Exhibit 13 – 2020 Annual Report to Shareholders

CITIZENS HOLDING COMPANY

Philadelphia, Mississippi

Consolidated Financial Statements

As of December 31, 2020 and 2019 and for the

Years Ended December 31, 2020, 2019 and 2018

CONTENTS

Report of Independent Registered Public Accounting Firm	1-3
Management’s Assessment of Internal Control over 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 – 76

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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, are in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

1

Allowance for Loan Losses

As described in Notes 1 and 7 to the financial statements, the Company’s allowance for loan losses is a valuation allowance that reflects the Company’s estimation of incurred losses in its loan portfolio to the extent they are both probable and reasonable to estimate. The allowance for loan losses was $4,735,000 at December 31, 2020, which consists of two components; the allowance for loans individually evaluated for impairment (“specific reserves”) and the allowance for loans collectively evaluated for impairment (“general reserves”).

The Company’s general reserves include reserves based on historical charge-off factors and qualitative general reserve factors. The component for qualitative general reserve factors involves an evaluation of items which are not yet reflected in the factors for historical charge-offs including changes in: lending policies and procedures, economic and business conditions, nature and volume of the portfolio, lending staff, volume and severity of delinquent loans, loan review systems, collateral values, and concentrations of credit. The evaluation of these items results in qualitative general reserve factors, which contribute significantly to the general reserve component of the estimate of the allowance for loan losses.

We identified management’s estimate of the aggregate effect of the qualitative reserve factors on the allowance for loan losses as a critical audit matter as it involved subjective auditor judgment. Management’s determination of qualitative general reserve factors involved especially subjective judgment because management’s estimate relies on qualitative analysis to determine the quantitative impact the items have on the allowance.

The primary procedures we performed to address this critical audit matter included:

Evaluated the design and tested the operating effectiveness of controls over the determination of items used to estimate the qualitative general reserve factors, including controls addressing:

• The data used as the basis for the adjustments relating to qualitative general reserve factors.

• Management’s determination of loans excluded from qualitative general reserve factors calculation.

• Management’s review of the qualitative and quantitative conclusions related to the qualitative general reserve factors and the resulting allocation to the allowance.

Substantively tested the general reserves related to qualitative general reserve factors which primarily included:

• Evaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to the qualitative general reserve factors.

• Evaluation of loans excluded from the qualitative general reserve calculation for propriety of classification.

• Evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative general reserve factors and the resulting allocation to the allowance. Our evaluation considered the weight of confirming and disconfirming evidence from internal and external sources, loan portfolio performance and third-party data, and whether management’s assumptions were applied consistently period to period.

2

/s/ HORNE LLP

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

Memphis, Tennessee

March 12, 2021

3

[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.

4

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, 2020, 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, 2020, the Company’s system of internal control over financial reporting was effective.

/s/ Greg L. McKee	/s/ Phillip R. Branch
Greg L. McKee	Phillip R. Branch
President and Chief Executive Officer	Treasurer and Chief Financial Officer

March 12, 2021

5

CITIZENS HOLDING COMPANY

Consolidated Statements of Financial Condition

December 31, 2020 and 2019

(in thousands, except share data)

	2020		2019
ASSETS
Cash and due from banks	$	16,840	$	15,937
Interest bearing deposits with other banks		25,468		58,557
Federal funds sold		—		1,600
Securities available for sale, at fair value		678,749		464,383
Loans, net of allowance for loan losses of $4,735 in 2020 and $3,755 in 2019		647,521		573,312
Bank premises, furniture, fixtures and equipment, net		25,630		24,672
Other real estate owned, net		3,073		3,552
Accrued interest receivable		5,983		4,181
Cash surrender value of life insurance		25,814		25,088
Deferred tax assets		1,548		3,684
Identifiable intangible assets, net		13,660		13,856
Other assets		6,406		6,612
Total assets	$	1,450,692	$	1,195,434
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing deposits	$	276,033	$	190,406
Interest bearing deposits		819,156		708,590
Total deposits		1,095,189		898,996
Securities sold under agreement to repurchase		196,272		170,410
Federal Home Loan Bank (FHLB) advances		25,000		—
Accrued interest payable		522		1,128
Deferred compensation payable		9,665		9,453
Other liabilities		4,496		2,647
Total liabilities		1,331,144		1,082,634
Shareholders’ equity
Common stock, $.20 par value, authorized 22,500,000 shares; 5,587,070 shares issued and outstanding at December 31, 2020 and 5,578,131 shares issued and outstanding at December 31, 2019		1,118		1,116
Additional paid-in capital		18,134		17,883
Accumulated other comprehensive income (loss), net of tax (expense) benefit of ($1,376) in 2020 and $262 in 2019		4,138		(789	)
Retained earnings		96,158		94,590
Total shareholders’ equity		119,548		112,800
Total liabilities and shareholders’ equity	$	1,450,692	$	1,195,434

The accompanying notes are an integral part of these statements.

6

CITIZENS HOLDING COMPANY

Consolidated Statements of Income

Years Ended December 31, 2020, 2019, and 2018

(in thousands, except share and per share data)

	2020			2019			2018
Interest income
Interest and fees on loans	$	30,941		$	24,652		$	20,241
Interest on securities
Taxable		7,837			7,993			8,345
Non-taxable		1,501			1,808			2,579
Other interest		282			908			193
Total interest income		40,561			35,361			31,358
Interest expense
Deposits		6,556			7,719			2,811
Other borrowed funds		871			2,003			1,648
Total interest expense		7,427			9,722			4,459
Net interest income		33,134			25,639			26,899
Provision for loan losses		(1,485	)		(573	)		(334	)
Net interest income after provision for loan losses		31,649			25,066			26,565
Non-interest income
Service charges on deposit accounts		3,352			4,413			4,562
Other service charges and fees		3,606			3,129			2,879
Net gains on sales of securities		829			191			11
Other income		2,673			2,015			1,148
Total non-interest income		10,460			9,748			8,600
Non-interest expense
Salaries and employee benefits		17,476			14,883			14,530
Occupancy expense		4,156			2,099			2,017
Equipment expense		3,204			3,146			3,713
Other expense		8,590			7,430			7,404
Total non-interest expense		33,426			27,558			27,664
Income before income taxes		8,683			7,256			7,501
Income tax expense		1,752			1,354			828
Net income	$	6,931		$	5,902		$	6,673
Net income per share – basic	$	1.24		$	1.17		$	1.36
Net income per share – diluted	$	1.24		$	1.17		$	1.36
Weighted average shares outstanding
Basic		5,577,352			5,063,736			4,889,420
Diluted		5,579,916			5,066,103			4,899,218

The accompanying notes are an integral part of these statements.

7

CITIZENS HOLDING COMPANY

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31, 2020, 2019, and 2018

(in thousands)

	2020			2019			2018
Net income	$	6,931		$	5,902		$	6,673
Other comprehensive income (loss)
Unrealized holding gains (losses) on available-for-sale securities		7,394			19,093			(8,982	)
Income tax effect		(1,845	)		(4,764	)		2,240
Net unrealized gains (losses)		5,549			14,329			(6,742	)
Reclassification adjustment for gains included in net income		(829	)		(191	)		(11	)
Income tax effect		207			48			3
Net gains included in net income		(622	)		(143	)		(8	)
Total other comprehensive income (loss)		4,927			14,186			(6,750	)
Comprehensive income (loss)	$	11,858		$	20,088		$	(77	)

The accompanying notes are an integral part of these statements.

8

CITIZENS HOLDING COMPANY

Consolidated Statements of Changes in Shareholders’ Equity

Years Ended December 31, 2020, 2019, and 2018

(in thousands, except share data)

	Number of Shares Issued			Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balance, January 1, 2018		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
Net income		—			—			—			—			6,931			6,931
Dividends paid ($0.96 per share)		—			—			—			—			(5,363	)		(5,363	)
Options exercised		5,189			1			85									86
Restricted stock granted		8,250			2			(2	)		—			—			—
Restricted stock forfeited		(4,500	)		(1	)		1									—
Stock compensation expense		—			—			167			—			—			167
Other comprehensive income, net		—			—			—			4,927			—			4,927
Balance, December 31, 2020		5,587,070		$	1,118		$	18,134		$	4,138		$	96,158		$	119,548

The accompanying notes are an integral part of these statements.

9

CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2020, 2019, and 2018

1 of 2

(in thousands)

	2020			2019			2018
Cash flows from operating activities
Net income	$	6,931		$	5,902		$	6,673
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		1,121			912			937
Amortization of premiums and accretion of discounts on investment securities, net		7,286			5,294			3,283
Stock compensation expense		167			163			170
Provision for loan losses		1,485			573			334
Gain on sale of securities		(829	)		(191	)		(11	)
Gain from death benefit proceeds on BOLI		—			(371	)		—
Gain on sale of fixed assets		(74	)		—			—
Net gain on sale of other real estate owned		(105	)		(311	)		—
Deferred income tax expense		498			459			973
Writedown on other real estate owned		230			—			—
(Increase) decrease in accrued interest receivable		(1,802	)		382			285
Increase in cash surrender value life insurance		(726	)		(709	)		(771	)
(Decrease) increase in accrued interest payable		(606	)		166			273
Increase in deferred compensation liability		212			400			432
Net change in other operating assets and liabilities		255			(722	)		(407	)
Net cash provided by operating activities		14,043			11,947			12,171
Cash flows from investing activities
Proceeds from calls, paydowns and maturities of securities available-for-sale		237,705			59,189			40,964
Proceeds from sales of securities available-for-sale		188,324			122,171			17,620
Proceeds from sale of FHLB stock		2,913			—			—
Purchases of investment securities available-for-sale		(640,289	)		(160,591	)		(10,550	)
Decrease (increase) in federal funds sold		1,600			(1,600	)		—
Death benefit proceeds from bank-owned life insurance		—			1,549			—
Purchases of bank premises, furniture, fixtures and equipment		(2,019	)		(1,042	)		(346	)
Proceeds from sales of bank premises, furniture, fixtures and equipment		124			—			264
Proceeds from sale of other real estate owned		1,899			584			812

10

CITIZENS HOLDING COMPANY

Consolidated Statements of Cash Flows

Years Ended December 31, 2020, 2019, and 2018

2 of 2

(in thousands)

	2020			2019			2018
Net decrease (increase) in interest bearing deposits with other banks		33,089			(48,927	)		(6,547	)
Net cash paid in acquisition of business		—			(317	)		—
Purchases of FHLB stock		(1,025	)		—			(476	)
Net increase in loans		(77,239	)		(44,678	)		(24,108	)
Net cash (used by) provided by investing activities		(254,918	)		(73,662	)		17,633
Cash flows from financing activities
Net increase in deposits	$	196,193		$	16,459		$	35,536
Net decrease in federal funds purchased		—			—			(1,500	)
Net increase (decrease) in securities sold under agreement to repurchase		25,862			62,444			(34,532	)
Proceeds from exercise of stock options		86			—			27
Dividends paid to shareholders		(5,363	)		(4,874	)		(4,706	)
Net increase (decrease) increase in FHLB advances		25,000			(8,969	)		(30,000	)
Net cash provided by (used in) financing activities		241,778			65,060			(35,175	)
Net increase (decrease) in cash and due from banks		903			3,345			(5,371	)
Cash and due from banks, beginning of year		15,937			12,592			17,963
Cash and due from banks, end of year	$	16,840		$	15,937		$	12,592
Supplemental disclosures of cash flow information
Cash paid for
Interest	$	8,033		$	9,065		$	4,186
Income taxes	$	1,539		$	685		$	410
Noncash disclosures
Issuance of common stock for acquisition of business	$	—		$	13,557		$	—
Real estate acquired by foreclosure	$	1,546		$	385		$	260

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

11

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and 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 Mississippi, along with southern and northern counties of Mississippi and their surrounding areas. Services are provided at multiple branch offices.

