10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

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

For the transition periodfrom 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<br><br><br>Incorporation or Organization)	(IRS Employer<br><br><br>Identification Number)
521 Main Street, Philadelphia, MS	39350
(Address of Principal Executive Office)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (601)656-4692

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

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on WhichRegistered
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒

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 for 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 the definition of “accelerated filer,” “large 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 ☒

As of June 30, 2019, the aggregate market value of the registrant’s common stock, $.20 par value, held by non-affiliates of the registrant was $92,106,467 based on the closing sale price as reported on the NASDAQ Global Market for such date (the exchange on which the registrant’s common stock was listed on June 30, 2019).

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding at March 11,2020
Common stock, $.20 par value	5,578,131 Shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Citizens Holding Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2019 are incorporated by reference into Part II of this Annual Report on Form 10-K.

Portions of Citizens Holding Company’s Definitive Proxy Statement with respect to its 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

CITIZENS HOLDING COMPANY

FORM 10-K

INDEX


	PART I
ITEM 1.	BUSINESS	3
ITEM 1A.	RISK FACTORS	12
ITEM 1B.	UNRESOLVED STAFF COMMENTS	27
ITEM 2.	PROPERTIES	28
ITEM 3.	LEGAL PROCEEDINGS	30
ITEM 4.	MINE SAFETY DISCLOSURES	30
	PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	31
ITEM 6.	SELECTED FINANCIAL DATA	31
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	32
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	32
ITEM 9A.	CONTROLS AND PROCEDURES	32
ITEM 9B	OTHER INFORMATION	32
	PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	33
ITEM 11.	EXECUTIVE COMPENSATION	33
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	33
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	34
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	34
	PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	36
ITEM 16.	FORM 10-K SUMMARY	37
SIGNATURES		38

CITIZENS HOLDING COMPANY

FORM 10-K

PART I

In addition to historical information, this report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management’s beliefs, plans, expectations, assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this report, including, but not limited to, statements found in Item 1, “Business,” and in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Citizens Holding Company (the “Company”) notes that a variety of factors could cause its actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the business of the Company and the Company’s wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank”), include, but are not limited to, the following:

•	expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve<br>Board in response to changing economic conditions;
•	adverse changes in asset quality and loan demand, the potential insufficiency of the allowance for loan losses<br>and our ability to foreclose on delinquent mortgage loans;
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•	the risk of adverse changes in business conditions in the banking industry generally and in the specific<br>markets in which the Company operates;
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•	extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company<br>and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, or litigation;
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•	increased competition from other financial institutions and the risk of failure to achieve our business<br>strategies;
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•	events affecting our business operations, including the effectiveness of our risk management framework, the<br>accuracy of our estimates, our reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances;
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•	our ability to maintain sufficient capital and to raise additional capital when needed;
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•	our ability to maintain adequate liquidity to conduct business and meet our obligations;<br>
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•	events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to<br>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;
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•	events that adversely affect our reputation, and the resulting potential adverse impact on our business<br>operations
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•	risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay<br>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<br>time-to-time in the Company’s filings with the Securities and Exchange Commission.
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The Company undertakes no obligation to update or revise any forward-looking statements subsequent to the date on which they are made. Please also refer to Item 1A, “Risk Factors,” for a detailed discussion of the risks related to the Company, the Bank in particular, and the banking industry generally.

ITEM 1.	BUSINESS.

BACKGROUND

The Company is a one-bank holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of The Citizens Bank of Philadelphia (the “Bank”). The Company does not have any subsidiaries other than the Bank. The “Company,” “we,” or “our,” as used herein, includes the Bank, unless the context otherwise requires.

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 December 31, 2019, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,195,261 and total deposits of $900,732. For more information regarding the assets, revenue and profits of the Company, refer to the Consolidated Financial Statements of the Company contained in Item 8, “Financial Statements and Supplementary Data.” The Company’s only reportable segment is the assets and cash flow of the Bank, resulting in revenues of $44,919, operating profit of $6,277 and total assets of $1,195,261 for the Company as of December 31, 2019.

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.

OPERATIONS

Through its ownership of the Bank, the Company engages in a wide range of commercial and personal banking activities, including accepting demand deposits, savings and time deposit accounts, making secured and unsecured loans, issuing letters of credit, originating mortgage loans, and providing personal and corporate trust services. The Company also provides certain services that are closely related to commercial banking such as credit life insurance and title insurance for its loan customers.

Revenues from the Company’s lending activities constitute the largest component of the Company’s operating revenues. Revenue from loan interest and fees made up 54.7% of gross revenues in 2019, 50.7% in 2018 and 48.3% in 2017. Loan demand has improved and loan yields are gradually increasing, both of which has contributed to this percentage increasing from 2017. The increase in lending has been distributed among the Bank’s leading products, including commercial, real estate, installment (direct and indirect) and credit card loans. The Company’s primary lending area is East Central and South Mississippi, specifically Neshoba, Newton, Leake, Lamar, Forrest, Scott, Attala, Lauderdale, Oktibbeha, Lafayette, Rankin, Harrison, Jackson, Winston and Kemper counties and contiguous counties. In 2019, the Company expanded its presence on the Mississippi Gulf Coast through the acquisition of Charter. The Company continues to look for areas of growth within the state of Mississippi and surrounding states but, occasionally the Company extends out-of-area credit to borrowers who are considered to be low risk, as defined within the Bank’s lending policy. The Company is not dependent upon any single customer or small group of customers, and it has no foreign operations.

The Company’s market area has historically been rural, however, since 2008, the Company has continued to expand into larger metropolitan areas and now serves a number of larger growth areas with Gulfport, population 71,570, Hattiesburg, population 46,251, Biloxi, population 45,568, and Meridian, population 38,602, being the largest markets. The economy throughout Mississippi is becoming more diverse but agriculture and manufacturing continue to be the largest industries in Mississippi. For more information regarding revenue from external customers for the last three fiscal years, attributed by geographic region, please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in the Company’s Annual Report and attached as an exhibit hereto.

The Company has historically made, and intends to continue to make, most types of real estate loans, including, but not limited to, single and multi-family housing, farm, residential and commercial construction, and commercial real estate loans. At December 31, 2019, approximately 79.8% of the Company’s loan portfolio was attributed to real estate lending, 17.3% of the Company’s loan portfolio was comprised of commercial, industrial and agricultural production loans, and consumer loans made up the remaining 2.9% of the Company’s total loan portfolio.

The Company’s loan personnel have the authority to extend credit under guidelines established and approved by the Company’s Board of Directors. Any aggregate credit that exceeds the authority of the loan officer is forwarded to the Board’s loan committee for approval. The loan committee is composed of certain independent Company directors. All aggregate credits that exceed the loan committee’s lending authority are presented to the Board of Directors for ultimate approval or denial. The loan committee not only acts as an approval body to ensure consistent application of the Company’s loan policies, but also provides valuable insight through the communication and pooling of knowledge, judgment and experience of its members.

All loans in the Company’s portfolio are subject to risk based on the state of both the local and national economy. As our footprint expands, the Company’s portfolio risks are more closely aligned with the state economy. The state economy remains strong with 2019 being one of the best in recent years. The state economy is expected to slow down some but still projected to see growth over the next couple of years. The national economy remains strong but is seeing signs of slowing. It is still uncertain how the slowing economies on the local, state and national levels will affect the Company in the future.

The Company continues to invest in technology as we understand it is necessary to compete in today’s market. The Company has the technology for consumers to perform many of the routine, transaction-related items through its online and mobile platforms. Additionally, the Company continues to build out a robust treasury management suite of products for business banking such as remote deposit capture, ACH transactions and wire transfers. The Company is evolving with the market to ensure we continue to offer a great customer experience that they have come to expect from the Company.

EXECUTIVE OFFICERS OF THE COMPANY

Greg L. McKee, 58, has been employed by the Bank since 1984. He was named President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank in January 2003. He has served as President of the Bank since January 2002 and served as Chief Operating Officer of the Bank from January 2002 until December 31, 2002. He has also been a member of the

Board of Directors of both the Company and the Bank since 2001. Mr. McKee served as Executive Vice-President of the Bank from 2001 to 2002, Senior Vice-President of the Bank from 2000 to 2001, Vice-President of the Bank from 1992 to 2000, Assistant Vice-President of the Bank from 1989 to 1992, and Assistant Cashier of the Bank from 1984 to 1989.

Robert T. Smith, 68, has been employed by the Bank since 1986. He has served as Senior Vice-President and Chief Financial Officer of the Bank since January 2001. Prior to January 2001, Mr. Smith held the title of Vice-President and Controller of the Bank from 1987 until 2001 and Assistant Vice-President of the Bank from 1986 to 1987. In addition to his position with the Bank, Mr. Smith has served as Treasurer of the Company since February 1996 and Treasurer and Chief Financial Officer since January 2001.

EMPLOYEES

The Company has no employees other than three Bank officers who provide services to the Company. These officers receive no compensation from the Company for their services to it as their compensation is paid by the Bank. At December 31, 2019, the Bank employed 264 full-time employees and 26 part-time employees. The Bank is not a party to any collective bargaining agreements, and employee relations are considered to be good.

SUPERVISION AND REGULATION

The Bank is chartered under the banking laws of the State of Mississippi and is subject to the supervision of, and is regularly examined by, the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Corporation (“FDIC”). The Company is a registered bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to the supervision of the Federal Reserve Board (“FRB”). Certain legislation and regulations affecting the businesses of the Company and the Bank are discussed below.

General.

The current regulatory environment for financial institutions includes substantial enforcement activity by the federal and state banking agencies, and other state and federal law enforcement agencies, reflecting an increase in activity over prior years. This environment entails significant increases in compliance requirements and associated costs. The FRB requires the Company to maintain certain levels of capital and to file an annual report with the FRB. The FRB also has the authority to conduct examinations of the Company and the Bank and to take enforcement action against any bank holding company that engages in any unsafe or unsound practice or that violates certain laws, regulations, or conditions imposed in writing by the FRB.

Financial Reform. ~~~~

The Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, (“Dodd- Frank Act”) made extensive changes in the regulation of financial institutions. There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based, a number of which still have not been implemented. It is anticipated that these rules and enforcement by the Bank’s regulators will continue to evolve through regulatory amendments, informal interpretations, and enhanced enforcement in the future. Congress and the President have announced proposed reforms and changes to the Dodd-Frank Act, and it is uncertain how the Dodd- Frank Act provisions may be modified or the ultimate impact any such modifications may have to our business operations.

In November 2017, a bipartisan group of U.S. Senators, led by Senate Banking Committee Chairman, introduced the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”). The Economic Growth Act, signed into law on May 24, 2019, provides relief from certain regulatory requirements under the Dodd-Frank Act. Generally, the Economic Growth Act addressed the following areas: the threshold at which banks are classified as systemically important financial institutions (SIFIs), and therefore subject to stricter oversight; targeted relief from Dodd-Frank Act requirements for smaller banks; capital formation; mortgage lending; student borrower debt and provisions addressing veterans, consumers and homeowners. While we expect the Economic Growth Act to have an overall positive impact on our business going forward, we continue to evaluate its impact on our business and that impact remains uncertain.

Capital Standards.

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

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Since December 31, 1992, the federal banking agencies have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet items of 4%. At December 31, 2019, the Company’s ratio of qualifying total capital to risk-adjusted assets and off-balance sheet items was 14.39%, and its ratio of Tier 1 capital to risk-adjusted assets and off-balance sheet items was 13.86%.

In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 4%. The Company’s leverage ratio at December 31, 2019 was 8.33%.

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

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

•	Create a new requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of<br>not less than 4.5%;
•	Increase the minimum leverage ratio to 4% for all banking organizations (currently 3% for certain banking<br>organizations);
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•	Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and
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•	Maintain the minimum total risk-based capital ratio at 8%.
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In addition, the Basel III rules will subject a banking organization 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 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 Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital.

Management believes that, as of December 31, 2019, the Company and the Bank met all capital adequacy requirements under Basel III. Management will continue to monitor these and any future proposals submitted by the Company’s and Bank’s regulators.

Prompt Corrective Action and Other Enforcement Mechanisms.

The Federal Deposit Insurance Corporation Improvement Act of 1991, as amended (“FDICIA”) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including, but not limited to, those that fall below one or more of the prescribed minimum capital ratios. The law requires each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized; adequately capitalized; undercapitalized; significantly undercapitalized; and critically undercapitalized. The Company and the Bank are classified as well capitalized under the guidelines promulgated by the FRB and the FDIC.

Safety and Soundness Standards.

FDICIA also implemented certain specific restrictions on transactions and required the regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, the use of brokered deposits and the aggregate extension of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions and for deposits by certain employee benefits accounts.

Restrictions on Dividends and Other Distributions.

The Company’s ability to pay dividends depends in large part on the ability of the Bank to pay dividends to the Company. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to federal statutory and regulatory restrictions, which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.

The approval of the Mississippi Department of Banking and Consumer Finance is also required prior to the Bank paying dividends. The department’s regulations limit dividends to earned surplus in excess of three times the Bank’s capital stock. At December 31, 2019, the maximum amount available for transfer from the Bank to the Company in the form of a dividend was approximately $101,119, or 92.6% of the Bank’s consolidated net assets.

FRB regulations limit the amount the Bank may loan to the Company unless those loans are collateralized by specific obligations. At December 31, 2019, the maximum amount available for transfer from the Bank in the form of loans was $10,900, or 10% of the Bank’s consolidated net assets. The Bank does not have any outstanding loans with the Company.

FDIC InsuranceAssessments.

The FDIC insures the deposits of federally insured banks up to prescribed statutory limits for each depositor, through the Deposit Insurance Fund (“DIF”) and safeguards the safety and soundness of the banking and thrift industries. The amount of FDIC assessments paid by each insured depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.

The FDIC’s deposit insurance premium assessment is based on an institution’s average consolidated total assets minus average tangible equity.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking, if required. If there are additional bank or financial institution failures or if the FDIC otherwise determines to increase assessment rates, the Bank may be required to pay higher FDIC insurance premiums. Any future increases in FDIC insurance premiums may have a material and adverse effect on our earnings.

Other BHC Act Provisions.

The BHC Act requires a bank holding company to obtain the prior approval of the FRB before acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by such bank holding company. The BHC Act provides that the FRB shall not approve any acquisition, merger or consolidation that would result in a monopoly or that would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking. The FRB also will not approve any other transactions in which the effect might be to substantially lessen competition or in any manner be a restraint on trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in the probable effect of the transaction in meeting the convenience and needs of the community to be served.

The BHC Act also prohibits a bank holding company, with certain exceptions, from engaging in or from acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities. The principal exception to this rule is for engaging in or acquiring shares of a company whose activities are found by the FRB to be so closely related to banking or managing banks as to be a proper incident thereto. In making such determinations, the FRB is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency of resources that outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices.

The BHC Act prohibits the acquisition by a bank holding company of more than 5% of the outstanding voting shares of a bank located outside the state in which the operations of its banking subsidiaries are principally conducted, unless such an acquisition is specifically authorized by statute of the state in which the bank to be acquired is located.

The Company and the Bank are subject to certain restrictions imposed by the Federal Reserve Act and the Federal Deposit Insurance Act on any extensions of credit to the Company or the Bank, on investments in the stock or other securities of the Company or the Bank, and on taking such stock or other securities as collateral for loans of any borrower.

The BHC Act was amended in 2000 by the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 to permit “financial holding companies” to engage in a broader range of nonbanking financial activities, such as underwriting and selling insurance, providing financial or investment advice, and dealing and making markets in securities and merchant banking. In order to qualify as a financial holding company, the Company must declare to the FRB its intention to become a financial holding company and certify that the Bank meets the capitalization management requirements and that it has at least a satisfactory rating under the Community Reinvestment Act of 1997, as amended (the “CRA”). To date, we have not elected to become a financial holding company.

Community Reinvestment Act.

The CRA requires the assessment by the appropriate regulatory authority of a financial institution’s record in meeting the credit needs of the local community, including low and moderate-income neighborhoods. The regulations promulgated under CRA emphasize an assessment of actual performance in meeting local credit needs, rather than of the procedures followed by a bank to evaluate compliance with the CRA. CRA compliance is also a factor in evaluations of proposed mergers, acquisitions and applications to open new branches or facilities. Overall CRA compliance is rated across a four-point scale from “outstanding” to “substantial noncompliance.” Different evaluation methods are used depending on the asset size of the bank.

The FDIC examined the Bank on July 12, 2016 for its performance under the CRA. The Bank was rated Satisfactory during this examination. No discriminatory practices or illegal discouragement of applications were found.

Consumer Protection.

The Bank is subject to a number of federal and state consumer protection laws. These laws provide substantive consumer rights and subject the Bank to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which our bank subsidiary operates and civil money penalties. Failure to comply with consumer protection requirements may also result in the Bank’s failure to obtain any required bank regulatory approval for merger or acquisition transactions the Bank may wish to pursue or its prohibition from engaging in such transactions even if approval is not required.

Anti-Money Laundering Efforts.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) requires financial institutions to establish anti-money laundering programs and due diligence policies, procedures and controls with respect to bank accounts involving foreign individuals and certain foreign banks, and to avoid establishing and maintaining accounts in the United States for, or on the behalf of, foreign banks that do not have a physical presence in any country. We believe that we are in compliance with the requirements of the USA PATRIOT Act.

Corporate Governance.

The Sarbanes-Oxley Act of 2002 (“Sarbanes Act”) requires publicly traded companies, such as the Company, to adhere to several directives designed to prevent corporate misconduct. As a result, additional duties have been placed on officers, directors, auditors and attorneys of public companies. The Sarbanes Act requires certifications regarding financial statement accuracy and internal control adequacy by the chief executive officer and the chief financial officer to accompany periodic reports filed with the Securities and Exchange Commission (“SEC”). The Sarbanes Act also accelerates insider reporting obligations under Section 16 of the Securities Exchange Act of 1934, as amended, restricts certain executive officer and director transactions, imposes new obligations on corporate audit committees and provides for enhanced review by the SEC.

The Dodd-Frank Act mandated a number of new requirements with respect to corporate governance. The legislation requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. The Dodd-Frank Act also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Impact of Monetary Policies.

Banking is a business that substantially depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings and the interest rate earned by banks on loans, securities and other interest-earning assets comprises the major source of banks’ earnings. Thus, the earnings and growth of banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies including the FRB. The nature and timing of any future changes in such policies and their impact on the Company cannot be predicted.

Future Legislation.

Various legislation affecting financial institutions and the financial industry is from time to time introduced in Congress. Such legislation may change banking statutes and our operating environment in substantial and unpredictable ways and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or our results of operations. With the proposals to alter the Dodd-Frank Act and the evolution of the CFPB, the nature and extent of future legislative and regulatory changes affecting financial institutions continues to be very unpredictable.

COMPETITION

The banking business is highly competitive. The Company’s primary market area is East Central, South and North Mississippi, specifically Neshoba, Newton, Leake, Lamar, Forrest, Scott, Attala, Lauderdale, Oktibbeha, Lafayette, Rankin, Harrison, Jackson, Winston and Kemper counties and contiguous counties. In 2019, the Company expanded its presence on the Mississippi Gulf Coast through the acquisition of Charter. The Company continues to look for areas of growth in the state of Mississippi and surrounding states but, occasionally the Company extends out-of-area credit to borrowers who are considered to be low risk, as defined within the Bank’s lending policy. The Company competes with local, regional and national financial institutions in these counties and in surrounding counties in Mississippi in obtaining deposits, lending activities and providing many types of financial services. The Company also competes with larger regional banks for the business of companies located in the Company’s market area.

All financial institutions, including the Company, compete for customers’ deposits. The Company also competes with savings and loan associations, credit unions, production credit associations, federal land banks, finance companies, personal loan companies, money market funds and other non-depository financial intermediaries. Many of these financial institutions have resources significantly greater than those of the Company. In addition, financial intermediaries, such as money-market mutual funds and large retailers, are not subject to the same regulations and laws that govern the operation of traditional depository institutions. The Company believes it benefits from a good reputation in the community and from the significant length of time it has provided needed banking services to its customers. Also, as a locally owned financial institution, the Company believes it is able to respond to the needs of the community with services tailored to the particular demands of its customers. Furthermore, as a local institution, the Company believes it can provide such services faster than a larger institution not based in the Company’s market area.

Changes in federal and state law have resulted in, and are expected to continue to result in, increased competition. The reductions in legal barriers to the acquisition of banks by out-of-state bank holding companies resulting from implementation of the Dodd-Frank Act and other banking laws and regulations are expected to continue to further stimulate competition in the markets in which the Company operates, although it is not possible to predict the extent or timing of such increased competition.

Currently, there are approximately forty different financial institutions in the Company’s market competing for the same customer base. According to the FDIC’s Summary of Deposits that is collected as of June 30 each year, the Company’s market share in its market area was approximately 5.51% at June 30, 2019. The Company competes in its market for loan and deposit products, along with many of the other services required by today’s banking customer, on the basis of availability, quality and pricing. The Company believes it is able to compete favorably in its markets, in terms of both the rates the Company offers and the level of service that the Company provides to its customers.

AVAILABILITY OF INFORMATION

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, along with other information about the Company, are available, free of charge, on our website, http://www.citizensholdingcompany.com. The information contained on our website is not incorporated into this report. Upon request, the Company will provide to any record holder or beneficial holder of its shares a copy of such reports without charge. Requests should be made to Robert T. Smith, Treasurer and Chief Financial Officer, Citizens Holding Company, 521 Main Street, Philadelphia, Mississippi 39350.

ITEM 1A.	RISK FACTORS.

In addition to the other information contained in or incorporated by reference into this report and the exhibits hereto, the following risk factors should be considered carefully in evaluating the Company’s business. The risks disclosed below, either alone or in combination, could materially adversely affect the business, prospects, financial condition or results of operations of the Company and/or the Bank. Additional risks not presently known to the Company, or that the Company currently deems immaterial, may also adversely affect the Company’s business, financial condition or results of operations.

Risks Related To The Company’s Business and Industry

The Company is subject to interest rate risk.

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

The Company’s assets and liabilities are principally financial in nature and the resulting earnings thereon are subject to significant variability due to the timing and extent to which the Company can reprice the yields on interest-earning assets and the costs of interest bearing liabilities as a result of changes in market interest rates. Interest rates in the financial markets affect the Company’s decisions on pricing its assets and liabilities, which impacts net interest income, an

important cash flow stream for the Company. As a result, a substantial part of the Company’s risk-management activities is devoted to managing interest-rate risk. Currently, the Company does not have any significant risks related to foreign currency exchange, commodities or equity risk exposures.

The Company’s earnings and cash flows are largely dependent upon the net interest income of the Company. Net interest income is the difference between interest earned on assets, such as loans and securities, and the cost of interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest the Company pays on deposits and borrowings, but such changes could also affect (i) the Company’s ability to originate loans and obtain deposits, which could reduce the amount of fee income generated; (ii) the fair value of the Company’s financial assets and liabilities; and (iii) the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income could be adversely affected, which in turn could negatively affect its earnings. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the results of operations of the Company, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. For the reasons set forth above, an increase in interest rates generally as a result of such a credit rating downgrade could adversely affect out net interest income levels, thereby resulting in reduced earnings, and reduce loan demand. Volatility in interest rates may also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as United States Government and Agency securities and other investment vehicles, including mutual funds, which generally pay higher rates of return than financial institutions because of the absence of federal insurance premiums and reserve requirements. Disintermediation could also result in material adverse effects on the Company’s financial condition and results of operations.

A discussion of the policies and procedures used to identify, assess and manage certain interest rate risk is set forth in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk.”

The Company is subject to lending risk.

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those across the United States. Increases in interest rates or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans.

As of December 31, 2019, approximately 73.1% of the Company’s loan portfolio consisted of commercial, construction and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans due primarily to the large amounts loaned to individual borrowers. Because the loan portfolio contains a

significant number of commercial, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations.

Delays in the Company’s ability to foreclose on delinquent mortgage loans may negatively impact our business.

