10-Q 1 cizn20230930_10q.htm FORM 10-Q cizn20230930_10q.htm
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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 September 30, 2023

 

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

               (IRS Employer Identification No.)

Company or organization)

 
  
521 Main Street, Philadelphia, MS39350
(Address of principal executive offices)  (Zip Code)

 

601-656-4692

(Registrant’s telephone number, including area code)

 

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.20 par value

CIZN

NASDAQ Global Market

 

 

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

Emerging growth company

Smaller Reporting 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 November 10, 2023:

 

Title

 

Outstanding

Common Stock, $0.20 par value

 

5,616,438

 

 

  

 

CITIZENS HOLDING COMPANY

TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

1
     

Item 1.

Consolidated Financial Statements.

1
     

 

Consolidated Statements of Financial Condition, as of September 30, 2023 (Unaudited) and December 31, 2022 (Audited)

1
     

 

Consolidated Statements of Income for the Three and Nine months ended September 30, 2023 (Unaudited) and 2022 (Unaudited)

2
     

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine months ended September 30, 2023 (Unaudited) and 2022 (Unaudited)

3
     

 

Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2023 (Unaudited) and 2022 (Unaudited)

4
     

 

Notes to Consolidated Financial Statements (Unaudited)

5
     

Item 2.

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

35
     

Item 4.

Controls and Procedures. 50
     
     

PART II.

OTHER INFORMATION

51
     

Item 1.

 Legal Proceedings.

51
     

Item 1A.

Risk Factors.

51
     

Item 6.

Exhibits.

52
     
     
     

SIGNATURES

52

 

 

  

 
 

PART I.‐ FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 
  

(Unaudited)

  

(Audited)

 
Assets        

Cash and due from banks

 $14,061  $26,948 

Interest bearing deposits with other banks

  130,320   1,646 

Cash and cash equivalents

  144,381   28,594 

Investment securities held-to-maturity, at amortized cost

  392,133   406,590 

Investment securities available-for-sale, at fair value

  183,535   201,322 

Loans held for investment (LHFI) (1)

  587,238   585,591 

Less allowance for credit losses (ACL), LHFI (1)

  6,390   5,264 

Net LHFI

  580,848   580,327 

Premises and equipment, net

  27,353   27,705 

Other real estate owned, net

  974   1,179 

Accrued interest receivable

  4,712   4,864 

Cash surrender value of life insurance

  26,191   25,724 

Deferred tax assets, net

  31,417   29,574 

Identifiable intangible assets, net

  13,359   13,442 

Other assets

  9,107   4,682 
         

Total Assets

 $1,414,010  $1,324,003 
         

Liabilities and Shareholders' Equity

        

Liabilities

        

Deposits:

        

Non-interest bearing deposits

 $277,949  $299,112 

Interest bearing deposits

  916,748   827,290 

Total deposits

  1,194,697   1,126,402 
         

Securities sold under agreement to repurchase

  151,089   127,574 

Borrowings on secured line of credit

  18,000   18,000 

Deferred compensation payable

  10,120   9,868 

Other liabilities

  5,759   3,134 

Total liabilities

  1,379,665   1,284,978 
         

Shareholders' Equity

        

Common stock, $0.20 par value, 22,500,000 shares authorized, Issued and outstanding: 5,616,438 shares - September 30, 2023; 5,603,570 shares - December 31, 2022

  1,123   1,122 

Additional paid-in capital

  18,554   18,448 

Accumulated other comprehensive loss, net of tax benefit of $28,717 at September 30, 2023 and $29,355 at December 31, 2022

  (86,377)  (83,070)

Retained earnings

  101,045   102,525 
         

Total shareholders' equity

  34,345   39,025 
         

Total liabilities and shareholders' equity

 $1,414,010  $1,324,003 

 

(1) Effective January 1, 2023, Citizens adopted FASB ASU 2016-13 using the modified restrospective approach. Therefore prior period balances are presented under legacy GAAP and may not be comparable to current period presentation.

 

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

 

1

 
 

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Interest Income

                               

Interest and fees on loans

  $ 8,503     $ 6,855     $ 23,355     $ 19,891  

Interest on securities

                               

Taxable

    2,218       2,130       6,786       5,728  

Nontaxable

    1,058       1,057       3,193       2,987  

Other interest

    1,040       80       1,676       130  

Total interest income

    12,819       10,122       35,010       28,736  

Interest Expense

                               

Deposits

    3,481       496       7,751       1,580  

Other borrowed funds

    1,906       577       4,735       1,057  

Total interest expense

    5,387       1,073       12,486       2,637  

Net Interest Income

    7,432       9,049       22,524       26,099  

Provision for (reversal of) credit losses (PCL)

    98       (53 )     562       96  

Net Interest Income After PCL

    7,334       9,102       21,962       26,003  
                                 

Other Income

                               

Service charges on deposit accounts

    994       1,019       2,798       2,931  

Other service charges and fees

    1,106       1,111       3,214       3,230  

Other operating income, net

    1,105       747       1,817       2,012  

Total other income

    3,205       2,877       7,829       8,173  
                                 

Other Expense

                               

Salaries and employee benefits

    4,655       4,506       14,060       13,357  

Occupancy expense

    1,935       1,968       5,636       5,454  

Other expense

    2,494       2,462       7,125       6,858  

Total other expense

    9,084       8,936       26,821       25,669  
                                 

Income Before Income Taxes

    1,455       3,043       2,970       8,507  
                                 

Income taxes

    248       463       323       1,350  
                                 

Net Income

  $ 1,207     $ 2,580     $ 2,647     $ 7,157  
                                 

Earings Per Share

                               

-Basic

  $ 0.22     $ 0.46     $ 0.47     $ 1.28  

-Diluted

  $ 0.22     $ 0.46     $ 0.47     $ 1.28  
                                 

Dividends Paid Per Share

  $ 0.16     $ 0.24     $ 0.56     $ 0.72  

 

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

 

2

 

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(in thousands)

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Net income

  $ 1,207     $ 2,580     $ 2,647     $ 7,157  
                                 

Other comprehensive (loss) income

                               
                                 

Securities available-for-sale

                               

Unrealized holding (losses) gains during the period

    (9,949 )     6,805       (8,492 )     (102,377 )

Income tax effect

    2,482       (1,698 )     2,119       25,543  

Net unrealized (losses) gains

    (7,467 )     5,107       (6,373 )     (76,834 )
                                 

Amortization of net unrealized losses on securities transferred from AFS to HTM

    1,128       439       3,445       439  

Income tax effect

    (281 )     (109 )     (860 )     (109 )

Net unrealized gains

    847       330       2,585       330  
                                 

Derivitave Instruments

                               

Unrealized holding gains during the period

    641       -       641       -  

Income tax effect

    (160 )     -       (160 )     -  

Net unrealized gains

    481       -       481       -  
                                 

Total other comprehensive (loss) income

    (6,139 )     5,437       (3,307 )     (76,504 )
                                 

Comprehensive (loss) income

  $ (4,932 )   $ 8,017     $ (660 )   $ (69,347 )

 

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

 

3

 
 

 

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

   

For the Nine Months

 
   

Ended September 30,

 
   

2023

   

2022

 
                 

Operating Activities

               
                 

Net cash provided by operating activities

  $ 4,386     $ 10,864  
                 

Investing Activities

               

Proceeds from maturities, paydowns and calls of securities available-for-sale

    8,654       36,692  

Proceeds from maturities, paydowns and calls of securities held-to-maturity

    16,449       2,332  

Purchases of investment securities

    -       (122,120 )

Purchases of bank premises and equipment

    (633 )     (2,211 )

Net change in FHLB stock

    (317 )     (784 )

Proceeds from sale of other real estate owned

    324       1,155  

Proceeds from death benefit of bank-owned life insurance

    -       813  

Net change in loans

    (1,743 )     (6,359 )
                 

Net cash provided by (used in) investing activities

    22,734       (90,482 )
                 

Financing Activities

               

Net change in deposits

    68,295       23,044  

Net change in securities sold under agreement to repurchase

    23,515       17,159  

Payment of dividends

    (3,143 )     (4,033 )
                 

Net cash provided by financing activities

    88,667       36,170  
                 

Net increase (decrease) in cash and cash equivalents

    115,787       (43,448 )

Cash and cash equivalents, beginning of period

    28,594       79,236  

Cash and cash equivalents, end of period

  $ 144,381     $ 35,788  

 

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

 

4

 

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three and nine months ended September 30, 2023

(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”). 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.

 

Significant Accounting Policies

 

Derivative Instruments and Hedging Activities: The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure as well as to meet the needs of its customers. Derivative financial instruments are included in the Consolidated Balance Sheets line item “Other assets” or “Other liabilities” at fair value in accordance with ASC 815.

 

Fair value hedges are utilized to mitigate the exposure to future interest rate risk. For the Company’s derivatives designated as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged liability attributable to the hedged risk are recognized in current earnings. The gain or loss on the derivative instrument is presented on the same line item as the earnings effect of the hedged item.

 

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 September 30, 2023 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. All significant intercompany transactions have been eliminated in consolidation.

 

5

 

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, 2022, filed with the Securities and Exchange Commission on March 16, 2023.

 

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 credit losses (“ACL”) 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 ACL 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 ACL 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 ACL and valuation of foreclosed real estate may change materially in the near term.

 

Impact of Recently-Issued Accounting Standards and Pronouncements:

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). This update to Accounting Standards Codification Topic (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”), significantly changed the way entities recognize impairment on many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. FASB describes this impairment recognition model as the current expected credit loss (“CECL”) model and believes the CECL model will result in more timely recognition of credit losses since the CECL model incorporates expected credit losses versus incurred credit losses. The scope of FASB’s CECL model includes loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that are not accounted for at fair value. Additionally, ASU 2016-13 amended the accounting for credit losses on available-for-sale securities and purchased financial assets with credit deterioration (“PCD”). In the remainder of these Notes to Consolidated Financial Statements, references to “CECL” or to “FASB ASU 2016-13” shall mean the accounting standards and principles set forth in ASC 326 after giving effect to ASU 2016-13 and the clarifications thereto discussed in the next paragraph.

 

6

 

The Company adopted ASU 2016-13 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. To implement CECL, entities are required to apply a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company recorded a one-time cumulative-effect adjustment as disclosed in the table below.

 

  

December 31, 2022

  

Impact of FASB ASU

  

January 1, 2023

 
  

(as reported)

  2016-13 Adoption  

(adjusted)

 

Assets:

            

ACL

 $(5,264) $(634) $(5,898)

Deferred tax assets, net

  29,574   327   29,901 

Liabilities:

            

ACL on off-balance sheet exposures

  -   677 2 677 

Shareholders' equity:

            

Retained earnings

 $102,525  $(984) $101,541 

 

 

2

The allowance for credit losses on unfunded loan commitments is included in "Other liabilities" in the accompanying consolidated balance sheet. The related provision for credit losses on unfunded loan commitments is included in "Provision for credit losses" in the accompanying consolidated statements of income for the three and nine months ended September 30, 2023.