Risks and Uncertainties

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as an over $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

12

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Financial position and results of operations

The Company’s fee income has been, and could continue to be, reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact is likely to impact its fee income in future periods.

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses and loss of fee income.

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

Asset valuation

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its consolidated statements of financial condition; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

13

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

COVID-19 could cause a decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company has been executing a payment deferral program for its commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 or 90 days. As of December 31, 2020, the Company had 9 loans with aggregate principal balances totaling $12,258 which were modified under this guidance. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. The Company closed 590 SBA PPP loans representing $48,830 in funding and starting in the fourth quarter of 2020, the SBA began forgiving these loans. The Company currently has 446 loans with a total balance of $29,523 still outstanding at December 31, 2020. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Further, in sensitivity and service to its communities during this unprecedented time, the Company is waiving certain late payments and service charges.

Credit

The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its allowance for loan losses and record additional credit loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

14

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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.

Segment Reporting

We have determined that all of our lending divisions meet the aggregation criteria of ASC 280, Segment Reporting, since all offer similar products and services, operate with similar processes, have similar customers and are collectively reviewed by the chief operating decision maker. No other services are material for presentation as a separate segment.

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.

15

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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 held to maturity or 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.

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.

16

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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.

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.

17

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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.

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.

18

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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.

Leases

ASU 2016-02, “Leases (Topic 842),” became effective for the Company on January 1, 2019. The Company adopted FASB ASC Topic 842 utilizing the modified retrospective transition approach prescribed by ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. The Company did not elect to adopt the package of practical expedients, which includes reassessing whether any expired or existing contracts are or contain leases, reassessing the lease classification and reassessing initial direct costs. Also, the Company did not elect to adopt the hindsight practical expedient therefore maintaining the lease terms previously determined under FASB ASC Topic 840, “Leases”. The Company made an accounting policy election to not recognize short-term leases (12 months or less) on the balance sheet. The Company accounts for the lease and nonlease components separately as such amounts are readily determinable.

Once the Company identifies and determines certain contracts are leases according to FASB ASC Topic 842, the Company classifies it as an operating or a finance lease and recognizes a right-of-use asset and a lease liability at the lease commencement date. The lease liability represents the present value of the lease payments that remain unpaid as of the commencement date and the right-of-use asset is the initial lease liability recognized for the lease plus any lease payments made to the lessor at or before the commencement date as well as any initial direct costs less any lease incentives received.

The Company’s operating leases primarily consist of building and land leases. The Company recognizes lease rent expense on a straight-line basis over the term of the lease contract and records it as noninterest expense in net occupancy – premises for building and land leases. The Company’s amortization of the right-of-use asset is the difference between the straight-line lease expense and the interest expense recognized on the lease liability during the period. The Company’s lease liabilities are measured as the present value of the remaining lease payments throughout the lease term.

In order to calculate its right-of-use assets and lease liabilities, FASB ASC Topic 842 requires the Company to use the rate of interest implicit in the lease when readily determinable. If the rate implicit in the lease is not readily determinable, the Company is required to use its incremental borrowing rate, which is the rate of interest the Company would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Since the implicit interest rate for most of its building and land leases were not readily determinable, the Company used its incremental borrowing rate.

19

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

The Company’s short-term leases primarily include automated teller machines. For short-term leases, the Company recognizes lease expense on a straight-line basis over the lease term. As previously stated, the Company has elected not to include short-term leases on its balance sheet.

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.

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.

20

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

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.

21

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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 2020, 2019 and 2018 is illustrated in the following table.

	2020		2019		2018
Basic weighted average shares outstanding		5,577,352		5,063,736		4,889,420
Dilutive effect of stock options		2,564		2,367		9,798
Dilutive weighted average shares outstanding		5,579,916		5,066,103		4,899,218
Net income	$	6,931	$	5,902	$	6,673
Net income per share-basic	$	1.24	$	1.17	$	1.36
Net income per share-diluted	$	1.24	$	1.17	$	1.36

Advertising Costs

Advertising costs are charged to expense when incurred. Advertising expense was $642, $551 and $640 for the years ended December 31, 2020, 2019 and 2018, 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 2019 has been reclassified to conform to the financial presentation for 2020. Such reclassifications had no effect on net income or shareholders’ equity.

22

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

Stock-Based Compensation

At December 31, 2020, 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.”

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, 2020 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

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation’s financial statements.

23

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Continued

ASU 2019-13 “Fair Value Measurement (Topic 820) – Changes in the Disclosure Requirements for Fair Value Measurement” (“ASU 2019-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2019-13 is effective for annual and interim periods beginning after December 15, 2019. ASU 2019-13 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation’s financial statements.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Corporation’s financial statements; however, this impact cannot be quantified at this time.

24

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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.

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 does not expect a material impact to the Company’s consolidated financial statements upon adoption.

25

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Business Combinations

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

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 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

26

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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

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, 2020 and 2019 were as follows:

2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities available-for-sale
Obligations of U.S.
Government agencies	$	11,870	$	191	$	—	$	12,061
Mortgage-backed securities		560,033		4,550		2,600		561,983
State, County, Municipals		100,823		3,410		36		104,197
Other securities		500		8		—		508
Total	$	673,226	$	8,159	$	2,636	$	678,749

27

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Continued

2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized 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

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, 2020 and 2019.

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

December 31, 2020	Less than 12 months				2 months or more				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage backed securities	$	278,162	$	2,600	$	—	$	—	$	278,162	$	2,600
State, County, Municipal		6,541		36		—		—		6,541		36
Total	$	284,703	$	2,636	$	—	$	—	$	284,703	$	2,636

28

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Continued

December 31, 2019	Less than 12 months				12 months or more				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S.
Government agencies	$	76,682	$	217	$	20,429	$	72	$	97,111	$	289
Mortgage backed securities		101,730		871		76,630		1,179		178,360		2,050
State, County, Municipal		8,280		37		3,731		23		12,011		60
Total	$	186,692	$	1,125	$	100,790	$	1,274	$	287,482	$	2,399

The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. The Company does not intend to sell any of the securities in an unrealized loss position, and it is more likely than not that the Company will not be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. 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, 2020 or 2019.

The amortized cost and estimated fair value of securities at December 31, 2020, 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.

	Amortized Cost		Fair Value
Securities AFS
Due in one year or less	$	—	$	—
Due after one year through five years		3,594		3,701
Due after five years through ten years		20,538		21,446
Due after ten years		89,061		91,619
Residential mortgage backed securities		536,215		537,027
Commercial mortgage backed securities		23,818		24,956
Total	$	673,226	$	678,749

Investment securities with fair values of $558,955 and $413,275 at December 31, 2020 and December 31, 2019, respectively, were pledged as collateral for public deposits and securities sold under agreement to repurchase.

29

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Continued

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

	2020		2019		2018
Gross realized gains	$	1,656	$	414	$	171
Gross realized losses		827		223		160
Net realized gains	$	829	$	191	$	11

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 $1,223 and $3,083 at December 31, 2020 and December 31, 2019, respectively, and is included in other assets in the Consolidated Statements of Financial Condition. The Company purchased stock in 2020 and 2019 at the par value of $100 per share.

30

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020 and 2019 is as follows:

	2020			2019
Real Estate:
Land Development and Construction (1)	$	42,677		$	66,428
Farmland		15,616			15,595
1-4 Family Mortgages		94,280			87,631
Commercial Real Estate		306,875			207,604
Total Real Estate Loans		459,448			377,258
Business Loans:
Commercial and Industrial Loans (2)		115,679			84,611
Farm Production and Other Farm Loans		541			683
Total Business Loans		116,220			85,294
Consumer Loans:
Credit Cards		1,878			1,833
Other Consumer Loans		10,929			12,060
Total Consumer Loans		12,807			13,893
Total Gross Loans		588,475			476,445
Unearned Income		(1	)		(8	)
Allowance for Loan Losses		(4,735	)		(3,755	)
Loans, net	$	583,739		$	472,682

(1) Reclassifications to other loan segments due to changes in loan risk characteristics that occurred in 2020.

(2) Includes PPP loans of $29,523 and $-0- as of December 31, 2020 and December 31, 2019, respectively.

31

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

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 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 $88,986 and $77,700 of the loans outstanding at December 31, 2020 and 2019, 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 2020 is presented in the following table.​​​​​​​

Balance outstanding at December 31, 2019	$	387
Principal additions		690
Principal reductions		(231	)
Balance outstanding at December 31, 2020	$	846

32

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

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.

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

	2020		2019
Real Estate:
Land Development and Construction	$	308	$	111
Farmland		287		232
1-4 Family Mortgages		1,809		2,160
Commercial Real Estate		5,600		9,082
Total Real Estate Loans		8,004		11,585
Business Loans:
Commercial and Industrial Loans		413		338
Farm Production and Other Farm Loans		9		10
Total Business Loans		422		348
Consumer Loans:
Other Consumer Loans		33		60
Total Consumer Loans		33		60
Total non-accrual Loans	$	8,459	$	11,993

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 $383, $555 and $429 in 2020, 2019 and 2018, respectively.