Because the Bank originates loans secured by real estate, the Bank may have to foreclose on the collateral property to protect its investment and may thereafter own and operate such property, in which case the Company is exposed to the risks inherent in the ownership of real estate. The amount realized after a default is dependent upon factors outside of the Company’s control, including, but not limited to:

•	general or local economic conditions;
•	environmental cleanup liability;
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•	neighborhood values;
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•	interest rates;
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•	real estate tax rates;
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•	operating expenses of the mortgaged properties;
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•	supply of and demand for rental units or properties;
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•	ability to obtain and maintain adequate occupancy of the properties;
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•	zoning laws;
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•	governmental rules, regulations and fiscal policies; and
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•	natural disasters.
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Certain expenses associated with the ownership of real estate, principally real estate taxes, insurance, and maintenance costs, may adversely affect the net proceeds received from the real estate, if any. The ability to mitigate the losses on defaulted loans depends upon the ability to promptly foreclose upon the collateral after an appropriate cure period. Any delay in the foreclosure process adversely affects us by increasing the expenses related to carrying such real estate and exposes us to losses as a result of potential additional declines in the value of such collateral. As a result, the increased cost of owning and operating such real estate may exceed the rental income earned from the real estate (if any), the Company may have to advance additional funds to protect our investment or the Company may be required to dispose of the real estate at a loss.

The allowance for possible loan losses may be insufficient.

Although the Company tries to maintain diversification within its loan portfolio in order to minimize the effect of economic conditions within a particular industry, management also maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on management’s quarterly analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses, including collective impairment. Among other considerations in establishing the allowance for loan losses, management considers economic conditions reflected within industry segments, the unemployment rate in the Company’s markets, loan segmentation and historical losses that are inherent in the loan portfolio.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Company’s control, may require an increase in the allowance for loan losses.

In addition, bank regulatory agencies periodically review the allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the Company will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Company’s financial condition and results of operations. A discussion of the policies and procedures related to management’s process for determining the appropriate level of the allowance for loan losses is set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company depends on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, the Company often relies on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company’s business and, in turn, its financial condition and results of operations.

The Company is subject to environmental liability risk associated with lending activities.

A significant portion of the loan portfolio is secured by real property. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially reduce the affected property’s value or limit the ability of the Company to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to environmental liability. Although management has policies and procedures to perform an environmental review during the loan application process and also before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company’s financial condition and results of operations.

The Company is subject to risk from adverse economic conditions.

Our operations and profitability are impacted by general business and economic conditions in the State of Mississippi, and the United States. These conditions include recession, short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which we operate, all of which are beyond our control. A deterioration in economic conditions could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values and a decrease in demand for our products and services, among other things, any of which could have a material adverse impact on our financial condition and results of operations.

The FRB has implemented significant economic strategies that have impacted interest rates, inflation, asset values, and the shape of the yield curve,and currently is transitioning from many years of easing to what may be a new period of tightening.

In recent years, the FRB has begun to gradually unwind the remaining domestic monetary policy initiatives as the economy continues to recover. During 2019, the FRB lowered the target federal funds rate by 25 bps in August, September and October, bringing the current range to 1.50 to 1.75 percent. This development, along with the U.S. government’s credit and deficit concerns and international economic considerations, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Other significant monetary strategies could be implemented in the future including, in particular, so-called tightening strategies. FRB strategies can, and often are intended to, affect the domestic money supply, inflation, interest rates, and the shape of the yield curve. Effects on the yield curve often are most pronounced at the short end of the curve, which is of particular importance to us and other banks. Risks associated with interest rates and the yield curve are discussed in this Item 1A under the caption “The Company is subject to interest rate risk.” Such strategies also can affect the United States. and world-wide financial systems in ways that may be difficult to predict.

The profitability of the Company depends significantly on economicconditions in the State of Mississippi.

The Company’s success depends primarily on the general economic conditions of the State of Mississippi and the specific local markets in which it operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides banking and financial services to customers primarily in East Central and South Mississippi. The local economic conditions in this area have a significant impact on the demand for the Company’s products and services, as well as the ability of its customers to repay loans, the value of the collateral securing loans and the stability of its deposit funding sources.

The Company is subject to extensive government regulation andsupervision.

The Company and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, and not the economic or other interests of shareholders. These regulations affect the Company’s and the Bank’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Changes to statutes,

regulations or regulatory policies, including changes in interpretation or implementation of the foregoing, could affect the Company or the Bank in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products it may offer or increase the ability of non-banks to offer competing financial services and products, among other things.

Under regulatory capital adequacy guidelines and other regulatory requirements, the Company and the Bank must meet guidelines that include quantitative measures of assets, liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. If the Company fails to meet these minimum capital guidelines and other regulatory requirements, its financial condition would be materially and adversely affected. The Company’s failure to maintain the status of “well capitalized” under its regulatory framework could affect the confidence of its customers in the Company, thus compromising the Company’s competitive position. In addition, failure to maintain the status of “well capitalized” under the Company’s regulatory framework or “well managed” under regulatory examination procedures could compromise the Company’s status as a bank holding company and related eligibility for a streamlined review process for acquisition proposals.

The Company is also subject to laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes Act, the Dodd Frank Act and SEC regulations. These laws, regulations and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. The Company is committed to maintaining high standards of corporate governance and public disclosure. As a result, the Company’s efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased expenses and a diversion of management time and attention.

Failure to comply with laws, regulations or policies could also result in sanctions by regulatory agencies and/or civil money penalties, which could have a material adverse effect on the Company’s business, prospects, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, it cannot assure that such violations will be prevented. The information under the heading “Supervision and Regulation” in Item 1, “Business,” and Note 16, “Regulatory Matters” to the Consolidated Financial Statements of the Company in Item 8, “Financial Statements and Supplementary Data,” provides more information regarding the regulatory environment in which the Company and the Bank operate including descriptions of the laws, regulations or policies applicable to us.

We are subject to claims and litigation.

From time to time, customers and others make claims and take legal action pertaining to our performance of our responsibilities. Whether customer claims and legal action related to our performance of our responsibilities are founded or unfounded, or if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

The Company operates in a highly competitive industry and market area.

The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and have more financial resources. Such competitors primarily include national, regional and community banks within the various markets in which the Company operates. The Company also faces competition from many other types of financial institutions, including savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The information under the heading “Competition” in Item 1, “Business,” provides more information regarding the competitive conditions in the Company’s markets.

The Company’s industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, many of the Company’s competitors have substantially greater resources than the Company, including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services.

The Company’s ability to compete successfully depends on a number of factors, including, among other things:

•	the ability to develop, maintain and build upon long-term customer relationships based on top quality service,<br>high ethical standards and safe, sound assets.
•	the ability to expand the Company’s market position.
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•	the scope, relevance and pricing of products and services offered to meet customer needs and demands.<br>
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•	the rate at which the Company introduces new products and services relative to its competitors.<br>
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•	customer satisfaction with the Company’s and the Bank’s level of service.
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•	industry and general economic trends.
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Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect its growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

We are subject to a variety of operational risks, including the risk of fraud or theft by employees, whichmay adversely affect our business and results of operations.

We are exposed to many types of operational risks, including liquidity risk, credit risk, market risk, interest rate risk, legal and compliance risk, strategic risk, information security risk, and reputational risk. We are also reliant upon our employees, and our operations are subject to the risk of fraud, theft or malfeasance by our employees. We have established processes and procedures intended to identify, measure, monitor, report and analyze these risks, however, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated, monitored or identified. If our risk management framework proves ineffective, we could suffer unexpected losses, we may have to expend resources detecting and correcting the failure in our systems and we may be subject to potential claims from third parties and government agencies. We may also suffer severe reputational damage. Any of these consequences could adversely affect our business, financial condition or results of operations. In particular, the unauthorized disclosure, misappropriation, mishandling or misuse of personal, non-public, confidential or proprietary information of customers could result in significant regulatory consequences, reputational damage and financial loss.

Our risk management policies and procedures may not be fullyeffective in identifying or mitigating risk exposure in all market environments or against all types of risk, including employee misconduct.

We have devoted significant resources to develop our risk management policies and procedures and will continue to do so. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. Many of our methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics based on historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations upon which these methods are based may not be valid. As a result, these methods may not predict future exposures accurately, which could be significantly greater than what our models indicate. This could cause us to incur investment losses or cause our hedging and other risk management strategies to be ineffective. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated.

Moreover, we are subject to the risks of errors and misconduct by our employees and advisors, such as fraud, non-compliance with policies, recommending transactions that are not suitable, and improperly using or disclosing confidential information. These risks are difficult to detect in advance and deter, and could harm our business, results of operations or financial condition. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. Insurance and other traditional risk-shifting tools may be held by or available to us in order to manage certain exposures, but they are subject to terms such as deductibles, coinsurance, limits and policy exclusions, as well as risk of counterparty denial of coverage, default or insolvency.

The Company may be subject to more stringent capital and liquidity requirements which would adversely affect its net income and future growth.

The Dodd-Frank Act applies the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will change the way in which hybrid securities, such as trust preferred securities, are treated for purposes of determining a bank holding company’s regulatory capital. In 2011, the federal banking agencies

published a final rule regarding minimum leverage and risk-based capital requirements for banks and bank holding companies consistent with the requirements of Section 171 of the Dodd-Frank Act. For a more detailed description of the minimum capital requirements see “Supervision and Regulation – Capital Standards”. The Dodd-Frank Act also increased regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency. These requirements, and any other new regulations, could adversely affect the Company’s ability to pay dividends, or could require the Company to reduce business levels or to raise capital, including in ways that may adversely affect the Company’s results of operations or financial condition.

In addition, in 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III. In 2013, regulators adopted enhancements to United States. capital standards based on Basel III. The revised standards create a new emphasis on Tier 1 common equity, modify eligibility criteria for regulatory capital instruments, and modify the methodology for calculating risk-weighted assets. The revised standards require the following:

•	Tier 1 Common Equity. For all supervised financial institutions, including the Company and the Bank,<br>the ratio of Tier 1 common equity to risk-weighted assets (“Tier 1 Common Equity Capital ratio”) must be at least 4.5%. To be “well capitalized” the Tier 1 Common Equity Capital ratio must be at least 6.5%. If a capital<br>conservation buffer of an additional 2.5% above the minimum 4.5% (or 7% overall) is not maintained, special restrictions would apply to capital distributions, such as dividends and stock repurchases, and on certain compensatory bonuses. Tier 1<br>common equity capital consists of core components of Tier 1 capital: common stock plus retained earnings net of goodwill, other intangible assets, and certain other required deduction items.
•	Tier 1 Capital Ratio. For all banking organizations, including the Bank, the ratio of Tier 1 capital to<br>risk-weighted assets must be at least 6%. The threshold is raised from the prior 4%, and the risk-weighting method is changed as mentioned above. To be “well capitalized” the Tier 1 capital ratio must be at least 8%.
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•	Total Capital Ratio. For all supervised financial institutions, including the Company and the Bank, the<br>ratio of total capital to risk-weighted assets must be at least 8%. Although this threshold is unchanged from prior requirements, as mentioned above the method for risk-weighting assets has been changed. As a result of that method change, many banks<br>could have experienced a reduction in this ratio if the change had been effective immediately when the rules were adopted.
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•	Leverage Ratio – Base. For all banking organizations, including the Bank, the leverage ratio must<br>be at least 4%. To be “well capitalized” the leverage ratio must be at least 5%.
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•	Leverage Ratio – Supplemental. For the largest internationally active banking organizations, not<br>including the Bank, a minimum supplementary leverage ratio must be maintained that takes into account certain off-balance sheet exposures.
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The revised standards took effect on January 1, 2015 for the Company and the Bank. The capital conservation buffer requirement is subject to a phase-in period.

Future increases in minimum capital requirements could adversely affect the Company’s net income. Furthermore, the Company’s failure to comply with the minimum capital requirements could result in regulators taking formal or informal actions against the Company which could restrict future growth or operations.

Negative perceptions or publicity could damage our reputation among existing and potential customers, investors, employees and advisors.

Our reputation is one of our most important assets. Our ability to attract and retain customers, investors, employees and advisors is highly dependent upon external perceptions of our company. Damage to our reputation could cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, compliance failures, any perceived or actual weakness in our financial strength or liquidity, technological, cybersecurity, or other security breaches resulting in improper disclosure of client or employee personal information, unethical behavior and the misconduct of our employees, advisors and counterparties. Negative perceptions or publicity regarding these matters could damage our reputation among existing and potential customers, investors, employees and advisors. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us. In addition, the SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. It is possible that potential or perceived conflicts could give rise to litigation or enforcement actions. It is possible also that the regulatory scrutiny of, and litigation in connection with, conflicts of interest will make our clients less willing to enter into transactions in which such a conflict may occur and will adversely affect our businesses.

The Company may be required to pay significantly higher FDIC premiums in the future.

The FDIC insures deposits at FDIC insured financial institutions, including the Bank. The FDIC charges the insured financial institutions premiums to maintain the Deposit Insurance Fund at an adequate level. The FDIC may increase these rates and impose additional special assessments in the future, which could have a material adverse effect on future earnings.

The Company’s controls and procedures may fail or be circumvented.

Management regularly reviews and updates the Company’s internal control over financial reporting, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, has inherent limitations, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to the Company’s adherence to financial reporting, disclosure and corporate governance policies and procedures.

The Company may be adversely affected by the soundness of other financial institutions.

Financial institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by the Company cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company’s financial condition and results of operations.

The Company relies on third party vendors for a number of key components of its business.

The Company contracts with a number of third party vendors to support its infrastructure. Many of these vendors are large national companies who are dominant in their area of expertise and would be difficult to quickly replace. Failures of certain vendors to provide services could adversely affect the Company’s ability to deliver products and services to its customers, disrupting its business and causing it to incur significant expense. External vendors also present information security risks.

Slowerthan anticipated growth in new branches and new product and service offerings could result in reduced income.

The Company has placed a strategic emphasis on expanding its branch network and product offerings. Executing this strategy carries risks of slower than anticipated growth both in new branches and new products. New branches and products require a significant investment of both financial and personnel resources. Lower than expected loan and deposit growth in new investments can decrease anticipated revenues and net income generated by those investments and opening new branches and introducing new products could result in more additional expenses than anticipated and divert resources from current core operations.

The Company issubstantially dependent on dividends from the Bank for its revenues.

The Company is a separate and distinct legal entity from the Bank, and it receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on its common stock and interest and principal on debt. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. In the event the Bank is unable to pay dividends to the Company, it may not be able to pay obligations or pay dividends on the Company’s common stock. The inability to receive dividends from the Bank could have a material adverse effect on the Company’s business, prospects, financial condition and results of operations. The information under the heading “Supervision and Regulation” in Item 1, “Business,” provides a discussion about the restrictions governing the Bank’s ability to transfer funds to the Company.

Potential acquisitions may disrupt the Company’s business and dilute shareholder value.

From time-to-time, the Company evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place, and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:

•	potential exposure to unknown or contingent liabilities of the target company;
•	exposure to potential asset quality issues of the target company;
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•	difficulty and expense of integrating the operations and personnel of the target company;<br>
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•	potential disruption to the Company’s business;
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•	potential diversion of management’s time and attention;
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•	the possible loss of key employees and customers of the target company;
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•	difficulty in estimating the value of the target company; and
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•	potential changes in banking or tax laws or regulations that may affect the target company.<br>
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In addition, acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, or other projected benefits from an acquisition could have a material adverse effect on the Company’s business, prospects, financial condition and results of operations.

The Company may not be able to attract and retain skilled people.

The Company’s success depends in part on its ability to retain key executives and to attract and retain additional qualified personnel who have experience both in sophisticated banking matters and in operating a bank of the Company’s size. Competition for such personnel is strong in the banking industry, and the Company may not be successful in attracting or retaining the personnel it requires. The unexpected loss of one or more of the Company’s key personnel could have a material adverse impact on its business because of their skills, knowledge of the Company’s markets, years of industry experience and the difficulty of promptly finding qualified replacements. The Company expects to effectively compete in this area by offering financial packages that are competitive within the industry.

The Company’s information systems may experience an interruption or breach in security. Evolving technologies and the need to protect against andreact to cybersecurity risks and electronic fraud requires significant resources.

The Company relies heavily on communications and information systems to conduct its business. Furthermore, the Bank provides its customers the ability to bank online. The secure transmission of confidential information over the internet is a critical element of online banking. The Company needs to invest in information technology to keep pace with technology changes, and while the Company invests amounts it believes will be adequate, it may fail to invest adequate amounts such that the efficiency of information technology systems fails to meet operational needs. Any failure, interruption or breach in security of these systems could result in failures or disruptions in its customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption

or security breach of the Company’s information systems, there can be no assurance that any such failures, interruptions or security breaches will be prevented, and if they occur, that they will be adequately addressed. Additionally, to the extent the Company relies on third party vendors to perform or assist operational functions, the challenge of managing the associated risks becomes more difficult. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage its reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose it to civil litigation and possible financial liability, any of which could have a material adverse effect on the financial condition and results of operations of the Company.

TheCompany continually encounters technological change.

The Company’s industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the Company’s industry could have a material adverse impact on its business and, in turn, the Company’s financial condition and results of operations.

The operational functions of business counterparties may experience similar disruptions that could adverselyimpact us and over which the Company may have limited or no control.

Over the course of the past few years, companies such as major retailers have experienced data systems incursions reportedly resulting in the thefts of credit and debit card information, online account information, and other financial data of tens of millions of the retailers’ customers. Retailer incursions affect cards issued and deposit accounts maintained by many banks, including the Bank. Although the Bank systems are not breached in retailer incursions, these events can cause the Bank to reissue a significant number of cards and take other costly steps to avoid significant theft loss to the Bank and its customers. Other possible points of incursion or disruption not within the Bank’s control include internet service providers, electronic mail portal providers, social media portals, distant-server (“cloud”) service providers, electronic data security providers, telecommunications companies, and smart phone manufacturers.

Consumers may decide not to use banks to complete their financial transactions.

While the Company continually attempts to use technology to offer new products and services, at the same time, technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds in brokerage accounts, mutual funds or use electronic payment methods such as Apple Pay or PayPal, that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantlyimpact the Company’s business.

The Bank has branches along the coast of Mississippi that are subject to risks from hurricanes from time to time. Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on the ability of the Company to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause the Company to incur additional expenses. The occurrence of any such event could have a material adverse effect on the Company’s business, prospects, financial condition and results of operations.

The Company is subject to Accounting Estimate Risks.

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

Expense Control could have an effect on the Company’searnings.

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

Risks Associated With the Company’s Common Stock

The Company’s stock price can be volatile*.*

Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other things:

•	actual or anticipated variations in quarterly results of operations;
•	recommendations by securities analysts;
---	---
•	operating and stock price performance of other companies that investors deem comparable to the Company;<br>
---	---
•	news reports relating to trends, concerns and other issues in the banking and financial services industry;<br>
---	---
•	perceptions in the marketplace regarding the Company or its competitors;
---	---
•	new technology used, or services offered, by competitors;
---	---
•	significant acquisitions or business combinations, strategic partnerships, joint ventures or capital<br>commitments by or involving the Company or its competitors;
---	---
•	failure to integrate acquisitions or realize anticipated benefits from acquisitions;
---	---
•	changes in government regulations; and
---	---
•	geopolitical conditions such as acts or threats of terrorism or military conflicts.
---	---

Additionally, general market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause the Company’s stock price to decrease regardless of operating results.

The trading volume in the Company’s common stock is less than that of other larger bank holding companies.

The Company’s common stock is listed for trading on NASDAQ Global Market. The average daily trading volume in the Company’s common stock is low, generally less than that of many of its competitors and other larger bank holding companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Company’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Company’s common stock, significant sales of the Company’s common stock, or the expectation of these sales, could cause volatility in the price of the Company’s common stock.

An investment in the Company’s common stock is not an insured deposit.

The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you may lose some or all of your investment.

Issuing additional shares of our common stock to acquire other banks, bank holding companies, financial holding companies and/or insurance agencies mayresult in dilution for existing shareholders and may adversely affect the market price of our stock.

We may issue, in the future, shares of our common stock to acquire additional banks, bank holding companies, and other businesses related to the financial services industry that may complement our organizational structure. Resales of substantial amounts of common stock in the

public market and the potential of such sales could adversely affect the prevailing market price of our common stock and impair our ability to raise additional capital through the sale of equity securities. We may be required to pay an acquisition premium above the fair market value of acquired assets for acquisitions. Paying this acquisition premium, in addition to the dilutive effect of issuing additional shares, may also adversely affect the prevailing market price of our common stock.

We may issue debt or equity securities or securities convertible into equity securities, any ofwhich may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.

In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by all or up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive a distribution of our available assets before distributions to the holders of our common stock. Because any decision to incur debt or issue securities in future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any such future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.

The Company’s Articles of Incorporation and Bylaws, as well as certain banking laws, may have an anti-takeover effect.

Provisions of the Company’s Articles of Incorporation and Bylaws, which are exhibits to this Annual Report on Form 10-K, and the federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the Company’s shareholders. The combination of these provisions impedes a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Company’s common stock.

ITEM 1B.	UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.	PROPERTIES.

The Company, through the Bank, currently operates from its main office in downtown Philadelphia, Mississippi, and from 28 additional branches in Neshoba, Newton, Leake, Lamar, Forrest, Scott, Attala, Lauderdale, Lafayette, Oktibbeha, Rankin, Harrison, Jackson, Winston, and Kemper counties, Mississippi. Information about these branches, the Bank’s main office and its loan production office is set forth in the table below:

NAME OF OFFICE	LOCATION/TELEPHONE NUMBER	BANKINGFUNCTIONS<br><br><br>OFFERED
Main Office	521 Main Street Philadelphia, Mississippi (601) 656-4692	Full Service; 24 Hour Teller
Eastside Branch	599 East Main Street Philadelphia, Mississippi (601) 656-4976	Full Service; 24 Hour Teller
Westside Branch	912 West Beacon Street Philadelphia, Mississippi (601) 656-4978	Full Service; 24 Hour Teller
Northside Branch	802 Pecan Avenue Philadelphia, Mississippi (601) 656-4977	Deposits; 24 Hour Teller
Union Branch	502 Bank Street Union, Mississippi (601) 774-9231	Full Service
Carthage Branch	301 West Main Street Carthage, Mississippi (601) 267-4525	Full Service
Flowood Branch	5419 Hwy 25, Suite Q Flowood, Mississippi (601) 992-7688	Deposits; Loans
Sebastopol Branch	24 Pine Street Sebastopol, Mississippi (601) 625-7447	Full Service; 24-Hour Teller
DeKalb Branch	176 Main Avenue DeKalb, Mississippi (601) 743-2115	Full Service

Kosciusko Branch	775 North Jackson Avenue Kosciusko, Mississippi (662) 289-4356	Full Service; 24-hour Teller
Scooba Branch	27597 Highway 16 East Scooba, Mississippi (662) 476-8431	Full Service
Meridian Eastgate Branch	1825 Highway 39 North Meridian, Mississippi (601) 693-8367	Full Service; 24-Hour Teller
Decatur Branch	15330 Highway 15 South Decatur, Mississippi (601) 635-2321	Full Service; 24-Hour Teller
Forest Branch	247 Woodland Drive North Forest, Mississippi (601) 469-3424	Full Service; 24-Hour Teller
Louisville Main Branch	100 East Main Street Louisville, MS (662) 773-6261	Full Service; 24 Hour Teller
Louisville Industrial Branch	803 South Church Street Louisville, MS (662) 773-6261	Drive-Up
Noxapater Branch	45 East Main Street Noxapater, MS (662) 724-4261	Deposits
Starkville Branch	201 Highway 12 West Starkville, MS 39759 (662) 323-4210	Full Service; 24 Hour Teller
Collinsville Branch	9065 Collinsville Road Collinsville, MS 39325 (601) 626-7608	Full Service; 24 Hour Teller
Meridian Broadmoor	5015 Highway 493 Meridian, MS 39305 (601) 581-1541	Full Service; 24 Hour Teller
Hattiesburg	6222 Highway 98 West Hattiesburg, MS 39402 (601) 264-4425	Full Service 24 Hour Teller

Biloxi Lemoyne	15309 Lemoyne Boulevard Biloxi, MS 39532 (228) 207-2343	Full Service; 24 Hour Teller
Biloxi Cedar Lake	1830 Popps Ferry Road Biloxi, MS 39532 (228) 594-6913	Full Service 24 Hour Teller
Biloxi Medical Towers	1721 Medical Park Drive Biloxi, MS 39532 (228) 392-2330	Full Service
Oxford LPO	304 Enterprise Drive Suite A Oxford, MS 38655	Loan Production Office
Gulfport Branch	12008 Hwy 49 Gulfport, MS 39503 (228) 831-3535	Full Service 24 Hour Teller
Ocean Springs Branch	2702 Bienville Blvd Ocean Springs, MS 39564 (228) 875-3933	Full Service 24 Hour Teller
Pascagoula Branch	1519 Jackson Ave Pascagoula, MS 39567 (228) 762-3330	Full Service 24 Hour Teller

The Bank owns its offices, except for the Flowood Branch, Gulfport Branch and the Oxford LPO, each of which is leased. The main office facility, originally occupied in 1966, is used solely by the Company and the Bank. This facility contains approximately 20,000 square feet and houses the executive offices and all operations-related departments of the Company. The other branches range in size from nearly 1,000 square feet to 12,000 square feet.

