CITIZENS HOLDING CO /MS/ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS. (Form 10-Q)

(in thousands, except per 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 regarding the development of interest rates, including equities

          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 economic developments in the banking sector

industry in general and in the specific markets in which the Company

operates, including but not limited to the effects of the emergence of

generalized health emergencies or pandemics, including the duration of

COVID-19[feminine]

pandemic and its impact on the business of the Company and its customers,

          results of operations, asset quality and financial condition;


• the impact of rising inflation rates on the general economy, the market

          or business conditions;



     •    extensive regulation, changes in the legislative and regulatory

environment having a negative impact on the Company and the Bank through

increased operating expenses and regulatory enforcement potential

          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

affect the Company’s business and results of operations, including

          indirectly through impact to its customers;



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• our ability to maintain sufficient capital and raise funds

          capital when needed;


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

          our obligations;


• events affecting our ability to compete effectively and achieve our objectives

strategies, such as the risk of not realizing revenue increases

expected to result from our acquisitions, branch additions and new

product and service offerings, our ability to control expenses and our

          ability to attract and retain skilled people;


• events that damage our reputation and the potential risks resulting therefrom

          adverse impact on our business operations;


• risks arising from owning our common stock, such as volatility and

volume of transactions, our ability to pay dividends, regulatory limits

          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 undertakes no obligation to update or revise any forward-looking statements after the date of this quarterly report or, if earlier, the date on which such statements were made.

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

OVERVIEW

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

The Bank was opened on February 8, 1908 as The First National Bank of
Philadelphia. In 1917, the Bank surrendered its national charter and obtained a
state charter, at which time the name of the Bank was changed to The Citizens
Bank of Philadelphia, Mississippi. At June 30, 2022, the Bank was the largest
bank headquartered in Neshoba County, Mississippi, with total assets of
$1,298,752 and total deposits of $1,118,523. 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.

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LIQUIDITY

The Company has an asset and liability management program that assists
management in maintaining net interest margins during times of both rising and
falling interest rates and in maintaining sufficient liquidity. A measurement of
liquidity is the ratio of net deposits and short-term liabilities divided by the
sum of net cash, short-term investments and marketable assets. This measurement
for liquidity of the Company at June 30, 2022, was 19.11% 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 coupled with increased pledging requirements to collateralize public
deposit funds as of June 30, 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
$1,117,987 at June 30, 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 $688,743 invested in
available-for-sale
investment securities at June 30, 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 $27,008 in interest bearing deposits at other banks at
June 30, 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 June 30, 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 June 30, 2022,
the Company had unused and available $197,280 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 June 30, 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 June 30, 2022, the Company
had unused and available $2,000 of its secured line of credit with FHN. The
Company had federal funds purchased of
$-0-
as of June 30, 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.

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CAPITAL RESOURCES

Total shareholders' equity was $25,926 at June 30, 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 the medium-term interest
rates that has occurred since the purchase of securities. Management does not
intend to sell any securities at an unrealized loss position. Additionally, as
noted in the liquidity section the Company has sufficient liquidity options
available if the need for short-term funds arises.

The Company paid aggregate cash dividends in the amount of $2,688, or $0.48 per
share, during the
six-month
period ended June 30, 2022 compared to $2,684, or $0.48 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 June 30, 2022, the Company and Bank meets all
capital adequacy requirements to which it is subject and according to these
requirements the Company and Bank is considered to be well capitalized.

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

79,143 10.00% 63,314 8.00%


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

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

• Create a requirement to maintain a Common Equity Tier 1 ratio

          to total risk-weighted assets of not less than 4.5%;


• Increase the minimum leveraged capital ratio to 4% for all banks

          organizations (currently 3% for certain banking organizations);



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



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


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

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

Management estimates that as of June 30, 2022the Company and the Bank have met all capital requirements under Basel III.

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RESULTS OF OPERATIONS

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

                                    For the Three Months          For the Six Months
                                       Ended June 30,               Ended June 30,
                                     2022            2021         2022          2021

Interest income, including fees $9,560 $9,816 $18,614

  $  18,895
Interest Expense                          797         1,322         1,564         2,768

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

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

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

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

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

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


See Note 3 to the Company’s consolidated financial statements for an explanation of the Company’s calculation of net earnings per share – basic and – diluted.

