CITIZENS HOLDING CO /MS/ 10-Q

10-Q 1 d891624d10q.htm 10-Q 10-Q Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 or ☐ 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. Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller Reporting Company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No Number of shares outstanding of each of the issuer’s classes of common stock, as of May 6, 2020: Title Outstanding Common Stock, $0.20 par value 5,590,131 Table of Contents CITIZENS HOLDING COMPANY TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 1 Consolidated Statements of Financial Condition, as of March 31, 2020 (Unaudited) and December 31, 2019 (Audited) 1 Consolidated Statements of Income for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited) 2 Consolidated Statements of Comprehensive Income for the Three months ended March 31, 2020 (Unaudited) and 2019 (Unaudited) 3 Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 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 41 Item 3. Quantitative and Qualitative Disclosures About Market Risk 53 Item 4. Controls and Procedures 55 PART II. OTHER INFORMATION Item 1. Legal Proceedings 56 Item 1A.. Risk Factors 56 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.* Item 3. Defaults Upon Senior Securities.* Item 4. Mine Safety Disclosures.* Item 5. Other Information.* Item 6. Exhibits 58 * None or Not Applicable SIGNATURES 59 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) March 31, December 31, 2020 2019 ASSETS (Unaudited) (Audited) Cash and due from banks $ 19,610 $ 15,937 Interest bearing deposits with other banks 61,909 58,557 Federal funds sold — 1,600 Investment securities available for sale, at fair value 482,077 464,383 Loans, net of allowance for loan losses of $3,816 in 2020 and $3,755 in 2019 573,163 573,312 Premises and equipment, net 24,495 24,672 Other real estate owned, net 3,643 3,552 Accrued interest receivable 4,106 4,181 Cash surrender value of life insurance 25,220 25,088 Deferred tax assets, net 1,669 3,684 Other assets 20,219 20,468 TOTAL ASSETS $ 1,216,111 $ 1,195,434 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits: Noninterest-bearing demand $ 195,843 $ 190,406 Interest-bearing NOW and money market accounts 410,485 369,354 Savings deposits 87,422 83,065 Certificates of deposit 232,138 256,171 Total deposits 925,888 898,996 Securities sold under agreement to repurchase 159,442 170,410 Accrued interest payable 722 1,128 Deferred compensation payable 9,530 9,453 Other liabilities 1,785 2,647 Total liabilities 1,097,367 1,082,634 SHAREHOLDERS’ EQUITY Common stock, $0.20 par value, 22,500,000 shares authorized, 5,582,631 shares issued and outstanding at March 31, 2020 and 5,578,131 at December 31, 2019 1,117 1,116 Additional paid-in capital 18,009 17,883 Retained earnings 94,411 94,590 Accumulated other comprehensive loss, net of tax (expense) benefit of ($1,731) at March 31, 2020 and $262 at December 31, 2019 5,207 (789 ) Total shareholders’ equity 118,744 112,800 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,216,111 $ 1,195,434 The accompanying notes are an integral part of these financial statements. 1 Table of Contents CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited) For the Three Months Ended March 31, 2020 2019 INTEREST INCOME Interest and fees on loans $ 7,480 $ 5,450 Interest on securities Taxable 1,657 2,082 Nontaxable 340 617 Other interest 232 235 Total interest income 9,709 8,384 INTEREST EXPENSE Deposits 1,969 1,729 Other borrowed funds 355 445 Total interest expense 2,324 2,174 NET INTEREST INCOME 7,385 6,210 PROVISION FOR LOAN LOSSES 314 195 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,071 6,015 OTHER INCOME Service charges on deposit accounts 1,049 1,097 Other service charges and fees 773 684 Other operating income 559 266 Total other income 2,381 2,047 OTHER EXPENSES Salaries and employee benefits 4,435 3,547 Occupancy expense 1,659 1,423 Other expense 1,973 1,670 Total other expenses 8,067 6,640 INCOME BEFORE PROVISION FOR INCOME TAXES 1,385 1,422 PROVISION FOR INCOME TAXES 225 195 NET INCOME $ 1,160 $ 1,227 NET INCOME PER SHARE -Basic $ 0.21 $ 0.25 -Diluted $ 0.21 $ 0.25 DIVIDENDS PAID PER SHARE $ 0.24 $ 0.24 The accompanying notes are an integral part of these financial statements. 2 Table of Contents CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ( Unaudited) (in thousands) For the Three Months Ended March 31, 2020 2019 Net income $ 1,160 $ 1,227 Other comprehensive income Securities available-for-sale Unrealized holding gains 7,912 8,823 Income tax effect (1,974 ) (2,201 ) 5,938 6,622 Reclassification adjustment for gains included in net income 77 — Income tax effect (19 ) — 58 — Total other comprehensive income 5,996 6,622 Comprehensive income $ 7,156 $ 7,849 The accompanying notes are an integral part of these financial statements. 3 Table of Contents CITIZENS HOLDING COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Three Months Ended March 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 2,340 $ 1,978 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of securities available for sale 74,267 8,336 Proceeds from sale of investment securities 37,196 — Purchases of investment securities available for sale (122,722 ) (63,403 ) Purchases of bank premises and equipment (70 ) (45 ) Decrease in federal funds sold 1,600 — Increase in interest bearing deposits with other banks (3,352 ) (19,042 ) Proceeds from sale of other real estate — — Net increase in loans (258 ) (18,200 ) Net cash used in investing activities (13,339 ) (92,354 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 26,892 83,938 (Decrease) increase in securities sold under agreement to repurchase (10,968 ) 7,485 Proceeds from exercise of stock options 87 — Payment of dividends (1,339 ) (1,177 ) Net cash provided by financing activities 14,672 90,246 Net increase (decrease) in cash and due from banks 3,673 (130 ) Cash and due from banks, beginning of period 15,937 12,592 Cash and due from banks, end of period $ 19,610 $ 12,462 The accompanying notes are an integral part of these financial statements. 