UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2023

☐	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, MS	39350
(Address of principal executive offices)	(Zip Code)

601-656-4692

(Registrant’s telephone number, including area code)

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

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

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~~☑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 ~~August 8, 2023 :~~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 ~~June~~September 30, 2023 (Unaudited) and December 31, 2022 (Audited)	1

	Consolidated Statements of Income for the Three and ~~Six~~Nine months ended ~~June~~September 30, 2023 (Unaudited) and 2022 (Unaudited)	2

	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Six~~Nine months ended ~~June~~September 30, 2023 (Unaudited) and 2022 (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine months ended ~~June~~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.	30

~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk.~~	4335

Item 4.	Controls and Procedures.	4450


PART II.	OTHER INFORMATION	4551

Item 1.	Legal Proceedings.	4551

Item 1A.	Risk Factors.	45 51

Item 6.	Exhibits.	45 52



SIGNATURES			4652

PART I.‐ FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.

CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

	June 30,			December 31,			September 30,			December 31,
	2023			2022			2023			2022
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
Assets
Cash and due from banks	$	17,086		$	26,948		$	14,061		$	26,948
Interest bearing deposits with other banks		862			1,646			130,320			1,646
Cash and cash equivalents		17,948			28,594			144,381			28,594
Investment securities held-to-maturity, at amortized cost		396,931			406,590			392,133			406,590
Investment securities available-for-sale, at fair value		196,866			201,322			183,535			201,322
Loans held for investment (LHFI) (1)		574,734			585,591			587,238			585,591
Less allowance for credit losses (ACL), LHFI (1)		6,397			5,264			6,390			5,264
Net LHFI		568,337			580,327			580,848			580,327
Premises and equipment, net		27,381			27,705			27,353			27,705
Other real estate owned, net		1,009			1,179			974			1,179
Accrued interest receivable		4,766			4,864			4,712			4,864
Cash surrender value of life insurance		26,062			25,724			26,191			25,724
Deferred tax assets, net		29,346			29,574			31,417			29,574
Identifiable intangible assets, net		13,386			13,442			13,359			13,442
Other assets		7,307			4,682			9,107			4,682

Total Assets	$	1,289,339		$	1,324,003		$	1,414,010		$	1,324,003

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Non-interest bearing deposits	$	281,812		$	299,112		$	277,949		$	299,112
Interest bearing deposits		821,260			827,290			916,748			827,290
Total deposits		1,103,072			1,126,402			1,194,697			1,126,402

Securities sold under agreement to repurchase		109,526			127,574			151,089			127,574
Short-term borrowings		4,000			-
Borrowings on secured line of credit		18,000			18,000			18,000			18,000
Deferred compensation payable		10,104			9,868			10,120			9,868
Other liabilities		4,496			3,134			5,759			3,134
Total liabilities		1,249,198			1,284,978			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 - June 30, 2023; 5,603,570 shares - December 31, 2022		1,123			1,122
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		18,519			18,448			18,554			18,448
Accumulated other comprehensive loss, net of tax benefit of $26,674 at March 31, 2023 and $29,355 at December 31, 2022		(80,238	)		(83,070	)
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		100,737			102,525			101,045			102,525

Total shareholders' equity		40,141			39,025			34,345			39,025

Total liabilities and shareholders' equity	$	1,289,339		$	1,324,003		$	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~~(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.

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)

	For the Three Months					For the Six Months				For the Three Months					For the Nine Months
	Ended June 30,					Ended June 30,				Ended September 30,					Ended September 30,
	2023			2022		2023		2022		2023		2022			2023		2022
Interest Income
Interest and fees on loans	$	7,529		$	6,639	$	14,852	$	13,036	$	8,503	$	6,855		$	23,355	$	19,891
Interest on securities
Taxable		2,262			1,901		4,568		3,598		2,218		2,130			6,786		5,728
Nontaxable		1,070			983		2,135		1,930		1,058		1,057			3,193		2,987
Other interest		297			37		636		50		1,040		80			1,676		130
Total interest income		11,158			9,560		22,191		18,614		12,819		10,122			35,010		28,736
Interest Expense
Deposits		2,449			528		4,270		1,084		3,481		496			7,751		1,580
Other borrowed funds		1,295			269		2,829		480		1,906		577			4,735		1,057
Total interest expense		3,744			797		7,099		1,564		5,387		1,073			12,486		2,637
Net Interest Income		7,414			8,763		15,092		17,050		7,432		9,049			22,524		26,099
Provision for credit losses (PCL)		417			56		464		149
Provision for (reversal of) credit losses (PCL)											98		(53	)		562		96
Net Interest Income After PCL		6,997			8,707		14,628		16,901		7,334		9,102			21,962		26,003

Other Income
Service charges on deposit accounts		890			967		1,804		1,912		994		1,019			2,798		2,931
Other service charges and fees		1,071			1,094		2,108		2,119		1,106		1,111			3,214		3,230
Other operating income, net		300			702		712		1,265		1,105		747			1,817		2,012
Total other income		2,261			2,763		4,624		5,296		3,205		2,877			7,829		8,173

Other Expense
Salaries and employee benefits		4,710			4,412		9,405		8,851		4,655		4,506			14,060		13,357
Occupancy expense		1,856			1,711		3,701		3,486		1,935		1,968			5,636		5,454
Other expense		2,471			2,309		4,631		4,396		2,494		2,462			7,125		6,858
Total other expense		9,037			8,432		17,737		16,733		9,084		8,936			26,821		25,669

Income Before Income Taxes		221			3,038		1,515		5,464		1,455		3,043			2,970		8,507

Income taxes		(79	)		497		75		887		248		463			323		1,350

Net Income	$	300		$	2,541	$	1,440	$	4,577	$	1,207	$	2,580		$	2,647	$	7,157

Earings Per Share
-Basic	$	0.05		$	0.45	$	0.26	$	0.82	$	0.22	$	0.46		$	0.47	$	1.28
-Diluted	$	0.05		$	0.45	$	0.26	$	0.82	$	0.22	$	0.46		$	0.47	$	1.28