33

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

An age analysis of past due loans, segregated by class of loans, as of December 31, 2020 is as follows:

	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	112	$	—	$	112	$	42,565	$	42,677	$	—
Farmland		183		75		258		15,358		15,616		—
1-4 Family Mortgages		1,301		246		1,547		92,733		94,280		—
Commercial Real Estate		1,407		700		2,107		304,768		306,875		—
Total Real Estate Loans		3,003		1,021		4,024		455,424		459,448		—
Business Loans:
Commercial and Industrial Loans		97		405		502		115,177		115,679		5
Farm Production and Other Farm Loans		2		—		2		539		541		—
Total Business Loans		99		405		504		115,716		116,220		5
Consumer Loans:
Credit Cards		25		9		34		1,844		1,878		9
Other Consumer Loans		66		—		66		10,863		10,929		—
Total Consumer Loans		91		9		100		12,707		12,807		9
Total Loans	$	3,193	$	1,435	$	4,628	$	583,847	$	588,475	$	14

34

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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:

	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	736	$	—	$	736	$	65,692	$	66,428	$	—
Farmland		171		39		210		15,385		15,595		39
1-4 Family Mortgages		3,116		777		3,893		83,738		87,631		147
Commercial Real Estate		8,511		2,080		10,591		197,013		207,604		18
Total Real Estate Loans		12,534		2,896		15,430		361,828		377,258		204
Business Loans:
Commercial and Industrial Loans		586		312		898		83,713		84,611		52
Farm Production and Other Farm Loans		17		—		17		666		683		—
Total Business Loans		603		312		915		84,379		85,294		52
Consumer Loans:
Credit Cards		45		18		63		1,770		1,833		18
Other Consumer Loans		172		42		214		11,846		12,060		—
Total Consumer Loans		217		60		277		13,616		13,893		18
Total Loans	$	13,354	$	3,268	$	16,622	$	459,823	$	476,445	$	274

35

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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:

2020	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	308	$	256	$	52	$	308	$	13	$	210
Farmland		111		111		—		111		—		182
1-4 Family Mortgages		1,016		1,012		4		1,016		1		928
Commercial Real Estate		6,021		3,323		2,504		5,827		768		7,808
Total Real Estate Loans		7,456		4,702		2,560		7,262		782		9,127
Business:
Commercial and Industrial		413		54		359		413		125		279
Total Business Loans		413		54		359		413		125		279
Total Loans	$	7,869	$	4,756	$	2,919	$	7,675	$	907	$	9,405

36

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

2019	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	111	$	58	$	53	$	111	$	16	$	56
Farmland		252		252		—		252		—		261
1-4 Family Mortgages		839		740		99		839		28		996
Commercial Real Estate		11,506		5,949		3,840		9,789		566		9,337
Total Real Estate Loans		12,708		6,999		3,992		10,991		610		10,649
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

37

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

The Company did not have any new troubled debt restructurings as of December 31, 2020, 2019, and 2018, respectively.

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

	Number of Loans		Recorded Investment
Total at January 1, 2018		3	$	3,047
Reductions due to:
Principal paydowns				(265	)
Total at December 31, 2018		3		2,782
Reductions due to:
Principal paydowns				(287	)
Total at December 31, 2019		3		2,495
Reductions due to:
Principal paydowns				(382	)
Total at December 31, 2020		3	$	2,113

The allocated allowance for loan losses attributable to restructured loans was $-0- at December 31, 2020 and 2019, respectively.

The Company had no commitments to lend additional funds on these troubled debt restructurings at December 31, 2020.

38

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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.

39

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5. Continued

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

Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors 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, 2020.

40

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020:

	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	41,775	$	120	$	782	$	—	$	—	$	42,677
Farmland		14,801		95		720		—		—		15,616
1-4 Family Mortgages		85,203		3,210		5,867		—		—		94,280
Commercial Real Estate		258,339		35,769		12,767		—		—		306,875
Total Real Estate Loans		400,118		39,194		20,136		—		—		459,448
Business Loans:
Commercial and Industrial Loans		109,525		4,409		1,738		—		7		115,679
Farm Production and Other Farm Loans		512		—		20		—		9		541
Total Business Loans		110,037		4,409		1,758		—		16		116,220
Consumer Loans:
Credit Cards		1,845		—		33		—		—		1,878
Other Consumer Loans		10,820		43		41		25		—		10,929
Total Consumer Loans		12,665		43		74		25		—		12,807
Total Loans	$	522,820	$	43,646	$	21,968	$	25	$	16	$	588,475

41

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	64,112	$	1,682	$	634	$	—	$	—	$	66,428
Farmland		14,533		331		731		—		—		15,595
1-4 Family Mortgages		79,068		1,917		6,646		—		—		87,631
Commercial Real Estate		169,270		21,266		17,068		—		—		207,604
Total Real Estate Loans		326,983		25,196		25,079		—		—		377,258
Business Loans:
Commercial and Industrial Loans		80,289		128		4,194		—		—		84,611
Farm Production and Other Farm Loans		669		—		4		—		10		683
Total Business Loans		80,958		128		4,198		—		10		85,294
Consumer Loans:
Credit Cards		1,770		—		63		—		—		1,833
Other Consumer Loans		11,907		59		53		41		—		12,060
Total Consumer Loans		13,677		59		116		41		—		13,893
Total Loans	$	421,618	$	25,383	$	29,393	$	41	$	10	$	476,445

42

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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:

	2020		2019
Real Estate:
Land Development and Construction	$	6,153	$	14,722
Farmland		520		510
1-4 Family Mortgages		23,306		35,952
Commercial Real Estate		24,237		32,436
Total Real Estate Loans		54,216		83,620
Business Loans:
Commercial and Industrial Loans		7,871		14,153
Farm Production and Other Farm Loans		755		884
Total Business Loans		8,626		15,037
Consumer Loans:
Other Consumer Loans		940		1,973
Total Consumer Loans		940		1,973
Total Gross Loans		63,782		100,630
Total Purchased Loans	$	63,782	$	100,630

43

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Continued

An age analysis of past due loans, segregated by class of loans, as of December 31, 2020 is as follows:

	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	332	$	—	$	332	$	5,821	$	6,153	$	—
Farmland		—		—		—		520		520		—
1-4 Family Mortgages		401		—		401		22,905		23,306		—
Commercial Real Estate		—		—		—		24,237		24,237		—
Total Real Estate Loans		733		—		733		53,483		54,216		—
Business Loans:
Commercial and Industrial Loans		849		—		849		7,022		7,871		—
Farm Production and Other Farm Loans		—		—		—		755		755		—
Total Business Loans		849		—		849		7,777		8,626		—
Consumer Loans:
Credit Cards		—		—		—		—		—		—
Other Consumer Loans		35		—		35		905		940		—
Total Consumer Loans		35		—		35		905		940		—
Total Loans	$	1,617	$	—	$	1,617	$	62,165	$	63,782	$	—

44

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or more Days Past Due
Real Estate:
Land Development and Construction	$	528	$	—	$	528	$	14,194	$	14,722	$	—
Farmland		—		—		—		510		510		—
1-4 Family Mortgages		444		—		444		35,508		35,952		—
Commercial Real Estate		603		—		603		31,833		32,436		—
Total Real Estate Loans		1,575		—		1,575		82,045		83,620		—
Business Loans:
Commercial and Industrial Loans		379		3		382		13,771		14,153		—
Farm Production and Other Farm Loans		—		—		—		884		884		—
Total Business Loans		379		3		382		14,655		15,037		—
Consumer Loans:
Credit Cards		—		—		—		—		—		—
Other Consumer Loans		49		8		57		1,916		1,973		—
Total Consumer Loans		49		8		57		1,916		1,973		—
Total Loans	$	2,003	$	11	$	2,014	$	98,616	$	100,630	$	—

There were no non credit deteriorated loans that were subsequently impaired and recognized in conformity with ASC 310 as of December 31, 2020 or 2019.

45

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020:

	1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	5,364	$	766	$	23	$	—	$	—	$	6,153
Farmland		357		163		—		—		—		520
1-4 Family Mortgages		21,116		1,655		535		—		—		23,306
Commercial Real Estate		22,469		1,484		284		—		—		24,237
Total Real Estate Loans		49,306		4,068		842		—		—		54,216
Business Loans:
Commercial and Industrial Loans		7,121		397		353		—		—		7,871
Farm Production and Other Farm Loans		755		—		—		—		—		755
Total Business Loans		7,876		397		353		—		—		8,626
Consumer Loans:
Other Consumer Loans		862		29		35		—		14		940
Total Consumer Loans		862		29		35		—		14		940
Total Loans	$	58,044	$	4,494	$	1,230	$	—	$	14	$	63,782

46

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Continued

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

	Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	13,890	$	789	$	43	$	—	$	—	$	14,722
Farmland		510		—		—		—		—		510
1-4 Family Mortgages		33,737		1,535		680		—		—		35,952
Commercial Real Estate		30,780		1,656		—		—		—		32,436
Total Real Estate Loans		78,917		3,980		723		—		—		83,620
Business Loans:
Commercial and Industrial Loans		13,545		608		—		—		—		14,153
Farm Production and Other Farm Loans		884		—		—		—		—		884
Total Business Loans		14,429		608		—		—		—		15,037
Consumer Loans:
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

47

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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:

	2020		2019
Real Estate:
Land Development and Construction	$	8	$	43
1-4 Family Mortgages		25		706
Total Real Estate Loans		33		749
Business Loans:
Commercial and Industrial Loans		305		—
Total Business Loans		305		—
Total PCD Loans	$	338	$	749

Non-accrual loans of $25 and 33 are included in the 1-4 Family Mortgages at December 31, 2020 and 2019, respectively.

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

48

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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.

49

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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:

2020	Real Estate		Business Loans		Consumer			Total
Beginning Balance	$	3,075	$	371	$	309		$	3,755
Provision for loan losses		1,072		422		(9	)		1,485
Chargeoffs		384		229		104			717
Recoveries		122		47		43			212
Net chargeoffs		262		182		61			505
Ending Balance	$	3,885	$	611	$	239		$	4,735
Period end allowance allocated to:
Loans individually evaluated for impairment	$	782	$	125	$	—		$	907
Loans collectively evaluated for impairment		3,103		486		239			3,828
Ending Balance	$	3,885	$	611	$	239		$	4,735

2019	Real Estate		Business 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

50

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Continued

2018	Real Estate			Business 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

The Company’s recorded investment in loans as of December 31, 2020 and 2019 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:

2020	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for impairment	$	7,262	$	413	$	—	$	7,675
Loans collectively evaluated for impairment		506,368		124,128		13,748		644,244
Acquired with deteriorated credit quality		33		305		—		338
	$	513,663	$	124,846	$	13,748	$	652,257
2019	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for impairment	$	10,991	$	144	$	—	$	11,135
Loans collectively evaluated for impairment		449,138		100,187		15,866		565,191
Acquired with deteriorated credit quality		749		—		—		749
	$	460,878	$	100,331	$	15,866	$	577,075

51

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Continued

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

	2020			2019			2018
Real Estate:
Land Development and Construction	$	(6	)	$	(18	)	$	56
Farmland		—			—			3
1-4 Family Mortgages		243			32			51
Commercial Real Estate		25			(13	)		(198	)
Total Real Estate Loans		262			1			(88	)
Business Loans:
Commercial and Industrial Loans		182			98			12
Total Business Loans		182			98			12
Consumer Loans:
Credit Cards		39			34			36
Other Consumer Loans		22			57			21
Total Consumer Loans		61			91			57
Total Net Chargeoffs (Recoveries)	$	505		$	190		$	(19	)

52

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020 and December 31, 2019:

	2020		2019
Land and buildings	$	33,651	$	33,791
Furniture, fixtures and equipment		7,105		8,447
		40,756		42,238
Less accumulated depreciation		15,126		17,566
Total	$	25,630	$	24,672

Depreciation expense for the years ended December 31, 2020, 2019 and 2018, respectively, was $1,012, $899, and $937.

