CITIZENS HOLDING CO /MS/ 10-Q

10-Q Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-15375 CITIZENS HOLDING COMPANY (Exact name of registrant as specified in its charter) Mississippi 64-0666512 (State or other jurisdiction of In Company or organization) (IRS Employer Identification No.) 521 Main Street , Philadelphia , MS 39350 (Address of principal executive offices) (Zip Code) 601 - 656-469 2 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, $0.20 par value CIZN NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller Reporting Company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No Number of shares outstanding of each of the issuer’s classes of common stock, as of May 6, 2022: Title Outstanding Common Stock, $0.20 par value 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 March 31, 2022 (Unaudited) and December 31, 2021 (Audited) 1 Consolidated Statements of Income for the Three months ended March 31, 2022 (Unaudited) and 2021 (Unaudited) 2 Consolidated Statements of Comprehensive Loss for the Three months ended March 31, 2022 (Unaudited) and 2021 (Unaudited) 3 Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2022 (Unaudited) and 2021 (Unaudited) 4 Notes to Consolidated Financial Statements (Unaudited) 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 42 Item 4. Controls and Procedures. 44 PART II. OTHER INFORMATION 45 Item 1. Legal Proceedings. 45 Item 1A. Risk Factors. 45 Item 6. Exhibits. 45 SIGNATURES 46 Table of Contents PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except share data) March 31, 2022 (Unaudited) December 31, 2021 (Audited) ASSETS Cash and due from banks $ 13,228 $ 10,673 Interest bearing deposits with other banks 59,217 68,563 Cash and cash equivalents 72,445 79,236 Investment securities available for sale, at fair value 600,766 631,835 Loans held for investment (LHFI), net of unearned income 583,194 571,847 Less allowance for loan losses, LHFI 4,776 4,513 Net LHFI 578,418 567,334 Premises and equipment, net 26,630 26,661 Other real estate owned, net 1,421 2,475 Accrued interest receivable 4,014 4,171 Cash surrender value of life insurance 25,877 25,679 Deferred tax assets, net 20,669 6,279 Identifiable intangible assets, net 13,524 13,551 Other assets 4,928 4,088 TOTAL ASSETS $ 1,348,692 $ 1,361,309 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits: Non-interest bearing deposits $ 305,674 $ 302,707 Interest bearing deposits 843,906 809,185 Total deposits 1,149,580 1,111,892 Securities sold under agreement to repurchase 105,795 112,760 Borrowings on secured line of credit 18,000 18,000 Accrued interest payable 345 328 Deferred compensation payable 9,640 9,543 Other liabilities 2,382 2,886 Total liabilities 1,285,742 1,255,409 SHAREHOLDERS’ EQUITY Common stock, $ 0.20 par value, 22,500,000 shares authorized, 5,595,320 shares issued and outstanding at March 31, 2022 and at December 31, 2021 1,120 1,120 Additional paid-in capital 18,332 18,293 Accumulated other comprehensive loss, net of tax benefit of $ 18,443 at March 31, 2021 and $ 3,921 at December 31, 2021 ( 55,477 ) ( 11,795 ) Retained earnings 98,975 98,282 Total shareholders’ equity 62,950 105,900 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,348,692 $ 1,361,309 The accompanying notes are an integral part of these financial statements. 1 Table of Contents CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) (Unaudited) For the Three Months Ended March 31, 2022 2021 INTEREST INCOME Interest and fees on loans $ 6,397 $ 8,131 Interest on securities Taxable 1,697 262 Nontaxable 947 671 Other interest 13 15 Total interest income 9,054 9,079 INTEREST EXPENSE Deposits 556 1,266 Other borrowed funds 211 180 Total interest expense 767 1,446 NET INTEREST INCOME 8,287 7,633 PROVISION FOR LOAN LOSSES 93 87 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,194 7,546 OTHER INCOME Service charges on deposit accounts 945 814 Other service charges and fees 1,025 975 Net gains on sales of securities — 526 Other operating income 563 917 Total other income 2,533 3,232 OTHER EXPENSES Salaries and employee benefits 4,439 4,568 Occupancy expense 1,775 1,817 Other expense 2,087 2,083 Total other expenses 8,301 8,468 INCOME BEFORE PROVISION FOR INCOME TAXES 2,426 2,310 PROVISION FOR INCOME TAXES 390 413 NET INCOME $ 2,036 $ 1,897 NET INCOME PER SHARE -Basic $ 0.36 $ 0.34 -Diluted $ 0.36 $ 0.34 DIVIDENDS PAID PER SHARE $ 0.24 $ 0.24 The accompanying notes are an integral part of these financial statements. 2 Table of Contents CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (in thousands) For the Three Months Ended March 31, 2022 2021 Net income $ 2,036 $ 1,897 Other comprehensive loss Securities available-for-sale Net unrealized holding losses ( 58,204 ) ( 18,737 ) Income tax effect 14,522 4,674 Net unrealized losses ( 43,682 ) ( 14,063 ) Reclassification adjustment for gains included in net income — 526 Income tax effect — ( 131 ) Net gains included in net income — 395 Total other comprehensive loss ( 43,682 ) ( 13,668 ) Comprehensive loss $ ( 41,646 ) $ ( 11,771 ) The accompanying notes are an integral part of these financial statements. 3 Table of Contents CITIZENS HOLDING COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Three Months Ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 2,978 $ 4,845 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and calls of securities available for sale 15,803 77,734 Proceeds from sale of investment securities — 206,125 Purchases of investment securities available for sale ( 43,886 ) ( 400,134 ) Purchases of bank premises and equipment ( 250 ) ( 259 ) Purchases of federal home loan bank stock ( 717 ) — Proceeds from sale of other real estate owned 1,078 364 Net change in loans ( 11,177 ) 11,166 Net cash used in investing activities ( 39,149 ) ( 105,004 ) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 37,688 134,432 (Decrease) increase in securities sold under agreement to repurchase ( 6,965 ) 1,436 Payment of federal home loan bank (FHLB) advances — ( 25,000 ) Payment of dividends ( 1,343 ) ( 1,341 ) Net cash provided by financing activities 29,380 109,527 Net (decrease) increase in cash and cash equivalents ( 6,791 ) 9,368 Cash and cash equivalents, beginning of period 79,236 42,308 Cash and cash equivalents, end of period $ 72,445 $ 51,676 The accompanying notes are an integral part of these financial statements. 