ITEM 3.	LEGAL PROCEEDINGS.

There are no material pending legal proceedings, other than routine litigation incidental to their business, to which either the Company or the Bank is a party or to which any of their property is subject.

ITEM 4.	MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY<br>SECURITIES.

Information required in partial response to this Item 5 can be found under the heading “Market Price and Dividend Information” in the 2019 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information in incorporated herein by reference.

The information appearing under the caption “Equity Compensation Plan Information” in Item 12 of this Annual Report on Form 10-K is incorporated herein by reference.

There were no unregistered sales of equity securities not covered by the filing of a Form 10-Q or Form 8-K during the period covered by this filing. On July 26, 2017, the Company’s Board of Directors authorized the repurchase of up to 200,000 shares of the Company’s outstanding shares of common stock over the next thirty-six months. There were no repurchases of equity securities not covered by the filing of a Form 10-Q or Form 8-K during the period covered by this filing.

ITEM 6.	SELECTED FINANCIAL DATA.

Information required in response to this Item 6 can be found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2019, 2018 and 2017—Selected Financial Data” in the 2019 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.<br>

Information required in response to this Item 7 can be found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2019, 2018 and 2017” in the 2019 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information required in response to this Item 7A can be found under the headings “Quantitative and Qualitative Disclosures about Market Risk” in the 2019 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information required in response to this Item 8 can be found under the heading “Consolidated Financial Statements” and “Quarterly Financial Trends” in the 2019 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.	CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

The management of this Company, with the participation of its principal executive and financial officers, has evaluated the effectiveness of the Company’s 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 decisions regarding required disclosure. Based on such evaluation, the Company’s principal executive and financial officers have concluded that such disclosure controls and procedures were effective as of December 31, 2019 (the end of the period covered by this Annual Report on Form 10-K).

Management’s Annual Reporton Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm

Information required in response to this item can be found under the headings “Management’s Assessment of Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” in the Company’s Consolidated Financial Statements contained in its 2019 Annual Report to Shareholders, a copy of which is filed as an Exhibit to this Annual Report on Form 10-K. Such information is incorporated herein by reference.

Changes in Internal Control over Financial Reporting

There were no changes to the internal control over financial reporting in the fourth quarter of 2019 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

ITEM 9B.	OTHER INFORMATION.

None.

PART III

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Information required in partial response to this Item 10 can be found under the heading “Executive Officers of the Registrant” in Item 1, “Business,” and under the headings “Stock Ownership” and “Board of Directors” in the Company’s Definitive Proxy Statement to be filed with the SEC on or about March 20, 2020, relating to its 2020 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

Code of Ethics

The Company has adopted a Code of Ethics and Code of Conduct in compliance with Item 406 of Regulation S-K for the Company’s principal executive officer, principal financial officer, principal accounting officer and controller. Copies of both the Code of Ethics and the Code of Conduct can be found on the Company’s website: http://www.citizensholdingcompany.com. The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics and the Code of Conduct by posting information on the Company’s website at the address specified above.

ITEM 11.	EXECUTIVE COMPENSATION.

Information required in response to this Item 11 can be found under the headings “Board of Directors,” “Executive Officers and Executive Compensation,” “Report of the Compensation Committee,” and “Compensation Committee Interlocks and Insider Participation” in the Company’s Definitive Proxy Statement to be filed with the SEC on or about March 20, 2020, relating to its 2020 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.<br>

Information required in partial response to this Item 12 can be found under the heading “Stock Ownership” in the Company’s Definitive Proxy Statement to be filed with the SEC on or about March 20, 2020, relating to its 2020 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

Equity Compensation Plan Information

The following table provides information about the Company’s equity compensation plans as of December 31, 2019.

Equity Compensation Plan Information

Plan category	(a)<br>Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights	(b)<br>Weighted-averageexercise price ofoutstanding options,warrants and rights	(c)<br>Number of securitiesremaining available forfuture issuance underequity compensation plans(excludingsecurities<br>in column (a))
Equity compensation plans approved by security holders^(1)^	40,500	$21.49	270,000
Equity compensation plans not<br><br><br>approved by security holders	-0-	$ 0.00	-0-
Total	40,500	$21.49	270,000
^(1)^	Consists of the 1999 Directors’ Stock Compensation Plan and the 2013 Incentive Compensation Plan.<br>
---	---
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
---	---

Information required in response to this Item 13 can be found under the heading “Board of Directors” in the Company’s Definitive Proxy Statement to be filed with the SEC on or about March 20, 2020, relating to its 2020 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES.

Information required in response to this Item 14 can be found under the heading “Proposal No. 3, Appointment of HORNE LLP as the Company’s Independent Registered Public Accounting Firm” in the Company’s Definitive Proxy Statement to be filed with the SEC on or about March 20, 2020, relating to its 2020 Annual Meeting of Shareholders. Such information is incorporated herein by reference.

PART IV

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)	Financial Statements
---	---	---	---	---
	1.	Consolidated Financial Statements and Supplementary Information for years ended December 31, 2017, 2018<br>and 2019, which include the following:
		(i)	Report of Independent Registered Public Accounting Firm (Financial Statements and Internal Control)
		(ii)	Management’s Assessment of Internal Control over Financial Reporting
		(iii)	Consolidated Statements of Condition
		(iv)	Consolidated Statements of Income
		(v)	Consolidated Statements of Comprehensive Income
		(vi)	Consolidated Statements of Changes in Stockholders’ Equity
		(vii)	Consolidated Statements of Cash Flows
		(viii)	Notes to Consolidated Financial Statements
	2.	Financial Statement Schedules
			None.
	3.	Exhibits required by Item 601 of Regulation S-K
		3(i)	Restated Articles of Incorporation<br> of the Company	*
		3(ii)	Second Amended and Restated Bylaws<br> of the Company, as amended	**
		10(a)	Directors’ Deferred<br> Compensation Plan - Form of Agreement	*†
		10(b)	Citizens Holding Company<br> 1999 Directors’ Stock Compensation Plan	*†
		10(c)	Citizens Holding Company<br> 1999 Employees’ Long-Term Incentive Plan	*†
		10(d)	Change in Control Agreement<br> dated December 10, 2002 between the Company and Greg L. McKee	***†
		10(e)	Supplemental Executive Retirement Plan	****†
		10(f)	Citizens Holding Company<br> 2013 Incentive Compensation Plan	*****†
		10(g)	Form of Incentive Stock Option Agreement<br> under the Citizens Holding Company 2013 Incentive Compensation Plan	******†
		10(h)	Form of Non-Qualified Stock Option Agreement under the Citizens Holding Company 2013 Incentive Compensation Plan	******†
		10(i)	Form of Restricted Share Award Agreement<br> under the Citizens Holding Company 2013 Incentive Compensation Plan	******†
		10(j)	Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Citizens Holding Company 2013 Incentive Compensation Plan	******†
		13	2019 Annual Report to Shareholders	+

14	Code of Ethics	*******
21	Subsidiaries of Registrant	+
23	Consent of Independent Registered Public Accounting Firm	+
31.1	Rule 13a-14(a)/15d-14(a)<br> Certification of Chief Executive Officer	+
31.2	Rule 13a-14(a)/15d-14(a)<br> Certification of Chief Executive Officer	+
32.1	Section 1350 Certification of Chief Executive Officer	++
32.2	Section 1350 Certification of Chief Financial Officer	++
101	XBRL Exhibits	+
*	Filed as Exhibit 3(A) to the Company’s Quarterly Report on Form<br>10-Q (File No. 000-25221) filed on May 10, 2017 and incorporated herein by reference.
---	---
**	Filed as Exhibit 3(B) to the Company’s Quarterly Report on Form<br>10-Q (File No. 000-25221) filed on May 10, 2017 and incorporated herein by reference.
---	---
***	Filed as an exhibit to the Company’s Annual Report on Form 10-K<br>for the fiscal year ended December 31, 2002 (File No. 000-25221) filed on March 31, 2003 and incorporated herein by reference.
---	---
****	Filed as an exhibit to the Company’s Annual Report on Form 10-K<br>for the fiscal year ended December 31, 2004 (File No. 000-25221) filed on March 16, 2005 and incorporated herein by reference.
---	---
*****	Filed as an exhibit to the Company’s Definitive Proxy Statement relating to its 2013 Annual Meeting of<br>Shareholders (File No. 000-15375) filed on March 21, 2013 and incorporated herein by reference.
---	---
******	Filed as an exhibit to the Company’s Current Report on Form 8-K<br>(File No. 000-15375) filed on April 25, 2013 and incorporated herein by reference.
---	---
*******	Filed as an exhibit to the Company’s Annual Report on Form 10-K<br>for the fiscal year ended December 31, 2003 (File No. 000-25221) filed on March 26, 2004, as updated on the Company’s website, http://www.citizensholdingcompany.com and incorporated herein<br>by reference.
---	---
†	Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.
---	---
+	Filed herewith.
---	---
++	Furnished herewith.
---	---
ITEM 16.	FORM 10-K SUMMARY.
---	---

The Company has elected not to include summary information.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 13, 2020	By:	/s/ Greg McKee
	Greg McKee
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacity and on the dates indicated:

SIGNATURES	CAPACITIES	DATE
/s/ Greg McKee<br><br><br>Greg McKee	Director, President and Chief Executive Officer<br><br><br>(Principal Executive Officer)	March 13, 2020
/s/ Robert T. Smith<br><br><br>Robert T. Smith	Treasurer, Chief Financial Officer<br><br><br>(Principal Financial & Accounting Officer)	March 13, 2020
/s/ Craig Dungan<br><br><br>Craig Dungan, MD	Director	March 13, 2020
/s/ Don L. Fulton<br><br><br>Don L. Fulton	Director	March 13, 2020
/s/ Donald L. Kilgore<br><br><br>Donald L. Kilgore	Director	March 13, 2020
/s/ David A. King<br><br><br>David A. King	Director	March 13, 2020
/s/ Herbert A. King<br><br><br>Herbert A. King	Chairman of the Board	March 13, 2020
/s/ Adam Mars<br><br><br>Adam Mars	Director	March 13, 2020

/s/ David P. Webb<br><br><br>David P. Webb	Director	March 13, 2020
/s/ A. T. Williams<br><br><br>A.T. Williams	Director	March 13, 2020
/s/ Terrell E. Winstead<br><br><br>Terrell E. Winstead	Director	March 13, 2020
/s/ Gregory E. Cronin<br><br><br>Gregory E. Cronin	Director	March 13, 2020

EX-13

Exhibit 13 – 2019 Annual Report to Shareholders

TO OUR STOCKHOLDERS

I am pleased to present the annual report and a summary of the Company’s accomplishments for 2019. We experienced positive trends in several areas that should enhance the value of your investment. These positive trends include growth, both internally, and externally due to the acquisition of Charter Bank.

During 2019 total loans increased internally by 9.23% while deposits grew by 3.07%. The acquisition brought external growth and increased total assets by another $157.1 million. Due to combined internal growth and the acquisition, the bank ended 2019 with $1.195 billion in total assets and total capital of $110.8 million. I am very pleased with our growth accomplishments for the year.

Along with the already stated asset growth, we added some valuable members to our Gulf Coast team and to the overall bank team. It has been very encouraging to see the interaction of these individuals and the integration of processes that has happened over the last few months. This combination will give the Bank five good branch locations across the Coast. This begins a network of convenience for existing and future customer relationships. The Gulf Coast division is well positioned to be an enhancement in many ways for the Bank. This should enable the Bank to carry our brand of banking further into more Mississippi communities.

In November, we were saddened to learn that Steve Webb passed away. Steve was a former Director, President, CEO and Chairman of Citizens Bank and Citizens Holding Company. During his tenure he oversaw the formation of the Holding Company and growth of the Bank, both geographically and in asset size. I have been a beneficiary of Steve’s work and legacy. The bank and I have had a great foundation to stand on as we grow and prosper, and Steve was an integral part of that foundation. I am thankful to Steve for the lessons he taught and his accomplishments that made us a better company.

I hope it is evident to the owners of this great company that the Board of Directors and staff are continually analyzing any opportunity that would further maximize your investment. As the financial services landscape continues to change, we will continue to evolve in technology, personnel and products in order to remain relevant within the market. But we will do that with the same commitment to integrity, customer service and sound business practices that have been in place since 1908.

As I have stated many times, because we are blessed with great stockholders, great customers and great employees, our Company continues to prosper. I appreciate your continued participation and support in all we do to improve the Company.

It is an honor to be able to serve you and I look forward to what we can accomplish together in 2020.

Sincerely,

Greg McKee

President and CEO

Exhibit 13

CITIZENS HOLDING COMPANY

Philadelphia, Mississippi

Consolidated Financial Statements

As of December 31, 2019 and 2018 and for the

Years Ended December 31, 2019, 2018 and 2017

CONTENTS

Report of Independent Registered Public Accounting Firm	1 – 3
Management’s Assessment of Internal Control over<br>Financial Reporting	4 – 5
Consolidated Financial Statements
Consolidated Statements of Financial Condition	6
Consolidated Statements of Income	7
Consolidated Statements of Comprehensive Income (Loss)	8
Consolidated Statements of Changes in Shareholders’ Equity	9
Consolidated Statements of Cash Flows	10 – 11
Notes to Consolidated Financial Statements	12 – 72

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Shareholders and the Board of Directors of Citizens Holding Company

Opinion on Financial Statement

We have audited the accompanying consolidated statements of financial condition of Citizens Holding Company and subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, are in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis forOpinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ HORNE LLP

We have served as the Company’s auditor since 1998.

Memphis, Tennessee

March 13, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Shareholders and the Board of Directors of Citizens Holding Company

Opinion on the Internal Control Over Financial Reporting

We have audited Citizens Holding Company and subsidiary’s (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria for effective internal control over financial reporting described in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidated statements of financial condition of Citizens Holding Company and subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements and our report dated March 13, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Definition and Limitations of Internal Control OverFinancial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

/s/ HORNE LLP

Memphis, Tennessee

March 13, 2020

[CITIZENS HOLDING COMPANY LETTERHEAD]

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

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

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

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

Citizens Holding Company

Page Two

Management, with the participation of the Company’s principal executive officer and principal financial officer, conducted an assessment of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2019, based on criteria for effective internal control over financial reporting described in the “Internal Control – Integrated Framework,” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that, as of December 31, 2019, the Company’s system of internal control over financial reporting was effective. HORNE LLP, the Company’s independent registered public accounting firm that has audited the Company’s financial statements included in this annual report, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 which is included herein.

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

March 13, 2020

CITIZENS HOLDING COMPANY

Consolidated Statements of Financial Condition

December 31, 2019 and 2018

(in thousands, except share data)

ASSETS			2018
Cash and due from banks	15,937		$	12,592
Interest bearing deposits with other banks	58,557			8,080
Federal funds sold	1,600			—
Securities available for sale, at fair value	464,383			444,746
Loans, net of allowance for loan losses of 3,755 in 2019 and 3,372 in 2018	573,312			425,905
Bank premises, furniture, fixtures and equipment, net	24,672			19,717
Other real estate owned, net	3,552			3,440
Accrued interest receivable	4,181			4,166
Cash surrender value of life insurance	25,088			25,384
Deferred tax assets	3,684			6,634
Other assets	20,468			7,966
Total assets	1,195,434		$	958,630
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing deposits	190,406		$	170,030
Interest bearing deposits	708,590			586,192
Total deposits	898,996			756,222
Securities sold under agreement to repurchase	170,410			107,965
Accrued interest payable	1,128			471
Deferred compensation payable	9,453			9,053
Other liabilities	2,647			1,053
Total liabilities	1,082,634			874,764
Shareholders’ equity
Common stock, .20 par value, authorized 22,500,000 shares; 5,578,131 shares issued and outstanding at December 31, 2019 and<br>4,904,530 shares issued and outstanding at December 31, 2018	1,116			981
Additional paid-in capital	17,883			4,298
Accumulated other comprehensive loss, net of tax benefit of (262) in 2019 and (4,978) in 2018	(789	)		(14,975	)
Retained earnings	94,590			93,562
Total shareholders’ equity	112,800			83,866
Total liabilities and shareholders’ equity	1,195,434		$	958,630

All values are in US Dollars.

The accompanying notes are an integral part of these statements.

CITIZENS HOLDING COMPANY

Consolidated Statements of Income

Years Ended December 31, 2019, 2018, and 2017

(in thousands, except share and per share data)

	2019			2018			2017
Interest income
Interest and fees on loans	$	24,652		$	20,241		$	18,734
Interest on securities
Taxable		7,993			8,345			8,179
Non-taxable		1,808			2,579			3,319
Other interest		908			193			273
Total interest income		35,361			31,358			30,505
Interest expense
Deposits		7,719			2,811			1,922
Other borrowed funds		2,003			1,648			1,421
Total interest expense		9,722			4,459			3,343
Net interest income		25,639			26,899			27,162
(Provision for) reversal of loan losses		(573	)		(334	)		543
Net interest income after (provision for) reversal of loan losses		25,066			26,565			27,705
Non-interest income
Service charges on deposit accounts		4,413			4,562			4,239
Other service charges and fees		3,129			2,879			2,638
Net gains on sales of securities		191			11			105
Other income		2,015			1,148			1,315
Total non-interest income		9,748			8,600			8,297
Non-interest expense
Salaries and employee benefits		14,883			14,530			14,772
Occupancy expense		2,099			2,017			2,175
Equipment expense		3,146			3,713			3,210
Other expense		7,430			7,404			8,070
Total non-interest expense		27,558			27,664			28,227
Income before income taxes		7,256			7,501			7,775
Income tax expense		1,354			828			4,071
Net income	$	5,902		$	6,673		$	3,704
Net income per share – basic	$	1.17		$	1.36		$	0.76
Net income per share – diluted	$	1.17		$	1.36		$	0.76
Weighted average shares outstanding
Basic		5,063,736			4,889,420			4,878,691
Diluted		5,066,103			4,899,218			4,895,848

The accompanying notes are an integral part of these statements.

CITIZENS HOLDING COMPANY

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31, 2019, 2018, and 2017

(in thousands)

	2019			2018			2017
Net income	$	5,902		$	6,673		$	3,704
Other comprehensive income (loss)
Unrealized holding gains (losses) on<br>available-for-sale securities		19,093			(8,982	)		6,241
Income tax effect		(4,764	)		2,240			(2,080	)
Net unrealized gains (losses)		14,329			(6,742	)		4,161
Reclassification adjustment for gains included in net income		(191	)		(11	)		(105	)
Income tax effect		48			3			26
Net gains included in net income		(143	)		(8	)		(79	)
Total other comprehensive income (loss)		14,186			(6,750	)		4,082
Comprehensive income (loss)	$	20,088		$	(77	)	$	7,786

The accompanying notes are an integral part of these statements.

CITIZENS HOLDING COMPANY

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2019, 2018, and 2017

(in thousands, except per share data)

							Accumulated
				Additional			Other
		Common		Paid-In			Comprehensive			Retained
		Stock		Capital			Loss			Earnings			Total
Balance, January 1, 2017	4,882,579	$	976	$	3,802		$	(10,719	)	$	91,000		$	85,059
Net income	—		—		—			—			3,704			3,704
Dividends paid (0.96 per share)	—		—		—			—			(4,697	)		(4,697	)
Options exercised	4,626		1		92			—			—			93
Restricted stock granted	7,500		2		(2	)		—			—			—
Stock compensation expense	—		—		211			—			—			211
AOCI reclassification	—		—		—			(1,588	)		1,588			—
Other comprehensive income, net	—		—		—			4,082			—			4,082
Balance, December 31, 2017	4,894,705		979		4,103			(8,225	)		91,595			88,452
Net income	—		—		—			—			6,673			6,673
Dividends paid (0.96 per share)	—		—		—			—			(4,706	)		(4,706	)
Options exercised	2,325		—		27			—			—			27
Restricted stock granted	7,500		2		(2	)		—			—			—
Stock compensation expense	—		—		170			—			—			170
Other comprehensive loss, net	—		—		—			(6,750	)		—			(6,750	)
Balance, December 31, 2018	4,904,530		981		4,298			(14,975	)		93,562			83,866
Net income	—		—		—			—			5,902			5,902
Dividends paid (0.96 per share)	—		—		—			—			(4,874	)		(4,874	)
Common stock issued in connection with acquisition	666,101		133		13,424			—			—			13,557
Restricted stock granted	7,500		2		(2	)		—			—			—
Stock compensation expense	—		—		163			—			—			163
Other comprehensive income, net	—		—		—			14,186			—			14,186
Balance, December 31, 2019	5,578,131	$	1,116	$	17,883		$	(789	)	$	94,590		$	112,800

All values are in US Dollars.

