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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

☐	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)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.20 par value	CIZN	NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

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 large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange Act.

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 August 5, 2020:


Title	Outstanding
Common Stock, $0.20 par value		5,586,381

Table of Contents

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS


PART I.		FINANCIAL INFORMATION	1

	Item 1.	Consolidated Financial Statements	1

		Consolidated Statements of Financial Condition, as of June 30, 2020 (Unaudited) and December 31, 2019 (Audited)	1

		Consolidated Statements of Income for the Three and six months ended June 30, 2020 (Unaudited) and 2019 (Unaudited)	2

		Consolidated Statements of Comprehensive Income for the Three and six months ended June 30, 2020 (Unaudited) and 2019 (Unaudited)	3

		Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2020 (Unaudited) and 2019 (Unaudited)	4

		Notes to Consolidated Financial Statements (Unaudited)	5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

	Item 4.	Controls and Procedures	58

PART II.		OTHER INFORMATION	59

	Item 1.	Legal Proceedings	59

	Item 1A.	Risk Factors	59

	Item 6.	Exhibits	61

SIGNATURES			62

Table of Contents

PART I.

FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)


	June 30,		December 31,
	2020		2019
	(Unaudited)		(Audited)
ASSETS
Cash and due from banks	$	20,003	$	15,937
Interest bearing deposits with other banks		41,184		58,557
Federal funds sold		—		1,600
Investment securities available for sale, at fair value		627,719		464,383
Loans, net of allowance for loan losses of $4,257 in 2020 and $3,755 in 2019		631,940		573,312
Premises and equipment, net		24,286		24,672
Other real estate owned, net		4,358		3,552
Accrued interest receivable		5,913		4,181
Cash surrender value of life insurance		25,375		25,088
Deferred tax assets, net		1,328		3,684
Other assets		20,118		20,468

TOTAL ASSETS	$	1,402,224	$	1,195,434

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand	$	254,214	$	190,406
Interest-bearing NOW and money market accounts		501,327		369,354
Savings deposits		96,165		83,065
Certificates of deposit		223,642		256,171

Total deposits		1,075,348		898,996
Securities sold under agreement to repurchase		193,780		170,410
Accrued interest payable		699		1,128
Deferred compensation payable		9,505		9,453
Other liabilities		3,523		2,647

Total liabilities		1,282,855		1,082,634
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, 5,586,381 shares issued and outstanding at June 30, 2020 and 5,578,131 at December 31, 2019		1,118		1,116
Additional paid-in capital		18,049		17,883
Retained earnings		94,531		94,590
Accumulated other comprehensive income (loss), net of tax (expense) benefit of ($1,885) at March 31, 2020 and $262 at December 31, 2019		5,671		(789	)

Total shareholders’ equity		119,369		112,800

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,402,224	$	1,195,434

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

Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2020		2019		2020		2019
INTEREST INCOME
Interest and fees on loans	$	7,632	$	5,830	$	15,112	$	11,280
Interest on securities
Taxable		2,100		2,226		3,757		4,308
Nontaxable		364		513		704		1,130
Other interest		31		82		263		316

Total interest income		10,127		8,651		19,836		17,034
INTEREST EXPENSE
Deposits		1,612		1,917		3,581		3,645
Other borrowed funds		165		528		520		973

Total interest expense		1,777		2,445		4,101		4,618

NET INTEREST INCOME		8,350		6,206		15,735		12,416
PROVISION FOR LOAN LOSSES		622		265		936		460

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,728		5,941		14,799		11,956
OTHER INCOME
Service charges on deposit accounts		668		1,046		1,717		2,143
Other service charges and fees		871		770		1,644		1,453
Other operating income		931		257		1,490		523

Total other income		2,470		2,073		4,851		4,119

OTHER EXPENSES
Salaries and employee benefits		4,307		3,470		8,742		7,016
Occupancy expense		2,036		1,410		3,695		2,832
Other expense		2,001		1,443		3,974		3,114

Total other expenses		8,344		6,323		16,411		12,962

INCOME BEFORE PROVISION FOR INCOME TAXES		1,854		1,691		3,239		3,113
PROVISION FOR INCOME TAXES		392		320		617		515

NET INCOME	$	1,462	$	1,371	$	2,622	$	2,598

NET INCOME PER SHARE -Basic	$	0.26	$	0.28	$	0.47	$	0.53

-Diluted	$	0.26	$	0.28	$	0.47	$	0.53

DIVIDENDS PAID PER SHARE	$	0.24	$	0.24	$	0.48	$	0.48

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

Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2020			2019			2020			2019
Net income	$	1,462		$	1,371		$	2,622		$	2,598
Other comprehensive income
Securities available-for-sale
Unrealized holding gains		285			7,149			8,197			15,972
Income tax effect		(71	)		(1,784	)		(2,045	)		(3,985	)

		214			5,365			6,152			11,987
Reclassification adjustment for gains (losses) included in net income		333			(54	)		410			(54	)
Income tax effect		(83	)		14			(102	)		13

		250			(40	)		308			(41	)

Total other comprehensive income		464			5,325			6,460			11,946

Comprehensive income	$	1,926		$	6,696		$	9,082		$	14,544

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

Table of Contents

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	For the Six Months
	Ended June 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	5,871		$	5,294
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		135,188			23,345
Proceeds from sale of investment securities		71,168			60,111
Purchases of investment securities available for sale		(363,823	)		(108,815	)
Purchases of bank premises and equipment		(163	)		(879	)
Proceeds from sales of bank premises and equipment		124			—
Decrease in federal funds sold		1,600			—
Increase in interest bearing deposits with other banks		17,373			6,886
Proceeds from sale of other real estate		392			170
Net increase in loans		(60,792	)		(36,592	)

Net cash used in investing activities		(198,933	)		(55,774	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		176,353			38,637
Increase in securities sold under agreement to repurchase		23,370			11,362
Increase in federal funds purchased		—			12,000
Proceeds from exercise of stock options		86			—
Payment of dividends		(2,681	)		(2,356	)

Net cash provided by financing activities		197,128			59,643

Net increase in cash and due from banks		4,066			9,163
Cash and due from banks, beginning of period		15,937			12,592

Cash and due from banks, end of period	$	20,003		$	21,755

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

Table of Contents

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, 2020

(Unaudited)

Note 1. Summary of Significant Accounting Policies

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 June 30, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

The interim consolidated financial statements of Citizens Holding Company (the “Company”) include the accounts of its wholly owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with the Company, the “Corporation”). In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. 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, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

Nature of Business

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

Estimates

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

Table of Contents

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

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

Risks and Uncertainties

(in thousands, except for number of loans)

The outbreak of

COVID-19

has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared

COVID-19

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 Company operates. While there has been no material impact to the Company’s employees to date,

COVID-19

could also potentially create widespread business continuity issues for the Company.

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

COVID-19,

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 Company’s operations.

The Company’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

COVID-19

escalates further or is unsuccessful, the Company 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

COVID-19,

and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Table of Contents

Financial position and results of operations

The Company’s fee income has been, and could continue to be, reduced due to

COVID-19. In

keeping with guidance from regulators, the Company is actively working with

COVID-19

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

COVID-19

related economic crisis. At this time, the Company 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 Company’s interest income could be reduced due to

COVID-19. In

keeping with guidance from regulators, the Company is actively working with

COVID-19

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 Company 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.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by

COVID-19,

its reported and regulatory capital ratios could be adversely impacted by further credit losses and loss of fee income.

The Company maintains access to multiple sources of liquidity. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.

Asset valuation

Currently, the Company does not expect

COVID-19

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 Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19

could cause a decline in the Company’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 Company concludes that all or a portion of its goodwill is impaired, a

non-cash

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.