Dividends Paid Per Share	$	0.16		$	0.24	$	0.40	$	0.48	$	0.16	$	0.24		$	0.56	$	0.72

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

CITIZENS HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(in thousands)

	For the Three Months						For the Six Months						For the Three Months						For the Nine Months
	Ended June 30,						Ended June 30,						Ended September 30,						Ended September 30,
	2023			2022			2023			2022			2023			2022			2023			2022

Net income	$	300		$	2,541		$	1,440		$	4,577		$	1,207		$	2,580		$	2,647		$	7,157

Other comprehensive (loss) income

Securities available-for-sale
Unrealized holding (losses) gains during the period		(1,771	)		(50,978	)		1,457			(109,182	)		(9,949	)		6,805			(8,492	)		(102,377	)
Income tax effect		442			12,719			(364	)		27,241			2,482			(1,698	)		2,119			25,543
Net unrealized (losses) gains		(1,329	)		(38,259	)		1,093			(81,941	)		(7,467	)		5,107			(6,373	)		(76,834	)

Amortization of net unrealized losses on securities transferred from AFS to HTM		1,216			-			2,317			-			1,128			439			3,445			439
Income tax effect		(303	)		-			(578	)		-			(281	)		(109	)		(860	)		(109	)
Net unrealized gains		913			-			1,739			-			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		(416	)		(38,259	)		2,832			(81,941	)		(6,139	)		5,437			(3,307	)		(76,504	)

Comprehensive (loss) income	$	(116	)	$	(35,718	)	$	4,272		$	(77,364	)	$	(4,932	)	$	8,017		$	(660	)	$	(69,347	)

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

CITIZENS HOLDING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	For the Six Months						For the Nine Months
	Ended June 30,						Ended September 30,
	2023			2022			2023			2022

Operating Activities

Net cash provided by operating activities	$	2,085		$	6,778		$	4,386		$	10,864

Investing Activities
Proceeds from maturities, paydowns and calls of securities available-for-sale		5,494			28,258			8,654			36,692
Proceeds from maturities, paydowns and calls of securities held-to-maturity		11,001			-			16,449			2,332
Purchases of investment securities		-			(71,190	)		-			(122,120	)
Purchases of bank premises and equipment		(328	)		(479	)		(633	)		(2,211	)
Net change in FHLB stock		(316	)		(784	)		(317	)		(784	)
Proceeds from sale of other real estate owned		149			1,151			324			1,155
Proceeds from death benefit of bank-owned life insurance		-			813			-			813
Net change in loans		10,891			(17,310	)		(1,743	)		(6,359	)

Net cash provided by (used in) investing activities		26,891			(59,541	)		22,734			(90,482	)

Financing Activities
Net change in deposits		(23,330	)		6,095			68,295			23,044
Net change in securities sold under agreement to repurchase		(18,048	)		11,402			23,515			17,159
Net change in short-term borrowings		4,000			-
Payment of dividends		(2,244	)		(2,688	)		(3,143	)		(4,033	)

Net cash (used in) provided by financing activities		(39,622	)		14,809
Net cash provided by financing activities								88,667			36,170

Net decrease in cash and cash equivalents		(10,646	)		(37,954	)
Net increase (decrease) in cash and cash equivalents								115,787			(43,448	)
Cash and cash equivalents, beginning of period		28,594			79,236			28,594			79,236
Cash and cash equivalents, end of period	$	17,948		$	41,282		$	144,381		$	35,788

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

CITIZENS HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three and ~~six~~nine months ended ~~June~~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 ~~June~~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.

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.

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

The allowance for credit losses on unfunded ~~laon~~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 ~~six~~nine months ended ~~June~~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 ~~$1,938~~$2,038 and $1,981 at ~~June~~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 ~~June~~September 30, 2023, the Company had entered into loan commitments with certain customers with an aggregate unused balance of ~~$68,680~~$80,885 compared to an aggregate unused balance of $75,602 at December 31, 2022. There were ~~$3,488~~$3,476 letters of credit outstanding at ~~June~~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.

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 Six Months				For the Three Months				For the Nine Months
	Ended June 30,				Ended June 30,				Ended September 30,				Ended September 30,
	2023		2022		2023		2022		2023		2022		2023		2022
Basic weighted average shares outstanding		5,601,213		5,592,782		5,598,299		5,589,958		5,603,570		5,595,320		5,600,082		5,591,771
Dilutive effect of stock based compensation		-		-		202		-		-		-		8		-

Diluted weighted average shares outstanding		5,601,213		5,592,782		5,598,501		5,589,958		5,603,570		5,595,320		5,600,090		5,591,771

Net income	$	300	$	2,541	$	1,440	$	4,577	$	1,207	$	2,580	$	2,647	$	7,157
Net income per share-basic	$	0.05	$	0.45	$	0.26	$	0.82	$	0.22	$	0.46	$	0.47	$	1.28
Net income per share-diluted	$	0.05	$	0.45	$	0.26	$	0.82	$	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 ~~June~~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.

Note 5. Income Taxes

(in thousands)

For the three months ended ~~June~~September 30, 2023 and 2022, the Company recorded a provision for income taxes totaling ~~($79)~~$248 and ~~$497,~~$463, respectively. The effective tax rate was ~~(35.75%)~~17.04% and ~~16.36%~~15.22% for the three months ended ~~June~~September 30, 2023 and 2022, respectively.