4 Table of Contents CITIZENS HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the three months ended March 31, 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 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. Basis of Presentation These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 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 the Company include the accounts of its wholly-owned subsidiary, The Citizens Bank of Philadelphia (the “Bank” and collectively with the Company, the “Company”). 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, 2021, filed with the Securities and Exchange Commission on March 11, 2022. 5 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. Newly Issued, But Not Yet Effective Accounting Standards In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments and disclosures about them. The new current expected credit loss (“CECL”) impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics, determining the contractual terms of said financial assets and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are currently effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. However, in October 2019, the FASB approved deferral of the effective date for ASU 2016-13 for certain companies. The new effective date for the Company is January 1, 2023. ASU 2016-13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The ASU lists several common credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (PD/LGD) method. Depending on the nature of each identified pool of 6 Table of Contents financial assets with similar risk characteristics, the Company currently plans on implementing a PD/LGD method or a loss-rate method to estimate expected credit losses. The Company expects ASU 2016-13 to have a significant impact on the Company’s accounting policies, internal controls over financial reporting and footnote disclosures. The Company has assessed its data and system needs and has begun designing its financial models to estimate expected credit losses in accordance with the standard. Further development, testing and evaluation is required to determine the impact that adoption of this standard will have on the financial condition 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 March 31, 2022, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $ 101,696 compared to an aggregate unused balance of $ 112,292 at December 31, 2021. There were $ 4,484 of letters of credit outstanding at March 31, 2022 and $ 4,432 at December 31, 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. 7 Table of Contents Note 3. Net Income per Share (in thousands, except share and per share data) Net income per share - basic has been computed based on the weighted average number of shares outstanding during each period. Net income per share - diluted has been computed based on the weighted average number of shares outstanding during each period plus the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Net income per share was computed as follows: For the Three Months Ended March 31, 2022 2021 Basic weighted average shares outstanding 5,587,070 5,578,820 Dilutive effect of granted options — 994 Diluted weighted average shares outstanding 5,587,070 5,579,814 Net income $ 2,036 $ 1,897 Net income per share-basic $ 0.36 $ 0.34 Net income per share-diluted $ 0.36 $ 0.34 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. The following table is a summary of the stock option activity for the three months ended March 31, 2022: Directors’ Plan 2013 Plan Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Outstanding at December 31, 2021 9,000 $ 18.76 — $ — Granted — — — — Exercised — — — — Expired — — — — Outstanding at March 31, 2022 9,000 $ 18.76 — $ — The intrinsic value of options outstanding under the Directors’ Plan at March 31, 2022, was $ 5 . No options were outstanding under the 2013 Plan as of March 31, 2022. During 2021, 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 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 and is expensed ratably over the one-year vesting period. 8 Table of Contents Note 5. Income Taxes (in thousands) For the three months ended March 31, 2022 and 2021, the Company recorded a provision for income taxes totaling $ 390 and $ 413 , respectively. The effective tax rate was 16.08 % and 17.88 % for the three months ending March 31, 2022 and 2021, 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. 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: March 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Securities available-for-sale Obligations of U.S. Government agencies $ 4,970 $ — $ 683 $ 4,287 Mortgage backed securities 433,024 15 40,946 392,093 State, County, Municipals 236,221 53 32,358 203,916 Other securities 500 — 30 470 Total $ 674,715 $ 68 $ 74,017 $ 600,766 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 At March 31, 2022 and December 31, 2021, securities with a carrying value of $ 366,958 and $ 371,190 , respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase. 9 Table of Contents The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2022 and December 31, 2021 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations. March 31, 2022 December 31, 2021 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Available-for-sale Due in one year or less $ 215 $ 215 $ 216 $ 217 Due after one year through five years 1,894 1,856 1,895 1,924 Due after five years through ten years 4,226 4,146 4,226 4,287 Due after ten years 235,356 202,456 229,491 225,816 Residential mortgage backed securities 356,046 323,698 332,779 323,736 Commercial mortgage backed securities 76,978 68,395 78,950 75,855 Total $ 674,715 $ 600,766 $ 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 March 31, 2022 and December 31, 2021. A summary of unrealized loss information for securities available-for-sale, categorized by security type follows: March 31, 2022 Less than 12 months 12 months or more Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. government agencies $ — $ — $ 4,287 $ 683 $ 4,287 $ 683 Mortgage backed securities 136,126 12,224 252,656 28,722 388,782 40,946 State, County, Municipal 168,178 21,986 31,619 10,372 199,797 32,358 Total $ 304,304 $ 34,210 $ 288,562 $ 39,777 $ 592,866 $ 73,987 December 31, 2021 Less than 12 months 12 months or more Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. government agencies $ 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 10 Table of Contents The Company’s unrealized losses on its obligations of United States government agencies, 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 March 31, 2022 nor at December 31, 2021.