Table of Contents

Processes, controls and business continuity plan

The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy, among other measures. The Company 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 Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of

COVID-19. The

Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company 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 Company 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 Company is offering an interest-only payment program for up to an additional six months on a

loan-by-loan

basis. As of July 24, 2020, the Company has executed 311 deferrals on outstanding loan balances of $226,855. 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 Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a

two-year

term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of July 24, 2020, the Company has closed 588 SBA PPP loans representing $48,821 in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Further, in sensitivity and service to its communities during this unprecedented time, the Company is waiving certain late payments and service charges and has temporarily suspended collection efforts on past due loans.

Table of Contents

Credit

The Company is working with customers directly affected by

COVID-19. The

Company is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the

COVID-19

virus, the Company 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 Company could experience further increases in its allowance for loan losses and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of

COVID-19

are prolonged.

Adoption of New Accounting Standards

In January 2017, the FASB issued ASU

2017-04, “

Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment

” (“ASU

2017-04”). ASU

2017-04

simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous

two-step

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

2017-04

was effective for the Company on January 1, 2020 and did not have a material impact on the Company’s financial statements.

ASU

2019-13

“

Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement

” (“ASU

2019-13”)

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

2019-13

is effective for annual and interim periods beginning after December 15, 2019. ASU

2019-13

was effective for the Company on January 1, 2020 and did not have a material impact on the Company’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

COVID-19.

The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification

310-40,

“

Receivables – Troubled Debt Restructurings by Creditors

,” (“ASC

310-40”),

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

COVID-19

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

Table of Contents

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 Company’s financial statements; however, this impact cannot be quantified at this time. See Note 8 of the condensed footnotes to the consolidated financial statements for disclosure of the impact to date.

Newly Issued, But Not Yet Effective Accounting Standards

In June 2016, the FASB issued ASU

2016-13,

“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU

2016-13”).

ASU

2016-13

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

2016-13

amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU

2016-13

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

2016-13

for certain companies. The new effective date for the Company is January 1, 2023. ASU

2016-13

permits the use of estimation techniques that are practical and relevant to the Company’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 Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU

2016-13

to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company 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 Company.

Table of Contents

Note 2. Mergers and Acquisitions

(in thousands, except share data)

Merger with Charter Bank

Effective October 1, 2019, the Company completed its acquisition by merger of Charter Bank (“Charter”), in a transaction valued at approximately $19.7 million. The Company issued 666,101 shares of common stock and paid approximately $6.1 million in cash to Charter shareholders, excluding cash paid for fractional shares. At closing, Charter merged with and into the Bank, with the Bank being the surviving corporation in the merger. Operations of Charter are included in the consolidated financial statements of the Corporation for periods subsequent to the acquisition date.

For further information regarding the merger with Charter, 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, 2019, filed with the Securities and Exchange Commission on March 13, 2020.

Note 3. Commitments and Contingent Liabilities

(in thousands)

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 June 30, 2020, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $88,744 compared to an aggregate unused balance of $94,009 at December 31, 2019. There were $4,565 of letters of credit outstanding at June 30, 2020 and $2,436 at December 31, 2019. 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 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.

Table of Contents

Note 4. Net Income per Share

(in thousands, except share and per share data)

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 and restricted stock using the treasury stock method. Net income per share was computed as follows:


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2020		2019		2020		2019
Basic weighted average shares outstanding		5,580,340		4,897,970		5,573,515		4,895,265
Dilutive effect of granted options		3,449		2,921		2,824		2,697

Diluted weighted average shares outstanding		5,583,789		4,900,891		5,576,339		4,897,962

Net income	$	1,462	$	1,371	$	2,622	$	2,598
Net income per share-basic	$	0.26	$	0.28	$	0.47	$	0.53
Net income per share-diluted	$	0.26	$	0.28	$	0.47	$	0.53

Note 5. Equity Compensation Plans

(in thousands, except per share data)

The Corporation has adopted the 2013 Incentive Compensation Plan (the “2013 Plan”), which the Corporation intends to use for 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 issued awards to directors from the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”), which has expired.

Table of Contents

The following table is a summary of the stock option activity for the six months ended June 30, 2020:


	Directors’ Plan					2013 Plan
	Number of Shares			Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2019		40,500		$	21.49		—	$	—
Granted		—			—		—		—
Exercised		(4,500	)		19.18		—		—
Expired		(13,500	)		25.72		—		—

Outstanding at June 30, 2020		22,500		$	19.41		—	$	—

The intrinsic value of options outstanding under the Directors’ Plan at June 30, 2020, was $125,280. No options were outstanding under the 2013 Plan as of June 30, 2020.

During 2020, the Corporation’s directors received restricted stock grants totaling 8,250 shares of common stock under the 2013 Plan. These grants vest over a

one-year

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

one-year

vesting period.

During 2015, 7,500 shares of restricted stock were granted to the Chief Executive Officer (CEO) that would vest according to a stock performance schedule over the next five years. The stock performance for the Company met the goal for 2016 and the CEO became vested in 20%, or 1,500 shares of the restricted stock at an expense of $32. Again in 2017, the Company met 20% of its goal and the CEO became vested in an additional 1,500 shares of the restricted stock at an expense of $37. The stock performance for the Company did not meet the goal in 2020, 2019 or 2018 and no corresponding expense was recorded. Additionally, the remaining 4,500 shares of restricted stock were forfeited as of June 22, 2020, the expiration of the five-year vesting period.

Note 6. Income Taxes

(in thousands)

For the three months ended June 30, 2020 and 2019, the Company recorded a provision for income taxes totaling $392 and $320, respectively. The effective tax rate was 21.1% and 18.9% for the three months ending June 30, 2020 and 2019, respectively.

For the six months ended June 30, 2020 and 2019, the Company recorded a provision for income taxes totaling $617 and $515, respectively. The effective tax rate was 19.0% and 16.5% for the six months ending June 30, 2020 and 2019, respectively.

The provision for income taxes includes both federal and state income taxes and differs from the statutory rate due to favorable permanent differences primarily related to tax free municipal investments.

Table of Contents

Note 7. Securities

(in thousands)

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:


June 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	7,605	$	202	$	—	$	7,807
Mortgage backed securities		546,348		6,734		1,695		551,387
State, County, Municipals		65,711		2,325		21		68,015
Other Securities		500		10		—		510

Total	$	620,164	$	9,271	$	1,716	$	627,719


December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	97,400	$	—	$	289	$	97,111
Mortgage backed securities		308,310		640		2,050		306,900
State, County, Municipals		59,724		708		60		60,372

Total	$	465,434	$	1,348	$	2,399	$	464,383

At June 30, 2020 and December 31, 2019, securities with a carrying value of $559,885 and $413,275, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2020 and December 31, 2019 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

Table of Contents


	June 30, 2020				December 31, 2019
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Available-for-sale
Due in one year or less	$	845	$	855	$	345	$	345
Due after one year through five years		1,349		1,384		89,920		89,681
Due after five years through ten years		18,862		19,569		18,678		18,808
Due after ten years		52,760		54,524		48,181		48,649
Residential mortgage backed securities		508,477		512,365		259,309		258,415
Commercial mortgage backed securities		37,871		39,022		49,001		48,485

Total	$	620,164	$	627,719	$	465,434	$	464,383

The tables below show the Corporation’s gross unrealized losses and fair value of

available-for-sale

investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, 2020 and December 31, 2019.

A summary of unrealized loss information for securities

available-for-sale,

categorized by security type follows:


June 30, 2020	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	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage backed securities		204,746		1,695		—		—		204,746		1,695
State, County, Municipal		3,363		21		—		—		3,363		21

Total	$	208,109	$	1,716	$	—	$	—	$	208,109	$	1,716


December 31, 2019	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	$	76,682	$	217	$	20,429	$	72	$	97,111	$	289
Mortgage backed securities		101,730		871		76,630		1,179		178,360		2,050
State, County, Municipal		8,280		37		3,731		23		12,011		60

Total	$	186,692	$	1,125	$	100,790	$	1,274	$	287,482	$	2,399

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

mid-term

sector. 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 June 30, 2020 nor at December 31, 2019.

