UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended June 30, ~~2021~~

2022

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

For the transition period from

Commission File Number:

001-15375

CITIZENS HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Mississippi		64-0666512
(State or other jurisdiction of In Company or organization)		(IRS Employer Identification No.)


521 Main Street, Philadelphia, MS		39350
(Address of principal executive offices)		(Zip Code)

601-656-4692

(Registrant’s telephone number, including area code)

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


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

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

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months (or such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

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

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). ☐ Yes ☒ No

Number of shares outstanding of each of the issuer’s classes of common stock, as of August ~~6, 2021:~~

5, 2022:


Title		Outstanding
Common Stock, $0.20 par value		~~5,595,320~~5,603,570

Table of Contents

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION		1

Item 1.	Consolidated Financial Statements.		1

	Consolidated Statements of Financial Condition, as of June 30, ~~2021~~2022 (Unaudited) and December 31, ~~2020~~2021 (Audited)		1

	Consolidated Statements of Income for the Three and six months ended June 30, ~~2021~~2022 (Unaudited) and ~~2020~~2021 (Unaudited)		2

	Consolidated Statements of Comprehensive ~~Income~~Loss for the Three and six months ended June 30, ~~2021~~2022 (Unaudited) and ~~2020~~2021 (Unaudited)		3

	Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, ~~2021~~2022 (Unaudited) and ~~2020~~2021 (Unaudited)		4

	Notes to Consolidated Financial Statements (Unaudited)		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	39	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	56	46

Item 4.	Controls and Procedures.	58	48

PART II.	OTHER INFORMATION	59	49

Item 1.	Legal Proceedings.	59	49

Item 1A.	Risk Factors.	59	49

Item 6.	Exhibits.	59	49

SIGNATURES	60		50

Table of Contents

PART I. FINANCIAL INFORMATION

~~ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.~~

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

ASSETS
   June 30,
2021
(Unaudited) December 31,
2020
(Audited)
Cash and cash equivalents
   $ 16,050 $ 16,840
Interest bearing cash and cash equivalents
   66,153 25,468
Investment securities available for sale, at fair value
   542,671 678,749
Loans, net of allowance for loan losses of $4,351 in 2021 and $4,735 in 2020
   629,691 647,521
Premises and equipment, net
   25,446 25,630
Other real estate owned, net
   4,481 3,073
Accrued interest receivable
   3,465 5,983
Cash surrender value of life insurance
   25,830 25,814
Deferred tax assets, net
   4,924 1,548
Identifiable intangible assets, net
   13,605 13,660
Other assets
   5,818 6,406


TOTAL ASSETS
   $ 1,338,134 $ 1,450,692


LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

Deposits:

Non-interest
bearing deposits
   $ 287,519 $ 276,033
Interest bearing deposits
   839,843 819,156


Total deposits
   1,127,362 1,095,189
Securities sold under agreement to repurchase
   67,286 196,272
Federal Home Loan Bank (FHLB) advances
   —   25,000
Borrowings on secured line of credit
   18,000 —
Accrued interest payable
   454 522
Deferred compensation payable
   9,875 9,665
Other liabilities
   5,583 4,496


Total liabilities
   1,228,560 1,331,144
SHAREHOLDERS’ EQUITY

Common stock, $0.20 par value:

Authorized: 22,500,000 shares

Issued and outstanding: 5,595,320 shares - June 30, 2021; 5,587,070 shares - December 31, 2020
   1,120 1,118
Additional
paid-in
capital
   18,214 18,134
Retained earnings
   97,278 96,158
Accumulated other comprehensive (loss) income, net of tax benefit (expense) of $2,340 at June 30, 2021 and ($1,376) at December 31, 2020
   (7,038 ) 4,138


Total shareholders’ equity
   109,574 119,548


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 1,338,134 $ 1,450,692

~~Table of Contents~~

~~CITIZENS HOLDING COMPANY~~

~~CONSOLIDATED STATEMENTS OF INCOME (Unaudited)~~

~~(in thousands, except per share data)~~

   For the Three Months
Ended June 30,    For the Six Months
Ended June 30,
   2021    2020    2021    2020
INTEREST INCOME

Interest and fees on loans
   $ 7,917    $ 7,632    $ 16,048    $ 15,112
Interest on securities

Taxable
   1,255    2,100    1,517    3,757
Nontaxable
   634    364    1,305    704
Other interest
   10    31    25    263








Total interest income
   9,816    10,127    18,895    19,836

INTEREST EXPENSE

Deposits
   1,186    1,612    2,452    3,581
Other borrowed funds
   136    165    316    520








Total interest expense
   1,322    1,777    2,768    4,101








NET INTEREST INCOME
   8,494    8,350    16,127    15,735

PROVISION FOR LOAN LOSSES
   232    622    319    936








NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
   8,262    7,728    15,808    14,799

OTHER INCOME

Service charges on deposit accounts
   768    668    1,582    1,717
Other service charges and fees
   1,091    871    2,066    1,644
Other operating income
   1,130    931    2,573    1,490








Total other income
   2,989    2,470    6,221    4,851








OTHER EXPENSES

Salaries and employee benefits
   4,585    4,307    9,153    8,742
Occupancy expense
   1,791    2,036    3,608    3,695
Other expense
   2,606    2,001    4,689    3,974








Total other expenses
   8,982    8,344    17,450    16,411








INCOME BEFORE PROVISION FOR INCOME TAXES
   2,269    1,854    4,579    3,239

PROVISION FOR INCOME TAXES
   362    392    775    617








NET INCOME
   $ 1,907    $ 1,462    $ 3,804    $ 2,622








NET INCOME PER SHARE -Basic
   $ 0.34    $ 0.26    $ 0.68    $ 0.47








                                -Diluted
   $ 0.34    $ 0.26    $ 0.68    $ 0.47








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


	June 30,			December 31,
	2022			2021
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	14,274		$	10,673
Interest bearing deposits with other banks		27,008			68,563

Cash and cash equivalents		41,282			79,236
Investment securities available for sale, at fair value		563,796			631,835
Loans held for investment (LHFI), net of unearned income		589,541			571,847
Less allowance for loan losses, LHFI		5,046			4,513

Net LHFI		584,495			567,334
Premises and equipment, net		26,444			26,661
Other real estate owned, net		1,328			2,475
Accrued interest receivable		4,103			4,171
Cash surrender value of life insurance		25,424			25,679
Deferred tax assets, net		33,340			6,279
Identifiable intangible assets, net		13,495			13,551
Other assets		5,374			4,088

TOTAL ASSETS	$	1,299,081		$	1,361,309

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing deposits	$	304,640		$	302,707
Interest bearing deposits		813,347			809,185

Total deposits		1,117,987			1,111,892
Securities sold under agreement to repurchase		124,162			112,760
Borrowings on secured line of credit		18,000			18,000
Accrued interest payable		389			328
Deferred compensation payable		9,715			9,543
Other liabilities		2,902			2,886

Total liabilities		1,273,155			1,255,409
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value, 22,500,000 shares authorized, Issued and outstanding: 5,603,570 shares - June 30, 2022; 5,595,320 shares - December 31, 2021		1,121			1,120
Additional paid-in capital		18,370			18,293
Accumulated other comprehensive loss, net of tax benefit of $31,162 at June 30, 2022 and $3,921 at December 31, 2021		(93,736	)		(11,795	)
Retained earnings		100,171			98,282

Total shareholders’ equity		25,926			105,900

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,299,081		$	1,361,309

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

Table of Contents

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE~~ INCOME ~~(LOSS)~~

(Unaudited)

(in ~~thousands)~~thousands, except per share data)

   For the Three Months
Ended June 30, For the Six Months
Ended June 30,
   2021 2020 2021 2020
Net income
   $ 1,907 $ 1,462 $ 3,804 $ 2,622
Other comprehensive income (loss)

Securities
available-for-sale

Unrealized holding gains (losses)
   2,927 285 (15,810 ) 8,197
Income tax effect
   (730 ) (71 ) 3,944 (2,045 )


Net unrealized gains (losses)
   2,197 214 (11,866 ) 6,152

Reclassification adjustment for gains included in net income
   393 333 919 410
Income tax effect
   (98 ) (83 ) (229 ) (102 )


Net gains included in net income
   295 250 690 308


Total other comprehensive income (loss)
   2,492 464 (11,176 ) 6,460


Comprehensive income (loss)
   $ 4,399 $ 1,926 $ (7,372 ) $ 9,082


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2022		2021		2022		2021
INTEREST INCOME
Interest and fees on loans	$	6,639	$	7,917	$	13,036	$	16,048
Interest on securities
Taxable		1,901		1,255		3,598		1,517
Nontaxable		983		634		1,930		1,305
Other interest		37		10		50		25

Total interest income		9,560		9,816		18,614		18,895
INTEREST EXPENSE
Deposits		528		1,186		1,084		2,452
Other borrowed funds		269		136		480		316

Total interest expense		797		1,322		1,564		2,768

NET INTEREST INCOME		8,763		8,494		17,050		16,127
PROVISION FOR LOAN LOSSES		56		232		149		319

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,707		8,262		16,901		15,808
OTHER INCOME
Service charges on deposit accounts		967		768		1,912		1,582
Other service charges and fees		1,094		1,091		2,119		2,066
Net gains on sales of securities		—		393		—		919
Other operating income		702		737		1,265		1,654

Total other income		2,763		2,989		5,296		6,221

OTHER EXPENSES
Salaries and employee benefits		4,412		4,585		8,851		9,153
Occupancy expense		1,711		1,791		3,486		3,608
Other expense		2,309		2,606		4,396		4,689

Total other expenses		8,432		8,982		16,733		17,450

INCOME BEFORE PROVISION FOR INCOME TAXES		3,038		2,269		5,464		4,579
PROVISION FOR INCOME TAXES		497		362		887		775

NET INCOME	$	2,541	$	1,907	$	4,577	$	3,804

NET INCOME PER SHARE -Basic	$	0.45	$	0.34	$	0.82	$	0.68

-Diluted	$	0.45	$	0.34	$	0.82	$	0.68

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

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

Table of Contents

CITIZENS HOLDING COMPANY

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~COMPREHENSIVE LOSS

(Unaudited)

(in thousands)

   For the Six Months
Ended June 30,
   2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES


Net cash provided by operating activities
   $ 12,387 $ 5,871

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from maturities and calls of securities available for sale
   114,330 135,188
Proceeds from sale of investment securities
   464,528 71,168
Purchases of investment securities available for sale
   (461,553 ) (363,823 )
Proceeds from sale of FHLB stock
   4,447 —
Purchase of FHLB Stock
   (3,943 ) —
Purchases of bank premises and equipment
   (329 ) (163 )
Proceeds from sales of bank premises and equipment
   —   124
Net change in federal funds sold
   —   1,600
Net change in interest bearing deposits with other Banks
   (40,685 ) 17,373
Proceeds from sale of other real estate
   1,774 392
Proceeds from death benefit of bank-owned life insurance
   489 —
Net change in loans
   14,262 (60,792 )


Net cash provided by (used in) investing activities
   93,320 (198,933 )

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in deposits
   32,173 176,353
Net change in securities sold under agreement to repurchase
   (128,986 ) 23,370
Proceeds from exercise of stock options
   —   86
Proceeds from borrowings on secured line of credit
   18,000 —
Payment of FHLB advances
   (25,000 ) —
Payment of dividends
   (2,684 ) (2,681 )


Net cash (used in) provided by financing activities
   (106,497 ) 197,128


Net change in cash and cash equivalents
   (790 ) 4,066

Cash and cash equivalents, beginning of period
   16,840 15,937


Cash and cash equivalents, end of period
   $ 16,050 $ 20,003


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2022			2021			2022			2021
Net income	$	2,541		$	1,907		$	4,577		$	3,804
Other comprehensive (loss) gains
Securities available-for-sale
Net unrealized holding (losses) gains		(50,978	)		2,927			(109,182	)		(15,810	)
Income tax effect		12,719			(730	)		27,241			3,944

Net unrealized (losses) gains		(38,259	)		2,197			(81,941	)		(11,866	)
Reclassification adjustment for gains included in net income		—			393			—			919
Income tax effect		—			(98	)		—			(229	)

Net gains included in net income		—			295			—			690

Total other comprehensive (loss) gain		(38,259	)		2,492			(81,941	)		(11,176	)

Comprehensive (loss) gain	$	(35,718	)	$	4,399		$	(77,364	)	$	(7,372	)

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

Table of Contents

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	For the Six Months
	Ended June 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities	$	6,778		$	12,387
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities available for sale		28,258			114,330
Proceeds from sale of investment securities		—			464,528
Purchases of investment securities available for sale		(71,190	)		(461,553	)
Purchases of bank premises and equipment		(479	)		(329	)
Purchases of Federal Home Loan Bank (FHLB) stock		(784	)		(3,943	)
Proceeds from the sale of FHLB stock		—			4,447
Proceeds from sale of other real estate owned		1,151			1,774
Proceeds from death benefit of bank-owned life insurance		813			489
Net change in loans		(17,310	)		14,262

Net cash (used in) provided by investing activities		(59,541	)		134,005
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		6,095			32,173
Net change in securities sold under agreement to repurchase		11,402			(128,986	)
Proceeds from borrowings on secured line of credit		—			18,000
Payment of FHLB advances		—			(25,000	)
Payment of dividends		(2,688	)		(2,684	)

Net cash provided by (used in) financing activities		14,809			(106,497	)

Net (decrease) increase in cash and cash equivalents		(37,954	)		39,895
Cash and cash equivalents, beginning of period		79,236			42,308

Cash and cash equivalents, end of period	$	41,282		$	82,203

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

Table of Contents

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, ~~2021~~2022

(Unaudited)

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,~~an affiliate, 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 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 three separate stimulus bills, including the CARES Act, the Consolidated Appropriations Act, and the American Rescue Plan Act totaling approximately $4.8 trillion. The goal of these are 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 packages also include extensive emergency funding for hospitals and providers. In addition to the general impact of

~~COVID-19,~~

~~certain provisions of the these acts as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.~~

~~The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain~~

~~COVID-19~~

escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of

~~COVID-19,~~

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

~~Table of Contents~~

~~Financial position and results of operations~~

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

~~COVID-19. Due~~

~~to the amount of stimulus and unemployment measures from the federal government, overdraft fees continue to be reduced significantly from~~

~~pre-pandemic~~

~~levels. 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.~~

~~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 have been adversely impacted due to loss of fee income, net interest margin compression along with the significant increase in assets from all the federal government stimulus. For a detailed discussion of the Company’s capital ratios see Capital Resources on page 43.

The Company maintains access to multiple sources of liquidity. If an extended recession causes 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, and rates for short term funding have recently been at historic lows. If funding costs start to elevate, 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. 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.

~~The impact from~~

~~COVID-19~~

could cause a decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a

~~non-cash~~

~~charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.~~

~~Table of Contents~~

~~Lending operations and accommodations to borrowers~~

~~(dollar amounts in thousands)~~

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 originated before June 5, 2020 have a

~~two-year~~

term while PPP loans originated after June 5, 2020 have a five-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 currently has 610 loans with a total balance of $21,642 outstanding at June 30, 2021. 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.

~~Credit~~

~~The Company has worked with customers directly affected by~~

~~COVID-19. The~~

Company offered short-term assistance in accordance with regulatory guidelines. However, as of June 30, 2021, the Company had no customer with deferments. While this is a positive trend, the Company makes no representations that there could not be future credit losses related to

~~COVID-19.~~

Basis of Presentation

These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended June 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole.

The interim consolidated financial statements of ~~Citizens Holding~~the Company ~~(the “Company”)~~ include the accounts of its ~~wholly-owned~~wholly owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” ~~and collectively with the Company, the “Company”~~). ~~In addition to full service commercial banking, the Bank offers title insurance services through its subsidiary, Title Services LLC.~~ All significant intercompany transactions have been eliminated in consolidation.