​​​​​​​​​​​​​​ Note 7. Loans held for investment (in thousands, except number of loans) The composition of net loans at March 31, 2022 and December 31, 2021 was as follows: March 31, 2022 December 31, 2021 (1) Real Estate: Land Development and Construction $ 80,812 $ 71,898 Farmland 12,738 13,114 1-4 Family Mortgages 95,488 98,525 Commercial Real Estate 286,956 281,239 Total Real Estate Loans 475,994 464,776 Business Loans: Commercial and Industrial Loans (2) 92,311 92,501 Farm Production and Other Farm Loans 643 621 Total Business Loans 92,954 93,122 Consumer Loans: Credit Cards 2,102 1,963 Other Consumer Loans 12,144 11,986 Total Consumer Loans 14,246 13,949 Total Gross Loans 583,194 571,847 Allowance for Loan Losses ( 4,776 ) ( 4,513 ) Loans, net $ 578,418 $ 567,334 (1) Reclassifications from acquired loans to loans held for investment. (2) Includes PPP loans of $ 2,047 and $ 5,789 as of March 31, 2022 and December 31, 2021, respectively. 11 Table of Contents 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: March 31, 2022 December 31, 2021 Real Estate: Land Development and Construction $ 166 $ 171 Farmland 112 118 1-4 Family Mortgages 1,782 1,891 Commercial Real Estate 1,205 1,249 Total Real Estate Loans 3,265 3,429 Business Loans: Commercial and Industrial Loans 274 386 Farm Production and Other Farm Loans 2 3 Total Business Loans 276 389 Consumer Loans: Other Consumer Loans 4 8 Total Consumer Loans 4 8 Total Nonaccrual Loans $ 3,545 $ 3,826 12 Table of Contents An aging analysis of past due loans, segregated by class, as of March 31, 2022, was as follows: Loans 30-89 Days Past Due Loans 90 or more Days Past Due Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or more Days Past Due Real Estate: Land Development and Construction $ 9 $ 6 $ 15 $ 80,797 $ 80,812 $ 6 Farmland 161 — 161 12,577 12,738 — 1-4 Family Mortgages 1,767 31 1,798 93,690 95,488 — Commercial Real Estate 158 569 727 286,229 286,956 — Total Real Estate Loans 2,095 606 2,701 473,293 475,994 6 Business Loans: Commercial and Industrial Loans 80 266 346 91,965 92,311 — Farm Production and Other Farm Loans 7 — 7 636 643 — Total Business Loans 87 266 353 92,601 92,954 — Consumer Loans: Credit Cards 57 10 67 2,035 2,102 10 Other Consumer Loans 48 — 48 12,096 12,144 — Total Consumer Loans 105 10 115 14,131 14,246 10 Total Loans $ 2,287 $ 882 $ 3,169 $ 580,025 $ 583,194 $ 16 13 Table of Contents An aging analysis of past due loans, segregated by class, as of December 31, 2021 was as follows: Loans 30-89 Days Past Due Loans 90 or more Days Past Due Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or more Days Past Due Real Estate: Land Development and Construction $ 6 $ — $ 6 $ 71,892 $ 71,898 $ — Farmland 130 33 163 12,951 13,114 — 1-4 Family Mortgages 1,678 292 1,970 96,555 98,525 140 Commercial Real Estate 157 570 727 280,512 281,239 — Total Real Estate Loans 1,971 895 2,866 461,910 464,776 140 Business Loans: Commercial and Industrial Loans 205 376 581 91,920 92,501 — Farm Production and Other Farm Loans 3 — 3 618 621 — Total Business Loans 208 376 584 92,538 93,122 — Consumer Loans: Credit Cards 35 12 47 1,916 1,963 12 Other Consumer Loans 76 2 78 11,908 11,986 2 Total Consumer Loans 111 14 125 13,824 13,949 14 Total Loans $ 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. 14 Table of Contents Impaired loans as of March 31, 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 $ 166 $ 166 $ — $ 166 $ — $ 169 Farmland 32 32 — 32 — 33 1-4 Family Mortgages 640 640 — 640 — 704 Commercial Real Estate 4,198 4,036 — 4,036 — 2,583 Total Real Estate Loans 5,036 4,874 — 4,874 — $ 3,489 Business Loans: Commercial and Industrial Loans 304 196 — 196 — $ 214 Total Business Loans 304 196 — 196 — $ 214 Total Loans $ 5,340 $ 5,070 $ — $ 5,070 $ — $ 3,703 Impaired loans as of December 31, 2021, 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 15 Table of Contents The Company did not have any new troubled debt restructurings as of March 31, 2022 or December 31, 2021. Changes in the Company’s troubled debt restructurings are set forth in the table below: Number of Loans Recorded Investment Totals at January 1, 2021 3 $ 2,113 Reductions due to: Principal paydowns ( 112 ) Reclassification to OREO 2 ( 1,788 ) Totals at December 31, 2021 1 $ 213 Reductions due to: Principal paydowns ( 25 ) Total at March 31, 2022 1 $ 188 The allocated allowance for loan losses attributable to restructured loans was $- 0 - at March 31, 2022 and December 31, 2021. The Company had no commitments to lend additional funds on this troubled debt restructuring as of March 31, 2022. 16 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 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 not align with peers. Grade 5. MANAGEMENT ATTENTION - Borrower has 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 weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. These loans have an identifiable weakness in credit, collateral, or repayment ability but there is no expectation of loss. Grade 7. SUBSTANDARD ASSETS - Assets classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard must have a well-defined weakness based upon objective evidence. Assets classified as substandard are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss. Grade 8. DOUBTFUL - A loan classified as doubtful has all the weaknesses of a substandard classification and the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. A doubtful classification could reflect the fact that the primary source of repayment is gone and serious doubt exists as to the quality of a secondary source of repayment. 