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

CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2019, 2018, and 2017

1 of 2

(in thousands)

	2019			2018			2017
Cash flows from operating activities
Net income	$	5,902		$	6,673		$	3,704
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		912			937			1,003
Amortization of premiums and accretion of discounts on investment securities, net		5,294			3,283			3,317
Stock compensation expense		163			170			211
Provision for (reversal of) loan losses		573			334			(543	)
Gain on sale of securities		(191	)		(11	)		(105	)
Gain from death benefit proceeds on BOLI		(371	)		—			—
Net gain on sale of other real estate owned		(311	)		—			—
Deferred income tax expense		459			973			3,885
Net writedown on other real estate owned		—			—			414
Decrease in accrued interest receivable		382			285			269
Increase in cash surrender value life insurance		(709	)		(771	)		(722	)
Increase (decrease) in accrued interest payable		166			273			(1	)
Increase in deferred compensation liability		400			432			411
Net change in other operating assets and liabilities		(722	)		(407	)		(1,224	)
Net cash provided by operating activities		11,947			12,171			10,619
Cash flows from investing activities
Proceeds from calls, paydowns and maturities of securities<br>available-for-sale		59,189			40,964			42,390
Proceeds from sales of securities<br>available-for-sale		122,171			17,620			114,061
Purchases of investment securities<br>available-for-sale		(160,591	)		(10,550	)		(162,449	)
Increase in federal funds sold		(1,600	)		—			—
Death benefit proceeds from bank-owned life insurance		1,549			—			—
Purchases of bank premises, furniture, fixtures and equipment		(1,042	)		(346	)		(2,911	)
Proceeds from sales of bank premises, furniture, fixtures and equipment		—			264			—
Proceeds from sale of other real estate owned		584			812			138
Net (increase) decrease in interest bearing deposits with other banks		(48,927	)		(6,547	)		47,071
Net cash paid in acquisition of business		(317	)		—			—

CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2019, 2018, and 2017

2 of 2

(in thousands)

	2019			2018			2017
Purchases of Federal Home Loan Bank Stock		—			(476	)		(499	)
Net increase in loans		(44,678	)		(24,108	)		(11,788	)
Net cash (used by) provided by investing activities		(73,662	)		17,633			26,013
Cash flows from financing activities
Net increase (decrease) in deposits	$	16,459		$	35,536		$	(39,469	)
Net (decrease) increase in federal funds purchased		—			(1,500	)		1,500
Net increase (decrease) in securities sold under agreement to repurchase		62,444			(34,532	)		(7,785	)
Proceeds from exercise of stock options		—			27			93
Dividends paid to shareholders		(4,874	)		(4,706	)		(4,697	)
Net (decrease) increase in Federal Home
Loan Bank advances		(8,969	)		(30,000	)		10,000
Net cash provided by (used in) financing activities		65,060			(35,175	)		(40,358	)
Net increase (decrease) in cash and due from banks		3,345			(5,371	)		(3,726	)
Cash and due from banks, beginning of year		12,592			17,963			21,689
Cash and due from banks, end of year	$	15,937		$	12,592		$	17,963
Supplemental disclosures of cash flow information
Cash paid for
Interest	$	9,065		$	4,186		$	3,344
Income taxes	$	685		$	410		$	1,782
Noncash disclosures
Issuance of common stock for acquisition of business	$	13,557		$	—		$	—
Real estate acquired by foreclosure	$	385		$	260		$	89

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

(in thousands, except share and per share data)

Nature of Business

Citizens Holding Company (referred to herein as the “Company”) owns and operates The Citizens Bank of Philadelphia (the “Bank”). In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC. As a state bank, the Bank is subject to regulations of the Mississippi Department of Banking and Consumer Finance and the Federal Deposit Insurance Company. The Company is also subject to the regulations of the Federal Reserve. The area served by the Bank is east central, several southern and northern counties of Mississippi and the surrounding areas. Services are provided at multiple branch offices.

Basis of Financial Statement Presentation

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

Estimates

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

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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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

For the purpose of reporting cash flows, cash and due from banks includes cash on hand and demand deposits. Cash flows from loans originated by the Company, deposits, and federal funds purchased and sold are reported net in the statement of cash flows. The Company is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits.

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

Investment Securities

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

Securities Available-for-Sale

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

Securities Held to Maturity

Securities that are held-to-maturity (“HTM”) are those securities that the Company has the positive intent and ability to hold until maturity. These securities cannot be sold in response to the risk factors discussed above for available for sale securities. These securities are reported at book value. As of December 31, 2019 and 2018, there were no securities classified as HTM.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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

The Company periodically reviews its securities for impairment based upon a number of factors, including but not limited to, length of time and extent to which the fair value has been less than cost, the likelihood of the security’s ability to recover any decline in its fair value, financial condition of the underlying issuer, ability of the issuer to meet contractual obligations and ability to retain the security for a period of time sufficient to allow for recovery in fair value. Impairments on securities are recognized when management, based on its analysis, deems the impairment to be other-than-temporary. Disclosures about unrealized losses in the Company’s securities portfolio that have not been recognized as other-than-temporary impairments are provided in Note 3.

Loans and Allowance for Loan Losses

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

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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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

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

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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Business Combinations, Accounting for Credit-Deteriorated Purchased Loans and Related Assets

Business combinations are accounted for by applying the acquisition method in accordance with ASC 805, “Business Combinations.” Under the acquisition method, identifiable assets acquired and liabilities assumed and any non-controlling interest in the acquiree at the acquisition date are measured at their fair values as of that date and are recognized separately from goodwill. Results of operations of the acquired entities are included in the Consolidated Statements of Income from the date of acquisition. Acquisition costs incurred by the Company are expensed as incurred.

Loans purchased in business combinations with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit-impaired. Purchased credit deteriorated loans are accounted for in accordance with ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Increases in expected cash flows to be collected on these loans are recognized as an adjustment of the loan’s yield over its remaining life, while decreases in expected cash flows are recognized as an impairment.

Bank Premises, Furniture, Fixtures and Equipment

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

Other Real Estate Owned

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

Cash Surrender Value of Life Insurance

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Intangible Assets

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

Trust Assets

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

Income Taxes

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

Comprehensive Income (Loss)

Comprehensive income (loss) includes net earnings reported in the consolidated statements of income and changes in unrealized gain (loss) on securities available-for-sale reported as a component of shareholders’ equity. Unrealized gain (loss) on securities available-for-sale, net of related income taxes, was the only component of accumulated other comprehensive income for the Company.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Net Income Per Share

Net income per share-basic is computed by dividing net income by the weighted average number of common shares outstanding during the year. Net income per share-diluted is based on the weighted average number of shares of common stock outstanding for the periods, including the dilutive effect of the Company’s outstanding stock options and restricted stock grants. The effect of the dilutive shares for the years 2019, 2018 and 2017 is illustrated in the following table.

	2019		2018		2017
Basic weighted average shares outstanding		5,063,736		4,889,420		4,878,691
Dilutive effect of stock options		2,367		9,798		17,157
Dilutive weighted average shares outstanding		5,066,103		4,899,218		4,895,848
Net income	$	5,902	$	6,673	$	3,704
Net income per share-basic	$	1.17	$	1.36	$	0.76
Net income per share-diluted	$	1.17	$	1.36	$	0.76

Advertising Costs

Advertising costs are charged to expense when incurred. Advertising expense was $551, $640 and $650 for the years ended December 31, 2019, 2018 and 2017, respectively.

Securities Sold Under Agreements to Repurchase

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

Reclassifications

Certain information for 2017 and 2018 has been reclassified to conform to the financial presentation for 2019. Such reclassifications had no effect on net income or shareholders’ equity.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Stock-Based Compensation

At December 31, 2019, the Company had outstanding grants under two stock-based compensation plans, which are the 1999 Directors’ Stock Compensation Plan and the 2013 Incentive Compensation Plan. Compensation expense for option grants and restricted stock awards is determined based on the estimated fair value of the stock options and restricted stock on the applicable grant or award date. The Company has elected to account for forfeitures in compensation cost when they occur as permitted under the guidance in ASC 718, “Compensation—Stock Compensation” (“ASC 718”). Expense associated with the Company’s stock-based compensation is included under the line item “Salaries and benefits” on the Consolidated Statements of Income. The Company recognizes compensation expense for all share-based payments to employees in accordance with ASC 718, “Compensation – Stock Compensation.” See Note 19 for further details regarding the Company’s stock-based compensation.

Subsequent Events

The Company has evaluated, for consideration of recognition or disclosure, subsequent events that have occurred through the date of issuance of its financial statements, and has determined that no significant events occurred after December 31, 2019 but prior to the issuance of these financial statements that would have a material impact on its Consolidated Financial Statements.

Adoption of New Accounting Standards

ASU 2016-02 “Leases” (Topic 842)” (“ASU 2016-02”) requires lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was effective for the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. Of the optional practical expedients available under ASU 2016-02, all that apply have been adopted.

The Company’s operating leases relate primarily to branch properties and related equipment. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $1,009 and an operating lease liability of $1,009 on January 1, 2019, with no impact on our consolidated statements of income or condensed consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and liability are recorded in other assets and other liabilities, respectively, in the consolidated statements of financial condition. See Note 8. Premises and Equipment for additional information.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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 were originally 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.

ASU 2018-13 “Fair Value Measurement (Topic 820) – Changes in the DisclosureRequirements for Fair Value Measurement” (“ASU 2018-13”) 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 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Management is currently evaluating the impact this ASU will have on the Company’s financial statements.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In January 2017, FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350)” (“ASU 2017-04”). ASU 2017-04 amends and simplifies current goodwill impairment testing by eliminating certain testing under the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU 2017-04 becomes effective for the company for periods beginning after December 15, 2022. Management is currently evaluating the impact this ASU will have on the Company’s financial statements.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes to simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. The amendments are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Management is currently evaluating the impact this ASU will have on the Company’s financial statements.

Note 2. Business Combinations

(dollar amounts in thousands, except share and per sharedata)

Acquisition of Charter Bank

Effective October 1, 2019, the Company completed its acquisition of Charter Bank (“Charter”) in a transaction valued at approximately $19,668. The Company issued 666,101 shares of common stock and paid approximately $6,110 to Charter stockholders for 100% voting equity interest in Charter. On October 1, 2019, Charter operated 4 banking locations on the Mississippi Gulf Coast.

The Company recorded approximately $10,719 in intangible assets which consist of goodwill of $9,953 and a core deposit intangible of $766. Goodwill resulted from a combination of revenue enhancements from expansion in existing markets and efficiencies resulting from operational synergies. The fair value of the core deposit intangible is being amortized on a straight-line basis over the estimated useful life, currently expected to be 7 years.

The Company recorded approximately $558 in expenses related to the merger in 2019. Merger expenses were expensed as incurred and are included in other expense in the consolidated statements of income.

The following table summarizes the allocation of purchase price to assets and liabilities acquired in connection with the Company’s acquisition of Charter based on their fair values on October 1, 2019.

Purchase Price:
Shares issued to common shareholders		666,101
Purchase price per share	$	20.35
Value of stock paid				$	13,555
Cash consideration paid					6,110
Cash paid for fractional shares					3
Total Purchase Price				$	19,668
Net Assets Acquired:
Stockholders’ equity at transaction date	$	11,383
Increase (decrease) to net assets as a result of fair value adjustments to assets acquired and liabilities<br>assumed:
Securities		(237	)
Loans, including loans held for sale		(347	)
Premises and equipment		(1,252	)
Intangible assets		575
Other assets		(272	)
Deposits		(135	)
Total Net Assets Acquired					9,715
Goodwill resulting from merger				$	9,953

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Continued

The following table summarizes the fair value on October 1, 2019 of assets acquired and liabilities assumed at acquisition date in connection with the merger with Charter.

Cash and cash equivalents	$	7,343
Investment securities available for sale		26,607
Loans		103,665
Premises and equipment		4,813
Intangible assets		10,719
Other assets		3,957
Total assets		157,104
Deposits		126,316
Borrowings		8,969
Other liabilities		2,151
Total liabilities	$	137,436

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Continued

Supplemental Pro Forma Condensed Consolidated Results of Operations

The following unaudited pro forma condensed consolidated financial information presents the results of operations for the twelve months ended December 31, 2019 and 2018 of the Company as though the Charter merger had been completed as of January 1, 2018. The unaudited estimated pro forma information combines the historical results of Charter with the Company’s historical consolidated results and includes adjustments reflecting the estimated impact of certain fair value adjustments for the periods presented. The pro forma information is not necessarily indicative of what would have occurred had the acquisitions taken place on January 1, 2018. The pro forma information does not include the effect of any cost-saving or revenue-enhancing strategies. Merger expenses are reflected in the period in which they were incurred.

	(Unaudited)
	Year Ended
	December 31,
	2019		2018
Net interest income - pro forma	$	29,237	$	32,206
Noninterest income - pro forma	$	10,090	$	9,014
Noninterest expense - pro forma	$	35,075	$	32,714
Net income - pro forma	$	2,692	$	6,982
Earnings per share - pro forma
Basic	$	0.53	$	1.43
Diluted	$	0.53	$	1.43

For the three months ended December 31, 2019, Charter, the acquiree, had net interest income of $1,021, non-interest income of $720 and income before income taxes of $1,362 included in the consolidated statements of income for the year ended December 31, 2019.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Investment 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 at December 31, 2019 and 2018 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
2019	Cost		Gains		Losses		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
			Gross		Gross
---	---	---	---	---	---	---	---	---
	Amortized		Unrealized		Unrealized
2018	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S.
Government agencies	$	99,366	$	—	$	3,388	$	95,978
Mortgage-backed securities		259,742		5		12,373		247,374
State, County, Municipals		105,591		67		4,264		101,394
Total	$	464,699	$	72	$	20,025	$	444,746

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Continued

The following tables show the gross unrealized losses and fair value of the Company’s investments classified as AFS investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2019 and 2018.

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

December 31, 2019	Less than 12 months				12 months or more				Total
Description of Securities	Fair Value		UnrealizedLosses		Fair Value		UnrealizedLosses		Fair Value		UnrealizedLosses
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
December 31, 2018	Less than 12 months				12 months or more				Total
---	---	---	---	---	---	---	---	---	---	---	---	---
Description of Securities	FairValue		UnrealizedLosses		Fair Value		UnrealizedLosses		Fair Value		UnrealizedLosses
Obligations of U.S.
Government agencies	$	—		—	$	95,978		3,388	$	95,978		3,388
Mortgage backed securities		12,258		179		234,929		12,194		247,187		12,373
State, County, Municipal		12,624		285		76,536		3,979		89,160		4,264
Total	$	24,882		464	$	407,443		19,561	$	432,325		20,025

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Continued

The Company’s unrealized losses on its Obligations of United States Government agencies, Mortgage backed securities and State, County and Municipal bonds are the result of an upward trend in interest rates, mainly in the mid-term sector. The Company does not intend to sell any of the securities in an unrealized loss position, and it is not more likely than not that the Company 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 a period greater than twelve months, the Company is collecting principal and interest from the respective issuers as scheduled. None of the unrealized losses disclosed in the previous table are related to credit deterioration. As such, the Company did not record any other-than-temporary impairment for the years ended December 31, 2019 or 2018.

The amortized cost and estimated fair value of securities at December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	AmortizedCost		Fair Value
Securities AFS
Due in one year or less	$	345	$	345
Due after one year through five years		89,920		89,681
Due after five years through ten years		18,678		18,808
Due after ten years		48,181		48,649
Residential mortgage backed securities		259,309		258,415
Commercial mortgage backed securities		49,001		48,485
Total	$	465,434	$	464,383

Investment securities with fair values of $413,275 and $357,231 at December 31, 2019 and December 31, 2018, respectively, were pledged as collateral for public deposits and securities sold under agreement to repurchase.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Continued

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

	2019		2018		2017
Gross realized gains	$	414	$	171	$	633
Gross realized losses		223		160		528
Net realized gains	$	191	$	11	$	105

Note 4. Federal Home Loan Bank Stock

(in thousands)

The Company, as a member of the Federal Home Loan Bank of Dallas (“FHLB”) system, owns stock in the organization. No ready market exists for the stock, and it has no quoted market value. The Company’s investment in the FHLB is carried at cost of $3,083 and $2,253 at December 31, 2019 and December 31, 2018, respectively, and is included in other assets. The Company purchased stock in 2019 and 2018 at the par value of $100 per share.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. 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 this Note 5, all references to “loans” mean non purchased loans.

The composition of loans, net at December 31, 2019 and 2018 is as follows:

	2019			2018
Real Estate:
Land Development and Construction	$	66,428		$	41,134
Farmland		15,595			14,498
1-4 Family Mortgages		87,631			88,747
Commercial Real Estate		207,604			203,595
Total Real Estate Loans		377,258			347,974
Business Loans:
Commercial and Industrial Loans		84,611			66,421
Farm Production and Other Farm Loans		683			907
Total Business Loans		85,294			67,328
Consumer Loans:
Credit Cards		1,833			1,648
Other Consumer Loans		12,060			12,372
Total Consumer Loans		13,893			14,020
Total Gross Loans		476,445			429,322
Unearned Income		(8	)		(45	)
Allowance for Loan Losses		(3,755	)		(3,372	)
Loans, net	$	472,682		$	425,905

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews these policies and procedures and submits them to the Company’s Board of Directors for its approval when needed, but no less frequently than annually. A reporting system supplements the review process by

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

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

Loans are made principally to customers in the Company’s market. The Company’s lending policy provides that loans collateralized by real estate are normally made with loan-to-value (“LTV”) ratios of 80 percent or less. Commercial loans are typically collateralized by property, equipment, inventories or receivables with LTV ratios from 50 percent to 80 percent. Real estate mortgage loans are collateralized by personal residences with LTV ratios of 80 percent or less. Consumer loans are typically collateralized by real estate, vehicles and other consumer durable goods. Approximately $77,700 and $67,500 of the loans outstanding at December 31, 2019 and 2018, respectively, were variable rate loans.

In the ordinary course of business, the Company has granted loans to certain directors, significant shareholders and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Activity in related party loans during 2019 is presented in the following table.

Balance outstanding at December 31, 2018	$	2,941
Principal additions		190
Principal reductions		(2,744	)
Balance outstanding at December 31, 2019	$	387

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.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

Year-end non-accrual loans, segregated by class of loans, were as follows:

	2019		2018
Real Estate:
Land Development and Construction	$	111	$	—
Farmland		232		200
1-4 Family Mortgages		2,160		1,831
Commercial Real Estate		9,082		7,612
Total Real Estate Loans		11,585		9,643
Business Loans:
Commercial and Industrial Loans		338		76
Farm Production and Other Farm Loans		10		31
Total Business Loans		348		107
Consumer Loans:
Other Consumer Loans		60		89
Total Consumer Loans		60		89
Total non-accrual Loans	$	11,993	$	9,839

In the event that non-accrual loans had performed in accordance with their original terms, the Company would have recognized additional interest income of approximately $555, $429 and $413 in 2019, 2018 and 2017, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

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<br>Past Due		Days Past<br>Due		Total Past<br>Due Loans		Current<br>Loans		Total<br>Loans		Days<br>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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

An age analysis of past due loans, segregated by class of loans, as of December 31, 2018 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	$	1,494	$	54	$	1,548	$	39,586	$	41,134	$	54
Farmland		779		29		808		13,690		14,498		—
1-4 Family Mortgages		3,456		330		3,786		84,961		88,747		—
Commercial Real Estate		1,059		2,981		4,040		199,555		203,595		—
Total Real Estate Loans		6,788		3,394		10,182		337,792		347,974		54
Business Loans:
Commercial and Industrial Loans		1,672		21		1,693		64,728		66,421		—
Farm Production and Other Farm Loans		9		—		9		898		907		—
Total Business Loans		1,681		21		1,702		65,626		67,328		—
Consumer Loans:
Credit Cards		16		4		20		1,628		1,648		4
Other Consumer Loans		212		33		245		12,127		12,372		15
Total Consumer Loans		228		37		265		13,755		14,020		19
Total Loans	$	8,697	$	3,452	$	12,149	$	417,173	$	429,322	$	73

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

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

Impaired loans as of December 31, by class of loans, are as follows:

2019	Unpaid<br>Principal<br>Balance		Recorded<br>Investment<br>With No<br>Allowance		Recorded<br>Investment<br>With<br>Allowance		Total<br>Recorded<br>Investment		Related<br>Allowance		Average<br>Recorded<br>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		10,649
Business:
Commercial and Industrial		144		—		144		144		72		72
Total Business Loans		144		—		144		144		72		72
Total Loans	$	12,852	$	6,999	$	4,136	$	11,135	$	682	$	10,721

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

2018	Unpaid<br>Principal<br>Balance		Recorded<br>Investment<br>With No<br>Allowance		Recorded<br>Investment<br>With<br>Allowance		Total<br>Recorded<br>Investment		Related<br>Allowance		Average<br>Recorded<br>Investment
Real Estate:
Land Development and Construction	$	—	$	—	$	—	$	—	$	—	$	—
Farmland		269		269		—		269		—		135
1-4 Family Mortgages		1,153		1,062		91		1,153		27		728
Commercial Real Estate		10,601		5,209		3,675		8,884		374		6,489
Total Real Estate Loans		12,023		6,540		3,766		10,306		401		7,352
Total Loans	$	12,023	$	6,540	$	3,766	$	10,306	$	401	$	7,352

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

The following table presents troubled debt restructurings segregated by class:

December 31, 2019	Number of<br>Loans		Pre-Modification<br>Outstanding<br>Recorded<br>Investment		Post-Modification<br>Outstanding<br>Recorded<br>Investment
Commercial real estate		3	$	4,871	$	2,495
Total		3	$	4,871	$	2,495
December 31, 2018	Number of<br>Loans		Pre-Modification<br>Outstanding<br>Recorded<br>Investment		Post-Modification<br>Outstanding<br>Recorded<br>Investment
---	---	---	---	---	---	---
Commercial real estate		3	$	4,871	$	2,782
Total		3	$	4,871	$	2,782

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

		Recorded<br>Investment
Total at January 1, 2017	3	$	3,288
Reductions due to:
Principal paydowns			(241	)
Total at January 1, 2018	3		3,047
Reductions due to:
Principal paydowns			(265	)
Total at January 1, 2019	3		2,782
Reductions due to:
Principal paydowns			(287	)
Total at December 31, 2019	3	$	2,495

The allocated allowance for loan losses attributable to restructured loans was $-0- and $174 at December 31, 2019 and 2018, respectively.

The Company had no commitments to lend additional funds on these troubled debt restructurings at December 31, 2019.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

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

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

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

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

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

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

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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

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

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at December 31, 2019.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2019:

	Satisfactory<br>1,2,3,4		Special<br>Mention<br>5,6		Substandard<br>7		Doubtful<br>8		Loss<br>9		Total<br>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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

The following table details the amount of gross loans by loan grade and class for the year ended December 31, 2018:

	Satisfactory<br>1,2,3,4		Special<br>Mention<br>5,6		Substandard<br>7		Doubtful<br>8		Loss<br>9		Total<br>Loans
Real Estate:
Land Development and Construction	$	39,726	$	840	$	568	$	—	$	—	$	41,134
Farmland		13,248		339		911		—		—		14,498
1-4 Family Mortgages		79,659		1,751		7,337		—		—		88,747
Commercial Real Estate		172,217		17,938		13,440		—		—		203,595
Total Real Estate Loans		304,850		20,868		22,256		—		—		347,974
Business Loans:
Commercial and Industrial Loans		63,994		81		2,346		—		—		66,421
Farm Production and Other Farm Loans		876		—		31		—		—		907
Total Business Loans		64,870		81		2,377		—		—		67,328
Consumer Loans:
Credit Cards		1,628		—		20		—		—		1,648
Other Consumer Loans		12,181		65		71		55		—		12,372
Total Consumer Loans		13,809		65		91		55		—		14,020
Total Loans	$	383,529	$	21,014	$	24,724	$	55	$	—	$	429,322

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Purchased Loans

(In Thousands)

For purposes of this Note 6, all references to “loans” means purchased loans.

The following is a summary of purchased loans at December 31:

	2019		2018
Real Estate:
Land Development and Construction	$	14,722	$	—
Farmland		510		—
1-4 Family Mortgages		35,952		—
Commercial Real Estate		32,436		—
Total Real Estate Loans		83,620		—
Business Loans:
Commercial and Industrial Loans		14,153		—
Farm Production and Other Farm Loans		884		—
Total Business Loans		15,037		—
Consumer Loans:
Credit Cards		—		—
Other Consumer Loans		1,973		—
Total Consumer Loans		1,973		—
Total Gross Loans		100,630		—
Unearned Income		—		—
Loans, net of unearned income	$	100,630	$	—

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Continued

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

	Loans<br>30-89 Days<br>Past Due		Loans<br>90 or more<br>Days<br>Past<br>Due		Total Past<br>Due Loans		Current<br>Loans		Total<br>Loans		Accruing<br>Loans<br>90 or <br>more<br>Days<br>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		1,576		—		965		82,044		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	$	98,615	$	100,630	$	—

There were no non credit deteriorated loans that were subsequently impaired and recognized in conformity with ASC 310 as of December 31, 2019.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Continued

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Continued

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 as of December 31, 2019:

	2019		2018
Real Estate:
Land Development and Construction	$	43	$	—
Farmland		—		—
1-4 Family Mortgages		706		—
Commercial Real Estate		—		—
Total Real Estate Loans		749		—
Total PCD Loans	$	749	$	—

Non-accrual loans of $33 are included in the 1-4 Family Mortgages at December 31, 2019.