For the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, the Company recorded a provision for income taxes totaling ~~$75~~$323 and ~~$887,~~$1,350, respectively. The effective tax rate was ~~4.95%~~10.88% and ~~16.23%~~15.87% for the ~~six~~nine months ended ~~June~~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						Gross		Gross
June 30, 2023	Amortized		Unrealized		Unrealized		Estimated
September 30, 2023									Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
Securities available-for-sale
Mortgage backed securities	$	101,834	$	-	$	10,731	$	91,103	$	99,084	$	-	$	13,135	$	85,949
State, County, Municipals		134,210		10		28,898		105,322		133,595		-		36,433		97,162
Other securities		500	$	-	$	59	$	441		500		-		76		424
Total	$	236,544	$	10	$	39,688	$	196,866	$	233,179	$	-	$	49,644	$	183,535

			Gross		Gross
December 31, 2022	Amortized		Unrealized		Unrealized		Estimated		Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
Securities available-for-sale
Mortgage backed securities	$	107,055	$	-	$	10,083	$	96,972	$	107,055	$	-	$	10,083	$	96,972
State, County, Municipals		134,906		-		30,993		103,913		134,906		-		30,993		103,913
Other securities		500		-		63		437		500		-		63		437
Total	$	242,461	$	-	$	41,139	$	201,322	$	242,461	$	-	$	41,139	$	201,322

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						Gross		Gross
June 30, 2023	Amortized		Unrealized		Unrealized		Estimated
September 30, 2023									Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
Securities held-to-maturity
Obligations of U.S. Government agencies	$	4,033	$	-	$	434	$	3,599	$	4,049	$	-	$	616	$	3,433
Mortgage backed securities		300,013		-		28,570		271,443		295,177		-		40,991		254,186
State, County, Municipals		92,885		-		4,752		88,133		92,907		-		11,663		81,244
Total	$	396,931	$	-	$	33,756	$	363,175	$	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 ~~June~~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 ~~$67,294~~$66,167 ($~~50,505,~~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, and makes targeted improvements to the accounting for credit losses on securities available-for-sale.~~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.

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.

At ~~June~~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 ~~and attested to~~ quarterly. The Company is using an internally built model to verify the accuracy of third-party provided calculations.

At ~~June~~September 30, 2023, the Company’s securities held-to-maturity totaled ~~$396,931.~~$392,133. The potential credit loss exposure was ~~$92,885~~$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 ~~June~~September 30, 2023.

At ~~June~~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 ~~June~~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 ~~June~~September 30, 2023 and December 31, 2022:

	June 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Aaa	$	16,811	$	18,096	$	16,831	$	18,096
Aa1 to Aa3		41,485		40,174		41,478		40,174
Not Rated (1)		34,589		34,570		34,598		34,570
	$	92,885	$	92,840	$	92,907	$	92,840

(1) Not rated securities were municipals that did not have a current Moody’s 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 Poor’s rating agency.

1112

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 ~~June~~September 30, 2023 and December 31, 2022.

June 30, 2023
September 30, 2023													September 30, 2023
Available-for-sale	Less than 12 months				12 months or more				Total					Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses			Value		Losses		Value		Losses		Value		Losses

Mortgage backed securities	$	36,816	$	1,464	$	54,287	$	9,267	$	91,103	$	10,731		$	5,839	$	243	$	80,110	$	12,892	$	85,949	$	13,135
State, County, Municipal		12,246		322		91,816		28,576	$	104,062		28,898			6,869		404		90,293		36,029	$	97,162		36,433
Other securities		-		-		441		59		441		59			-		-		424		76		424		76
Total	$	49,062	$	1,786	$	146,544	$	37,902	$	195,606	$	39,688		$	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
$ - $ - $ 3,599 $ 434 $ 3,599 $ 434
Mortgage backed securities
- - 271,443 28,570 271,443 28,570
State, County, Municipal
- - 88,133 4,752 88,133 4,752
Total
$ - $ - $ 363,175 $ 33,756 $ 363,175 $ 33,756

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.

1213

Contractual Maturities

The amortized cost and estimated fair value of securities by contractual maturity at ~~June~~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				Available-for-sale				Held-to-maturity
	Amortized		Estimated		Amortized		Estimated		Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value

Due in one year or less	$	500	$	441	$	-	$	-	$	500	$	424	$	-	$	-
Due after one year through five years		3,302		3,178		-		-		2,930		2,802		-		-
Due after five years through ten years		5,514		5,115		-		-		5,514		4,855		-		-
Due after ten years		125,394		97,029		96,918		91,732		125,151		89,505		96,956		84,677
Residential mortgage backed securities		89,186		78,883		241,713		219,821		86,538		73,922		237,052		205,398
Commercial mortgage backed securities		12,648		12,220		58,300		51,622		12,546		12,027		58,125		48,788
Total	$	236,544	$	196,866	$	396,931	$	363,175	$	233,179	$	183,535	$	392,133	$	338,863

Securities Pledged

At ~~June~~September 30, 2023 and December 31, 2022, securities with a carrying value of ~~$444,663~~$416,098 and $462,954, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.

1314

Note 7. LHFI and ACL

(in thousands, except number of loans)

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

	June 30, 2023			December 31, 2022			September 30, 2023			December 31, 2022
Loans secured by real estate:
Land Development and Construction	$	57,623		$	52,731		$	61,754		$	52,731
Farmland		11,496			11,437			10,994			11,437
1-4 Family Mortgages		91,540			92,148			94,567			92,148
Commercial Real Estate		319,903			316,541			322,623			316,541
Total Real Estate Loans		480,562			472,857			489,938			472,857
Business Loans:
Commercial and Industrial Loans		77,346			96,500			79,957			96,500
Farm Production and Other Farm Loans		418			504			359			504
Total Business Loans		77,764			97,004			80,316			97,004
Consumer Loans:
Consumer Loans		13,531			12,992			13,973			12,992
Credit Cards		2,877			2,738			3,011			2,738
Total Consumer Loans		16,408			15,730			16,984			15,730
Gross LHFI		574,734			585,591			587,238			585,591

Less Allowance for credit losses		(6,397	)		(5,264	)		(6,390	)		(5,264	)


Net LHFI	$	568,337		$	580,327		$	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		Nonaccrual With No Allowance for Credit Loss		Nonaccrual		Loans Past Due 90 Days or More Still Accruing
June 30, 2023
September 30, 2023
Loans secured by real estate:
Land Development and Construction	$	-	$	-	$	-	$	248	$	248	$	-
Farmland		27		119		-		26		104		-
1-4 Family Mortgages		178		1,771		145		77		1,803		-
Commercial Real Estate		180		766		-		-		508		-
Total Real Estate Loans		385		2,656		145		351		2,663		-
Business Loans:
Commercial and Industrial Loans		124		303		-		124		301		-
Farm Production and Other Farm Loans		-		-		-		-		-		-
Total Business Loans		124		303		-		124		301		-
Consumer Loans:
Consumer Loans		-		36		-		-		45		-
Credit Cards		-		-		15		-		-		10
Total Consumer Loans		-		36		15		-		45		10
Total	$	509	$	2,995	$	160	$	475	$	3,009	$	10

1415

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 ~~June~~September 30, 2023 and 2022.