Table of Contents

Note 8. Non Purchased Loans

(in thousands, except number of loans)

“Purchased” loans are those acquired in any of the Company’s previous acquisitions. “Non Purchased” loans include all of the Company’s other loans. For purposes of Note 8, all references to “loans” mean non purchased loans.

Table of Contents

The composition of net loans at June 30, 2020 and December 31, 2019 was as follows:


	June 30, 2020			December 31, 2019
Real Estate:
Land Development and Construction	$	86,135		$	66,428
Farmland		15,458			15,595
1-4 Family Mortgages		89,743			87,631
Commercial Real Estate		218,871			207,604

Total Real Estate Loans		410,207			377,258
Business Loans:
Commercial and Industrial Loans (1)		128,788			84,611
Farm Production and Other Farm Loans		584			683

Total Business Loans		129,372			85,294
Consumer Loans:
Credit Cards		1,603			1,833
Other Consumer Loans		11,183			12,060

Total Consumer Loans		12,786			13,893

Total Gross Loans		552,365			476,445
Unearned Income		(2	)		(8	)
Allowance for Loan Losses		(4,257	)		(3,755	)

Loans, net	$	548,106		$	472,682

(1)	Includes PPP loans of $48,821 and $-0- as of June 30, 2020 and December 31, 2019, respectively.

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.

Table of Contents

Period-end,

non-accrual

loans, segregated by class, were as follows:


	June 30, 2020		December 31, 2019
Real Estate:
Land Development and Construction	$	110	$	111
Farmland		218		232
1-4 Family Mortgages		2,129		2,160
Commercial Real Estate		7,243		9,082

Total Real Estate Loans		9,700		11,585
Business Loans:
Commercial and Industrial Loans		465		338
Farm Production and Other Farm Loans		10		10

Total Business Loans		475		348
Consumer Loans:
Other Consumer Loans		73		60

Total Consumer Loans		73		60

Total Nonaccrual Loans	$	10,248	$	11,993

Table of Contents

An aging analysis of past due loans, segregated by class, as of June 30, 2020, 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	$	6	$	110	$	116	$	86,019	$	86,135	$	—
Farmland		145		44		189		15,269		15,458		44
1-4 Family Mortgages		1,419		518		1,937		87,806		89,743		126
Commercial Real Estate		2,850		1,214		4,064		214,807		218,871		118

Total Real Estate Loans		4,420		1,886		6,306		403,901		410,207		288
Business Loans:
Commercial and Industrial Loans		60		422		482		128,306		128,788		—
Farm Production and Other Farm Loans		25		—		25		559		584		—

Total Business Loans		85		422		507		128,865		129,372		—
Consumer Loans:
Credit Cards		17		10		27		1,576		1,603		10
Other Consumer Loans		62		40		102		11,081		11,183		3

Total Consumer Loans		79		50		129		12,657		12,786		13

Total Loans	$	4,584	$	2,358	$	6,942	$	545,423	$	552,365	$	301

Table of Contents

An aging analysis of past due loans, segregated by class, as of December 31, 2019 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	$	736	$	—	$	736	$	65,692	$	66,428	$	—
Farmland		171		39		210		15,385		15,595		39
1-4 Family Mortgages		3,116		777		3,893		83,738		87,631		147
Commercial Real Estate		8,511		2,080		10,591		197,013		207,604		18

Total Real Estate Loans		12,534		2,896		15,430		361,828		377,258		204
Business Loans:
Commercial and Industrial Loans		586		312		898		83,713		84,611		52
Farm Production and Other Farm Loans		17		—		17		666		683		—

Total Business Loans		603		312		915		84,379		85,294		52
Consumer Loans:
Credit Cards		45		18		63		1,770		1,833		18
Other Consumer Loans		172		42		214		11,846		12,060		—

Total Consumer Loans		217		60		277		13,616		13,893		18

Total Loans	$	13,354	$	3,268	$	16,622	$	459,823	$	476,445	$	274

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

charged-off

when deemed uncollectible.

Table of Contents

Impaired loans as of June 30, 2020, segregated by class, were as follows:


	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	161	$	108	$	53	$	161	$	16	$	136
Farmland		159		159		—		159		—		206
1-4 Family Mortgages		967		959		8		967		5		903
Commercial Real Estate		8,203		3,479		4,531		8,010		699		8,900

Total Real Estate Loans		9,490		4,705		4,592		9,297		720		10,144
Business Loans:
Commercial and Industrial Loans		566		59		507		566		165		355

Total Business Loans		566		59		507		566		165		355

Total Loans	$	10,056	$	4,764	$	5,099	$	9,863	$	885	$	10,499

Impaired loans as of December 31, 2019, segregated by class, were as follows:


	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	111	$	58	$	53	$	111	$	16	$	56
Farmland		252		252		—		252		—		261
1-4 Family Mortgages		839		740		99		839		28		996
Commercial Real Estate		11,506		5,949		3,840		9,789		566		9,337

Total Real Estate Loans		12,708		6,999		3,992		10,991		610		10,650
Business Loans:
Commercial and Industrial Loans		144		—		144		144		72		72

Total Business Loans		144		—		144		144		72		72

Total Loans	$	12,852	$	6,999	$	4,136	$	11,135	$	682	$	10,722

Table of Contents

The following table presents troubled debt restructurings, segregated by

class


June 30, 2020	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate		3	$	4,871	$	2,400

Total		3	$	4,871	$	2,400


December 31, 2019	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate		3	$	4,871	$	2,495

Total		3	$	4,871	$	2,495

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


	Number of Loans		Recorded Investment
Totals at January 1, 2019		3	$	2,782
Reductions due to:
Principal paydowns				(287	)

Totals at January 1, 2020		3	$	2,495
Reductions due to:
Principal paydowns				(95	)

Total at June 30, 2020		3	$	2,400

The allocated allowance for loan losses attributable to restructured loans was

$-0-

at June 30, 2020 and December 31, 2019. The Corporation had no commitments to lend additional funds on these troubled debt restructurings as of June 30, 2020.

Table of Contents

The Corporation utilizes a risk grading matrix to assign a risk grade to each of its loans when

originated

and is updated as factors related to the strength of the loan changes. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades follows.

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

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

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

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

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

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

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

Table of Contents

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 June 30, 2020.

The following table details the amount of gross loans, segregated by loan grade and class, as of June 30, 2020:


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	83,509	$	1,922	$	704	$	—	$	—	$	86,135
Farmland		14,450		280		728		—		—		15,458
1-4 Family Mortgages		81,552		2,047		6,144		—		—		89,743
Commercial Real Estate		183,080		20,818		14,973		—		—		218,871

Total Real Estate Loans		362,591		25,067		22,549		—		—		410,207
Business Loans:
Commercial and Industrial Loans		121,398		4,050		3,331		—		9		128,788
Farm Production and Other Farm Loans		552		19		3		—		10		584

Total Business Loans		121,950		4,069		3,334		—		19		129,372
Consumer Loans:
Credit Cards		1,576		—		27		—		—		1,603
Other Consumer Loans		11,029		46		71		37		—		11,183

Total Consumer Loans		12,605		46		98		37		—		12,786

Total Loans	$	497,146	$	29,182	$	25,981	$	37	$	19	$	552,365

Table of Contents

The following table details the amount of gross loans segregated by loan grade and class, as of

December

31, 2019:


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	64,112	$	1,682	$	634	$	—	$	—	$	66,428
Farmland		14,533		331		731		—		—		15,595
1-4 Family Mortgages		79,068		1,917		6,646		—		—		87,631
Commercial Real Estate		169,270		21,266		17,068		—		—		207,604

Total Real Estate Loans		326,983		25,196		25,079		—		—		377,258
Business Loans:
Commercial and Industrial Loans		80,289		128		4,194		—		—		84,611
Farm Production and Other Farm Loans		669		—		4		—		10		683

Total Business Loans		80,958		128		4,198		—		10		85,294
Consumer Loans:
Credit Cards		1,770		—		63		—		—		1,833
Other Consumer Loans		11,907		59		53		41		—		12,060

Total Consumer Loans		13,677		59		116		41		—		13,893

Total Loans	$	421,618	$	25,383	$	29,393	$	41	$	10	$	476,445

Table of Contents

Note 9. Purchased Loans

(in thousands)

For purposes of this Note 9, all references to “loans” means

purchased

loans.