For further information and significant accounting policies of the Company, see the Notes to Consolidated Financial Statements of Citizens Holding Company included in the Company’s Annual Report on Form

10-K

for the year ended December 31, ~~2020,~~2021, filed with the Securities and Exchange Commission on March ~~12, 2021.~~11, 2022.

Table of Contents

Estimates

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

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, or other real estate owned (“OREO”). 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.

~~Adoption of New Accounting Standards~~

~~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. ASU

~~2019-12~~

~~was effective for the Company on January 1, 2021 and did not have a material impact on the Company’s financial statements.~~

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)~~(“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

~~Table of Contents~~

2016-13

are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU

2016-13

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

2016-13

permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of financial assets with similar risk characteristics, the Company currently plans on implementing a ~~PD/LGD~~

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discounted cash flow 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 is required to determine the ~~impact~~

impa

ct that adoption of this standard will have on the

financial ~~condition~~c

ondition and results of operations of the Company.

Note 2. Commitments and Contingent Liabilities

(in thousands)

In the ordinary course of business, the Company enters into commitments to extend credit to its customers. The unused portion of these commitments is not reflected in the accompanying financial statements. As of June 30, ~~2021,~~2022, the Company had entered into loan commitments with certain customers with an aggregate unused balance of ~~$131,792~~$95,059 compared to an aggregate unused balance of ~~$138,185~~$112,292 at December 31, ~~2020.~~2021. There were ~~$4,437~~$5,432 of letters of credit outstanding at June 30, ~~2021~~2022 and ~~$4,565~~$4,432 at December 31, ~~2020.~~2021. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Company does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.

The Company is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provisions are made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the present time, management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not likely have a material impact on the Company’s consolidated financial condition or results of operations.

~~Table of Contents~~

Note 3. Net Income per Share

(in thousands, except share and per share data)

Net income per ~~share -~~ share—basic has been computed based on the weighted average number of shares outstanding during each period. Net income per ~~share -~~ share—diluted has been computed based on the weighted average number of shares outstanding during each period plus the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Net income per share was computed as follows:

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	For the Three Months Ended June 30,				For the Six Months Ended June 30,				For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Basic weighted average shares outstanding		5,584,441		5,580,340		5,581,662		5,573,515		5,592,782		5,584,441		5,589,958		5,581,662
Dilutive effect of granted options		240		3,449		596		2,824		—		240		—		596

Diluted weighted average shares outstanding		5,584,681		5,583,789		5,582,258		5,576,339		5,592,782		5,584,681		5,589,958		5,582,258

Net income	$	1,907	$	1,462	$	3,804	$	2,622	$	2,541	$	1,907	$	4,577	$	3,804
Net income per share-basic	$	0.34	$	0.26	$	0.68	$	0.47	$	0.45	$	0.34	$	0.82	$	0.68
Net income per share-diluted	$	0.34	$	0.26	$	0.68	$	0.47	$	0.45	$	0.34	$	0.82	$	0.68

Note 4. Equity Compensation Plans

(in thousands, except per share data)

The Company has adopted the 2013 Incentive Compensation Plan (the “2013 Plan”), which the Company intends to use for future equity grants to employees, directors or consultants until the termination or expiration of the 2013 Plan.

Prior to the adoption of the 2013 Plan, the Company issued awards to directors from the 1999 Directors’ Stock Compensation Plan (the “Directors’ Plan”), which has expired.

~~Table of Contents~~

The following table is a summary of the stock option activity for the six months ended June 30, ~~2021:~~2022:


	Directors’ Plan					2013 Plan				Directors’ Plan					2013 Plan
	Number of Shares			Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2020		19,500		$	19.42		0	$	0
Outstanding at December 31, 2021											9,000		$	18.76		—	$	—
Granted		0			0		0		0		—			—		—		—
Exercised		0			0		0		0		—			—		—		—
Expired		(10,500	)		20.02		0		0		(9,000	)		18.76		—		—

Outstanding at June 30, 2021		9,000		$	18.76		0	$	0
Outstanding at June 30, 2022											—		$	—		—	$	—

The ~~intrinsic value of~~remaining outstanding options ~~outstanding~~ under the Directors’ Plan ~~at June 30, 2021, was~~

~~$-0-.~~

expired on April 25, 2022. No options were outstanding under the 2013 Plan as of June 30, ~~2021.~~2022.

During ~~2021,~~2022, the Company’s directors received restricted stock grants totaling 8,250 shares of common stock under the 2013 Plan. These grants vest over a

one-year

period ending April ~~28, 2022~~27, 2023 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was ~~$156~~$157 and ~~will be~~is expensed ratably over the

one-year

vesting period.

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Note 5. Income Taxes

(in thousands)

For the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded a provision for income taxes totaling ~~$362~~$497 and ~~$392,~~$362, respectively. The effective tax rate was ~~15.95%~~16.36% and ~~21.14%~~15.95% for the three months ending June 30, 2022 and 2021, ~~and 2020,~~ respectively.

For the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recorded a provision for income taxes totaling ~~$775~~$887 and ~~$617,~~$775, respectively. The effective tax rate was ~~16.93%~~16.23% and ~~19.05%~~16.93% for the six months ending June 30, 2022 and 2021, ~~and 2020,~~ respectively.

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

~~Table of Contents~~

Note 6. 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 were as follows:


June 30, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S.
Government agencies	$	4,970	$	—	$	981	$	3,989
Mortgage backed securities		441,600		—		68,391		373,209
State, County, Municipals		241,673		7		55,532		186,148
Other securities		500		—		50		450

Total	$	688,743	$	7	$	124,954	$	563,796


December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available-for-sale
Obligations of U.S.
Government agencies	$	4,969	$	—	$	269	$	4,700
Mortgage backed securities		411,729		42		12,180		399,591
State, County, Municipals		230,359		700		4,008		227,051
Other securities		500		—		7		493

Total	$	647,557	$	742	$	16,464	$	631,835

      Gross    Gross
June 30, 2021    Amortized    Unrealized    Unrealized    Estimated
   Cost    Gains    Losses    Fair Value
Securities
available-for-sale

Obligations of U.S. Government agencies
   $ 4,969    $ 0      $ 192    $ 4,777
Mortgage backed securities
   420,760    239    8,610    412,389
State, County, Municipals
   125,818    837    1,650    125,005
Other Securities
   500    0      0      500








Total
   $ 552,047    $ 1,076    $ 10,452    $ 542,671








      Gross    Gross
December 31, 2020    Amortized    Unrealized    Unrealized    Estimated
   Cost    Gains    Losses    Fair Value
Securities
available-for-sale

Obligations of U.S. Government agencies
   $ 11,870    $ 191    $ 0      $ 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    0      508








Total
   $ 673,226    $ 8,159    $ 2,636    $ 678,749

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At June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, securities with a carrying value of ~~$392,018~~$546,919 and ~~$558,955,~~$371,190, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

~~Table of Contents~~

The amortized cost and estimated fair value of securities by contractual maturity at June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.


	June 30, 2021				December 31, 2020
	Amortized		Estimated		Amortized		Estimated		June 30, 2022				December 31, 2021
	Cost		Fair Value		Cost		Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available-for-sale
Due in one year or less	$	218	$	220	$	—	$	—	$	223	$	222	$	216	$	217
Due after one year through five years		2,247		2,286		3,594		3,701		2,501		2,418		1,895		1,924
Due after five years through ten years		2,821		2,884		20,538		21,446		4,614		4,277		4,226		4,287
Due after ten years		126,001		124,892		89,061		91,619		239,805		183,670		229,491		225,816
Residential mortgage backed securities		420,760		412,389		536,215		537,027		365,333		311,168		332,779		323,736
Commercial mortgage backed securities		0		0		23,818		24,956		76,267		62,041		78,950		75,855

Total	$	552,047	$	542,671	$	673,226	$	678,749	$	688,743	$	563,796	$	647,557	$	631,835

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

available-for-sale

investments, aggregated by investment category and length of time that individual investments were in a continuous loss position at June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

A summary of unrealized loss information for securities

available-for-sale,

categorized by security type follows:


June 30, 2022	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	—	$	—	$	3,989	$	981	$	3,989	$	981
Mortgage backed securities		131,733		18,489		241,474		49,902		373,207		68,391
State, County, Municipal		153,946		40,021		31,221		15,511		185,167		55,532

Total	$	285,679	$	58,510	$	276,684	$	66,394	$	562,363	$	124,904


December 31, 2021	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	4,700	$	269	$	—	$	—	$	4,700	$	269
Mortgage backed securities		376,644		11,535		19,986		645		396,630		12,180
State, County, Municipal		175,520		3,997		119		11		175,639		4,008

Total	$	556,864	$	15,801	$	20,105	$	656	$	576,969	$	16,457

June 30, 2021    Less than 12 months    12 months or more    Total
   Fair    Unrealized    Fair    Unrealized    Fair    Unrealized
Description of Securities
   Value    Losses    Value    Losses    Value    Losses
Obligations of U.S. government agencies
   $ 4,777    $ 192    $ 0      $ 0      $ 4,777    $ 192
Mortgage backed securities
   370,942    8,610    0      0      370,942    8,610
State, County, Municipal
   78,987    1,650    0      0      78,987    1,650












Total
   $ 454,706    $ 10,452    $ 0      $ 0      $ 454,706    $ 10,452












December 31, 2020    Less than 12 months    12 months or more    Total
   Fair    Unrealized    Fair    Unrealized    Fair    Unrealized
Description of Securities
   Value    Losses    Value    Losses    Value    Losses
Mortgage backed securities
   $ 278,162    $ 2,600    $ 0      $ 0      $ 278,162    $ 2,600
State, County, Municipal
   6,541    36    0      0      6,541    36












Total
   $ 284,703    $ 2,636    $ 0      $ 0      $ 284,703    $ 2,636

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The Company’s unrealized losses on its obligations of United States government agencies, ~~mortgage backed~~mortgage-backed securities, other securities and state, county and municipal bonds are the result of an upward trend in interest rates since purchase, mainly in the

mid-term

sector. None of the unrealized losses disclosed in the previous table are related to credit deterioration. The Company does not intend to sell any securities in an unrealized loss position that it holds, and it is not more likely than not that the Company will be required to sell any such security prior to the recovery of its amortized cost basis, which may be at maturity. The Company has determined that none of the securities were other-than-temporarily impaired at June 30, ~~2021~~2022 nor at December 31, ~~2020.~~2021.

~~Table of Contents~~

Note 7. ~~Non Purchased~~ Loans held for investment

(in thousands, except number of loans)

“Purchased” loans are those acquired in any of the Company’s previous acquisitions. “Non Purchased” loans include all of the Company’s other loans. For purposes of Note 7, all references to “loans” mean non purchased loans.

The composition of net loans at June 30, ~~2021~~2022 and December 31, ~~2020~~2021 was as follows:

   June 30, 2021    December 31, 2020
Real Estate:

Land Development and Construction
   $ 66,633    $ 42,677
Farmland
   13,917    15,616
1-4
Family Mortgages
   87,208    94,280
Commercial Real Estate
   294,876    306,875




Total Real Estate Loans
   462,634    459,448

Business Loans:

Commercial and Industrial Loans
(1)
   107,302    115,679
Farm Production and Other Farm Loans
   455    541




Total Business Loans
   107,757    116,220

Consumer Loans:

Credit Cards
   1,875    1,878
Other Consumer Loans
   10,856    10,929




Total Consumer Loans
   12,731    12,807




Total Gross Loans
   583,122    588,475

Unearned Income
   0      (1 )
Allowance for Loan Losses
   (4,351 )    (4,735 )




Loans, net
   $ 578,771    $ 583,739


	June 30, 2022			December 31, 2021
Real Estate:
Land Development and Construction	$	89,352		$	71,898
Farmland		11,975			13,114
1-4 Family Mortgages		94,093			98,525
Commercial Real Estate		287,542			281,239

Total Real Estate Loans		482,962			464,776
Business Loans:
Commercial and Industrial Loans (1)		90,799			92,501
Farm Production and Other Farm Loans		518			621

Total Business Loans		91,317			93,122
Consumer Loans:
Credit Cards		2,450			1,963
Other Consumer Loans		12,812			11,986

Total Consumer Loans		15,262			13,949

Total Gross Loans		589,541			571,847
Allowance for Loan Losses		(5,046	)		(4,513	)

Loans, net	$	584,495		$	567,334

(1)	Includes PPP loans of ~~$21,642~~$1,356 and ~~$29,523~~$5,789 as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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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 nonaccrual 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 nonaccrual 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.

Period-end,

nonaccrual loans, segregated by class, were as follows:


	June 30, 2022		December 31, 2021
Real Estate:
Land Development and Construction	$	156	$	171
Farmland		104		118
1-4 Family Mortgages		1,801		1,891
Commercial Real Estate		1,244		1,249

Total Real Estate Loans		3,305		3,429
Business Loans:
Commercial and Industrial Loans		271		386
Farm Production and Other Farm Loans		1		3

Total Business Loans		272		389
Consumer Loans:
Other Consumer Loans		3		8

Total Consumer Loans		3		8

Total Nonaccrual Loans	$	3,580	$	3,826

   June 30, 2021    December 31, 2020
Real Estate:

Land Development and Construction
   $ 185    $ 308
Farmland
   191    287
1-4
Family Mortgages
   1,844    1,809
Commercial Real Estate
   1,736    5,600




Total Real Estate Loans
   3,956    8,004

Business Loans:

Commercial and Industrial Loans
   323    413
Farm Production and Other Farm Loans
   6    9




Total Business Loans
   329    422

Consumer Loans:

Other Consumer Loans
   21    33




Total Consumer Loans
   21    33




Total Nonaccrual Loans
   $ 4,306    $ 8,459

Table of Contents

An aging analysis of past due loans, segregated by class, as of June 30, ~~2021,~~2022, was as follows:


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days		Total Past		Current		Total		Days
	Past Due		Past Due		Due Loans		Loans		Loans		Past Due		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	$	10	$	—	$	10	$	66,623	$	66,633	$	—	$	1,192	$	—	$	1,192	$	88,160	$	89,352	$	—
Farmland		101		0		101		13,816		13,917		0		143		—		143		11,832		11,975		—
1-4 Family Mortgages		1,247		19		1,266		85,942		87,208		—		1,768		274		2,042		92,051		94,093		56
Commercial Real Estate		941		573		1,514		293,362		294,876		—		457		646		1,103		286,439		287,542		—

Total Real Estate Loans		2,299		592		2,891		459,743		462,634		0		3,560		920		4,480		478,482		482,962		56

Business Loans:
Commercial and Industrial Loans		70		327		397		106,905		107,302		4		2,235		266		2,501		88,298		90,799		—
Farm Production and Other Farm Loans		0		—		0		455		455		—		—		—		—		518		518		—

Total Business Loans		70		327		397		107,360		107,757		4		2,235		266		2,501		88,816		91,317		—

Consumer Loans:
Credit Cards		38		1		39		1,836		1,875		1		15		8		23		2,427		2,450		8
Other Consumer Loans		32		2		34		10,822		10,856		—		25		—		25		12,787		12,812		—

Total Consumer Loans		70		3		73		12,658		12,731		1		40		8		48		15,214		15,262		8

Total Loans	$	2,439	$	922	$	3,361	$	579,761	$	583,122	$	5	$	5,835	$	1,194	$	7,029	$	582,512	$	589,541	$	64

1613

Table of Contents

An aging analysis of past due loans, segregated by class, as of December 31, ~~2020~~2021 was as follows:


											Accruing
			Loans								Loans
	Loans		90 or more								90 or more
	30-89 Days		Days		Total Past		Current		Total		Days
	Past Due		Past Due		Due Loans		Loans		Loans		Past Due		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	$	—	$	6	$	—	$	6	$	71,892	$	71,898	$	—
Farmland		183		75		258		15,358		15,616		—		130		33		163		12,951		13,114		—
1-4 Family Mortgages		1,301		246		1,547		92,733		94,280		—		1,678		292		1,970		96,555		98,525		140
Commercial Real Estate		1,407		700		2,107		304,768		306,875		—		157		570		727		280,512		281,239		—

Total Real Estate Loans		3,003		1,021		4,024		455,424		459,448		—		1,971		895		2,866		461,910		464,776		140

Business Loans:
Commercial and Industrial Loans		97		405		502		115,177		115,679		5		205		376		581		91,920		92,501		—
Farm Production and Other Farm Loans		2		—		2		539		541		—		3		—		3		618		621		—

Total Business Loans		99		405		504		115,716		116,220		5		208		376		584		92,538		93,122		—

Consumer Loans:
Credit Cards		25		9		34		1,844		1,878		9		35		12		47		1,916		1,963		12
Other Consumer Loans		66		—		66		10,863		10,929		—		76		2		78		11,908		11,986		2

Total Consumer Loans		91		9		100		12,707		12,807		9		111		14		125		13,824		13,949		14

Total Loans	$	3,193	$	1,435	$	4,628	$	583,847	$	588,475	$	14	$	2,290	$	1,285	$	3,575	$	568,272	$	571,847	$	154

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

charged-off

when deemed uncollectible.

