$	393,333

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


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

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

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

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

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

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

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

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

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017:


	Real			Business
March 31, 2017	Estate			Loans		Consumer			Total
Beginning Balance, January 1, 2017	$	3,117,134		$	257,554	$	528,108		$	3,902,796
Provision for possible loan losses		(282,820	)		175,477		(43,877	)		(151,220	)
Chargeoffs		4,107			67,850		12,046			84,003
Recoveries		12,465			254		21,622			34,341

Net chargeoffs		(8,358	)		67,596		(9,576	)		49,662

Ending Balance	$	2,842,672		$	365,435	$	493,807		$	3,701,914


Period end allowance allocated to:
Loans individually evaluated for impairment	$	649,449		$	61,288	$	—		$	710,737
Loans collectively evaluated for impairment		2,193,223			304,147		493,807			2,991,177

Ending Balance, March 31, 2017	$	2,842,672		$	365,435	$	493,807		$	3,701,914

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016:


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

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

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


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

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

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


	Real		Business
March 31, 2017	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	5,925	$	61	$	—	$	5,986
Loans collectively evaluated for general impairment		312,626		56,533		18,188		387,347

	$	318,551	$	56,594	$	18,188	$	393,333


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

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

Note 8.

Fair Value of Financial Instruments

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


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

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

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

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

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2017:


	Fair Value Measurements Using:
	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	$	—	$	199,552,252	$	—	$	199,552,252
Mortgage-backed securities		—		143,565,587		—		143,565,587
State, county and municipal obligations		—		143,837,423		—		143,837,423
Other investments		—		—		2,985,759		2,985,759

Total	$	—	$	486,955,262	$	2,985,759	$	489,941,021

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


	Fair Value Measurements Using:
	Quoted Prices in Active 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 and municipal obligations		—		144,922,150		—		144,922,150
Other investments		—		—		2,971,106		2,971,106

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

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


	Fair Value Measurements Using:
	Significant Unobservable Inputs
	(Level 3)
	Structured Financial Product
	As of March 31,
	2017			2016
Beginning Balance	$	2,971,106		$	2,915,709

Principal payments received		(4,466	)		(15,190	)
Unrealized gains included in other comprehensive income		19,119			25,668


Ending Balance	$	2,985,759		$	2,926,187

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

The following table presents information as of March 31, 2017 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a recurring basis:


Financial instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs
Trust preferred securities	$	2,985,759	Discounted cash flows	Default rate	0-100%

For assets measured at fair value on a nonrecurring basis during 2017 that were still held on the Corporation’s balance sheet at March 31, 2017, the following table provides the hierarchy level and the fair value of the related assets:


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

Impaired loans	$	—	$	—	$	2,515,509	$	2,515,509
Other real estate owned		—		—		1,413,700		1,413,700


Total	$	—	$	—	$	3,929,209	$	3,929,209

Financial instrument

Fair Value

Valuation Technique

Significant Unobservable

Inputs

Range of
Inputs

Impaired loans

2,515,509

Appraised value of collateral less

estimated costs to sell

Estimated costs to sell

OREO

1,413,700

Appraised value of collateral less

estimated costs to sell

Estimated costs to sell

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


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

Impaired loans	$	—	$	—	$	3,591,516	$	3,591,516
Other real estate owned		—		—		1,893,949		1,893,949


Total	$	—	$	—	$	5,485,465	$	5,485,465

Impaired loans with a carrying value of $5,985,642 and $7,064,185 had an allocated allowance for loan losses of $710,737 and $786,893 at March 31, 2017 and December 31, 2016, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

Real estate acquired through foreclosure or deed in lien, sometimes referred to as other real estate owned (“OREO”) acquired during the three-month period ended March 31, 2017, and recorded at fair value, less costs to sell, was $11,200, of which $0 was acquired and sold during this period. There were no writedowns during the period on properties owned. OREO acquired during 2016 and recorded at fair value, less costs to sell, was $2,187,125. There were $220,419 in additional writedowns during 2016 on OREO acquired in previous years.

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

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at March 31, 2017:


			Fair Value Measurements Using:
March 31, 2017	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	27,706,912	$	27,706,912	$	—	$	—	$	27,706,912
Interest bearing deposits with banks		73,714,719		73,714,719		—		—		73,714,719
Securities available-for-sale		489,941,021		—		486,955,262		2,985,759		489,941,021
Net loans		389,183,439		—		—		389,851,680		389,851,680

Financial liabilities
Deposits	$	789,214,876	$	595,106,483	$	—	$	194,261,809	$	789,368,292
Federal Home Loan Bank advances		20,000,000		—		—		20,214,525		20,214,525
Securities Sold under Agreement to Repurchase		141,098,287		141,098,287		—		—		141,098,287

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


December 31, 2016	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	21,688,557	$	21,688,557	$	—	$	—	$	21,688,557
Interest bearing deposits with banks		48,603,182		48,603,182		—		—		48,603,182
Securities available-for-sale		496,124,574		—		493,153,468		2,971,106		496,124,574
Net loans		390,148,343		—		—		391,106,337		391,106,337

Financial liabilities
Deposits	$	760,152,340	$	563,440,632	$	—	$	196,859,851	$	760,300,483
Federal Home Loan Bank advances		20,000,000		—		—		20,283,999		20,283,999
Securities Sold under Agreement to Repurchase		150,282,913		150,282,913		—		—		150,282,913

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

Cash and Due from Banks and Interest Bearing Deposits with Banks

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

Securities Available-for-Sale

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

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

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

Net Loans

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

Deposits

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

Federal Home Loan Bank (“FHLB”) Borrowings

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

Securities Sold Under Agreement to Repurchase

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

Off-Balance Sheet Instruments

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

Note 9.

Recent Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is intended to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flow; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes. The amendments of ASU 2016-09 are effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact this ASU will have on the Company’s consolidated financial statements.