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

June 30, 2023	30 - 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current Loans		Total
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	$	247	$	-	$	247	$	57,376	$	57,623	$	-	$	248	$	248	$	61,506	$	61,754
Farmland		72		19		91		11,405		11,496		17		26		43		10,951		10,994
1-4 Family Mortgages		976		400		1,376		90,164		91,540		1,451		285		1,736		92,831		94,567
Commercial Real Estate		437		-		437		319,466		319,903		650		67		717		321,906		322,623
Total Real Estate Loans		1,732		419		2,151		478,411		480,562		2,118		626		2,744		487,194		489,938
Business Loans:
Commercial and Industrial Loans		141		266		407		76,939		77,346		81		266		347		79,610		79,957
Farm Production and Other Farm Loans		6		-		6		412		418		5		-		5		354		359
Total Business Loans		147		266		413		77,351		77,764		86		266		352		79,964		80,316
Consumer Loans:
Consumer Loans		116		-		116		13,415		13,531		67		-		67		13,906		13,973
Credit Cards		74		15		89		2,788		2,877		53		10		63		2,948		3,011
Total Consumer Loans		190		15		205		16,203		16,408		120		10		130		16,854		16,984
Total	$	2,069	$	700	$	2,769	$	571,965	$	574,734	$	2,324	$	902	$	3,226	$	584,012	$	587,238

1516

December 31, 2022	30 - 89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Current Loans		Total		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	$	-	$	4	$	4	$	52,727	$	52,731
Farmland		38		30		68		11,369		11,437		38		30		68		11,369		11,437
1-4 Family Mortgages		1,799		439		2,238		89,910		92,148		1,799		439		2,238		89,910		92,148
Commercial Real Estate		933		486		1,419		315,122		316,541		933		486		1,419		315,122		316,541
Total Real Estate Loans		2,770		959		3,729		469,128		472,857		2,770		959		3,729		469,128		472,857
Business Loans:
Commercial and Industrial Loans		109		277		386		96,114		96,500		109		277		386		96,114		96,500
Farm Production and Other Farm Loans		4		-		4		500		504		4		-		4		500		504
Total Business Loans		113		277		390		96,614		97,004		113		277		390		96,614		97,004
Consumer Loans:
Consumer Loans		66		23		89		12,903		12,992		66		23		89		12,903		12,992
Credit Cards		56		12		68		2,670		2,738		56		12		68		2,670		2,738
Total Consumer Loans		122		35		157		15,573		15,730		122		35		157		15,573		15,730
Total	$	3,005	$	1,271	$	4,276	$	581,315	$	585,591	$	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 ~~June~~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.

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 ~~second~~third quarter of 2023.

At ~~June~~September 30, 2023, LHFI classified as modified loans totaled ~~$2,035.~~$2,641. At ~~June~~September 30, 2023, modified loans were primarily comprised of interest rate concessions. The Company had $-0- thousand in unused commitments on modified loans at ~~June~~September 30, 2023.

The allocated ACL attributable to modified loans was ~~$90~~$159 at ~~June~~September 30, 2023. The Company had no commitments to lend additional funds on ~~this troubled debt restructuring~~these loans as of ~~June~~September 30, 2023.

There were no loans modified within the last twelve months for which there was a payment default during the three and ~~six~~nine months ended ~~June 30,~~September, 2023.

At ~~June~~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 ~~June~~September 30, 2023:

June 30, 2023	Inventory		Real Estate		Receivables		Total
September 30, 2023									Bonds		Inventory		Real Estate		Receivables		Total
Loans secured by real estate:
Land Development and Construction	$	-	$	247	$	-	$	247	$	-	$	-	$	248	$	-	$	248
Farmland		-		27		-		27		-		-		26		-		26
1-4 Family Mortgages		-		178		-		178		-		-		300		-		300
Commercial Real Estate		-		2,619		-		2,619		-		-		2,418		-		2,418
Total Real Estate Loans		-		3,071		-		3,071		-		-		2,992		-		2,992
Business Loans:
Commercial and Industrial Loans		92		-		32		124		1,300		92		-		32		1,424
Farm Production and Other Farm Loans		-		-		-		-		-		-		-		-		-
Total Business Loans		92		-		32		124		1,300		92		-		32		1,424

Total	$	92	$	3,071	$	32	$	3,195	$	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.

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 ~~June~~September 30, 2023.

1820

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

Term Loans Amortized Cost Basis by Origination Year	Term Loans Amortized Cost Basis by Origination Year																		Term Loans Amortized Cost Basis by Origination Year
June 30, 2023		2023		2022		2021		2020		2019		Prior		Revolving Loans		Total Loans
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		$	8,956	$	6,215	$	3,460	$	10,320	$	930	$	929	$	24,741	$	55,551			$	21,605	$	4,646	$	1,290	$	12,469	$	881	$	232	$	19,083	$	60,206
Special Mention - Category 5 & 6			-		872		679		-		-		-		-		1,551				-		356		679		-		-		-		-		1,035
Substandard - Category 7			-		520		-		-		-		1		-		521				-		513		-		-		-		-		-		513
Doubtful - Category 8			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Loss 9			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Total Land Development and Construction			8,956		7,607		4,139		10,320		930		930		24,741		57,623				21,605		5,515		1,969		12,469		881		232		19,083		61,754