Table of Contents

Impaired loans as of June 30, 2022, segregated by class, were as follows:


	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	156	$	156	$	—	$	156	$	—	$	164
Farmland		32		32		—		32		—		33
1-4 Family Mortgages		570		570		—		570		—		669
Commercial Real Estate		4,213		4,051		—		4,051		—		2,591

Total Real Estate Loans		4,971		4,809		—		4,809		—	$	3,457
Business Loans:
Commercial and Industrial Loans		304		196		—		196		—	$	214

Total Business Loans		304		196		—		196		—	$	214

Total Loans	$	5,275	$	5,005	$	—	$	5,005	$	—	$	3,671

Impaired loans as of December 31, 2021, segregated by class, were as follows:

      Recorded    Recorded
   Unpaid    Investment    Investment    Total       Average
   Principal    With No    With    Recorded    Related    Recorded
   Balance    Allowance    Allowance    Investment    Allowance    Investment
Real Estate:

Land Development and Construction
   $ 185    $ 185    $ —      $ 185    $ —      $ 247
Farmland
   34    34    —      34    —      73
1-4
Family Mortgages
   962    962    —      962    —      989
Commercial Real Estate
   2,687    2,051    114    2,165    3    3,996












Total Real Estate Loans
   3,868    3,232    114    3,346    3    5,305

Business Loans:

Commercial and Industrial Loans
   304    72    160    232    36    323












Total Business Loans
   304    72    160    232    36    323












Total Loans
   $ 4,172    $ 3,304    $ 274    $ 3,578    $ 39    $ 5,628

~~Impaired loans as of December 31, 2020, segregated by class, were as follows:~~


	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Real Estate:
Land Development and Construction	$	171	$	171	$	—	$	171	$	—	$	240
Farmland		33		33		—		33		—		72
1-4 Family Mortgages		767		767		—		767		—		892
Commercial Real Estate		1,294		1,019		112		1,131		3		3,479

Total Real Estate Loans		2,265		1,990		112		2,102		3	$	4,683
Business Loans:
Commercial and Industrial Loans		304		72		160		232		36	$	323

Total Business Loans		304		72		160		232		36	$	323

Total Loans	$	2,569	$	2,062	$	272	$	2,334	$	39	$	5,006

      Recorded    Recorded
   Unpaid    Investment    Investment    Total       Average
   Principal    With No    With    Recorded    Related    Recorded
   Balance    Allowance    Allowance    Investment    Allowance    Investment
Real Estate:

Land Development and Construction
   $ 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 Loans:

Commercial and Industrial Loans
   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

Table of Contents

The Company did not have any new troubled debt restructurings ~~for the six months ended~~as of June 30, ~~2021~~2022 or ~~June 30, 2020.~~December 31, 2021.

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


	Number		Recorded			Number of Loans		Recorded Investment
	of Loans		Investment
Totals at January 1, 2020		3	$	2,495
Reductions due to:
Principal paydowns				(382	)

Totals at December 31, 2020		3	$	2,113
Totals at January 1, 2021							3	$	2,113
Reductions due to:
Principal paydowns				(64	)				(112	)
Reclassification to OREO		2		(1,788	)		2		(1,788	)

Total at June 30, 2021		1	$	261
Totals at December 31, 2021							1	$	213
Reductions due to:
Principal paydowns									(48	)

Total at June 30, 2022							1	$	165

The allocated allowance for loan losses attributable to restructured loans was

$-0-

at June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The Company had no commitments to lend additional funds on this troubled debt ~~restructurings~~restructuring as of June 30, ~~2021.~~

2022.

Table of Contents

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 ~~the majority~~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~~not align with peers.

Grade 5. MANAGEMENT ATTENTION - Borrower has ~~significant~~potential 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~~Bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss.

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

~~Table of Contents~~

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

Table of Contents

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

These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at June 30, ~~2021.~~2022.

The following table details the amount of gross loans, segregated by loan grade and class, as of June 30, ~~2021:~~2022:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans		Satisfactory 1,2,3,4		Special Mention 5,6		Substandard 7		Doubtful 8		Loss 9		Total Loans
Real Estate:
Land Development and Construction	$	65,232	$	771	$	630	$	—	$	—	$	66,633	$	87,435	$	1,750	$	167	$	—	$	—	$	89,352
Farmland		13,212		167		538		—		—		13,917		11,324		283		368		—		—		11,975
1-4 Family Mortgages		79,085		2,654		5,469		—		—		87,208		87,211		2,091		4,791		—		—		94,093
Commercial Real Estate		251,312		7,929		35,635		—		—		294,876		244,720		5,851		36,971		—		—		287,542

Total Real Estate Loans		408,841		11,521		42,272		—		—		462,634		430,690		9,975		42,297		—		—		482,962

Business Loans:
Commercial and Industrial Loans		101,184		901		5,214		—		3		107,302		87,881		696		2,222		—		—		90,799
Farm Production and Other Farm Loans		433		—		16		—		6		455		511		—		6		—		1		518

Total Business Loans		101,617		901		5,230		—		9		107,757		88,392		696		2,228		—		1		91,317

Consumer Loans:
Credit Cards		1,836		—		39		—		—		1,875		2,432		—		18		—		—		2,450
Other Consumer Loans		10,750		63		28		13		2		10,856		12,760		12		40		—		—		12,812

Total Consumer Loans		12,586		63		67		13		2		12,731		15,192		12		58		—		—		15,262

Total Loans	$	523,044	$	12,485	$	47,569	$	13	$	11	$	583,122	$	534,274	$	10,683	$	44,583	$	—	$	1	$	589,541

Table of Contents

The following table details the amount of gross loans segregated by loan grade and class, as of December 31, ~~2020:~~2021:


			Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans		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	$	69,758	$	1,547	$	593	$	—	$	—	$	71,898
Farmland		14,801		95		720		—		—		15,616		12,365		297		452		—		—		13,114
1-4 Family Mortgages		85,203		3,210		5,867		—		—		94,280		89,120		3,590		5,815		—		—		98,525
Commercial Real Estate		258,339		35,769		12,767		—		—		306,875		238,561		8,055		34,623		—		—		281,239

Total Real Estate Loans		400,118		39,194		20,136		—		—		459,448		409,804		13,489		41,483		—		—		464,776

Business Loans:
Commercial and Industrial Loans		109,525		4,409		1,738		—		7		115,679		85,138		1,483		5,877		—		3		92,501
Farm Production and Other Farm Loans		512		—		20		—		9		541		606		—		12		—		3		621

Total Business Loans		110,037		4,409		1,758		—		16		116,220		85,744		1,483		5,889		—		6		93,122

Consumer Loans:
Credit Cards		1,845		—		33		—		—		1,878		1,916		—		47		—		—		1,963
Other Consumer Loans		10,820		43		41		25		—		10,929		11,903		20		58		3		2		11,986

Total Consumer Loans		12,665		43		74		25		—		12,807		13,819		20		105		3		2		13,949

Total Loans	$	522,820	$	43,646	$	21,968	$	25	$	16	$	588,475	$	509,367	$	14,992	$	47,477	$	3	$	8	$	571,847

~~Table of Contents~~

~~Note 8. Purchased Loans~~

~~(in thousands)~~

~~For purposes of this Note 8, all references to “loans” means purchased loans.~~

~~The following is a summary of purchased loans:~~

   June 30, 2021    December 31, 2020
Real Estate:

Land Development and Construction
   $ 5,152    $ 6,153
Farmland
   388    520
1-4
Family Mortgages
   18,197    23,306
Commercial Real Estate
   21,188    24,237




Total Real Estate Loans
   44,925    54,216

Business Loans:

Commercial and Industrial Loans
   5,099    7,871
Farm Production and Other Farm Loans
   226    755




Total Business Loans
   5,325    8,626

Consumer Loans:

Other Consumer Loans
   670    940




Total Consumer Loans
   670    940




Total Purchased Loans
   $ 50,920    $ 63,782

Table of Contents

~~Period-end,~~

~~nonaccrual loans, segregated by class, were as follows:~~

   June 30, 2021    December 31, 2020
Real Estate:

1-4
Family Mortgages
   $ 45    $ 73




Total Real Estate Loans
   45    73

Business Loans:

Commercial and Industrial Loans
   15    18




Total Business Loans
   15    18

Consumer Loans:

Other Consumer Loans
   0      14




Total Consumer Loans
   0      14




Total Nonaccrual Loans
   $ 60    $ 105

~~An age analysis of past due loans, segregated by class of loans, as of June 30, 2021, is as follows:~~

                  Accruing
      Loans             Loans
   Loans    90 or more             90 or more
   30-89 Days    Days    Total Past    Current    Total    Days
   Past Due    Past Due    Due Loans    Loans    Loans    Past Due
Real Estate:

Land Development and Construction
   $ —      $ —      $ —      $ 5,152    $ 5,152    $ —
Farmland
   —      —      —      388    388    —
1-4
Family Mortgages
   347    0      347    17,850    18,197    0
Commercial Real Estate
   336    —      336    20,852    21,188    —












Total Real Estate Loans
   683    0      683    44,242    44,925    0

Business Loans:

Commercial and Industrial Loans
   47    —      47    5,052    5,099    —
Farm Production and Other Farm Loans
   —      —      —      226    226    —












Total Business Loans
   47    —      47    5,278    5,325    —

Consumer Loans:

Other Consumer Loans
   11    —      11    659    670    —












Total Consumer Loans
   11    —      11    659    670    —












Total Loans
   $ 741    $ 0      $ 741    $ 50,179    $ 50,920    $ 0

~~Table of Contents~~

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

                  Accruing
      Loans             Loans
   Loans    90 or more             90 or more
   30-89 Days    Days    Total Past    Current    Total    Days
   Past Due    Past Due    Due Loans    Loans    Loans    Past Due
Real Estate:

Land Development and Construction
   $ 332    $ —      $ 332    $ 5,821    $ 6,153    $ —
Farmland
   —      —      —      520    520    —
1-4
Family Mortgages
   401    —      401    22,905    23,306    —
Commercial Real Estate
   0      —      0      24,237    24,237    —












Total Real Estate Loans
   733    —      733    53,483    54,216    —

Business Loans:

Commercial and Industrial Loans
   849    0      849    7,022    7,871    —
Farm Production and Other Farm Loans
   —      —      —      755    755    —












Total Business Loans
   849    0      849    7,777    8,626    —

Consumer Loans:

Other Consumer Loans
   35    0      35    905    940    —












Total Consumer Loans
   35    0      35    905    940    —












Total Loans
   $ 1,617    $ 0      $ 1,617    $ 62,165    $ 63,782    $ —

~~Table of Contents~~

~~The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of June 30, 2021:~~

   Satisfactory
1,2,3,4    Special
Mention
5,6    Substandard
7    Doubtful
8    Loss
9    Total
Loans
Real Estate:

Land Development and Construction
   $ 4,396    $ 744    $ 12    $ —      $ —      $ 5,152
Farmland
   231    157    —      —      —      388
1-4
Family Mortgages
   15,788    1,847    562    —      —      18,197
Commercial Real Estate
   19,731    1,176    281    —      —      21,188












Total Real Estate Loans
   40,146    3,924    855    —      —      44,925

Business Loans:

Commercial and Industrial Loans
   4,549    434    116    —      —      5,099
Farm Production and Other Farm Loans
   226    —      —      —      —      226












Total Business Loans
   4,775    434    116    —      —      5,325

Consumer Loans:

Other Consumer Loans
   639    0      31    —      0      670












Total Consumer Loans
   639    0      31    —      0      670












Total Loans
   $ 45,560    $ 4,358    $ 1,002    $ —      $ 0      $ 50,920

~~The following table details the amount of gross loans by loan grade, which are consistent with the Company’s loan grades, and class as of December 31, 2020:~~

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

~~Table of Contents~~

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

   June 30,
2021    December 31,
2020
Real Estate:

Land Development and Construction
   $ —      $ 8
1-4
Family Mortgages
   —      25




Total Real Estate Loans
   0      33




Business Loans:

Commercial and Industrial Loans
   308    305




Total Business Loans
   308    305




Total Purchased Credit Deteriorated Loans
   $ 308    $ 338

~~Nonaccrual loans of~~

~~$-0-~~

~~and $25 are included in the~~

~~1-4~~

~~Family Mortgages at June 30, 2021 and December 31, 2020, 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

~~There were no purchased loans classified as TDRs as of the six months ended June 30, 2021, or June 30, 2020.~~

~~Table of Contents~~

Note 9.8. Allowance for Loan Losses

(in thousands)

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

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

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

The following table details activity in the allowance for loan losses by portfolio segment for the ~~three~~six months ended June 30, ~~2021:~~2022:

   Real
Estate    Business
Loans    Consumer    Total
Balance, January 1, 2021
   $ 3,885    $ 611    $ 239    $ 4,735
Provision for loan losses
   138    181    0      319
Charge-offs
   623    175    49    847
Recoveries
   84    10    50    144








Net charge-offs (recoveries)
   539    165    (1 )    703








Balance, June 30, 2021
   $ 3,484    $ 627    $ 240    $ 4,351








Period end allowance allocated to:

Loans individually evaluated for impairment
   $ 3    $ 36    $ —      $ 39
Loans collectively evaluated for impairment
   3,481    591    240    4,312








Balance, June 30, 2021
   $ 3,484    $ 627    $ 240    $ 4,351


	Real			Business
June 30, 2022	Estate			Loans		Consumer			Total
Beginning Balance, January 1, 2022	$	3,622		$	645	$	246		$	4,513
Provision for (reversal of) loan losses		251			65		(167	)		149
Chargeoffs		1			56		46			103
Recoveries		110			20		357			487

Net (recoveries) chargeoffs		(109	)		36		(311	)		(384	)

Ending Balance	$	3,982		$	674	$	390		$	5,046

Period end allowance allocated to:
Loans individually evaluated for impairment	$	—		$	—	$	—		$	—
Loans collectively evaluated for impairment		3,982			674		390			5,046

Ending Balance, June 30, 2022	$	3,982		$	674	$	390		$	5,046

Table of Contents

The following table details activity in the allowance for loan losses by portfolio segment for the ~~three~~six months ended June 30, ~~2020:~~2021:


	Real Estate		Business Loans		Consumer		Total		Real		Business
Balance, January 1, 2020	$	3,075	$	371	$	309	$	3,755
June 30, 2021									Estate		Loans		Consumer			Total
Beginning Balance, January 1, 2021									$	3,885	$	611	$	239		$	4,735
Provision for loan losses		550		280		106		936		138		181		—			319
Charge-offs		265		210		65		540
Chargeoffs										623		175		49			847
Recoveries		59		28		19		106		84		10		50			144

Net charge-offs		206		182		46		434
Net chargeoffs (recoveries)										539		165		(1	)		703

Balance, June 30, 2020	$	3,419	$	469	$	369	$	4,257
Ending Balance									$	3,484	$	627	$	240		$	4,351

Period end allowance allocated to:
Loans individually evaluated for impairment	$	720	$	165	$	—	$	885	$	3	$	36	$	—		$	39
Loans collectively evaluated for impairment		2,699		304		369		3,372		3,481		591		240			4,312

Balance, June 30, 2020	$	3,419	$	469	$	369	$	4,257
Ending Balance, June 30, 2021									$	3,484	$	627	$	240		$	4,351

The Company’s recorded investment in loans as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021 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:


June 30, 2021	Real Estate		Business Loans		Consumer		Total
									Real		Business
June 30, 2022									Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	3,346	$	232	$	—	$	3,578	$	4,809	$	196	$	—	$	5,005
Loans collectively evaluated for general impairment		504,213		112,542		13,401		630,156		478,153		91,121		15,262		584,536
Acquired with deteriorated credit quality		0		308		—		308

	$507,559		$113,082		$13,401		$634,042		$	482,962	$	91,317	$	15,262	$	589,541


December 31, 2020	Real Estate		Business Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	7,262	$	413	$	—	$	7,675
Loans collectively evaluated for general 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


	Real		Business
December 31, 2021	Estate		Loans		Consumer		Total
Loans individually evaluated for specific impairment	$	2,102	$	232	$	—	$	2,334
Loans collectively evaluated for general impairment		462,674		92,890		13,949		569,513

	$	464,776	$	93,122	$	13,949	$	571,847

2921

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~~Note 10. Premises and Equipment~~

~~(in thousands)~~

~~The Company leases certain premises and equipment under operating leases. As of June 30, 2021, the Company had lease liabilities and~~

~~Right-of-Use~~

(“ROU”) assets totaling $2,521 related to these leases. Lease liabilities and ROU assets are reflected in other liabilities and other assets, respectively. For the six months ended June 30, 2021, the weighted average remaining lease term for operating leases was 1 year and the weighted average discount rate used in the measurement of operating lease liabilities was 3.26%.

~~Lease costs were as follows:~~

Three
Months
Ended
June 30,
2021

Six
Months
Ended
June 30,
2021

(in thousands)

Operating lease cost
   $ 117    $ 233
Short-term lease cost
   6    12
Variable lease cost
   0—      —




   $ 123    $ 245

~~There were no sale and leaseback transactions, leverage leases or lease transactions with related parties during the six months ended June 30, 2021.~~

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

As of
June 30,
2021

(in thousands)

Lease payments due:

Within one year
   $ 2,137
After one year but within two years
   102
After two years but within three years
   63
After three year but within four years
   64
After four years but within five years
   66
After five years
   106


Total undiscounted cash flows
   2,538
Discount on cash flows
   (17 )


Total lease liability
   $ 2,521

~~Table of Contents~~

~~Note 11. Other Intangible Assets~~

~~(in thousands)~~

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

June 30,
2021

December 31,
2020

Core deposit intangible
   $ 630    $ 739
Accumulated amortization
   (55 )    (109 )




Total finite-lived intangible assets
   $ 575    $ 630

Core deposit intangible amortization expense for the period ended June 30, 2021 and period ended December 31, 2020 was $55 and $109, 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
   $ 54
2022
   109
2023
   109
2024
   109
2025
   109
Thereafter
   85



$ 575

~~Table of Contents~~

Note ~~12.~~9. Secured Line of Credit

(in thousands)

On June 9, 2021, the Company obtained a secured revolving line of credit (“Line”) in the amount of $20,000 with First Horizon Bank. The proceeds of the Line were used to enhance the Bank’s capital structure. The Line bears interest at a floating interest rate linked to WSJ Prime Rate with an initial interest rate of 3.25%, which is payable quarterly on the first day of each calendar quarter, commencing on July 1, 2021, with the final installment of interest being due and payable concurrently on the same date that the principal balance is due. As of June 30, 2022, the interest rate was 4.75%. The Line also bears an unused line fee at a rate equal to 0.25%, applied to the unused balance of ~~The~~the Line. The Line is fully secured by the common stock of the Bank. The Line matures on June 9, 2023, at which time all unpaid interest and principal is due and payable.


	June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Funded balance	$	18,000	$	0	$	18,000	$	18,000
Unfunded balance		2,000		0		2,000		2,000

Total credit facility	$	20,000	$	0	$	20,000	$	20,000

Note ~~13.~~10. Shareholders’ Equity

(in thousands, except share data)

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


	Number of Shares Issued		Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total										Accumulated
Balance, January 1, 2021		5,587,070	$	1,118	$	18,134		$	4,138		$	96,158		$	119,548
																	Number				Additional			Other
																	of Shares		Common		Paid-In			Comprehensive			Retained
																	Issued		Stock		Capital			(Loss) Income			Earnings			Total
Balance, January 1, 2022																		5,595,320	$	1,120	$	18,293		$	(11,795	)	$	98,282		$	105,900
Net income		—		—		—			—			1,897			1,897			—		—		—			—			2,036			2,036
Dividends paid ($0.24 per share)		—		—		—			—			(1,341	)		(1,341	)		—		—		—			—			(1,343	)		(1,343	)
Options exercised		—		—		—			—			—			—			—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—			—		—		—			—			—			—
Stock compensation expense		—		—		42			—			—			42			—		—		39			—			—			39
Other comprehensive loss, net		—		—		—			(13,668	)		—			(13,668	)		—		—		—			(43,682	)		—			(43,682	)

Balance, March 31, 2021		5,587,070	$	1,118	$	18,176		$	(9,530	)	$	96,714		$	106,478
Balance, March 31, 2022																		5,595,320	$	1,120	$	18,332		$	(55,477	)	$	98,975		$	62,950
Net income		—		—		—			—			1,907			1,907			—		—		—			—			2,541			2,541
Dividends paid ($0.24 per share)		—		—		—			—			(1,343	)		(1,343	)		—		—		—			—			(1,345	)		(1,345	)
Restricted stock forfeited		—		—		—			—			—			—
Restricted stock granted		8,250		2		(2	)		—			—			—			8,250		1		(1	)		—			—			—
Stock compensation expense		—		—		40			—			—			40			—		—		39			—			—			39
Other comprehensive income, net		—		—		—			2,492			—			2,492			—		—		—			(38,259	)		—			(38,259	)

Balance, June 30, 2021		5,595,320	$	1,120	$	18,214		$	(7,038	)	$	97,278		$	109,574
Balance, June 30, 2022																		5,603,570	$	1,121	$	18,370		$	(93,736	)	$	100,171		$	25,926

Table of Contents

Number
of Shares
Issued

Common
Stock

Additional
Paid-In

Capital

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total

Balance, January 1, 2020
   5,578,131 $ 1,116 $ 17,883 $ (789 ) $ 94,590 $ 112,800
Net income
   —   —   —   —   1,160 1,160
Dividends paid ($0.24 per share)
   —   —   —   —   (1,339 ) (1,339 )
Options exercised
   4,500 1 86 —   —   87
Restricted stock granted
   —   —   —   —   —   —
Stock compensation expense
   —   —   40 —   —   40
Other comprehensive income, net
   —   —   —   5,996 —   5,996


Balance, March 31, 2020
   5,582,631 $ 1,117 $ 18,009 $ 5,207 $ 94,411 $ 118,744
Net income
   —   —   —   —   1,462 1,462
Dividends paid ($0.24 per share)
   —   —   —   —   (1,342 ) (1,342 )
Restricted stock forfeited

   (4,500 ) (1 ) 1 —   —   —
Restricted stock granted
   8,250 2 (2 ) —   —   —
Stock compensation expense
   —   —   41 —   —   41
Other comprehensive income, net
   —   —   —   464 —   464


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


								Accumulated
	Number				Additional			Other
	of Shares		Common		Paid-In			Comprehensive			Retained
	Issued		Stock		Capital			(Loss) Income			Earnings			Total
Balance, January 1, 2021		5,587,070	$	1,118	$	18,134		$	4,138		$	96,158		$	119,548
Net income		—		—		—			—			1,897			1,897
Dividends paid ($0.24 per share)		—		—		—			—			(1,341	)		(1,341	)
Options exercised		—		—		—			—			—			—
Restricted stock granted		—		—		—			—			—			—
Stock compensation expense		—		—		42			—			—			42
Other comprehensive income, net		—		—		—			(13,668	)		—			(13,668	)

Balance, March 31, 2021		5,587,070	$	1,118	$	18,176		$	(9,530	)	$	96,714		$	106,478
Net income		—		—		—			—			1,907			1,907
Dividends paid ($0.24 per share)		—		—		—			—			(1,343	)		(1,343	)
Restricted stock forfeited		—		—		—			—			—			—
Restricted stock granted		8,250		2		(2	)		—			—			—
Stock compensation expense		—		—		40			—			—			40
Other comprehensive income, net		—		—		—			2,492			—			2,492

Balance, June 30, 2021		5,595,320	$	1,120	$	18,214		$	(7,038	)	$	97,278		$	109,574

Note ~~14.~~11. Fair Value of Financial Instruments

(in thousands)

The fair value topic of the ASC establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:


Level 1		Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2		Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or

Level 3		Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Table of Contents

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of June 30, ~~2021:~~2022:

   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
   $ —      $ 4,777    $ —      $ 4,777
Mortgage-backed securities
   —      412,389    —      412,389
State, county and municipal obligations
   —      125,005    —      125,005
Other securities
   500    —      —      500








Total
   $ 500    $ 542,171    $ —      $ 542,671


	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S.
Government Agencies	$	—	$	3,989	$	—	$	3,989
Mortgage-backed securities		—		373,209		—		373,209
State, county and municipal		—		186,148		—		186,148
Other securities		450		—		—		450

Total	$	450	$	563,346	$	—	$	563,796

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, ~~2020:~~2021:


									Quoted Prices
									in Active		Significant
									Markets for		Other		Significant
			Fair Value Measurements Using:						Identical		Observable		Unobservable
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs				Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals		(Level 1)		(Level 2)		(Level 3)		Totals
Securities available for sale
Obligations of U.S. Government Agencies	$	—	$	12,061	$	—	$	12,061
Obligations of U.S.
Government Agencies									$	—	$	4,700	$	—	$	4,700
Mortgage-backed securities		—		561,983		—		561,983		—		399,591		—		399,591
State, county and municipal obligations		—		104,197		—		104,197
State, county and municipal										—		227,051		—		227,051
Other securities		—		508		—		508		493		—		—		493

Total	$	—	$	678,749	$	—	$	678,749	$	493	$	631,342	$	—	$	631,835

The Company recorded 0 gains or losses in earnings for the period ended June 30, ~~2021~~2022 or December 31, ~~2020~~2021 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

Impaired Loans

Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate

~~Table of Contents~~

and/or business assets including but not limited to, equipment, inventory and accounts receivable.

Table of Contents

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 allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically approximate 25% of the appraised value.

The Company did not have any assets measured at fair value on a nonrecurring basis during 2022 that were still held on the Company’s balance sheet at June 30, 2022.

For assets measured at fair value on a nonrecurring basis during 2021 that were still held on the Company’s balance sheet at ~~June 30,~~December 31, 2021, the following table provides the hierarchy level and the fair value of the related assets:

      2021
Fair Value Measurements Using:
   Quoted Prices
in Active
Markets for
Identical
Assets    Significant
Other
Observable
Inputs    Significant
Unobservable
Inputs
   (Level 1)    (Level 2)    (Level 3)    Totals
Impaired loans
   $ —      $ —      $ 111    $ 111
Other real estate owned
   —      —      1,567    1,567








Total
   $ —      $ —      $ 1,678    $ 1,678

~~Table of Contents~~

The following table presents information as of June 30, 2021 about significant unobservable inputs (Level 3) used in the valuation of assets and liabilities measured at fair value on a nonrecurring basis:

Financial instrument
   Fair Value
Valuation Technique

Significant Unobservable
Inputs
   Range of
Inputs
Impaired loans
   $ 111    Appraised value of collateral less estimated costs to sell    Estimated costs to sell    25%
OREO
   1,567    Appraised value of collateral less estimated costs to sell    Estimated costs to sell    25%

For assets measured at fair value on a nonrecurring basis during 2020 that were still held on the Company’s balance sheet at December 31, 2020, the following table provides the hierarchy level and the fair value of the related assets:

   Quoted Prices
in Active
Markets for
Identical
Assets    Significant
Other
Observable
Inputs    Significant
Unobservable
Inputs
   (Level 1)    (Level 2)    (Level 3)    Totals
Impaired loans
   $ —      $ —      $ 2,013    $ 2,013








Total
   $ —      $ —      $ 2,013    $ 2,013


	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	109	$	109
Other real estate owned		—		—		1,121		1,121

Total	$	—	$	—	$	1,230	$	1,230

Impaired loans, whose fair value was remeasured during the period, with a carrying value of ~~$114~~

$-0-

and ~~$2,920,~~$112, had an allocated allowance for loan losses of

$-0-

and $3 ~~and $907~~ at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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.

Table of Contents

After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of ~~$375~~

$-0-

and ~~$391~~$836 was necessary and recorded during the ~~three and~~

~~six-month~~

three-month period ended June 30, ~~2021, respectively. Management determined 0 fair value adjustment was necessary for~~2022 and the year ended December 31, ~~2020.~~2021, respectively.

~~Table of Contents~~

The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. The following represents the carrying value and estimated fair value of the Company’s financial instruments at June 30, ~~2021:~~2022:


	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value				Quoted Prices
June 30, 2021	Carrying Value		(Level 1)		(Level 2)		(Level 3)		Total Fair Value
													in Active		Significant
													Markets for		Other		Significant		Total
											Carrying		Identical		Observable		Unobservable		Fair
June 30, 2022											Value		Assets		Inputs		Inputs		Value
													(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	16,050	$	16,050	$	—	$	—	$	16,050	$	14,274	$	14,274	$	—	$	—	$	14,274
Interest bearing deposits with banks		66,153		66,153		—		—		66,153		27,008		27,008		—		—		27,008
Securities available-for-sale		542,671		500		542,171		—		542,671		563,796		450		563,346		—		563,796
Net loans		629,691		—		—		622,348		622,348
Net LHFI												584,495		—		—		564,496		564,496
Financial liabilities
Deposits	$	1,127,362	$	875,283	$	253,178	$	—	$	1,128,461	$	1,117,987	$	918,987	$	199,528	$	—	$	1,118,515
Securities sold under agreement to repurchase		67,286		67,286		—		—		67,286		124,162		124,162		—		—		124,162
Secured line of credit		18,000		18,000		—		—		18,000
Borrowings on secured line of credit												18,000		18,000		—		—		18,000

Table of Contents

The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, ~~2020:~~2021:


	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value				Quoted Prices
December 31, 2020	Carrying Value		(Level 1)		(Level 2)		(Level 3)		Total Fair Value
													in Active		Significant
													Markets for		Other		Significant		Total
											Carrying		Identical		Observable		Unobservable		Fair
December 31, 2021											Value		Assets		Inputs		Inputs		Value
													(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	16,840	$	16,840	$	—	$	—	$	16,840	$	10,673	$	10,673	$	—	$	—	$	10,673
Interest bearing deposits with banks		25,468		25,468		—		—		25,468		68,563		68,563		—		—		68,563
Securities available-for-sale		678,749		—		678,749		—		678,749		631,835		493		631,342		—		631,835
Net loans		647,521		—		—		638,362		638,362
Net LHFI												567,334		—		—		554,351		554,351
Financial liabilities
Deposits	$	1,095,189	$	861,552	$	234,909	$	—	$	1,096,461	$	1,111,892	$	861,552	$	230,590	$	—	$	1,092,142
Securities sold under agreement to repurchase		196,272		196,272		—		—		196,272		112,760		112,760		—		—		112,760
FHLB advances		25,000		25,000		—		—		25,000
Borrowings on secured line of credit												18,000		18,000		—		—		18,000

Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS.