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

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 amends the accounting model and disclosure requirements for leases. The current accounting model for leases distinguishes between capital leases, which are recognized on-

balance sheet, and operating leases, which are not. Under the new standard, the lease classifications are defined as finance leases, which are similar to capital leases under current GAAP, and operating leases. Further, a lessee will recognize a lease liability and a right-of-use asset for all leases with a term greater than 12 months on its balance sheet regardless of the lease’s classification, which may significantly increase reported assets and liabilities. The accounting model and disclosure requirements for lessors remains substantially unchanged from current GAAP. ASU 2016-02 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Management is currently evaluating the impact ASU 2016-02 will have on the Company’s financial position and results of operations.

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

ITEM 2.

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

FORWARD-LOOKING STATEMENTS

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

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

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

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

OVERVIEW

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

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At March 31, 2017, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1.048 billion and total deposits of $789.2 million

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

LIQUIDITY

The Corporation has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Corporation at March 31, 2017, was 39.23% and at December 31, 2016, was 37.64%. The increase was due to an increase in short term marketable assets at March 31, 2017. Management believes it maintains adequate liquidity for the Corporation’s current needs.

The Corporation’s primary source of liquidity is customer deposits, which were $789,214,876 at March 31, 2017, and $760,152,340 at December 31, 2016. Other sources of liquidity include investment securities, the Corporation’s line of credit with the Federal Home Loan Bank (“FHLB”) and federal funds lines with correspondent banks. The Corporation had $489,941,021 invested in available-for-sale investment securities at March 31, 2017, and $496,124,574 at December 31, 2016. This decrease is due to matured or called funds in the available-for-sale classification not being fully re-invested. The Corporation also had $73,714,719 in interest bearing deposits at other banks at March 31, 2017 and $48,603,182 at December 31, 2016. The increase in interest bearing deposits was the result of long term investments being called or matured. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000,000 at both March 31, 2017 and December 31, 2016. In

addition, the Corporation has the ability to draw on its line of credit with the FHLB. At March 31, 2017, the Corporation had unused and available $94,291,995 of its line of credit with the FHLB and at December 31, 2016, the Corporation had unused and available $123,592,789 of its line of credit with the FHLB. The decrease in the amount available under the Corporation’s line of credit with the FHLB from the end of 2016 to March 31, 2017, was the result of a decrease in the amount of loans eligible for the collateral pool securing the Corporation’s line of credit with the FHLB. The Corporation had no federal funds purchased as of both March 31, 2017 and December 31, 2016. The Corporation may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

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

CAPITAL RESOURCES

Total shareholders’ equity was $88,218,142 at March 31, 2107, as compared to $85,059,395 at December 31, 2016. The increase in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment as well as the increase in the amount of earnings in excess of dividends paid. The market value adjustment, which was an increase was due to general market conditions, specifically the decrease in medium term interest rates, which caused an increase in the market price of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $1,172,899, or $0.24 per share, during the three-month period ended March 31, 2017 compared to $0.24 per share for the same period in 2016.

Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of March 31, 2017, the Corporation meets all capital adequacy requirements to which it is subject and according to these requirements the Corporation is considered to be well capitalized.


	Actual					Minimum Capital Requirement to be Well Capitalized					Minimum Capital Requirement to be Adequately Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017
Citizens Holding Company
Tier 1 leverage ratio	$	93,026		9.34	%	$	49,803		5.00	%	$	39,842		4.00	%
Common Equity tier 1 capital ratio		93,026		9.34	%		64,744		6.50	%		44,823		4.50	%
Tier 1 risk-based capital ratio		93,026		17.88	%		41,633		8.00	%		31,225		6.00	%
Total risk-based capital ratio		96,728		18.59	%		52,041		10.00	%		41,633		8.00	%

December 31, 2016
Citizens Holding Company
Tier 1 leverage ratio	$	92,629		9.22	%	$	50,258		5.00	%	$	40,207		4.00	%
Common Equity tier 1 capital ratio		92,629		9.22	%		65,336		6.50	%		45,232		4.50	%
Tier 1 risk-based capital ratio		92,629		17.92	%		41,354		8.00	%		31,016		6.00	%
Total risk-based capital ratio		96,532		18.67	%		51,693		10.00	%		41,354		8.00	%

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

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

•

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

•

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

•

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

•

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

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

equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.

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

Management believes that, as of March 31, 2017, the Company and the Bank would meet all capital adequacy requirements under Basel III and the banking agencies’ proposals on a fully phased-in basis, if such requirements were currently effective. The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Corporation’s capital ratios as presented. Management will continue to monitor these and any future proposals submitted by the Corporation’s and Bank’s regulators.

RESULTS OF OPERATIONS

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


	For the Three Months
	Ended March 31,
	2017			2016

Interest Income, including fees	$	7,469,077		$	7,579,734
Interest Expense		807,447			769,060


Net Interest Income		6,661,630			6,810,674
Provision for Loan Losses		(151,220	)		60,498


Net Interest Income after
Provision for Loan Losses		6,812,850			6,750,176
Other Income		1,934,260			1,815,688
Other Expense		7,109,156			6,644,315


Income Before Provision For
Income Taxes		1,637,954			1,921,549
Provision for Income Taxes		200,629			395,379


Net Income	$	1,437,325		$	1,526,170


Net Income Per share - Basic	$	0.29		$	0.31


Net Income Per Share-Diluted	$	0.29		$	0.31

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

Annualized return on average equity (“ROE”) was 6.67% for the three months ended March 31, 2017, and 7.69% for the corresponding period in 2016.

Book value per share increased to $18.05 at March 31, 2017, compared to $17.42 at December 31, 2016. The increase in book value per share reflects the amount of earnings in excess of dividends and a decrease in other comprehensive loss due to the increase in fair value of the Corporation’s investment securities. Average assets for the three months ended March 31, 2017, were $999,205,548 compared to $996,266,145 for the year ended December 31, 2016. This increase was due mainly to an increase in interest bearing due from bank accounts offset by a decrease in available-for-sale securities.