17 Table of Contents Grade 9. LOSS - Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Also included in this classification is the defined loss portion of loans rated substandard assets and doubtful assets. These internally assigned grades are updated on a continual basis throughout the course of the year and represent management’s most updated judgment regarding grades at March 31, 2022. The following table details the amount of gross loans, segregated by loan grade and class, as of March 31, 2022: Satisfactory 1,2,3,4 Special Mention 5,6 Substandard 7 Doubtful 8 Loss 9 Total Loans Real Estate: Land Development and Construction $ 78,975 $ 1,261 $ 576 $ — $ — $ 80,812 Farmland 12,016 289 433 — — 12,738 1-4 Family Mortgages 87,740 2,575 5,173 — — 95,488 Commercial Real Estate 242,386 7,274 37,296 — — 286,956 Total Real Estate Loans 421,117 11,399 43,478 — — 475,994 Business Loans: Commercial and Industrial Loans 85,577 706 6,028 — — 92,311 Farm Production and Other Farm Loans 632 — 9 — 2 643 Total Business Loans 86,209 706 6,037 — 2 92,954 Consumer Loans: Credit Cards 2,035 — 67 — — 2,102 Other Consumer Loans 12,076 16 52 — — 12,144 Total Consumer Loans 14,111 16 119 — — 14,246 Total Loans $ 521,437 $ 12,121 $ 49,634 $ — $ 2 $ 583,194 18 Table of Contents The following table details the amount of gross loans segregated by loan grade and class, as of December 31, 2021: Satisfactory 1,2,3,4 Special Mention 5,6 Substandard 7 Doubtful 8 Loss 9 Total Loans Real Estate: Land Development and Construction $ 69,758 $ 1,547 $ 593 $ — $ — $ 71,898 Farmland 12,365 297 452 — — 13,114 1-4 Family Mortgages 89,120 3,590 5,815 — — 98,525 Commercial Real Estate 238,561 8,055 34,623 — — 281,239 Total Real Estate Loans 409,804 13,489 41,483 — — 464,776 Business Loans: Commercial and Industrial Loans 85,138 1,483 5,877 — 3 92,501 Farm Production and Other Farm Loans 606 — 12 — 3 621 Total Business Loans 85,744 1,483 5,889 — 6 93,122 Consumer Loans: Credit Cards 1,916 — 47 — — 1,963 Other Consumer Loans 11,903 20 58 3 2 11,986 Total Consumer Loans 13,819 20 105 3 2 13,949 Total Loans $ 509,367 $ 14,992 $ 47,477 $ 3 $ 8 $ 571,847 19 Table of Contents Note 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 months ended March 31, 2022: March 31, 2022 Real Estate Business Loans Consumer Total Beginning Balance, January 1, 2022 $ 3,622 $ 645 $ 246 $ 4,513 Provision for (reversal of) loan losses 170 57 ( 134 ) 93 Chargeoffs — 56 26 82 Recoveries 50 5 197 252 Net (recoveries) chargeoffs ( 50 ) 51 ( 171 ) ( 170 ) Ending Balance $ 3,842 $ 651 $ 283 $ 4,776 Period end allowance allocated to: Loans individually evaluated for impairment $ — $ — $ — $ — Loans collectively evaluated for impairment 3,842 651 283 4,776 Ending Balance, March 31, 2022 $ 3,842 $ 651 $ 283 $ 4,776 20 Table of Contents The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2021: March 31, 2021 Real Estate Business Loans Consumer Total Beginning Balance, January 1, 2021 $ 3,885 $ 611 $ 239 $ 4,735 Provision for loan losses 33 22 32 87 Chargeoffs 31 31 35 97 Recoveries 36 3 8 47 Net (recoveries) chargeoffs ( 5 ) 28 27 50 Ending Balance $ 3,923 $ 605 $ 244 $ 4,772 Period end allowance allocated to: Loans individually evaluated for impairment $ 766 $ 108 $ — $ 874 Loans collectively evaluated for impairment 3,157 497 244 3,898 Ending Balance, March 31, 2021 $ 3,923 $ 605 $ 244 $ 4,772 The Company’s recorded investment in loans as of March 31, 2022 and December 31, 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: March 31, 2022 Real Estate Business Loans Consumer Total Loans individually evaluated for specific impairment $ 4,874 $ 196 $ — $ 5,070 Loans collectively evaluated for general impairment 471,120 92,758 14,246 578,124 $ 475,994 $ 92,954 $ 14,246 $ 583,194 December 31, 2021 Real Estate Business 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 21 Table of Contents Note 9. Other Intangible Assets (in thousands) The following table provides a summary of finite-lived intangible assets as of the dates presented: March 31, 2022 December 31, 2021 Core deposit intangible $ 766 $ 766 Accumulated amortization ( 272 ) ( 245 ) Total finite-lived intangible assets $ 494 $ 521 Core deposit intangible amortization expense for the period ended March 31, 2022 and period ended March 31, 2021 was $ 27 and $ 27 , 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 2022 $ 82 2023 109 2024 109 2025 109 2026 85 Thereafter — $ 494 Note 10. 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. The Line also bears an unused line fee at a rate equal to 0.25 %, applied to the unused balance of 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. March 31, 2022 December 31, 2021 Funded balance $ 18,000 $ 18,000 Unfunded balance 2,000 2,000 Total credit facility $ 20,000 $ 20,000 22 Table of Contents Note 11. 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 (Loss) Income Retained Earnings Total Balance, January 1, 2022 5,595,320 $ 1,120 $ 18,293 $ ( 11,795 ) $ 98,282 $ 105,900 Net income — — — — 2,036 2,036 Dividends paid ($0.24 per share) — — — — ( 1,343 ) ( 1,343 ) Options exercised — — — — — — Restricted stock granted — — — — — — Stock compensation expense — — 39 — — 39 Other comprehensive loss, net — — — ( 43,682 ) — ( 43,682 ) Balance, March 31, 2022 5,595,320 $ 1,120 $ 18,332 $ ( 55,477 ) $ 98,975 $ 62,950 Number of Shares Issued Common Stock Additional Paid-In Capital Accumulated Other Comprehensive (Loss) Income Retained 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 23 Table of Contents Note 12. 