~~CONDITION AND RESULTS OF OPERATIONS.~~

(in thousands, except share and per share data)

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form

10-Q

(the “Quarterly Report”) contains statements that constitute

forward-looking

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

forward-looking

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

The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly-owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank” and collectively with the Company, the “Company”), 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 effects of the emergence of widespread health emergencies or pandemics, including the duration of the

COVID-19

pandemic and its impact on the Company’s and its customers’ business, results of operations, asset quality and financial condition;

the impact of increasing inflation rates on the general economic, market or business conditions;

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;

climate change and societal responses to climate change could adversely affect the Company’s business and results of operations, including indirectly through impact to its customers;

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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;

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

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

other risks detailed from

time-to-time

in the Company’s filings with the Securities and Exchange Commission.

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

Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Company. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report. All dollar amounts appearing in this section of our Quarterly Report are in thousands unless otherwise noted or the context otherwise requires.

OVERVIEW

The Company is a

one-bank

holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of the Bank. The Company does not have any direct subsidiaries other than the Bank.

The Bank was opened on February 8, 1908 as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At June 30, ~~2021,~~2022, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of ~~$1,337,945~~$1,298,752 and total deposits of ~~$1,128,203.~~$1,118,523. In addition to full service commercial banking, the Bank offers title insurance services through its ~~subsidiary,~~affiliate, Title Services LLC. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601)

656-4692.

All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

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LIQUIDITY

The Company has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Company at June 30, ~~2021,~~2022, was ~~28.31%~~19.11% and at December 31, ~~2020,~~2021, was ~~22.06%~~39.71%. The ~~increase~~decrease was due to ~~an increase~~a decrease in interest bearing cash and cash equivalents and a ~~reduction~~decline in the ~~amount~~fair market value of investment securities ~~required~~coupled with increased pledging requirements to ~~be pledged at~~collateralize public deposit funds as of June 30, ~~2021.~~2022. Management believes it maintains adequate liquidity for the Company’s current needs.

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The Company’s primary source of liquidity is customer deposits, which were ~~$1,127,362~~$1,117,987 at June 30, ~~2021,~~2022, and ~~$1,095,189~~$1,111,892 at December 31, ~~2020.~~2021. Other sources of liquidity include investment securities, the Company’s line of credit with the Federal Home Loan Bank (“FHLB”), the Company’s secured line of credit with First Horizon Bank (“FHN”) and federal funds lines with correspondent banks. The Company had ~~$542,671~~$688,743 invested in

available-for-sale

investment securities at June 30, ~~2021,~~2022, and ~~$678,749~~$647,557 at December 31, ~~2020.~~2021. The ~~decrease~~increase in securities is the result of management ~~strategically reducing~~deploying excess cash into higher ~~interest-bearing deposits that increased significantly through the first quarter of 2021 due to government stimulus by liquidating under-performing securities.~~yielding assets.

The Company also had ~~$66,153~~$27,008 in interest bearing deposits at other banks at June 30, ~~2021~~2022 and ~~$25,468~~$68,563 at December 31, ~~2020.~~2021. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At June 30, ~~2021,~~2022, the Company had unused and available ~~$222,073~~$197,280 of its line of credit with the FHLB and at December 31, ~~2020,~~2021, the Company had unused and available ~~$167,285~~$221,088 of its line of credit with the FHLB. The ~~increase~~decrease in the amount available under the Company’s line of credit with the FHLB from the end of ~~2020~~2021 to June 30, ~~2021,~~2022, was the result of ~~an increase~~a decrease in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. The secured line of credit with FHN was originated on June 9, 2021. At June 30, ~~2021,~~2022, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of

$-0-

as of June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The Company may purchase federal funds from correspondent banks on a temporary basis to meet short term funding needs.

When the Company has more funds than it needs for its reserve requirements or short-term liquidity needs, the Company increases its investment portfolio, increases the balances in interest bearing due from bank accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to ~~insure~~ensure rate flexibility and to meet loan funding and liquidity needs. When deposits decline or do not grow sufficiently to fund loan demand, management will seek funding either through federal funds purchased or advances from the FHLB.

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CAPITAL RESOURCES

Total shareholders’ equity was ~~$109,574~~$25,926 at June 30, ~~2021,~~2022, as compared to ~~$119,548~~$105,900 at December 31, ~~2020.~~2021. The decrease in shareholders’ equity was the result of the accumulated other comprehensive loss (“AOCL”) brought about by the investment securities market value adjustment partially offset by earnings in excess of dividends paid.

~~On June 9, 2021,~~ The AOCL is a result of an increase in the medium-term interest rates that has occurred since the purchase of securities. Management does not intend to sell any securities at an unrealized loss position. Additionally, as noted in the liquidity section the Company ~~obtained a $20,000 secured revolving line of credit with FHN to enhance~~has sufficient liquidity options available if the Bank’s capital structure by injecting $18,000 into the Bank. With the capital injection coupled with strategically reducing higher interest-bearing deposits, the Bank’s Tier 1 Leverage ratio increased at June 30, 2021 and December 31, 2020, respectively, to 8.25% from 7.05%.need for short-term funds arises.

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The Company paid aggregate cash dividends in the amount of ~~$2,684,~~$2,688, or $0.48 per share, during the

six-month

period ended June 30, ~~2021~~2022 compared to ~~$2,681,~~$2,684, or $0.48 per share, for the same period in ~~2020.~~2021.

Quantitative measures established by federal regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of June 30, ~~2021,~~2022, the Company and Bank meets all capital adequacy requirements to which it is subject and according to these requirements the Company and Bank is considered to be well capitalized.

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   Actual Minimum Capital
Requirement to be
Well Capitalized Minimum Capital
Requirement to be
Adequately
Capitalized
   Amount    Ratio Amount    Ratio Amount    Ratio
June 30, 2021

Citizens Holding Company

Tier 1 leverage ratio
   $ 102,970    7.08 % $ 72,724    5.00 % $ 58,179    4.00 %
Common Equity tier 1 capital ratio
   102,970    12.67 % 94,541    6.50 % 65,452    4.50 %
Tier 1 risk-based capital ratio
   102,970    12.67 % 64,994    8.00 % 48,746    6.00 %
Total risk-based capital ratio
   107,322    13.21 % 81,243    10.00 % 64,994    8.00 %
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    12.55 % 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 %


	Actual					Minimum Capital Requirement to be Well Capitalized					Minimum Capital Requirement to be Adequately Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2022
Citizens Holding Company
Tier 1 leverage ratio	$	106,237		7.72	%	$	68,846		5.00	%	$	55,077		4.00	%
Common Equity tier 1 capital ratio		106,237		12.71	%		89,500		6.50	%		61,962		4.50	%
Tier 1 risk-based capital ratio		106,237		12.71	%		66,854		8.00	%		50,140		6.00	%
Total risk-based capital ratio		111,283		13.32	%		83,567		10.00	%		66,854		8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	123,632		8.98	%	$	68,839		5.00	%	$	55,071		4.00	%
Common Equity tier 1 capital ratio		123,632		8.98	%		89,490		6.50	%		61,955		4.50	%
Tier 1 risk-based capital ratio		123,632		14.80	%		66,828		8.00	%		50,121		6.00	%
Total risk-based capital ratio		128,679		15.40	%		83,534		10.00	%		66,828		8.00	%
December 31, 2021
Citizens Holding Company
Tier 1 leverage ratio	$	104,181		7.80	%	$	66,789		5.00	%	$	53,431		4.00	%
Common Equity tier 1 capital ratio		104,181		13.16	%		86,826		6.50	%		60,110		4.50	%
Tier 1 risk-based capital ratio		104,181		13.16	%		63,322		8.00	%		47,492		6.00	%
Total risk-based capital ratio		108,694		13.73	%		79,153		10.00	%		63,322		8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	121,421		9.09	%	$	66,776		5.00	%	$	53,421		4.00	%
Common Equity tier 1 capital ratio		121,421		9.09	%		86,808		6.50	%		60,098		4.50	%
Tier 1 risk-based capital ratio		121,421		15.34	%		63,314		8.00	%		47,486		6.00	%
Total risk-based capital ratio		125,934		15.91	%		79,143		10.00	%		63,314		8.00	%

The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Company (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the “standardized approach of Basel II for

non-core

banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.

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

Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%;

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Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking organizations);

Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and

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Maintain the minimum total risk-based capital ratio at 8%.

In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.

The final Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the final Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital.

Management believes that, as of June 30, ~~2021,~~2022, the Company and the Bank met all capital adequacy requirements under Basel III. ~~The changes to the calculation of risk-weighted assets required by Basel III did not have a material impact on the Company’s capital ratios as presented.~~

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RESULTS OF OPERATIONS

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

   For the Three Months
Ended June 30,    For the Six Months
Ended June 30,
   2021    2020    2021    2020
Interest Income, including fees
   $ 9,816    $ 10,127    $ 18,895    $ 19,836
Interest Expense
   1,322    1,777    2,768    4,101








Net Interest Income
   8,494    8,350    16,127    15,735
Provision for loan losses
   232    622    319    936








Net Interest Income after


Provision for loan losses
   8,262    7,728    15,808    14,799
Other Income
   2,989    2,470    6,221    4,851
Other Expense
   8,982    8,344    17,450    16,411








Income Before Provision For


Income Taxes
   2,269    1,854    4,579    3,239
Provision for Income Taxes
   362    392    775    617








Net Income
   $ 1,907    $ 1,462    $ 3,804    $ 2,622








Net Income Per share - Basic
   $ 0.34    $ 0.26    $ 0.68    $ 0.47








Net Income Per Share-Diluted
   $ 0.34    $ 0.26    $ 0.68    $ 0.47


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Interest Income, including fees	$	9,560	$	9,816	$	18,614	$	18,895
Interest Expense		797		1,322		1,564		2,768

Net Interest Income		8,763		8,494		17,050		16,127
Provision for loan losses		56		232		149		319

Net Interest Income after
Provision for loan losses		8,707		8,262		16,901		15,808
Other Income		2,763		2,989		5,296		6,221
Other Expense		8,432		8,982		16,733		17,450

Income Before Provision For
Income Taxes		3,038		2,269		5,464		4,579
Provision for Income Taxes		497		362		887		775

Net Income	$	2,541	$	1,907	$	4,577	$	3,804

Net Income Per share - Basic	$	0.45	$	0.34	$	0.82	$	0.68

Net Income Per Share-Diluted	$	0.45	$	0.34	$	0.82	$	0.68

See Note 3 to the Company’s Consolidated Financial Statements for an explanation regarding the Company’s calculation of Net Income Per Share - basic and - diluted.

Annualized return on average equity (“ROE”) was ~~7.04%~~15.97% for the three months ended June 30, ~~2021,~~2022, and ~~4.90%~~7.04% for the corresponding period in ~~2020.~~2021. Annualized ~~return on average equity (“ROE”)~~ROE was ~~6.74%~~11.52% for the six months ended June 30, ~~2021,~~2022, and ~~4.52%~~6.74% for the corresponding period in ~~2020.~~2021. The increase in ROE for the three and six months ended June 30, ~~2021 was caused by the increase in earnings and decrease in accumulated other comprehensive income (“AOCI “)~~2022 compared to the same period in ~~2020.~~2021 was a result of an increase in earnings compared to prior period coupled with a decline in equity due to the unrealized losses on investments in AOCL.

Book value per share decreased to ~~$19.61~~$4.64 at June 30, ~~2021,~~2022, compared to ~~$21.43~~$18.95 at December 31, ~~2020.~~2021. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity ~~discussed above.~~resulting from the AOCL caused by the increase in medium-term interest rates. Average assets for the six months ended June 30, ~~2021~~2022 were ~~$1,479,315~~$1,343,566 compared to ~~$1,336,513~~$1,412,082 for the year ended December 31, ~~2020.~~2021. This ~~increase~~decrease was due mainly to ~~an increase in investment securities and loans held for investment. During~~ the ~~second quarter management strategically reduced~~Company reducing higher interest-bearing deposits ~~by approximately $200,000 to improve~~throughout 2021 coupled with the ~~Bank’s capital structure. In doing so management liquidated securities available for sale along with utilizing excess cash~~increase in the ~~Bank’s interest-bearing deposit account held by other banks. The overall effect of this reduction will be reflected in the third quarter average balances.~~unrealized loss on investment securities.

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NET INTEREST INCOME / NET INTEREST MARGIN

The main component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds. The net interest margin is net interest income expressed as a percentage of average earning assets. The primary concerns in managing net interest income are the volume, mix and repricing of assets and liabilities.

Net interest income was $8,763 and $17,050 for the three and six months ended June 30, 2022, respectively, as compared to $8,494 and $16,127 for the same respective time periods in 2021.

The annualized net interest margin was 2.78% for the three months ended June 30, 2022, compared to 2.57% for the corresponding period of 2021. Additionally, the annualized net interest margin was 2.74% for the six months ended June 30, 2022, compared to 2.45% for the corresponding period of 2021. The increase in net interest margin for both the three and six months ended June 30, 2022, when compared to the same period in 2021, was mainly due to management’s reallocation of the investment portfolio into higher yielding securities throughout 2021. In addition, management’s deposit repricing campaign and reduction of higher interest-bearing deposit balances throughout 2021 decreased the cost of funds to 33 basis point (“bps”) for both the three and six months ended June 30, 2022 compared to 50 and 52 bps for the three and six months ended June 30, 2021, ~~respectively, as compared to $8,350 and $15,735~~respectively. The increase in interest on securities coupled with the decrease in the cost of funds offset the decline in interest income on loans which decreased for the ~~same respective time periods in 2020.~~

~~The annualized net interest margin was 2.45% for the~~three and six months ended June 30, ~~2021 compared to 2.74% for the corresponding period of 2020. The decrease in net interest margin for the six months ended June 30, 2021,~~2020 by $1,288, or (16.19%), and $3,305, or (18.82%) when compared to the same ~~period~~periods in ~~2020, was mainly~~2021.

With interest rates starting to increase due to quantitative tightening by the Federal Reserve Bank to combat inflationary pressure that is starting to affect the economic recovery, the Company expects interest rates will continue to increase in the coming year. As a result, the Company is in position to benefit from interest rate hikes due to the ~~historical low mortgage~~amount of assets set to reprice during the coming year, and due to the fact interest-bearing demand and savings deposits may not be immediately affected by changes in general interest rates increasing prepayments on mortgage-backed securities. Prepayments on mortgage-backed securities decreased the yield on taxable securities by 121 basis points (“bps”) to 49 bps at June 30, 2021 compared to 170 bps in 2020. However, the Company was able to offset this decline in yield on mortgage-backed securities by lowering the cost of cost funds to 52 bps for the six months ended June 30, 2021 compared to 89 bps for the same period in 2020.rates.