NET INTEREST INCOME / NET INTEREST MARGIN

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

The annualized net interest margin was 3.03% for the quarter ended March 31, 2017 compared to 3.12% for the corresponding period of 2016. The decrease in net interest margin for the period ended March 31, 2017, when compared to the same period in 2016, was the result of the decrease in yields on earning assets and a small increase in rates paid on deposits and borrowed funds, as detailed below. Earning assets averaged $918,570,792 for the three months ended March 31, 2017. This represents an increase of $17,581,088, or 2.0%, over average earning assets of $900,989,704 for the three months ended March 31, 2016. The increase in average earning assets for the three months ended March 31, 2017, is the result of an increase in interest bearing due from bank accounts offset by a decrease in loans and investment securities.

Interest bearing deposits averaged $618,886,173 for the three months ended March 31, 2017. This represents an increase of $600,804, or 0.1%, from the average of interest bearing deposits of $618,285,369 for the three months ended March 31, 2016. This was due, in large part, to an increase in interest-bearing NOW, money market accounts and savings accounts partially offset by a decrease in certificates of deposit.

Other borrowed funds averaged $140,424,252 for the three months ended March 31, 2017. This represents an increase of $17,710,173, or 14.4%, over the other borrowed funds of $122,714,079 for the three months ended March 31, 2016. This increase in other borrowed funds was due to a $17,730,133 increase in the securities sold under agreements to repurchase partially offset by a $13,367 decrease in the Agribusiness Enterprise Loan Liability and a $6,593 decrease in Federal Funds Purchased for the three months ended March 31, 2017, when compared to the three months ended March 31, 2016.

Net interest income was $6,661,630 for the three months ended March 31, 2017, a decrease of $202,697 from $6,810,674 for the three months ended March 31, 2016, primarily due to a decrease in interest rates paid on earning assets partially offset by an increase in earning assets. The changes in volume in earning assets and in deposits and in borrowed funds are discussed above. As for changes in interest rates in the three months ended March 31, 2017, the yields on earning assets decreased and the rates paid on deposits and borrowed funds increased from the same period in 2016. The yield on all interest-bearing assets decreased 8 basis points to 3.38% in the three months ended March 31, 2017 from 3.46% for the same period in 2016. At the same time, the rate paid on all interest-bearing liabilities for the three months ended March 31, 2017 increased 2 basis points to 0.43% from 0.41% in the same period in 2016. As longer term interest bearing assets and liabilities mature and reprice, management believes that the yields on interest bearing assets and rates on interest bearing liabilities will both increase.

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


	For the Three Months
	Ended September 30,
	2017			2016
Interest and Fees	$	4,568,079		$	4,784,505
Average Gross Loans		394,251,976			419,804,332
Annualized Yield		4.63	%		4.56	%

The increase in interest rates on loan accounts in the three months ended March 31, 2017, reflects the increase in all loan interest rates for both new and refinanced loans in the period.

CREDIT LOSS EXPERIENCE

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

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

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

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

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


	Quarter Ended			Year Ended			Amount of			Percent of
	March 31,			December 31,			Increase			Increase
	2017			2016			(Decrease)			(Decrease)

BALANCES:
Gross Loans	$	393,333,257		$	394,051,139		$	(717,882	)		-0.18	%
Allowance for Loan Losses		3,701,914			3,902,796			(200,882	)		-5.15	%
Nonaccrual Loans		8,986,666			8,879,393			107,273			1.21	%
Ratios:
Allowance for loan losses to gross loans		0.94	%		0.99	%
Net loans charged off to allowance for loan losses		1.34	%		64.21	%

The provision for loan losses for the three months ended March 31, 2017 was negative $151,220, a decrease of $211,718 from the $60,498 provision for the same period in 2016. The change in the Corporation’s loan loss provisions for the three months ended March 31, 2017 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact caused by current local, national and international economic conditions. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. Nonaccrual loans decreased during this period due to the amount of payments received and loans charged off in excess of new loans being added to the nonaccrual loan list.

For the three months ended March 31, 2017, net loan losses charged to the allowance for loan losses totaled $49,663, a decrease of $1,475,796 from the $1,525,459 charged off in the same period in 2016. The decrease was mainly due to a charge off in 2016 on a single loan in the amount of $1,523,401 on commercial real estate for which the Corporation had previously provided a specific reserve against this loss through the provision for loan loss.

Management reviews quarterly with the Corporation’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three months ended March 31, 2017 that have not been charged off. Management also believes that the Corporation’s allowance will be adequate to absorb probable losses inherent in the Corporation’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended March 31, 2017 was $1,934,260, an increase of $118,572, or 6.5%, from $1,815,688 the same period in 2016. Service charges on deposit accounts were $1,042,031 in the three months ended March 31, 2017, compared to $886,804 for the same period in 2016. Other service charges and fees increased by $30,350, or 5.2%, to $616,772 in the three months ended March 31, 2017, compared to $586,422 for the same period in 2016. Other operating income not derived from service charges or fees decreased $67,005, or 19.6% to $275,457 in the three months ended March 31, 2017, compared to $342,462 for the same period in 2016. This decrease was due mainly to a decrease in mortgage loan origination income from long-term mortgage loans originated for sale to the secondary market and income on bank owned life insurance.

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


	Three months
	Ended March 31,
Other operating income	2017		2016

BOLI Insurance	$	120,000	$	136,000
Mortgage Loan Origination Income		65,140		99,816
Other Income		90,317		106,646


Total Other Income	$	275,457	$	342,462

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended March 31, 2017 and 2016 were $7,109,156 and $6,644,315, respectively, an increase of $464,841 or 7.0%. Salaries and benefits increased to $3,663,804 for the three months ended March 31, 2017, from $3,402,318 for the same period in 2016. Occupancy expense decreased by $18,961, or 1.4%, to $1,310,243 for the three months ended March 31, 2017, compared to $1,329,204 for the same period of 2016. Other operating expenses increased by $222,316 to $2,135,109 for the three months ended March 31, 2017, compared to $1,912,793 for the same period of 2016. A detail of the major expense classifications is set forth below.