4 Table of Contents CITIZENS HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the three months ended March 31, 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 March 31, 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. 5 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. 6 Table of Contents Financial position and results of operations The Company’s fee income could 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 statement of 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 further and sustained 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. 7 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 is 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 of April 30, 2020, the Company has executed 309 of these deferrals on outstanding loan balances of $148,120. 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 April 30, 2020, the Company has closed 386 SBA PPP loans representing $38,315 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 late payment and overdraft fees and has temporarily suspended collection efforts on past due loans. 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. 8 Table of Contents 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 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. 9 Table of Contents 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. 10 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 will be 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 March 31, 2020, the Corporation had entered into loan commitments with certain customers with an aggregate unused balance of $86,167 compared to an aggregate unused balance of $94,009 at December 31, 2019. There were $2,488 of letters of credit outstanding at March 31, 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. 11 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 Ended March 31, 2020 2019 Basic weighted average shares outstanding 5,579,381 4,892,530 Dilutive effect of granted options 2,030 2,598 Diluted weighted average shares outstanding 5,581,411 4,895,128 Net income $ 1,160 $ 1,227 Net income per share-basic $ 0.21 $ 0.25 Net income per share-diluted $ 0.21 $ 0.25 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. 12 Table of Contents The following table is a summary of the stock option activity for the three months ended March 31, 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 — — — — Outstanding at March 31, 2020 36,000 $ 21.78 — $ — The intrinsic value of options outstanding under the Directors’ Plan at March 31, 2020, was $15,480. No options were outstanding under the 2013 Plan as of March 31, 2020. During 2019, the Corporation’s directors received restricted stock grants totaling 7,500 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 23, 2020 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $161,475 and will be expensed ratably over the one-year vesting period. Note 6. Income Taxes (in thousands) For the three months ended March 31, 2020 and 2019, the Company recorded a provision for income taxes totaling $225 and $195, respectively. The effective tax rate was 16.5% and 13.7% for the three months ending March 31, 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. 13 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: March 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Securities available-for-sale Obligations of U.S. Government agencies $ 44,574 $ 191 $ — $ 44,765 Mortgage backed securities 367,582 6,024 118 373,488 State, County, Municipals 62,484 931 94 63,321 Other Securities 500 3 — 503 Total $ 475,140 $ 7,149 $ 212 $ 482,077 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 March 31, 2020 and December 31, 2019, securities with a carrying value of $418,632 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 March 31, 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. 14 Table of Contents March 31, 2020 December 31, 2019 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Available-for-sale Due in one year or less $ 845 $ 848 $ 345 $ 345 Due after one year through five years 38,070 38,117 89,920 89,681 Due after five years through ten years 17,681 18,019 18,678 18,808 Due after ten years 50,962 51,605 48,181 48,649 Residential mortgage backed securities 320,902 326,742 259,309 258,415 Commercial mortgage backed securities 46,680 46,746 49,001 48,485 Total $ 475,140 $ 482,077 $ 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 March 31, 2020 and December 31, 2019. A summary of unrealized loss information for securities available-for-sale, categorized by security type follows: March 31, 2020 Less than 12 months 12 months or more Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. government agencies $ — $ — $ — $ — $ — $ — Mortgage backed securities 25,319 93 5,566 25 30,885 118 State, County, Municipal 12,380 92 651 2 13,031 94 Total $ 37,699 $ 185 $ 6,217 $ 27 $ 43,916 $ 212 December 31, 2019 Less than 12 months 12 months or more Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. government agencies $ 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 March 31, 2020 nor at December 31, 2019. 