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. The following table presents assets and liabilities that were measured at fair value on a recurring basis as of March 31, 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 $ — $ 4,287 $ — $ 4,287 Mortgage-backed securities — 392,093 — 392,093 State, county and municipal — 203,916 — 203,916 Other securities 470 — — 470 Total $ 470 $ 600,296 — $ 600,766 24 Table of Contents The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2021: 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 $ — $ 4,700 $ — $ 4,700 Mortgage-backed securities — 399,591 — 399,591 State, county and municipal — 227,051 — 227,051 Other securities 493 — — 493 Total $ 493 $ 631,342 — $ 631,835 The Company recorded no gains or losses in earnings for the period ended March 31, 2022 or December 31, 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 and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling, closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified. Other real estate owned OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the 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 25 Table of Contents 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 March 31, 2022. For assets measured at fair value on a nonrecurring basis during 2021 that were still held on the Company’s balance sheet at December 31, 2021, 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 $ — $ — $ 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 $- 0 - and $ 112 , had an allocated allowance for loan losses of $- 0 - and $ 3 at March 31, 2022 and December 31, 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. After monitoring the carrying amounts for subsequent declines or impairments after foreclosure, management determined that a fair value adjustment to OREO in the amount of $- 0 - and $ 836 was necessary and recorded during the three-month period ended March 31, 2022 and the year ended December 31, 2021, respectively. 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 March 31, 2022: ​​​​​​​ 26 Table of Contents Fair Value Measurements Using: March 31, 2022 Carrying Value Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Fair Value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 13,228 $ 13,228 $ — $ — $ 13,228 Interest bearing deposits with banks 59,217 59,217 — — 59,217 Securities available-for-sale 600,766 470 600,296 — 600,766 Net LHFI 578,418 — — 559,356 559,356 Financial liabilities Deposits $ 1,149,580 $ 944,563 $ 205,400 $ — $ 1,149,963 Securities sold under agreement to repurchase 105,795 105,795 — — 105,795 Borrowings on secured line of credit 18,000 18,000 — — 18,000 The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2021: Fair Value Measurements Using: December 31, 2021 Carrying Value Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Unobservable Inputs Total Fair Value (Level 1) (Level 2) (Level 3) Financial assets Cash and due from banks $ 10,673 $ 10,673 $ — $ — $ 10,673 Interest bearing deposits with banks 68,563 68,563 — — 68,563 Securities available-for-sale 631,835 493 631,342 — 631,835 Net LHFI 567,334 — — 554,351 554,351 Financial liabilities Deposits $ 1,111,892 $ 861,552 $ 230,590 $ — $ 1,092,142 Securities sold under agreement to repurchase 112,760 112,760 — — 112,760 Borrowings on secured line of credit 18,000 18,000 — — 18,000 27 Table of Contents ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (in thousands, except share and per share data) FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management’s beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report. The 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; • inflationary risks 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; • our ability to maintain sufficient capital and to raise additional capital when needed; 28 Table of Contents • our ability to maintain adequate liquidity to conduct business and meet our obligations; • events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people; • events that adversely affect our reputation, and the resulting potential adverse impact on our business operations; • risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and provisions in our governing documents that may make it more difficult for another party to obtain control of us; and • other risks detailed from time-to-time in the Company’s filings with the Securities and Exchange Commission. 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 March 31, 2022, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,348,538 and total deposits of $1,150,255. In addition to full service commercial banking, the Bank offers title insurance services through its 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. 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 29 Table of Contents 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 March 31, 2022, was 34.42% and at December 31, 2021, was 39.71%. The decrease was due to a decrease in interest bearing cash and cash equivalents and a decline in the fair market value of investment securities as of March 31, 2022. Management believes it maintains adequate liquidity for the Company’s current needs. The Company’s primary source of liquidity is customer deposits, which were $1,149,580 at March 31, 2022, and $1,111,892 at December 31, 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 $674,715 invested in available-for-sale investment securities at March 31, 2022, and $647,557 at December 31, 2021. The increase in securities is the result of management deploying excess cash into higher yielding assets. The Company also had $59,217 in interest bearing deposits at other banks at March 31, 2022 and $68,563 at December 31, 2021. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $45,000 at both March 31, 2022 and December 31, 2021. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At March 31, 2022, the Company had unused and available $210,522 of its line of credit with the FHLB and at December 31, 2021, the Company had unused and available $221,088 of its line of credit with the FHLB. The decrease in the amount available under the Company’s line of credit with the FHLB from the end of 2021 to March 31, 2022, was the result of 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 March 31, 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 March 31, 2022 and December 31, 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 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. CAPITAL RESOURCES Total shareholders’ equity was $62,950 at March 31, 2022, as compared to $105,900 at December 31, 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. The AOCL is a result of an increase in interest rates that have 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 has significant liquidity options available if the need for short-term funds arises. 