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


	Three months
	ended March 31,
Other Operating Expense	2017		2016

Advertising		210,458		252,562
Office Supplies		196,546		157,783
Legal and Audit Fees		137,069		112,897
Telephone expense		153,116		100,715
Postage and Freight		130,934		130,506
Loan Collection Expense		40,639		44,710
Other Losses		157,011		166,729
Regulatory and related expense		119,757		209,321
Debit Card/ATM expense		93,502		88,520
Travel and Convention		70,816		76,521
Other expenses		825,261		572,529


Total Other Expense	$	2,135,109	$	1,912,793

The Corporation’s efficiency ratio for the three months ended March 31, 2017 was 79.49%, compared to 74.89% for the same period in 2016. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.

BALANCE SHEET ANALYSIS


					Amount of			Percent of
	March 31,		December 31,		Increase			Increase
	2017		2016		(Decrease)			(Decrease)

Cash and Due From Banks	$	27,706,912	$	21,688,557	$	6,018,355			27.75	%
Interest Bearing deposits with Other Banks		73,714,719		48,603,182		25,111,537			51.67	%
Investment Securities		489,941,021		496,124,574		(6,183,553	)		-1.25	%
Loans, net		389,183,439		390,148,343		(964,904	)		-0.25	%
Premises and Equipment		19,451,561		18,664,084		787,477			4.22	%
Total Assets		1,048,008,748		1,025,211,907		22,796,841			2.22	%

Total Deposits		789,214,876		760,152,340		29,062,536			3.82	%

Total Shareholders’ Equity		88,218,142		85,059,395		3,158,747			3.71	%

CASH AND CASH EQUIVALENTS

Cash and cash equivalents, which consist of cash, balances at correspondent banks and items in process of collection, balance at March 31, 2017 was $27,706,912, which was an increase of $6,018,355 from the balance of $21,688,557 at December 31, 2016. The increase was due to an increase in the balances at correspondent banks due to an increase in the amount of checks drawn on other banks in the normal process of clearing funds between these banks.

INVESTMENT SECURITIES

The Corporation’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. The Corporation’s investments securities portfolio at March 31, 2017, decreased by $6,183,553, or 1.3%, to $489,941,021 from $496,124,574 at December 31, 2016. This decrease was due to maturities and calls of mortgage backed securities, agency and state county and municipal securities in excess of purchases, partially offset by changes in the market value of the Corporation’s investment securities portfolio.

LOANS

The Corporation’s loan balance decreased by $964,904 during the three months ended March 31, 2017, to $389,183,439 from $390,148,343 at December 31, 2016. Loan demand weakened, especially in business loan and consumer loan categories, and competition for available loans continued to be strong during the three months ended March 31, 2017. No material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the three months ended March 31, 2017, the Corporation’s premises and equipment increased by $787,477, or 4.2%, to $19,451,561 from $18,664,084 at December 31, 2016. The increase was due to costs related to the new branch construction in Biloxi in excess of depreciation expense for the period.

DEPOSITS

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


DEPOSITS					Amount of			Percent of
	March 31,		December 31,		Increase			Increase
	2017		2016		(Decrease)			(Decrease)

Noninterest-Bearing Deposits	$	154,378,785	$	149,512,941	$	4,865,844			3.25	%
Interest-Bearing Deposits		364,334,436		340,180,286		24,154,150			7.10	%
Savings Deposits		76,393,262		73,745,005		2,648,257			3.59	%
Certificates of Deposit		194,108,393		196,714,108		(2,605,715	)		-1.32	%


Total deposits	$	789,214,876	$	760,152,340	$	29,062,536			3.82	%

Interest-bearing and noninterest-bearing deposits and savings increased while certificates of deposit decreased during the three months ended March 31, 2017. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management objectives. These rate adjustments impact deposit balances.

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

Competition Risks

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

Credit Risks

Like all lenders, the Corporation faces the risk that the Corporation’s customers may not repay their loans and that the realizable value of collateral may be insufficient to avoid a loss of principal. In the Corporation’s business, some level of credit loss is unavoidable and overall levels of credit loss can vary over time. The Corporation’s ability to manage credit risk depends primarily upon the Corporation’s ability to assess the creditworthiness of customers and the value of collateral, including real estate. The Corporation controls credit risk by diversifying the Corporation’s loan portfolio and managing its composition, and by recording and managing an allowance for expected loan losses in accordance with applicable accounting rules. At the end of March 31, 2017, the Corporation had approximately $3.7 million of available reserves to cover such losses. The models and approaches the Corporation uses to originate and manage loans are regularly reviewed, if necessary or advisable, updated to take into account changes in the competitive environment, in real estate prices and other collateral values, and in the economy, among other things, based on the Corporation’s experience originating loans and servicing loan portfolios.

Financing, Funding and Liquidity Risks

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

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

Interest Rate and Yield Curve Risks

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

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

Regulatory and Legal Risks

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

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

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

Accounting Estimate Risks

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

Expense Control

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

ITEM 4. CONTROLS AND PROCEDURES.

The management of the Corporation, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Corporation’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of March 31, 2017 (the end of the period covered by this Quarterly Report).

There were no changes to the Corporation’s internal control over financial reporting that occurred in the three months ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

ITEM 1A.

RISK FACTORS.

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

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

ITEM 6.

EXHIBITS.


Exhibits

3(a)		Restated Articles of Incorporation of Citizens Holding Company.

3(b)		Restated Bylaws of Citizens Holding Company.

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

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

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

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

101		Financial Statements submitted in XBRL format.

SIGNATURES

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


CITIZENS HOLDING COMPANY

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

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

DATE: May 10, 2017

EXHIBIT INDEX


Exhibit Number		Description of Exhibit

3(a)		Restated Articles of Incorporation of Citizens Holding Company.

3(b)		Restated Bylaws of Citizens Holding Company.

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

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

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

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

101		Financial Statements submitted in XBRL format.

EXHIBIT 3(a)

RESTATED ARTICLES OF INCORPORATION

CITIZENS HOLDING COMPANY

Pursuant to the Mississippi Code Annotated §79-4-10.07, Citizens Holding Company adopts the following restated Articles of Incorporation which consolidates all prior amendments to the Articles into this one Restated Articles of Incorporation and adopts new amendments in accordance with Mississippi Code annotated §79-4-10.06.