15 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. The composition of net loans at March 31, 2020 and December 31, 2019 was as follows: March 31, 2020 December 31, 2019 Real Estate: Land Development and Construction $ 78,059 $ 66,428 Farmland 15,241 15,595 1-4 Family Mortgages 88,400 87,631 Commercial Real Estate 207,453 207,604 Total Real Estate Loans 389,153 377,258 Business Loans: Commercial and Industrial Loans 82,207 84,611 Farm Production and Other Farm Loans 649 683 Total Business Loans 82,856 85,294 Consumer Loans: Credit Cards 1,629 1,833 Other Consumer Loans 11,445 12,060 Total Consumer Loans 13,074 13,893 Total Gross Loans 485,083 476,445 Unearned Income (5 ) (8 ) Allowance for Loan Losses (3,816 ) (3,755 ) Loans, net $ 481,262 $ 472,682 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. 16 Table of Contents Period-end, non-accrual loans, segregated by class, were as follows: March 31, 2020 December 31, 2019 Real Estate: Land Development and Construction $ 111 $ 111 Farmland 230 232 1-4 Family Mortgages 2,054 2,160 Commercial Real Estate 8,966 9,082 Total Real Estate Loans 11,361 11,585 Business Loans: Commercial and Industrial Loans 512 338 Farm Production and Other Farm Loans 10 10 Total Business Loans 522 348 Consumer Loans: Other Consumer Loans 58 60 Total Consumer Loans 58 60 Total Nonaccrual Loans $ 11,941 $ 11,993 17 Table of Contents An aging analysis of past due loans, segregated by class, as of March 31, 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 $ 567 $ 111 $ 678 $ 77,381 $ 78,059 $ — Farmland 376 — 376 14,865 15,241 — 1-4 Family Mortgages 2,263 496 2,759 85,641 88,400 — Commercial Real Estate 18,676 2,890 21,566 185,887 207,453 — Total Real Estate Loans 21,882 3,497 25,379 363,774 389,153 — Business Loans: Commercial and Industrial Loans 531 296 827 81,380 82,207 12 Farm Production and Other Farm Loans 35 — 35 614 649 — Total Business Loans 566 296 862 81,994 82,856 12 Consumer Loans: Credit Cards 34 2 36 1,593 1,629 2 Other Consumer Loans 117 44 161 11,284 11,445 — Total Consumer Loans 151 46 197 12,877 13,074 2 Total Loans $ 22,599 $ 3,839 $ 26,438 $ 458,645 $ 485,083 $ 14 18 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. 19 Table of Contents Impaired loans as of March 31, 2020, segregated by class, were as follows: Recorded Recorded Unpaid Investment Investment Total Average Principal With No With Recorded Related Recorded Balance Allowance Allowance Investment Allowance Investment Real Estate: Land Development and Construction $ 111 $ 58 $ 53 $ 111 $ 16 $ 111 Farmland 250 250 — 250 — $ 251 1-4 Family Mortgages 805 795 10 805 8 $ 822 Commercial Real Estate 11,463 6,011 3,736 9,747 559 $ 9,768 Total Real Estate Loans 12,629 7,114 3,799 10,913 583 $ 10,952 Business Loans: Commercial and Industrial Loans 433 233 200 433 94 $ 289 Total Business Loans 433 233 200 433 94 $ 289 Total Loans $ 13,062 $ 7,347 $ 3,999 $ 11,346 $ 677 $ 11,241 Impaired loans as of December 31, 2019, segregated by class, were as follows: Recorded Recorded Unpaid Investment Investment Total Average Principal With No With Recorded Related Recorded Balance Allowance Allowance Investment Allowance 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 20 Table of Contents The following table presents troubled debt restructurings, segregated by class: Pre-Modification Post-Modification March 31, 2020 Outstanding Outstanding Number of Loans Recorded Investment Recorded Investment Commercial real estate 3 $ 4,871 $ 2,427 Total 3 $ 4,871 $ 2,427 Pre-Modification Post-Modification December 31, 2019 Outstanding Outstanding Number of Recorded Recorded Loans Investment 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 (68 ) Total at March 31, 2020 3 $ 2,427 The allocated allowance for loan losses attributable to restructured loans was $-0- at March 31, 2020 and December 31, 2019. The Corporation had no commitments to lend additional funds on these troubled debt restructurings as of March 31, 2020. 21 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. 22 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 March 31, 2020. The following table details the amount of gross loans, segregated by loan grade and class, as of March 31, 2020: Special Satisfactory Mention Substandard Doubtful Loss Total 1,2,3,4 5,6 7 8 9 Loans Real Estate: Land Development and Construction $ 75,338 $ 2,099 $ 622 $ — $ — $ 78,059 Farmland 14,163 327 751 — — 15,241 1-4 Family Mortgages 79,860 2,346 6,168 — 26 88,400 Commercial Real Estate 169,660 20,874 16,919 — — 207,453 Total Real Estate Loans 339,021 25,646 24,460 — 26 389,153 Business Loans: Commercial and Industrial Loans 77,968 275 3,951 13 — 82,207 Farm Production and Other Farm Loans 636 — 3 — 10 649 Total Business Loans 78,604 275 3,954 13 10 82,856 Consumer Loans: Credit Cards 1,593 — 36 — — 1,629 Other Consumer Loans 11,295 45 59 41 5 11,445 Total Consumer Loans 12,888 45 95 41 5 13,074 Total Loans $ 430,513 $ 25,966 $ 28,509 $ 54 $ 41 $ 485,083 23 Table of Contents The following table details the amount of gross loans segregated by loan grade and class, as of December 31, 2019: Special Satisfactory Mention Substandard Doubtful Loss Total 1,2,3,4 5,6 7 8 9 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 24 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: March 31, 2020 December 31, 2019 Real Estate: Land Development and Construction $ 13,029 $ 14,722 Farmland 504 510 1-4 Family Mortgages 32,157 35,952 Commercial Real Estate 30,789 32,436 Total