 

Additionally, the Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans and thus the measurement of the ACL in the Company’s loan portfolio. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Consolidated Balance Sheets and totaled $2,038 and $1,981 at September 30, 2023 and December 31, 2022, respectively, and is excluded from estimated credit losses.

  

 

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 September 30, 2023, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $80,885 compared to an aggregate unused balance of $75,602 at December 31, 2022. There were $3,476 letters of credit outstanding at September 30, 2023 and $5,438 at December 31, 2022. 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

  
 

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

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Basic weighted average shares outstanding

    5,603,570       5,595,320       5,600,082       5,591,771  

Dilutive effect of stock based compensation

    -       -       8       -  
                                 

Diluted weighted average shares outstanding

    5,603,570       5,595,320       5,600,090       5,591,771  
                                 

Net income

  $ 1,207     $ 2,580     $ 2,647     $ 7,157  

Net income per share-basic

  $ 0.22     $ 0.46     $ 0.47     $ 1.28  

Net income per share-diluted

  $ 0.22     $ 0.46     $ 0.47     $ 1.28  

  

 

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.

 

No options were outstanding under the 2013 Plan as of September 30, 2023.

 

During 2023, the Company’s directors received restricted stock grants totaling 9,000 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 28, 2024 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $112 and is expensed ratably over the one-year vesting period.

 

During 2023, the Company’s Chief Executive Officer (“CEO”) received restricted stock grants totaling 3,868 shares of common stock under the 2013 Plan. These grants vest over a four-year period ending March 1, 2027 during which time the CEO has rights to vote the shares and to receive dividends. The grant date fair value of these shares was $60 and is expensed ratably over the four-year vesting period.

 

8

  
 

Note 5. Income Taxes

(in thousands)

 

For the three months ended September 30, 2023 and 2022, the Company recorded a provision for income taxes totaling $248 and $463, respectively. The effective tax rate was 17.04% and 15.22% for the three months ended September 30, 2023 and 2022, respectively.

 

For the nine months ended September 30, 2023 and 2022, the Company recorded a provision for income taxes totaling $323 and $1,350, respectively. The effective tax rate was 10.88% and 15.87% for the nine months ended September 30, 2023 and 2022, 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 Available-for-Sale and Held-to-Maturity

(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:

 

      

Gross

  

Gross

     

September 30, 2023

 

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 

Securities available-for-sale

                

Mortgage backed securities

 $99,084  $-  $13,135  $85,949 

State, County, Municipals

  133,595   -   36,433   97,162 

Other securities

  500   -   76   424 

Total

 $233,179  $-  $49,644  $183,535 

 

December 31, 2022

 

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 

Securities available-for-sale

                

Mortgage backed securities

 $107,055  $-  $10,083  $96,972 

State, County, Municipals

  134,906   -   30,993   103,913 

Other securities

  500   -   63   437 

Total

 $242,461  $-  $41,139  $201,322 

 

9

 

The amortized cost and estimated fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses recognized were as follows:

 

      

Gross

  

Gross

     

September 30, 2023

 

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 

Securities held-to-maturity

                

Obligations of U.S. Government agencies

 $4,049  $-  $616  $3,433 

Mortgage backed securities

  295,177   -   40,991   254,186 

State, County, Municipals

  92,907   -   11,663   81,244 

Total

 $392,133  $-  $53,270  $338,863 

 

 

      

Gross

  

Gross

     

December 31, 2022

 

Amortized

  

Unrealized

  

Unrealized

  

Estimated

 
  

Cost

  

Gains

  

Losses

  

Fair Value

 

Securities held-to-maturity

                

Obligations of U.S. Government agencies

 $4,002  $-  $367  $3,635 

Mortgage backed securities

  309,748   -   24,654   285,094 

State, County, Municipals

  92,840   -   6,277   86,563 

Total

 $406,590  $-  $31,298  $375,292 

 

During the third quarter of 2022, the Company reclassified $413,921 of securities available-for-sale to securities held-to-maturity. At the date of this transfer, the net unrealized holding loss on the transferred securities totaled approximately $71,319 ($53,525 net of tax).

 

The securities were transferred at fair value, which became the cost basis for the securities held-to-maturity. The net unrealized holding loss is amortized over the remaining life of the securities in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At September 30, 2023, the net unamortized, unrealized loss on transferred securities included in accumulated other comprehensive income (loss) in the accompanying balance sheet totaled approximately $66,167 ($49,659, net of tax) compared to $69,612 ($52,244, net of tax) at December 31, 2022.

 

ACL on Securities

 

ASU 2016-13 applies to all financial instruments carried at amortized cost, including securities held-to-maturity.

 

Under ASU 2016-13, the allowance for credit losses is an estimate measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

 

10

 

In order to comply with ASU 2016-13, the Company conducted a review of its investment portfolio and determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero.  This zero-credit loss assumption applies to debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government.  The reasons behind the adoption of the zero-credit loss assumption are as follows:

 

 

High credit rating

 

Long history with no credit losses

 

Guaranteed by a sovereign entity

 

Widely recognized as “risk-free rate”

 

Can print its own currency

 

The Company will continuously monitor any changes in economic conditions, credit downgrades, changes to explicit or implicit guarantees granted to certain debt issuers, and any other relevant information that would indicate potential credit deterioration and prompt the Company to reconsider its zero-credit loss assumption.

 

At the date of adoption, the Company’s estimated allowance for credit losses on securities available-for-sale and held-to-maturity under ASU 2016-13 was deemed immaterial due to the composition of these portfolios. Both portfolios consist primarily of U.S. government agency guaranteed mortgage-backed securities for which the risk of loss is minimal. Therefore, the Company did not recognize a cumulative effect adjustment through retained earnings related to the available-for-sale or held-to-maturity securities.

 

Securities Available-for-Sale

 

ASU 2016-13 makes targeted improvements to the accounting for credit losses on securities available-for-sale.  The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses.  Unlike securities held-to-maturity, securities available-for-sale are evaluated on an individual level and pooling of securities is not allowed.  

 

Quarterly, the Company evaluates if any security has a fair value less than its amortized cost.  Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis to ensure that the changes in unrealized losses are, in fact, temporary in nature by correlating the changes to the yield curve movement.

 

Should it be determined that a credit loss exists, the credit portion of the allowance will be measured using a discounted cash flow (“DCF”) analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss the Company records will be limited to the amount by which the amortized cost exceeds the fair value.

 

The DCF analysis utilizes contractual maturities, as well as third-party credit ratings and cumulative default rates published annually by Moody’s Investor Service.

 

11

 

At September 30, 2023, the results of the analysis did not identify any available-for-sale securities that violate the credit loss triggers; therefore, no DCF analysis was performed and no credit loss was recognized on any of the securities available-for-sale.  

 

Securities Held-to-Maturity

 

ASU 2016-13 requires institutions to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risks exist.  The Company uses several levels of segmentation in order to measure expected credit losses:

 

 

The portfolio is segmented into agency and non-agency securities.

 

The non-agency securities consists primarily of municipal securities.

 

Each individual segment is categorized by third-party credit ratings.  

 

As discussed above, the Company has determined that for certain classes of securities it would be appropriate to conclude the expected credit loss to be zero, which include debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. This assumption will be reviewed quarterly.  The Company is using an internally built model to verify the accuracy of third-party provided calculations.  

 

At September 30, 2023, the Company’s securities held-to-maturity totaled $392,133.  The potential credit loss exposure was $92,907 and consisted of municipal securities.  After applying appropriate probability of default and loss given default assumptions, the total amount of current expected credit losses was deemed immaterial.  Therefore, no reserve was recorded at September 30, 2023.

 

At September 30, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments.  The Company had no securities held-to-maturity classified as nonaccrual at September 30, 2023.  

 

The Company monitors the credit quality of municipal securities held-to-maturity on a quarterly basis through credit ratings.  The following table presents the amortized cost of the Company’s securities held-to-maturity by credit rating, as determined by Moody’s Investor Services, at September 30, 2023 and December 31, 2022:

 

  

September 30, 2023

  

December 31, 2022

 

Aaa

 $16,831  $18,096 

Aa1 to Aa3

  41,478   40,174 

Not Rated (1)

  34,598   34,570 
  $92,907  $92,840 

 

(1) Not rated securities were municipals that did not have a current Moodys rating as of the dates reported above. However, all not rated securities are investment grade and are rated between AAA and AA- by Standard and Poors rating agency.

 

12

 

The tables below show the Company’s gross unrealized losses and fair value of available-for-sale and held-to-maturity investments for which an ACL has not been recorded, aggregated by investment category and length of impairment at September 30, 2023 and December 31, 2022.

 

September 30, 2023

 

Available-for-sale

 

Less than 12 months

  

12 months or more

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

Description of Securities

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
                         

Mortgage backed securities

 $5,839  $243  $80,110  $12,892  $85,949  $13,135 

State, County, Municipal

  6,869   404   90,293   36,029  $97,162   36,433 

Other securities

  -   -   424   76   424   76 

Total

 $12,708  $647  $170,827  $48,997  $183,535  $49,644 

 

Held-to-maturity

 

Less than 12 months

  

12 months or more

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

Description of Securities

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
                         

Obligations of U.S. government agencies

 $-  $-  $3,433  $616  $3,433  $616 

Mortgage backed securities

  -   -   254,186   40,991   254,186   40,991 

State, County, Municipal

  -   -   81,244   11,663   81,244   11,663 

Total

 $-  $-  $338,863  $53,270  $338,863  $53,270 

 

December 31, 2022

 

Available-for-sale

 

Less than 12 months

  

12 months or more

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

Description of Securities

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
                         
                         

Mortgage backed securities

 $70,652  $3,838  $26,320  $6,245  $96,972  $10,083 

State, County, Municipal

  45,200   9,027   58,713   21,966   103,913   30,993 

Other securities

  -   -   437   63   437   63 

Total

 $115,852  $12,865  $85,470  $28,274  $201,322  $41,139 

 

Held-to-maturity

 

Less than 12 months

  

12 months or more

  

Total

 
  

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

Description of Securities

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 
                         

Obligations of U.S. government agencies

 $-  $-  $3,635  $367  $3,635  $367 

Mortgage backed securities

  17,882   1,332   267,212   23,322   285,094   24,654 

State, County, Municipal

  15,059   781   71,504   5,496   86,563   6,277 

Total

 $32,941  $2,113  $342,351  $29,185  $375,292  $31,298 

 

The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

 

13

 

Contractual Maturities

 

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2023 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

 

  

Available-for-sale

  

Held-to-maturity

 
  

Amortized

  

Estimated

  

