CITIZENS HOLDING CO /MS/ - Quarter Report: 2020 September (Form 10-Q)

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation during the preceding 12 months (or such shorter period that the registrant was required to submit such files).  ☑  Yes    ☐  No

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

For further information and significant accounting policies of the Corporation, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Company’s Annual Report on Form for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

The outbreak of has adversely impacted a broad range of industries in which the Corporation’s customers operate and could impair their ability to fulfill their financial obligations to the Corporation. The World Health Organization has declared to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Corporation operates. While there has been no material impact to the Corporation’s employees to date, could also potentially create widespread business continuity issues for the Corporation.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as an over $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Corporation’s operations.

The Corporation’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain escalates further or is unsuccessful, the Corporation could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of and resulting measures to curtail its spread, will have on the Corporation’s operations, the Corporation is disclosing potentially material items of which it is aware.

The Corporation’s fee income has been, and could continue to be, reduced due to keeping with guidance from regulators, the Corporation is actively working with affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected related economic crisis. At this time, the Corporation is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.

The Corporation’s interest income could be reduced due to keeping with guidance from regulators, the Corporation is actively working with affected borrowers to defer their payments and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Corporation is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

While the Corporation believes that it has sufficient capital to withstand an extended economic recession brought about by its reported and regulatory capital ratios could be adversely impacted by further credit losses and loss of fee income.

Currently, the Corporation does not expect to affect its ability to account timely for the assets on its consolidated statements of financial condition; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Corporation does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

could cause a decline in the Corporation’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Corporation concludes that all or a portion of its goodwill is impaired, a charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

The Corporation has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy, among other measures. The Corporation does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Corporation does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Corporation has taken to prevent the spread of Corporation does not currently face any material resource constraint through the implementation of its business continuity plans.

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Corporation has been executing a payment deferral program for its commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Corporation is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days. As the original deferment period for many borrowers starts to expire, the Corporation is offering an interest-only payment program for up to an additional six months on a basis. As of October 15, 2020, the Corporation had 16 loans in the deferral program with a total balance of $33,601. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Corporation is actively participating in assisting its customers with applications for resources through the program. PPP loans have a term and earn interest at 1%. The Corporation believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The Corporation closed 590 SBA PPP loans representing $48,830 in funding. It is the Corporation’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Corporation could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

The Corporation is working with customers directly affected by Corporation is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the virus, the Corporation is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Corporation could experience further increases in its allowance for loan losses and record additional credit loss expense. It is possible that the Corporation’s asset quality measures could worsen at future measurement periods if the effects of are prolonged.

In January 2017, the FASB issued ASU ” (“ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation’s financial statements.

ASU “” (“ASU removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU is effective for annual and interim periods beginning after December 15, 2019. ASU was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation’s financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification “,” (“ASC a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal

reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Corporation’s financial statements; however, this impact cannot be quantified at this time.

In June 2016, the FASB issued ASU “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU ASU makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU for certain companies. The new effective date for the Corporation is January 1, 2023. ASU permits the use of estimation techniques that are practical and relevant to the Corporation’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Corporation currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Corporation expects ASU to have a significant impact on the Corporation’s accounting policies, internal controls over financial reporting and footnote disclosures. The Corporation has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation of said models is required to determine the impact that adoption of this standard will have on the financial condition and results of operations of the Corporation.

For further information regarding the merger with Charter, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Company’s Annual Report on Form for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

During 2020, the Company’s directors received restricted stock grants totaling 8,250 shares of common stock under the 2013 Plan. These grants vest over a period ending April 29, 2021 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $169 and will be expensed ratably over the vesting period.

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

		September 30, 2020								December 31, 2019
		Amortized				Estimated				Amortized				Estimated
		Cost				Fair Value				Cost				Fair Value
Available-for-sale
Due in one year or less		$	500			$	509			$	345			$	345
Due after one year through five years			3,230				3,314				89,920				89,681
Due after five years through ten years			17,644				18,381				18,678				18,808
Due after ten years			51,227				53,202				48,181				48,649
Residential mortgage backed securities			474,568				473,950				259,309				258,415
Commercial mortgage backed securities			31,502				33,342				49,001				48,485
Total		$	578,671			$	582,698			$	465,434			$	464,383

A summary of unrealized loss information for securities categorized by security type follows:

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 since purchase, mainly in the sector. Additionally, with mortgage rates at historical lows, all of the mortgage backed securities above are prepaying faster than expected at September 30, 2020, therefore causing the book yields to decrease and market yields to lower along with them. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Corporation does not intend to sell any securities in an unrealized loss position that it holds and it is not more likely than not that the Corporation will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. Furthermore, even though a number of these securities have been in a continuous unrealized loss position for greater than twelve months, the Corporation is collecting principal and interest payments as scheduled. The Corporation has determined that none of the securities in this classification were other-than-temporarily impaired at September 30, 2020 nor at December 31, 2019.

 

15

 

non-accrual

non-accrual

loans, segregated by , were as :

Loans are considered impaired when, based on current information and events, it is probable that 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 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 when deemed uncollectible.