The following is a summary of purchased loans:


	June 30, 2020		December 31, 2019
Real Estate:
Land Development and Construction	$	12,147	$	14,722
Farmland		442		510
1-4 Family Mortgages		29,736		35,952
Commercial Real Estate		27,810		32,436

Total Real Estate Loans		70,135		83,620
Business Loans:
Commercial and Industrial Loans		11,555		14,153
Farm Production and Other Farm Loans		858		884

Total Business Loans		12,413		15,037
Consumer Loans:
Other Consumer Loans		1,286		1,973

Total Consumer Loans		1,286		1,973

Total Purchased Loans	$	83,834	$	100,630

Table of Contents

An age analysis of past due loans, segregated by class of loans, as of June 30, 2020, is 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	$	—	$	50	$	50	$	12,097	$	12,147	$	—
Farmland		—		—		—		442		442		—
1-4 Family Mortgages		145		—		145		29,591		29,736		—
Commercial Real Estate		—		131		131		27,679		27,810		—

Total Real Estate Loans		145		181		326		69,809		70,135		—
Business Loans:
Commercial and Industrial Loans		73		147		220		11,335		11,555		—
Farm Production and Other Farm Loans		—		—		—		858		858		—

Total Business Loans		73		147		220		12,193		12,413		—
Consumer Loans:
Other Consumer Loans		43		—		43		1,243		1,286		—

Total Consumer Loans		43		—		43		1,243		1,286		—

Total Loans	$	261	$	328	$	589	$	83,245	$	83,834	$	—

Table of Contents

An age analysis of past due loans, segregated by class of loans, as of December 31, 2019, is as

follows


	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	528	$	—	$	528	$	14,194	$	14,722	$	—
Farmland		—		—		—		510		510		—
1-4 Family Mortgages		444		—		444		35,508		35,952		—
Commercial Real Estate		603		—		603		31,833		32,436		—

Total Real Estate Loans		1,575		—		1,575		82,045		83,620		—
Business Loans:
Commercial and Industrial Loans		379		3		382		13,771		14,153		—
Farm Production and Other Farm Loans		—		—		—		884		884		—

Total Business Loans		379		3		382		14,655		15,037		—
Consumer Loans:
Other Consumer Loans		49		8		57		1,916		1,973		—

Total Consumer Loans		49		8		57		1,916		1,973		—

Total Loans	$	2,003	$	11	$	2,014	$	98,616	$	100,630	$	—

Table of Contents

The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of June 30, 2020:


	Satisfactory 1,2,3,4		Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	10,466	$	1,602	$	79	$	—	$	—	$	12,147
Farmland		275		167		—		—		—		442
1-4 Family Mortgages		27,231		1,396		1,109		—		—		29,736
Commercial Real Estate		25,857		1,538		415		—		—		27,810

Total Real Estate Loans		63,829		4,703		1,603		—		—		70,135
Business Loans:
Commercial and Industrial Loans		10,560		667		328		—		—		11,555
Farm Production and Other Farm Loans		858		—		—		—		—		858

Total Business Loans		11,418		667		328		—		—		12,413
Consumer Loans:
Other Consumer Loans		1,232		34		20		—		—		1,286

Total Consumer Loans		1,232		34		20		—		—		1,286

Total Loans	$	76,479	$	5,404	$	1,951	$	—	$	—	$	83,834

Table of Contents

The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of

December

31, 2019:


	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	13,890	$	789	$	43	$	—	$	—	$	14,722
Farmland		510		—		—		—		—		510
1-4 Family Mortgages		33,737		1,535		680		—		—		35,952
Commercial Real Estate		30,780		1,656		—		—		—		32,436

Total Real Estate Loans		78,917		3,980		723		—		—		83,620
Business Loans:
Commercial and Industrial Loans		13,545		608		—		—		—		14,153
Farm Production and Other Farm Loans		884		—		—		—		—		884

Total Business Loans		14,429		608		—		—		—		15,037
Consumer Loans:
Other Consumer Loans		1,937		36		—		—		—		1,973

Total Consumer Loans		1,937		36		—		—		—		1,973

Total Loans	$	95,283	$	4,624	$	723	$	—	$	—	$	100,630

Loans purchased in business combinations that exhibited, at the date of acquisition, evidence of deterioration of the credit quality since origination, such that it was probable that all contractually required payments would not be collected, were as follows:


	June 30, 2020		December 31, 2019
Real Estate:
Land Development and Construction	$	28	$	43
Farmland		—		—
1-4 Family Mortgages		695		706
Commercial Real Estate		—		—

Total Real Estate Loans		723		749

Total PCD Loans	$	723	$	749

Table of Contents

The following table presents purchased loans that are classified as nonaccrual loans:


	June 30, 2020		December 31, 2019
Real Estate:
Land Development and Construction	$	50	$	—
1-4 Family Mortgages		151		33
Commercial Real Estate		131		—

Total Real Estate Loans		332		33
Business Loans:
Commercial and Industrial Loans		206		—

Total Business Loans		206		—
Consumer Loans:
Other Consumer Loans		—		—

Total Consumer Loans		—		—

Total Purchased Nonaccrual Loans	$	538	$	33

The following table presents the fair value of loans determined to be impaired at the time of acquisition:


	Total Purchased Credit Deteriorated Loans
Contractually-required principal	$	993
Nonaccretable difference		(68	)

Cash flows expected to be collected		925
Accretable yield		(36	)

Fair Value	$	889

Changes in the accretable yield of loans purchased with deteriorated credit quality were as follows:


Balance at January 1, 2020	$	(16	)
Additions through acquisition		—
Reclasses from nonaccretable difference		(13	)
Accretion		9
Charge-off		—

Balance at June 30, 2020	$	(20	)

There were no loans classified as TDRs purchased as part of the acquisition of Charter.

Table of Contents

The following table presents the fair value of loans purchased from Charter as of the October 1, 2019 acquisition date:


	October 1, 2019
At acquisition date:
Contractually-required principal	$	104,127
Nonaccretable difference		(68	)
Cash flows expected to be collected		104,059
Accretable yield		(394	)

Fair Value	$	103,665

Note 10. Allowance for Loan Losses

(in thousands)

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

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

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

Table of Contents

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2020:


June 30, 2020	Real Estate		Business Loans		Consumer		Total
Beginning Balance, January 1, 2020	$	3,075	$	371	$	309	$	3,755
Provision for loan losses		550		280		106		936
Charge-offs		265		210		65		540
Recoveries		59		28		19		106

Net charge-offs		206		182		46		434

Ending Balance	$	3,419	$	469	$	369	$	4,257

Period end allowance allocated to:
Loans individually evaluated for impairment	$	720	$	165	$	—	$	885
Loans collectively evaluated for impairment		2,699		304		369		3,372

Ending Balance, June 30, 2020	$	3,419	$	469	$	369	$	4,257

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2019:


June 30, 2019	Real Estate			Business Loans		Consumer		Total
Beginning Balance, January 1, 2019	$	2,845		$	222	$	305	$	3,372
Provision for loan losses		72			211		177		460
Charge-offs		15			12		42		69
Recoveries		24			8		27		59

Net (recoveries) charge-offs		(9	)		4		15		10

Ending Balance	$	2,926		$	429	$	467	$	3,822

Period end allowance allocated to:
Loans individually evaluated for impairment	$	504		$	77	$	—	$	581
Loans collectively evaluated for impairment		2,422			352		467		3,241

Ending Balance, June 30, 2019	$	2,926		$	429	$	467	$	3,822

Table of Contents

The Corporation’s recorded investment in loans as of June 30, 2020 and December 31, 2019 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):


June 30, 2020	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	9,297	$	566	$	—	$	9,863
Loans collectively evaluated for general impairment		470,322		141,219		14,072		625,613
Acquired with deteriorated credit quality		723		—		—		723

	$	480,342	$	141,785	$	14,072	$	636,199


December 31, 2019	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	10,991	$	144	$	—	$	11,135
Loans collectively evaluated for general impairment		449,138		100,187		15,866		565,191
Acquired with deteriorated credit quality		749		—		—		749

	$	460,878	$	100,331	$	15,866	$	577,075

Table of Contents

Note 11. Premises and Equipment

The Company leases certain premises and equipment under operating leases. At June 30, 2020, the Company had lease liabilities and ROU assets totaling $608 thousand related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the six months ended June 30, 2020, the weighted average remaining lease term for operating leases was 1.0 year and the weighted average discount rate used in the measurement of operating lease liabilities was 3.3%.