Amortized

  

Estimated

 
  

Cost

  

Fair Value

  

Cost

  

Fair Value

 
                 

Due in one year or less

 $500  $424  $-  $- 

Due after one year through five years

  2,930   2,802   -   - 

Due after five years through ten years

  5,514   4,855   -   - 

Due after ten years

  125,151   89,505   96,956   84,677 

Residential mortgage backed securities

  86,538   73,922   237,052   205,398 

Commercial mortgage backed securities

  12,546   12,027   58,125   48,788 

Total

 $233,179  $183,535  $392,133  $338,863 

 

Securities Pledged

 

At September 30, 2023 and December 31, 2022, securities with a carrying value of $416,098 and $462,954, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

 

14

  
 

Note 7. LHFI and ACL

(in thousands, except number of loans)

 

The composition of LHFI at September 30, 2023 and December 31, 2022 was as follows:

 

  

September 30, 2023

  

December 31, 2022

 

Loans secured by real estate:

        

Land Development and Construction

 $61,754  $52,731 

Farmland

  10,994   11,437 

1-4 Family Mortgages

  94,567   92,148 

Commercial Real Estate

  322,623   316,541 

Total Real Estate Loans

  489,938   472,857 

Business Loans:

        

Commercial and Industrial Loans

  79,957   96,500 

Farm Production and Other Farm Loans

  359   504 

Total Business Loans

  80,316   97,004 

Consumer Loans:

        

Consumer Loans

  13,973   12,992 

Credit Cards

  3,011   2,738 

Total Consumer Loans

  16,984   15,730 

Gross LHFI

  587,238   585,591 
         

Less Allowance for credit losses

  (6,390)  (5,264)
         
         

Net LHFI

 $580,848  $580,327 

 

Nonaccrual and Past Due LHFI

 

The amortized cost basis of period-end, nonaccrual and past due LHFI, segregated by class, were as follows:

 

  

Nonaccrual With No Allowance for

Credit Loss

  

Nonaccrual

  

Loans Past Due

90 Days or

More Still

Accruing

 

September 30, 2023

            

Loans secured by real estate:

            

Land Development and Construction

 $248  $248  $- 

Farmland

  26   104   - 

1-4 Family Mortgages

  77   1,803   - 

Commercial Real Estate

  -   508   - 

Total Real Estate Loans

  351   2,663   - 

Business Loans:

            

Commercial and Industrial Loans

  124   301   - 

Farm Production and Other Farm Loans

  -   -   - 

Total Business Loans

  124   301   - 

Consumer Loans:

            

Consumer Loans

  -   45   - 

Credit Cards

  -   -   10 

Total Consumer Loans

  -   45   10 

Total

 $475  $3,009  $10 

 

15

 

The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.

 

  

Nonaccrual

  

Loans Past Due

90 Days or

More Still

Accruing

 

December 31, 2022

        

Loans secured by real estate:

        

Land Development and Construction

 $-  $4 

Farmland

  117   - 

1-4 Family Mortgages

  1,720   - 

Commercial Real Estate

  846   95 

Total Real Estate Loans

  2,683   99 

Business Loans:

        

Commercial and Industrial Loans

  281   - 

Farm Production and Other Farm Loans

  -   - 

Total Business Loans

  281   - 

Consumer Loans:

        

Consumer Loans

  24   - 

Credit Cards

  -   12 

Total Consumer Loans

  24   12 

Total

 $2,988  $111 

 

No material interest income was recognized in the income statement on nonaccrual LHFI for each of the three and nine month periods ended September 30, 2023 and 2022.

 

An aging analysis of the amortized cost basis of LHFI (including nonaccrual LHFI), segregated by class, was as follows:

 

September 30, 2023

 

30 - 89 Days Past Due

  

Greater Than 89 Days

Past Due

  

Total Past Due

  

Current Loans

  

Total

 

Loans secured by real estate:

                    

Land Development and Construction

 $-  $248  $248  $61,506  $61,754 

Farmland

  17   26   43   10,951   10,994 

1-4 Family Mortgages

  1,451   285   1,736   92,831   94,567 

Commercial Real Estate

  650   67   717   321,906   322,623 

Total Real Estate Loans

  2,118   626   2,744   487,194   489,938 

Business Loans:

                    

Commercial and Industrial Loans

  81   266   347   79,610   79,957 

Farm Production and Other Farm Loans

  5   -   5   354   359 

Total Business Loans

  86   266   352   79,964   80,316 

Consumer Loans:

                    

Consumer Loans

  67   -   67   13,906   13,973 

Credit Cards

  53   10   63   2,948   3,011 

Total Consumer Loans

  120   10   130   16,854   16,984 

Total

 $2,324  $902  $3,226  $584,012  $587,238 

 

16

 

December 31, 2022

 

30 - 89 Days Past Due

  

Greater Than 89 Days

Past Due

  

Total Past Due

  

Current Loans

  

Total

 

Loans secured by real estate:

                    

Land Development and Construction

 $-  $4  $4  $52,727  $52,731 

Farmland

  38   30   68   11,369   11,437 

1-4 Family Mortgages

  1,799   439   2,238   89,910   92,148 

Commercial Real Estate

  933   486   1,419   315,122   316,541 

Total Real Estate Loans

  2,770   959   3,729   469,128   472,857 

Business Loans:

                    

Commercial and Industrial Loans

  109   277   386   96,114   96,500 

Farm Production and Other Farm Loans

  4   -   4   500   504 

Total Business Loans

  113   277   390   96,614   97,004 

Consumer Loans:

                    

Consumer Loans

  66   23   89   12,903   12,992 

Credit Cards

  56   12   68   2,670   2,738 

Total Consumer Loans

  122   35   157   15,573   15,730 

Total

 $3,005  $1,271  $4,276  $581,315  $585,591 

 

Impaired LHFI

 

Prior to the adoption of FASB ASC Topic 326, the Company’s individually evaluated impaired LHFI included all commercial substandard relationships of $100 or more, which were specifically reviewed for impairment and deemed impaired, and all LHFI classified as troubled-debt restructurings (“TDRs”) in accordance with FASB ASC Subtopic 310-10-50-20 “Impaired Loans.”  Once a LHFI was deemed to be impaired, the full difference between book value and the most likely estimate of the collateral’s net realizable value was charged off or a specific reserve was established.

 

No material interest income was recognized in the income statement on impaired LHFI for the periods ended September 30, 2023 and 2022.

 

The following disclosures are presented under GAAP in effect prior to the adoption of CECL that are no longer applicable or required. The Company has included these disclosures to address the applicable prior periods.

 

17

 

Loans formerly accounted for under FASB ASC 310-20, “Nonrefundable Fees and Other Cost” (“ASC 310-20”), and which are impaired loans recognized in conformity with ASC 310, “Receivables” (“ASC 310”), segregated by class, were as follows as of December 31, 2022:

 

      

Recorded

  

Recorded

             
  

Unpaid

  

Investment

  

Investment

  

Total

      

Average

 
  

Principal

  

With No

  

With

  

Recorded

  

Related

  

Recorded

 
  

Balance

  

Allowance

  

Allowance

  

Investment

  

Allowance

  

Investment

 

Real Estate:

                        

Land Development and Construction

 $-  $-  $-  $-  $-  $86 

Farmland

  30   30   -   30   -   32 

1-4 Family Mortgages

  190   190   -   190   -   479 

Commercial Real Estate

  3,023   795   2,066   2,861   116   1,996 

Total Real Estate Loans

  3,243   1,015   2,066   3,081   116  $2,593 
                         

Business Loans:

                        

Commercial and Industrial Loans

  304   196   -   196   -  $214 

Total Business Loans

  304   196   -   196   -  $214 
                         
                         

Total Loans

 $3,547  $1,211  $2,066  $3,277  $116  $2,807 

 

Loan Modifications

 

The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The amendments in this ASU were applied prospectively, and therefore, loan modification and charge off information is provided only for those items occurring after the January 1, 2023 adoption date.

 

Based on the guidance in ASU 2022-02, a loan modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans and the modification to the terms of the loans are more than minor. If a loan modification or refinancing does not result in a new loan, it is classified as a loan modification. There are additional disclosures for the modification of loans with borrowers experiencing financial difficulty that results in a direct change in the timing or amount of contractual cash flows. The disclosures are applicable to situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions or a combination of any of these terms. If the Company modifies any loans to borrowers in financial distress that involves principal forgiveness, the amount of principal forgiven is charged off against the ACL.

 

The Company had no loan modifications to borrowers experiencing financial difficulties in the third quarter of 2023.

 

At September 30, 2023, LHFI classified as modified loans totaled $2,641. At September 30, 2023, modified loans were primarily comprised of interest rate concessions. The Company had $-0- thousand in unused commitments on modified loans at September 30, 2023.

 

The allocated ACL attributable to modified loans was $159 at September 30, 2023. The Company had no commitments to lend additional funds on these loans as of September 30, 2023.

 

There were no loans modified within the last twelve months for which there was a payment default during the three and nine months ended September, 2023.

 

18

 

At September 30, 2023 and December 31, 2022, the amortized cost of loans secured by Real Estate – 1-4 Family Mortgage in the process of foreclosure was $-0- and $-0-, respectively.

 

Collateral-Dependent Loans

 

The following tables present the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of September 30, 2023:

 

September 30, 2023

 

Bonds

  

Inventory

  

Real Estate

  

Receivables

  

Total

 

Loans secured by real estate:

                    

Land Development and Construction

 $-  $-  $248  $-  $248 

Farmland

  -   -   26   -   26 

1-4 Family Mortgages

  -   -   300   -   300 

Commercial Real Estate

  -   -   2,418   -   2,418 

Total Real Estate Loans

  -   -   2,992   -   2,992 

Business Loans:

                    

Commercial and Industrial Loans

  1,300   92   -   32   1,424 

Farm Production and Other Farm Loans

  -   -   -   -   - 

Total Business Loans

  1,300   92   -   32   1,424 
                     

Total

 $1,300  $92  $2,992  $32  $4,416 

 

A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The following provides a qualitative description by class of loan of the collateral that secures the Company’s collateral-dependent LHFI:

 

 

Loans secured by real estate – Loans within these loan classes are secured by liens on real estate properties. There have been no significant changes to the collateral that secures these financial assets during the period.

 

Business loans – Loans within this loan class are primarily secured by inventory, accounts receivables, equipment and other non-real estate collateral. There have been no significant changes to the collateral that secures these financial assets during the period.

 

Credit Quality Indicators

 

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.

 

19

 

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.

 

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 September 30, 2023.