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, 2019	$	—
Additions through acquisition		(36	)
Reclasses from nonaccretable difference		12
Accretion		8
Charge-off		—
Balance at December 31, 2019	$	(16	)

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Continued

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

	October 1, 2019
At acquisition date:
Contractually-required principal	$	104,127
Nonaccretable difference		(68	)
Cash flows expected to be collected		104,059
Accretable yield		(394	)
Fair Value	$	103,665

Note 7. Allowance for Loan Losses

(in thousands)

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

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

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Continued

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31:

	Real		Business
2019	Estate		Loans		Consumer		Total
Beginning Balance	$	2,845	$	222	$	305	$	3,372
Provision for loan losses		231		247		95		573
Chargeoffs		115		107		138		360
Recoveries		114		9		47		170
Net chargeoffs		1		98		91		190
Ending Balance	$	3,075	$	371	$	309	$	3,755
Period end allowance allocated to:
Loans individually evaluated for impairment	$	610	$	72	$	—	$	682
Loans collectively evaluated for impairment		2,465		299		309		3,073
Ending Balance	$	3,075	$	371	$	309	$	3,755

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Continued

	Real			Business
2018	Estate			Loans			Consumer			Total
Beginning Balance	$	2,151		$	347		$	521		$	3,019
Provision for (reversal of) loan losses		606			(113	)		(159	)		334
Chargeoffs		223			19			145			387
Recoveries		311			7			88			406
Net chargeoffs		(88	)		12			57			(19	)
Ending Balance	$	2,845		$	222		$	305		$	3,372
Period end allowance allocated to:
Loans individually evaluated for impairment	$	401		$	—		$	—		$	401
Loans collectively evaluated for impairment		2,444			222			305			2,971
Ending Balance	$	2,845		$	222		$	305		$	3,372
	Real			Business
2017	Estate			Loans			Consumer			Total
Beginning Balance	$	3,117		$	258		$	528		$	3,903
Provision for (reversal of) loan losses		(827	)		254			30			(543	)
Chargeoffs		169			166			102			437
Recoveries		30			1			65			96
Net chargeoffs		139			165			37			341
Ending Balance	$	2,151		$	347		$	521		$	3,019
Period end allowance allocated to:
Loans individually evaluated for impairment	$	442		$	—		$	—		$	442
Loans collectively evaluated for impairment		1,709			347			521			2,577
Ending Balance	$	2,151		$	347		$	521		$	3,019

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Continued

The Company’s recorded investment in loans as of December 31, 2019 and 2018 related to each balance in the allowance for possible loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:

2019	Real Estate		Business<br>Loans		Consumer		Total
Loans individually evaluated for impairment	$	10,991	$	144	$	—	$	11,135
Loans collectively evaluated for impairment		449,138		100,187		15,866		564,937
Acquired with deteriorated credit quality		749		—		—		749
	$	460,878	$	100,331	$	15,866	$	577,075
	Real		Business
2018	Estate		Loans		Consumer		Total
Loans individually evaluated for impairment	$	10,306	$	—	$	—	$	10,306
Loans collectively evaluated for impairment		337,668		67,328		14,020		419,016
	$	347,974	$	67,328	$	14,020	$	429,322

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Continued

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

	2019			2018			2017
Real Estate:
Land Development and Construction	$	(18	)	$	56		$	98
Farmland		—			3			—
1-4 Family Mortgages		32			51			41
Commercial Real Estate		(13	)		(198	)		—
Total Real Estate Loans		1			(88	)		139
Business Loans:
Commercial and Industrial Loans		98			12			165
Total Business Loans		98			12			165
Consumer Loans:
Credit Cards		34			36			(7	)
Other Consumer Loans		57			21			44
Total Consumer Loans		91			57			37
Total Net Chargeoffs (Recoveries)	$	190		$	(19	)	$	341

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Bank Premises, Furniture, Fixtures and Equipment

(in thousands)

Bank premises, furniture, fixtures and equipment consist of the following at December 31, 2019 and December 31, 2018:

	2019		2018
Land and buildings	$	33,791	$	27,052
Furniture, fixtures and equipment		8,447		6,012
		42,238		33,064
Less accumulated depreciation		17,566		13,347
Total	$	24,672	$	19,717

Depreciation expense for the years ended December 31, 2019, 2018 and 2017, respectively, was $899, $937, and $1,003.

The Company leases certain premises and equipment under operating leases. At December 31, 2019, the Company had lease liabilities and ROU assets totaling $771 related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the twelve months ended December 31, 2019, the weighted average remaining lease term for operating leases was 1.2 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.3%.

Lease costs were as follows:

	Twelve Months Ended
	December 31, 2019
(in thousands)
Operating lease cost	$	370
Short-term lease cost		23
Variable lease cost		—
	$	393

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the twelve months ended December 31, 2019.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Continued

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

	December 31, 2019
Lease payments due:
Within one year	$	348
After one year but within two years		312
After two years but within three years		139
After three year but within four years		2
After four years but within five years		—
After five years		—
Total undiscounted cash flows		801
Discount on cash flows		(30	)
Total lease liability	$	771

Note 9. Goodwill and Other Intangible Assets

(in thousands)

Changes in the carrying amount of goodwill during the years ended December 31, 2019 and 2018 were as follows:

	Total
Balance at December 31, 2018	$	3,150
Addition to goodwill from Charter acquisition		9,953
Balance at December 31, 2019	$	13,103

The additions to goodwill in 2019 from the Charter acquisition represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in the relevant transaction. The Company is in the process of completing Charter’s final tax return, core processor conversion and analyzing potential unknown liabilities; as a result, the recorded balance of goodwill attributable to the Charter acquisition is subject to change in future periods.

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

	2019			2018
Core deposit intangible	$	766		$	—
Accumulated amortization		(27	)		—
Total finite-lived intangible assets	$	739		$	—

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Continued

Core deposit intangible amortization expense for the years ended December 31, 2019, 2018 and 2017 was $27, $-0- and $-0-, respectively. The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:

Year ending<br><br><br>December 31,	Amount
2020	$	109
2021		109
2022		109
2023		109
2024		109
Thereafter		194
	$	739

Note 10. Deposits

(in thousands)

The composition of deposits as of December 31, 2019 and December 31, 2018 is as follows:

		2018
Non-interest bearing	190,406	$	170,030
NOW and money market accounts	369,354		298,220
Savings deposits	83,065		76,736
Time deposits, 250,000 or more	74,098		65,407
Other time deposits	182,073		145,829
Total	898,996	$	756,222

All values are in US Dollars.

The scheduled maturities of time deposits at December 31, 2019 are as follows:

Year Ending<br><br><br>December 31,	Amount
2020	$	137,630
2021		59,641
2022		27,709
2023		15,912
2024		15,279
	$	256,171

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11. Federal Home Loan Bank Advances

(in thousands)

Pursuant to collateral agreements with the FHLB, advances are collateralized by all of the Bank’s FHLB stock ($3,083 included in other assets at December 31, 2019) and qualifying first mortgages and other loans. As of December 31, 2019, the balance in qualifying first mortgages and other loans was $177,592.

There were no outstanding FHLB advances at December 31, 2019 or December 31, 2018.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Other Income and Other Expense

(in thousands)

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

Other Income	2019		2018		2017
BOLI Insurance	$	471	$	495	$	528
Mortgage Loan Origination Income		320		363		340
Other Income		1,224		290		447
Total Other Income	$	2,015	$	1,148	$	1,315

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

Other Operating Expense	2019			2018		2017
Advertising	$	551		$	640	$	650
Office Supplies		973			975		1,009
Professional fees		1,668			561		515
FDIC and State Assessment		274			350		417
Telephone Expense		501			520		530
Postage and Freight		(49	)		567		545
Loan Collection Expense		286			288		472
Other Losses		73			243		463
Debit Card/ATM expense		551			471		413
Travel and Convention		200			207		255
Other expenses		2,402			2,582		2,801
Total Other Expense	$	7,430		$	7,404	$	8,070

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Income Taxes

(in thousands)

Income tax expense consists of the following:

	2019		2018			2017
Current payable (benefit)
Federal	$	806	$	(181	)	$	258
State		89		36			(72	)
		895		(145	)		186
Deferred tax expense		459		973			3,885
Income tax expense	$	1,354	$	828		$	4,071

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

	2019			2018			2017
Federal taxes based on statutory rate	$	1,524		$	1,575		$	2,643
State income taxes, net of federal benefit		145			133			(48	)
Tax-exempt investment interest		(309	)		(487	)		(1,074	)
Revaluation of net deferred tax assets as a result of the Tax Cuts and Jobs Act		—			—			2,559
Other, net		(6	)		(394	)		(9	)
Income tax expense	$	1,354		$	828		$	4,071

The Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, among other things, permanently lowered the statutory federal corporate tax rate from 35% to 21%, effective for tax years including or beginning January 1, 2018. Under the guidance of ASC 740, “Income Taxes” (“ASC 740”), the Company revalued its net deferred tax assets on the date of enactment based on the reduction in the overall future tax benefit expected to be realized at the lower tax rate implemented by the new legislation. After reviewing the Company’s inventory of deferred tax assets and liabilities on the date of enactment and giving consideration to the future impact of the lower corporate tax rates and other provisions of the new legislation, the Company’s revaluation of its net deferred tax assets was $2,559, which was included in “Income tax expense” in the Consolidated Statements of Income for the year ended December 31, 2017.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Continued

At December 31, 2019 and December 31, 2018, net deferred tax assets consist of the following:

	2019		2018
Deferred tax assets
Allowance for loan losses	$	937	$	841
Deferred compensation liability		2,488		2,419
Net operating loss carryforward		1,000		—
Other real estate owned		819		435
Acquisition fair value adjustments		130		—
Unrealized loss on securities<br>available-for-sale		262		4,978
Other		6		—
Total		5,642		8,673
Deferred tax liabilities
Premises and equipment		1,603		1,856
Core deposit intangible		184		—
Other		171		183
Total		1,958		2,039
Net deferred tax asset	$	3,684	$	6,634

The Company has evaluated the need for a valuation allowance related to the above deferred tax assets and, based on the weight of the available evidence, has determined that it is more likely than not that all deferred tax assets will be realized.

As of December 31, 2019, the Company has no unrecognized tax benefits related to federal and state income tax matters. As of December 31, 2019, the Company has not accrued for interest and penalties related to uncertain tax positions. It is the Company’s policy to recognize interest or penalties related to income tax matters in income tax expense.

The Company and the Bank file a consolidated United States federal income tax return. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2016 through 2018. The Company and Bank’s state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2016 through 2018.

The Company acquired federal net operating losses as part of its Charter acquisition, with varying expiration periods. The federal net operating losses (“NOLs”) acquired were $4,848, including $2,060 created prior to 2018 and $2,788 created during 2019. As part of the Tax Act, the federal NOLs created by Charter during 2019 have an indefinite carryforward period. The federal NOLs created prior to 2018 begin to expire in 2028 and are expected to be fully utilized.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Summarized Financial Information of Citizens Holding Company

(in thousands)

Summarized financial information of Citizens Holding Company, excluding the Bank, at December 31, 2019 and December 31, 2018, and for the years ended December 31, 2019, 2018 and 2017, is as follows:

Balance Sheets

December 31, 2019 and 2018

	2019		2018
Assets
Cash<br>^(1)^	$	1,736	$	1,596
Investment in bank subsidiary ^(1)^		110,892		82,002
Other assets ^(1)^		172		268
Total assets	$	112,800	$	83,866
Liabilities
Other liabilities	$	—	$	—
Shareholders’ equity		112,800		83,866
Total liabilities and shareholders’ equity	$	112,800	$	83,866
(1)	Fully or partially eliminates in consolidation.
---	---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Continued

Income Statements

Years Ended December 31, 2019, 2018 and 2017

	2019			2018			2017
Interest income ^(1)^	$	2		$	2		$	2
Other income
Dividends from bank subsidiary ^(1)^		11,242			3,990			5,472
Equity in undistributed earnings (loss) of bank subsidiary ^(1)^		(4,965	)		3,022			(1,349	)
Other income		—			—			—
Total other income		6,277			7,012			4,123
Other expense		462			446			459
Income before income taxes		5,817			6,568			3,666
Income tax benefit		(85	)		(105	)		(38	)
Net income	$	5,902		$	6,673		$	3,704
(1)	Eliminates in consolidation.
---	---

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Continued

Statements of Cash Flows

Years Ended December 31, 2019, 2018 and 2017

	2019			2018			2017
Cash flows from operating activities
Net income	$	5,902		$	6,673		$	3,704
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed loss (earnings) of the Bank		4,965			(3,022	)		1,349
Stock compensation expense		163			170			211
Increase in other assets		97			84			266
Net cash provided by operating activities		11,127			3,905			5,530
Cash flows from investing activities
Net cash paid in acquisition activities	$	(6,113	)	$	—		$	—
Net cash used in investing activities		(6,113	)		—			—
Cash flows from financing activities
Dividends paid to shareholders	$	(4,874	)	$	(4,706	)	$	(4,697	)
Proceeds from stock options		—			27			93
Net cash used in financing activities		(4,874	)		(4,679	)		(4,604	)
Net increase (decrease) in cash		140			(774	)		926
Cash, beginning of year		1,596			2,370			1,444
Cash, end of year	$	1,736		$	1,596		$	2,370

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Related Party Transactions

(in thousands)

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

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

Deposits from related parties at December 31, 2019 and December 31, 2018 approximated $5,406 and $5,606, respectively.

Note 16. Off-Balance Sheet Financial Instruments,Commitments and Contingencies and Concentrations of Risks

(in thousands)

Commitments to Extend Credit

In the ordinary course of business, the Company makes various commitments and incurs certain contingent liabilities to fulfill the financing needs of its customers. These commitments and contingent liabilities include commitments to extend credit and issue standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. At December 31, 2019 and December 31, 2018, commitments related to unused lines of credit were $94,009 and $58,835, respectively, and standby letters of credit were $2,436 and $2,517, respectively. The fair value of such commitments is not materially different than stated values. As some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company applies the same credit policies and standards as it does in the lending process when making these commitments. The collateral obtained is based upon the assessed credit worthiness of the borrower. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate and income-producing commercial properties.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16. Continued

Interest Rate Risk

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

Legal Proceedings

We are a party to various legal proceedings such as claims and lawsuits arising in the course of our normal business activities. Although the ultimate outcome of all claims and lawsuits outstanding as of December 31, 2019 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on our business, results of operations or financial condition.

Concentration of Risk

The Company makes commercial, residential and consumer loans throughout the state of Mississippi. A substantial portion of the customers’ abilities to honor their contracts is dependent on their business and the agricultural economy in the state.

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17. Benefit Plans

(in thousands)

The Company provides its employees with a profit sharing and savings plan, which allows employees to direct a percentage of their compensation into a tax deferred retirement account, subject to statutory limitations. To encourage participation, the Company provides a 50 percent matching contribution for up to a maximum of 3 percent of each participant’s compensation, plus discretionary non-matching contributions. Employees are eligible after one year of service. For 2019, 2018 and 2017, the Company’s contributions were $605, $590 and $538, respectively.

In connection with the acquisition of Charter, the Company assumed the Charter Bank 401(k) Plan. The plan was terminated by Charter immediately prior to the acquisition where the Charter employees had the choice to rollover their account balance into the Company’s plan, rollover their account balance into another account or take a distribution. The final distribution of account balances has occurred. There was no impact on the Company’s consolidated financial statements as of and for the years ended December 31, 2019 associated with the plan.

Deferred Compensation Plans

The Company provides a deferred compensation plan covering its directors. Participants in the deferred compensation plan can defer a portion of their compensation for payment after attaining age 70. Life insurance contracts have been purchased which may be used to fund payments under the plan. Expenses related to this plan were $173, $194 and $190 for the plan years ended December 31, 2019, 2018 and 2017, respectively.

The Company has also entered into deferred compensation arrangements with certain officers that provide for payments to such officers or their survivors after retirement. Life insurance policies have been purchased that may be used to fund all or a portion of the payments under these arrangements. The obligations of the Company under both the directors and officers deferred compensation arrangements are expensed on a systematic basis over the remaining expected service period of the individual directors and officers. Expenses related to this plan were $586, $535 and $522 for the plan years ended December 31, 2019, 2018 and 2017, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Regulatory Matters

(in thousands)

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

Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines involving quantitative measures of the Company’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total capital and Tier I capital to risk-weighted assets (as defined in the regulations) and Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2019, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Continued

Beginning January 1, 2015, the Bank began to comply with the Basel III rules, which became effective on January 1, 2019. Among other things, the Basel III rules impact regulatory capital ratios of banking organizations in the following manner:

•	Create a new requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%;
•	Increase the minimum leverage ratio to 4% for all banking organizations (currently 3% for certain banking organizations);
---	---
•	Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and
---	---
•	Maintain the minimum total risk-based capital ratio at 8%.
---	---

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

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Continued

As of December 31, 2019 and 2018, the most recent regulatory notification categorized the Bank as well capitalized. There have been no conditions or events that would cause changes to the capital structure of the Company since this notification. To continue to be categorized as well capitalized under the regulatory framework for prompt corrective action, the Company would have to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed below, in comparison with actual capital amounts and ratios:

											Minimum Capital
						Minimum Capital					Requirement to be
						Requirement to be					Adequately
	Actual					Well Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
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		8.33	%		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 Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	96,824		8.18	%	$	59,206		5.00	%	$	47,365		4.00	%
Common Equity tier 1 capital ratio		96,824		8.18	%		76,968		6.50	%		53,285		4.50	%
Tier 1 risk-based capital ratio		96,824		13.60	%		56,958		8.00	%		42,719		6.00	%
Total risk-based capital ratio		100,579		14.13	%		71,198		10.00	%		56,958		8.00	%
December 31, 2018
Citizens Holding Company
Tier 1 leverage ratio	$	95,691		9.93	%	$	48,191		5.00	%	$	38,553		4.00	%
Common Equity tier 1 capital ratio		95,691		9.93	%		62,648		6.50	%		43,372		4.50	%
Tier 1 risk-based capital ratio		95,691		17.41	%		43,966		8.00	%		32,974		6.00	%
Total risk-based capital ratio		99,063		18.03	%		54,957		10.00	%		43,966		8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	93,827		9.74	%	$	48,178		5.00	%	$	38,542		4.00	%
Common Equity tier 1 capital ratio		93,827		9.74	%		62,631		6.50	%		43,360		4.50	%
Tier 1 risk-based capital ratio		93,827		17.08	%		43,944		8.00	%		32,958		6.00	%
Total risk-based capital ratio		97,199		17.69	%		54,930		10.00	%		43,944		8.00	%

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Fair Values of Financial Instruments

(in thousands)

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

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

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company used the following methods and assumptions to estimate the fair value of financial instruments that are measured at fair value on a recurring basis:

Investment Securities

The fair values of debt securities available for sale are determined by third party matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Continued

The following table presents investment securities that are measured at fair value on a recurring basis as of December 31, 2019:

	Quoted Prices<br>in Active<br>Markets for<br>Identical<br>Assets		Significant<br>Other<br>Observable<br>Inputs		Significant<br>Unobservable<br>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, Municipals		—		60,372		—		60,372
	$	—	$	464,383	$	—	$	464,383

The following table presents investment securities that are measured at fair value on a recurring basis as of December 31, 2018:

	Quoted Prices<br>in Active<br>Markets for<br>Identical<br>Assets		Significant<br>Other<br>Observable<br>Inputs		Significant<br>Unobservable<br>Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S.
Government agencies	$	—	$	95,978	$	—	$	95,978
Mortgage-backed securities		—	$	247,374		—		247,374
State, County, Municipals		—	$	101,394		—		101,394
	$	—	$	444,746	$	—	$	444,746

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Continued

Impaired Loans

Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management 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.

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 ALLL. 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.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Continued

The following table presents assets measured at fair value on a nonrecurring basis during December 31, 2019 and 2018 and were still held at those respective dates:

	Quoted Prices<br>in Active<br>Markets for<br>Identical<br>Assets		Significant<br>Other<br>Observable<br>Inputs		Significant<br>Unobservable<br>Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
December 31, 2019
Impaired loans	$	—	$	—	$	4,576	$	4,576
	$	—	$	—	$	4,576	$	4,576
December 31, 2018
Impaired loans	$	—	$	—	$	3,365	$	3,365
Other real estate owned		—		—		189		189
	$	—	$	—	$	3,554	$	3,554

Impaired loans with a carrying value of $5,003 and $3,365 had an allocated allowance for loan losses of $427 and $401 at December 31, 2019 and December 31, 2018, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairment after foreclosure, management determined that no fair value adjustments to OREO was necessary or recorded during the year ended December 31, 2019 and December 31, 2018, respectively.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Continued

The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2019 and December 31, 2018:

	Carrying Value		Quoted Prices<br>in Active<br>Markets for<br>Identical<br>Assets		Significant<br>Other<br>Observable<br>Inputs		Significant<br>Unobservable<br>Inputs		Total Fair Value
2019			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	15,937	$	15,937	$	—	$	—	$	15,937
Interest bearing deposits with banks		58,557		58,557		—		—		58,557
Federal funds sold		1,600		1,600		—		—		1,600
Securities available-for-sale		464,383		—		464,383		—		464,383
Net loans		573,312		—		—		569,640		569,640
Financial liabilities
Deposits	$	898,996	$	642,825	$	258,100	$	—	$	900,925
Securities Sold under
Agreement to Repurchase		170,410		170,410		—		—		170,410
	Carrying Value		Quoted Prices<br>in Active<br>Markets for<br>Identical<br>Assets		Significant<br>Other<br>Observable<br>Inputs		Significant<br>Unobservable<br>Inputs		Total Fair Value
---	---	---	---	---	---	---	---	---	---	---
2018			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	12,592	$	12,592	$	—	$	—	$	12,592
Interest bearing deposits with banks		8,080		8,080		—		—		8,080
Securities available-for-sale		444,746		—		444,746		—		444,746
Net loans		425,905		—		—		420,992		420,992
Financial liabilities
Deposits	$	756,222	$	544,986	$	210,477	$	—	$	755,463
Securities Sold under
Agreement to Repurchase		107,965		107,965		—		—		107,965

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. Stock Based Compensation

(in thousands, except share data)

The Company has a directors’ stock compensation plan and had an employees’ long-term incentive plan. Under the directors’ plan, the Company may grant options for up to 210,000 shares of common stock. The price of each option is equal to the market price determined as of the option grant date. Options granted are exercisable after six months and expire after 10 years. The employee plan expired on April 13, 2009, no options have been granted since this date and all previously granted options either expired or were exercised as of December 31, 2019. The options previously granted under the employee plan expire 10 years from the grant date. The exercise price is equal to the market price of the Company’s stock on the date of grant.

The fair value of each option granted is estimated on the date of the grant using the Black-Sholes option-pricing model. No options were granted in 2019 or 2018, therefore no calculations were required in 2019 or 2018 to determine fair values.

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

During 2019, the Company’s directors received restricted stock grants totaling 7,500 shares of common stock at a then market value of $21.53 per share and in 2018 received 7,500 shares of common stock at a then market value of $22.05 per share. These grants vest over a one-year period during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares granted in 2019 was $161 and will be recognized over the one-year restriction period at a cost of $13 per month less deferred taxes of $3 per month. The grant date fair value of the shares granted in 2018 was $165 and was recognized over the one-year restriction period at a cost of $14 per month less deferred taxes of $3 per month.

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

During 2019 and 2018, the Company recorded expense of $163 and $170 and recorded deferred taxes in the amounts of $41 and $42, respectively, related to all of the restricted shares.

At December 31, 2019, there were 12,000 shares non-vested with $54 in unrecognized stock-based compensation expense related to the 2013 Plan.