Annualized return on average equity ("ROE") was 15.97% for the three months
ended June 30, 2022, and 7.04% for the corresponding period in 2021. Annualized
ROE was 11.52% for the six months ended June 30, 2022, and 6.74% for the
corresponding period in 2021. The increase in ROE for the three and six months
ended June 30, 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 $4.64 at June 30, 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 resulting from the AOCL caused by the
increase in medium-term interest rates. Average assets for the six months ended
June 30, 2022 were $1,343,566 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 coupled with the increase in the
unrealized loss on investment securities.

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NET INTEREST INCOME / NET INTEREST MARGIN

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

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

The annualized net interest margin was 2.78% for the three months ended June 30,
2022, compared to 2.57% for the corresponding period of 2021. Additionally, the
annualized net interest margin was 2.74% for the six months ended June 30, 2022,
compared to 2.45% for the corresponding period of 2021. The increase in net
interest margin for both the three and six months ended June 30, 2022, when
compared to the same period in 2021, was mainly due to management's reallocation
of the investment portfolio into higher yielding securities throughout 2021. In
addition, management's deposit repricing campaign and reduction of higher
interest-bearing deposit balances throughout 2021 decreased the cost of funds to
33 basis point ("bps") for both the three and six months ended June 30, 2022
compared to 50 and 52 bps for the three and six months ended June 30, 2021,
respectively. The increase in interest on securities coupled with the decrease
in the cost of funds offset the decline in interest income on loans which
decreased for the three and six months ended June 30, 2020 by $1,288, or
(16.19%), and $3,305, or (18.82%) when compared to the same periods in 2021.

With interest rates starting to increase due to quantitative tightening by the
Federal Reserve Bank to combat inflationary pressure that is starting to affect
the economic recovery, the Company expects interest rates will continue to
increase in the coming year. As a result, the Company is in position to benefit
from interest rate hikes due to the 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.

The following table sets forth average balance sheet data, including all major
categories of interest-earning assets and interest-bearing liabilities, together
with the interest earned or interest paid and the average yield or average rate
paid on each such category for the periods presented:

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TABLE 1 – BALANCE SHEET AND AVERAGE INTEREST RATES

Three months completed June 30th,

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

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

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

Non-Earning
Assets                                            32,786          93,712

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

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

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

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

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

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

Interest Rate Spread                                                                                       2.69 %        2.45 %

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

Less
Tax Equivalent Adjustment                                                        274          319

Net Interest Income                                                          $ 8,763     $  8,494




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

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

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

Non-Earning
Assets                                      50,662         102,878

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

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

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

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

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

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

Interest Rate Spread                                                                                  2.63 %        2.31 %

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

Less
Tax Equivalent Adjustment                                                   539          589

Net Interest Income                                                    $ 17,050     $ 16,127



(1) Overdrafts, although not considered an earning asset, are included in loans, net

of the unearned in the calculation of the average volume due to the insignificant impact on

    the yield.



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(2) Income assets in the table above include shares paying dividends of

the Federal mortgage bank.

(3) Sight deposits are not included in the calculation of the average volume because 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
and six months ended June 30, 2022, management's disciplined deposit pricing
coupled with increasing interest rates and corresponding yields on both new
loans originated and securities purchased were the largest contributing factors
to the increase in net interest income over these periods. Management believes
by continuing its disciplined deposit pricing and continued focus on loan
growth, and continuing to reallocate excess funds into higher yielding
securities as the Federal Reserve continues interest rate hikes will increase
the net interest margin.

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

                         TABLE 2 - VOLUME/RATE ANALYSIS

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

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

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

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

NET INTEREST INCOME                $    (184 )      $     408       $    224




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

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

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

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

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



CREDIT LOSS EXPERIENCE

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

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

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

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The Company's allowance for loan losses is designed to provide for loan losses
that can be reasonably anticipated. The allowance for loan losses is established
through charges to operating expenses in the form of provisions for loan losses.
Actual loan losses or recoveries are charged or credited to the allowance for
loan losses. 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           Year Ended          Amount of          Percent of
                                        June 30,             December 31,          Increase           Increase
                                          2022                   2021             (Decrease)         (Decrease)
BALANCES:
Gross Loans                          $       589,541        $      571,847       $     17,694               3.09 %
Allowance for Loan Losses                      5,046                 4,513                533              11.81 %
Nonaccrual Loans                               3,580                 3,826               (246 )            (6.43 %)
Ratios:
Allowance for loan losses to
gross loans                                     0.86 %                0.79 %
Net loans (recovered) charged
off to allowance for loan losses               (7.61 %)              20.56 %


The provision for loan losses for the three months ended June 30, 2022 was $56.
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. The allowance for loan losses to LHFI was 0.86% and 0.69% at
June 30, 2022 and 2021, respectively, and 0.79% at December 31, 2021
representing a level management considers commensurate with the present risk in
the loan portfolio.