1. The name of the corporation is Citizens Holding Company.

2. The period of its duration is perpetual.

3. The purpose for which the corporation is organized is to engage in any business that is lawful under the laws of the State of Mississippi.

4. The aggregate number of shares the corporation is authorized to issue is 22,500,000 shares of common stock with a par value of $0.20 per share and 5,000,000 shares of preferred stock with no par value. The common stock of the corporation may be issued in such amounts and for such consideration as determined from time to time by the Board of Directors. The holders of common stock shall have unlimited voting rights and, subject to the preferences and rights, if any, of any holders of any other class of stock, holders of common stock shall have the right to receive such dividends as may be declared, from time to time, by the Board of Directors and shall be entitled to receive the net assets of the corporation upon liquidation. The Board of Directors is authorized, subject only to any limitations prescribed by law and the Articles of Incorporation, to provide for the issuance of shares of preferred stock of the corporation in one or more classes or series without any further action of the shareholders of the corporation by filing such Articles of Amendment as may be required by law establishing the number of such shares to be issued and the designation, powers, terms, preferences, rights and limitations thereof. The authority of the Board of Directors with respect to a class or series shall include, but not be limited to, the authority to determine the following:

(i) The number of shares constituting that class or series and the distinctive designation of that class or series;

(ii) The dividend rate on the shares of that class or series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights and priorities, if any, of the right to the payment of dividends on shares of that class or series;

(iii) Whether that class or series shall have voting rights in addition to any voting rights required by law, and, if so, the terms of such voting rights;

(iv) Whether that class or series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate as a consequence of such events as the Board of Directors shall determine;

(v) Whether or not the shares of that class or series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date, dates or events upon or after which they shall be redeemable, and the amount or method of determining the amount payable in case of redemption;

(vi) Whether that class or series shall have a sinking fund for the redemption or purchase of shares of that class or series, and, if so, the terms and amount of such sinking fund;

(vii) The rights of the shares of that class or series in the event of voluntary or involuntary liquidation, dissolution, or winding-up of the corporation, and the relative rights and priorities, if any, of payment of shares of that class or series; and

(viii) Any other relative rights, preferences, and limitations of that class or series.

5. The post office address of the corporation’s registered office is 521 Main Street, P.O. Box 209, Philadelphia, Mississippi 39350, and the name of its registered agent at such address is Greg McKee.

6. The number of directors of the corporation shall be not less than nine (9), nor more than twenty-five (25), and the Board of Directors shall establish by resolution from time to time the number of directors to serve. The corporation shall have three classes of directors, each class to be as nearly equal in number as possible, the term of office of directors of the first class to expire at the first annual meeting of the shareholders after their election, that of the second class to expire at the second annual meeting after their election, and that of the third class to expire at the third annual meeting after their election. At each annual meeting after such initial classification, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office for a term of three (3) years. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. The vote of shareholders required to alter, amend or repeal this Article 6 of the Articles of Incorporation or to alter, amend or repeal any other Article of the Articles of Incorporation in any respect which would or might have the effect, direct or indirect, of modifying, permitting any action inconsistent with, or permitting circumvention of this Article, shall be by the affirmative vote of at least seventy-five percent (75%) of the total voting power of all shares of stock of the corporation entitled to vote in the election of directors, considered for purposes of this Article as one class.

7. No member of the Board of Directors may be removed, with or without cause, except at a meeting called in accordance with the Bylaws expressly for that purpose and except upon a vote in favor of such removal of the holders of seventy-five percent (75%) of the shares then entitled to vote at an election of directors; and in the event that less than the entire Board is to be removed, no one of the directors may be removed if the votes cast against his removal would be sufficient to elect him if then voted at an election of the class of directors of which he is a part. The vote of shareholders required to alter, amend or repeal this Article 7 of the Articles of Incorporation or to alter, amend or repeal any other Article of the Articles of Incorporation in any respect which would or might have the effect, direct or indirect, of modifying, permitting any action inconsistent with, or permitting circumvention of this Article, shall be by the affirmative vote of at least seventy-five percent (75%) of the total voting power of all shares of stock of the corporation entitled to vote in the election of directors, considered for purposes of this Article as one class.

8. Unless the corporation consents in writing to the selection of an alternative forum, any derivative action under Miss. Code. Ann. § 79-4-7.41 or any other internal corporate claim that is based upon a current or former director’s or officer’s violation of a duty shall be brought in the

appropriate court in Neshoba County, Mississippi, consistent with applicable law and jurisdictional requirements. Any person or entity owning, purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this Section.

9. If any person, firm, or corporation, (herein referred to as the Tender Offeror) or any person, firm, or corporation controlling the Tender Offeror, controlled by the Tender Offeror, or under common control with the Tender Offeror, or any group of which the Tender Offeror or any of the foregoing persons, firms, or corporations are members, or any other group controlling the Tender Offeror, controlled by the Tender Offeror, or under common control with the Tender Offeror owns of record, or owns beneficially, directly or indirectly, more than 10% of any class of equity voting security of this Corporation with the Tender Offeror, then any merger or consolidation of this corporation with the Tender Offeror, or any sale, lease, or exchange of substantially all of the assets of this Corporation or of the Tender Offeror to the other may not be effected under the laws of Mississippi unless a meeting of the shareholders of this Corporation is held to vote thereon and the votes of the holders of voting securities of this Company representing not less than 80% of the votes entitled to vote thereon, vote in favor thereof. As used herein, the term group includes persons, firms, and corporations acting in concert, whether or not as a formal group, and the term equity security means any share or similar security; or any security convertible, with or without consideration, into such a security, or carrying any warrant to subscribe to or purchase such a security; or any such warrant or right. The foregoing provision is to require a greater vote of shareholders than is required by Mississippi Code of 1972 Section 79-3-145 (dealing with mergers and consolidations) and Section 79-3-157 (dealing with sales, mortgages, etc. of assets outside the ordinary course of business) and the provisions of this Article NINTH shall not be amended, changed or repealed without a similar 80% vote of the voting securities in this Corporation, which is a greater vote than required by Mississippi Code of 1972 Section 79-3-117 (dealing with amendments to these Articles of Incorporation).