Lease costs were as follows:


(in thousands)	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Operating lease cost	$	92	$	185
Short-term lease cost		6		12
Variable lease cost		—		—

	$	98	$	197

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the six months ended June 30, 2020.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:


(in thousands)	Six Months Ended June 30, 2020
Lease payments due:
Within one year	$	336
After one year but within two years		250
After two years but within three years		41
After three year but within four years		—
After four years but within five years		—
After five years		—

Total undiscounted cash flows		627
Discount on cash flows		(19	)

Total lease liability	$	608

Table of Contents

Note 12. Goodwill and Other Intangible Assets

(in thousands)

The carrying amount of goodwill for the six months ended June 30, 2020 were as follows:


	Total
Balance at January 1, 2020	$	13,103
Measurement period adjustment to goodwill from Charter acquisition		(73	)

Balance at June 30, 2020	$	13,030

The following table provides a summary of finite-lived intangible assets as of the dates presented:


	June 30, 2020			December 31, 2019
Core deposit intangible	$	739		$	766
Accumulated amortization		(55	)		(27	)

Total finite-lived intangible assets	$	684		$	739

Core deposit intangible amortization expense for the

six-month

periods ended June 30, 2020 and 2019 was $55 and

$-0-,

respectively. Core deposit intangible amortization expense for the three-month period ended June 30, 2020 and 2019 was $28 and

$-0-,

respectively. The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:


Year ending December 31,	Amount
2020	$	54
2021		109
2022		109
2023		109
2024		109
Thereafter		194

	$	684

Table of Contents

Note 13. Shareholders’ Equity

(in thousands, except share data)

The following summarizes the activity in the capital structure of the Company:


	Number of Shares Issued			Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balance, January 1, 2020		5,578,131		$	1,116		$	17,883		$	(789	)	$	94,590		$	112,800
Net income		—			—			—			—			1,160			1,160
Dividends paid ($0.24 per share)		—			—			—			—			(1,339	)		(1,339	)
Options exercised		4,500			1			86			—			—			87
Restricted stock granted		—			—			—			—			—			—
Stock compensation expense		—			—			40			—			—			40
Other comprehensive income, net		—			—			—			5,996			—			5,996

Balance, March 31, 2020		5,582,631		$	1,117		$	18,009		$	5,207		$	94,411		$	118,744
Net income		—			—			—			—			1,462			1,462
Dividends paid ($0.24 per share)		—			—			—			—			(1,342	)		(1,342	)
Restricted stock forfeited		(4,500	)		(1	)		1			—			—			—
Restricted stock granted		8,250			2			(2	)		—			—			—
Stock compensation expense		—			—			41			—			—			41
Other comprehensive income, net		—			—			—			464			—			464

Balance, June 30, 2020		5,586,381		$	1,118		$	18,049		$	5,671		$	94,531		$	119,369


	Number of Shares Issued		Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balance, January 1, 2019		4,904,530	$	981	$	4,298		$	(14,975	)	$	93,562		$	83,866
Net income		—		—		—			—			1,227			1,227
Dividends paid ($0.24 per share)		—		—		—			—			(1,177	)		(1,177	)
Options exercised		—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—
Stock compensation expense		—		—		41			—			—			41
Other comprehensive income, net		—		—		—			6,622			—			6,622

Balance, March 31, 2019		4,904,530	$	981	$	4,339		$	(8,353	)	$	93,612		$	90,579
Net income		—		—		—			—			1,371			1,371
Dividends paid ($0.24 per share)		—		—		—			—			(1,179	)		(1,179	)
Options exercised		—		—		—			—			—			—
Restricted stock granted		7,500		2		(2	)		—			—			—
Stock compensation expense		—		—		41			—			—			41
Other comprehensive income, net		—		—		—			5,325			—			5,325

Balance, June 30, 2019		4,912,030	$	983	$	4,378		$	(3,028	)	$	93,804		$	96,137

Table of Contents

Note 14. 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 June 30, 2020:


	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	$	—	$	7,807	$	—	$	7,807
Mortgage-backed securities		—		551,387		—		551,387
State, county and municipal obligations		—		68,015		—		68,015
Other securities		510		—		—		510

Total	$	510	$	627,209	$	—	$	627,719

Table of Contents

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2019:


	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	$	—	$	97,111	$	—	$	97,111
Mortgage-backed securities		—		306,900		—		306,900
State, county and municipal obligations		—		60,372		—		60,372

Total	$	—	$	464,383	$	—	$	464,383

The Corporation recorded no gains or losses in earnings for the period ended June 30, 2020 or December 31, 2019 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

Impaired Loans

Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less

estimated

selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling, closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.

Table of Contents

Other real estate owned

OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.

For assets measured at fair value on a nonrecurring basis during 2020 that were still held on the Corporation’s balance sheet at June 30, 2020, 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	$	—	$	—	$	3,614	$	3,614

Total	$	—	$	—	$	3,614	$	3,614

The following table presents information as of June 30, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

Financial instrument

Fair Value

Valuation Technique

Significant Unobservable

Inputs

Range of
Inputs

Impaired loans

3,614

Appraised value of collateral less estimated costs to sell

Estimated costs to sell

For assets measured at fair value on a nonrecurring basis during 2019 that were still held on the Corporation’s balance sheet at December 31, 2019, the following table provides the hierarchy level and the fair value of the related assets:

Table of Contents


	Fair Value Measurements Using:
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	4,576	$	4,576

Total	$	—	$	—	$	4,576	$	4,576

Impaired loans, whose fair value was remeasured during the period, with a carrying value of $4,299 and $5,003 had an allocated allowance for loan losses of $685 and $427 at June 30, 2020 and December 31, 2019, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of

$-0-

was necessary and recorded during the three and

six-month

period ended June 30, 2020 and the year ended December 31, 2019.

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.

Table of Contents

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at June 30, 2020:


					Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
June 30, 2020	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	20,003	$	20,003	$	—	$	—	$	20,003
Interest bearing deposits with banks		41,184		41,184		—		—		41,184
Securities available-for-sale		627,719		510		627,209		—		627,719
Net loans		631,940		—		—		624,458		624,458
Financial liabilities
Deposits	$	1,075,348	$	851,706	$	225,141	$	—	$	1,076,847
Securities sold under agreement to repurchase		193,780		193,780		—		—		193,780

The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at December 31, 2019:


					Fair Value Measurements Using:
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair
December 31, 2019	Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	15,937	$	15,937	$	—	$	—	$	15,937
Interest bearing deposits with banks		58,557		58,557		—		—		58,557
Federal funds sold		1,600		1,600		—		—		1,600
Securities available-for-sale		464,383		—		464,383		—		464,383
Net loans		573,312		—		—		569,640		569,640
Financial liabilities
Deposits	$	898,996	$	642,825	$	258,100	$	—	$	900,925
Securities sold under agreement to repurchase		170,410		170,410		—		—		170,410

Table of Contents

ITEM 2.