 

20

 

The following table details the amortized cost basis of LHFI, segregated by loan origination year, grade and class, as of September 30, 2023:

 

Term Loans Amortized Cost Basis by Origination Year

                         

September 30, 2023

 

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving

Loans

  

Total Loans

 

Loans secured by real estate:

                                

Land Development and Construction

                                

Satisfactory - Categories 1-4

 $21,605  $4,646  $1,290  $12,469  $881  $232  $19,083  $60,206 

Special Mention - Category 5 & 6

  -   356   679   -   -   -   -   1,035 

Substandard - Category 7

  -   513   -   -   -   -   -   513 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Land Development and Construction

  21,605   5,515   1,969   12,469   881   232   19,083   61,754 
                                 

Farmland

                                

Satisfactory - Categories 1-4

  1,345   1,590   1,273   1,906   3,042   570   899   10,625 

Special Mention - Category 5 & 6

  -   -   84   -   132   38   -   254 

Substandard - Category 7

  -   33   10   6   19   47   -   115 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Farmland

  1,345   1,623   1,367   1,912   3,193   655   899   10,994 
                                 

1-4 Family Mortgages

                                

Satisfactory - Categories 1-4

  8,940   19,417   11,949   11,415   9,723   7,040   19,995   88,479 

Special Mention - Category 5 & 6

  552   189   95   485   299   785   201   2,606 

Substandard - Category 7

  137   35   274   267   82   2,057   549   3,401 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   81   -   -   81 

Total 1-4 Family Mortgages

  9,629   19,641   12,318   12,167   10,185   9,882   20,745   94,567 
                                 

Commercial Real Estate

                                

Satisfactory - Categories 1-4

  40,527   51,865   58,617   53,373   25,109   32,905   17,180   279,576 

Special Mention - Category 5 & 6

  9,262   2,439   2,227   931   4,566   297   4,131   23,853 

Substandard - Category 7

  -   67   3,654   -   265   15,208   -   19,194 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Commercial Real Estate

  49,789   54,371   64,498   54,304   29,940   48,410   21,311   322,623 

Total Real Estate Loans

  82,368   81,150   80,152   80,852   44,199   59,179   62,038   489,938 

Business Loans:

                                

Commercial and Industrial Loans

                                

Satisfactory - Categories 1-4

  9,013   21,619   4,729   14,344   6,263   10,431   8,839   75,238 

Special Mention - Category 5 & 6

  -   121   -   277   4   453   2,151   3,006 

Substandard - Category 7

  -   17   92   -   38   731   835   1,713 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Commercial & Industrial

  9,013   21,757   4,821   14,621   6,305   11,615   11,825   79,957 
                                 

Farm Production and Other Farm Loans

                                

Satisfactory - Categories 1-4

  -   185   -   -   -   90   78   353 

Special Mention - Category 5 & 6

  -   -   -   -   -   -   -   - 

Substandard - Category 7

  -   -   5   -   -   1   -   6 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Farm Production & Other Farm

  -   185   5   -   -   91   78   359 

Total Business Loans

  9,013   21,942   4,826   14,621   6,305   11,706   11,903   80,316 

Consumer Loans:

                                

Satisfactory - Categories 1-4

  5,936   3,930   1,656   733   881   207   257   13,600 

Special Mention - Category 5 & 6

  -   -   -   -   -   -   -   - 

Substandard - Category 7

  307   36   29   1   -   -   -   373 

Doubtful - Category 8

  -   -   -   -   -   -   -   - 

Loss 9

  -   -   -   -   -   -   -   - 

Total Consumer Loans

  6,243   3,966   1,685   734   881   207   257   13,973 
                                 

Credit Cards

                                

Performing

  -   -   -   -   -   -   3,001   3,001 

Nonperforming

  -   -   -   -   -   -   10   10 

Total Credit Card

  -   -   -   -   -   -   3,011   3,011 

Gross LHFI

 $97,624  $107,058  $86,663  $96,207  $51,385  $71,092  $77,209  $587,238 
                                 

Less ACL

                              (6,390)

Net LHFI

                             $580,848 

 

21

 

There were no revolving loans converted to term loans during the three and nine months ended September 30, 2023.

 

The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.

 

A discussion of the Company’s policies regarding internal risk-rating of loans is discussed above and is applicable to these tables. The following table presents the Company’s loan portfolio by internal risk-rating grades as of December 31, 2022:

 

      

Special

                 
  

Satisfactory

  

Mention

  

Substandard

  

Doubtful

  

Loss

  

Total

 
  

1,2,3,4

  

5,6

  

7

  

8

  

9

  

Loans

 

Real Estate:

                        

Land Development and Construction

 $50,015  $2,427  $289  $-  $-  $52,731 

Farmland

  10,832   269   336   -   -   11,437 

1-4 Family Mortgages

  85,861   1,816   4,471   -   -   92,148 

Commercial Real Estate

  274,901   7,975   33,665   -   -   316,541 

Total Real Estate Loans

  421,609   12,487   38,761   -   -   472,857 
                         

Business Loans:

                        

Commercial and Industrial Loans

  91,016   4,902   577   -   5   96,500 

Farm Production and Other Farm Loans

  491   -   13   -   -   504 

Total Business Loans

  91,507   4,902   590   -   5   97,004 
                         

Consumer Loans:

                        

Other Consumer Loans

  12,934   7   51   -   -   12,992 

Credit Cards

  2,670   -   68   -   -   2,738 

Total Consumer Loans

  15,604   7   119   -   -   15,730 
                         
                         

Total Loans

 $528,720  $17,396  $39,470  $-  $5  $585,591 

  

 

Note 8. ACL on LHFI

 

The Company’s ACL methodology for LHFI is based upon guidance within ASC Subtopic 326-20 as well as applicable regulatory guidance. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within the Company’s existing LHFI portfolio. The ACL for LHFI is adjusted through the PCL, LHFI and reduced by the charge off of loan amounts, net of recoveries.

 

22

 

The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a collective, or pooled, component for estimated expected credit losses for pools of loans that share similar risk characteristics, and an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. In estimating the ACL for the collective component, loans are segregated into loan pools based on loan product types and similar risk characteristics.

 

The loans secured by real estate segment includes loans for both commercial and residential properties. The underwriting process for these loans includes analysis of the financial position and strength of both the borrower and guarantor, experience with similar projects in the past, market demand and prospects for successful completion of the proposed project within the established budget and schedule, values of underlying collateral, availability of permanent financing, maximum loan-to-value ratios, minimum equity requirements, acceptable amortization periods and minimum debt service coverage requirements, based on property type. The borrower’s financial strength and capacity to repay their obligations remain the primary focus of underwriting. Financial strength is evaluated based upon analytical tools that consider historical and projected cash flows and performance in addition to a financial analysis of any proposed project. Additional support offered by guarantors is also considered. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.

 

The business loan segment includes loans within the Company’s geographic markets made to many types of businesses for various purposes, such as short term working capital loans that are usually secured by accounts receivable and inventory and term financing for equipment and fixed asset purchases that are secured by those assets. The Company’s credit underwriting process for commercial and industrial loans includes analysis of historical and projected cash flows and performance, evaluation of financial strength of both borrowers and guarantors as reflected in current and detailed financial information and evaluation of underlying collateral to support the credit.

 

The consumer LHFI portfolio segment is comprised of loans that are centrally underwritten based on a credit scoring system as well as an evaluation of the borrower’s repayment capacity, credit, and collateral. Property appraisals are obtained to assist in evaluating collateral. Loan-to-value and debt-to-income ratios, loan amount, and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment.

 

The following table provides a description of each of the Company’s portfolio segments, loan classes, loan pools and the ACL methodology and loss drivers:

 

Portfolio Segment

Loan Class

Methodology

Loss Drivers

Loans secured by real estate

   
 

Land Development and Construction

Loss Rate

CRE Price Index, Real GDP, US Unemployment
 

Farmland

Loss Rate

CRE Price Index, Real GDP, US Unemployment
 

1-4 Family Mortgages

Loss Rate

CRE Price Index, Real GDP, US Unemployment
 

Commercial Real Estate

Loss Rate

CRE Price Index, Real GDP, US Unemployment
    

Business loans

   
 

Commercial and Industrial Loans

Loss Rate

US Unemployment, Nominal GDP
 

Farm Production and Other Farm Loans

Loss Rate

US Unemployment, Nominal GDP
    

Consumer loans

   
 

Consumer Loans

Loss Rate

Moody's Expected Consumer Credit Loss Model
 Credit CardsWARMCompany loss history
 OverdraftsWARMCompany loss history

 

23

 

The Loss Rate model is designed to operate at the portfolio segment level. These segments are relatively homogenous groups of loans with similar characteristics. Based on the average inputs of each segment, the model then calculates both quarterly and lifetime loss rates for the entire segment by loan. The lifetime loss rate is then multiplied by the amortized cost of each loan within a class to get a quantitative reserve.

 

The Company chose the Weighted Average Remaining Maturity (“WARM”) method for two loan classes that are relatively non-complex. The WARM methodology factors in the remaining life of each applicable loan class that must be calculated to be used within the quantitative model.

 

The Company determined that reasonable and supportable forecasts could be made for a twelve-month period for all of its loan pools. To the extent the lives of the loans in the LHFI portfolio extend beyond this forecast period, the Company uses a reversion period of four quarters and reverts to the historical mean on a straight-line basis over the remaining life of the loans. The econometric models currently in production reflect segment or pool level sensitivities of probability of default to changes in macroeconomic variables. By measuring the relationship between defaults and changes in the economy, the quantitative reserve incorporates reasonable and supportable forecasts of future conditions that will affect the value of its assets, as required by FASB ASC Topic 326.

 

In addition to the items mentioned above, the Company incorporates qualitative factors into the ACL methodology, including the following:

 

 

Lending expertise

 

Risk tolerance measured through lending policy requirements

 

Quality of the loan review system

 

Changes in collateral valuations

 

External factors within the Company’s operating region, including economic conditions

 

Impact of competition

 

The qualitative reserve is calculated by taking the quantitative reserve rate and multiplying this rate by the qualitative factor (“Q-factor”) scalar. The Q-factor scalar takes the average of all the Q-factors selected for a specific loan class. Each Q-factor is given a rating between 0 to 100 basis points (“bps”), with the 0 being no risk to 100 bps being the highest risk impact. Each Q-factor is evaluated and adjusted quarterly using both internal and external reports and data.