The Company leases certain premises and equipment under operating leases. At December 31, 2020, the Company had lease liabilities and ROU assets totaling $2,339 related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the year ended December 31, 2020, the weighted average remaining lease term for operating leases was .6 years and the weighted average discount rate used in the measurement of operating lease liabilities was 5.58%.

Lease costs were as follows:

	December 31, 2020		December 31, 2019
(in thousands)
Operating lease cost	$	473	$	370
Short-term lease cost		23		23
Variable lease cost		—		—
	$	496	$	393

There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the year ended December 31, 2020 and 2019.

53

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020
Lease payments due:
Within one year	$	2,177
After one year but within two years		139
After two years but within three years		2
After three year but within four years		—
After four years but within five years		—
After five years		—
Total undiscounted cash flows		2,318
Discount on cash flows		21
Total lease liability	$	2,339

Note 9. Goodwill and Other Intangible Assets

(in thousands)

Changes in the carrying amount of goodwill during the years ended December 31, 2020 and 2019 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
Measurement period adjustment to goodwill from charter acquisition		(73	)
Balance at December 31, 2020	$	13,030

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 performed a goodwill impairment test for 2020 and concluded that the fair value of Charter acquisition substantially exceeded the book value and no impairment charge was required.

54

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Continued

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

	2020			2019
Core deposit intangible	$	739		$	766
Accumulated amortization		(109	)		(27	)
Total finite-lived intangible assets	$	630		$	739

Core deposit intangible amortization expense for the years ended December 31, 2020, 2019 and 2018 was $109, $27 and $-0-, respectively. The estimated amortization expense of finite-lived intangible assets for the five succeeding fiscal years is summarized as follows:​​​​​​​

Year Ending December 31,	Amount
2021	$	109
2022		109
2023		109
2024		109
2025		109
Thereafter		85
	$	630

Note 10. Deposits

(in thousands)

The composition of deposits as of December 31, 2020 and December 31, 2019 is as follows:

	2020		2019
Non-interest bearing	$	276,033	$	190,406
NOW and money market accounts		480,650		369,354
Savings deposits		104,869		83,065
Time deposits, $250,000 or more		71,344		74,098
Other time deposits		162,293		182,073
Total	$	1,095,189	$	898,996

55

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. Continued

The scheduled maturities of time deposits at December 31, 2020 are as follows:

Year Ending December 31,	Amount
2021	$	151,033
2022		48,684
2023		17,603
2024		13,069
2025		3,248
	$	233,637

Note 11. Federal Home Loan Bank Advances

(in thousands)

Advances from the FHLB have a maturity date of January 25, 2021. Interest is payable monthly at an interest rate of 0.16%. Pursuant to collateral agreements with the FHLB, advances are collateralized by all of the Bank’s FHLB stock and qualifying first mortgages and other loans. As of December 31, 2020, the balance in qualifying first mortgages and other loans was $167,285.

There were $25,000 and $-0- in outstanding FHLB advances at December 31, 2020 and 2019, respectively.

56

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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	2020		2019		2018
BOLI Insurance	$	506	$	471	$	495
Mortgage Loan Origination Income		1,310		320		363
Other Income		857		1,224		290
Total Other Income	$	2,673	$	2,015	$	1,148

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	2020		2019			2018
Advertising	$	642	$	551		$	640
Office Supplies		1,171		973			975
Professional fees		1,027		1,668			561
FDIC and State Assessment		669		274			350
Telephone Expense		578		501			520
Postage and Freight		548		(49	)		567
Loan Collection Expense		236		286			288
Other Losses		291		73			243
Debit Card/ATM expense		612		551			471
Travel and Convention		129		200			207
Other expenses		2,687		2,402			2,582
Total Other Expense	$	8,590	$	7,430		$	7,404

57

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Income Taxes

(in thousands)

Income tax expense consists of the following:

	2020		2019		2018
Current payable (benefit)
Federal	$	872	$	806	$	(181	)
State		382		89		36
		1,254		895		(145	)
Deferred tax expense		498		459		973
Income tax expense	$	1,752	$	1,354	$	828

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

	2020			2019			2018
Federal taxes based on statutory rate	$	1,823		$	1,524		$	1,575
State income taxes, net of federal benefit		326			145			133
Tax-exempt investment interest		(280	)		(309	)		(487	)
Income related to bank-owned life insurance		(126	)		—			—
Other, net		9			(6	)		(394	)
Income tax expense	$	1,752		$	1,354		$	8,28

58

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13. Continued

At December 31, 2020 and December 31, 2019, net deferred tax assets consist of the following:

	2020		2019
Deferred tax assets
Allowance for loan losses	$	1,181	$	937
Deferred compensation liability		2,485		2,488
Net operating loss carryforward		267		1,000
Other real estate owned		488		819
Acquisition fair value adjustments		76		130
Unrealized loss on securities available-for-sale		—		262
Other		206		6
Total		4,703		5,642
Deferred tax liabilities
Premises and equipment		1,622		1,603
Unrealized gain on securities available-for-sale		1,376		—
Core deposit intangible		157		184
Other		—		171
Total		3,155		1,958
Net deferred tax asset	$	1,548	$	3,684

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, 2020, the Company has no unrecognized tax benefits related to federal and state income tax matters. As of December 31, 2020, 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, 2017 through 2019. The Company and Bank’s state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2017 through 2019.

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 $2,302, including $241 created during 2019. The Company used $824 of the NOL during 2020. As part of the Tax Act, the federal NOLs created by Charter during 2019 have an indefinite carryforward period.

59

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020 and December 31, 2019, and for the years ended December 31, 2020, 2019 and 2018, is as follows:

Balance Sheets

December 31, 2020 and 2019

	2020		2019
Assets
Cash (1)	$	2,197	$	1,736
Investment in bank subsidiary (1)		117,078		110,892
Other assets (1)		273		172
Total assets	$	119,548	$	112,800
Liabilities
Other liabilities	$	—	$	—
Shareholders’ equity		119,548		112,800
Total liabilities and shareholders’ equity	$	119,548	$	112,800

(1)  Fully or partially eliminates in consolidation.

60

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Continued

Income Statements

Years Ended December 31, 2020, 2019 and 2018

	2020			2019			2018
Interest income (1)	$	2		$	2		$	2
Other income
Dividends from bank subsidiary (1)		6,099			11,242			3,990
Equity in undistributed earnings gain (loss) of bank subsidiary (1)		1,260			(4,965	)		3,022
Other income		—			—			—
Total other income		7,359			6,277			7,012
Other expense		524			462			446
Income before income taxes		6,835			5,817			6,568
Income tax benefit		(96	)		(85	)		(105	)
Net income	$	6,931		$	5,902		$	6,673

(1) Eliminates in consolidation.

61

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Continued

Statements of Cash Flows

Years Ended December 31, 2020, 2019 and 2018

	2020			2019			2018
Cash flows from operating activities
Net income	$	6,931		$	5,902		$	6,673
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed (earnings) loss of the Bank		(1,260	)		4,965			(3,022	)
Stock compensation expense		167			163			170
Increase in other assets		(100	)		97			84
Net cash provided by operating activities		5,738			11,127			3,905
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	$	(5,363	)	$	(4,874	)	$	(4,706	)
Proceeds from stock options		86			—			27
Net cash used in financing activities		(5,277	)		(4,874	)		(4,679	)
Net increase (decrease) in cash		461			140			(774	)
Cash, beginning of year		1,736			1,596			2,370
Cash, end of year	$	2,197		$	1,736		$	1,596

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

62

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020 and December 31, 2019 approximated $7,190 and $5,406, 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, 2020 and December 31, 2019, commitments related to unused lines of credit were $138,185 and $94,009, respectively, and standby letters of credit were $4,565 and $2,436, 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.

63

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020 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.

64

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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 2020, 2019 and 2018, the Company’s contributions were $712, $605 and $590, 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 $142, $173 and $194 for the plan years ended December 31, 2020, 2019 and 2018, 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 $607, $586 and $535 for the plan years ended December 31, 2020, 2019 and 2018, respectively.

65

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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%.

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.

66

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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.

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.

67

CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18. Continued

As of December 31, 2020 and 2019, 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:​​​​​​​​​​​​​​

	Actual					Minimum Capital Requirement to be Well Capitalized					Minimum Capital Requirement to be Adequately Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2020
Citizens Holding Company
Tier 1 leverage ratio	$	101,640		7.22	%	$	70,344		5.00	%	$	56,275		4.00	%
Common Equity tier 1 capital ratio		101,640		7.22	%		91,448		6.50	%		63,310		4.50	%
Tier 1 risk-based capital ratio		101,640		12.55	%		64,780		8.00	%		48,585		6.00	%
Total risk-based capital ratio		106,375		13.14	%		80,975		10.00	%		64,780		8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	99,170		7.05	%	$	70,326		5.00	%	$	56,261		4.00	%
Common Equity tier 1 capital ratio		99,170		7.05	%		91,423		6.50	%		63,293		4.50	%
Tier 1 risk-based capital ratio		99,170		12.25	%		64,759		8.00	%		48,569		6.00	%
Total risk-based capital ratio		103,905		12.84	%		80,948		10.00	%		64,759		8.00	%
December 31, 2019
Citizens Holding Company
Tier 1 leverage ratio	$	98,733		8.33	%	$	59,270		5.00	%	$	47,416		4.00	%
Common Equity tier 1 capital ratio		98,733		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	%

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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).

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020:

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government agencies	$	—	$	12,061	$	—	$	12,061
Mortgage-backed securities		—		561,983		—		561,983
State, County, Municipals		—		104,197		—		104,197
Other securities		—		508		—		508
	$	—	$	678,749	$	—	$	678,749

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

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government agencies	$	—	$	97,111	$	—	$	97,111
Mortgage-backed securities		—		306,900		—		306,900
State, County, Municipals		—		60,372.00		—		60,372
	$	—	$	464,383	$	—	$	464,383

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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.

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19. Continued

The following table presents assets measured at fair value on a nonrecurring basis during December 31, 2020 and 2019 and were still held at those respective dates:

	in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
December 31, 2020
Impaired loans	$	—	$	—	$	2,013	$	2,013
	$	—	$	—	$	2,013	$	2,013
December 31, 2019
Impaired loans	$	—	$	—	$	4,576	$	4,576
	$	—	$	—	$	4,576	$	4,576

Impaired loans with a carrying value of $2,920 and $5,003 had an allocated allowance for loan losses of $907 and $427 at December 31, 2020 and December 31, 2019, respectively. The allocated allowance is based on the carrying value of the impaired loan and the fair value of the underlying collateral less estimated costs to sell.

After monitoring the carrying amounts for subsequent declines or impairment after foreclosure, management determined that no fair value adjustments to OREO was necessary or recorded during the year ended December 31, 2020 and December 31, 2019, respectively.