The undersigned hereby certifies that the foregoing Restated Articles of Incorporation of Citizens Holding Company, which contains amendments requiring shareholder approval, was adopted by the Board of Directors at a meeting held on March 8, 2017, and approved by the requisite vote of the shareholders of Citizens Holding Company at a meeting held on April 25, 2017 in the manner required by the Mississippi Business Corporation Act and by the Articles of Incorporation.


CITIZENS HOLDING COMPANY

By:		/s/ Robert T. Smith
		Robert T. Smith

Title:		Treasurer and Chief Financial Officer

EXHIBIT 3(b)

SECOND AMENDED AND RESTATED BYLAWS

CITIZENS HOLDING COMPANY

PHILADELPHIA, MISSISSIPPI

Amended and Restated April 25, 2017

CITIZENS HOLDING COMPANY

PHILADELPHIA, MISSISSIPPI

SECOND AMENDED AND RESTATED BYLAWS

Preamble : These Bylaws are subordinate to and governed by the provisions of (1) the Articles of Incorporation of this corporation; and (2) the Mississippi Business Corporation Act, except to the extent that these Bylaws or the Articles of Incorporation specifically provide to the contrary, to the extent allowed by the Mississippi Business Corporation Act and Mississippi state law.

OFFICES

Principal Office . The principal office shall be at 521 Main Street, Philadelphia, Neshoba County, Mississippi 39350. The corporation may have such other offices as are allowable by the laws of the State of Mississippi and as the Board of Directors may designate or the business of the corporation may require from time to time.

Registered Office . The registered office of the corporation required by the Mississippi Business Corporation Act to be maintained in the State of Mississippi may be, but need not be identical with the principal office in the State of Mississippi, and the address of the registered office may be changed from time to time by the Board of Directors as provided by law.

STOCKHOLDERS

Annual Meeting . The annual meeting of the stockholders for the purpose of electing such number of directors and for the transaction of such other business as may come before the meeting shall be held each year on the date and at the time selected by the Board of Directors and stated in the notice of the meeting.

Special Meetings . Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the President or by a majority of the Board of Directors, and shall be called by the President at the request of the holders of not less than one-tenth of all the outstanding shares of the corporation entitled to vote at the meeting. On failure of the President so to issue such call, same may be made, and notice given as hereinafter prescribed, by those demanding such meeting. Such request shall state the purposes of the proposed meeting. Business transacted at all special meetings shall be confined to the objects stated in the call.

Place of Meeting . The Board of Directors may designate any place, either within or without the State of Mississippi, as the place of meeting for any annual meeting or for any special meeting of the stockholders. If no designation is made, the place of meeting shall be at the principal office of the corporation in Philadelphia, Neshoba County, Mississippi.

Notice of Meeting . Written or printed notice stating the place, day and hour of the meeting, and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the President or the Secretary, or the officer or persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If

mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at his or her address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. In addition, without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice can be given in any manner authorized by the Mississippi Business Corporation Act.

Closing of Transfer Books or Fixing of Record Date . For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, fifty (50) days. If the stock transfer books shall be closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date to be not more than fifty (50) days and in case of a meeting of stockholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of stockholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution is adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section, such determination shall apply to any adjournment thereof.

Presiding Officer and the Secretary . The President or, in his or her absence, an officer designated by the Board of Directors shall preside at all stockholder meetings, and the Secretary shall serve as secretary. Otherwise, a Chairman or Secretary shall be elected by the stockholders present to act in the absence of those officers.

Voting Lists . The officer or agent having charge of the stock transfer books for shares of the corporation shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any stockholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders.

Quorum . A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized

meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, as long as not less than one-third of the shares entitled to vote at the meeting are represented. If a quorum is present, or the above conditions are fulfilled so that business may be transacted, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater number is required by law or the articles of incorporation or elsewhere in these bylaws by specific provision.

Proxies . At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or by his or her duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the corporation before or at the time of meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy.

Voting of Shares . Each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote of a meeting of stockholders.

Voting of Shares by Certain Holders . Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine.

Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name.

Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his or her name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed.

A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred.

The corporation may own shares of its own stock as provided by Mississippi law. If the corporation owns shares of its own stock at any time, those shares shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time.

Voting for Directors. Except as provided in Section 3.11, a nominee for director shall be elected to the Board of Directors at any meeting of stockholders at which a quorum is present if the votes cast for such nominee’s election exceed the votes cast against such nominee’s election; provided, however, that nominees for director shall be elected by a plurality of the votes cast at any meeting of stockholders for which the number of nominees exceeds the number of directors to be elected. If a nominee who is an incumbent director is not elected to the Board of Directors and no successor has been elected at such meeting of stockholders, such nominee shall tender his resignation to the Board of Directors. The Nominating Committee shall make a recommendation to

the Board of Directors on whether to accept or reject the resignation, or whether to take other action. The director who tenders his resignation shall not participate in the recommendation of the Nominating Committee or the decision of the Board of Directors with respect to such director’s resignation.

Action by Stockholders Without a Meeting . Any action required to be taken at a meeting of the stockholders of the corporation, or any action which may be taken at a meeting of the stockholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the stockholders entitled to vote with respect to the subject matter thereof.

Stockholder Proposals or Nominations . Except as otherwise provided herein or by action of the Board of Directors, stockholder proposals for any action at a stockholder meeting or nomination for election to the Board of Directors may be made by any stockholder entitled to vote at the meeting when the proposal is to be acted upon, or election to be held. Proposals and nominations, other than those made by or on behalf of the existing management of the corporation, shall be made in writing and shall be delivered or mailed to the President of the corporation not less than fourteen (14) days nor more than fifty (50) days prior to the meeting when the proposal is to be acted upon, or election to be held, provided however, that if less than twenty-one (21) days’ notice of the meeting is given to stockholders, such proposal or nomination shall be mailed or delivered to the President of the corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Proposals and nominations not made in accordance herewith may, in his or her discretion, be disregarded by the chairman of the meeting, and upon his or her instructions, the vote tellers may disregard all votes cast for each such proposal or nominee.