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. Continued

Following is a summary of the status of the stock options remaining under the plans for the years ending December 31, 2019, 2018 and 2017:

	Directors’ Plan
	Number<br>of<br>Shares			WeightedAverageExercisePrice
Outstanding at January 1, 2017		78,000		$	21.08
Granted		—			—
Exercised		(6,000	)		20.94
Expired		(9,000	)		22.00
Outstanding at December 31, 2017		63,000		$	20.96
Granted		—			—
Exercised		(6,000	)		18.00
Expired		(4,500	)		18.00
Outstanding at December 31, 2018		52,500		$	21.55
Granted		—			—
Exercised		—			—
Expired		(12,000	)		21.75
Outstanding at December 31, 2019		40,500		$	21.49
Options exercisable at:
December 31, 2019		40,500		$	21.49

CITIZENS HOLDING COMPANY

Years Ended December 31, 2019, 2018 and 2017

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20. Continued

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

		Weighted		Weighted Average
Range of Exercise Prices		Average Price		Life Remaining
15.01 to 20.00	13,500		18.76	2 years, 4 months
20.01 to 22.50	13,500		20.02	1 year, 4 months
22.51 and above	13,500		25.72	4 months
Total	40,500	$	21.49	1 years, 4 months

All values are in US Dollars.

The intrinsic value of options outstanding under the Directors’ Plan at December 31, 2019 was $52. Additionally, the total intrinsic value of options exercised during 2019 and 2018 was $-0- and $24, respectively.

There were no options granted during 2019 under the 2013 Plan.

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

as of December 31, 2019, 2018 and 2017

(in thousands)

OVERVIEW

The following information discusses the financial condition and results of operations of Citizens Holding Company (the “Company”) as of December 31, 2019, 2018 and 2017. In this discussion, all references to the activities, operations or financial performance of the Company reflect the Company’s activities, operations and financial performance through its wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank”), unless otherwise specifically noted. The Company’s financial statements and accompanying notes should be read in conjunction with this Management’s Discussion and Analysis.

Over the past three years, the Company has experienced growth in total loans as management has capitalized on opportunities for organic growth within the Company’s market area. Total loans increased over the three-year period by $170,462 or 41.9%. Of the loan growth, $104,127 was purchased in the acquisition of Charter and $66,335, or 16.3%, was organic growth. In the three-year period, net income increased by $2,198 or 59.3%. A large part of this net income growth was due to the tax consequences recorded in the year ended 2017 related to the Tax Act, discussed further in Note 12. Income Taxes. Excluding the impact of the Tax Act of $2,559 in 2017, net income has decreased $361 or 9.7%. As competition for deposits has increased, the cost of deposits has also increased. The yield on earning assets hasn’t increased at the same rate as interest bearing liabilities. Management continues to focus on growing non-interest income while containing costs to the extent possible to help offset shrinking margins. Due to the loan growth over the period, management has increased the provision for loan losses to help manage risks. All of these factors are driving the net income results and continue to be a focus of management moving forward.

During 2019 as compared to 2018, the Company’s total assets increased by $236,804, or 24.7%, loans increased by $147,753, or 34.4%, and total deposits increased by $142,774, or 18.9%. Loans increased in 2019 due to an increased focus on loan production in the Company’s service area coupled with the acquisition of Charter. Certificates of deposit ended 2019 at $256,171, or 21.3% higher than 2018. Demand, NOW, savings and money market accounts increased $97,839, or 12.9% from December 31, 2018 to $642,825 at December 31, 2019.

During 2018 as compared to 2017, the Company’s total assets decreased by $34,465, or 3.5%, loans increased by $23,515, or 5.8%, and total deposits increased by $35,536, or 4.9%. Loans increased in 2018 due to an increased focus on loan production in the Company’s service area, including the loan production office in North Mississippi. Certificates of deposit ended 2018 at $211,236, or 19.0% higher than 2017. Demand, NOW, savings and money market accounts increased $1,863, or 0.3% from December 31, 2017 to $544,986 at December 31, 2018.

In 2019, the Company’s net income after taxes decreased to $5,902, a decrease of $771 from 2018. This decrease was primarily due to a decrease in the Company’s net interest margin caused by an increase in cost funds in excess of the increase in yields on earning assets. An increase in non-interest income coupled with the decrease in non-interest expense helped offset the decrease in net interest income. Net income for 2019 produced, on a fully diluted basis, earnings per share of $1.17 compared to $1.36 for 2018.

In 2018, the Company’s net income after taxes increased to $6,673, an increase of $2,930 from 2017. The bulk of this increase was from the Tax Act of 2017 that was signed into law on December 22, 2017 that negatively impacted 2017 earnings. This resulted in an increase in the income tax expense related to this in the amount of $2,559 in 2017. Net interest income after the provision for loan losses decreased in 2018 primarily due to an increase in interest expense on interest bearing liabilities and an increase in the provision for loan losses. An increase in non-interest income coupled with the decrease in non-interest expense helped offset the decrease in net interest income. Net income for 2018 produced, on a fully diluted basis, earnings per share of $1.36 compared to $0.76, after the deferred tax adjustment, for 2017.

The Company’s return on average assets (“ROA”) was 0.51% in 2019, compared to 0.69% in 2018 and 0.37% in 2017. The Company’s return on average equity (“ROE”) was 6.13% in 2019, 7.95% in 2018 and 4.10% in 2017. During these periods, leverage capital ratios (the ratio of equity to average total assets) increased from 9.17% in 2017 to 9.74% in 2018 and decreased to 8.18% in 2019. The ROE in 2019, 2018 and 2017 is a function of the level of net income and equity balances during those years. The changes in ROA were also a result of the Company’s net income in those years and also affected by the increase in total assets during these time periods. The Company set the annual dividend payout rate to approximately 82.05% of 2019 earnings per share, as compared to 70.59% in 2018 and 126.32% in 2017. The leverage capital ratio of 8.18% in 2019 remains above the regulatory requirement of 5% to be considered “well capitalized” under applicable Federal Deposit Insurance Corporation (the “FDIC”) guidelines for the Bank.

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

Liquidity is discussed in more detail beginning on page 94 of this report under the heading, Liquidity and Rate Sensitivity. The Company did not have any commitments at December 31, 2019 that would require a material expenditure of capital resources.

The Company is not aware of any developments that would have material impact on its revenues or net income. Interest rate movements are currently projected to be stable for 2020 but it is difficult to know the frequency and size of interest rate movements, if any. A measured increase in interest rates could have the effect of increasing revenues and net income.

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses

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

Loans purchased in acquisitions or mergers with evidence of credit deterioration since origination are accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). ASC 310-30 prohibits the carryover of an allowance for loan losses for loans purchased in which the acquirer concludes that it will not collect the contractual amount. As a result, these loans are carried at values which represent management’s estimate of the future cash flows of these loans. Increases in expected cash flow to be collected from the contractual cash flows are required to be recognized as an adjustment of the loan’s yield over its remaining life, while decreases in expected cash flows are required to be recognized as an impairment. A more detailed discussion of loans accounted for under ASC 310-30, which were acquired in connection with our mergers, including our acquisitions of Charter, is set forth below under the heading “Provision for Loan Losses and Asset Quality” and in Note 6, “Purchased Loans” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data.

Other Than Temporary Impairment

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

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

Other Real Estate

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

Business Combinations, Accounting for Purchased Loans

The Company accounts for its acquisitions under ASC 805, “Business Combinations,” which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed are recorded at fair value and recognized separately from goodwill. For a purchased loan, no allowance for loan losses is recorded on the acquisition date because the fair value measurements incorporate assumptions regarding credit risk. This applies even to a purchased loan with evidence of credit deterioration since origination pursuant to ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310- 30”). Generally speaking, rather than carry over an allowance for loan losses, as part of the acquisition we establish a “Day 1 Fair Value” of a purchased loan or pools of purchased loans sharing common risk characteristics, which equals the outstanding balance of a purchased loan or 77 pool on the acquisition date less any credit and/or yield discount applied against the purchased loan or pool of loans. In other words, these loans or pools of loans are carried at values which represent our estimate of their future cash flows. After the acquisition date, a purchased loan or pool of loans will either meet or exceed the performance expectations established in determining the Day 1 Fair Values or deteriorate from such expected performance. If the cash flows expected to be collected on a purchased loan or pool of loans decreases from expectations established in determining the Day 1 Fair Values or since our most recent review of such portfolio’s performance, then the decrease is recognized as an impairment, and the Company provides for such loan or pool in the provision for loan losses in its consolidated statement of income; ultimately, the Company may partially or fully charge-off the carrying value thereof. If performance expectations are exceeded such that we increase our expectations of cash flows to be collected on the loan or pool, then the Company reverses any previous provision for such loan or pool and, if it continues to exceed expectations subsequent to the reversal of any previously-established provision, then we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life, which has a positive impact on interest income.

Additional detail about our loans acquired in connection with our mergers, including our acquisition of Charter, is set forth below under the heading “Risk Management - Allowance for Loan Losses” and in Note 6, “Purchased Loans” in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, in this report.

Intangible Assets

Goodwill resulting from business combinations represents the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead reviewed for impairment when there is evidence to suggest that the estimated fair value of the net assets is lower than the carrying value, or at a minimum of once a year. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill was the only intangible asset with an indefinite life on the Company’s balance sheet. Other intangible assets consisted of core deposit intangibles arising from the Company’s acquisition of Charter. These assets are initially measured at fair value and then are amortized on a straight-line method over their estimated useful lives, which were determined to be 7 years.

Stock Based Compensation

The Company recognizes stock compensation expenses in accordance with ASC 718, “Compensation—Stock Compensation” (“ASC 718”). The Company sponsors stock plans which most commonly include restricted stock and stock options. The Company accounts for stock based compensation under the fair value recognition provisions whereby compensation cost is measure based on the fair value of the award at the grant date and is recognized in the consolidated financial statements on a straight-line basis over the requisite service period. The fair value of restructured stock is determined based on the closing price of the Company’s common stock on the date of grant. The fair value of stock options is estimated at the date of grant using a Black-Scholes option pricing model. For more information on the Company’s stock options and the assumptions used to calculate the expense of such options, please refer to Note 1, “Summary of Significant Accounting Policies,” and Note 20, “Stock Based Compensation” to the Company’s Consolidated Financial Statements included in this Annual Report.

Income Taxes

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

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

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

•	expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic<br>conditions;
•	adverse changes in asset quality and loan demand, the potential insufficiency of the allowance for loan losses and our ability to foreclose on<br>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;
---	---
•	extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased<br>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<br>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<br>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;
---	---
•	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<br>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<br>with the Securities and Exchange Commission.
---	---

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

SELECTED FINANCIAL DATA

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

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

TABLE 1 - FIVE YEAR SUMMARY OF CONSOLIDATED STATEMENTS AND RELATED

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

	2019		2018		2017			2016			2015
Summary of Earnings
Total Interest Income	$	35,361	$	31,359	$	30,505		$	30,169		$	30,965
Total Interest Expense		9,722		4,459		3,343			3,098			3,077
Provision for loan losses		573		334		(543	)		(65	)		556
Non-interest income		9,748		8,599		8,296			7,692			8,327
Non-interest expense		27,558		27,665		28,227			26,480			25,591
Income tax expense		1,354		828		4,070			1,612			2,479
Net Income		5,902		6,673		3,704			6,737			7,589
Per Share Data
Earnings-basic	$	1.17	$	1.36	$	0.76		$	1.38		$	1.56
Earnings-diluted		1.17		1.36		0.76			1.38			1.56
Cash dividends		0.96		0.96		0.96			0.96			0.93
Book value at year end		20.22		17.09		18.07			17.42			17.73
Selected Year End Actual Balances
Loans, net of unearned income	$	577,067	$	429,277	$	406,605		$	394,051		$	429,582
Allowance for loan losses		3,755		3,372		3,019			3,903			6,474
Investment Securities		464,383		444,746		505,046			496,125			428,308
Earning assets		1,105,103		885,416		910,283			935,957			894,765
Total assets		1,195,434		958,630		993,096			1,025,212			973,505
Deposits		898,996		756,222		720,685			760,152			753,405
Long term borrowings		6		15		20,000			20,000			20,000
Shareholders’ equity		112,800		83,866		88,451			85,059			86,425
Selected Year End Average Balances
Loans, net of unearned income	$	561,483	$	418,136	$	395,217		$	409,367		$	412,161
Allowance for loan losses		3,667		3,002		3,586			5,051			6,637
Investment securities		458,522		484,298		511,133			475,714			421,729
Earning assets		1,068,683		911,175		929,260			917,366			863,830
Total assets		1,164,570		971,893		1,013,177			996,266			945,270
Deposits		929,598		760,992		762,983			766,264			725,116
Long term borrowings		10		19		20,000			20,042			20,056
Shareholders’ equity		96,295		83,907		90,230			91,766			84,250
	2019			2018			2017			2016			2015
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
Selected Ratios
Return on average assets		0.51	%		0.69	%		0.37	%		0.68	%		0.80	%
Return on average equity		6.13	%		7.95	%		4.10	%		7.34	%		9.01	%
Dividend payout ratio		82.05	%		70.59	%		126.32	%		69.57	%		59.62	%
Equity to year end assets		9.44	%		8.75	%		8.91	%		8.30	%		8.88	%
Total risk-based capital to risk-adjusted assets		14.13	%		17.69	%		18.51	%		18.67	%		17.54	%
Leverage capital ratio		8.18	%		9.74	%		9.17	%		9.22	%		9.26	%
Efficiency ratio		77.88	%		75.99	%		76.35	%		71.49	%		68.69	%

NET INCOME

Net income for 2019 decreased by 11.6% to $5,902 or $1.17 per share-basic and -diluted, from $6,673 or $1.36 per share-basic and -diluted for 2018. The provision for loan losses for 2019 was $573 as compared to $334 in 2018. The increase in the loan loss provision for 2019 was mainly due to the increase in the balance of loans outstanding coupled with management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions. Non-interest income increased by $1,148, or 13.4%, and non-interest expense decreased by $106 or 0.4%, in 2019. Non-interest income for 2019 increased primarily due to the result of gains from security sales and other real estate coupled with death benefit proceeds from a bank-owned life insurance policy offset by a decrease in mortgage loan origination income. Non-interest expense decreased mainly due to a refund of excess prepaid postage and continued cost containment focus throughout the Company, partially offset by an increase in salaries and benefits related to the Charter acquisition.

Net income for 2018 increased by 0.9% to $6,673 or $1.36 per share-basic and -diluted, from $3,704 or $0.76 per share-basic and -diluted for 2017. The provision for loan losses for 2018 was a positive $334 as compared to negative $543 in 2017. The increase in the loan loss provision for 2018 was mainly due to the increase in the balance of loans outstanding coupled with management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions. Non-interest income increased by $303, or 3.7%, and non-interest expense decreased by $562 or 2.0%, in 2018. Non-interest income for 2018 increased primarily due to an increase in service charges on deposit accounts and other service charges and fees offset by a decrease in other income. Non-interest expense decreased due to a decrease in salaries and benefits, loan collection expense, other losses and a reduction in other expenses.

Net income for 2017 decreased by 45.0% to $3,704 or $0.76 per share-basic and -diluted, from $6,737 or $1.38 per share-basic and -diluted for 2016. The provision for loan losses for 2017 was a negative $543 as compared to negative $65 in 2016. The increase in the negative loan loss provision for 2017 was mainly due to management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions and low level of prior years’ loan losses offset by the increase in the balance of loans outstanding. Non-interest income increased by $605, or 7.9%, and non-interest expense increased by $1,748 or 6.6%, in 2017. Non-interest income for 2017 increased primarily due to an increase in other service charges and fees. Non-interest expense increased due to an increase in salaries and benefits, loan collection expense and office supplies.

NET INTEREST INCOME

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

Net interest income on a tax equivalent basis was $29,897, $27,806 and $28,339 for the years 2019, 2018 and 2017, respectively. Net interest margin was 2.77%, 3.05% and 3.01% for the same periods. During 2019, the yields on interest earning assets and the rates paid on interest bearing deposits increased. In 2019 as compared to 2018, interest-bearing assets increased by $167,713, or 18.4% and interest-bearing liabilities increased by $145,753, or 20.5%. For the year ended December 31, 2019, the average yield on earnings assets was 3.77%, an increase of 23 basis points compared to the average yield at December 31, 2018. The average rate paid on interest-bearing liabilities was 1.26%, an increase of 64 basis points compared to the average rate at December 31, 2018.

During 2018, the yields on interest earning assets and the rates paid on interest bearing deposits increased. In 2018 as compared to 2017, interest-bearing assets decreased by $24.9 million, or 2.7% and interest-bearing liabilities decreased by $41.2 million, or 5.6%. For the year ended December 31, 2018, the average yield on earnings assets was 3.54%, an increase of 18 basis points compared to the average yield at December 31, 2017. The average rate paid on interest-bearing liabilities was 0.62%, an increase of 18 basis points compared to the average rate at December 31, 2017.

During this three-year period, loans outstanding increased in 2017, 2018 and 2019. Loans generally provide the Company with yields that are greater than the yields on typical investment securities.

Table 2 – Average Balance Sheets and Interest Rates sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the fiscal years ended December 31, 2019, 2018 and 2017.

TABLE 2 – AVERAGE BALANCE SHEETS AND INTEREST RATES

(in thousands)

	Average Balance						Income/Expense						Average Yield/Rate
	2019		2018		2017		2019		2018		2017		2019			2018			2017
Loans:
Loans, net of unearned^(1)^	$	560,888	$	417,624	$	394,684	$	29,427	$	20,287	$	18,782		5.25	%		4.86	%		4.76	%
Investment Securities
Taxable		388,490		376,392		392,626		7,993		8,345		8,178		2.06	%		2.22	%		2.08	%
Tax-exempt		78,843		107,906		129,709		2,423		3,445		4,448		3.07	%		3.19	%		3.43	%
Total Investment Securities		467,333		484,298		522,335		10,416		11,790		12,626		2.23	%		2.43	%		2.42	%
Federal Funds Sold and Other		50,666		9,253		24,999		854		157		274		1.69	%		1.70	%		1.09	%
Total Interest Earning Assets^(1)(2)^		1,078,887		911,175		942,018		40,697		32,234		31,682		3.77	%		3.54	%		3.36	%
Non-Earning Assets		85,683		69,971		71,159
Total Assets	$	1,164,570	$	981,146	$	1,013,177
Deposits:
Interest-bearing Demand
Deposits ^(3)^	$	381,635	$	325,192	$	347,260	$	3,468	$	1,131	$	806		0.91	%		0.35	%		0.23	%
Savings		79,886		79,281		74,923		130		113		133		0.16	%		0.14	%		0.14	%
Time		274,597		191,836		189,359		5,226		1,536		983		1.90	%		0.80	%		0.52	%
Total Deposits		736,118		596,309		611,542		8,824		2,780		1,922		1.20	%		0.47	%		0.31	%
Borrowed Funds
Short-term Borrowings		121,951		116,787		130,248		1,976		1,648		907		1.62	%		1.41	%		0.70	%
Long-term Borrowings		—		—		20,000		—		—		514		0.00	%		0.00	%		2.53	%
Total Borrowed Funds		121,951		116,787		150,248		1,976		1,648		1,421		1.62	%		1.41	%		0.95	%
Total Interest-Bearing Liabilities ^(3)^		858,069		713,096		761,790		10,800		4,428		3,343		1.26	%		0.62	%		0.44	%
Non-Interest Bearing Liabilities
Demand Deposits		192,672		164,682		150,689
Other Liabilities		17,534		10,208		10,468
Shareholders’ Equity		96,295		83,907		90,230
Total Liabilities and Shareholders’ Equity	$	1,164,570	$	971,893	$	1,013,177
Interest Rate Spread														2.51	%		2.92	%		2.92	%
Net Interest Margin							$	29,897	$	27,806	$	28,339		2.77	%		3.05	%		3.01	%
Less
Tax Equivalent Adjustment								654		906		1,177
Net Interest Income							$	29,243	$	26,900	$	27,162
^(1)^	Overdrafts on demand deposit accounts are not included in the average volume calculation as they are not considered interest earning assets by the<br>Company. They are included in the “Non-Earning Assets” balance above.
---	---
^(2)^	Earning Assets in Table 2 does not include the dividend paying stock of the Federal Home Loan Bank.
---	---
^(3)^	Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the non-interest bearing liabilities section above.
---	---

Table 3 – Net Average Interest Earning Assets illustrates net interest earning assets and liabilities for 2019, 2018, and 2017.

TABLE 3 – NET AVERAGE INTEREST EARNING ASSETS

	(in thousands)
	2019		2018		2017
Average interest earning assets	$	1,078,887	$	911,175	$	942,018
Average interest bearing liabilities		858,069		713,096		761,790
Net average interest earning assets	$	220,818	$	198,079	$	180,228

Table 4 – Volume/Rate Analysis depicts the effect on interest income and interest expense of changes in volume and changes in rate from 2017 through 2019. Variances, which were attributable to both volume and rate, are allocated proportionately between rate and volume using the absolute values of each for a basis for the allocation. Non-accruing loans are included in the average loan balances used in determining the yields. Interest income on tax-exempt securities and loans has been adjusted to a tax equivalent basis using a federal income tax rate of 21% in 2019 and 2018, respectively.

TABLE 4 – VOLUME/RATE ANALYSIS

	(in thousands)<br> <br>2019 Change from 2018									2018 Change from 2017
	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME
Loans	$	6,959			2,181		$	9,140		$	1,114		$	391		$	1,505
Taxable Securities		268			(620	)		(352	)		(360	)		527			167
Non-Taxable Securities		(928	)		(94	)		(1,022	)		(696	)		(307	)		(1,003	)
Federal Funds Sold and Other		703			(6	)		697			(267	)		150			(117	)
TOTAL INTEREST INCOME	$	7,002		$	1,461		$	8,463		$	(209	)	$	761		$	552
INTEREST EXPENSE
Interest-bearing demand deposits	$	196			2,141			2,337		$	(77	)	$	402			325
Savings Deposits		1			16			17			6			(26	)		(20	)
Time Deposits		663			3,027			3,690			20			533			553
Short-term borrowings		73			255			328			(190	)		931			741
Long-term borrowings		—			—			—			—			(514	)		(514	)
TOTAL INTEREST EXPENSE	$	933		$	5,439			6,372		$	(241	)	$	1,326			1,085
NET INTEREST INCOME	$	6,070		$	(3,979	)	$	2,091		$	32		$	(565	)	$	(533	)

LOANS

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

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

•	to make loans after sound and thorough credit analysis;
•	to properly document all loans;
---	---
•	to eliminate loans from the portfolio that are underpriced, high risk or difficult and costly to administer;
---	---
•	to seek good relationships with the customer;
---	---
•	to avoid undue concentrations of loans; and
---	---
•	to keep non-accrual loans to a minimum by aggressive collection policies.
---	---

Loan demand in the Company’s market improved after economic conditions began to show some improvement. Although the Company continues to face intense competition for available loans from other financial institutions and the current economic conditions have improved slightly, the Company was able, in 2018 and 2019, to increase the amount of loans outstanding. Additionally, the acquisition of Charter added a significant amount of loans to the Company’s portfolio in 2019. The overall loan demand in the Company’s operating markets has been robust in certain sectors. Commercial, financial and agricultural has seen the most growth with an increase of 25.3%, or $77,353, in 2019, by 6.6%, or $17,653, in 2018 and by 5.9%, or $14,186, in 2017. Commercial, financial and agricultural loans are the largest segment of the loan portfolio and, by nature, bear a higher degree of risk. Management believes the lending practices, policies and procedures applicable to this loan category are adequate to manage any risk represented by the growth of this loan segment.

Real estate mortgage loans originated by the Company increased by 37.4%, or $33,267 in 2019 and decreased by 7.5%, or $7,177 in 2018, and by 1.9%, or $1,888, in 2017 when compared to the prior years. The increase in mortgage loans in 2019 was mainly driven by the acquisition of Charter coupled with expansion to more metropolitan markets and the decrease in prior years reflects the weakness in some of the Company’s local housing markets coupled with increased competition in the mortgage market.

Real estate construction loans increased by $40,063, or 97.4% in 2019 to $81,197 when compared to the $41,134 at December 31, 2018 and by $15,210, or 58.7% when compared to 2017. Real estate construction loans are usually short term in nature and are dependent on construction activity in the Company’s service area. There was a large amount of demand for these types of loans in the Company’s service area during 2019 coupled with the acquisition of Charter.