30 Table of Contents The Company paid aggregate cash dividends in the amount of $1,343, or $0.24 per share, during the three-month period ended March 31, 2022 compared to $1,341, or $0.24 per share, for the same period in 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 March 31, 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. Actual Minimum Capital Requirement to be Well Capitalized Minimum Capital Requirement to be Adequately Capitalized Amount Ratio Amount Ratio Amount Ratio March 31, 2022 Citizens Holding Company Tier 1 leverage ratio $ 104,957 7.70 % $ 68,117 5.00 % $ 54,493 4.00 % Common Equity tier 1 capital ratio 104,957 12.77 % 88,552 6.50 % 61,305 4.50 % Tier 1 risk-based capital ratio 104,957 12.77 % 65,750 8.00 % 49,313 6.00 % Total risk-based capital ratio 109,733 13.35 % 82,188 10.00 % 65,750 8.00 % The Citizens Bank of Philadelphia Tier 1 leverage ratio $ 122,237 8.97 % $ 68,104 5.00 % $ 54,484 4.00 % Common Equity tier 1 capital ratio 122,237 8.97 % 88,536 6.50 % 61,294 4.50 % Tier 1 risk-based capital ratio 122,237 14.88 % 65,738 8.00 % 49,304 6.00 % Total risk-based capital ratio 127,013 15.46 % 82,173 10.00 % 65,738 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. 31 Table of Contents Beginning January 1, 2015, the Company and the Bank began to comply with the final Basel III rules, which became effective on January 1, 2019. Among other things, the final Basel III rules impact regulatory capital ratios of banking organizations in the following manner: • Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%; • Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking organizations); • Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and • Maintain the minimum total risk-based capital ratio at 8%. In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers. The final Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the final Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital. Management believes that, as of March 31, 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. 32 Table of Contents RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods: For the Three Months Ended March 31, 2022 2021 Interest Income, including fees $ 9,054 $ 9,079 Interest Expense 767 1,446 Net Interest Income 8,287 7,633 Provision for loan losses 93 87 Net Interest Income after Provision for loan losses 8,194 7,546 Other Income 2,533 3,232 Other Expense 8,301 8,468 Income Before Provision For Income Taxes 2,426 2,310 Provision for Income Taxes 390 413 Net Income $ 2,036 $ 1,897 Net Income Per share - Basic $ 0.36 $ 0.34 Net Income Per Share-Diluted $ 0.36 $ 0.34 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 8.53% for the three months ended March 31, 2022, and 6.45% for the corresponding period in 2021. The increase in ROE for the three months March 31, 2022 compared to the same period in 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 $11.27 at March 31, 2022, compared to $18.95 at December 31, 2021. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity discussed above. Average assets for the three months ended March 31, 2022 were $1,352,709 compared to $1,412,082 for the year ended December 31, 2021. This decrease was due mainly to the Company reducing higher interest-bearing deposits throughout 2021. 33 Table of Contents 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 $8,287 for the three months ended March 31, 2022, as compared to $7,633 for the same respective time period in 2021. The annualized net interest margin was 2.69% for the three months ended March 31, 2022 compared to 2.32% for the corresponding period of 2021. The increase in net interest margin for the three months ended Mach 31, 2022, when compared to the same period in 2021, was mainly due to interest on securities increasing by $1,711, or 183.39%, to $2,644 compared to $933 in same period in 2021. Additionally, management decreased the cost of funds to 33 basis point (“bps”) for the three months ended March 31, 2022 compared to 54 bps for the three months ended March 31, 2021. 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 by $1,734, or (21.33%), compared to the same period in 2021. At the current stage in the pandemic 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 reasonably 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 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. 34 Table of Contents 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: TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES Three Months Ended March 31, Average Balance Income/Expense Average Yield/Rate 2022 2021 2022 2021 2022 2021 Loans: Loans, net of unearned (1) $ 578,127 $ 652,783 $ 6,426 $ 8,173 4.45 % 5.01 % Investment Securities Taxable 462,140 545,923 1,698 262 1.47 % 0.19 % Tax-exempt 210,915 128,612 1,183 899 2.24 % 2.80 % Total Investment Securities 673,055 674,535 2,881 1,161 1.71 % 0.69 % Federal Funds Sold and Other 32,790 51,206 13 15 0.16 % 0.12 % Total Interest Earning Assets (1)(2) 1,283,972 1,378,524 9,320 9,349 2.90 % 2.71 % Non-Earning Assets 68,737 112,146 Total Assets $ 1,352,709 $ 1,490,670 Deposits: Interest-bearing Demand Deposits (3) $ 477,248 $ 513,117 $ 188 $ 518 0.16 % 0.40 % Savings 129,694 107,314 31 27 0.10 % 0.10 % Time 219,785 242,861 337 721 0.61 % 1.19 % Total Deposits 826,727 863,292 556 1,266 0.27 % 0.15 % Borrowed Funds Short-term Borrowings 99,221 212,849 60 180 0.24 % 0.34 % Long-term Borrowings 18,000 — 151 — 3.36 % 0.00 % Total Borrowed Funds 117,221 212,849 211 180 0.72 % 0.34 % Total Interest-Bearing Liabilities (3) 943,948 1,076,141 767 1,446 0.33 % 0.54 % Non-Interest Bearing Liabilities Demand Deposits 300,428 269,051 Other Liabilities 12,871 27,866 Shareholders’ Equity 95,462 117,612 Total Liabilities and Shareholders’ Equity $ 1,352,709 $ 1,490,670 Interest Rate Spread 2.58 % 2.18 % Net Interest Margin $ 8,553 $ 7,903 2.69 % 2.32 % Less Tax Equivalent Adjustment 266 270 Net Interest Income $ 8,287 $ 7,633 35 Table of Contents (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. (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. 