Farmland
Satisfactory - Categories 1-4			1,043		1,725		1,383		1,954		3,158		840		1,000		11,103				1,345		1,590		1,273		1,906		3,042		570		899		10,625
Special Mention - Category 5 & 6			-		-		87		-		135		38		-		260				-		-		84		-		132		38		-		254
Substandard - Category 7			-		34		14		8		28		49		-		133				-		33		10		6		19		47		-		115
Doubtful - Category 8			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Loss 9			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Total Farmland			1,043		1,759		1,484		1,962		3,321		927		1,000		11,496				1,345		1,623		1,367		1,912		3,193		655		899		10,994

1-4 Family Mortgages
Satisfactory - Categories 1-4			5,620		20,038		12,390		12,315		10,445		8,523		16,850		86,181				8,940		19,417		11,949		11,415		9,723		7,040		19,995		88,479
Special Mention - Category 5 & 6			-		193		97		125		302		789		149		1,655				552		189		95		485		299		785		201		2,606
Substandard - Category 7			42		36		280		368		164		2,225		589		3,704				137		35		274		267		82		2,057		549		3,401
Doubtful - Category 8			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Loss 9			-		-		-		-		-		-		-		-				-		-		-		-		81		-		-		81
Total 1-4 Family Mortgages			5,662		20,267		12,767		12,808		10,911		11,537		17,588		91,540				9,629		19,641		12,318		12,167		10,185		9,882		20,745		94,567

Commercial Real Estate
Satisfactory - Categories 1-4			33,197		53,441		59,556		55,449		28,943		34,035		18,866		283,487				40,527		51,865		58,617		53,373		25,109		32,905		17,180		279,576
Special Mention - Category 5 & 6			9,340		2,468		2,264		958		1,473		306		-		16,809				9,262		2,439		2,227		931		4,566		297		4,131		23,853
Substandard - Category 7			-		247		3,707		-		267		15,386		-		19,607				-		67		3,654		-		265		15,208		-		19,194
Doubtful - Category 8			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Loss 9			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Total Commercial Real Estate			42,537		56,156		65,527		56,407		30,683		49,727		18,866		319,903				49,789		54,371		64,498		54,304		29,940		48,410		21,311		322,623
Total Real Estate Loans			58,198		85,789		83,917		81,497		45,845		63,121		62,195		480,562				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			5,626		22,677		5,145		14,639		6,591		11,556		6,449		72,683				9,013		21,619		4,729		14,344		6,263		10,431		8,839		75,238
Special Mention - Category 5 & 6			-		127		-		307		6		1,007		2,783		4,230				-		121		-		277		4		453		2,151		3,006
Substandard - Category 7			-		19		102		-		46		194		72		433				-		17		92		-		38		731		835		1,713
Doubtful - Category 8			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Loss 9			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Total Commercial & Industrial			5,626		22,823		5,247		14,946		6,643		12,757		9,304		77,346				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			-		232		-		9		-		90		79		410				-		185		-		-		-		90		78		353
Special Mention - Category 5 & 6			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Substandard - Category 7			-		-		6		-		-		2		-		8				-		-		5		-		-		1		-		6
Doubtful - Category 8			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Loss 9			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Total Farm Production & Other Farm			-		232		6		9		-		92		79		418				-		185		5		-		-		91		78		359
Total Business Loans			5,626		23,055		5,253		14,955		6,643		12,849		9,383		77,764				9,013		21,942		4,826		14,621		6,305		11,706		11,903		80,316
Consumer Loans:
Satisfactory - Categories 1-4			3,889		4,727		1,961		824		913		299		260		12,873				5,936		3,930		1,656		733		881		207		257		13,600
Special Mention - Category 5 & 6			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Substandard - Category 7			592		39		25		2		-		-		-		658				307		36		29		1		-		-		-		373
Doubtful - Category 8			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Loss 9			-		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-
Total Consumer Loans			4,481		4,766		1,986		826		913		299		260		13,531				6,243		3,966		1,685		734		881		207		257		13,973

Credit Cards
Performing			-		-		-		-		-		-		2,876		2,876				-		-		-		-		-		-		3,001		3,001
Nonperforming			-		-		-		-		-		-		1		1				-		-		-		-		-		-		10		10
Total Credit Card			-		-		-		-		-		-		2,877		2,877				-		-		-		-		-		-		3,011		3,011
Gross LHFI		$	68,305	$	113,610	$	91,156	$	97,278	$	53,401	$	76,269	$	74,715	$	574,734			$	97,624	$	107,058	$	86,663	$	96,207	$	51,385	$	71,092	$	77,209	$	587,238

Less ACL																	(6,397	)																	(6,390	)
Net LHFI																$	568,337																	$	580,848

1921

There were no revolving loans converted to term loans during the three and ~~six~~nine months ended ~~June~~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												Special
	Satisfactory		Mention		Substandard		Doubtful		Loss		Total		Satisfactory		Mention		Substandard		Doubtful		Loss		Total
	1,2,3,4		5,6		7		8		9		Loans		1,2,3,4		5,6		7		8		9		Loans
Real Estate:
Land Development and Construction	$	50,015	$	2,427	$	289	$	-	$	-	$	52,731	$	50,015	$	2,427	$	289	$	-	$	-	$	52,731
Farmland		10,832		269		336		-		-		11,437		10,832		269		336		-		-		11,437
1-4 Family Mortgages		85,861		1,816		4,471		-		-		92,148		85,861		1,816		4,471		-		-		92,148
Commercial Real Estate		274,901		7,975		33,665		-		-		316,541		274,901		7,975		33,665		-		-		316,541
Total Real Estate Loans		421,609		12,487		38,761		-		-		472,857		421,609		12,487		38,761		-		-		472,857

Business Loans:
Commercial and Industrial Loans		91,016		4,902		577		-		5		96,500		91,016		4,902		577		-		5		96,500
Farm Production and Other Farm Loans		491		-		13		-		-		504		491		-		13		-		-		504
Total Business Loans		91,507		4,902		590		-		5		97,004		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		2,670		-		68		-		-		2,738
Other Consumer Loans		12,934		7		51		-		-		12,992
Total Consumer Loans		15,604		7		119		-		-		15,730		15,604		7		119		-		-		15,730


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

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 Cards	WARM	~~WARM~~	Company loss history
	Overdrafts	~~Overdrafts~~ WARM		~~WARM~~	Company loss history

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.