Real Estate Loans 76,479 83,620 Business Loans: Commercial and Industrial Loans 12,903 14,153 Farm Production and Other Farm Loans 871 884 Total Business Loans 13,774 15,037 Consumer Loans: Credit Cards — — Other Consumer Loans 1,648 1,973 Total Consumer Loans 1,648 1,973 Total Purchased Loans $ 91,901 $ 100,630 25 Table of Contents An age analysis of past due loans, segregated by class of loans, as of March 31, 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 $ 610 $ — $ 610 $ 12,419 $ 13,029 $ — Farmland 167 — 167 337 504 — 1-4 Family Mortgages 189 53 242 31,915 32,157 — Commercial Real Estate 17 4 21 30,768 30,789 — Total Real Estate Loans 983 57 1,040 75,439 76,479 — Business Loans: Commercial and Industrial Loans 74 — 74 12,829 12,903 — Farm Production and Other Farm Loans — — — 871 871 — Total Business Loans 74 — 74 13,700 13,774 — Consumer Loans: Credit Cards — — — — — — Other Consumer Loans 32 — 32 1,616 1,648 — Total Consumer Loans 32 — 32 1,616 1,648 — Total Loans $ 1,089 $ 57 $ 1,146 $ 90,755 $ 91,901 $ — 26 Table of Contents An age analysis of past due loans, segregated by class of loans, as of December 31, 2019, is as follows: Accruing Loans Loans Loans 90 or more 90 or more 30-89 Days Days Total Past Current Total Days Past Due Past Due Due Loans Loans Loans Past Due Real Estate: Land Development and Construction $ 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: Credit Cards — — — — — — 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 $ — 27 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 March 31, 2020: Special Satisfactory Mention Substandard Doubtful Loss Total 1,2,3,4 5,6 7 8 9 Loans Real Estate: Land Development and Construction $ 12,163 $ 780 $ 86 $ — $ — $ 13,029 Farmland 504 — — — — 504 1-4 Family Mortgages 29,975 1,516 666 — — 32,157 Commercial Real Estate 28,956 1,546 287 — — 30,789 Total Real Estate Loans 71,598 3,842 1,039 — — 76,479 Business Loans: Commercial and Industrial Loans 11,999 588 316 — — 12,903 Farm Production and Other Farm Loans 871 — — — — 871 Total Business Loans 12,870 588 316 — — 13,774 Consumer Loans: Credit Cards — — — — — — Other Consumer Loans 1,615 33 — — — 1,648 Total Consumer Loans 1,615 33 — — — 1,648 Total Loans $ 86,083 $ 4,463 $ 1,355 $ — $ — $ 91,901 28 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: Special Satisfactory Mention Substandard Doubtful Loss Total 1,2,3,4 5,6 7 8 9 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: Credit Cards — — — — — — 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: March 31, 2020 December 31, 2019 Real Estate: Land Development and Construction $ 36 $ 43 Farmland — — 1-4 Family Mortgages 692 706 Commercial Real Estate 4 — Total Real Estate Loans 732 749 Total PCD Loans $ 732 $ 749 Non-accrual loans of $82 and $33 are included in 1-4 Family Mortgages at March 31, 2020 and December 31, 2019 and $4 are included in Commercial Real Estate at March 31, 2020. 29 Table of Contents 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 5 Charge-off — Balance at March 31, 2020 $ (24 ) There were no loans classified as TDRs purchased as part of the acquisition of Charter. 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 30 Table of Contents 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. The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020: Real Estate Business Loans Consumer Total March 31, 2020 Beginning Balance, January 1, 2020 $ 3,075 $ 371 $ 309 $ 3,755 Provision for loan losses 184 3 127 314 Chargeoffs 222 23 55 300 Recoveries 14 24 9 47 Net (recoveries) chargeoffs 208 (1 ) 46 253 Ending Balance $ 3,051 $ 375 $ 390 $ 3,816 Period end allowance allocated to: Loans individually evaluated for impairment $ 582 $ 95 $ — $ 677 Loans collectively evaluated for impairment 2,469 280 390 3,139 Ending Balance, March 31, 2020 $ 3,051 $ 375 $ 390 $ 3,816 31 Table of Contents The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019: Real Estate Business Loans Consumer Total March 31, 2019 Beginning Balance, January 1, 2019 $ 2,845 $ 222 $ 305 $ 3,372 Provision for loan losses (63 ) 99 159 195 Chargeoffs — 12 25 37 Recoveries 12 4 14 30 Net (recoveries) chargeoffs (12 ) 8 11 7 Ending Balance $ 2,794 $ 313 $ 453 $ 3,560 Period end allowance allocated to: Loans individually evaluated for impairment $ 417 $ 5 $ — $ 422 Loans collectively evaluated for impairment 2,377 308 453 3,138 Ending Balance, March 31, 2019 $ 2,794 $ 313 $ 453 $ 3,560 The Corporation’s recorded investment in loans as of March 31, 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): Real Estate Business Loans Consumer Total March 31, 2020 Loans individually evaluated for specific impairment $ 10,913 $ 433 $ — $ 11,346 Loans collectively evaluated for general impairment 453,987 96,197 14,722 564,906 Acquired with deteriorated credit quality 732 — — 732 $ 465,632 $ 96,630 $ 14,722 $ 576,984 Real Estate Business Loans Consumer Total December 31, 2019 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 32 Table of Contents Note 11. Premises and Equipment The Company leases certain premises and equipment under operating leases. At March 31, 2020, the Company had lease liabilities and ROU assets totaling $690 thousand related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the three months ended March 31, 2020, the weighted average remaining lease term for operating leases was 1.1 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.3%. Lease costs were as follows: Three Months Ended March 31, 2020 (in thousands) Operating lease cost $ 92 Short-term lease cost 6 Variable lease cost — $ 98 There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the three months ended March 31, 2020. A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows: Three Months Ended March 31, 2020 (in thousands) Lease payments due: Within one year $ 348 After one year but within two years 306 After two years but within three years 60 After three year but within four years — After four years but within five years — After five years — Total undiscounted cash flows 714 Discount on cash flows (24 ) Total lease liability $ 690 33 Table of Contents Note 12. Goodwill and Other Intangible Assets (in thousands) The carrying amount of goodwill for the three months ended March 31, 2020 were as follows: Total Balance at January 1, 2020 $ 13,103 Measurement period adjustment to goodwill from Charter acquisition 27 Balance at March 31, 2020 $ 13,130 The following table provides a summary of finite-lived intangible assets as of the dates presented: March 31, 2020 December 31, 2019 Core deposit intangible $ 739 $ 766 Accumulated amortization (27 ) (27 ) Total finite-lived intangible assets $ 712 $ 739 Core deposit intangible amortization expense for the three month periods ended March 31, 2020 and 2019 was $27 and $-0-, respectively. The estimated amortization expense of finite-lived intangible assets for the fived succeeding fiscal years is summarized as follows: Year ending December 31, Amount 2020 $ 82 2021 109 2022 109 2023 109 2024 109 Thereafter 194 $ 712 34 Table of Contents Note 13. Shareholders’ Equity (in thousands, except share data) The following summarizes the activity in the capital structure of the Company: Accumulated Number Additional Other of Shares Common Paid-In Comprehensive Retained Issued Stock Capital Income (Loss) 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 Accumulated Number Additional Other of Shares Common Paid-In Comprehensive Retained Issued Stock Capital Income (Loss) 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 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: 35 Table of Contents Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or Level 3 Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations. The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table presents assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2020: Fair Value Measurements Using: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Totals Securities available for sale Obligations of U.S. Government Agencies $ — $ 44,765 $ — $ 44,765 Mortgage-backed securities — 373,488 — 373,488 State, county and municipal obligations — 63,321 — 63,321 Other securities 503 — — 503 Total $ 503 $ 481,574 $ — $ 482,077 36 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 Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Totals Securities available for sale Obligations of U.S. Government Agencies $ — $ 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 March 31, 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. 37 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 March 31, 2020, the following table provides the hierarchy level and the fair value of the related assets: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Level 1) (Level 2) (Level 3) Totals Impaired loans $ — $ — $ 254 $ 254 Total $ — $ — $ 254 $ 254 The following table presents information as of March 31, 2020 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis: Significant Unobservable Range of Financial instrument Fair Value Valuation Technique Inputs Inputs Impaired loans $ 254 Appraised value of collateral less Estimated costs to sell 25 % estimated costs to sell 38 Table of Contents 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: 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 with a carrying value of $390 and $5,003 had an allocated allowance for loan losses of $136 and $427 at March 31, 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-month period ended March 31, 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. 39 Table of Contents The following represents the carrying value and estimated fair value of the Corporation’s financial instruments at March 31, 2020: Fair Value Measurements Using: Quoted Prices in Active Significant Markets for Other Significant Total Carrying Identical Observable Unobservable Fair March 31, 2020 Value Assets Inputs Inputs Value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 19,610 $ 19,610 $ — $ — $ 19,610 Interest bearing deposits with banks 61,909 61,909 — — 61,909 Securities available-for-sale 482,077 503 481,574 — 482,077 Net loans 573,163 — — 566,944 566,944 Financial liabilities Deposits $ 925,888 $ 693,750 $ 234,138 $ — $ 927,888 Securities sold under agreement to repurchase 159,442 159,442 — — 159,442 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 Federal funds sold 1,600 1,600 — — 1,600 Interest bearing deposits with banks 58,557 58,557 — — 58,557 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 40 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report. The Corporation notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the business of 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; 41 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 March 31, 2020, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,216 and total deposits of $927,645. 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 March 31, 2020, was 21.67% and at December 31, 2019, was 24.87%. The decrease was due to an increase in deposits at March 31, 2020. Management believes it maintains adequate liquidity for the Corporation’s current needs. 