 

24

 

The following table details activity in the ACL by portfolio segment for the three and nine months ended September 30, 2023:

 

  

Real

  

Business

         
  

Estate

  

Loans

  

Consumer

  

Total

 

Beginning Balance, January 1, 2023

 $4,154  $713  $397  $5,264 

FASB ASU 2016-13 adoption adjustment

  665   56   (86)  635 
PCL  (46)  112   (19)  47 

Chargeoffs

  1   -   32   33 

Recoveries

  26   7   71   104 

Net recoveries

  (25)  (7)  (39)  (71)

Ending Balance March 31, 2023

 $4,798  $888  $331  $6,017 
PCL  564   (222)  30   372 

Chargeoffs

  18   67   34   119 

Recoveries

  46   5   60   111 

Net recoveries

  (28)  62   (26)  8 

Ending Balance June 30, 2023

 $5,334  $728  $335  $6,397 
PCL  218   (127)  14   105 

Chargeoffs

  2   5   59   66 

Recoveries

  124   22   32   178 

Net recoveries

  (122)  (17)  27   (112)

Ending Balance September 30, 2023

 $5,430  $584  $376  $6,390 

Period end allowance allocated to:

                

Loans individually evaluated for impairment

 $158  $-  $-  $158 

Loans collectively evaluated for impairment

  5,272   584   376   6,232 

Ending Balance, September 30, 2023

 $5,430  $584  $376  $6,390 

September 30, 2023

                

Loans individually evaluated for specific impairment

 $2,993  $1,424  $-  $4,417 

Loans collectively evaluated for general impairment

  486,945   78,892   16,984   582,821 
  $489,938  $80,316  $16,984  $587,238 

 

25

 

The following table details activity in the ACL by portfolio segment, based on the Company’s former allowance methodology prior to the adoption of ASC 326, for the three and nine months ended September 30, 2022:

 

  

Real

  

Business

         
  

Estate

  

Loans

  

Consumer

  

Total

 

Beginning Balance, January 1, 2022

 $3,622  $645  $246  $4,513 

PCL

  170   57   (134)  93 

Chargeoffs

  -   56   26   82 

Recoveries

  50   5   197   252 

Net chargeoffs (recoveries)

  (50)  51   (171)  (170)

Ending Balance March 31, 2022

 $3,842  $651  $283  $4,776 
PCL  81   8   (33)  56 

Chargeoffs

  1   -   20   21 

Recoveries

  60   15   160   235 

Net recoveries

  (59)  (15)  (140)  (214)

Ending Balance June 30, 2022

 $3,982  $674  $390  $5,046 
PCL  (20)  (27)  (6)  (53)

Chargeoffs

  6   5   11   22 

Recoveries

  23   6   68   97 

Net recoveries

  (17)  (1)  (57)  (75)

Ending Balance September 30, 2022

 $3,979  $648  $441  $5,068 

Period end allowance allocated to:

                

Loans individually evaluated for impairment

 $-  $-  $-  $- 

Loans collectively evaluated for impairment

  3,979   648   441   5,068 
                 

Ending Balance, September 30, 2022

 $3,979  $648  $441  $5,068 

September 30, 2022

                

Loans individually evaluated for specific impairment

 $1,286  $196  $-  $1,482 

Loans collectively evaluated for general impairment

  473,280   88,339   15,564   577,183 
  $474,566  $88,535  $15,564  $578,665 

 

The Company recorded a provision for credit losses of $105 during the third quarter of 2023, as compared to a provision for credit losses of ($53) recorded in the third quarter of 2022. The Company’s allowance for credit losses model considers economic projections, primarily the national unemployment rate, recessionary risks, gross domestic product (GDP) and commercial real estate (CRE) price fluctuations.

 

26

 

The following table represents gross charge-offs by year of origination for the date presented:

 

                          

Revolving

  

Total Charge-

 
  

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Loans

  

Offs

 

Gross Charge-Offs

                                

September 30, 2023

                                

Loans secured by real estate:

                                

Commercial Real Estate

 $-  $-  $-  $-  $5  $16  $-  $21 

Total Real Estate Loans

  -   -   -   -   5   16   -   21 
                                 

Business Loans

                                

Commercial and Industrial Loans

  5   -   -   -   -   67   -   72 

Total Business Loans

  5   -   -   -   -   67   -   72 
                                 

Total Consumer Loans

  5   28   2   4   -   -   -   39 
                                 

Total Credit Card

  -   -   -   -   -   -   86   86 
                                 

Net LHFI

 $10  $28  $2  $4  $5  $83  $86  $218 

 

ACL for Off-Balance Sheet Credit Exposure

 

The Company maintains a separate ACL for Off-Balance Sheet Credit Exposure, which is included in the “Other liabilities” line item on the Consolidated Balance Sheets. The Company estimates the amount of expected losses on off-balance sheet credit exposure by calculating a likelihood of funding over the contractual period for exposures that are not unconditionally cancellable by the Company and applying the loss factors used in the ACL on loans methodology described above to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company.

 

The following table provides a roll-forward of the ACL for off-balance sheet credit exposure for the period presented:

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

  

Ended September 30,

 
  

2023

  

2023

 

ACL for off-balance sheet credit exposure:

        

Beginning balance

 $681  $- 

FASB ASU 2016-13 adoption adjustment

  -   677 

PCL for off-balance sheet credit exposure

  230   234 

Ending Balance

 $911  $911 

 

The Company recorded a PCL for off-balance sheet credit exposure for the three and nine months ended September 30, 2023 of $230 and $234, respectively. The Company’s allowance for credit losses model considers economic projections, primarily the national unemployment rate, recessionary risks, GDP and CRE price fluctuations. The provision during the current quarter was primarily driven by increased recessionary risk due to inflationary pressures partially offset by a decrease in unfunded loan commitments.

 

27

  
 

Note 9. Derivative Instruments

 

The company uses certain derivative instruments to meet the needs of customers as well as to manage the interest rate risk associated with certain transactions.

 

Derivatives designated as fair value hedges

 

Fair value hedges protect against changes in the fair value of an asset, liability, or firm commitment. The Company enters into interest rate swap agreements to manage interest rate exposure on certain of the Company’s fixed-rate investment portfolio. The agreements convert the fixed interest rates to variable interest rates.

 

The following table provides a summary of the Company's derivatives designated as fair value hedges as of the dates presented:

 

 

Balance Sheet

 

September 30,2023

  

December 31, 2022

 
 

Location

 

Notional Amount

  

Fair Value

  

Notional Amount

  

Fair Value

 

Derivative Assets:

                 

Interest rate swaps

Other Assets

 $66,600  $641  $-  $- 

 

The following table presents the effects of the Company’s fair value hedge relationships on the Consolidated Statements of Income for the periods presented:

 

   

Amount of Gain (Loss) Recognized in Income

 
 

Income Statement

 

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
 

Location

 

2023

  

2022

  

2023

  

2022

 

Derivative assets:

                 

Interest rate swaps - investment securities

Interest Income

 $106  $-  $106  $- 

Derivative assets - hedged items:

                 

Interest rate swaps - investment securities

Interest Income

 $(106) $-  $(106) $- 

  

 

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. As of September 30, 2023, the interest rate was 8.25%. 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 renewed Line matures on June 9, 2024, at which time all unpaid interest and principal is due and payable.

 

  

September 30, 2023

  

December 31, 2022

 

Funded balance

 $18,000  $18,000 

Unfunded balance

  2,000   2,000 

Total credit facility

 $20,000  $20,000 

 

28

  
 

Note 11. Shareholders Equity

(in thousands, except share data)

 

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

 

              

Accumulated

         
  

Number

      

Additional

  

Other

         
  

of Shares

  

Common

  

Paid-In

  

Comprehensive

  

Retained

     
  

Issued

  

Stock

  

Capital

  

(Loss) Income

  

Earnings

  

Total

 

Balance, January 1, 2023

  5,603,570  $1,122  $18,448  $(83,070) $102,525  $39,025 

FASB ASU 2016-13 adoption adjustment

               (984)  (984)

Net income

  -   -   -   -   1,140   1,140 

Dividends paid ($0.24 per share)

  -   -   -   -   (1,346)  (1,346)

Restricted stock granted

  3,868   -   -   -   -   - 

Stock compensation expense

  -   -   40   -   -   40 

Other comprehensive loss, net

  -   -   -   3,248   -   3,248 

Balance, March 31, 2023

  5,607,438  $1,122  $18,488  $(79,822) $101,335  $41,123 

Net income

  -   -   -   -   300   300 

Dividends paid ($0.16 per share)

  -   -   -   -   (898)  (898)

Restricted stock granted

  9,000   1   (1)  -   -   - 

Stock compensation expense

  -   -   32   -   -   32 

Other comprehensive loss, net

  -   -   -   (416)  -   (416)

Balance, June 30, 2023

  5,616,438  $1,123  $18,519  $(80,238) $100,737  $40,141 

Net income

  -   -   -   -   1,207   1,207 

Dividends paid ($0.16 per share)

  -   -   -   -   (899)  (899)

Stock compensation expense

  -   -   35   -   -   35 

Other comprehensive income, net

  -   -   -   (6,139)  -   (6,139)

Balance, September 30, 2023

  5,616,438  $1,123  $18,554  $(86,377) $101,045  $34,345 

 

 

              

Accumulated

         
  

Number

      

Additional

  

Other

         
  

of Shares

  

Common

  

Paid-In

  

Comprehensive

  

Retained

     
  

Issued

  

Stock

  

Capital

  

Income (Loss)

  

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)

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 

Net income

  -   -   -   -   2,541   2,541 

Dividends paid ($0.24 per share)

  -   -   -   -   (1,345)  (1,345)

Restricted stock granted

  8,250   1   (1)  -   -   - 

Stock compensation expense

  -   -   39   -   -   39 

Other comprehensive income, net

  -   -   -   (38,259)  -   (38,259)

Balance, June 30, 2022

  5,603,570   1,121   18,370   (93,736)  100,171   25,926 

Net income

  -   -   -   -   2,580   2,580 

Dividends paid ($0.24 per share)

  -   -   -   -   (1,345)  (1,345)

Stock compensation expense

  -   -   39   -   -   39 

Other comprehensive loss, net

  -   -   -   5,437   -   5,437 

Balance, September 30, 2022

  5,603,570  $1,121  $18,409  $(88,299) $101,406  $32,637 

 

29

  
 

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 September 30, 2023:

 

  

Quoted Prices

             
  

in Active

  

Significant

         
  

Markets for

  

Other

  

Significant

     
  

Identical

  

Observable

  

Unobservable

     
  

Assets

  

Inputs

  

Inputs

     
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Totals

 

Derivative instruments

 $-  $641  $-  $641 

Securities available-for-sale

                

Mortgage-backed securities

  -   85,949   -   85,949 

State, county and municipal

  -   97,162   -   97,162 

Other securities

  -   424   -   424 

Total

 $-  $184,176  $-  $184,176 

 

30

 

The following table presents assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022:

 

  

Quoted Prices

             
  

in Active

  

Significant

         
  

Markets for

  

Other

  

Significant

     
  

Identical

  

Observable

  

Unobservable

     
  

Assets

  

Inputs

  

Inputs

     
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Totals

 

Securities available-for-sale

                

Mortgage-backed securities

 $-  $96,972  $-  $96,972 

State, county and municipal

  -   103,913   -   103,913 

Other securities

  -   437   -   437 

Total

 $-  $201,322  $-  $201,322 

 

The Company recorded no gains or losses in earnings for the nine month period ended September 30, 2023 or year ended December 31, 2022 that were attributable to the change in unrealized gains or losses relating to assets still held at the reporting date.