2224

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

	Real			Business									Real			Business
	Estate			Loans			Consumer			Total			Estate			Loans			Consumer			Total
Beginning Balance, January 1, 2023	$	4,154		$	713		$	397		$	5,264		$	4,154		$	713		$	397		$	5,264
FASB ASU 2016-13 adoption adjustment		665			56			(86	)		635			665			56			(86	)		635
Provision for credit losses ("PCL")		(46	)		112			(19	)		47
PCL														(46	)		112			(19	)		47
Chargeoffs		1			-			32			33			1			-			32			33
Recoveries		26			7			71			104			26			7			71			104
Net recoveries		(25	)		(7	)		(39	)		(71	)		(25	)		(7	)		(39	)		(71	)
Ending Balance March 31, 2023	$	4,798		$	888		$	331		$	6,017		$	4,798		$	888		$	331		$	6,017
Provision for credit losses ("PCL")		564			(222	)		30			372
PCL														564			(222	)		30			372
Chargeoffs		18			67			34			119			18			67			34			119
Recoveries		46			5			60			111			46			5			60			111
Net recoveries		(28	)		62			(26	)		8			(28	)		62			(26	)		8
Ending Balance June 30, 2023	$	5,334		$	728		$	335		$	6,397		$	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	$	99		$	-		$	-		$	99		$	158		$	-		$	-		$	158
Loans collectively evaluated for impairment		5,235			728			335			6,298			5,272			584			376			6,232
Ending Balance, June 30, 2023	$	5,334		$	728		$	335		$	6,397
June 30, 2023
Ending Balance, September 30, 2023													$	5,430		$	584		$	376		$	6,390
September 30, 2023
Loans individually evaluated for specific impairment	$	3,071		$	124		$	-		$	3,195		$	2,993		$	1,424		$	-		$	4,417
Loans collectively evaluated for general impairment		477,491			77,640			16,408			571,539			486,945			78,892			16,984			582,821
	$	480,562		$	77,764		$	16,408		$	574,734		$	489,938		$	80,316		$	16,984		$	587,238

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 ~~andsix~~and nine months ended ~~June~~September 30, 2022:

	Real			Business									Real			Business
	Estate			Loans			Consumer			Total			Estate			Loans			Consumer			Total
Beginning Balance, January 1, 2022	$	3,622		$	645		$	246		$	4,513		$	3,622		$	645		$	246		$	4,513
PCL		170			57			(134	)		93			170			57			(134	)		93
Chargeoffs		-			56			26			82			-			56			26			82
Recoveries		50			5			197			252			50			5			197			252
Net chargeoffs (recoveries)		(50	)		51			(171	)		(170	)		(50	)		51			(171	)		(170	)
Ending Balance March 31, 2022	$	3,842		$	651		$	283		$	4,776		$	3,842		$	651		$	283		$	4,776
Provision for credit losses ("PCL")		81			8			(33	)		56
PCL														81			8			(33	)		56
Chargeoffs		1			-			20			21			1			-			20			21
Recoveries		60			15			160			235			60			15			160			235
Net recoveries		(59	)		(15	)		(140	)		(214	)		(59	)		(15	)		(140	)		(214	)
Ending Balance June 30, 2022	$	3,982		$	674		$	390		$	5,046		$	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		3,982			674			390			5,046			3,979			648			441			5,068
Ending Balance, June 30, 2022	$	3,982		$	674		$	390		$	5,046
June 30, 2022

Ending Balance, September 30, 2022													$	3,979		$	648		$	441		$	5,068
September 30, 2022
Loans individually evaluated for specific impairment	$	3,081		$	196		$	-		$	3,277		$	1,286		$	196		$	-		$	1,482
Loans collectively evaluated for general impairment		469,776			96,808			15,730			582,314			473,280			88,339			15,564			577,183
	$	472,857		$	97,004		$	15,730		$	585,591		$	474,566		$	88,535		$	15,564		$	578,665

The Company recorded a provision for credit losses of ~~$372~~$105 during the ~~second~~third quarter of 2023, as compared to a provision for credit losses of ~~$56~~($53) recorded in the ~~second~~third quarter of 2022. The Company’s allowance for credit losses model considers economic projections, primarily the national unemployment rate, recessionary risks, ~~GDP~~gross domestic product (GDP) and ~~CRE~~commercial real estate (CRE) price fluctuations. ~~The provision activity during the current quarter was primarily driven by increased recessionary risks due to inflationary pressures partially offset by a decline in loans.~~

2326

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

													Revolving		Total Charge-														Revolving		Total Charge-
	2023		2022		2021		2020		2019		Prior		Loans		Offs		2023		2022		2021		2020		2019		Prior		Loans		Offs
Gross Charge-Offs
June 30, 2023
September 30, 2023
Loans secured by real estate:
Commercial Real Estate	$	-	$	-	$	-	$	-	$	5	$	14	$	-	$	19	$	-	$	-	$	-	$	-	$	5	$	16	$	-	$	21
Total Real Estate Loans		-		-		-		-		5		14		-		19		-		-		-		-		5		16		-		21

Business Loans
Commercial and Industrial Loans		-		-		-		-		-		67		-		67		5		-		-		-		-		67		-		72
Total Business Loans		-		-		-		-		-		67		-		67		5		-		-		-		-		67		-		72

Total Consumer Loans		-		11		1		4		-		-		-		16		5		28		2		4		-		-		-		39

Total Credit Card		-		-		-		-		-		-		50		50		-		-		-		-		-		-		86		86

Net LHFI	$	-	$	11	$	1	$	4	$	5	$	81	$	50	$	152	$	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 Six Months		For the Three Months		For the Nine Months
	Ended June 30,		Ended June 30,		Ended September 30,		Ended September 30,
	2023		2023		2023		2023
ACL for off-balance sheet credit exposure:
Beginning balance	$	636	$	-	$	681	$	-
FASB ASU 2016-13 adoption adjustment		-		677		-		677
PCL for off-balance sheet credit exposure		45		4		230		234
Ending Balance	$	681	$	681	$	911	$	911

The Company recorded a PCL for off-balance sheet credit exposure for the three and ~~six~~nine months ended ~~June~~September 30, 2023 of ~~$45~~$230 and ~~$4,~~$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.