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020 and December 31, 2019:

	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
2020			(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	16,840	$	16,840	$	—	$	—	$	16,840
Interest bearing deposits with banks		25,468		25,468		—		—		25,468
Federal funds sold		—		—		—		—		—
Securities available-for-sale		678,749		—		678,749		—		678,749
Net loans		647,521		—		—		638,362		638,362
Financial liabilities
Deposits		1,095,189		861,552		234,909		—		1,096,461
Securities Sold under Agreement to Repurchase		196,272		196,272		—		—		196,272
Federal Home Loan										—
Bank advances		25,000		25,000		—		—		25,000

	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable 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

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020. 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 2020 or 2019, therefore no calculations were required in 2020 or 2019 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 2020, the Company’s directors received restricted stock grants totaling 8,250 shares of common stock at a then market value of $20.49 per share and in 2019 received 7,500 shares of common stock at a then market value of $21.53 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 2020 was $169 and will be recognized ratably over the one-year vesting period. The grant date fair value of the shares granted in 2019 was $161 and was recognized ratably over the one-year vesting period.

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 2020, 2019 or 2018 and no corresponding expense was recorded. Additionally, the remaining 4,500 shares of restricted stock were forfeited as of June 22, 2020, the expiration of the five-year vesting period.

During 2020 and 2019, the Company recorded expense of $167 and $163 related to all of the restricted shares.

At December 31, 2020, there were 8,250 shares non-vested with $56 in unrecognized stock-based compensation expense related to the 2013 Plan.

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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, 2020, 2019 and 2018:

	Directors’ Plan
	Number of Shares			Weighted Average Exercise Price
Outstanding at January 1, 2018		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
Granted		—			—
Exercised		(7,500	)		19.26
Expired		(13,500	)		25.72
Outstanding at December 31, 2020		19,500		$	19.42
Options exercisable at:
December 31, 2020		19,500		$	19.42

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CITIZENS HOLDING COMPANY

Years Ended December 31, 2020, 2019 and 2018

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.

Range of Exercise Prices	Options Outstanding		Weighted Average Price		Weighted Average Life Remaining
$15.01 to $20.00		9,000		18.76	1 years, 4 months
$20.01 to $22.50		10,500		20.02	4 months
Total		19,500	$	19.42	9 months

The intrinsic value of options outstanding under the Directors’ Plan at December 31, 2020 was $29. Additionally, the total intrinsic value of options exercised during 2020 and 2019 was $9 and $-0-, respectively.

There were no options granted during 2020 or 2019 under the 2013 Plan.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2020, 2019 and 2018

(in thousands)

OVERVIEW

The following information discusses the financial condition and results of operations of Citizens Holding Company (the “Company”) as of December 31, 2020, 2019 and 2018. 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.

The Company has been committed to meeting the banking financial needs of its customers and communities for over 110 years. During the COVID-19 pandemic, the Company remained focused on providing support, advice and solutions to meet its customers’ unique needs. As a result, the Company experienced strong revenue growth with total revenue increasing $5,912 or 13.11% to $51,021 at December 31, 2020 compared to $45,109 at December 31, 2019.

Net income for the year was $6,931, an increase of $1,029, or 17.43% compared to $5,902 at December 31, 2019. The majority of the increase in net income is related to an increase in net interest income partially offset by additional provision for loan losses and non-interest expense.

The Company continued to maintain and expand customer relationships as reflected by the loan growth of $75,182 or 13.03%, and growth in deposits of $196,193 or 21.82% to $1,095,189 at December 31, 2020. Excluding PPP loans with a total balance of $29,523 at December 31, 2020, total loans increased $45,666, or 7.91%, compared to December 31, 2019.

As a result of the COVID-19 pandemic, continued low interest rates decreased the yield on the loans as well as the securities portfolio but were partially offset by lower costs on interest-bearing deposits along with an increased volume of loans, excluding PPP loans which earn 1% interest, thus further compressing our margin.

Due to the loan growth over the period, management has increased the provision for loan losses to help manage the risks of loan growth along with the additional increased credit risks related to the pandemic. All of these factors are driving the net income results and continue to be a focus of management moving forward.

During the second quarter of 2020, the Company participated as a lender in the Small Business Administration’s (“SBA”) and U.S. Department of Treasury’s Paycheck Protection Program (“PPP”) as established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP loans are generally 100% guaranteed by the SBA. At December 31, 2020, the balance of PPP loans was $29,523 and the Company had recognized $1,172 in PPP fee income for the year ended December 31, 2020.

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The Company and Bank remain well capitalized with all capital ratios above the regulatory requirements. The Tier 1 capital ratio for the Company and Bank was 12.55% and 12.25%, respectively, at December 31, 2020. The Company’s capital position reflects the consistent profitability of its diversified financial services businesses.

The Company’s return on average assets (“ROA”) was 0.52% in 2020, compared to 0.51% in 2019 and 0.69% in 2018. The Company’s return on average equity (“ROE”) was 5.88% in 2020, 6.13% in 2019 and 7.95% in 2018. During these periods, leverage capital ratios (the ratio of equity to average total assets) decreased from 9.93% in 2018 to 8.33% in 2019 to 7.22% in 2020. The ROE in 2020, 2019 and 2018 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 77.42% of 2020 earnings per share, as compared to 82.05% in 2019 and 70.59% in 2018. The leverage capital ratio of 7.05% in 2020 remains above the regulatory requirement of 5% to be considered “well capitalized” under applicable Federal Deposit Insurance Corporation (the “FDIC”) guidelines for the Bank.

Management has continued its practice of maintaining excess funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this regard, the Company benefits from its strong deposit base, its highly liquid investment portfolio, and its access to funding from a variety of external funding sources such as federal funds lines and FHLB advances. Liquidity is discussed in more detail beginning on page 98 of this report under the heading, Liquidity and Rate Sensitivity. The Company did not have any commitments at December 31, 2020 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 outside of the pandemic. Interest rates are currently projected to remain at historical lows for 2021 to help stimulate the economy due to the COIVD-19 pandemic. The Company continues to be proactive in dealing with the effects of the pandemic to its employees, customers and communities. Although the ultimate impact of the crisis cannot be accurately predicted at this point, the Company believes that it is well-capitalized and has the financial stability to continue to serve its customers and communities during this unprecedented time.

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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, Loss Contingencies. 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.

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

79

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 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 Brand, 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.

Please refer to Note 1, “Nature of Business and 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.

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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 Board in response to changing economic conditions;

• adverse changes in asset quality and loan demand, and the potential insufficiency of the allowance for loan losses and our ability to foreclose on delinquent mortgages;

• the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates including, but not limited to, the negative impacts and disruptions resulting from the COVID-19 pandemic;

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

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

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

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

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

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

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

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

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

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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.

NET INCOME

Net income for 2020 increased by 17.43% to $6,931 or $1.24 per share-basic and -diluted, from $5,902 or $1.17 per share-basic and -diluted for 2019. The provision for loan losses for 2020 was $1,485 as compared to $573 in 2019. The increases in the provision for loan losses in each quarter of 2020 compared to the same quarters in 2019 are primarily a result of the stable loan growth during the year along with qualitative adjustments for uncertainty of market conditions brought about by the COVID-19 pandemic. Non-interest income increased by $712, or 7.30%, and non-interest expense increased by $5,868 or 21.29%, in 2020. Non-interest income for 2020 increased primarily due to the result of increase in mortgage loan origination income due to a decrease in long-term mortgages rates, increase in gains from security sales to lower the Company’s prepayment risk within the Company’s mortgage-backed securities portfolio, partially offset by a decrease in overdraft income due to the savings trend related to the COVID-19 pandemic. Non-interest expense increased mainly due to an increase in non-recurring COVID-19 safety measures such as: PPE, laptops, and branch safety measures. In addition, the Company also incurred with an increase in regulatory related expenses and core service contracts after the merger conversion in the second quarter of 2020. Also, a full year of recurring expenses from the Charter acquisition contributed to the increase of non-interest expense.

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 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.

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Net interest income on a tax equivalent basis was $33,699, $29,897 and $27,806 for the years 2020, 2019 and 2018, respectively. Net interest margin was 2.72%, 2.77% and 3.05% for the same periods. During 2020, the yields on interest earning assets and the rates paid on interest bearing deposits decreased. In 2020 as compared to 2019, interest-bearing assets increased by $156,334, or 14.50% and interest-bearing liabilities increased by $109,494, or 12.76%. For the year ended December 31, 2020, the average yield on earnings assets was 3.33%, a decrease of 44 basis points compared to the average yield at December 31, 2019. The average rate paid on interest-bearing liabilities was 0.76%, a decrease of 50 basis points compared to the average rate at December 31, 2019.

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 this three-year period, loans outstanding increased in 2018, 2019 and 2020. Loans generally provide the Company with yields that are greater than the yields on typical investment securities.

Table 1 – 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, 2020, 2019 and 2018.

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TABLE 1 – AVERAGE BALANCE SHEETS AND INTEREST RATES

(in thousands)

	Average Balance						Income/Expense						Average Yield/Rate
	2020		2019		2018		2020		2019		2018		2020			2019			2018
Loans:
Loans, net of unearned(1)	$	622,309	$	560,888	$	417,624	$	30,980	$	29,427	$	20,287		4.98	%		5.25	%		4.86	%
Investment Securities
Taxable		498,016		388,490		376,392		7,837		7,993		8,345		1.57	%		2.06	%		2.22	%
Tax-exempt		69,591		78,843		107,906		2,027		2,423		3,445		2.91	%		3.07	%		3.19	%
Total Investment Securities		567,607		467,333		484,298		9,864		10,416		11,790		1.74	%		2.23	%		2.43	%
Federal Funds Sold and Other		45,305		50,666		9,253		250		854		157		0.55	%		1.69	%		1.70	%
Total Interest Earning Assets(1)(2)		1,235,221		1,078,887		911,175		41,094		40,697		32,234		3.33	%		3.77	%		3.54	%
Non-Earning Assets		101,292		85,683		69,971
Total Assets	$	1,336,513	$	1,164,570	$	981,146
Deposits:
Interest-bearing Demand Deposits (3)	$	449,828	$	381,635	$	325,192	$	3,062	$	3,468	$	1,131		0.68	%		0.91	%		0.35	%
Savings		93,886		79,886		79,281		111		130		113		0.12	%		0.16	%		0.14	%
Time		231,832		274,597		191,836		3,351		5,226		1,536		1.45	%		1.90	%		0.80	%
Total Deposits		775,546		736,118		596,309		6,524		8,824		2,780		0.84	%		1.20	%		0.47	%
Borrowed Funds
Short-term Borrowings		192,017		121,951		116,787		871		1,976		1,648		0.45	%		1.62	%		1.41	%
Long-term Borrowings		—		—		—		—		—		—		0.00	%		0.00	%		0.00	%
Total Borrowed Funds		192,017		121,951		116,787		871		1,976		1,648		0.45	%		1.62	%		1.41	%
Total Interest-Bearing Liabilities (3)		967,563		858,069		713,096		7,395		10,800		4,428		0.76	%		1.26	%		0.62	%
Non-Interest Bearing Liabilities
Demand Deposits		236,881		192,672		164,682
Other Liabilities		14,294		17,534		10,208
Shareholders’ Equity		117,775		96,295		93,160
Total Liabilities and Shareholders’ Equity	$	1,336,513	$	1,164,570	$	981,146
Interest Rate Spread														2.56	%		2.51	%		2.92	%
Net Interest Margin							$	33,699	$	29,897	$	27,806		2.72	%		2.77	%		3.05	%
Less
Tax Equivalent Adjustment								565		654		906
Net Interest Income							$	33,134	$	29,243	$	26,900

(1) Overdrafts on demand deposit accounts are not included in the average volume calculation as they are not considered interest earning assets by the Company. They are included in the “Non-Earning Assets” balance above.