 

Loans Individually Evaluated For Impairment

 

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

 

31

 

The following tables provide the fair value measurement for assets measured at fair value on a nonrecurring basis that were still held on the balance sheets as of the dates presented and the level within the fair value hierarchy each is classified:

 

  

September 30, 2023

 
  

Quoted Prices

             
  

in Active

  

Significant

         
  

Markets for

  

Other

  

Significant

     
  

Identical

  

Observable

  

Unobservable

     
  

Assets

  

Inputs

  

Inputs

     
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Totals

 
                 

Loans individually evaluated for impairment

 $-  $-  $2,483  $2,483 
                 

Total

 $-  $-  $2,483  $2,483 

 

 

  

December 31, 2022

 
  

Quoted Prices

             
  

in Active

  

Significant

         
  

Markets for

  

Other

  

Significant

     
  

Identical

  

Observable

  

Unobservable

     
  

Assets

  

Inputs

  

Inputs

     
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Totals

 
                 

Loans individually evaluated for impairment

 $-  $-  $2,074  $2,074 
                 

Total

 $-  $-  $2,074  $2,074 

 

Individually evaluated loans, whose fair value was remeasured during the period, with a carrying value of $2,641 and $2,190, had an allocated ACL of $158 and $116 at September 30, 2023 and December 31, 2022, 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 no fair value adjustment to OREO was necessary during the three- and nine-month period ended September 30, 2023 and the year ended December 31, 2022, respectively.

 

32

 

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 September 30, 2023:

 

      

Quoted Prices

             
      

in Active

  

Significant

         
      

Markets for

  

Other

  

Significant

  

Total

 
  

Carrying

  

Identical

  

Observable

  

Unobservable

  

Fair

 

September 30, 2023

 

Value

  

Assets

  

Inputs

  

Inputs

  

Value

 
      

(Level 1)

  

(Level 2)

  

(Level 3)

     

Financial assets

                    

Cash and due from banks

 $14,061  $14,061  $-  $-  $14,061 

Interest bearing deposits with banks

  130,320   130,320   -   -   130,320 

Securities held-to-maturity

  392,133   -   338,863   -   338,863 

Securities available-for-sale

  183,535   -   183,535   -   183,535 

Net LHFI

  580,848   -   -   546,924   546,924 

Derivative instruments

  641   -   641   -   641 
                     

Financial liabilities

                    

Deposits

 $1,194,697  $958,179  $212,108  $-  $1,170,287 

Securities sold under agreement to repurchase

  151,089   151,089   -   -   151,089 

Borrowings on secured line of credit

  18,000   18,000   -   -   18,000 

 

33

 

The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2022:

 

      

Quoted Prices

             
      

in Active

  

Significant

         
      

Markets for

  

Other

  

Significant

  

Total

 
  

Carrying

  

Identical

  

Observable

  

Unobservable

  

Fair

 

December 31, 2022

 

Value

  

Assets

  

Inputs

  

Inputs

  

Value

 
      

(Level 1)

  

(Level 2)

  

(Level 3)

     

Financial assets

                    

Cash and due from banks

 $26,948  $26,948  $-  $-  $26,948 

Interest bearing deposits with banks

  1,646   1,646   -   -   1,646 

Securities held-to-maturity

  406,590   -   375,292   -   375,292 

Securities available-for-sale

  201,322   -   201,322   -   201,322 

Net LHFI

  580,327   -   -   541,173   541,173 
                     

Financial liabilities

                    

Deposits

 $1,126,402  $947,479  $178,902  $-  $1,126,381 
                     
Securities sold under agreement to repurchase   127,574   127,574   -   -   127,574 

Borrowings on secured line of credit

  18,000   18,000   -   -   18,000 

 

34

 
  
 

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 ACL 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;

natural disasters, civil unrest, epidemics and other catastrophic events in the Company’s geographic area;

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

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

increased competition from other financial institutions, in particular with respect to deposits, 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;

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;

 

35

 

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

increased cybersecurity risk, including network breaches, business disruptions or financial losses;

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;

risks associated with national and global events, such as the conflict between Russia and Ukraine and supply chain disruptions;

risks associated with the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, which have resulted in significant market volatility and less confidence in depository institutions;

internal and external factors affecting net interest margin; 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 September 30, 2023, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,413,219 and total deposits of $1,194,636. 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.

 

36

 

CRITICAL ACCOUNTING POLICIES

 

For an overview of the Company’s critical accounting policies, see the section captioned “Critical Accounting Policies” included in Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s 2022 Annual Report. Additionally, as described more fully in our unaudited financial statements in Part I of this Quarterly report, especially Note 1, Impact of Recently-Issued Accounting Standards and Pronouncements and Note 8, ACL on LHFI, on January 1, 2023, the Company adopted ASC 326. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit.

 

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 cash, short-term investments and marketable assets divided by net deposits and short-term liabilities. This measurement for liquidity of the Company at September 30, 2023, was 22.58% and at December 31, 2022, was 14.58%. The increase was due to an increase in interest bearing cash and cash equivalents partially offset by an decrease in the fair market value of investment securities as of September 30, 2023. Management believes it maintains adequate liquidity for the Company’s current needs.

 

The Company’s primary source of liquidity is customer deposits, which were $1,194,697 at September 30, 2023, and $1,126,402 at December 31, 2022. 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”), the Federal Reserve Bank Term Funding Program (“BTFP”) and federal funds lines with correspondent banks. The Company had $183,535 invested in available-for-sale investment securities at September 30, 2023, and $201,322 at December 31, 2022. The decrease in securities available-for-sale is the result of paydowns on investment securities coupled with a decrease in the fair market value of investment securities.

 

37

 

The Company also had $130,320 in interest bearing deposits at other banks at September 30, 2023 and $1,646 at December 31, 2022. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $50,000 at September 30, 2023 and $45,000 at December 31, 2022. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At September 30, 2023, the Company had unused and available $189,165 of its line of credit with the FHLB and at December 31, 2022, the Company had unused and available $160,488 of its line of credit with the FHLB. The increase in the amount available under the Company’s line of credit with the FHLB from the end of 2022 to September 30, 2023, was the result of an increase in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. In addition to the line of credit previously mentioned with the FHLB that is secured by pledged loans, the Company can also pledge investment securities at their current face value, less a predetermined discount amount, typically between 3% to 10%. This is similar to the BTFP except the Company can structure the terms of the line of credit with the FHLB and the BTFP is a one-year line of credit secured by investment securities at par. The Company has approximately $132,712 and $133,033 of unpledged securities at September 30, 2023 and December 31, 2022, respectively. The secured line of credit with FHN was originated on June 9, 2021. At September 30, 2023, 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 September 30, 2023 and December 31, 2022. 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 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.

 

The Company utilizes derivative financial instruments, primarily interest rate swaps, as part of its ongoing efforts to mitigate its interest rate risk exposure and to facilitate the needs of its customers. To mitigate the interest rate risk associated with certain customer transactions, the Company enters into an offsetting derivative contract position with other financial institutions. At September 30, 2023 and December 31, 2022, the Company had notional amounts of $66,600 and -0-, respectively, on interest rate swaps with other financial institutions to mitigate the Company’s rate exposure on certain fixed rate securities.

 

For more information about the Company’s derivatives, see Note 9, “Derivative Instruments,” in the Notes to Consolidated Financial Statements of the Company.

 

CAPITAL RESOURCES

 

Total shareholders’ equity was $34,345 at September 30, 2023, as compared to $39,025 at December 31, 2022. The decrease is a result of a change in AOCI caused by an increase in the medium-term interest rates that has occurred since December 31, 2022. To help manage the AOCI volatility, the Company transferred securities to held-to-maturity during the third quarter 2022 to help further mitigate any future negative impacts on shareholders’ equity that could result from continued interest rate hikes. The unrealized loss that was frozen in AOCI at the time of the transfer will be amortized out of AOCI back into shareholders’ equity over the remaining life of the securities. Additionally, as noted in the Liquidity section of Item 2. of this Quarterly Report, the Company has sufficient liquidity options available if the need for short-term funds arises.

 

38

 

The Company paid aggregate cash dividends in the amount of $3,143, or $0.56 per share, during the nine-month period ended September 30, 2023 compared to $4,033, or $0.72 per share, for the same period in 2022.

 

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 September 30, 2023, the Company and Bank meet all capital adequacy requirements to which they are subject and according to these requirements the Company and Bank are considered to be well capitalized.

 

                                   

Minimum Capital

 
                   

Minimum Capital

   

Requirement to be

 
                   

Requirement to be

   

Adequately

 
   

Actual

   

Well Capitalized

   

Capitalized

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

September 30, 2023

                                               

Citizens Holding Company

                                               

Tier 1 leverage ratio

  $ 108,184       7.83 %   $ 69,124       5.00 %   $ 55,299       4.00 %

Common Equity tier 1 capital ratio

    108,184       7.83 %     89,861       6.50 %     62,212       4.50 %

Tier 1 risk-based capital ratio

    108,184       13.06 %     66,268       8.00 %     49,701       6.00 %

Total risk-based capital ratio

    114,746       13.85 %     82,835       10.00 %     66,268       8.00 %

The Citizens Bank of Philadelphia

                                               

Tier 1 leverage ratio

  $ 125,452       9.08 %   $ 69,093       5.00 %   $ 55,274       4.00 %

Common Equity tier 1 capital ratio

    125,452       9.08 %     89,821       6.50 %     62,184       4.50 %

Tier 1 risk-based capital ratio

    125,452       15.16 %     66,206       8.00 %     49,655       6.00 %

Total risk-based capital ratio

    132,015       15.95 %     82,758       10.00 %     66,206       8.00 %
                                                 

December 31, 2022

                                               

Citizens Holding Company

                                               

Tier 1 leverage ratio

  $ 108,756       7.96 %   $ 68,352       5.00 %   $ 54,682       4.00 %

Common Equity tier 1 capital ratio

    108,756       7.96 %     88,858       6.50 %     61,517       4.50 %

Tier 1 risk-based capital ratio

    108,756       13.19 %     65,951       8.00 %     49,463       6.00 %

Total risk-based capital ratio

    114,020       13.83 %     82,438       10.00 %     65,951       8.00 %

The Citizens Bank of Philadelphia

                                               

Tier 1 leverage ratio

  $ 126,105       9.23 %   $ 68,333       5.00 %   $ 54,667       4.00 %

Common Equity tier 1 capital ratio

    126,105       9.23 %     88,833       6.50 %     61,500       4.50 %

Tier 1 risk-based capital ratio

    126,105       15.34 %     65,759       8.00 %     49,320       6.00 %

Total risk-based capital ratio

    131,370       15.98 %     82,199       10.00 %     65,759       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.