2427

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 9.10. 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 ~~June~~September 30, 2023, ~~when the line was renewed,~~ 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.

	June 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Funded balance	$	18,000	$	18,000	$	18,000	$	18,000
Unfunded balance		2,000		2,000		2,000		2,000
Total credit facility	$	20,000	$	20,000	$	20,000	$	20,000

Note ~~10.~~11. Shareholders’ Equity

(in thousands, except share data)

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

								Accumulated																Accumulated
	*Number*				*Additional*			*Other*									*Number*				*Additional*			*Other*
	*of Shares*		*Common*		*Paid-In*			*Comprehensive*			*Retained*						*of Shares*		*Common*		*Paid-In*			*Comprehensive*			*Retained*
	*Issued*		*Stock*		*Capital*			*(Loss) Income*			*Earnings*			*Total*			*Issued*		*Stock*		*Capital*			*(Loss) Income*			*Earnings*			*Total*
Balance, January 1, 2023		5,603,570	$	1,122	$	18,448		$	(83,070	)	$	102,525		$	39,025			5,603,570	$	1,122	$	18,448		$	(83,070	)	$	102,525		$	39,025
FASB ASU 2016-13 adoption adjustment												(984	)		(984	)												(984	)		(984	)
Net income		-		-		-			-			1,140			1,140			-		-		-			-			1,140			1,140
Dividends paid ($0.24 per share)		-		-		-			-			(1,346	)		(1,346	)
Dividends paid ($0.24 per share)																		-		-		-			-			(1,346	)		(1,346	)
Restricted stock granted		3,868		-		-			-			-			-			3,868		-		-			-			-			-
Stock compensation expense		-		-		40			-			-			40			-		-		40			-			-			40
Other comprehensive loss, net		-		-		-			3,248			-			3,248			-		-		-			3,248			-			3,248
Balance, March 31, 2023		5,607,438	$	1,122	$	18,488		$	(79,822	)	$	101,335		$	41,123			5,607,438	$	1,122	$	18,488		$	(79,822	)	$	101,335		$	41,123
Net income		-		-		-			-			300			300			-		-		-			-			300			300
Dividends paid ($0.16 per share)		-		-		-			-			(898	)		(898	)
Dividends paid ($0.16 per share)																		-		-		-			-			(898	)		(898	)
Restricted stock granted		9,000		1		(1	)		-			-			-			9,000		1		(1	)		-			-			-
Stock compensation expense		-		-		32			-			-			32			-		-		32			-			-			32
Other comprehensive loss, net		-		-		-			(416	)		-			(416	)		-		-		-			(416	)		-			(416	)
Balance, June 30, 2023		5,616,438	$	1,123	$	18,519		$	(80,238	)	$	100,737		$	40,141			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

2529

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

Note ~~11.~~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 ~~June~~September 30, 2023:

	Quoted Prices								Quoted Prices
	in Active		Significant						in Active		Significant
	Markets for		Other		Significant				Markets for		Other		Significant
	Identical		Observable		Unobservable				Identical		Observable		Unobservable
	Assets		Inputs		Inputs				Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals		(Level 1)		(Level 2)		(Level 3)		Totals
Derivative instruments									$	-	$	641	$	-	$	641
Securities available-for-sale

Mortgage-backed securities	$	-	$	91,103	$	-	$	91,103		-		85,949		-		85,949
State, county and municipal		-		105,322		-		105,322		-		97,162		-		97,162
Other securities		-		441		-		441		-		424		-		424
Total	$	-	$	196,866	$	-	$	196,866	$	-	$	184,176	$	-	$	184,176

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 ~~June~~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.

~~Impaired~~ Loans Individually Evaluated For Impairment

Loans considered ~~impaired~~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. ~~Impaired~~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.

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:

	June 30, 2023								September 30, 2023
	Quoted Prices								Quoted Prices
	in Active		Significant						in Active		Significant
	Markets for		Other		Significant				Markets for		Other		Significant
	Identical		Observable		Unobservable				Identical		Observable		Unobservable
	Assets		Inputs		Inputs				Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Totals		(Level 1)		(Level 2)		(Level 3)		Totals

Loans individually evaluated for impairment	$	-	$	-	$	2,340	$	2,340	$	-	$	-	$	2,483	$	2,483

Total	$	-	$	-	$	2,340	$	2,340	$	-	$	-	$	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 ~~$2,439~~$2,641 and $2,190, had an allocated ACL of ~~$99~~$158 and $116 at ~~June~~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 ~~six~~nine-month period ended ~~June~~September 30, 2023 and the year ended December 31, 2022, respectively.