(2) Earning Assets in Table 1 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.

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Table 2 – Net Average Interest Earning Assets illustrates net interest earning assets and liabilities for 2020, 2019, and 2018.

TABLE 2 – NET AVERAGE INTEREST EARNING ASSETS

	(in thousands)
	2020		2019		2018
Average interest earning assets	$	1,235,221	$	1,078,887	$	911,175
Average interest bearing liabilities		967,563		858,069		713,096
Net average interest earning assets	$	267,658	$	220,818	$	198,079

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Table 3 – Volume/Rate Analysis depicts the effect on interest income and interest expense of changes in volume and changes in rate from 2018 through 2020. 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% and a state tax rate of 5% in 2020 and 2019, respectively.

TABLE 3 – VOLUME/RATE ANALYSIS

	(in thousands)
	2020 Change from 2019									2019 Change from 2018
	Volume			Rate			Total			Volume			Rate			Total
INTEREST INCOME
Loans	$	3,222			(1,669	)	$	1,553		$	6,959		$	2,181		$	9,140
Taxable securities		2,253			(2,454	)		(201	)		268			(620	)		(352	)
Non-Taxable securities		(284	)		(67	)		(351	)		(928	)		(94	)		(1,022	)
Federal funds sold and other		(90	)		(514	)		(604	)		703			(6	)		697
TOTAL INTEREST INCOME	$	5,101		$	(4,704	)	$	397		$	7,002		$	1,461		$	8,463
INTEREST EXPENSE
Interest-bearing demand deposits	$	620			(1,026	)		(406	)	$	196		$	2,141			2,337
Savings deposits		23			(42	)		(19	)		1			16			17
Time deposits		(814	)		(1,061	)		(1,875	)		663			3,027			3,690
Short-term borrowings		1,135			(2,241	)		(1,106	)		73			255			328
TOTAL INTEREST EXPENSE	$	964		$	(4,370	)		(3,406	)	$	933		$	5,439			6,372
NET INTEREST INCOME	$	4,137		$	(334	)	$	3,803		$	6,070		$	(3,979	)	$	2,091

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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 remained stable for the year even with the negative economic impact of the COVID-19 pandemic. Although the Company continues to face intense competition for available loans from other financial institutions, the Company was able, in 2020 and 2019, to increase the amount of loans outstanding. Additionally, the PPP loans added a significant amount of loans to the Company’s portfolio in 2020. The overall loan demand in the Company’s operating markets has been stable in certain sectors. Commercial, financial and agricultural has seen the most growth with an increase of 31.95%, or $114,305, in 2020, by 25.3%, or $77,353, in 2019 and by 6.6%, or $17,653, in 2018. Included in this portfolio segment is the Company’s PPP loans of $29,523. 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 decreased by 3.63%, or $4,430 in 2020 and increased by 37.4%, or $33,267, in 2019, and decreased by 7.5%, or $7,177, in 2018 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 2020 and 2018 years reflects the weakness in some of the Company’s local housing markets coupled with increased competition in the mortgage market.

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Real estate construction loans decreased by $32,366, or (39.86%) in 2020 to $48,831 when compared to the $81,197 at December 31, 2019 and increased by $7,697 or 18.71% when compared to 2018. Of the overall decrease for the year, the Company had a reclassification of $54,023 from real estate construction to other loan segments. Real estate construction loans are usually short term in nature and are dependent on construction activity in the Company’s service area. Demand was stable for construction loans during the 2020 fiscal year despite the impact due to the COVID-19 pandemic.

Consumer loans decreased by $2,327 or 14.48% in 2020 and increased by $2,054 or 14.6% in 2019, and decreased by $1,969, or 12.3% in 2018, compared to the prior years. The Company believes the COVID-19 pandemic has caused a pause of consumer spending due to the economic impact of the pandemic.

Table 4 – 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 4 – LOANS OUTSTANDING

(in thousands)

	AT DECEMBER 31,
	2020		2019		2018		2017		2016
Commercial, financial and agricultural	$	472,094	$	357,789	$	285,420	$	267,767	$	253,581
Real estate - construction		48,831		81,197		41,134		25,923		23,793
Real estate - mortgage		117,584		122,014		88,747		95,925		97,812
Consumer		13,748		16,075		14,021		15,990		19,466
TOTAL LOANS	$	652,257	$	577,075	$	429,322	$	405,605	$	394,652

Table 5 – 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 5 – LOAN LIQUIDITY

LOAN MATURITIES AT DECEMBER 31, 2020

	1 YEAR OR LESS		1 - 5 YEARS		OVER 5 YEARS		Total
Commercial, financial and agricultural	$	69,949	$	305,828	$	96,317	$	472,094
Real estate - construction		10,457		33,946		4,428	$	48,831
Real estate - mortgage		20,330		76,059		21,195	$	117,584
Consumer		5,202		8,065		481	$	13,748
Total loans	$	105,938	$	423,898	$	122,421	$	652,257

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SENSITIVITY TO CHANGES IN INTEREST RATES

	1 - 5 YEARS		OVER 5 YEARS
Fixed rates	$	487,792	$	75,479
Variable rates		39,569		49,417
Total loans	$	527,361	$	124,896

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 2020, 2019 and 2018. The ratio of net loans charged off to average loans was 0.08% in 2020, 0.03% in 2019 and 0.00% in 2018. 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 2020 was an expense of $1,485 compared to an expense of $573 in 2019 and an expense of $334 in 2018. 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. Additionally, during the second quarter of 2020 management made qualitative adjustments for the uncertainty of market conditions brought about by the COVID-19 pandemic that contributed to a majority of the provision increase coupled with stable loan growth. The Company uses a model that takes into

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account historical charge-offs and recoveries and applies that to certain loan segments of the Company’s portfolio. At the end of 2020, the total allowance for loan losses was $4,735, 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 6 – 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 6 – ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

(in thousands except for percentage amounts)

	2020			2019			2018			2017			2016
BALANCE AT BEGINNING OF YEAR	$	3,755		$	3,372		$	3,019		$	3,903		$	6,474
LOANS CHARGED-OFF
Commercial, financial and agricultural		272			176			35			166			2,397
Real estate - construction		37			—			74			112			—
Real estate - mortgage		304			46			133			57			179
Consumer		104			138			146			102			65
TOTAL CHARGE-OFFS		717			360			388			437			2,641
CHARGE-OFFS RECOVERED
Commercial, financial and agricultural		65			91			219			2			18
Real estate - construction		43			18			19			14			18
Real estate - mortgage		61			14			81			16			24
Consumer		43			47			88			64			75
TOTAL RECOVERIES		212			170			407			96			135
Net loans charged-off		505			190			(19	)		341			2,506
Additions charged to operating expense		1,485			573			334			(543	)		(65	)
BALANCE AT END OF YEAR	$	4,735		$	3,755		$	3,372		$	3,019		$	3,903
Loans, net of unearned, at year end	$	652,256		$	577,067		$	429,277		$	406,605		$	394,051
Ratio of allowance to loans at year end		0.73	%		0.65	%		0.79	%		0.74	%		0.99	%
Average loans - net of unearned	$	622,805		$	561,483		$	418,136		$	395,217		$	409,367
Ratio of net loans charged-off to average loans		0.08	%		0.03	%		0.00	%		0.09	%		0.61	%

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ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

(in thousands)

	AT DECEMBER 31,
	2020		2019		2018		2017		2016
Commercial, financial and agricultural	$	3,576	$	2,692	$	2,295	$	1,550	$	2,139
Real estate - construction		267		192		139		120		402
Real estate - mortgage		653		566		417		821		770
Consumer		239		305		521		528		592
Total	$	4,735	$	3,755	$	3,372	$	3,019	$	3,903

COMPOSITION OF LOAN PORTFOLIO BY TYPE

	AT DECEMBER 31,
	2020			2019			2018			2017			2016
Commercial, financial and agricultural		72.38	%		62.00	%		66.48	%		66.02	%		64.25	%
Real estate - construction		7.49	%		14.07	%		9.58	%		6.39	%		6.03	%
Real estate - mortgage		18.03	%		21.14	%		20.67	%		23.65	%		24.78	%
Consumer		2.11	%		2.79	%		3.27	%		3.94	%		4.93	%
		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

Loan balances outstanding, as illustrated in Table 4, increased in 2020 even though the Company maintained tight credit standards and the negative economic impact of the COVID-19. All loan segments decreased from 2019 except for the commercial, financial and agricultural loan segment. In 2019 as compared to 2018, all loan segments increased primarily due to the acquisition of Charter coupled with solid organic growth. 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 7 – 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, 2020 was 0.47% compared to 0.62% in 2019. OREO decreased in 2020 after increasing in 2019 due to sales of several parcels in 2020 partially offset by foreclosures in 2020.

Loans on non-accrual status amounted to $8,484 in 2020 as compared to $12,026 in 2019 and $9,839 in 2018. Interest income forgone on loans classified as non-accrual in 2020 was $383 as compared to $555 in 2019 and $429 in 2018. 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.

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TABLE 7 – NON-PERFORMING ASSETS

(in thousands, except percentages)

	As of December 31,
	2020			2019			2018			2017			2016
PRINCIPAL BALANCE
Non-accrual	$	8,484		$	12,026		$	9,839		$	7,582		$	8,879
Accruing loans 90 days or more past due		14			274			73			807			206
Troubled debt restructurings		2,113			2,495			2,782			3,047			3,288
TOTAL NON-PERFORMING LOANS	$	10,611		$	14,795		$	12,694		$	11,436		$	12,373
Income on non-accrual loans not recorded	$	395		$	555		$	429		$	413		$	652
Non-performing as a percent of loans		1.63	%		2.56	%		2.96	%		2.82	%		3.14	%
Other real estate owned	$	3,073		$	3,552		$	3,440		$	3,980		$	4,443
OREO as a percent of loans		0.47	%		0.62	%		0.80	%		0.98	%		1.13	%
Allowance as a percent of non-performing loans		44.62	%		25.38	%		26.56	%		26.40	%		31.54	%

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 2020, 2019 and 2018 were $7,675, $11,135 and $10,305, respectively.

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This table details the impaired loans by category for years ending 2020, 2019 and 2018.