Consumer loans increased by $2,054 or 14.6% in 2019 and decreased by $1,969 or 12.3% in 2018, and $3,476, or 17.9% in 2017, compared to the prior years. The Company believes that changes in consumer purchasing habits and the increase in loan sources have affected the growth of this segment of loans.

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

TABLE 5 – LOANS OUTSTANDING

(in thousands)

	AT DECEMBER 31,
	2019		2018		2017		2016		2015
Commercial, financial and agricultural	$	357,789	$	285,420	$	267,767	$	253,581	$	266,464
Real estate - construction		81,197		41,134		25,923		23,793		33,133
Real estate - mortgage		122,014		88,747		95,925		97,812		104,046
Consumer		16,075		14,021		15,990		19,466		26,625
TOTAL LOANS	$	577,075	$	429,322	$	405,605	$	394,652	$	430,268

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

TABLE 6 – LOAN LIQUIDITY

LOAN MATURITIES AT DECEMBER 31, 2019

	1 YEAR<br>OR LESS		1 - 5<br>YEARS		OVER 5<br>YEARS		Total
Commercial, financial and agricultural	$	66,360	$	228,981	$	62,448	$	357,789
Real estate - construction		26,021		48,088		7,088	$	81,197
Real estate - mortgage		22,466		73,243		26,305	$	122,014
Consumer		5,973		9,167		935	$	16,075
Total loans	$	120,820	$	359,463	$	96,776	$	577,059

SENSITIVITY TO CHANGES IN INTEREST RATES

	1 - 5<br>YEARS		OVER 5<br>YEARS
Fixed rates	$	419,139	$	60,129
Variable rates		57,008		37,036
Total loans	$	476,147	$	97,165

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

PROVISION FOR LOAN LOSSES AND ASSET QUALITY

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

The allowance for loan losses is established through a provision for loan losses charged against net income. This expense is determined by a number of factors, including historical loan losses, assessment of specific credit weaknesses within the portfolio, assessment of the prevailing economic climate, and other factors that may affect the overall condition of the loan portfolio. Management utilized these factors to determine the provision for loan losses for each of 2017, 2018 and 2019. The ratio of net loans charged off to average loans was 0.03% in 2019, 0.00% in 2018 and 0.09% in 2017. Management evaluates the adequacy of the allowance for loan loss on a monthly basis and makes adjustments to the allowance based on this analysis.

The provision for loan losses in 2019 was an expense of $573 compared to an expense of $334 in 2018 and reversal of expense of $543 in 2017. The change in the provision for all three years was mainly due to management’s assessment of inherent losses in the loan portfolio, including the impact caused by current local and national economic conditions. The Company uses a model that takes into account historical charge-offs and recoveries and applies that to certain loan segments of the Company’s portfolio. At the end of 2019, the total allowance for loan losses was $3,755, an amount that management believes to be sufficient to cover estimated probable losses in the loan portfolio.

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

TABLE 7 – ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

(in thousands except for percentage amounts)

	2019			2018			2017			2016			2015
BALANCE AT BEGINNING OF YEAR	$	3,372		$	3,019		$	3,903		$	6,474		$	6,542
LOANS CHARGED-OFF
Commercial, financial and agricultural		176			35			166			2,397			457
Real estate - construction		—			74			112			—			—
Real estate - mortgage		46			133			57			179			201
Consumer		138			146			102			65			164
TOTAL CHARGE-OFFS		361			388			437			2,641			822
CHARGE-OFFS RECOVERED
Commercial, financial and agricultural		91			219			2			18			45
Real estate - construction		18			19			14			18			9
Real estate - mortgage		14			81			16			24			52
Consumer		47			88			64			75			91
TOTAL RECOVERIES		171			407			96			135			197
Net loans charged-off		190			(19	)		341			2,506			625
Additions charged to operating expense		573			334			(543	)		(65	)		557
BALANCE AT END OF YEAR	$	3,755		$	3,372		$	3,019		$	3,903		$	6,474
Loans, net of unearned, at year end	$	577,067		$	429,277		$	406,605		$	394,051		$	429,582
Ratio of allowance to loans at year end		0.65	%		0.79	%		0.74	%		0.99	%		1.51	%
Average loans - net of unearned	$	561,483		$	418,136		$	395,217		$	409,367		$	412,161
Ratio of net loans charged-off to average loans		0.03	%		0.00	%		0.09	%		0.61	%		0.15	%

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

(in thousands)

	AT DECEMBER 31,
	2019		2018		2017		2016		2015
Commercial, financial and agricultural	$	2,499	$	2,309	$	1,942	$	2,434	$	4,710
Real estate - construction		375		192		139		120		402
Real estate - mortgage		572		566		417		821		770
Consumer		309		305		521		528		592
Total	$	3,755	$	3,372	$	3,019	$	3,903	$	6,474

COMPOSITION OF LOAN PORTFOLIO BY TYPE

	AT DECEMBER 31,
	2019			2018			2017			2016			2015
Commercial, financial and agricultural		62.00	%		66.48	%		66.02	%		64.25	%		61.93	%
Real estate - construction		14.07	%		9.58	%		6.39	%		6.03	%		7.70	%
Real estate - mortgage		21.14	%		20.67	%		23.65	%		24.79	%		24.18	%
Consumer		2.79	%		3.27	%		3.94	%		4.93	%		6.19	%
		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

Loan balances outstanding, as illustrated in Table 5, increased in 2019 even though the Company maintained tight credit standards and the competition for loans was strong. All loan segments increased during 2019, primarily due to the acquisition of Charter coupled with solid organic growth. In 2018 as compared to 2017, commercial, financial and agricultural along with real estate construction loans increased and real estate mortgage and consumer loans decreased. The allowance for loan losses is allocated to the various categories based on the historical loss percentage for each segment of loan and any specific reserves that might be assigned to those loans.

Non-performing assets and the relative percentages of such assets to loan balances are presented in Table 8 – Non-performing Assets. Non-performing loans include non-accrual loans, loans delinquent 90 days or more based on contractual terms and troubled debt restructurings. Management classifies loans as non-accrual when it believes that collection of interest is doubtful. This typically occurs when payments are past due over 90 days, unless the loans are well secured and in the process of collection. Another measurement of asset quality is OREO, which represents properties acquired by the Company through foreclosure following loan defaults by customers. The percentage of OREO to total loans at December 31, 2019 was 0.62% compared to 0.80% in 2018. OREO increased in 2019 after decreasing in 2018 due to more foreclosures in 2019 partially offset by the sale of several parcels during 2019.

Loans on non-accrual status amounted to $12,026 in 2019 as compared to $9,839 in 2018 and $7,582 in 2017. Interest income forgone on loans classified as non-accrual in 2019 was $555 as compared to $429 in 2018 and $413 in 2017. Upon the classification of a loan as non-accrual, all interest accrued on the loan prior to the time it is classified as non-accrual is reversed and interest accruals are suspended until such time that the loan is in compliance with its terms and deemed collectable.

TABLE 8 – NON-PERFORMING ASSETS

(in thousands, except percentages)

	As of December 31,
	2019			2018			2017			2016			2015
PRINCIPAL BALANCE
Non-accrual	$	12,026		$	9,839		$	7,582		$	8,879		$	14,423
Accruing loans 90 days or more past due		274			73			807			206			76
Troubled debt restructurings		2,495			2,782			3,047			3,288			3,858
TOTAL NON-PERFORMING LOANS	$	14,795		$	12,694		$	11,436		$	12,373		$	18,357
Income on non-accrual loans not recorded	$	555		$	429		$	413		$	652		$	732
Non-performing as a percent of loans		2.56	%		2.96	%		2.82	%		3.14	%		4.26	%
Other real estate owned	$	3,552		$	3,440		$	3,980		$	4,443		$	3,573
OREO as a percent of loans		0.62	%		0.80	%		0.98	%		1.13	%		0.83	%
Allowance as a percent of non-performing loans		25.38	%		26.56	%		26.40	%		31.54	%		35.27	%

ASC Subtopic 310-10, Loan Impairments outlines the guidance for evaluating impaired loans. These statements changed the methods of estimating the loan loss allowance for problem loans. In general, when management determines that principal and interest due under the contractual terms of a loan are not fully collectible, management must value the loan using discounted future expected cash flows. Management evaluates the Company’s loans for impairment under ASC Subtopic 310-10. The balances of impaired (including non-accruals) loans for the years 2019, 2018 and 2017 were $11,135, $10,306 and $4,396, respectively.

This table details the impaired loans by category for years ending 2019, 2018 and 2017.

	AT DECEMBER 31,
	2019		2018		2017
Commercial, financial and agricultural	$	10,296	$	9,153	$	4,093
Real estate - mortgage		839		1,152		303
Total loans	$	11,135	$	10,305	$	4,396

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

At December 31, 2019, loans totaling $30,756 were included on the Company’s watch list compared to $26,252 at December 31, 2018. The majority of these loans are real estate loans that, although adequately collateralized, have experienced frequent delinquencies in scheduled payments. The inclusion of loans on this list does not indicate a greater risk of loss; rather it indicates that the loan possesses one of the several characteristics described above warranting increased oversight by management.

SECURITIES

At December 31, 2019, the Company classified all of its securities as AFS. AFS securities are reported at fair value, with unrealized gains and losses included as a separate component of equity, net of tax. The Company does not hold any securities classified as held to maturity or held for trading purposes.

Table 9 – Securities and Securities Maturity Schedule summarizes the amortized cost of securities from 2017 through 2019 and the maturity distribution at December 31, 2019, by classification.

TABLE 9 – SECURITIES

(in thousands)

	2019		2018		2017
SECURITIES AVAILABLE-FOR-SALE
U. S. Government Agencies	$	97,400	$	99,366	$	180,648
Mortgage Backed Securities		308,310		259,742		213,707
State, County and Municipal Obligations		59,724		105,591		118,786
Other Securities		—		—		2,865
TOTAL SECURITIES<br>AVAILABLE-FOR-SALE	$	465,434	$	464,699	$	516,006

SECURITIES MATURITY SCHEDULE

	1 year or less					1 to 5 years					5 to 10 years					over 10 years
	Actual<br>Balance		Average<br>Yield			Actual<br>Balance		Average<br>Yield			Actual<br>Balance		Average<br>Yield			Actual<br>Balance		Average<br>Yield
AVAILABLE-FOR-SALE
U.S. Government Agencies(1)	$	—		0.00	%	$	88,814		1.86	%	$	8,586		2.32	%	$	—		0.00	%
Mortgage Backed Securities		—		0.00	%		4,849		2.19	%		—		0.00	%		303,461		2.31	%
State, County and Municipal(2)		345		3.13	%		1,106		1.82	%		10,092		2.93	%		48,181		2.67	%
TOTAL AVAILABLE-FOR-SALE	$	345		3.13	%	$	94,769		1.88	%	$	18,678		2.65	%	$	351,642		2.36	%
(1)	The maturities for the mortgage backed securities included in this line item are based on final maturity.
---	---
(2)	Average yields were calculated on tax equivalent basis using a marginal federal income tax rate of 21% and a state tax rate of 5%.
---	---

The change in the carrying value of the AFS portfolio is due to market value fluctuations resulting from the changing interest rate environment during 2018. This change is not used in the Tier 1 capital calculation.

As detailed in Table 9, the security portfolio increased $735 or 0.2% in 2019, decreased $51,307 or 9.9% in 2018 and increased $2,800 or 0.5% in 2017. The Company strives to maximize the yields on its portfolio while balancing pledging needs and managing risk. The Company seeks to invest most of its funds not needed for loan demand or the reduction of other borrowings in higher yielding securities and not in the lower yielding federal funds sold.

DEPOSITS

The Company offers a wide variety of deposit services to individual and commercial customers, such as non-interest-bearing and interest-bearing checking accounts, savings accounts, money market deposit accounts and time deposits. The deposit base is the Company’s major funding source for earning assets. Time deposits increased in 2019 and 2018 due to an increase in rates paid by the Company caused by competition in our operating markets. During this time span, we continue to see an increase in other deposit segments as well, except for Interest-bearing demand in 2018.

A three-year schedule of average deposits by type and maturities of time deposits greater than $250 is presented in Table 10 – Deposit Information.

TABLE 10 – DEPOSIT INFORMATION

	(in thousands, except percentages)
	2019					2018					2017
	Average<br>Balance		Average<br>Rate			Average<br>Balance		Average<br>Rate			Average<br>Balance		Average<br>Rate
Noninterest-bearing	$	192,672				$	164,682				$	150,689
Interest-bearing demand		381,635		0.91	%		325,192		0.35	%		347,260		0.23	%
Savings		79,886		0.16	%		79,281		0.14	%		74,923		0.14	%
Time deposits		274,597		1.90	%		191,836		0.80	%		189,359		0.52	%
	$	928,790		1.20	%	$	760,991		0.47	%	$	762,231		0.31	%

MATURITY RANGES OF TIME DEPOSITS

OF $250,000 OR MORE

	AS OF DECEMBER 31, 2019
3 months or less	$	22,392
3 through 12 months		16,203
1 year to 3 years		20,856
over 3 years		9,897
	$	69,348

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

BORROWINGS

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

TABLE 11 - SHORT-TERM BORROWINGS

(in thousands)

	As of December 31,
	2019			2018			2017
Short-term borrowings
Year-end balance	$	170,410		$	107,966		$	153,998
Weighted average rate		1.05	%		1.20	%		0.75	%
Maximum month-end balance	$	181,347		$	140,115		$	201,427
Year to date average balance	$	121,951		$	116,787		$	130,248
Weighted average rate		1.62	%		1.41	%		0.75	%

The Company borrows funds for short periods from the FHLB as an alternative to Federal Funds Purchased. The Company foresees short-term borrowings to be a continued source of liquidity and likely will continue to use these borrowings as a method to fund short-term needs. At December 31, 2019, the Company had the capacity to borrow up to $222,592 from the FHLB and other financial institutions in the form of Federal Funds Purchased. The Company generally will use these types of borrowings if loan demand is greater than the growth in deposits. At December 31, 2019 and 2018, the Company had borrowed $-0- from the FHLB and $-0- in Federal Funds Purchased. In 2019, the balances in Securities Sold Under Agreement to Repurchase increased $62,444, or 57.8% to $170,410. In 2018, these balances decreased to $107,966, a decrease of $46,032, or 29.9%.

At the end of 2019, the Company had long-term debt in the amount of $-0- to the FHLB for advances and $6 payable to the State of Mississippi for advances under the Mississippi Agribusiness Enterprise Loan Program. This program provides interest-free loans to banks to fund loans to qualifying farmers. Farmers that qualify for the program receive 20% of their loan at zero interest. When the loan is repaid, the State of Mississippi receives 20% of the principal payment, which is equal to the amount advanced by the state, and the Company retains the balance of the principal payment.

The remaining maturity schedule of the long-term debt at December 31, 2019 is listed below.

	(in thousands)
	2019
Less than one year	$	—
One year to three years		6
Over three years		—
Total long-term borrowings	$	6

NON-INTEREST INCOME AND EXPENSE

Table 12 - Non-Interest Income and Expense illustrates the Company’s non-interest income and expense from 2017 through 2019 and percentage changes between such years.

TABLE 12 - NON-INTEREST INCOME & EXPENSE

(in thousands)

			% CHANGE					% CHANGE
	2019		FROM ‘18			2018		FROM ‘17			2017
NON-INTEREST INCOME
Service charges on deposit accounts	$	4,413		-3.27	%	$	4,562		7.62	%	$	4,239
Other operating income		5,335		32.12	%		4,038		-0.49	%		4,058
TOTAL NON-INTEREST INCOME	$	9,748		13.35	%	$	8,600		3.65	%	$	8,297
NON-INTEREST EXPENSE
Salaries and employee benefits	$	14,883		2.43	%	$	14,530		-1.64	%	$	14,772
Occupancy expense, including equipment		5,245		-8.46	%		5,730		6.41	%		5,385
Other operating expense		7,430		0.35	%		7,404		-8.25	%		8,070
TOTAL NON-INTEREST EXPENSE	$	27,558		-0.38	%	$	27,664		-1.99	%	$	28,227

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

During 2019 as compared to 2018, non-interest income increased by $1,148, or 13.4%, when compared to 2018. An increase in other operating income and net gains on sales of securities was partially offset by a decrease in other income and net gains on sales of securities.

During 2018 as compared to 2017, non-interest income increased by $303, or 3.7%, when compared to 2017. An increase in service charges on deposit accounts and other service charges and fees was partially offset by a decrease in other income and net gains on sales of securities.

Non-interest expenses consist of salaries and benefits, occupancy expense and other overhead expenses incurred by the Company in the transaction of its business. In 2019 as compared to 2018, non-interest expense decreased by $106, or 0.4%, to $27,558. Included in this decrease was a decrease in occupancy expense of $485 or 8.5% partially offset by an increase in salaries and benefits in the amount of $353, or 2.4%, and other expense in the amount of $26, or 0.4%. The decrease in occupancy expense was primarily due to a to a refund of excess prepaid postage and continued cost containment focus throughout the Company. The increase in salaries and benefits was due to the Charter acquisition.

In 2018 as compared to 20167 non-interest expense decreased by $562, or 2.0%, to $27,665. Included in this decrease was a decrease in salaries and benefits in the amount of $242, or 1.6%, occupancy expense in the amount of $145, or 6.7%, other expense in the amount of $666, or 8.3%, partially offset by an increase in equipment expense in the amount of $490, or 15.3%. The increase in equipment expense was primarily due to strategic investments in technology over the past few years. The decrease in other expense was in large part due to decreased loan collection expense and other losses attributable to writedowns on other real estate.

In 2019, the Company’s efficiency ratio was 77.88%, compared to 75.99% in 2018 and 76.35% in 2017. The efficiency ratio is calculated to measure the cost of generating one dollar of revenue. The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income, on a fully tax equivalent basis, and non-interest income.

INCOME TAXES

The Company records a provision for income taxes currently payable, along with a provision for deferred taxes to be realized in the future. Such deferred taxes arise from differences in timing of certain items for financial statement reporting rather than income tax reporting. The deferred tax amount of $3,684 is considered realizable without the use of extraordinary tax planning strategies.

The Company’s effective tax rate was 18.66%, 11.04% and 52.36% in 2019, 2018 and 2017, respectively. The major difference between the effective tax rate applied to the Company’s financial statement income and the federal statutory rate of 21%, 21% and 34% in 2019, 2018 and 2017, respectively, is interest on tax-exempt securities and loans and the impact on deferred tax assets due to tax reform. Further tax information is disclosed in Note 12, “Income Taxes” to the Company’s Consolidated Financial Statements included in this Annual Report.

LIQUIDITY AND RATE SENSITIVITY

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

The Company’s predominant sources of funding include: core deposits (consisting of both commercial and individual deposits); proceeds from maturities of securities; repayments of loan principal and interest; commercial repurchase agreements; Federal Funds Purchased; and short-term and long-term borrowing from the FHLB. In 2019 as compared to 2018, the Company experienced an increase in deposits and repurchase agreements in excess of the increase in loans outstanding. The increase in investment securities is mainly the result of the desire to invest excess funds outside of new loans. The Company relies upon non-core sources of funding, such as commercial repurchase agreements, Federal Funds Purchased and short and long- term borrowings from the FHLB, when deposit growth is not adequate to meet its short-term needs. While the strategy of using these wholesale funding sources is adequate to cover liquidity deficiencies in the short term, the Company’s goal is to increase core deposits as a source of long term funding. Management does not intend to rely on borrowings from the FHLB as the first choice as a source of funds but prefers to increase core deposits through increased competition for available deposits. Management believes that core deposits will increase by offering competitive rates and superior service to the Bank’s customers.

The Company had no FHLB advances outstanding at year end as part of our strategy to rely more on core deposits than wholesale funding. However, the Company will continue to use advances if they are needed to maintain the Company’s liquidity position.

The deposit base is diversified between individual and commercial accounts, which the Company believes helps it avoid dependence on large concentrations of funds. The Company does not currently solicit certificates of deposit from brokers. The primary sources of liquidity on the asset side of the balance sheet are securities classified as AFS. All of the $464,383 in the investment securities portfolio is classified in the AFS category, and any securities not pledged are available to be sold, should liquidity needs arise. Management, through its Asset Liability Committee (“ALCO”), and the Board review the Company’s liquidity position on a monthly basis. At December 31, 2019, both the ALCO and the Board of Directors determined that the Company’s liquidity position was adequate.

Table 13 - Funding Uses and Sources details the main components of cash flows for 2019 and 2018.

TABLE 13 - FUNDING USES AND SOURCES

(in thousands)

	2019								2018
	Average		Increase/(decrease)						Average		Increase/(decrease)
	Balance		Amount			Percent			Balance		Amount			Percent
FUNDING USES
Loans, net of unearned income	$	560,888	$	142,752			34.14	%	$	418,136	$	22,919			5.80	%
Taxable securities		388,490		12,098			3.21	%		376,392		(8,329	)		-2.16	%
Tax-exempt securities		78,843		(29,063	)		-26.93	%		107,906		(18,506	)		-14.64	%
Federal funds sold and other		50,666		41,413			447.56	%		9,253		(15,746	)		-62.99	%
TOTAL USES	$	1,078,887	$	167,200			18.34	%	$	911,687	$	(19,662	)		-2.11	%
FUNDING SOURCES
Noninterest-bearing deposits	$	192,672	$	27,990			17.00	%	$	164,682	$	13,993			9.29	%
Interest-bearing demand and
savings deposits		461,521		57,048			14.10	%		404,473		(18,462	)		-4.37	%
Time deposits		274,597		82,761			43.14	%		191,836		2,477			1.31	%
Short-term borrowings		1,483		(19,996	)		-93.10	%		21,479		19,167			829.02	%
Commercial repo		124,344		29,036			30.47	%		95,308		(32,629	)		-25.50	%
Long-term debt		—		—			—			—		(20,029	)		-100.00	%
TOTAL SOURCES	$	1,054,617	$	176,839			20.15	%	$	877,778	$	(35,483	)		-3.89	%

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

CAPITAL RESOURCES

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

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

During 2019 as compared to 2018, total capital decreased due to the purchase of Charter, in which the consideration paid was 80% stock and 20% cash partially offset by earnings in excess of dividends paid.

Management believes the Company and the Bank meet all the capital requirements to be well-capitalized under the guidelines established by FDICIA as of December 31, 2019, as noted below in Table 14—Capital Ratios. To be classified as well-capitalized, the Company and Bank must maintain the ratios described above.

TABLE 14 – CAPITAL RATIOS

(in thousands, except percentage amounts)

	At December 31,
	2019			2018			2017
Tier 1 capital
Shareholders’ equity	$	112,800		$	83,866		$	88,452
Less: Intangibles		(13,856	)		(3,150	)		(3,150	)
Less: DTA related to NOLs		(1,000	)		—			—
Add/less: Unrealized loss/(gain) on securities		789			14,975			8,225
TOTAL TIER 1 CAPITAL	$	98,733		$	95,691		$	93,527
Total capital
Tier 1 capital	$	98,733		$	95,691		$	93,527
Allowable allowance for loan losses		3,755			3,372			3,019
TOTAL CAPITAL	$	102,488		$	99,063		$	96,546
RISK WEIGHTED ASSETS	$	712,154		$	549,828		$	521,708
AVERAGE ASSETS (FOURTH QUARTER)	$	1,185,397		$	963,820		$	1,020,107
TIER 1 LEVERAGE RATIO		8.33	%		9.93	%		9.17	%
COMMON EQUITY TIER 1 CAPITAL RATIO		8.33	%		9.93	%		9.17	%
TIER 1 RISK-BASED CAPITAL RATIO		13.86	%		17.40	%		17.93	%
TOTAL RISK-BASED CAPITAL RATIO		14.39	%		18.02	%		18.51	%

Management’s strategy with respect to capital levels is to maintain a sufficient amount of capital to allow the Company to respond to growth and acquisition opportunities in the Bank’s service area. Over the past three years, the Company has been able to increase the amount of its capital, through retention of earnings, while still maintaining the dividend payout ratio to approximately 70% of earnings per share. The Company does not currently have any commitments for capital expenditures that would require the Company to raise additional capital by means other than retained earnings. The Company does not plan to change this strategy unless needed to support future acquisition activity.