42 Table of Contents The Corporation’s primary source of liquidity is customer deposits, which were $925,888 at March 31, 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 $482,077 invested in available-for-sale investment securities at March 31, 2020, and $464,383 at December 31, 2019. This increase was due to purchases coupled with an increase in the market value of the Corporation’s investment securities portfolio in excess of paydowns, maturities, sales and calls. The Corporation also had $61,909 in interest bearing deposits at other banks at March 31, 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 March 31, 2020 and December 31, 2019. In addition, the Corporation has the ability to draw on its line of credit with the FHLB. At March 31, 2020, the Corporation had unused and available $223,047 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 March 31, 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 March 31, 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 $118,744 at March 31, 2020, as compared to $112,800 at December 31, 2019. The increase in shareholders’ equity was the result of a decrease in the accumulated other comprehensive loss brought about by the investment securities market value adjustment partially offset by dividends paid in excess of earnings. The market value adjustment, which was an increase due to general market conditions, specifically the decrease in medium term interest rates, caused an increase in the market price of the Corporation’s investment portfolio. The Corporation paid aggregate cash dividends in the amount of $1,339, or $0.24 per share, during the three-month period ended March 31, 2020 compared to $1,177, or $0.24 per share, for the same period in 2019. 43 Table of Contents Quantitative measures established by federal regulations to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of March 31, 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. Minimum Capital Minimum Capital Requirement to be Requirement to be Adequately Actual Well Capitalized Capitalized Amount Ratio Amount Ratio Amount Ratio March 31, 2020 Citizens Holding Company Tier 1 leverage ratio $ 98,695 8.30 % $ 59,432 5.00 % $ 47,546 4.00 % Common Equity tier 1 capital ratio 98,695 13.82 % 77,262 6.50 % 53,489 4.50 % Tier 1 risk-based capital ratio 98,695 13.82 % 57,147 8.00 % 42,861 6.00 % Total risk-based capital ratio 102,510 14.35 % 71,434 10.00 % 57,147 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%. 44 Table of Contents 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. The final Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the final Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital. Management believes that, as of March 31, 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. 45 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 Ended March 31, 2020 2019 Interest Income, including fees $ 9,709 $ 8,384 Interest Expense 2,324 2,174 Net Interest Income 7,385 6,210 Provision for loan losses 314 195 Net Interest Income after Provision for loan losses 7,071 6,015 Other Income 2,381 2,047 Other Expense 8,067 6,640 Income Before Provision For Income Taxes 1,385 1,422 Provision for Income Taxes 225 195 Net Income $ 1,160 $ 1,227 Net Income Per share - Basic $ 0.21 $ 0.25 Net Income Per Share - Diluted $ 0.21 $ 0.25 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 4.11% for the three months ended March 31, 2020, and 5.70% for the corresponding period in 2019. The decrease in ROE for the three months ended March 31, 2020 was caused by the increase in equity balances and a decrease in net income compared to the same period in 2019. Book value per share increased to $21.27 at March 31, 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 three months ended March 31, 2020 were $1,202,483 compared to $1,164,570 for the year ended December 31, 2019. This increase was due mainly to an increase in investment securities. 46 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 2.72% for the three months ended March 31, 2020 compared to 2.74% for the corresponding period of 2019. The decrease in net interest margin for the three months ended March 31, 2020, when compared to the same period in 2019, was overall minimal as yields on earning assets and rates on interest bearing liabilities decreased proportionally, as detailed below. Earning assets averaged $1,109,562 for the three months ended March 31, 2020. This represents an increase of $179,885, or 19.3%, over average earning assets of $929,677 for the three months ended March 31, 2019. Interest bearing deposits averaged $731,470 for the three months ended March 31, 2020. This represents an increase of $97,486, or 15.4%, from the average of interest-bearing deposits of $633,984 for the three months ended March 31, 2019. This was due to an increase in interest-bearing NOW and money market accounts, savings and certificates of deposit. Other borrowed funds averaged $158,424 for the three months ended March 31, 2020. This represents an increase of $51,635, or 48.4%, over the other borrowed funds of $106,789 for the three months ended March 31, 2019. This increase in other borrowed funds was due to an increase in securities sold under agreements to repurchase for the three months ended March 31, 2020, when compared to the three months ended March 31, 2019. Net interest income was $7,385 for the three months ended March 31, 2020, an increase of $1,175 from $6,210 for the three months ended March 31, 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 March 31, 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 11 basis points to 3.56% in the three months ended March 31, 2020 from 3.67% for the same period in 2019. At the same time, the rate paid on all interest-bearing liabilities for the three months ended March 31, 2020 decreased 14 basis points to 1.05% from 1.19% 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 both increase. 