	AT DECEMBER 31,
	2020		2019		2018
Commercial, financial and agricultural	$	6,659	$	10,296	$	9,153
Real estate - mortgage		1,016		839		1,152
Total loans	$	7,675	$	11,135	$	10,305

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, 2020, loans totaling $25,146 were included on the Company’s watch list compared to $30,756 at December 31, 2019. 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, 2020, 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 8 – Securities and Securities Maturity Schedule summarizes the amortized cost of securities from 2018 through 2020 and the maturity distribution at December 31, 2020, by classification.

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TABLE 8 – SECURITIES

(in thousands)

	2020		2019		2018
SECURITIES AVAILABLE-FOR-SALE
U. S. Government Agencies	$	11,870	$	97,400	$	99,366
Mortgage Backed Securities		560,033		308,310		259,742
State, County and Municipal Obligations		100,823		59,724		105,591
Other Securities		500		—		—
TOTAL SECURITIES AVAILABLE-FOR-SALE	$	673,226	$	465,434	$	464,699

SECURITIES MATURITY SCHEDULE

	1 year or less				1 to 5 years					5 to 10 years					over 10 years
	Actual Balance		Average Yield		Actual Balance		Average Yield			Actual Balance		Average Yield			Actual Balance		Average Yield
AVAILABLE-FOR-SALE
U. S. Government Agencies	$	—		—	$	—		—		$	6,903		2.31	%	$	4,967		1.74	%
Mortgage Backed Securities(1)		—		—		4,749		2.50	%		19,857		1.34	%		535,427		0.14	%
State, County and Municipal(2)		—		—		3,594		3.26	%		13,635		2.68	%		83,594		2.50	%
Other Securities		—		—		—		—			—		—			500		—
TOTAL AVAILABLE-FOR-SALE	$	—		—	$	8,343		2.83	%	$	40,395		1.96	%	$	624,488		0.47	%

(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 2020. This change is not used in the Tier 1 capital calculation.

As detailed in Table 8, the security portfolio increased $207,792 or 44.64% in 2020, increased $735 or 0.02% in 2019 and decreased $51,307 or (9.9%) in 2018. 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 decreased in 2020 as a result of low

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interest rates and increases in other deposit products as a result of the COVID-19 pandemic. Time deposits increased in 2019 and 2018 due to an increase in rates paid by the Company caused by competition in our operating markets.

A three-year schedule of average deposits by type and maturities of time deposits greater than $250 is presented in Table 9 – Deposit Information.

TABLE 9 – DEPOSIT INFORMATION

(in thousands, except percentages)

	2020					2019					2018
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Noninterest-bearing	$	236,881				$	192,672				$	164,682
Interest-bearing demand		449,828		0.68	%		381,635		0.91	%		325,192		0.35	%
Savings		93,886		0.12	%		79,886		0.16	%		79,281		0.14	%
Time deposits		231,832		1.44	%		274,597		1.90	%		191,836		0.80	%
	$	1,012,427		0.84	%	$	928,790		1.20	%	$	760,991		0.47	%

MATURITY RANGES OF TIME DEPOSITS

OF $250 OR MORE

	AS OF DECEMBER 31, 2020
3 months or less	$	16,789
3 through 12 months		35,167
1 year to 3 years		11,166
over 3 years		8,222
	$	71,344

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.

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TABLE 10 - SHORT-TERM BORROWINGS

(in thousands)

	As of December 31,
	2020			2019			2018
Short-term borrowings
Year-end balance	$	221,272		$	170,410		$	107,966
Weighted average rate		0.39	%		1.05	%		1.20	%
Maximum month-end balance	$	265,177		$	181,347		$	140,115
Year to date average balance	$	192,017		$	121,951		$	116,787
Weighted average rate		0.45	%		1.62	%		1.41	%

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, 2020, the Company had the capacity to borrow up to $167,285 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, 2020 the Company had borrowed $25,000 from the FHLB and $-0- in Federal Funds Purchased. At December 31, 2019, the Company had borrowed $-0- from the FHLB and $-0- in Federal Funds Purchased. In 2020, the balances in Securities Sold Under Agreement to Repurchase increased $25,862, or 15.18% to $196,272. In 2019, these balances increased to $170,410, an increase of $62,444, or 57.8%.

At the end of 2020, the Company had $-0- in long-term debt to the FHLB for advances or any other institution.

NON-INTEREST INCOME AND EXPENSE

Table 11 - Non-Interest Income and Expense illustrates the Company’s non-interest income and expense from 2018 through 2020 and percentage changes between such years.

TABLE 11 - NON-INTEREST INCOME & EXPENSE

(in thousands)

	2020		% CHANGE FROM ‘19			2019		% CHANGE FROM ‘18			2018
NON-INTEREST INCOME
Service charges on deposit accounts	$	3,352		-24.04	%	$	4,413		-3.27	%	$	4,562
Other operating income		7,108		33.23	%		5,335		32.12	%		4,038
TOTAL NON-INTEREST INCOME	$	10,460		7.30	%	$	9,748		13.35	%	$	8,600
NON-INTEREST EXPENSE
Salaries and employee benefits	$	17,476		17.42	%	$	14,883		2.43	%	$	14,530
Occupancy expense, including equipment		7,360		40.32	%		5,245		-8.46	%		5,730
Other operating expense		8,590		15.61	%		7,430		0.35	%		7,404
TOTAL NON-INTEREST EXPENSE	$	33,426		21.29	%	$	27,558		-0.38	%	$	27,664

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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 2020 as compared to 2019, non-interest income increased by $712, or 7.30%. An increase in other operating income mainly attributed to increases in mortgage loan origination income and net gains on sales of securities, partially offset by a decrease in overdraft income.

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

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 2020 as compared to 2019, non-interest expense increased by $5,868, or 21.29%, to $33,426. Included in this increase was an increase in occupancy expense of $2,115 or 40.32%. Additionally, an increase in salaries and benefits in the amount of $2,593, or 17.42%, and other expense in the amount of $1,160, or 15.61%. The increase in occupancy expense was primarily due to non-recurring COVID-19 safety measures such as: PPE, laptops, and branch safety measures. In addition, the Company also incurred an increase in regulatory related expenses and core service contracts after the merger conversion in the second quarter of 2020. The increase in salaries and benefits was due to the Charter acquisition October 1, 2019.

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 on October 1, 2019.

In 2020, the Company’s efficiency ratio was 78.29%, compared to 77.88% in 2019 and 75.99% in 2018. 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 $1,548 is considered realizable and no valuation allowance is considered necessary.

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The Company’s effective tax rate was 20.18%, 18.66% and 11.04% % in 2020, 2019 and 2018, respectively. The major difference between the effective tax rate applied to the Company’s financial statement income and the federal statutory rate of 21% in 2020, 2019 and 2018, respectively, is interest on tax-exempt securities and loans. Further tax information is disclosed in Note 13, “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 2020 as compared to 2019, 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 $25,000 of FHLB advances outstanding at year end. 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 $678,749 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, 2020, both the ALCO and the Board of Directors determined that the Company’s liquidity position was adequate.

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Table 12 - Funding Uses and Sources details the main components of cash flows for 2020 and 2019.

TABLE 12 - FUNDING USES AND SOURCES

(in thousands)

	2020								2019
	Average Balance		Increase/ (decrease) Amount			Percent			Average Balance		Increase/ (decrease) Amount			Percent
FUNDING USES
Loans, net of unearned income	$	622,309	$	61,421			10.95	%	$	560,888	$	142,752			34.14	%
Taxable securities		498,016		109,526			28.19	%		388,490		12,098			3.21	%
Tax-exempt securities		69,591		(9,252	)		-11.73	%		78,843		(29,063	)		-26.93	%
Federal funds sold and other		45,305		(5,361	)		-10.58	%		50,666		41,413			447.56	%
TOTAL USES	$	1,235,221	$	156,334			14.49	%	$	1,078,887	$	167,200			17.95	%
FUNDING SOURCES
Noninterest-bearing deposits	$	236,881	$	44,209			22.95	%	$	192,672	$	27,990			17.00	%
Interest-bearing demand and
savings deposits		543,714		82,193			17.81	%		461,521		57,048			14.10	%
Time deposits		231,832		(42,765	)		-15.57	%		274,597		82,761			43.14	%
Short-term borrowings		10,318		8,835			595.75	%		1,483		(19,996	)		-93.10	%
Commercial repo		181,699		57,355			46.13	%		124,344		29,036			30.47	%
Long-term debt		—		—			—			—		—			—
TOTAL SOURCES	$	1,204,444	$	149,827			14.21	%	$	1,054,617	$	176,839			19.36	%

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.

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During 2020 as compared to 2019, total risk-based capital decreased due to assets outpacing earnings.

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, 2020, as noted below in Table 13 - Capital Ratios. To be classified as well-capitalized, the Company and Bank must maintain the ratios described above.

TABLE 13 – CAPITAL RATIOS

(in thousands, except percentage amounts)

	At December 31,
	2020			2019			2018
Tier 1 capital
Shareholders’ equity	$	119,548		$	112,800		$	83,866
Less: Intangibles		(13,502	)		(13,856	)		(3,150	)
Less: DTA related to NOLs		(267	)		(1,000	)		—
Add/less: Unrealized loss/(gain) on securities		(4,139	)		789			14,975
TOTAL TIER 1 CAPITAL	$	101,640		$	98,733		$	95,691
Total capital
Tier 1 capital	$	101,640		$	98,733		$	95,691
Allowable allowance for loan losses		4,735			3,755			3,372
TOTAL CAPITAL	$	106,375		$	102,488		$	99,063
RISK WEIGHTED ASSETS	$	809,754		$	712,154		$	549,828
AVERAGE ASSETS (FOURTH QUARTER)	$	1,406,885		$	1,185,397		$	963,820
TIER 1 LEVERAGE RATIO		7.22	%		8.33	%		9.93	%
COMMON EQUITY TIER 1 CAPITAL RATIO		7.22	%		8.33	%		9.93	%
TIER 1 RISK-BASED CAPITAL RATIO		12.55	%		13.86	%		17.40	%
TOTAL RISK-BASED CAPITAL RATIO		13.14	%		14.39	%		18.02	%

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.

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OFF-BALANCE SHEET ARRANGEMENTS

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. These off-balance sheet arrangements are further detailed in Note 16, “Off-Balance Sheet Financial Instruments, Commitments and Contingencies and Concentrations of Risks,” in the notes to the Company’s Consolidated Financial Statements included in this Annual Report.

CONTRACTUAL OBLIGATIONS

Long-term debt obligations represent borrowings from the FHLB that have an original maturity in excess of one year. The only other significant obligations, other than obligations under deposit contracts and short-term borrowing, were for operating leases for banking facilities. Operating leases are primarily for the lease of branches, ATM machines and other necessary equipment. The equipment leases are for various terms.