BOARD OF DIRECTORS

General Powers . The business and affairs of the corporation shall be managed and administered by its Board of Directors. Except as limited by law, all corporate powers shall be vested in and exercised by the Board.

Number and Tenure . Subject to the requirements of the Articles of Incorporation, the Board of Directors may from time to time determine the number of directors by Board resolution. No decrease in the number of directors shall shorten the term of any incumbent director.

Regular Meetings . A regular meeting of the Board of Directors shall be held without other notice than this bylaw, immediately after or conjointly with, and at the same place as, the annual meeting of stockholders. The Board of Directors shall provide, by resolution, the time and place, either within or without the State of Mississippi, for the holding of additional meetings without other notice than such resolution.

Special Meetings . Special meetings of the Board of Directors may be called by or at the request of the President, Chairman of the Board of Directors or by a majority of the Board of Directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Mississippi, as the place for holding any special meeting of the Board of Directors called by them.

Action by Directors Without a Meeting . Any action required to be taken at a meeting of the Board of Directors of the corporation, or any action which may be taken at a meeting of the directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof.

Notice . Notice of any special meeting shall be given by written notice delivered personally or mailed to each director at his or her business address, or by electronic transmission. If notice is by personal delivery, the delivery shall be at least two (2) days prior to the special meeting. If notice is given by mail, such notice shall be deposited in the United States mail and addressed to each director at his or her business address with postage thereon prepaid at least five (5) days prior to any special meeting. If notice is given by electronic transmission, such notice shall be made at least two (2) days prior to any special meeting. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.

Quorum . A majority of the number of directors elected and serving within the limits fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at the meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.

Organization . The Board of Directors shall elect one of its members Chairman, who shall preside at all meetings of the Board. By resolution, the Board of Directors shall designate from among its members other committees, each of which shall have all the authority of the Board of Directors except as limited in such resolution or bylaw, and except as provided by law. All such committees shall keep regular minutes of their meetings and shall report their actions to the Board of Directors at its next meeting.

Manner of Acting . The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

Vacancies . Any vacancies in the Board of Directors, whether caused by resignation, removal, death, increase in the number of directors or otherwise, may be filled through appointment by a majority of the remaining directors then in office; provided, however, should a vacancy cause the number of directors to be less than the number required for a quorum, then the majority of the remaining directors then in office shall appoint at least the number of directors necessary to constitute a quorum. A director thus appointed to fill any vacancy shall hold office until the next annual meeting of the stockholders or until his successor is elected and qualified.

Compensation . By resolution of the Board of Directors, the directors may be paid for the expense, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. However, no such payment shall preclude any director from serving the corporation as an officer or in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending meetings.

Presumption of Assent . A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless he or she or she shall file his or her written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the corporation within twenty-four (24) hours after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

Action by Simultaneous Communication . The Board of Directors may permit any or all directors to participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating by this means is deemed to be present in person at the meeting.

OFFICERS

Generally . The officers of the corporation shall consist of a President, a Vice President, a Secretary and a Treasurer. Officers shall be elected by the Board of directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold his or her office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any one or more offices may be held by the same person, except the offices of President and Secretary. Officers do not have to be stockholders.

President . The Board of Directors shall appoint a President of the corporation to serve at the pleasure of the Board. The President shall supervise the carrying out of the policies adopted or approved by the Board and shall be the Chief Executive Officer of the corporation. He or she shall have general executive powers, as well as the specific powers conferred by these Bylaws. He or she shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him or her by the Board of Directors. A Vice President shall be designated by the Board of Directors, in the absence of the President, to perform all the duties of the President.

Vice Presidents . The Board of Directors may appoint one or more Vice Presidents and shall have the authority to designate different classes of Vice Presidents, including Executive Vice Presidents, Senior Vice Presidents, Assistant Vice Presidents, and such other classes as from time to time may appear to the Board of Directors to be required or desirable to transact the business of the corporation. Each Vice President shall have such powers and duties as may be assigned to him or her by the Board of Directors.

Secretary . The Board of Directors shall appoint a Secretary, who shall: (a) keep the minutes of the stockholders and of the Board of Directors meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws and as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents, the execution of which on behalf of the corporation under its seal is duly authorized; (d) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by each stockholder; (e) sign with the President or other designated officer stock certificates of the corporation, the issuance of which shall

have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the corporation; and (g) in general perform all duties incident to the office of Secretary and such other duties as may from time to time be assigned to him or her by the President or by the Board of Directors.

Other Officers . The Board of Directors may appoint one or more such other officers as from time to time may appear to the Board of Directors to be required or desirable to transact the business of the Association. Such officers shall respectively exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon, or assigned to, them by the Board of Directors or the President.

Removal . Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed, and the election of another person to an office shall automatically remove the incumbent from such office.

Vacancies . The Board of Directors shall have authority to fill any vacancy occurring in the offices of the corporation or any office to be created by election at any regular meeting of the Board of Directors or at a special meeting of the Board of Directors called for that purpose. An officer elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office.

Salaries . The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving a salary merely by reason of the fact that he or she is also a director or employee of the corporation. The President and Secretary may fix the salaries of the employees who are not officers, subject to the approval of the Board of Directors.

STOCK CERTIFICATES AND THEIR TRANSFER

Certificates for Shares . The shares of the corporation may be certificated or uncertificated. If the shares are certificated, the certificates shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary and shall be attested by the corporate seal. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, and the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled, and no new certificates shall be issued until the former certificates for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. No stock certificates will be issued for fractional shares of stock, and no dividend payment will be made for fractional shares of stock.