47 Table of Contents The following table shows the interest and fees and corresponding yields for loans only. For the Three Months Ended March 31, 2020 2019 Interest and Fees $ 7,480 $ 5,450 Average Gross Loans 574,755 435,070 Annualized Yield 5.21 % 5.01 % CREDIT LOSS EXPERIENCE As a natural corollary to the Corporation’s lending activities, some loan losses are to be expected. The risk of loss varies with the type of loan being made and the overall creditworthiness of the borrower over the term of the loan. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and for various types of loans. The Corporation attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures. The Corporation maintains a program of systematic review of its existing loans. Loans are graded for their overall quality. Those loans, which management determines require further monitoring and supervision, are segregated and reviewed on a regular basis. Significant problem loans are reviewed monthly by the Corporation’s management and Board of Directors. The Corporation charges off that portion of any loan that the Corporation’s management and Board of Directors has determined to be a loss. A loan is generally considered by management to represent a loss, in whole or in part, when exposure beyond the collateral value is apparent, servicing of the unsecured portion has been discontinued or collection is not anticipated based on the borrower’s financial condition. The general economic conditions in the borrower’s industry influence this determination. The principal amount of any loan that is declared a loss is charged against the Corporation’s allowance for loan losses. The Corporation’s allowance for loan losses is designed to provide for loan losses that can be reasonably anticipated. The allowance for loan losses is established through charges to operating expenses in the form of provisions for loan losses. Actual loan losses or recoveries are charged or credited to the allowance for loan losses. The Board of Directors determines the amount of the allowance. Among the factors considered in determining the allowance for loan losses are the current financial condition of the Corporation’s borrowers and the value of security, if any, for their loans. Estimates of future economic conditions and their impact on various industries and individual borrowers are also taken into consideration, as are the Corporation’s historical loan loss experience and reports of banking regulatory authorities. As these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether the Corporation will sustain loan losses in excess or below its allowance or that subsequent evaluation of the loan portfolio may not require material increases or decreases in such allowance. 48 Table of Contents The following table summarizes the Corporation’s allowance for loan losses for the dates indicated: Quarter Ended Year Ended Amount of Percent of March 31, December 31, Increase Increase 2020 2019 (Decrease) (Decrease) BALANCES: Gross Loans $ 576,984 $ 577,075 $ (91 ) -0.02 % Allowance for Loan Losses 3,816 3,755 61 1.62 % Nonaccrual Loans 11,941 11,993 (52 ) -0.43 % Ratios: Allowance for loan losses to gross loans 0.66 % 0.65 % Net loans charged off (recovered) to allowance for loan losses 6.63 % 5.06 % The provision for loan losses for the three months ended March 31, 2020 was $314, an increase of $119 from the provision for loan losses of $195 for the same period in 2019. The change in the Corporation’s loan loss provisions for the three months ended March 31, 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 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 March 31, 2020, net loan losses charged to the allowance for loan losses totaled $253, an increase of $246 from the $7 charged off in the same period in 2019. The decrease was primarily due to one significant charge-off during the first quarter of 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 three months ended March 31, 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. 49 Table of Contents OTHER INCOME Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended March 31, 2020 was $2,381, an increase of $334, or 16.3%, from $2,047 in the same period in 2019. Service charges on deposit accounts were $1,049 in the three months ended March 31, 2020, compared to $1,097 for the same period in 2019. Other service charges and fees increased by $89, or 13.0%, to $773 in the three months ended March 31, 2020, compared to $684 for the same period in 2019. Other operating income not derived from service charges or fees increased $293, or 110.2% to $559 in the three months ended March 31, 2020, compared to $266 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. 