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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, 2020 ($ in thousands):

	Interest Sensitive Within
	90 days			One year
Total rate sensitive assets	$	206,190		$	305,309
Total rate sensitive liabilities		258,994			140,107
Net gap	$	(52,804	)	$	165,202

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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 14 - 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, 2020 and December 31, 2019.

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TABLE 14 - INTEREST RATE SENSITIVITY

AS OF DECEMBER 31, 2020

(in thousands)

	2021			2022			2023			2024			2025			Thereafter			Carrying Value			Fair Value
Loans
Fixed Rate	$	91,241		$	85,106		$	88,745		$	100,155		$	122,545		$	75,479		$	563,271		$	557,032
Average Int Rate		4.74	%		3.48	%		4.63	%		5.14	%		4.01	%		4.00	%		4.35	%
Floating Rate	$	12,223		$	7,700		$	4,469		$	13,150		$	2,027		$	49,417		$	88,986		$	88,986
Average Int Rate		3.52	%		4.63	%		3.88	%		4.57	%		4.49	%		4.62	%		4.42	%
Investment securities
Fixed Rate	$	0		$	5,375		$	228		$	240		$	2,501		$	664,882		$	673,226		$	678,749
Average Int Rate		0.00	%		2.41	%		1.80	%		1.99	%		3.89	%		0.56	%		2.30	%
Floating Rate
Average Int Rate
Other earning assets
Fixed Rate
Average Int Rate
Floating Rate	$	25,468																	$	25,468		$	25,468
Average Int Rate		0.98	%																	0.98	%
Interest-bearing deposits
Fixed Rate	$	736,611		$	48,684		$	17,603		$	13,069		$	3,189					$	819,156		$	820,487
Average Int Rate		0.67	%		1.67	%		1.42	%		2.04	%		0.68	%					1.16	%
Floating Rate
Average Int Rate
Other int-bearing liabilities
Fixed Rate
Average Int Rate
Floating Rate	$	221,272																	$	221,272		$	221,272
Average Int Rate		0.39	%																	0.39	%

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AS OF DECEMBER 31, 2019

(in thousands)

	2020			2021			2022			2023			2024			Thereafter			Carrying 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	%		4.67	%
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	%		5.68	%
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	%		2.42	%
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	%					0.78	%
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	%

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 15 - Rate Sensitivity Gap reflects interest-earning assets and interest-bearing liabilities by maturity distribution as of December 31, 2020. Product lines repricing in time periods predetermined by contractual agreements are included in the respective maturity categories.

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TABLE 15 - RATE SENSITIVITY GAP AT DECEMBER 31, 2020

(in thousands, except percentage amounts)

	1 - 90 Days			91 - 365 Days			1 - 5 Years			Over 5 years			Total
INTEREST EARNING ASSETS
Loans	$	84,899		$	117,177		$	423,500		$	16,372		$	641,948
Investment securities		95,823			188,132			233,317			157,552			674,824
Interest Bearing Due From Bank Accounts		25,468			—			—			—			25,468
Federal funds sold		—			—			—			—			—
TOTAL INTEREST BEARING ASSETS	$	206,190		$	305,309		$	656,817		$	173,924		$	1,342,240
INTEREST BEARING LIABILITIES
Interest bearing demand deposits	$	11,387		$	34,161		$	182,189		$	45,547		$	273,284
Savings and Money Market deposits		158,263			—			224,953			204,498			587,714
Time deposits		44,717			105,946			82,917			—			233,580
Short term borrowings		44,627			—			117,764			58,882			221,273
Long term borrowings		—			—			—			—			—
TOTAL INTEREST BEARING LIABILITIES	$	258,994		$	140,107		$	607,823		$	308,927		$	1,315,851
Rate sensitive gap	$	(52,804	)	$	165,202		$	48,994		$	(135,003	)	$	26,389
Rate sensitive cumulative gap		(52,804	)		112,398			161,392			26,389			—
Cumulative gap as a percentage of total earning assets		-3.93	%		8.37	%		12.02	%		1.97	%

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.

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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, 2020. 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; and (3) approximately 19.14% of certificates of deposit maturing during 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. Due to the pandemic the Company does not believe interest rates will go any lower than the rates currently are, therefore; the Company has attempted to mitigate the impact of its interest rate position by structuring deposit rates to entice customers to lengthen the maturities of their time deposits.

The COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of actions by the Federal Reserve Bank (“FRB”). Market interest rates have declined significantly. On March 3, 2020, the ten-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds rate by 100 basis points to a range of 0.00% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. The FRB reduced the interest that it pays on excess reserves from 1.60% to 1.10% on March 3, 2020, and then to 0.10% on March 15, 2020. 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 an impact on the Company’s earnings as we positioned our balance sheet for rising rates. 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 2020 and 2019, the Company was asset sensitive 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 2020 was 2.72% and in 2019 was 2.77% due to the aforementioned facts.

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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 1, 2021, the common stock’s closing price on NASDAQ was $20.00.

On March 1, 2021, shares of the Company’s common stock were held of record by approximately 486 shareholders.

DIVIDENDS

Dividends totaled $0.96 per share for 2020 and 2019.

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.

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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, 2015 and that all dividends were reinvested.

Performance Graph

December 31, 2015 - December 31, 2020

	2015		2016		2017		2018		2019		2020
Citizens Holding Company		100.00		113.57		105.68		100.38		109.57		109.57
NASDAQ Market Index		100.00		108.87		141.13		137.12		187.44		271.64
Morningstar Regional Banks		100.00		128.37		151.66		133.74		162.97		144.00

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.

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THE CITIZENS BANK OFFICERS

Greg McKee President and CEO   Phillip R. Branch 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   Ashley Peebles Vice President, Director of Deposit Services   Sommer Vick Assistant Vice President, Assistant Trust Officer   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   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   Union and Decatur Branches   Susan Brown Deposit Operations Officer   Kosciusko Branch   Teresa Patterson Vice President, Branch Manager

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  Scooba and DeKalb Branches   Reggie Moore Assistant Vice President, Branch Manager   Jan White Branch Operations Officer   Forest Branch   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   Tammara Hopson, Deposit Operations Officer   Hattiesburg Branch   Chad Hill Vice President, Branch Manager   Tammy McAlpin Commercial Loan Portfolio Manager   Flowood Branch   George Gammon III Metro Jackson President   Cory Bass Assistant Vice President, Accounting Officer   Ridgeland Branch   Daniel Webb Assistance Vice President   Biloxi Cedar Lake and Lemoyne Branches   Travis Moore Vice President, Regional Commercial Lender   Brandon Sherwood Regional Commercial Lender   Tammy Warren Assistant Vice President, Mortgage Loan Officer   Katie Hancock Vice President, Branch Manager   Patrick Ricci Vice President, Commercial Lender   Mandy Dawson Treasury Management Officer   Mortgage Loan Department   Charlene Deweese Assistant Vice President, Mortgage Loan Officer   Oxford Branch   Grant Boone Oxford City President   Marion Boyd Vice President, Regional Commercial Lender   Meg Smith Branch Operations Officer   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   Julius Bosco III Loan Compliance Officer   Pam Pierce Human Resources Administrator   Theresa Jenkins Community Retail Officer

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Ocean Springs Branch

Melissa Ceasar

Community Retail Officer

Sharon Wetzel

Vice President, Information Technology Officer

Reagan Bridley

Vice President, Commercial Lender

Thomas Graham

Vice President, Mortgage Loan Officer

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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   Jane Crosswhite Executive Vice President Williams Brothers Inc.   Terrell E. Winstead Executive Vice President Molpus Woodlands Group

CITIZENS HOLDING COMPANY OFFICERS

Herbert A. King

Chairman

Greg L. McKee

President and Chief Executive Officer

Mark Taylor

Secretary

Phillip R. Branch

Treasurer and Chief Financial Officer

Gregory E. Cronin

Gulf Coast President

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BANKING LOCATIONS

Philadelphia Main Office 521 Main Street Philadelphia, MS 39350 601.656.4692   Westside Branch 912 West Beacon Street Philadelphia, MS 39350 601.656.4692   Northside Branch 802 Pecan Avenue Philadelphia, MS 39350 601.656.4692   Eastside Branch 599 East Main Street Philadelphia, MS 39350 601.656.4692   Union Branch 502 Bank Street Union, MS 39365 601.774.9231   Starkville Branch 201 Highway 12 West Starkville, MS 39759 662.323.1420   Carthage Main Office 301 West Main Street Carthage, MS 39051 601.257.4525   Biloxi Cedar Lakes 1830 Popps Ferry Road Biloxi, MS 39532 228.594.6913   Oxford Branch 902 Sisk Avenue, Ste E Oxford, MS 38655 Collinsville Branch 9065 Collinsville Road Collinsville, MS 39325 601.626.7608   Flowood Branch 2845 Lakeland Drive 247 Flowood, MS 39232 601.992.7688   Sebastopol Branch 24 Pine Street Sebastopol, MS 39359 601.625.7447   DeKalb Branch 176 Main Avenue DeKalb, MS 39328 601.743.2115   Kosciusko Branch 775 North Jackson Street Kosciusko, MS 39090 662.289.4356   Scooba Branch 27597 Highway 16 East Scooba, MS 39358 662.476.8431   Meridian Eastgate 1825 Hwy 39 North Meridian, MS 39301 601.693.8367   Hattiesburg Branch 6222 Highway 98 Hattiesburg, MS 39402 601.264.4425   Gulfport Branch 12008 Hwy 49 Gulfport, MS 39503 Decatur Branch 15330 Hwy 15 South Decatur, MS 39327 601.635.2321   Forest Branch Woodland Drive North Forest, MS 39074 601.469.3424   Louisville-Main Branch 100 East Main Street Louisville, MS 39339 662.773.6261   Noxapater Branch 45 East Main Street Noxapater, MS 39346 662.724.4261   Louisville-Industrial Branch 803 South Church Street Louisville, MS 39339 662.773.6261   Biloxi Lemoyne Boulevard 15309 Lemoyne Boulevard Biloxi, MS 39532 228.207.2343   Meridian Broadmoor 5015 Highway 493 Meridian. MS 39305 601.581.1541   Ridgeland Branch 320 Highway 51 North Ridgeland, MS 39157 601.519.4020   Pascagoula Branch 1519 Jackson Ave Pascagoula, MS 39567

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BANKING LOCATIONS - Continued

  Ocean Springs Branch 2702 Bienville Blvd Ocean Springs, MS 39564   Internet and Mobile Banking http.//www.thecitizensbankphila.com   Phone Teller 1.800.397.0344

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FINANCIAL INFORMATION

CORPORATE HEADQUARTERS

521 Main Street

P.O. Box 209

Philadelphia, MS 39350

601.656.4692

ANNUAL SHAREHOLDER MEETING

The Annual Shareholder meeting of the Citizens Holding Company, Inc. will be held Tuesday, April 27, 2021, at 4:30 P.M. in the lobby of the main office of The Citizens Bank, 521 Main Street, Philadelphia, Mississippi.

STOCK REGISTRAR AND TRANSFER AGENT

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

Phillip R. Branch

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.

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