Transfer of Shares . The corporation, or its designated transfer agent or other agent, shall keep a book or set a books to be known as the stock transfer books of the corporation. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority duly executed and filed with the Secretary of the corporation, and on surrender for cancellation of

the certificate for such shares. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, save as may be expressly provided by the laws of Mississippi.

INDEMNIFICATION

General Provision . Subject to the provisions of Section 4 of this Article, the corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, including appeals (other than an action by or in the right of the corporation), by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

Suits by Corporation . Subject to the provisions of Section 4 of this Article, the corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed claim, action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonable incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper.

Successful Defense . To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 or 2 of this Article, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection therewith, notwithstanding that he or she has not been successful on any other claim, issue or matter in any such action, suit or proceeding.

Authorization of Indemnification . Any indemnification under Section 1 or 2 of this Article shall (unless ordered by a court) by made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 1 and 2, as the case may be. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to, or who have been wholly successful on the merits or otherwise with respect to, such claim, action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders.

Advance Payments . Expenses (including attorneys’ fees) incurred in defending a civil or criminal claim, action, suit or proceeding may be paid by the corporation in advance of the final disposition of such claim, action, suit or proceeding as authorized in the manner provided in Section 4 of this Article upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if and to the extent it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation as authorized in this Section.

Exclusivity . The indemnification provided by this Section shall not be deemed exclusive of, and shall be in addition to, any other rights to which those indemnified may be entitled under any statute, rule of law, provision in the corporation’s certificate of incorporation, bylaw, agreement, vote of members or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

Insurance . The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, employee or agent of another corporation, partnership, joint venture trust or other enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her statute as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of this Section.

Partial Enforcement . The invalidity or unenforceability of any provision hereof shall not in any way affect the remaining provisions hereof, which shall continue in full force and effect.

CONTRACTS, LOANS, CHECKS, DEPOSITS AND INVESTMENTS

Contracts . The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

Loans . No loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. Loans may be made by the corporation to its officers or directors subject to the guidelines imposed by law.

Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

Deposits . All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board of Directors may select.

CONFIRMATION AND RATIFICATION OF CONTRACTS

Conflicts of Interest . In the absence of fraud, no contract or other transaction of the corporation shall be affected or invalidated in any way by the fact that any of the directors of the corporation are in any wise interested in or connected with any other party to such contract or transaction or are themselves parties to such contract or transaction, provided that such interest shall be fully disclosed or otherwise known to the Board of Directors at its meeting at which such contract or transaction is authorized or confirmed, and provided further that at the meeting of the Board of Directors authorizing or confirming such contract or transaction, there shall be present a quorum of directors not so interested or connected and such contract or transaction shall be approved by a majority of such quorum, which majority shall consist of directors not so interested or connected. Any such contract, transaction or act of the corporation or of the Board of Directors or of any committee thereof which shall be ratified by a majority of the stockholders of the corporation, voting either in person or by proxy, at any annual meeting, or at any special meeting called for such purpose, shall be as valid and as binding as though ratified by every stockholder of the corporation. Any director of the corporation may vote upon any contract or other transaction between the corporation and any subsidiary or affiliated corporation without regard to the fact that he or she is also a director of such subsidiary or affiliated corporation.

Ratification by Stockholders . Any contract, transaction, or act of the corporation or of the Board of Directors or any committee thereof which shall be ratified by a majority of the stockholders of the corporation, voting either in person or by proxy at any annual meeting, or at any special meeting called for such purpose, shall be as valid and binding as though ratified by every stockholder of the corporation; provided, however, that any failure of the stockholders to approve or ratify such contract, transaction, or act, when and if submitted, shall not be deemed in any way to invalidate the same or to deprive the corporation, its officers or directors of their right to proceed with such contract, transaction or action.

YEAR

The corporation tax and accounting year shall be a fiscal year ending December 31 of each year.

DIVIDENDS

The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares, payable in cash, other assets or by the way of stock dividends. No dividends will be made for fractional shares of stock.

SEAL

The Board of Directors may provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation, state of incorporation and the words “Corporate Seal.”

WAIVER OF NOTICE

Whenever any notice is required to be given to any stockholder or director of the corporation under the provisions of these Bylaws or under the provisions of the articles of incorporation or under the provisions of the laws of the State of Mississippi, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.

BYLAWS

Inspection . A copy of the Bylaws, with all amendments thereto, shall at all times be kept in a convenient place at the principal office of the corporation and shall be open for inspection to all stockholders during regular business hours.

Amendments . These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by a two-thirds (2/3s) vote of the directors then holding office at any regular or special meeting of the Board of Directors.

FORUM FOR ADJUDICATION OF DISPUTES

Forum for Adjudication of Disputes . Unless the corporation consents in writing to the selection of an alternative forum, any derivative action under Miss. Code. Ann. § 79-4-7.41 or any other internal corporate claim that is based upon a current or former director’s or officer’s violation of a duty shall be brought in the appropriate court in Neshoba County, Mississippi, consistent with applicable law and jurisdictional requirements. Any person or entity owning, purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this Section.

EXHIBIT 31(a)

Certification of Chief Executive Officer

Pursuant to Rule 13a-14(a)/15d-14(a)

I, Greg L. McKee, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Citizens Holding Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2017

/s/ Greg L. McKee

Greg L. McKee

President and Chief Executive Officer

EXHIBIT 31(b)

Certification of Chief Financial Officer

Pursuant to Rule 13a-14(a)/15d-14(a)

I, Robert T. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Citizens Holding Company;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2017

/s/ Robert T. Smith

Robert T. Smith

Treasurer and Chief Financial Officer

EXHIBIT 32(a)

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350

In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, of Citizens Holding Company (the “Company”), as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Greg L. McKee, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: May 10, 2017				/s/ Greg L. McKee
				Greg L. McKee
				President and Chief Executive Officer

EXHIBIT 32(b)

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. § 1350

In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, of Citizens Holding Company (the “Company”), as filed with the Securities Exchange Commission on the date hereof (the “Report”), I, Robert T. Smith, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: May 10, 2017				/s/ Robert T. Smith
				Robert T. Smith
				Treasurer and Chief Financial Officer