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

(in thousands, except share and per share data)

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form

10-Q

(the “Quarterly Report”) contains statements that constitute

forward-looking

statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify

forward-looking

statements. These statements appear in a number of places in this Quarterly Report. The Corporation notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank” and collectively with the Company, the “Corporation”), 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 and our ability to foreclose on delinquent mortgages;

•

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates including, but not limited to, the negative impacts and disruptions resulting from the recent outbreak of

COVID-19;

•

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, the accuracy of our estimates, 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 affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people;

Table of Contents

•

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.

Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.

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

OVERVIEW

The Company is a

one-bank

holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of the Bank. The Company does not have any direct 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 June 30, 2020, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,402,061 and total deposits of $1,077,318. In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. 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 June 30, 2020, was 18.19% and at December 31, 2019, was 24.87%. The decrease was due to an increase in deposits at June 30, 2020. Management believes it maintains adequate liquidity for the Corporation’s current needs.

Table of Contents

The Corporation’s primary source of liquidity is customer deposits, which were $1,075,348 at June 30, 2020, and $898,996 at December 31, 2019. 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 $627,719 invested in

available-for-sale

investment securities at June 30, 2020, and $464,383 at December 31, 2019. This increase was due to purchases coupled with an increase in the fair value of the Corporation’s investment securities portfolio in excess of paydowns, maturities, sales and calls.

The Corporation also had $41,184 in interest bearing deposits at other banks at June 30, 2020 and $58,557 at December 31, 2019. The Corporation had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both June 30, 2020 and December 31, 2019. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At June 30, 2020, the Corporation had unused and available $209,280 of its line of credit with the FHLB and at December 31, 2019, the Corporation had unused and available $177,592 of its line of credit with the FHLB. The increase in the amount available under the Corporation’s line of credit with the FHLB from the end of 2019 to June 30, 2020, was the result of an increase in the amount of loans eligible for the collateral pool securing the Corporation’s line of credit with the FHLB. The Corporation had federal funds purchased of

$-0-

as of June 30, 2020 and December 31, 2019. 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 $119,369 at June 30, 2020, as compared to $112,800 at December 31, 2019. The increase in shareholders’ equity per share reflects an increase in the fair value of the Corporation’s investment securities partially offset by dividends in excess of earnings. The fair value adjustment, caused by the decrease in medium term interest rates, resulted in an increase in the fair value of the Corporation’s investment portfolio.

The Corporation paid aggregate cash dividends in the amount of $2,681, or $0.48 per share, during the

six-month

period ended June 30, 2020 compared to $2,356, or $0.48 per share, for the same period in 2019.

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 June 30, 2020, 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.

Table of Contents


											Minimum Capital
						Minimum Capital					Requirement to be
						Requirement to be					Adequately
	Actual					Well Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2020
Citizens Holding Company
Tier 1 leverage ratio	$	99,630		7.56	%	$	65,906		5.00	%	$	52,725		4.00	%
Common Equity tier 1 capital ratio		99,630		13.50	%		85,678		6.50	%		59,316		4.50	%
Tier 1 risk-based capital ratio		99,630		13.50	%		59,040		8.00	%		44,280		6.00	%
Total risk-based capital ratio		103,887		14.08	%		73,799		10.00	%		59,040		8.00	%
December 31, 2019
Citizens Holding Company
Tier 1 leverage ratio	$	98,733		8.33	%	$	59,270		5.00	%	$	47,416		4.00	%
Common Equity tier 1 capital ratio		98,733		13.86	%		77,051		6.50	%		53,343		4.50	%
Tier 1 risk-based capital ratio		98,733		13.86	%		56,972		8.00	%		42,729		6.00	%
Total risk-based capital ratio		102,488		14.39	%		71,215		10.00	%		56,972		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 replaced 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 began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner:

•

Create a 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 subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does 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 increases 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.

Table of Contents

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 June 30, 2020, the Company and the Bank met all capital adequacy requirements under Basel III. 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.

Table of Contents

RESULTS OF OPERATIONS

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


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2020		2019		2020		2019
Interest Income, including fees	$	10,127	$	8,651	$	19,836	$	17,034
Interest Expense		1,777		2,445		4,101		4,618

Net Interest Income		8,350		6,206		15,735		12,416
Provision for loan losses		622		265		936		460

Net Interest Income after
Provision for loan losses		7,728		5,941		14,799		11,956
Other Income		2,470		2,073		4,851		4,119
Other Expense		8,344		6,323		16,411		12,962

Income Before Provision For
Income Taxes		1,854		1,691		3,239		3,113
Provision for Income Taxes		392		320		617		515

Net Income	$	1,462	$	1,371	$	2,622	$	2,598

Net Income Per share - Basic	$	0.26	$	0.28	$	0.47	$	0.53

Net Income Per Share-Diluted	$	0.26	$	0.28	$	0.47	$	0.53

See Note 4 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 4.90% for the three months ended June 30, 2020, and 6.10% for the corresponding period in 2019. Annualized return on average equity (“ROE”) was 4.52% for the six months ended June 30, 2020, and 5.90% for the corresponding period in 2019. The decrease in ROE for the three and six months ended June 30, 2020 was caused by the increase in equity balances compared to the same period in 2019.

Book value per share increased to $21.37 at June 30, 2020, compared to $20.22 at December 31, 2019. The increase in book value per share reflects an increase in the fair value of the Corporation’s investment securities partially offset by dividends in excess of earnings. Average assets for the six months ended June 30, 2020 were $1,267,163 compared to $1,164,570 for the year ended December 31, 2019. This increase was due mainly to an increase in loans and investment securities partially offset by a decrease in interest bearing deposits with other banks.

Table of Contents

NET INTEREST INCOME / NET INTEREST MARGIN

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

The annualized net interest margin was 2.60% for the three months ended June 30, 2020 compared to 2.65% for the corresponding period of 2019. The decrease in net interest margin for the three months ended June 30, 2020, when compared to the same period in 2019, was primarily driven by the impact of $48,821 in PPP loans yielding 1%. Earning assets averaged $1,237,906 for the three months ended June 30, 2020. This represents an increase of $281,415, or 29.4%, over average earning assets of $956,491 for the three months ended June 30, 2019.

The annualized net interest margin was 2.74% for the six months ended June 30, 2020 compared to 2.69% for the corresponding period of 2019. The increase in net interest margin for the six months ended June 30, 2020, when compared to the same period in 2019, was due to yields on earning assets decreasing less than rates paid on interest bearing liabilities. While the margin growth was significant, the increase was partially offset by the aforementioned impact the PPP loans had on our loan yields. Earning assets averaged $1,173,734 for the six months ended June 30, 2020. This represents an increase of $230,576, or 24.4%, over average earning assets of $943,158 for the six months ended June 30, 2019.

Interest bearing deposits averaged $770,288 for the three months ended June 30, 2020. This represents an increase of $119,537, or 18.4%, from the average of interest-bearing deposits of $650,751 for the three months ended June 30, 2019. In correlation with the national trend of increased savings, all

non-time

deposit categories increased as customers increased savings due to the uncertainty surrounding the

COVID-19

pandemic. The decrease in time deposits was caused by a strategic rate reduction made by the Company.

Interest bearing deposits averaged $750,879 for the six months ended June 30, 2020. This represents an increase of $126,465, or 20.2%, from the average of interest-bearing deposits of $624,414 for the six months ended June 30, 2019. This increase was discussed previously.

Other borrowed funds averaged $190,620 for the three months ended June 30, 2020. This represents an increase of $76,736, or 67.4%, over the other borrowed funds of $113,884 for the three months ended June 30, 2019. This increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase for the three months ended June 30, 2020, when compared to the three months ended June 30, 2019.

Other borrowed funds averaged $174,553 for the six months ended June 30, 2020. This represents an increase of $64,197, or 58.2%, over the other borrowed funds of $110,356 for the six months ended June 30, 2019. This increase was discussed previously.