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 March 31, 2022, repricing of interest-bearing demand deposits, and reallocating the investment portfolio into slower prepaying non-taxable securities and lower coupon mortgage-backed securities offset both the decline in yield on loans and the decline on yield on tax-exempt securities compared to the same period in 2021. Management believes by continuing to reprice and strategically reduce interest-bearing liabilities as they mature, continued focus on loan growth, and continuing to reallocate the investment mix will increase the net interest margin. 36 Table of Contents 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 months ended March 31, 2022 compared to the same respective period in 2021: TABLE 2 - VOLUME/RATE ANALYSIS (in thousands) Three Months Ended March 31, 2022 2022 Change from 2021 Volume Rate Total INTEREST INCOME Loans $ (935 ) (812 ) $ (1,747 ) Taxable Securities (40 ) 1,476 1,436 Non-Taxable Securities 579 (291 ) 288 Federal Funds Sold and Other (5 ) 3 (2 ) TOTAL INTEREST INCOME $ (401 ) $ 376 $ (25 ) INTEREST EXPENSE Interest-bearing demand deposits $ (36 ) (294 ) (330 ) Savings Deposits 6 (2 ) 4 Time Deposits (69 ) (315 ) (384 ) Short-term borrowings (96 ) (24 ) (120 ) Long-term borrowings — 151 151 TOTAL INTEREST EXPENSE $ (195 ) $ (484 ) (679 ) NET INTEREST INCOME $ (206 ) $ 860 $ 654 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, 37 Table of Contents 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. 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. Management determines the amount of the 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 March 31, 2022 Year Ended December 31, 2021 Amount of Increase (Decrease) Percent of Increase (Decrease) BALANCES: Gross Loans $ 583,194 $ 571,847 $ 11,347 1.98 % Allowance for Loan Losses 4,776 4,513 263 5.83 % Nonaccrual Loans 3,545 3,826 (281 ) -7.34 % Ratios: Allowance for loan losses to gross loans 0.82 % 0.79 % Net loans (recovered) charged off to allowance for loan losses -3.56 % 20.56 % The provision for loan losses for the three months ended March 31, 2022 was $93. The provision was primarily driven by loan growth during the quarter coupled with qualitative factor adjustments due to inflationary risk concerns to both the local and national 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 to payments received and loans charged off in excess of new loans being added to nonaccrual status. For the three months ended March 31, 2022, net loan losses recovered to the allowance for loan losses totaled $170, a decrease of $220 from the $50 charged off in the same period in 2021. A majority of the recoveries for the three months ended March 31, 2022 was due to recovery payments from one consumer loan that was previously charged-off in the fourth quarter of 2021. The total amount of recoveries from this loan was $175 for the three months ended March 31, 2022. 38 Table of Contents 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 three months ended March 31, 2022 that have not been charged 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 March 31, 2022 was $2,533, a decrease of $699, or (21.63%), from $3,232 in the same period in 2021. Service charges on deposit accounts were $945 in the three months ended March 31, 2022, compared to $814 for the same period in 2021. As the national and local economies are continuing to recover, spending and overdraft income have continued to trend upward. Included in the service charges on deposit accounts line item for the three months ended March 31, 2021, overdraft income increased by $124, or 22.56%, from the same period in 2021. Other service charges and fees increased by $50, or 5.13%, to $1,025 for the three months ended March 31, 2022 compared to $975 for the same period in 2021. Interchange fees which are included in the other service charges and fees line item on the income statement reflected a majority of the increase, by increasing $33, or 3.69%, to $922 for the three months ended March 31, 2022, compared to $889 for the same period in 2021. Other operating income not derived from service charges or fees decreased $354, or (38.60%), to $563 in the three months ended March 31, 2022, compared to $917 for the same period in 2021. This decrease was primarily due to a decrease in gains from the sale of other real estate owned properties and a decrease in mortgage loan origination income. The following is a detail of the other major income classifications that were included in other operation income on the income statement: For the Three Months Ended March 31, Other operating income 2022 2021 BOLI Income $ 121 $ 130 Mortgage Loan Origination Income 204 395 Gain on sale of OREO 65 323 Other Income 173 69 Total Other Income $ 563 $ 917 39 Table of Contents OTHER EXPENSES Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended March 31, 2022 and 2021 were $8,301 and $8,468, respectively, a decrease of $167 or (1.97%). Salaries and benefits decreased $129, or (2.82%), to $4,439 for the three months ended March 31, 2022 when compared to the same period in 2021. Occupancy expense decreased by $42, or (2.31%), to $1,775 for the three months ended March 31, 2022, compared to $1,817 for the same period of 2021. For the three months ended March 31, 2022, other expense increased $4, or 0.19% to $2,087 compared to $2,083 for the same period in 2021. The following is a detail of the major expense classifications that make up the other expense line item in the income statement: For the Three Months Ended March 31, Other Expense 2022 2021 Advertising $ 131 $ 141 Office Supplies 209 249 Professional Fees 219 237 Technology expense 116 155 Postage and Freight 138 169 Loan Collection Expense 7 54 Regulatory and related expense 204 235 Debit Card/ATM expense 188 168 Travel and Convention 52 26 Other expenses 823 649 Total Other Expense $ 2,087 $ 2,083 The Company’s efficiency ratio for the three months ended March 31, 2022 was 75.33%, compared to 76.12% for the same period in 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. 