 

39

 

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 September 30, 2023, the Company and the Bank met all capital adequacy requirements under Basel III.

 

40

 

 

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 Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2023

   

2022

   

2023

   

2022

 
                                 

Interest Income

  $ 12,819     $ 10,122     $ 35,010     $ 28,736  

Interest Expense

    5,387       1,073       12,486       2,637  
                                 

Net Interest Income

    7,432       9,049       22,524       26,099  

PCL

    98       (53 )     562       96  
                                 

Net Interest Income After PCL

    7,334       9,102       21,962       26,003  

Other Income

    3,205       2,877       7,829       8,173  

Other Expense

    9,084       8,936       26,821       25,669  
                                 

Income Before Income Taxes

    1,455       3,043       2,970       8,507  

Income taxes

    248       463       323       1,350  
                                 

Net Income

  $ 1,207     $ 2,580     $ 2,647     $ 7,157  
                                 

Net Income Per share - Basic

  $ 0.22     $ 0.46     $ 0.47     $ 1.28  

Net Income Per Share-Diluted

  $ 0.22     $ 0.46     $ 0.47     $ 1.28  

 

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 12.21% for the three months ended September 30, 2023, and 13.36% for the corresponding period in 2022. Annualized ROE was 8.91% for the nine months ended September 30, 2023, and 12.12% for the corresponding period in 2022. The decrease in ROE for the three and nine months ended September 30, 2023 compared to the same period in 2022 was primarily the result of a decrease in net income.

 

Book value per share decreased to $6.13 at September 30, 2023, compared to $6.97 at December 31, 2022. The decrease in book value per share is directly attributable to the decrease in shareholders’ equity resulting from the increase in AOCI caused by the increase in medium-term interest rates. Average assets for the nine months ended September 30, 2023 were $1,334,768 compared to $1,343,234 for the year ended December 31, 2022.

 

NET INTEREST INCOME / NET INTEREST MARGIN (NIM)

 

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 $7,432 and $22,524 for the three and nine months ended September 30, 2023 as compared to $9,049 and $26,099 for the same respective time periods in 2022.

 

41

 

The annualized net interest margin was 2.40% for the three months ended September 30, 2023, compared to 2.90% for the corresponding period of 2022. Additionally, the annualized net interest margin was 2.49% for the nine months ended September 30, 2023 and 2.79% for the corresponding period of 2022. The decrease in net interest margin for the three and nine months ended September 30, 2023, when compared to the same periods in 2022, was mainly due to rising funding costs during late 2022 and 2023. In addition, the shift from non-interest bearing deposits to higher interest-bearing deposits as of September 30, 2023 increased the cost of funds to 210 and 167 basis point (“bps”) for the three and nine months ended September 30, 2023 compared to 45 bps and 37 bps for the three and nine months ended September 30, 2022, respectively. Interest expense increased for the three and nine months ended September 30, 2023 by $4,313, or 402.05%, and 9,848, or 373.49%, respectively, when compared to the same period a year ago. Management expects continued pressure on NIM throughout 2023 as deposit competition remains tight.

 

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 September 30,

 
   

Average Balance

   

Income/Expense

   

Average Yield/Rate

 
   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

 

Loans:

                                               

LHFI(1)

  $ 582,947     $ 582,989     $ 8,599     $ 6,883       5.90 %     4.72 %
                                                 

Investment Securities

                                               

Taxable

    428,542       474,032       2,324       2,131       2.17 %     1.80 %

Tax-exempt

    201,417       215,825       1,321       1,320       2.62 %     2.45 %

Total Investment Securities

    629,959       689,857       3,645       3,451       2.31 %     2.00 %
                                                 

Federal Funds Sold and Other

    71,477       15,627       866       73       4.85 %     1.87 %
                                                 

Total Interest Earning Assets(1)(2)

    1,284,383       1,288,474       13,110       10,407       4.08 %     3.23 %
                                                 

Non-Earning Assets

    79,229       69,953                                  
                                                 

Total Assets

  $ 1,363,612     $ 1,358,427                                  
                                                 

Deposits:

                                               

Interest-bearing Demand Deposits (3)

  $ 524,089     $ 479,234     $ 1,789     $ 139       1.37 %     0.12 %

Savings

    117,919       135,260       91       34       0.31 %     0.10 %

Time

    224,389       195,438       1,601       323       2.85 %     0.66 %

Total Deposits

    866,396       809,932       3,481       496       1.61 %     0.24 %
                                                 

Borrowed Funds

                                               

Short-term Borrowings

    142,343       132,430       1,499       323       4.21 %     0.98 %

Long-term Borrowings

    18,000       18,000       406       254       9.02 %     5.64 %

Total Borrowed Funds

    160,343       150,430       1,905       577       4.75 %     1.53 %

Total Interest-Bearing Liabilities (3)

    1,026,739       960,362       5,386       1,073       2.10 %     0.45 %
                                                 

Non-Interest Bearing Liabilities

                                               

Demand Deposits

    282,217       309,913                                  

Other Liabilities

    -36,463       10,931                                  

Shareholders' Equity

    91,120       77,221                                  

Total Liabilities and Shareholders' Equity

  $ 1,363,612     $ 1,358,427                                  
                                                 

Interest Rate Spread

                                    1.98 %     2.78 %
                                                 

Net Interest Margin

                  $ 7,724     $ 9,334       2.40 %     2.90 %
                                                 

Less

                                               

Tax Equivalent Adjustment

                    292       285                  
                                                 

Net Interest Income

                  $ 7,432     $ 9,049                  

 

42

 

   

Nine Months Ended September 30,

 
   

Average Balance

   

Income/Expense

   

Average Yield/Rate

 
   

2023

   

2022

   

2023

   

2022

   

2023

   

2022

 

Loans:

                                               

Loans, net of unearned(1)

  $ 576,671     $ 583,859     $ 23,505     $ 19,976       5.43 %     4.56 %
                                                 

Investment Securities

                                               

Taxable

    436,146       470,223       6,892       5,729       2.11 %     1.62 %

Tax-exempt

    201,899       213,708       3,989       3,732       2.63 %     2.33 %

Total Investment Securities

    638,045       683,931       10,881       9,461       2.27 %     1.84 %
                                                 

Federal Funds Sold and Other

    40,272       23,621       1,502       123       4.97 %     0.69 %
                                                 

Total Interest Earning Assets(1)(2)

    1,254,988       1,291,411       35,888       29,560       3.81 %     3.05 %
                                                 

Non-Earning Assets

    79,780       57,163                                  
                                                 

Total Assets

  $ 1,334,768     $ 1,348,574                                  
                                                 

Deposits:

                                               

Interest-bearing Demand Deposits (3)

  $ 514,720     $ 482,405     $ 3,959     $ 534       1.03 %     0.15 %

Savings

    122,780       133,263       260       98       0.28 %     0.10 %

Time

    202,773       205,661       3,532       948       2.32 %     0.61 %

Total Deposits

    840,273       821,329       7,751       1,580       1.23 %     0.26 %
                                                 

Borrowed Funds

                                               

Short-term Borrowings

    136,787       112,723       3,635       466       3.54 %     0.55 %

Long-term Borrowings

    18,000       18,000       1,099       591       8.14 %     4.38 %

Total Borrowed Funds

    154,787       130,723       4,734       1,057       4.08 %     1.08 %

Total Interest-Bearing Liabilities (3)

    995,060       952,052       12,485       2,637       1.67 %     0.37 %
                                                 

Non-Interest Bearing Liabilities

                                               

Demand Deposits

    285,687       305,374                                  

Other Liabilities

    -2,980       12,438                                  

Shareholders' Equity

    57,001       78,710                                  

Total Liabilities and Shareholders' Equity

  $ 1,334,768     $ 1,348,574                                  
                                                 

Interest Rate Spread

                                    2.14 %     2.68 %
                                                 

Net Interest Margin

                  $ 23,403     $ 26,923       2.49 %     2.79 %
                                                 

Less

                                               

Tax Equivalent Adjustment

                    879       824                  
                                                 

Net Interest Income

                  $ 22,524     $ 26,099                  

 

 

(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 includes 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.

 

43

 

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 nine months ended September 30, 2023, rapidly increasing deposit costs have been the larger driver of decreased profitability. Management believes net interest margin may contract some more in the fourth quarter of 2023. Management remains focused on loan growth to help offset the increased funding costs.

 

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 nine months ended September 30, 2023 compared to the same respective periods in 2022:

 

TABLE 2 - VOLUME/RATE ANALYSIS

 

(in thousands)

 
   

Three Months Ended September 30, 2023

 
   

2023 Change from 2022

 
   

Volume

   

Rate

   

Total

 

INTEREST INCOME

                       
                         

LHFI

  $ (1 )   $ 1,717     $ 1,716  

Taxable Securities

    (204 )     397       193  

Non-Taxable Securities

    (88 )     89       1  

Federal Funds Sold and Other

    261       532       793  
                         

TOTAL INTEREST INCOME

  $ (32 )   $ 2,735     $ 2,703  
                         

INTEREST EXPENSE

                       
                         

Interest-bearing demand deposits

  $ 13     $ 1,637     $ 1,650  

Savings Deposits

    (4 )     61       57  

Time Deposits

    48       1,230       1,278  

Short-term borrowings

    24       1,152       1,176  

Long-term borrowings

    -       152       152  
                         

TOTAL INTEREST EXPENSE

  $ 81     $ 4,232     $ 4,313  
                         
                         

NET INTEREST INCOME

  $ (113 )   $ (1,497 )   $ (1,610 )

 

44

 

   

Nine Months Ended September 30, 2023

 
   

2023 Change from 2022

 
   

Volume

   

Rate

   

Total

 

INTEREST INCOME

                       
                         

Loans

  $ (246 )   $ 3,775     $ 3,529  

Taxable Securities

    (415 )     1,578       1,163  

Non-Taxable Securities

    (206 )     463       257  

Federal Funds Sold and Other

    87       1,292       1,379  
                         

TOTAL INTEREST INCOME

  $ (781 )   $ 7,109     $ 6,328  
                         

INTEREST EXPENSE

                       
                         

Interest-bearing demand deposits

  $ 36     $ 3,389     $ 3,425  

Savings Deposits

    (8 )     170       162  

Time Deposits

    (13 )     2,597       2,584  

Short-term borrowings

    99       3,070       3,169  

Long-term borrowings

    -       508       508  
                         

TOTAL INTEREST EXPENSE

  $ 114     $ 9,734     $ 9,848  
                         
                         

NET INTEREST INCOME

  $ (895 )   $ (2,625 )   $ (3,520 )

 

CREDIT LOSS EXPERIENCE

 

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

 

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

 

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

 

45

 

The Company’s ACL is designed to provide for loan losses that can be reasonably anticipated. The ACL is established through charges to operating expenses in the form of provisions for credit losses. Actual loan losses or recoveries are charged or credited to the ACL. Management determines the amount of the allowance, and the Board of Directors reviews and approves the ACL. Among the factors considered in determining the ACL 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 ACL for the dates indicated:

 

   

Quarter Ended

   

Year Ended

   

Amount of

   

Percent of

 
   

September 30,

   

December 31,

   

Increase

   

Increase

 
   

2023

   

2022

   

(Decrease)

   

(Decrease)

 
                                 

BALANCES:

                               

Gross loans

  $ 587,238     $ 585,591     $ 1,647       0.28 %

ACL

    6,390       5,264       1,126       21.39 %

Nonaccrual loans

    3,009       2,988       21       0.70 %

Ratios:

                               

ACL to gross loans

    1.09 %     0.90 %                

Net loans recovered to ACL(1)

    (1.11 %)     (11.91 %)                

 

(1) Quarter ended amount annualized.