Table of Contents

Net interest income was $8,350 for the three months ended June 30, 2020, an increase of $2,144 from $6,206 for the three months ended June 30, 2019, primarily due to an increase in the loan volume from the same period in 2019. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the three months ended June 30, 2020, the yields on earning assets decreased and the rates paid on deposits decreased from the same period in 2019. The yield on all interest-bearing assets decreased 33 basis points to 3.27% in the three months ended June 30, 2020 from 3.60% for the same period in 2019. At the same time, the rate paid on all interest-bearing liabilities for the three months ended June 30, 2020 decreased 36 basis points to 0.85% from 1.21% in the same period in 2019. 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 remain at similar levels for extended period of time.

Net interest income was $15,735 for the six months ended June 30, 2020, an increase of $3,319 from $12,416 for the six months ended June 30, 2019, primarily due to an increase in the loan volume from the same period in 2019. The changes in volume in earning assets, deposits and borrowed funds are discussed above. As for changes in interest rates in the six months ended June 30, 2020, the yields on earning assets decreased and the rates paid on deposits decreased from the same period in 2019. The yield on all interest-bearing assets decreased 21 basis points to 3.45% in the six months ended June 30, 2020 from 3.66% for the same period in 2019. At the same time, the rate paid on all interest-bearing liabilities for the six months ended June 30, 2020 decreased 34 basis points to 0.89% from 1.23% in the same period in 2019. 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 remain at similar levels for extended period of time.

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


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2020			2019			2020			2019
Interest and Fees	$	7,632		$	5,830		$	15,112		$	11,280
Average Gross Loans		618,365			456,841			596,560			446,016
Annualized Yield		4.94	%		5.10	%		5.07	%		5.06	%

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.

Table of Contents

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
	June 30,			December 31,			Increase			Increase
	2020			2019			(Decrease)			(Decrease)
BALANCES:
Gross Loans	$	636,199		$	577,075		$	59,124			10.25	%
Allowance for Loan Losses		4,257			3,755			502			13.37	%
Nonaccrual Loans		10,786			11,993			(1,207	)		-10.06	%
Ratios:
Allowance for loan losses to gross loans		0.67	%		0.65	%
Net loans charged off (recovered) to allowance for loan losses		10.19	%		5.06	%

The provision for loan losses for the three months ended June 30, 2020 was $622, an increase of $357 from the provision for loan losses of $265 for the same period in 2019. The provision for loan losses for the six months ended June 30, 2020 was $936, an increase of $476 from the provision for loan losses of $460 for the same period in 2019. The change in the Corporation’s loan loss provisions for the three and six months ended June 30, 2020 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 coupled with an increase in loan

Table of Contents

demand. As a result of the

COVID-19

virus, the Corporation increased the allowance for loan losses qualitatively, specifically related to exposures that we felt were more

“at-risk”

than others, including hotels, restaurants and retail real estate. The Corporation’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, 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 payments received and loans charged off in excess of new loans being added to nonaccrual status.

For the three months ended June 30, 2020, net loan losses charged to the allowance for loan losses totaled $181, an increase of $178 from the $4 charged off in the same period in 2019. The increase was primarily due to one significant

charge-off

during the second quarter of 2020.

For the six months ended June 30, 2020, net loan losses charged to the allowance for loan losses totaled $434, an increase of $424 from the $10 charged off in the same period in 2019. The increase was primarily due to two significant charge-offs during the six month period ended June 30, 2020.

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 six months ended June 30, 2020 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. We are working with customers directly affected by

COVID-19.

We have been and continue to be prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the

COVID-19

virus, we are engaging in more frequent communications with borrowers to better understand their situation and challenges faced, allowing us to proactively respond as needs and issues arise.

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 June 30, 2020 was $2,470, an increase of $397, or 19.2%, from $2,073 in the same period in 2019. Service charges on deposit accounts were $668 in the three months ended June 30, 2020, compared to $1,046 for the same period in 2019. In correlation with the national trend of increased savings due to the uncertainty surrounding

COVID-19,

there has been a decrease in overdraft income when compared to the same period in 2019 that is driving the reduction in service charges on deposit accounts. Other service charges and fees increased by $101, or 13.1%, to $871 in the three months ended June 30, 2020, compared to $770 for the same period in 2019. Other operating income not derived from service charges or fees increased $674, or 262.3% to $931 in the three months ended June 30, 2020, compared to $257 for the same period in 2019. This increase was primarily due to two reasons, (1) an increase in gains from security sales due to strategic investment decisions and (2) an increase in mortgage loan origination income due to a decrease in long-term mortgage rates.

Table of Contents

Other income for the six months ended June 30, 2020 was $4,851, an increase of $732, or 17.8%, from $4,119 in the same period in 2019. Service charges on deposit accounts were $1,717 in the six months ended June 30, 2020, compared to $2,143 for the same period in 2019. The reason for the significant decrease was discussed above. Other service charges and fees increased by $191, or 13.2%, to $1,644 in the six months ended June 30, 2020, compared to $1,453 for the same period in 2019. Other operating income not derived from service charges or fees increased $967, or 184.9% to $1,490 in the six months ended June 30, 2020, compared to $523 for the same period in 2019. The reason for the significant increase was discussed above.

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


	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
Other operating income	2020		2019			2020		2019
BOLI Income	$	123	$	120		$	229	$	246
Mortgage Loan Origination Income		282		59			529		107
Income from security sales, net		333		(54	)		410		(54	)
Other Income		193		132			322		224

Total Other Income	$	931	$	257		$	1,490	$	523

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 June 30, 2020 and 2019 were $8,344 and $6,323, respectively, an increase of $2,021 or 32.0%. Salaries and benefits increased to $4,307 for the three months ended June 30, 2020, from $3,470 for the same period in 2019. Occupancy expense increased by $626, or 44.4%, to $2,036 for the three months ended June 30, 2020, compared to $1,410 for the same period of 2019. The increases in salaries and benefits and occupancy expense are directly related to the Company closing the Charter merger in Q4 of 2019. Other operating expenses increased by $558, or 38.7%, to $2,001 for the three months ended June 30, 2020, compared to $1,443 for the same period of 2019. This increase was mainly due to an increase in Postage and Freight as a result of a

one-time

postage rebate in the same period of 2019.

Aggregate

non-interest

expenses for the six months ended June 30, 2020 and 2019 were $16,411 and $12,962, respectively, an increase of $3,449 or 26.6%. Salaries and benefits increased to $8,742 for the six months ended June 30, 2020, from $7,016 for the same period in 2019. Occupancy expense increased by $863, or 30.5%, to $3,695 for the six months ended June 30, 2020, compared to $2,832 for the same period of 2019. Other operating expenses increased by $860, or 27.6%, to $3,974 for the six months ended June 30, 2020, compared to $3,114 for the same period of 2019. The increases for all expense categories were discussed previously.

Table of Contents

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


	For the Three Months					For the Six Months
	Ended June 30,					Ended June 30,
Other Operating Expense	2020		2019			2020		2019
Advertising	$	156	$	125		$	360	$	303
Office Supplies		311		236			603		453
Professional Fees		261		280			519		413
Telephone expense		138		122			296		234
Postage and Freight		138		(447	)		279		(298	)
Loan Collection Expense		20		2			43		10
Regulatory and related expense		104		84			239		169
Debit Card/ATM expense		148		143			283		264
Travel and Convention		18		64			71		101
Other expenses		707		834			1,281		1,465

Total Other Expense	$	2,001	$	1,443		$	3,974	$	3,114

The Corporation’s efficiency ratio for the three months ended June 30, 2020 was 82.78%, compared to 81.46% for the same period in 2019. The Corporation’s efficiency ratio for the six months ended June 30, 2020 was 82.46%, compared to 79.95% for the same period in 2019. 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
	June 30,		December 31,		Increase			Increase
	2020		2019		(Decrease)			(Decrease)
Cash and Due From Banks	$	20,003	$	15,937	$	4,066			25.51	%
Interest Bearing deposits with Other Banks		41,184		58,557		(17,373	)		-29.67	%
Investment Securities		627,719		464,383		163,336			35.17	%
Loans, net		631,940		573,312		58,628			10.23	%
Premises and Equipment		24,286		24,672		(386	)		-1.56	%
Total Assets		1,402,224		1,195,434		206,790			17.30	%
Total Deposits		1,075,348		898,996		176,352			19.62	%
Total Shareholders’ Equity		119,369		112,800		6,569			5.82	%

CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at June 30, 2020 was $20,003, which was an increase of $4,066 from the balance of $15,937 at December 31, 2019. The increase was due to an increase in the balances being held at the Company’s branches due to uncertainty around the

COVID-19

pandemic.