OFF-BALANCE SHEET ARRANGEMENTS

CONTRACTUAL OBLIGATIONS

The following table summarizes the contractual obligations, excluding deposits and securities sold under agreement to repurchase, of the Company as of December 31, 2019.

	Payments Due by Period
	(in thousands)
			Less than		1-3		3 - 5		Over 5
Contractual Obligations	Total		1 year		Years		Years		Years
Operating Leases	$	801	$	348	$	451	$	2	$	—
Other Long-term Liabilities		6		—		6		—		—
Total	$	807	$	348	$	457	$	2	$	—

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

OVERVIEW

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

MARKET/INTEREST RATE RISK MANAGEMENT

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

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

In addition to the quarterly interest rate risk report, the Company employs a number of tools to measure interest rate risk. One tool is static gap analysis, which matches assets with specified maturities to liabilities with corresponding maturities. **** Although management believes that this does not provide a complete picture of the Company’s exposure to interest rate risk, it does highlight significant short-term repricing volume mismatches. The following table presents the Company’s rate sensitivity static gap analysis at December 31, 2019 ($ in thousands):

	Interest Sensitive Within
	90 days			One year
Total rate sensitive assets	$	193,301		$	180,773
Total rate sensitive liabilities		265,622			92,671
Net gap	$	(72,321	)	$	88,102

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

Management believes that static gap analysis does not fully capture the impact of interest rate movements on interest sensitive assets and liabilities. Thus, the Company also measures interest rate risk by analyzing interest rate sensitivity and the rate sensitivity gap. Table 15—Interest Rate Sensitivity provides additional information about the financial instruments that are sensitive to changes in interest rates. This tabular disclosure is limited by its failure to depict accurately the effect on assumptions of significant changes in the economy or interest rates or changes in management’s expectations or intentions relating to the Company’s financial statements. The information in the interest rate sensitivity table below reflects contractual interest rate pricing dates and contractual maturity dates. For indeterminate maturity deposit products (money market, NOW and savings accounts), the tables present principal cash flows in the shortest term. Although these deposits may not reprice within this time frame, the depositors of such funds have the ability to reprice. Weighted average floating rates are based on the rate for that product as of December 31, 2019 and December 31, 2018.

TABLE 15 - INTEREST RATE SENSITIVITY AS OF DECEMBER 31, 2019

(in thousands)

	2020			2021			2022			2023			2024			Thereafter			Carrying<br>Value			Fair Value
Loans
Fixed Rate	$	90,909		$	85,660		$	48,416		$	110,943		$	83,211		$	60,129		$	479,268		$	475,595
Average Int Rate		4.95	%		4.77	%		4.87	%		5.00	%		5.25	%		4.33	%		4.90	%
Floating Rate	$	25,758		$	14,582		$	3,049		$	3,274		$	10,345		$	37,036		$	94,044		$	94,044
Average Int Rate		5.30	%		3.99	%		4.97	%		4.90	%		4.91	%		5.47	%		5.10	%
Investment securities
Fixed Rate	$	345		$	10,000		$	53,481		$	25,566		$	5,722		$	370,320		$	465,434		$	464,383
Average Int Rate		3.13	%		1.75	%		1.92	%		1.80	%		2.08	%		2.41	%		2.30	%
Floating Rate
Average Int Rate
Other earning assets
Fixed Rate
Average Int Rate
Floating Rate	$	60,157																	$	60,157		$	60,157
Average Int Rate		1.58	%																	1.58	%
Interest-bearing deposits
Fixed Rate	$	591,785		$	59,641		$	27,709		$	15,912		$	15,279					$	710,326		$	710,195
Average Int Rate		0.93	%		1.99	%		2.61	%		2.37	%		2.74	%					1.16	%
Floating Rate
Average Int Rate
Other int-bearing liabilities
Fixed Rate
Average Int Rate
Floating Rate	$	170,410																	$	170,410		$	170,410
Average Int Rate		1.10	%																	1.10	%

AS OF DECEMBER 31, 2018

(in thousands)

	2019			2020			2021			2022			2023			Thereafter			Carrying<br>Value			Fair Value
Loans
Fixed Rate	$	81,808		$	54,416		$	70,950		$	32,780		$	83,478		$	34,948		$	358,380		$	353,467
Average Int Rate		4.89	%		4.80	%		4.49	%		4.72	%		4.96	%		3.58	%		4.67	%
Floating Rate	$	6,408		$	18,742		$	8,564		$	589		$	1,210		$	32,012		$	67,525		$	67,525
Average Int Rate		5.54	%		5.84	%		4.99	%		6.50	%		6.05	%		5.78	%		5.68	%
Investment securities
Fixed Rate	$	1,875		$	2,440		$	11,648		$	56,074		$	26,738		$	365,924		$	464,699		$	444,746
Average Int Rate		4.28	%		3.55	%		2.07	%		1.97	%		1.90	%		2.52	%		2.42	%
Floating Rate
Average Int Rate
Other earning assets
Fixed Rate	$	8,080																	$	8,080		$	8,080
Average Int Rate		1.69	%																	1.69	%
Floating Rate
Average Int Rate
Interest-bearing deposits
Fixed Rate	$	503,446		$	36,890		$	28,376		$	2,865		$	14,615					$	586,192		$	585,433
Average Int Rate		0.55	%		1.41	%		2.88	%		2.23	%		2.75	%					0.78	%
Floating Rate
Average Int Rate
Other int-bearing liabilities
Fixed Rate
Average Int Rate
Floating Rate	$	107,966																	$	107,966		$	107,966
Average Int Rate		1.20	%																	1.20	%

Rate sensitivity gap analysis is another tool management uses to measure interest rate risk. The rate sensitivity gap is the difference between the repricing of interest-earning assets and the repricing of interest-bearing liabilities within certain defined time frames. The Company’s interest rate sensitivity position is influenced by the distribution of interest-earning assets and interest-bearing liabilities among the maturity categories. Table 16—Rate Sensitivity Gap reflects interest-earning assets and interest-bearing liabilities by maturity distribution as of December 31, 2018. Product lines repricing in time periods predetermined by contractual agreements are included in the respective maturity categories.

TABLE 16 - RATE SENSITIVITY GAP AT DECEMBER 31, 2019

(in thousands, except percentage amounts)

	1 - 90<br>Days			91 - 365<br>Days			1 - 5<br>Years			Over<br>5 years			Total
INTEREST EARNING ASSETS
Loans	$	83,881		$	103,548		$	346,914		$	28,410		$	562,753
Investment securities		49,563			77,225			180,110			162,491			469,389
Interest Bearing Due From Bank Accounts		58,257			—			—			—			58,257
Federal funds sold		1,600			—			—			—			1,600
TOTAL INTEREST BEARING ASSETS	$	193,301		$	180,773		$	527,024		$	190,901		$	1,091,999
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	32,616		$	20,161		$	107,525		$	26,881		$	187,183
Savings and Money Market deposits		150,845			—			155,369			147,943			454,157
Time deposits		65,120			72,510			118,410			—			256,040
Short term borrowings		17,041			—			102,247			51,123			170,411
Long term borrowings		—			—			—			—			—
TOTAL INTEREST BEARING LIABILITIES	$	265,622		$	92,671		$	483,551		$	225,947		$	1,067,791
Rate sensitive gap	$	(72,321	)	$	88,102		$	43,473		$	(35,046	)	$	24,208
Rate sensitive cumulative gap		(72,321	)		15,781			59,254			24,208			—
Cumulative gap as a percentage of total earning assets		-6.62	%		1.45	%		5.43	%		2.22	%

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

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

The rate sensitivity gap table illustrates that the Company had a large negative cumulative gap position for the 1 to 90-day period as of December 31, 2019. This negative gap position was mainly due to: (1) a large amount of investment securities that have call dates within that period; (2) a significant amount of non-maturity deposits classified within that period; (3) approximately 25.4% of certificates of deposit maturing during that period; and (4) 82.8% of the Company’s loans maturing after that period.

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

Short term interest rates remained historically low in 2017, but started increasing in 2017 and all of 2018 but then starting decreasing in the second half of 2019 in connection with the target Federal Funds rate by the Federal Reserve Bank. The movement in the short term interest rates impact the Company’s decisions in regards to pricing the Company’s products and services. The short term interest rates have had impact on the Company’s earnings as we positioned our balance sheet for rising rates in 2018 and that was halted in mid-2019. Therefore, this caused an increase in our deposit costs without the corresponding increase in earning asset yields. The Company is focused on positioning the balance sheet to remain more neutral to interest rates during these uncertain times. In 2018, the Company was significantly liability sensitive and has been able to turn the balance sheet to asset sensitive over foreseeable future with a focus on getting closer to neutral through investing the Company’s excess funds into longer-term loans and investment securities. The Company’s net interest margin in 2019 was 2.77% and in 2018 was 3.05% due to the aforementioned facts.

Quarterly Financial Trends

	(in thousands, except per share<br>amounts)<br>2019
	First Quarter			Second Quarter		Third Quarter		Fourth Quarter
Interest Income	$	8,383		$	8,651	$	8,444	$	9,883
Interest Expense		2,174			2,444		2,525		2,578
Net Interest Income		6,209			6,207		5,919		7,305
Provision for Loan Losses		195			265		12		101
Non-interest Income		2,047			2,072		2,506		3,122
Non-interest Expense		6,639			6,323		6,868		7,728
Income Taxes		195			320		212		627
Net Income	$	1,227		$	1,371	$	1,333	$	1,971
Per common share:
Basic	$	0.25		$	0.28	$	0.27	$	0.35
Diluted	$	0.25		$	0.28	$	0.27	$	0.35
Cash Dividends	$	0.24		$	0.24	$	0.24	$	0.24
	2018
	First Quarter			Second Quarter		Third Quarter		Fourth Quarter
Interest Income	$	7,600		$	7,778	$	7,888	$	8,093
Interest Expense		795			826		1,169		1,669
Net Interest Income		6,805			6,952		6,719		6,424
Provision for Loan Losses		(237	)		89		289		193
Non-interest Income		2,100			2,078		2,221		2,200
Non-interest Expense		7,048			6,946		6,895		6,776
Income Taxes		322			306		260		(60	)
Net Income	$	1,772		$	1,689	$	1,496	$	1,715
Per common share:
Basic	$	0.36		$	0.35	$	0.31	$	0.35
Diluted	$	0.36		$	0.35	$	0.31	$	0.35
Cash Dividends	$	0.24		$	0.24	$	0.24	$	0.24

Amounts of income tax expense recorded during the fourth quarter of 2017 include a $2,559 charge to income tax expense for the revaluation of the net deferred tax asset as a result of the Tax Cut and Jobs Act. The reduction of income tax expense in the fourth quarter of 2018 is to adjust income taxes to the actual annual effective rate.

Market Price and Dividend Information

MARKET PRICE INFORMATION

The Company’s common stock trades on the NASDAQ Global Market (“NASDAQ”) under the symbol “CIZN”. On March 3, 2020, the common stock’s closing price on NASDAQ was $20.56.

On March 3, 2020, shares of the Company’s common stock were held of record by approximately 490 shareholders.

DIVIDENDS

Dividends totaled $0.96 per share for 2019 and 2018.

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

STOCK PERFORMANCE GRAPH

The following performance graph compares the performance of the Company’s common stock to the NASDAQ Composite Index and the Morningstar Regional Bank index (a peer group of other regional bank holding companies) for the Company’s reporting period. The graph assumes that the value of the investment in the Company’s common stock and each index was $100 at December 31, 2014 and that all dividends were reinvested.

Performance Graph

December 31, 2014 - December 31, 2019

LOGO


Citizens Holding Company	100.00	128.03	145.40	135.29	128.51	140.28
NASDAQ Market Index	100.00	106.96	116.45	150.96	146.67	200.49
Morningstar Regional Banks	100.00	93.77	120.37	142.21	125.41	152.82

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

THE CITIZENS BANK OFFICERS

Greg McKee

President and CEO

Robert T. Smith

Senior Vice President, CFO

Mark Taylor

Senior Vice President, COO, Trust Officer

Ray Stone

Senior Vice President, Chief Credit Officer

Ledale Reynolds

Senior Vice President and CIO

Liz Owen

Senior Vice President, Director of

Human Resources, Chief Risk Officer

Erdis Chaney

Vice President, Senior Deposit Officer

Jackie Hester

Vice President, Marketing Officer

Darrel Bates

Vice President, Collections Manager

Jean T. Fulton

Vice President, Internal Auditor

Brad Copeland

Vice President, Branch Manager

Mark Majure

Vice President, Loan Review Officer

Bob Posey

Vice President

Mike Chandler

Vice President

Stacy Arnold

Vice President, Compliance Officer

Tabbetha Calvert

Vice President, BSA Officer

Joshua Sullivan

Vice President, Senior Credit Analyst

Phillip Branch

Vice President, Comptroller

Ashley Peebles

Vice President, Director of Deposit Services

Sommer Vick

Assistant Vice President, Assistant Trust Officer

Beth Branning

Assistant Vice President

Mitch Peden

Assistant Vice President, Information Services Manager

Pam Garrett

Network Services Manager

Pat Stokes

Assistant Vice President, Operations Officer

Scott Lewis

Assistant Vice President, Information Security Officer

Sam Mars

Assistant Vice President, Loan Officer

Shon Kirkland

Assistant Vice President, Security Officer/

Facilities Manager

Charles Wilkerson

Assistant Vice President, Loan Operations Officer

Greg Jackson

Accounting Officer

Reaghan Jenkins

Accounting Officer

Deborah Ladd

Item Processing Officer

Sandra Curtis

Assistant Cashier, Teller Administrator

Temika Triplett

Assistant Cashier, Electronic Services Officer

Craig Stevens

Deposit Operations Officer

Grant Comans

Assistance Vice President, Branch Manager

Jamie Shotts

Vice President, Appraisal Review Officer

Carthage Branch

Billy Cook

Vice President

Tonya Dorman

Deposit Operations Officer

Sebastopol Branch

Connie Comans

Branch President

Unionand Decatur Branches

Susan Brown

Deposit Operations Officer

Kosciusko Branch

Teresa Patterson

Vice President, Branch Manager

David Blair, Mortgage Loan Officer

Vice President

Scooba and DeKalb Branches

Reggie Moore

Assistant Vice President, Branch Manager

Jan White

Branch Operations Officer

Forest Branch

Richard Latham

Vice President

Lawanda McCaughn

Deposit Operation Officer

Louisville Branch

Bruce Lee

Market President – Winston County

Lynn Graham

Assistant Vice President, Branch Operations Officer

Starkville Branch

Rhonda Edmonson

Assistant Vice President, Branch Manager

Collinsville Branch

Mike Shelby

Vice President, Branch Manager

Meridian Eastgate and Broadmoor Branches

Jay Hines

Vice President, Regional Commercial Lender

Vikki Gunter

Assistant Vice President, Branch Operations Officer

Hattiesburg Branch

Chad Hill

Vice President, Branch Manager

Tammy McAlpin

Commercial Loan Portfolio Manager

Flowood Branch

Billy Cook

Vice President, Manager

Daniel Webb

Assistance Vice President, Loan Officer

Biloxi Cedar Lake and Lemoyne Branches

Travis Moore

Regional Commercial Lender

Brandon Sherwood

Regional Commercial Lender

Tammy Warren

Assistant Vice President, Mortgage Loan Officer

Katie Hancock

Vice President, Branch Manager

Mortgage Loan Department

Charlene Deweese

Assistant Vice President, Mortgage Loan Officer

Oxford Loan Production Office

Marion Boyd

Vice President, Regional Commercial Lender

Pascagoula Branch

Gregory E. Cronin

Gulf Coast President

Ford Kinsey

Vice President, Senior Credit Officer

Pam Lindsey

Vice President, Senior Bank Officer

Paulette Roberts

Vice President, Senior Operations Officer

Amber Thomas

Vice President, Commercial Lender

Chandra McClendon

Loan Operations Officer

Julius Bosco III

Loan Compliance Officer

Pam Pierce

Human Resources Officer

Theresa Jenkins

Community Retail Officer

Ocean Springs Branch

Brad Grayson

Vice President, Commercial Lender

Melissa Ceasar

Community Retail Officer

Sharon Wetzel

Vice President, Information Technology Officer

Gulfport Branch

Reagan Bridley

Vice President, Commercial Lender

Thomas Graham

Vice President, Mortgage Loan Officer

Biloxi Medical Towers Branch

Mandy Dawson

Treasury Management Officer

Patrick Ricci

Vice President, Commercial Lender

BOARD OF DIRECTORS

Don Fulton Retired W. G. Yates and Sons Construction Co. Donald L. Kilgore Special Assistant Attorney General State of Mississippi David A. King Proprietor Philadelphia Motor Company Herbert A. King Civil Engineer King Engineering Associates, Inc. Adam Mars Business Manager Mars, Mars & Mars Gregory E. Cronin Gulf Coast President Citizens Holding Company and The Citizens Bank

Craig Dungan, MD Physician Meridian Gastroenterology PLLC Greg L. McKee President & Chief Executive Officer Citizens Holding Company and The Citizens Bank David P. Webb Attorney Baker, Donelson, Bearman, Caldwell & Berkowitz, PC A. T. Williams Certified Public Accountant A. T. Williams, CPA Terrell E. Winstead Chief Financial Officer Molpus Woodlands Group

CITIZENS HOLDING COMPANY OFFICERS

Herbert A. King

Chairman

Greg L. McKee

President and Chief Executive Officer

Mark Taylor

Secretary

Robert T. Smith

Treasurer and Chief Financial Officer

Gregory E. Cronin

Gulf Coast President

BANKING LOCATIONS

Philadelphia Main Office	Collinsville Branch	Decatur Branch
521 Main Street	9065 Collinsville Road	15330 Hwy 15 South
Philadelphia, MS 39350	Collinsville, MS 39325	Decatur, MS 39327
601.656.4692	601.626.7608	601.635.2321
Westside Branch	Flowood Branch	Forest Branch
912 West Beacon Street	5419 Hwy 25 Ste. Q	247 Woodland Drive North
Philadelphia, MS 39350	Flowood, MS 39232	Forest, MS 39074
601.656.4692	601.992.7688	601.469.3424
Northside Branch	Sebastopol Branch	Louisville-Main Branch
802 Pecan Avenue	24 Pine Street	l00 East Main Street
Philadelphia, MS 39350	Sebastopol, MS 39359	Louisville, MS 39339
601.656.4692	601.625.7447	662.773.6261
Eastside Branch	DeKalb Branch	Noxapater Branch
599 East Main Street	176 Main Avenue	45 East Main Street
Philadelphia, MS 39350	DeKalb, MS 39328	Noxapater, MS 39346
601.656.4692	601.743.2115	662.724.4261
Union Branch	Kosciusko Branch	Louisville-Industrial Branch
502 Bank Street	775 North Jackson Street	803 South Church Street
Union, MS 39365	Kosciusko, MS 39090	Louisville, MS 39339
601.774.9231	662.289.4356	662.773.6261
Starkville Branch	Scooba Branch	Biloxi Lemoyne Boulevard
201 Highway 12 West	27597 Highway 16 East	15309 Lemoyne Boulevard
Starkville, MS 39759	Scooba, MS 39358	Biloxi, MS 39532
662.323.1420	662.476.8431	228.207.2343
Carthage Main Office	Meridian Eastgate	Meridian Broadmoor
301 West Main Street	1825 Hwy 39 North	5015 Highway 493
Carthage, MS 39051	Meridian, MS 39301	Meridian. MS 39305
601.257.4525	601.693.8367	601.581.1541
Biloxi Cedar Lakes	Hattiesburg Branch	Flowood Branch
1830 Popps Ferry Road	6222 Highway 98	5419 Highway 25, Suite Q
Biloxi, MS 39532	Hattiesburg, MS 39402	Flowood, MS 39232
228.594.6913	601.264.4425	601.992.7688
Oxford Loan Production	Biloxi Medical Branch	Gulfport Branch
304 Enterprise Dr., Ste A	1721 Medical Park Dr.	12008 Hwy 49
Oxford, MS 38655	Biloxi, MS 39532	Gulfport, MS 39503

BANKING LOCATIONS - Continued ****

Pascagoula Branch	Ocean Springs Branch	Phone Teller
1519 Jackson Ave	2702 Bienville Blvd	1.800.397.0344
Pascagoula, MS 39567	Ocean Springs, MS 39564

Internet and Mobile Banking

http.//www.thecitizensbankphila.com

FINANCIAL INFORMATION

CORPORATE HEADQUARTERS

521 Main Street

P.O. Box 209

Philadelphia, MS 39350

601.656.4692

ANNUAL SHAREHOLDERMEETING

The Annual Shareholder meeting of the Citizens Holding Company, Inc. will be held Tuesday, April 28, 2020, at 4:30 P.M. in the lobby of the main office of The Citizens Bank, 521 Main Street, Philadelphia, Mississippi.

STOCK REGISTRAR AND TRANSFERAGENT

American Stock Transfer & Trust Company

59 Maiden Lane

New York, NY 10038

FORM 10-K

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

FINANCIAL CONTACT

Robert T. Smith

Treasurer and Chief Financial Officer

P.O. 209

Philadelphia, Mississippi 39350

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

116

EX-21

Exhibit 21 – Subsidiaries of the Registrant

The following is a list of subsidiaries of the Company:

		Approximate
	Jurisdiction	Percentage
	of	of Voting
Subsidiaries	Incorporation	Securities Owned
The Citizens Bank of Philadelphia, Mississippi	Mississippi	100%

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Annual Report on Form 10-K of Citizens Holding Company for the year ended December 31, 2019 and in the Registration Statements on Form S-8 (Nos. 333-89680 and 333-190500) of Citizens Holding Company of our reports dated March 13, 2020 related to our audits of the consolidated financial statements and internal control over financial reporting which appear in the 2019 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K of Citizens Holding Company for the year ended December 31, 2019.

/s/ HORNE LLP
Memphis, Tennessee
March 13, 2020

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Greg McKee, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Citizens Holding<br>Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state<br>a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3.	Based on my knowledge, the financial statements, and other financial information included in this report,<br>fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining<br>disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act<br>Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
---	---
a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be<br>designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is<br>being prepared;
---	---
b)	Designed such internal control over financial reporting, or caused such internal control over financial<br>reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting<br>principles;
---	---
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in<br>this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
---	---
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that<br>occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal<br>control over financial reporting; and
---	---
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of<br>internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a)	All significant deficiencies and material weaknesses in the design or operation of internal control over<br>financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role<br>in the registrant’s internal control over financial reporting.
---	---
Date: March 13, 2020	By:	/s/ Greg McKee
---	---	---
		Greg McKee
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Robert T. Smith, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Citizens Holding<br>Company;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state<br>a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3.	Based on my knowledge, the financial statements, and other financial information included in this report,<br>fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining<br>disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act<br>Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
---	---
a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be<br>designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is<br>being prepared;
---	---
b)	Designed such internal control over financial reporting, or caused such internal control over financial<br>reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting<br>principles;
---	---
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in<br>this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
---	---
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that<br>occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal<br>control over financial reporting; and
---	---
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of<br>internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a)	All significant deficiencies and material weaknesses in the design or operation of internal control over<br>financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role<br>in the registrant’s internal control over financial reporting.
---	---
Date: March 13, 2020	By:	/s/ Robert T. Smith
---	---	---
		Robert T. Smith
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

PURSUANT TO

SECTION 906OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Citizens Holding Company (the “Company”) for the period ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg McKee, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, as follows:

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

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date: March 13, 2020	By:	/s/ Greg McKee
		Greg McKee
		Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

PURSUANT TO

SECTION 906OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Citizens Holding Company (the “Company”) for the period ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert T. Smith, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, as follows:

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

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date: March 13, 2020	By:	/s/ Robert T. Smith
		Robert T. Smith
		Chief Financial Officer

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