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The following table 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 periods presented:

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TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES

   Three Months Ended June 30,
   Average Balance    Income/Expense    Average Yield/Rate
   2021    2020    2021    2020    2021 2020
Loans:

Loans, net of unearned
(1)
   $ 640,851    $ 617,940    $ 7,955    $ 7,617    4.97 % 4.93 %
Investment Securities

Taxable
   525,828    462,763    1,063    2,100    0.81 % 1.82 %
Tax-exempt
   166,230    64,179    1,107    485    2.66 % 3.02 %










Total Investment Securities
   692,058    526,942    2,170    2,585    1.25 % 1.96 %
Federal Funds Sold and Other
   41,464    82,152    10    45    0.10 % 0.22 %










Total Interest Earning Assets
(1)(2)
   1,374,373    1,227,034    10,135    10,247    2.95 % 3.34 %










Non-Earning
Assets
   93,712    104,809





Total Assets
   $ 1,468,085    $ 1,331,843





Deposits:

Interest-bearing Demand Deposits
(3)
   $ 534,839    $ 453,455    $ 415    $ 767    0.31 % 0.68 %
Savings
   116,412    92,036    30    25    0.10 % 0.11 %
Time
   257,667    227,324    741    820    1.15 % 1.44 %










Total Deposits
   908,918    772,815    1,186    1,612    0.52 % 0.83 %
Borrowed Funds

Short-term Borrowings
   151,593    190,618    136    165    0.36 % 0.35 %
Long-term Borrowings
   —      —      —      —      —   —










Total Borrowed Funds
   151,593    190,618    136    165    0.36 % 0.35 %










Total Interest-Bearing Liabilities
(3)
   1,060,511    963,433    1,322    1,777    0.50 % 0.74 %
Non-Interest
Bearing Liabilities


Demand Deposits
   295,877    241,956
Other Liabilities
   3,433    7,207
Shareholders’ Equity
   108,264    119,247





Total Liabilities and Shareholders’ Equity
   $ 1,468,085    $ 1,331,843





Interest Rate Spread
               2.45 % 2.60 %


Net Interest Margin
         $ 8,813    $ 8,470    2.57 % 2.76 %






Less

Tax Equivalent Adjustment

      319    120





Net Interest Income
         $ 8,494    $ 8,350


	Three Months Ended June 30,
	Average Balance				Income/Expense				Average Yield/Rate
	2022		2021		2022		2021		2022			2021
Loans:
Loans, net of unearned (1)	$	590,407	$	640,851	$	6,667	$	7,955		4.52	%		4.97	%
Investment Securities
Taxable		474,366		525,828		1,901		1,063		1.60	%		0.81	%
Tax-exempt		214,330		166,230		1,229		1,107		2.29	%		2.66	%

Total Investment Securities		688,697		692,058		3,130		2,170		1.82	%		1.25	%
Federal Funds Sold and Other		22,634		41,464		37		10		0.65	%		0.10	%

Total Interest Earning Assets (1)(2)		1,301,738		1,374,373		9,834		10,135		3.02	%		2.95	%

Non-Earning Assets		32,786		93,712

Total Assets	$	1,334,523	$	1,468,085

Deposits:
Interest-bearing Demand Deposits (3)	$	490,712	$	534,839	$	207	$	415		0.17	%		0.31	%
Savings		134,774		116,412		33		30		0.10	%		0.10	%
Time		202,027		257,667		288		741		0.57	%		1.15	%

Total Deposits		827,513		908,918		528		1,186		0.26	%		0.52	%
Borrowed Funds
Short-term Borrowings		106,153		151,593		83		136		0.31	%		0.36	%
Long-term Borrowings		18,000		—		186		—		4.13	%		—

Total Borrowed Funds		124,153		151,593		269		136		0.87	%		0.36	%

Total Interest-Bearing Liabilities (3)		951,665		1,060,511		797		1,322		0.33	%		0.50	%
Non-Interest Bearing Liabilities
Demand Deposits		305,677		295,877
Other Liabilities		13,533		3,433
Shareholders’ Equity		63,648		108,264

Total Liabilities and Shareholders’ Equity	$	1,334,523	$	1,468,085

Interest Rate Spread										2.69	%		2.45	%

Net Interest Margin					$	9,037	$	8,813		2.78	%		2.57	%

Less
Tax Equivalent Adjustment						274		319

Net Interest Income					$	8,763	$	8,494

4636

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   Six Months Ended June 30,
   Average Balance    Income/Expense    Average Yield/Rate
   2021    2020    2021    2020    2021 2020
Loans:

Loans, net of unearned
(1)
   $ 646,784    $ 595,985    $ 16,128    $ 15,106    4.99 % 5.07 %
Investment Securities

Taxable
   535,820    440,724    1,325    3,757    0.49 % 1.70 %
Tax-exempt
   147,525    62,596    2,006    943    2.72 % 3.01 %










Total Investment Securities
   683,345    503,320    3,331    4,700    0.97 % 1.87 %
Federal Funds Sold and Other
   46,308    67,495    25    263    0.11 % 0.78 %










Total Interest Earning Assets
(1)(2)
   1,376,437    1,166,800    19,484    20,069    2.83 % 3.44 %










Non-Earning
Assets
   102,878    100,363





Total Assets
   $ 1,479,315    $ 1,267,163





Deposits:

Interest-bearing Demand Deposits
(3)
   $ 524,038    $ 427,995    $ 933    $ 1,681    0.36 % 0.79 %
Savings
   111,888    88,346    57    57    0.10 % 0.13 %
Time
   250,305    235,536    1,462    1,843    1.17 % 1.56 %










Total Deposits
   886,231    751,877    2,452    3,581    0.55 % 0.95 %
Borrowed Funds

Short-term Borrowings
   182,052    174,549    316    520    0.35 % 0.60 %
Long-term Borrowings
   —      —      —      —      —   —










Total Borrowed Funds
   182,052    174,549    316    520    0.35 % 0.60 %










Total Interest-Bearing Liabilities
(3)
   1,068,283    926,426    2,768    4,101    0.52 % 0.89 %
Non-Interest
Bearing Liabilities


Demand Deposits
   282,538    213,345
Other Liabilities
   15,582    11,296
Shareholders’ Equity
   112,912    116,096





Total Liabilities and Shareholders’ Equity
   $ 1,479,315    $ 1,267,163





Interest Rate Spread
               2.31 % 2.55 %


Net Interest Margin
         $ 16,716    $ 15,968    2.45 % 2.74 %






Less

Tax Equivalent Adjustment

      589    233





Net Interest Income
         $ 16,127    $ 15,735


	Six Months Ended June 30,
	Average Balance				Income/Expense				Average Yield/Rate
	2022		2021		2022		2021		2022			2021
Loans:
Loans, net of unearned (1)	$	584,301	$	646,784	$	13,093	$	16,128		4.48	%		4.99	%
Investment Securities
Taxable		468,287		535,820		3,598		1,325		1.54	%		0.49	%
Tax-exempt		212,632		147,525		2,412		2,006		2.27	%		2.72	%

Total Investment Securities		680,919		683,345		6,010		3,331		1.77	%		0.97	%
Federal Funds Sold and Other		27,684		46,308		50		25		0.36	%		0.11	%

Total Interest Earning Assets (1)(2)		1,292,904		1,376,437		19,153		19,484		2.96	%		2.83	%

Non-Earning Assets		50,662		102,878

Total Assets	$	1,343,566	$	1,479,315

Deposits:
Interest-bearing Demand Deposits (3)	$	484,017	$	524,038	$	395	$	933		0.16	%		0.36	%
Savings		132,248		111,888		64		57		0.10	%		0.10	%
Time		210,857		250,305		625		1,462		0.59	%		1.17	%

Total Deposits		827,122		886,231		1,084		2,452		0.26	%		0.55	%
Borrowed Funds
Short-term Borrowings		102,706		182,052		143		316		0.28	%		0.35	%
Long-term Borrowings		18,000		—		337		—		3.74	%		—

Total Borrowed Funds		120,706		182,052		480		316		0.80	%		0.35	%

Total Interest-Bearing Liabilities (3)		947,828		1,068,283		1,564		2,768		0.33	%		0.52	%
Non-Interest Bearing Liabilities
Demand Deposits		303,067		282,538
Other Liabilities		13,204		15,582
Shareholders’ Equity		79,467		112,912

Total Liabilities and Shareholders’ Equity	$	1,343,566	$	1,479,315

Interest Rate Spread										2.63	%		2.31	%

Net Interest Margin					$	17,589	$	16,716		2.74	%		2.45	%

Less
Tax Equivalent Adjustment						539		589

Net Interest Income					$	17,050	$	16,127

(1)	Overdrafts, while not considered an earning asset, are included in Loans, net of unearned in the average volume calculation due to the immaterial impact on the yield.

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(2)	Earnings Assets in the table above does 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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The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on

tax-exempt

loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 3.95%, which is net of federal tax benefit.

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three ~~months ended June 30, 2021, repricing of interest-bearing demand deposits,~~ and ~~reallocating the investment portfolio into slower prepaying~~

~~non-taxable~~

~~securities offset the decline in yield on taxable securities compared to the same period in 2020. For the~~ six months ended June 30, ~~2021, as compared to the respective~~2022, management’s disciplined deposit pricing coupled with increasing interest rates and corresponding ~~period in 2020, the repricing of interest-bearing demand deposits, loan growth,~~yields on both new loans originated and ~~reallocating the investment portfolio into slower prepaying~~

~~non-taxable~~

securities purchased were the largest contributing factors to the increase in net interest income over these periods. Also, the Company’s continued efforts to reprice and reduce higher interest-bearing deposits has helped offset the yield decline in taxable securities that has been hampered by the low interest rate environment resulting from the Federal Reserve Board’s decreases to the target federal funds rate during the

~~COVID-19~~

~~pandemic.~~ Management believes by continuing ~~to reprice~~its disciplined deposit pricing and ~~strategically reduce interest-bearing liabilities as they mature,~~ continued focus on loan growth, and continuing to reallocate excess funds into higher yielding securities as the ~~investment mix~~Federal Reserve continues interest rate hikes will increase the net interest margin.

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The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three and six months ended June 30, ~~2021~~2022 compared to the same respective period in ~~2020:~~

2021:

TABLE 2 - VOLUME/RATE ANALYSIS

TABLE 2 - VOLUME/RATE
ANALYSIS
(in thousands)

   Three Months Ended June 30, 2021
   2021 Change from 2020
   Volume    Rate    Total
INTEREST INCOME

Loans
   $ 282    56    $ 338
Taxable Securities
   286    (1,323 )    (1,037 )
Non-Taxable
Securities
   771    (149 )    622
Federal Funds Sold and Other
   (22 )    (13 )    (35 )






TOTAL INTEREST INCOME
   $ 1,318    $ (1,430 )    $ (112 )






INTEREST EXPENSE

Interest-bearing demand deposits
   $ 138    (490 )    (352 )
Savings Deposits
   7    (2 )    5
Time Deposits
   109    (188 )    (79 )
Short-term borrowings
   (34 )    5    (29 )






TOTAL INTEREST EXPENSE
   $ 220    $ (675 )    (455 )






NET INTEREST INCOME
   $ 1,098    $ (755 )    $ 343


	(in thousands) Three Months Ended June 30, 2022 2022 Change from 2021
	Volume			Rate			Total
INTEREST INCOME
Loans	$	(626	)		(662	)	$	(1,288	)
Taxable Securities		(104	)		942			838
Non-Taxable Securities		320			(198	)		122
Federal Funds Sold and Other		(5	)		32			27

TOTAL INTEREST INCOME	$	(414	)	$	113		$	(301	)

INTEREST EXPENSE
Interest-bearing demand deposits	$	(34	)		(174	)		(208	)
Savings Deposits		5			(2	)		3
Time Deposits		(160	)		(293	)		(453	)
Short-term borrowings		(41	)		(12	)		(53	)
Long-term borrowings		—			186			186

TOTAL INTEREST EXPENSE	$	(230	)	$	(295	)		(525	)

NET INTEREST INCOME	$	(184	)	$	408		$	224

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   Six Months Ended June 30, 2021
   2021 Change from 2020
   Volume    Rate    Total
INTEREST INCOME

Loans
   $ 1,288    (266 )    $ 1,022
Taxable Securities
   811    (3,243 )    (2,432 )
Non-Taxable
Securities
   1,279    (216 )    1,063
Federal Funds Sold and Other
   (83 )    (155 )    (238 )






TOTAL INTEREST INCOME
   $ 3,295    $ (3,880 )    $ (585 )






INTEREST EXPENSE

Interest-bearing demand deposits
   $ 377    (1,125 )    (748 )
Savings Deposits
   15    (15 )    —
Time Deposits
   116    (497 )    (381 )
Short-term borrowings
   22    (226 )    (204 )






TOTAL INTEREST EXPENSE
   $ 530    $ (1,863 )    (1,333 )






NET INTEREST INCOME
   $ 2,765    $ (2,017 )    $ 748


	Six Months Ended June 30, 2022 2022 Change from 2021
	Volume			Rate			Total
INTEREST INCOME
Loans	$	(1,558	)		(1,477	)	$	(3,035	)
Taxable Securities		(167	)		2,440			2,273
Non-Taxable Securities		885			(479	)		406
Federal Funds Sold and Other		(10	)		35			25

TOTAL INTEREST INCOME	$	(850	)	$	519		$	(331	)

INTEREST EXPENSE
Interest-bearing demand deposits	$	(71	)		(467	)		(538	)
Savings Deposits		10			(3	)		7
Time Deposits		(230	)		(607	)		(837	)
Short-term borrowings		(138	)		(35	)		(173	)
Long-term borrowings		—			337			337

TOTAL INTEREST EXPENSE	$	(429	)	$	(775	)		(1,204	)

NET INTEREST INCOME	$	(421	)	$	1,294		$	873

CREDIT LOSS EXPERIENCE

As a natural corollary to the Company’s lending activities, some loan losses are to be expected. The risk of loss varies with the type of loan being made and the overall creditworthiness of the borrower over the term of the loan. The degree of perceived risk is taken into account in establishing the structure of, and interest rates and security for, specific loans and for various types of loans. The Company attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures.

The Company maintains a program of systematic review of its existing loans. Loans are graded for their overall quality. Those loans, which management determines require further monitoring and supervision, are segregated and reviewed on a regular basis. Significant problem loans are reviewed monthly by the Company’s management and Board of Directors.

The Company charges off that portion of any loan that the Company’s management and Board of Directors has determined to be a loss. A loan is generally considered by management to represent a loss, in whole or in part, when exposure beyond the collateral value is apparent, servicing of the unsecured portion has been discontinued or collection is not anticipated based on the borrower’s financial condition. The general economic conditions in the borrower’s industry influence this determination. The principal amount of any loan that is declared a loss is charged against the Company’s allowance for loan losses.

5040

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The Company’s allowance for loan losses is designed to provide for loan losses that can be reasonably anticipated. The allowance for loan losses is established through charges to operating expenses in the form of provisions for loan losses. Actual loan losses or recoveries are charged or credited to the allowance for loan losses. ~~The Board of Directors~~Management determines the amount of the ~~allowance.~~allowance, and the Board of Directors reviews and approves the allowance for loan losses. Among the factors considered in determining the allowance for loan losses are the current financial condition of the Company’s borrowers and the value of security, if any, for their loans. Estimates of future economic conditions and their impact on various industries and individual borrowers are also taken into consideration, as are the Company’s historical loan loss experience and reports of banking regulatory authorities. As these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether the Company will sustain loan losses in excess or below its allowance or that subsequent evaluation of the loan portfolio may not require material increases or decreases in such allowance.