Table of Contents

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 June 30, 2020 increased by $163,336, or 35.2%, to $627,719 from $464,383 at December 31, 2019. This increase was due to a large excess in liquidity as customers continue to save excess funds due to the uncertainty around the

COVID-19

pandemic.

LOANS

The Corporation’s loan balance increased by $58,628, or 10.2%, during the six months ended June 30, 2020, to $631,940 from $573,312 at December 31, 2019. This large increase was primarily due to two reasons: (1) Loan demand continues to be strong in our operating regions, especially in land development and construction and commercial real estate categories and (2) the Company funded approximately $48,821 in PPP loans during the second quarter of 2020. While loan demand continues to be strong in certain sectors, the uncertainty surrounding the

COVID-19

pandemic has put a lot of projects on hold in other sectors in the near term. Additionally, no material changes were made to the loan products offered by the Corporation during this period.

PREMISES AND EQUIPMENT

During the six months ended June 30, 2020, the Corporation’s premises and equipment decreased by $386, or 1.6%, to $24,286 from $24,672 at December 31, 2019. The decrease was due to the sale of an old branch building coupled with depreciation expense.

DEPOSITS

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


					Amount of			Percent of
	June 30,		December 31,		Increase			Increase
	2020		2019		(Decrease)			(Decrease)
Noninterest-Bearing Deposits	$	254,214	$	190,406	$	63,808			33.51	%
Interest-Bearing Deposits		501,327		369,354		131,973			35.73	%
Savings Deposits		96,165		83,065		13,100			15.77	%
Certificates of Deposit		223,642		256,171		(32,529	)		-12.70	%

Total deposits	$	1,075,348	$	898,996	$	176,352			19.62	%

Noninterest-bearing, interest-bearing and savings accounts increased during the six months ended June 30, 2020 while certificates of deposit decreased. As previously discussed, the

COVID-19

savings trend is creating a large increase in

non-time

deposits. Management continually monitors the interest rates on time deposit products to ensure that the Corporation is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.

Table of Contents

OFF-BALANCE

SHEET ARRANGEMENTS

Please refer to Note 3 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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors of the Bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions.

As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values.

We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so should the situation warrant. Based upon the nature of our operations, we are not subject to material foreign exchange or commodity price risk. We do not own any trading assets.

We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in projected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is a longer-term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

Table of Contents

The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of June 30, 2020 and December 31, 2019:


	June 30, 2020						December 31, 2019
	Following			Months			Following			Months
	12 months			13-24			12 months			13-24
+400 basis points		26.5	%		32.6	%		6.4	%		20.9	%
+300 basis points		25.7	%		27.5	%		6.3	%		17.5	%
+200 basis points		23.3	%		21.0	%		5.7	%		13.3	%
+100 basis points		16.3	%		12.5	%		3.0	%		7.0	%
Flat rates		—			—			—			—
-100 basis points		-10.8	%		-12.5	%		-7.3	%		-7.5	%
-200 basis points		-16.3	%		-22.8	%		-14.5	%		-15.1	%

The following table presents the change in our economic value of equity as of June 30, 2020 and December 31, 2019, assuming immediate parallel shifts in interest rates:


	Economic Value of Equity at Risk (%)
	June 30, 2020			December 31, 2019
+400 basis points		33.7	%		7.1	%
+300 basis points		38.6	%		8.0	%
+200 basis points		39.7	%		7.8	%
+100 basis points		24.8	%		5.4	%
Flat rates		—			—
-100 basis points		-35.4	%		-18.5	%
-200 basis points		-51.5	%		-42.3	%

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates, and actual results may also differ due to any actions taken in response to the changing rates.

As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly noninterest or low interest-bearing

non-maturity

deposit accounts, whose cost is less sensitive to changes in interest rates.

Table of Contents

ITEM 4.

CONTROLS AND PROCEDURES.

The management of the Company, 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 Company’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 June 30, 2020 (the end of the period covered by this Quarterly Report).

There were no changes to the Company’s internal control over financial reporting that occurred in the three months ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

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, 2019, which the Corporation filed with the Securities and Exchange Commission on March 13, 2020. 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, 2019, the Corporation’s quarterly reports on Form

10-Q

and other reports and forms 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.

The outbreak of the novel coronavirus

(“COVID-19”)

could adversely affect the Corporation’s business, financial condition, and results of operations.

The ongoing

COVID-19

global and national health emergency has caused significant disruption in the international and United States economies and financial markets. As a result, the

COVID-19

pandemic could have an adverse effect on the Corporation’s business, financial condition and results of operations. The spread of

COVID-19

has caused illness, quarantines, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. Additionally, in response to the

COVID-19

pandemic, the state government of Mississippi, where all of the Bank’s branch offices and the Corporation’s principal executive office are located, and the governments of most other states, have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego activities outside of their homes, and ordering temporary closures of businesses that have been deemed to be

non-essential.

These restrictions and other consequences of the pandemic have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Bank operates.

Table of Contents

The ultimate effects of

COVID-19

on the broader economy and the markets that the Bank serves are not known. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect the Corporation’s interest income and, therefore, earnings, financial condition and results of operation. Additional impacts of

COVID-19

on the Corporation’s business could be widespread and material, and may include, or exacerbate, among other consequences, the following:

•

employees contracting

COVID-19;

•

a work stoppage, forced quarantine, or other interruption of the Corporation’s business;

•

unavailability of key personnel necessary to conduct the Corporation’s business activities;

•

sustained closures of the Bank’s branch lobbies or the offices of the Bank’s customers;

•

declines in demand for loans and other banking services and products;

•

reduced consumer spending due to both job losses and other effects attributable to the pandemic;

•

unprecedented volatility in United States financial markets;

•

volatile performance of the Corporation’s investment securities portfolio;

•

decline in the credit quality of the Bank’s loan portfolio, owing to the effects of

COVID-19

in the markets the Bank serves, leading to a need to increase the Corporation’s allowance for loan losses;

•

declines in value of collateral for loans, including real estate collateral;

•

declines in the net worth and liquidity of borrowers and loan guarantors, impairing their ability to honor commitments to us; and

•

declines in demand resulting from businesses being deemed to be

“non-essential”

by governments in the markets the Bank serves, and from

“non-essential”

and “essential” businesses suffering adverse effects from reduced levels of economic activity in the Corporation’s markets.

These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect the Company’s business, financial condition and results of operations.

The ongoing

COVID-19

pandemic has resulted in meaningfully lower stock prices for many companies, as well as the trading prices for many other securities. The further spread of the

COVID-19

outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt banking and other economic activity generally and in the areas in which the Bank operates. This could result in further decline in demand for the Bank’s banking products and services, and could negatively impact, among other things, our liquidity, regulatory capital and growth strategy of the Corporation.

The Corporation is taking precautions to protect the safety and well-being of its employees and customers. However, no assurance can be given that the steps being taken will be adequate or deemed to be appropriate, nor can the Corporation predict the level of disruption which will occur to employee’s ability to provide customer support and service. If the Corporation is unable to recover from a business disruption on a timely basis, its business, financial condition and results of operations could be materially and adversely affected. The Corporation may also incur additional costs to remedy damages caused by such disruptions, which could further adversely affect its business, financial condition and results of operations.

Table of Contents

Since the Bank is a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and

non-clients

that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

ITEM 6.

EXHIBITS.

Exhibits

31(a)

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

31(b)

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

32(a)

Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.

32(b)

Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.

101

Financial Statements submitted in XBRL format.

Table of Contents

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: August 7, 2020