40 Table of Contents BALANCE SHEET ANALYSIS March 31, 2022 December 31, 2021 Amount of Increase (Decrease) Percent of Increase (Decrease) Cash and due from banks $ 13,228 $ 10,673 $ 2,555 23.94 % Interest bearing deposits with other banks 59,217 68,563 (9,346 ) -13.63 % Investment securities 600,766 631,835 (31,069 ) -4.92 % Net LHFI 578,418 567,334 11,084 1.95 % Premises and equipment 26,630 26,661 (31 ) -0.12 % Total assets 1,348,692 1,361,309 (12,617 ) -0.93 % Total deposits 1,149,580 1,111,892 37,688 3.39 % Total shareholders’ equity 62,950 105,900 (42,950 ) -40.56 % CASH AND CASH EQUIVALENTS Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at March 31, 2022 was $13,228, which was an increase of $2,555 from the balance of $10,673 at December 31, 2021. Interest bearing deposit with other banks decreased by $9,346, or (13.63%), to $59,217 at March 31, 2022 compared to $68,563 at December 31, 2021. 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 interest rates, the fair value of the Company’s investment securities on the balance sheet represents a decrease in investment securities for the three months ended as of March 31, 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 $43,682 is presented on the consolidated statements of comprehensive loss. However, as disclosed in Note 6 of the notes of the financial statement the Company’s investments securities portfolio at March 31, 2022 increased by $27,158, or 4.19%, to $674,715 from $647,557 at December 31, 2021 when comparing the amortized cost of the Company’s investments securities. The increase is a result of the Company deploying excess cash into higher yielding investment securities. LOANS The Company’s loan balance increased by $11,347, or 1.98%, during the three months ended March 31, 2022, to $583,194 from $571,847 at December 31, 2021. Excluding PPP loans with a total balance of $2,047 at March 31, 2022 and $5,789 at December 31, 2021, total loans increased $15,089, or 2.67%, compared to $566,058 at December 31, 2021. The linked-quarter growth primarily reflects increases in construction and development, commercial real estate, and credit cards loans. No material changes were made to the loan products offered by the Company during this period. 41 Table of Contents DEPOSITS The following table shows the balance and percentage change in the various deposits: March 31, 2022 December 31, 2021 Amount of Increase (Decrease) Percent of Increase (Decrease) Noninterest-Bearing Deposits $ 305,674 $ 302,707 $ 2,967 0.98 % Interest-Bearing Deposits 503,497 451,809 51,688 11.44 % Savings Deposits 135,392 127,217 8,175 6.43 % Certificates of Deposit 205,017 230,159 (25,142 ) -10.92 % Total deposits $ 1,149,580 $ 1,111,892 $ 37,688 3.39 % All deposit accounts except for certificates of deposits increased during the three months ended March 31, 2022. The increase in deposit accounts is a result of the continued savings trend because of the record financial stimulus issued to mitigate the effects of the COVID-19 pandemic. The decrease in 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. 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. OFF-BALANCE SHEET ARRANGEMENTS Please refer to Note 2 to the 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. Asset/Liability Management and Interest Rate Risk The principal objective of our asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Board of Directors of the Bank has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of our assets and liabilities to market rate changes, local and national market conditions and market interest rates. That group also reviews our liquidity, capital, deposit mix, loan mix and investment positions. As a financial institution, our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the fair value of all interest earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk 42 Table of Contents is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair values. We manage our exposure to interest rates primarily by structuring our balance sheet in the ordinary course of business. We do not typically enter into derivative contracts for the purpose of managing interest rate risk, but we may elect to do so should the situation warrant. Based upon the nature of our operations, we are not subject to material foreign exchange or commodity price risk. We do not own any trading assets. We use an interest rate risk simulation model to test the interest rate sensitivity of net interest income and the balance sheet. Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in projected net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the fair value of assets less the fair value of liabilities. The economic value of equity is a longer-term view of interest rate risk because it measures the present value of all future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income. The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Following 12 months Months 13-24 Following 12 months Months 13-24 +400 basis points -2.9 % 6.1 % -3.7 % 6.6 % +300 basis points -0.9 % 5.9 % -1.3 % 6.9 % +200 basis points 0.9 % 5.5 % -0.1 % 5.8 % +100 basis points 1.6 % 3.9 % -0.8 % 2.6 % Flat rates — — — — -100 basis points -1.3 % -3.1 % -5.5 % -7.7 % -200 basis points -3.6 % -6.2 % -10.9 % -13.6 % 43 Table of Contents The following table presents the change in our economic value of equity as of March 31, 2022 and December 31, 2021, assuming immediate parallel shifts in interest rates: Economic Value of Equity at Risk (%) March 31, 2022 December 31, 2021 +400 basis points -21.8 % -20.4 % +300 basis points -15.7 % -13.8 % +200 basis points -9.8 % -7.8 % +100 basis points -4.6 % -3.1 % Flat rates — — -100 basis points -3.0 % -13.0 % -200 basis points -14.7 % -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. The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decision regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of March 31, 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 three months ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 44 Table of Contents PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 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. 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, 2021, which the Company filed with the Securities and Exchange Commission on March 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, 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 of operations in the future. ITEM 6. 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. 45 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: May 6, 2022 46