 

The PCL for the three months ended September 30, 2023 was $98. The PCL was primarily driven by an increase in qualitative factor adjustments due to continued inflationary risk concerns in both the local and national economy and an increase in loan balances of $12,504 during the quarter. The Company’s model used to calculate the PCL is described in depth in Note 8 of the Consolidated Financial Statements. The ACL to LHFI was 1.09% and 0.88% at September 30, 2023 and 2022, respectively, and 0.90% at December 31, 2022 representing a level management considers commensurate with the present risk in the loan portfolio.

 

For the three months ended September 30, 2023, net loan losses recovered to the ACL totaled $112, an increase of $37 in net recoveries from the $75 in net recoveries in the same period in 2022. For the nine months ended September 30, 2023, net loan losses recovered to the allowance for loan losses totaled $175, a decrease of $284 in net recoveries from $459 in the same period in 2022.

 

Management reviews quarterly with the Company’s Board of Directors the adequacy of the ACL. The ACL is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three and nine months ended September 30, 2023 that have not been charged off or appropriately reserved for in the ACL. Management also believes that the Company’s ACL will be adequate to absorb probable losses inherent in the Company’s loan portfolio. However, it remains possible that additional PCL may be required.          

 

46

 

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 September 30, 2023 was $3,205, an increase of $328, or 11.40%, from $2,877 in the same period in 2022. Service charges on deposit accounts were $994 in the three months ended September 30, 2023, compared to $1,019 for the same period in 2022. Included in the service charges on deposit accounts line item for the three months ended September 30, 2023, overdraft income decreased by $47, or (6.28%) to $702, from the same period in 2022. Interchange fees which are included in the other service charges and fees line item on the Comprehensive Statements of Income decreased by $8, or 0.88%, to $904 for the three months ended September 30, 2023, compared to $912 for the same period in 2022. Other operating income not derived from service charges or fees increased $358, or 47.93% to $1,105 in the three months ended September 30, 2023, compared to $747 for the same period in 2022. This increase was primarily driven by two one-time events, including a gain on the sale of three loans of $488 and the gain on the sale of an ORE parcel of $100.

 

Other income for the nine months ended September 30, 2023 was $7,829, a decrease of $344, or (4.21%), from $8,173 in the same period in 2022. Service charges on deposit accounts were $2,798 in the nine months ended September 30, 2023, compared to $2,931 for the same period in 2022. Included in the service charges on deposit accounts line item for the nine months ended September 30, 2023, overdraft income decreased by $135, or (6.37%) to $1,984 from the same period in 2022. Interchange fees which are included in the other service charges and fees line item on the Comprehensive Statements of Income decreased by $34, or 1.21%, to $2,772 for the nine months ended September 30, 2023, compared to $2,806 for the same period in 2022. Other operating income not derived from service charges or fees decreased $195, or (9.69%) to $1,817 in the nine months ended September 30, 2023, compared to $2,012 for the same period in 2022. 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 nine months ended September 30, 2023 by $303, or (53.53%), to $263 compared to $566 for the same period in 2022.

 

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

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 

Other income

 

2023

   

2022

   

2023

   

2022

 
                                 

BOLI Income

  $ 250     $ 98     $ 369     $ 339  

Mortgage Loan Origination Income

    177       152       263       566  

Gain on sale of OREO

    107       5       93       86  

Other Income

    571       492       1,092       1,021  
                                 

Total other income

  $ 1,105     $ 747     $ 1,817     $ 2,012  

 

47

 

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 September 30, 2023 and 2022 were $9,084 and $8,936, respectively, an increase of $148, or 1.66%. Salaries and benefits increased $149, or 3.31%, to $4,655 for the three months ended September 30, 2023 when compared to the same period in 2022. Occupancy expense decreased by $33, or (1.68%), to $1,935 for the three months ended September 30, 2023, compared to $1,968 for the same period of 2022. For the three months ended September 30, 2023, other expense increased $32, or 1.30% to $2,494 compared to $2,462 for the same period in 2022. The increase in other expense is primarily the result of an increase in professional fees coupled with check fraud losses of $109 that occurred during the third quarter of 2023 that are included in the Other expense line item on the Consolidated Statements of Income.

 

Aggregate non-interest expenses for the nine months ended September 30, 2023 and 2022 were $26,821 and $25,669, respectively, an increase of $1,152, or 4.49%. Salaries and benefits increased $703, or 5.26%, to $14,060 for the nine months ended September 30, 2023 when compared to the same period in 2022. Occupancy expense increased by $182, or 3.34%, to $5,636 for the nine months ended September 30, 2023, compared to $5,454 for the same period of 2022. For the nine months ended September 30, 2023, other expense increased $267, or 3.89% to $7,125 compared to $6,858 for the same period in 2022. The increase in other expense is primarily the result of an increase in professional fees coupled with check fraud losses of $297 that occurred during the first nine months of 2023 that are included in the Other expense line item on the Consolidated Statements of Income.

 

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

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 

Other Expense

 

2023

   

2022

   

2023

   

2022

 
                                 

Advertising

  $ 169     $ 172     $ 407     $ 475  

Office Supplies

    266       284       745       743  

Professional Fees

    318       346       847       788  

Technology expense

    103       111       323       336  

Postage and Freight

    148       132       436       438  

Loan Collection Expense

    18       5       64       25  

Regulatory and related expense

    262       208       689       620  

Debit Card/ATM expense

    228       200       654       590  

Write down on OREO

    -       -       -       42  

Travel and Convention

    126       53       204       168  

Other expenses

    856       951       2,756       2,633  
                                 

Total other expense

  $ 2,494     $ 2,462     $ 7,125     $ 6,858  

 

The Company’s efficiency ratio for the three and nine months ended September 30, 2023 was 83.69% and 87.41%, compared to 72.79% and 73.26% for the same period in 2022, respectively. 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.

 

48

 

BALANCE SHEET ANALYSIS

 

                   

Amount of

   

Percent of

 
   

September 30,

   

December 31,

   

Increase

   

Increase

 
   

2023

   

2022

   

(Decrease)

   

(Decrease)

 
                                 

Cash and due from banks

  $ 14,061     $ 26,948     $ (12,887 )     (47.82 %)

Interest bearing deposits with other banks

    130,320       1,646       128,674       7817.38 %

Investment securities held to maturity

    392,133       406,590       (14,457 )     (3.56 %)

Investment securities available for sale

    183,535       201,322       (17,787 )     (8.84 %)

Net LHFI

    580,848       580,327       521       0.09 %

Total assets

    1,414,010       1,324,003       90,007       6.80 %
                                 

Total deposits

    1,194,697       1,126,402       68,295       6.06 %
                                 

Total shareholders' equity

    34,345       39,025       (4,680 )     (11.99 %)

 

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 September 30, 2023 was $14,061, which was a decrease of $12,887 from the balance of $26,948 at December 31, 2022. Interest bearing deposits with other banks increased by $128,674, or (7,817.38%), to $130,320 at September 30, 2023 compared to $1,646 at December 31, 2022.

 

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. The Company’s investments securities portfolio at September 30, 2023 decreased by $23,739, or 3.66%, to $625,312 from $649,051 at December 31, 2022 when comparing the amortized cost of the Company’s investments securities. The decrease is primarily a result of the mortgage-backed securities portfolio monthly paydowns.

 

LHFI

 

The Company’s gross loan balance increased by $1,647, or 0.28%, during the nine months ended September 30, 2023, to $587,238 from $585,591 at December 31, 2022. The year-to-date loan growth primarily reflects new loans in excess of paydown activity. No material changes were made to the loan products offered by the Company during this period.

 

49

 

DEPOSITS

 

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

 

                   

Amount of

   

Percent of

 
   

September 30,

   

December 31,

   

Increase

   

Increase

 
   

2023

   

2022

   

(Decrease)

   

(Decrease)

 
                                 

Noninterest-Bearing Deposits

  $ 277,949     $ 299,112     $ (21,163 )     (7.08% )

Interest-Bearing Deposits

    562,712       515,337       47,375       9.19 %

Savings Deposits

    117,518       133,030       (15,512 )     (11.66% )

Certificates of Deposit

    236,518       178,923       57,595       32.19 %
                                 

Total deposits

  $ 1,194,697     $ 1,126,402     $ 68,295       6.06 %

 

All deposit accounts except for noninterest-bearing deposits and savings deposits increased during the nine months ended September 30, 2023. The increase in deposit accounts is directly attributable to customers moving noninterest-bearing deposits to certificates of deposits and interest-bearing deposits due to the current rate environment. 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 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 the reports we file or submit 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, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions 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 September 30, 2023 (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 September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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.

 

In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC.

 

Other than the risk factor set forth below, there has been no material change in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

Risks Related to Recent Events Impacting the Financial Services Industry

 

The high-profile bank failures of Silicon Valley Bank and Signature Bank in March 2023 and First Republic Bank in May 2023 have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of operations. These events are occurring during a period of continued interest rate increases by the Federal Reserve which, among other things, have resulted in unrealized losses in longer-duration securities held by banks, increased competition for bank deposits and the possibility of an increase in the risk of a potential recession. These recent events have, and could continue to, adversely impact the market price and volatility of the Company's common stock.

 

These rapid bank failures have also highlighted risks associated with advances in technology that increase the speed at which information, concerns and rumors can spread through traditional and new media, and increase the speed at which deposits can be moved from bank to bank or outside the banking system, heightening liquidity concerns of traditional banks. While regulators and large banks have taken steps designed to increase liquidity at regional banks and strengthen depositor confidence in the broader banking industry, there can be no guarantee that these steps will stabilize the financial services industry and financial markets. In addition, regulators may adopt new regulations or increase FDIC insurance costs, which could increase our costs of doing business.

 

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ITEM 6.

EXHIBITS.

 

Exhibits

 

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).

 

 

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/ Stacy M. Brantley  
 

Stacy M. Brantley

 
 

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: November 14, 2023

 

 

 

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