The following table summarizes the Company’s allowance for loan losses for the dates indicated:

   Quarter
Ended
June 30,
2021 Year Ended
December 31,
2020 Amount of
Increase
(Decrease)    Percent of
Increase
(Decrease)
BALANCES:

Gross Loans
   $ 634,042 $ 652,257 $ (18,215 )    -2.79 %
Allowance for Loan Losses
   4,351 4,735 (384 )    -8.11 %
Nonaccrual Loans
   4,366 8,484 (4,118 )    -48.54 %
Ratios:

Allowance for loan losses to gross loans
   0.69 % 0.73 %
Net loans charged off to allowance for loan losses
   16.16 % 10.67 %


	Quarter Ended June 30, 2022			Year Ended December 31, 2021			Amount of Increase (Decrease)			Percent of Increase (Decrease)
BALANCES:
Gross Loans	$	589,541		$	571,847		$	17,694			3.09	%
Allowance for Loan Losses		5,046			4,513			533			11.81	%
Nonaccrual Loans		3,580			3,826			(246	)		(6.43	%)
Ratios:
Allowance for loan losses to gross loans		0.86	%		0.79	%
Net loans (recovered) charged off to allowance for loan losses		(7.61	%)		20.56	%

The provision for loan losses for the three months ended June 30, ~~2021~~2022 was ~~$232, a decrease of $390 from the provision for loan losses of $622 for the same period in 2020.~~$56. The provision ~~for~~was primarily driven by loan ~~losses for~~growth during the six months ended June 30, 2021 was $319, a decrease of $617 from the provision for loan losses of $936 for the same period in 2020. The change in the Company’s loan loss provision for the three and six months ended June 30, 2021 is a result of management’s assessment of inherent loss in the loan portfolio, including the impact of the continuing vaccine distribution and improvement inquarter coupled with qualitative factor adjustments due to inflationary risk concerns to both the local and national ~~unemployment rate coupled with a decrease in loan demand from the prior quarter.~~economy. The Company’s model used to calculate the provision is based on the percentage of historical charge-offs, increased for certain qualitative factors within the regulatory framework, applied to the current loan balances by loan segment and specific reserves applied to certain impaired loans. ~~Nonaccrual loans decreased during this period due~~The allowance for loan losses to ~~payments received~~LHFI was 0.86% and ~~loans charged off~~0.69% at June 30, 2022 and 2021, respectively, and 0.79% at December 31, 2021 representing a level management considers commensurate with the present risk in ~~excess of new loans being added to nonaccrual status.~~the loan portfolio.

For the three months ended June 30, ~~2021,~~2022, net loan losses ~~charged~~recovered to the allowance for loan losses totaled ~~$653,~~$214, an increase of ~~$471~~$867 in net recoveries from the ~~$181~~$653 charged off in the same period in ~~2020.~~2021. For the six months ended June 30, ~~2021,~~2022, net loan losses ~~charged~~recovered to the allowance for loan losses totaled ~~$703,~~$384, an increase of ~~$269~~$1,087 in net recoveries from the ~~$434~~$703 charged off in the same period in ~~2020.~~2021. The increase in net recoveries was primarily due to one significant charged off credit that occurred in the fourth quarter of 2021 and has since paid a total of $327 during the

six-month

period ended June 30, 2022.

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~~The increase was primarily due to two significant charge-offs during the~~

~~six-month~~

~~period ended June 30, 2021.~~

Management reviews quarterly with the Company’s Board of Directors the adequacy of the allowance for loan losses. The loan loss provision is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the six months ended June 30, ~~2021~~2022 that have not been charged ~~off.~~off or specifically reserved for in the allowance. Management also believes that the Company’s allowance will be adequate to absorb probable losses inherent in the Company’s loan portfolio. However, it remains possible that additional provisions for loan loss may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended June 30, ~~2021~~2022 was ~~$2,989, an increase~~$2,763, a decrease of ~~$519,~~$226, or ~~21.01%~~(7.56%), from ~~$2,470~~$2,989 in the same period in ~~2020.~~2021. Service charges on deposit accounts were ~~$768~~$967 in the three months ended June 30, ~~2021,~~2022, compared to ~~$668~~$768 for the same period in ~~2020.~~2021. As ~~the vaccine distribution continues,~~inflationary pressures continue throughout both the national and local ~~economies are starting to recover resulting in increased~~economy, spending and overdraft ~~income.~~income have continued to trend upward. Included in the service charges on deposit accounts line item for the three months ended June 30, ~~2021,~~2022, overdraft income increased by ~~$90,~~$197, or ~~22.01%~~39.46% from the same period in ~~2020.~~2021. Interchange fees which are included in the other service charges and fees line item on the income statement ~~continues its upward trend~~decreased slightly by ~~increasing~~decreasing by ~~$199,~~$9, or ~~25.46%~~(0.97%), to ~~$982~~$972 for the three months ended June 30, ~~2021,~~2022, compared to ~~$783~~$981 for the same period in ~~2020.~~2021. Other operating income not derived from service charges or fees ~~increased $199,~~decreased $45, or ~~21.37%~~(4.75%) to ~~$1,130~~$702 in the three months ended June 30, ~~2021,~~2022, compared to ~~$931~~$737 for the same period in ~~2020.~~2021. This ~~increase~~decrease was primarily due to ~~three reasons, (1) an increase in gains from security sales due to strategic investment decisions (2) an increase~~the decline in mortgage loan origination income ~~and (3)~~due to increased mortgage interest rates. Mortgage loan origination income ~~from~~decreased for the ~~payout of~~three months ended June 30, 2022 by $113, or (34.98%), to $210 compared to $323 for the ~~Company’s bank-owned life insurance (“BOLI”) claim.~~same period in 2021.

Other income for the six months ended June 30, ~~2021~~2022 was ~~$6,221, an increase~~$5,296, a decrease of ~~$1,370,~~$925, or ~~28.24%~~(14.87%), from ~~$4,851~~$6,221 in the same period in ~~2020.~~2021. Service charges on deposit accounts were ~~$1,582~~$1,912 in the six months ended June 30, ~~2021,~~2022, compared to ~~$1,717~~$1,582 for the same period in ~~2020.~~2021. The ~~decrease~~increase in service charges on deposit accounts year-over-year is primarily due to overdraft income ~~being down~~increasing by $321, or 30.63% compared to the same period in 2021. Other service charges and fees were $2,119 for the ~~first quarter. As discussed above,~~six months ended June 30, 2022 slightly up from the ~~second quarter results show overdraft income is starting to recover~~same period in 2021 due to ~~the vaccine distribution~~interchange fees increasing modestly by $23, or 1.24% and ~~local and national economies recovering.~~other miscellaneous service charges increasing by $31, or 18.97%. Other operating income not derived from service charges or fees ~~increased $1,083,~~decreased $389, or ~~72.68%~~(23.52%) to ~~$2,573~~$1,265 in the six months ended June 30, ~~2021,~~2022, compared to ~~$1,490~~$1,654 for the same period in ~~2020. The reasons~~2021. This decrease, as stated earlier, was primarily due to the decline in mortgage loan origination income due to increased mortgage interest rates. Mortgage loan origination income decreased for the ~~significant increase were discussed above.~~six months ended June 30, 2022 by $304, or (42.34%), to $414 compared to $718 for the same period in 2021.

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

   For the Three
Months Ended
June 30,    For the Six Months
Ended June 30,
Other operating income
   2021    2020    2021    2020
BOLI Income
   $ 306    $ 123    $ 436    $ 229
Mortgage Loan Origination Income
   323    282    718    529
Income from security sales, net
   393    333    919    410
Other Income
   108    193    500    322








Total Other Income
   $ 1,130    $ 931    $ 2,573    $ 1,490


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
Other operating income	2022		2021		2022		2021
BOLI Income	$	120	$	306	$	241	$	436
Mortgage Loan Origination Income		210		323		414		718
Gain on sale of OREO		16		—		81		323
Other Income		356		108		529		177

Total Other Income	$	702	$	737	$	1,265	$	1,654

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate

non-interest

expenses for the three months ended June 30, 2022 and 2021 were $8,432 and ~~2020 were~~ $8,982, ~~and $8,344,~~ respectively, ~~an increase~~a decrease of ~~$638~~$550, or ~~7.65%~~(6.12%). Salaries and benefits ~~increased~~decreased $173, or (3.77%), to ~~$278~~$4,412 for the three months ended June 30, ~~2021, and increased~~2022 when compared to ~~$4,585 from $4,307 for~~ the same period in ~~2020.~~2021. Occupancy expense decreased by ~~$245,~~$80, or ~~(12.03%~~(4.47%), to ~~$1,791~~$1,711 for the three months ended June 30, ~~2021,~~2022, compared to ~~$2,036~~$1,791 for the same period of ~~2020.~~2021. For the three months ended June 30, ~~2021,~~2022, other

~~non-interest~~

expense ~~increased $605,~~decreased $297, or ~~30.23%~~(11.40%) to $2,309 compared to $2,606 ~~compared to $2,001~~ for the same period in ~~2020. This increase was mainly due to the write down of two OREO properties coupled with continued investment in customer facing and internal technology.~~2021.

Aggregate

non-interest

expenses for the six months ended June 30, 2022 and 2021 were $16,733 and ~~2020 were~~ $17,450, ~~and $16,411,~~ respectively, ~~an increase~~a decrease of ~~$1,039~~$717 or ~~6.33%~~(4.11%). Salaries and benefits ~~increased~~decreased $302, or (3.30%), to ~~$411~~$8,851 for the six months ended June 30, ~~2021, and increased~~2022, when compared to ~~$9,153 from $8,742 for~~ the same period in ~~2020.~~2021. Occupancy expense decreased by ~~$87,~~$122, or ~~(2.35%~~(3.38%), to ~~$3,608~~$3,486 for the six months ended June 30, ~~2021,~~2022, compared to ~~$3,695~~$3,608 for the same period of ~~2020.~~2021. Other operating expenses ~~increased~~decreased by ~~$715,~~$293, or ~~17.99%~~(6.25%), to ~~$4,689~~$4,396 for the six months ended June 30, ~~2021,~~2022, compared to ~~$3,974~~$4,689 for the same period of ~~2020. The reason~~2021. Overall, other expenses have decreased for both the ~~significant increase was discussed above.~~three and six months ended June 30, 2022 compared to the same periods in 2021 as a result of management’s focus on expense management that started in 2020 due to the uncertainty stemming from the pandemic.

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

   For the Three Months
Ended June 30,    For the Six Months
Ended June 30,
Other Operating Expense
   2021    2020    2021    2020
Advertising
   $ 162    $ 156    $ 303    $ 360
Office supplies
   235    311    484    603
Professional fees
   217    261    454    519
Telephone expense
   141    138    296    296
Postage and freight
   161    138    330    279
Loan collection expense
   16    20    70    43
Regulatory and related expense
   237    104    472    239
Debit card/ATM expense
   192    148    360    283
Write down on OREO
   375    —      390    —
Other expenses
   870    725    1,530    1,352








Total Other Expense
   $ 2,606    $ 2,001    $ 4,689    $ 3,974


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Other Expense	2022		2021		2022		2021
Advertising	$	172	$	162	$	303	$	303
Office Supplies		250		235		459		484
Professional Fees		223		217		442		454
Technology expense		109		141		225		296
Postage and Freight		168		161		306		330
Loan Collection Expense		13		16		20		70
Regulatory and related expense		208		237		412		472
Debit Card/ATM expense		202		192		390		360
Write down on OREO		—		375		42		390
Travel and Convention		63		32		115		58
Other expenses		901		838		1,682		1,472

Total Other Expense	$	2,309	$	2,606	$	4,396	$	4,689

The Company’s efficiency ratio for the three months ended June 30, ~~2021~~2022 was ~~77.61%~~71.83%, compared to ~~82.78%~~77.61% for the same period in ~~2020.~~2021. The Company’s efficiency ratio for the six months ended June 30, ~~2021~~2022 was ~~76.80%~~73.51%, compared to ~~82.46%~~76.80% for the same period in ~~2020.~~2021. The efficiency ratio is the ratio of

non-interest

expenses divided by the sum of net interest income (on a fully tax equivalent basis) and

non-interest

income.

Table of Contents

BALANCE SHEET ANALYSIS

   June 30, 2021    December 31,
2020    Amount of
Increase
(Decrease) Percent of
Increase
(Decrease)
Cash and Due From Banks
   $ 16,050    $ 16,840    $ (790) -4.69 %
Interest Bearing deposits with Other Banks
   66,153    25,468    40,685 159.75 %
Investment Securities
   542,671    678,749    (136,078 ) -20.05 %
Loans, net
   629,691    647,521    (17,830 ) -2.75 %
Premises and Equipment
   25,446    25,630    (184 ) -0.72 %
Total Assets
   1,338,134    1,450,692    (112,558 ) -7.76 %
Total Deposits
   1,127,362    1,095,189    32,173 2.94 %
Total Shareholders’ Equity
   109,574    119,548    (9,974 ) -8.34 %


	June 30, 2022		December 31, 2021		Amount of Increase (Decrease)			Percent of Increase (Decrease)
Cash and due from banks	$	14,274	$	10,673	$	3,601			33.74	%
Interest bearing deposits with other banks		27,008		68,563		(41,555	)		(60.61	%)
Investment securities		563,796		631,835		(68,039	)		(10.77	%)
Net LHFI		584,495		567,334		17,161			3.02	%
Premises and equipment		26,444		26,661		(217	)		(0.81	%)
Total assets		1,299,081		1,361,309		(62,228	)		(4.57	%)
Total deposits		1,117,987		1,111,892		6,095			0.55	%
Total shareholders’ equity		25,926		105,900		(79,974	)		(75.52	%)

CASH AND CASH EQUIVALENTS

Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at June 30, ~~2021~~2022 was ~~$82,203,~~$14,274, which was an increase of ~~$39,895~~$3,601 from the balance of ~~$42,308~~$10,673 at December 31, ~~2020.~~2021. Interest bearing deposits with other banks decreased by $41,555, or (60.61%), to $27,008 at June 30, 2022 compared to $68,563 at December 31, 2021.

~~Table of Contents~~

INVESTMENT SECURITIES

The Company’s investment securities portfolio primarily consists of United States agency debentures, mortgage-backed securities and obligations of states, counties and municipalities. Due to recent increases in the medium-term interest rates, the fair value of the Company’s investment securities on the balance sheet represents a decrease in investment securities as of June 30, 2022 when compared to the balance of investment securities at December 31, 2021. The impact of the related unrealized losses net of the tax benefit was $81,941 as presented on the consolidated statements of comprehensive loss. However, as disclosed in Note 6 of the Notes to the Consolidated Financial Statements, the Company’s investments securities portfolio at June 30, ~~2021 decreased~~2022 increased by ~~$136,078,~~$41,186, or ~~(20.05%)~~6.36%, to ~~$542,671~~$688,743 from ~~$678,749~~$647,557 at December 31, ~~2020.~~2021 when comparing the amortized cost of the Company’s investments securities. The ~~decrease~~increase is a result of the Company ~~liquidating a portion of the~~deploying excess cash into higher yielding investment ~~portfolio to provide funding for the Company’s strategic high interest-bearing deposit reduction plan.~~securities.