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 Ended March 31, Other operating income 2020 2019 BOLI Income $ 106 $ 126 Mortgage Loan Origination Income 247 48 Income from security sales, net 77 — Other Income 129 92 Total Other Income $ 559 $ 266 OTHER EXPENSES Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended March 31, 2020 and 2019 were $8,067 and $6,640, respectively, an increase of $1,426 or 21.5%. Salaries and benefits increased to $4,435 for the three months ended March 31, 2020, from $3,547 for the same period in 2019. Occupancy expense increased by $236, or 16.6%, to $1,659 for the three months ended March 31, 2020, compared to $1,423 for the same period of 2019. Other operating expenses increased by $302, or 18.1%, to $1,973 for the three months ended March 31, 2020, compared to $1,670 for the same period of 2019. This increase was mainly due to an increase in legal and consulting fees, advertising, office supplies and telephone expense. 50 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 Ended March 31, Other Operating Expense 2020 2019 Advertising $ 204 $ 179 Office Supplies 292 217 Professional Fees 258 133 Telephone expense 158 112 Postage and Freight 141 149 Loan Collection Expense 23 8 Regulatory and related expense 66 84 Debit Card/ATM expense 135 121 Travel and Convention 53 37 Other expenses 643 630 Total Other Expense $ 1,973 $ 1,670 The Corporation’s efficiency ratio for the three months ended March 31, 2020 was 84.74%, compared to 76.34% 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 March 31, December 31, Increase Increase 2020 2019 (Decrease) (Decrease) Cash and Due From Banks $ 19,610 $ 15,937 $ 3,673 23.05 % Interest Bearing deposits with Other Banks 61,909 58,557 3,352 5.72 % Investment Securities 482,077 464,383 17,694 3.81 % Loans, net 573,163 573,312 (149 ) -0.03 % Premises and Equipment 24,495 24,672 (177 ) -0.72 % Total Assets 1,216,111 1,195,434 20,677 1.73 % Total Deposits 925,888 898,996 26,892 2.99 % Total Shareholders’ Equity 118,744 112,800 5,944 5.27 % 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 March 31, 2020 was $19,610, which was an increase of $3,673 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. 51 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 March 31, 2020 increased by $17,694, or 3.8%, to $482,077 from $464,383 at December 31, 2019. This increase was due to sales, maturities, paydowns and calls in excess of purchases and increases in the market value of the Corporation’s investment securities portfolio. LOANS The Corporation’s loan balance decreased by $149, or 0.3%, during the three months ended March 31, 2020, to $573,163 from $573,312 at December 31, 2019. Loan demand, especially in land development and construction, commercial and industrial, and commercial real estate categories, remained strong during the three months ended March 31, 2020 but competition for available loans continued to be strong during that period. Additionally, the uncertainty surrounding the COVID-19 pandemic has put a lot of projects on hold in the near term. No material changes were made to the loan products offered by the Corporation during this period. PREMISES AND EQUIPMENT During the three months ended March 31, 2020, the Corporation’s premises and equipment decreased by $177, or 0.7%, to $24,495 from $24,672 at December 31, 2019. The increase was due to the purchase of a piece of property for expansion partially offset by depreciation expense. DEPOSITS The following table shows the balance and percentage change in the various deposits: Amount of Percent of March 31, December 31, Increase Increase 2020 2019 (Decrease) (Decrease) Noninterest-Bearing Deposits $ 195,843 $ 190,406 $ 5,437 2.86 % Interest-Bearing Deposits 410,485 369,354 41,131 11.14 % Savings Deposits 87,422 83,065 4,357 5.25 % Certificates of Deposit 232,138 256,171 (24,033 ) -9.38 % Total deposits $ 925,888 $ 898,996 $ 26,892 2.99 % Noninterest-bearing, interest-bearing and savings accounts increased during the three months ended March 31, 2020 while certificates of deposit decreased slightly. Management continually monitors the interest rates on loan and deposit products to ensure that the Corporation is in line with the rates dictated by the market and our asset and liability management objectives. These rate adjustments impact deposit balances. 52 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. 53 Table of Contents The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of March 31, 2020 and December 31, 2019: March 31, 2020 December 31, 2019 Following Months Following Months 12 months 13-24 12 months 13-24 +400 basis points 24.4 % 32.7 % 6.4 % 20.9 % +300 basis points 22.3 % 27.6 % 6.3 % 17.5 % +200 basis points 18.3 % 20.7 % 5.7 % 13.3 % +100 basis points 11.8 % 11.4 % 3.0 % 7.0 % Flat rates — — — — -100 basis points -7.0 % -7.4 % -7.3 % -7.5 % -200 basis points -8.0 % -7.5 % -14.5 % -15.1 % The following table presents the change in our economic value of equity as of March 31, 2020 and December 31, 2019, assuming immediate parallel shifts in interest rates: Economic Value of Equity at Risk (%) March 31, 2020 December 31, 2019 +400 basis points 30.9 % 7.1 % +300 basis points 32.4 % 8.0 % +200 basis points 29.6 % 7.8 % +100 basis points 17.9 % 5.4 % Flat rates — — -100 basis points -27.1 % -18.5 % -200 basis points -46.7 % -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. 54 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 March 31, 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 March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 55 Table of Contents PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 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. 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. 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: 56 Table of Contents • 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. 57 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. 58 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: May 8, 2020 59