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

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Management reviews quarterly with the Company's Board of Directors the adequacy
of the allowance for loan losses. The loan loss provision is adjusted when
specific items reflect a need for such an adjustment. Management believes that
there were no material loan losses during the six months ended June 30, 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 June 30, 2022 was $2,763, a
decrease of $226, or (7.56%), from $2,989 in the same period in 2021. Service
charges on deposit accounts were $967 in the three months ended June 30, 2022,
compared to $768 for the same period in 2021. As inflationary pressures continue
throughout both the national and local economy, spending and overdraft income
have continued to trend upward. Included in the service charges on deposit
accounts line item for the three months ended June 30, 2022, overdraft income
increased by $197, or 39.46% from the same period in 2021. Interchange fees
which are included in the other service charges and fees line item on the income
statement decreased slightly by decreasing by $9, or (0.97%), to $972 for the
three months ended June 30, 2022, compared to $981 for the same period in 2021.
Other operating income not derived from service charges or fees decreased $45,
or (4.75%) to $702 in the three months ended June 30, 2022, compared to $737 for
the same period in 2021. This decrease was primarily due to the decline in
mortgage loan origination income due to increased mortgage interest rates.
Mortgage loan origination income decreased for the three months ended June 30,
2022 by $113, or (34.98%), to $210 compared to $323 for the same period in 2021.

Other income for the six months ended June 30, 2022 was $5,296, a decrease of
$925, or (14.87%), from $6,221 in the same period in 2021. Service charges on
deposit accounts were $1,912 in the six months ended June 30, 2022, compared to
$1,582 for the same period in 2021. The increase in service charges on deposit
accounts year-over-year is primarily due to overdraft income increasing by $321,
or 30.63% compared to the same period in 2021. Other service charges and fees
were $2,119 for the six months ended June 30, 2022 slightly up from the same
period in 2021 due to interchange fees increasing modestly by $23, or 1.24% and
other miscellaneous service charges increasing by $31, or 18.97%. Other
operating income not derived from service charges or fees decreased $389, or
(23.52%) to $1,265 in the six months ended June 30, 2022, compared to $1,654 for
the same period in 2021. This decrease, as stated earlier, was primarily due to
the decline in mortgage loan origination income due to increased mortgage
interest rates. Mortgage loan origination income decreased for the six months
ended June 30, 2022 by $304, or (42.34%), to $414 compared to $718 for the same
period in 2021.

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Here is a breakdown of the other major categories of income that have been included in other operating income in the income statement:

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

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



OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment,
and other operating expenses. Aggregate
non-interest
expenses for the three months ended June 30, 2022 and 2021 were $8,432 and
$8,982, respectively, a decrease of $550, or (6.12%). Salaries and benefits
decreased $173, or (3.77%), to $4,412 for the three months ended June 30, 2022
when compared to the same period in 2021. Occupancy expense decreased by $80, or
(4.47%), to $1,711 for the three months ended June 30, 2022, compared to $1,791
for the same period of 2021. For the three months ended June 30, 2022, other
expense decreased $297, or (11.40%) to $2,309 compared to $2,606 for the same
period in 2021.

Aggregate
non-interest
expenses for the six months ended June 30, 2022 and 2021 were $16,733 and
$17,450, respectively, a decrease of $717 or (4.11%). Salaries and benefits
decreased $302, or (3.30%), to $8,851 for the six months ended June 30, 2022,
when compared to the same period in 2021. Occupancy expense decreased by $122,
or (3.38%), to $3,486 for the six months ended June 30, 2022, compared to $3,608
for the same period of 2021. Other operating expenses decreased by $293, or
(6.25%), to $4,396 for the six months ended June 30, 2022, compared to $4,689
for the same period of 2021. Overall, other expenses have decreased for both the
three and six months ended June 30, 2022 compared to the same periods in 2021 as
a result of management's focus on expense management that started in 2020 due to
the uncertainty stemming from the pandemic.

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Here is a detail of the main categories of expenses that make up the item of other expenses in the income statement:

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

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



The Company's efficiency ratio for the three months ended June 30, 2022 was
71.83%, compared to 77.61% for the same period in 2021. The Company's efficiency
ratio for the six months ended June 30, 2022 was 73.51%, compared to 76.80% 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.

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