LOANS

The Company’s gross loan balance ~~decreased~~increased by ~~$17,830,~~$17,694, or ~~(2.75%)~~3.09%, during the six months ended June 30, ~~2021,~~2022, to ~~$629,691~~$589,541 from ~~$647,521~~$571,847 at December 31, ~~2020.~~2021. Excluding PPP loans with a total balance of $1,356 at June 30, 2022 and $5,789 at December 31, 2021, total loans increased $22,127, or 3.91%, compared to $566,058 at December 31, 2021. The ~~decrease was~~

year-to-date

growth primarily ~~due to two reasons: (1) Loan competition continues to be strong~~reflects increases in ~~our operating regions, especially in land development and~~ construction and development, commercial real estate, ~~categories resulting in large payoffs~~ and (2) payoffs of the PPP loans that were provided to customers. While loan demand continues to be strong in certain sectors, the uncertainty surrounding the pandemic continues to put a lot of projects on hold in other sectors in the near term. Additionally, noconsumer loans. No material changes were made to the loan products offered by the Company during this period. ~~Management remains optimistic for loan growth for the second half~~

Table of ~~the year as the economy starts to open back up with the vaccine distribution.~~Contents

DEPOSITS

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

   June 30, 2021    December 31,
2020    Amount of
Increase
(Decrease)    Percent of
Increase
(Decrease)
Noninterest-Bearing Deposits
   $ 287,519    $ 276,033    $ 11,486    4.16 %
Interest-Bearing Deposits
   465,606    480,987    (15,381 )    -3.20 %
Savings Deposits
   122,158    104,532    17,626    16.86 %
Certificates of Deposit
   252,079    233,637    18,442    7.89 %








Total deposits
   $ 1,127,362    $ 1,095,189    $ 32,173    2.94 %


	June 30, 2022		December 31, 2021		Amount of Increase (Decrease)			Percent of Increase (Decrease)
Noninterest-Bearing Deposits	$	304,640	$	302,707	$	1,933			0.64	%
Interest-Bearing Deposits		478,844		451,809		27,035			5.98	%
Savings Deposits		135,503		127,217		8,286			6.51	%
Certificates of Deposit		199,000		230,159		(31,159	)		(13.54	%)

Total deposits	$	1,117,987	$	1,111,892	$	6,095			0.55	%

All deposit accounts except for ~~interest-bearing~~certificates of deposits increased during the six months ended June 30, ~~2021.~~2022. The modest increase in deposit accounts is ~~a result of~~primarily due to excess liquidity in the

~~COVID-19~~

~~savings trend~~ financial markets coupled with ~~record financial stimulus.~~increased inflationary pressures causing increased precautionary saving by households and businesses. The decrease in ~~interest-bearing~~certificates of deposit accounts is a result of management strategically reducing higher interest-bearing accounts to help improve both interest margin and the Bank’s capital ratios. ~~While total~~Additionally, some customers have moved from renewing their time deposits ~~are still up from December 31, 2021,~~to keeping their funds in transactional accounts due to low time deposits rates and inflationary pressures. As the Federal Reserve continues interest rate hikes management ~~has reduced higher interest-bearing deposits during~~expects time deposit rates to increase modestly to stay competitive within the ~~second quarter by approximately $200,000.~~Company’s markets. Management continually monitors the interest rates on time deposit products to ensure that the Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.

~~Table of Contents~~

OFF-BALANCE

SHEET ARRANGEMENTS

Please refer to Note 2 to the ~~consolidated financial statements~~Consolidated Financial Statements included in this Quarterly Report for a discussion of the nature and extent of the Company’s

off-balance

sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Asset/Liability Management and Interest Rate Risk

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

Table of Contents

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

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

~~Table of Contents~~

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

The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


	June 30, 2022						December 31, 2021
	Following			Months			Following			Months
	12 months			13-24			12 months			13-24
+400 basis points		-6.6	%		0.6	%		-3.7	%		6.6	%
+300 basis points		-4.3	%		1.0	%		-1.3	%		6.9	%
+200 basis points		-2.1	%		1.4	%		-0.1	%		5.8	%
+100 basis points		-0.5	%		1.3	%		-0.8	%		2.6	%
Flat rates		—			—			—			—
-100 basis points		-4.2	%		-7.4	%		-5.5	%		-7.7	%
-200 basis points		-8.2	%		-14.8	%		-10.9	%		-13.6	%

Table of Contents

   June 30, 2021 December 31, 2020
   Following
12 months Months
13-24
Following
12 months Months
13-24

+400 basis points
   -5.3 % 0.5 % 9.1 % 8.9 %
+300 basis points
   -3.5 % 1.1 % 10.7 % 8.4 %
+200 basis points
   -2.2 % 1.2 % 11.6 % 7.3 %
+100 basis points
   -0.4 % 1.4 % 10.9 % 5.3 %
Flat rates
   —   —   —   —
-100 basis points
   -6.0 % -7.7 % -12.2 % -9.0 %
-200 basis points
   -9.9 % -12.9 % -19.8 % -19.9 %

The following table presents the change in our economic value of equity as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, assuming immediate parallel shifts in interest rates:

   Economic Value of
Equity at Risk (%)
   June 30,
2021 December 31,
2020
+400 basis points
   -18.8 % 11.3 %
+300 basis points
   -13.2 % 18.8 %
+200 basis points
   -7.7 % 24.6 %
+100 basis points
   -2.9 % 21.9 %
Flat rates
   —   —
-100 basis points
   -16.7 % -29.4 %
-200 basis points
   -34.1 % -43.1 %

~~Table of Contents~~


	Economic Value of Equity at Risk (%)
	June 30, 2022			December 31, 2021
+400 basis points		-24.7	%		-20.4	%
+300 basis points		-19.2	%		-13.8	%
+200 basis points		-13.1	%		-7.8	%
+100 basis points		-6.6	%		-3.1	%
Flat rates		—			—
-100 basis points		1.1	%		-13.0	%
-200 basis points		-3.7	%		-33.1	%

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

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

non-maturity

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

~~ITEM 4. CONTROLS AND PROCEDURES.~~

ITEM 4.

CONTROLS AND PROCEDURES.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of June 30, ~~2021~~2022 (the end of the period covered by this Quarterly Report).

There were no changes to the Company’s internal control over financial reporting that occurred in the six months ended June 30, ~~2021,~~2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

5848

Table of Contents

PART II. OTHER INFORMATION

~~ITEM 1. LEGAL PROCEEDINGS.~~

ITEM 1.

LEGAL PROCEEDINGS.

~~ITEM 1A. RISK FACTORS.~~

ITEM 1A.

RISK FACTORS.

The Company’s business, future

financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form

10-K

for the year ended December 31, ~~2020,~~2021, which the Company filed with the Securities and Exchange Commission on March ~~12, 2021.~~11, 2022. Additional information regarding some of those risks and uncertainties is contained in the notes to the consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report and in “Quantitative and Qualitative Disclosures About Market Risk” appearing in Part I, Item 3 of this Quarterly Report. The risks and uncertainties disclosed in the Company’s Annual Report on Form

10-K

for the year ended December 31, ~~2020,~~2021, the Company’s quarterly reports on Form

10-Q

and other reports and forms filed with the SEC are not necessarily all of the risks and uncertainties that may affect the Company’s business, financial condition and results

operations in the future.

ITEM 6.

EXHIBITS.

~~ITEM 6. EXHIBITS.~~

~~Exhibits~~


Exhibits

10(1)		Citizens Holding Company Revolving Credit Loan Agreement(1)

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

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

32(a)		Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350.

32(b)		Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350.

101		Financial Statements submitted in Inline XBRL format.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(1)	Filed as exhibit 10(1) to the Current Report on Form 8-K of the Company filed with the SEC on June 14, 2021 and incorporated herein by reference.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


CITIZENS HOLDING COMPANY

BY:		/s/ Greg L. McKee
Greg L. McKee
President and Chief Executive Officer
(Principal Executive Officer)

BY:		/s/ Phillip R. Branch
Phillip R. Branch
Treasurer and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)

DATE: August ~~6, 2021~~5, 2022

6050


ASSETS	June 30, 2021 (Unaudited)			December 31, 2020 (Audited)

Cash and cash equivalents	$	16,050		$	16,840
Interest bearing cash and cash equivalents		66,153			25,468
Investment securities available for sale, at fair value		542,671			678,749
Loans, net of allowance for loan losses of $4,351 in 2021 and $4,735 in 2020		629,691			647,521
Premises and equipment, net		25,446			25,630
Other real estate owned, net		4,481			3,073
Accrued interest receivable		3,465			5,983
Cash surrender value of life insurance		25,830			25,814
Deferred tax assets, net		4,924			1,548
Identifiable intangible assets, net		13,605			13,660
Other assets		5,818			6,406

TOTAL ASSETS	$	1,338,134		$	1,450,692

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing deposits	$	287,519		$	276,033
Interest bearing deposits		839,843			819,156

Total deposits		1,127,362			1,095,189
Securities sold under agreement to repurchase		67,286			196,272
Federal Home Loan Bank (FHLB) advances		—			25,000
Borrowings on secured line of credit		18,000			—
Accrued interest payable		454			522
Deferred compensation payable		9,875			9,665
Other liabilities		5,583			4,496

Total liabilities		1,228,560			1,331,144
SHAREHOLDERS’ EQUITY
Common stock, $0.20 par value:
Authorized: 22,500,000 shares
Issued and outstanding: 5,595,320 shares - June 30, 2021; 5,587,070 shares - December 31, 2020		1,120			1,118
Additional paid-in capital		18,214			18,134
Retained earnings		97,278			96,158
Accumulated other comprehensive (loss) income, net of tax benefit (expense) of $2,340 at June 30, 2021 and ($1,376) at December 31, 2020		(7,038	)		4,138

Total shareholders’ equity		109,574			119,548

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,338,134		$	1,450,692


			Gross		Gross
June 30, 2021	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	4,969	$	0	$	192	$	4,777
Mortgage backed securities		420,760		239		8,610		412,389
State, County, Municipals		125,818		837		1,650		125,005
Other Securities		500		0		0		500

Total	$	552,047	$	1,076	$	10,452	$	542,671


			Gross		Gross
December 31, 2020	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Obligations of U.S. Government agencies	$	11,870	$	191	$	0	$	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		0		508

Total	$	673,226	$	8,159	$	2,636	$	678,749


			Recorded		Recorded
	Unpaid		Investment		Investment		Total				Average
	Principal		With No		With		Recorded		Related		Recorded
	Balance		Allowance		Allowance		Investment		Allowance		Investment
Real Estate:
Land Development and Construction	$	185	$	185	$	—	$	185	$	—	$	247
Farmland		34		34		—		34		—		73
1-4 Family Mortgages		962		962		—		962		—		989
Commercial Real Estate		2,687		2,051		114		2,165		3		3,996

Total Real Estate Loans		3,868		3,232		114		3,346		3		5,305

Business Loans:
Commercial and Industrial Loans		304		72		160		232		36		323

Total Business Loans		304		72		160		232		36		323

Total Loans	$	4,172	$	3,304	$	274	$	3,578	$	39	$	5,628


	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


	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
(in thousands)
Operating lease cost	$	117	$	233
Short-term lease cost		6		12
Variable lease cost		0—		—

	$	123	$	245


	As of June 30, 2021
(in thousands)
Lease payments due:
Within one year	$	2,137
After one year but within two years		102
After two years but within three years		63
After three year but within four years		64
After four years but within five years		66
After five years		106

Total undiscounted cash flows		2,538
Discount on cash flows		(17	)

Total lease liability	$	2,521


	June 30, 2021			December 31, 2020
Core deposit intangible	$	630		$	739
Accumulated amortization		(55	)		(109	)

Total finite-lived intangible assets	$	575		$	630


Year ending December 31,	Amount
2021	$	54
2022		109
2023		109
2024		109
2025		109
Thereafter		85

	$ 575


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

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

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


			2021 Fair Value Measurements Using:
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals
Impaired loans	$	—	$	—	$	111	$	111
Other real estate owned		—		—		1,567		1,567

Total	$	—	$	—	$	1,678	$	1,678


Financial instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range of Inputs
Impaired loans	$	111	Appraised value of collateral less estimated costs to sell	Estimated costs to sell	25%
OREO		1,567	Appraised value of collateral less estimated costs to sell	Estimated costs to sell	25%


	TABLE 2 - VOLUME/RATE ANALYSIS (in thousands)
	Three Months Ended June 30, 2021
	2021 Change from 2020
	Volume			Rate			Total
INTEREST INCOME

Loans	$	282			56		$	338
Taxable Securities		286			(1,323	)		(1,037	)
Non-Taxable Securities		771			(149	)		622
Federal Funds Sold and Other		(22	)		(13	)		(35	)

TOTAL INTEREST INCOME	$	1,318		$	(1,430	)	$	(112	)

INTEREST EXPENSE

Interest-bearing demand deposits	$	138			(490	)		(352	)
Savings Deposits		7			(2	)		5
Time Deposits		109			(188	)		(79	)
Short-term borrowings		(34	)		5			(29	)

TOTAL INTEREST EXPENSE	$	220		$	(675	)		(455	)

NET INTEREST INCOME	$	1,098		$	(755	)	$	343


	Six Months Ended June 30, 2021
	2021 Change from 2020
	Volume			Rate			Total
INTEREST INCOME

Loans	$	1,288			(266	)	$	1,022
Taxable Securities		811			(3,243	)		(2,432	)
Non-Taxable Securities		1,279			(216	)		1,063
Federal Funds Sold and Other		(83	)		(155	)		(238	)

TOTAL INTEREST INCOME	$	3,295		$	(3,880	)	$	(585	)

INTEREST EXPENSE

Interest-bearing demand deposits	$	377			(1,125	)		(748	)
Savings Deposits		15			(15	)		—
Time Deposits		116			(497	)		(381	)
Short-term borrowings		22			(226	)		(204	)

TOTAL INTEREST EXPENSE	$	530		$	(1,863	)		(1,333	)

NET INTEREST INCOME	$	2,765		$	(2,017	)	$	748


	Quarter Ended June 30, 2021			Year Ended December 31, 2020			Amount of Increase (Decrease)			Percent of Increase (Decrease)
BALANCES:
Gross Loans	$	634,042		$	652,257		$	(18,215	)		-2.79	%
Allowance for Loan Losses		4,351			4,735			(384	)		-8.11	%
Nonaccrual Loans		4,366			8,484			(4,118	)		-48.54	%
Ratios:
Allowance for loan losses to gross loans		0.69	%		0.73	%
Net loans charged off to allowance for loan losses		16.16	%		10.67	%


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Other operating income	2021		2020		2021		2020
BOLI Income	$	306	$	123	$	436	$	229
Mortgage Loan Origination Income		323		282		718		529
Income from security sales, net		393		333		919		410
Other Income		108		193		500		322

Total Other Income	$	1,130	$	931	$	2,573	$	1,490


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Other Operating Expense	2021		2020		2021		2020
Advertising	$	162	$	156	$	303	$	360
Office supplies		235		311		484		603
Professional fees		217		261		454		519
Telephone expense		141		138		296		296
Postage and freight		161		138		330		279
Loan collection expense		16		20		70		43
Regulatory and related expense		237		104		472		239
Debit card/ATM expense		192		148		360		283
Write down on OREO		375		—		390		—
Other expenses		870		725		1,530		1,352

Total Other Expense	$	2,606	$	2,001	$	4,689	$	3,974


	June 30, 2021						December 31, 2020
	Following 12 months			Months 13-24			Following 12 months			Months 13-24
+400 basis points		-5.3	%		0.5	%		9.1	%		8.9	%
+300 basis points		-3.5	%		1.1	%		10.7	%		8.4	%
+200 basis points		-2.2	%		1.2	%		11.6	%		7.3	%
+100 basis points		-0.4	%		1.4	%		10.9	%		5.3	%
Flat rates		—			—			—			—
-100 basis points		-6.0	%		-7.7	%		-12.2	%		-9.0	%
-200 basis points		-9.9	%		-12.9	%		-19.8	%		-19.9	%


	Economic Value of Equity at Risk (%)
	June 30, 2021			December 31, 2020
+400 basis points		-18.8	%		11.3	%
+300 basis points		-13.2	%		18.8	%
+200 basis points		-7.7	%		24.6	%
+100 basis points		-2.9	%		21.9	%
Flat rates		—			—
-100 basis points		-16.7	%		-29.4	%
-200 basis points		-34.1	%		-43.1	%

Large accelerated filer

Accelerated filer

Non-accelerated
filer

Smaller Reporting Company

Emerging growth company