The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. The following represents the carrying value and estimated fair value of the Company’s financial instruments at ~~June~~September 30, 2023:

			Quoted Prices										Quoted Prices
			in Active		Significant								in Active		Significant
			Markets for		Other		Significant		Total				Markets for		Other		Significant		Total
	Carrying		Identical		Observable		Unobservable		Fair		Carrying		Identical		Observable		Unobservable		Fair
June 30, 2023	Value		Assets		Inputs		Inputs		Value
September 30, 2023											Value		Assets		Inputs		Inputs		Value
			(Level 1)		(Level 2)		(Level 3)						(Level 1)		(Level 2)		(Level 3)
Financial assets
Cash and due from banks	$	17,086	$	17,086	$	-	$	-	$	17,086	$	14,061	$	14,061	$	-	$	-	$	14,061
Interest bearing deposits with banks		862		862		-		-		862		130,320		130,320		-		-		130,320
Securities held-to-maturity		396,931		-		363,175		-		363,175		392,133		-		338,863		-		338,863
Securities available-for-sale		196,866		-		196,866		-		196,866		183,535		-		183,535		-		183,535
Net LHFI		568,337		-		-		531,812		531,812		580,848		-		-		546,924		546,924
Derivative instruments												641		-		641		-		641

Financial liabilities
Deposits	$	1,103,072	$	904,008	$	199,605	$	-	$	1,103,316	$	1,194,697	$	958,179	$	212,108	$	-	$	1,170,287
Securities sold under agreement to repurchase		109,526		109,526		-		-		109,526		151,089		151,089		-		-		151,089
Short-term borrowings		4,000		4,000		-		-		4,000
Borrowings on secured line of credit		18,000		18,000		-		-		18,000		18,000		18,000		-		-		18,000

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

2934

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;

3035

●	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 ~~recent~~ 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 ~~June~~September 30, 2023, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of ~~$1,288,649~~$1,413,219 and total deposits of ~~$1,103,121.~~$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.

3136

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 ~~deposits and short-term liabilities divided by the sum of net~~ cash, short-term investments and marketable ~~assets.~~assets divided by net deposits and short-term liabilities. This measurement for liquidity of the Company at ~~June~~September 30, 2023, was ~~13.39%~~22.58% and at December 31, 2022, was 14.58%. The ~~decrease~~increase was due to ~~a decrease~~an increase in interest bearing cash and cash equivalents partially offset by an ~~increase~~decrease in the fair market value of investment securities as of ~~June~~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 ~~$1,103,072~~$1,194,697 at ~~June~~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 ~~$196,866~~$183,535 invested in available-for-sale investment securities at ~~June~~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 ~~partially offset by an increase~~coupled with a decrease in the fair market value of investment securities.

The Company also had ~~$862~~$130,320 in interest bearing deposits at other banks at ~~June~~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 ~~June~~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 ~~June~~September 30, 2023, the Company had unused and available ~~$190,612~~$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 ~~June~~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 33% 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 ~~$132,739~~$132,712 and $133,033 of unpledged securities at ~~June~~September 30, 2023 and December 31, 2022, respectively. The secured line of credit with FHN was originated on June 9, 2021. At ~~June~~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 ~~$4,000 and~~ $-0- as of ~~June~~September 30, 2023 and December 31, ~~2022, respectively.~~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 ~~$40,141~~$34,345 at ~~June~~September 30, 2023, as compared to $39,025 at December 31, 2022. The ~~increase~~decrease is a result of a change in AOCI caused by ~~a decrease~~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. ~~Management does not intend to sell any securities at an unrealized loss position.~~ 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.

The Company paid aggregate cash dividends in the amount of ~~$2,244,~~$3,143, or ~~$0.40~~$0.56 per share, during the ~~six-month~~nine-month period ended ~~June~~September 30, 2023 compared to ~~$2,688,~~$4,033, or ~~$0.48~~$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 ~~June~~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
						Minimum Capital					Requirement to be										Minimum Capital					Requirement to be
						Requirement to be					Adequately										Requirement to be					Adequately
	Actual					Well Capitalized					Capitalized					Actual					Well Capitalized					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2023
September 30, 2023
Citizens Holding Company
Tier 1 leverage ratio	$	107,933		8.17	%	$	66,033		5.00	%	$	52,826		4.00	%	$	108,184		7.83	%	$	69,124		5.00	%	$	55,299		4.00	%
Common Equity tier 1 capital ratio		107,933		8.17			85,842		6.50			59,429		4.50			108,184		7.83	%		89,861		6.50	%		62,212		4.50	%
Tier 1 risk-based capital ratio		107,933		13.50			64,532		8.00			48,399		6.00			108,184		13.06	%		66,268		8.00	%		49,701		6.00	%
Total risk-based capital ratio		114,136		14.28			80,665		10.00			64,532		8.00			114,746		13.85	%		82,835		10.00	%		66,268		8.00	%
The Citizens Bank of Philadelphia
Tier 1 leverage ratio	$	125,193		9.48		$	66,007		5.00		$	52,806		4.00		$	125,452		9.08	%	$	69,093		5.00	%	$	55,274		4.00	%
Common Equity tier 1 capital ratio		125,193		7.96			85,809		6.50			59,406		4.50			125,452		9.08	%		89,821		6.50	%		62,184		4.50	%
Tier 1 risk-based capital ratio		125,193		15.53			64,477		8.00			48,358		6.00			125,452		15.16	%		66,206		8.00	%		49,655		6.00	%
Total risk-based capital ratio		131,396		16.30			80,596		10.00			64,477		8.00			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	%	$	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			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			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			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		$	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			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			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			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.

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

RESULTS OF OPERATIONS

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

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

2023

2022

2023

2022

Interest Income
$ 11,158 $ 9,560 $ 22,191 $ 18,614
Interest Expense
3,744 797 7,099 1,564

Net Interest Income
7,414 8,763 15,092 17,050
Provision for credit losses (PCL)
417 56 464 149

Net Interest Income After PCL
6,997 8,707 14,628 16,901
Other Income
2,261 2,763 4,624 5,296
Other Expense
9,037 8,432 17,737 16,733

Income Before Income Taxes
221 3,038 1,515 5,464
Income taxes
(79 ) 497 75 887

Net Income
$ 300 $ 2,541 $ 1,440 $ 4,577

Net Income Per share - Basic
$ 0.05 $ 0.45 $ 0.26 $ 0.82
Net Income Per Share-Diluted
$ 0.05 $ 0.45 $ 0.26 $ 0.82

	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 ~~3.02%~~12.21% for the three months ended ~~June~~September 30, 2023, and ~~15.97%~~13.36% for the corresponding period in 2022. Annualized ROE was ~~7.26%~~8.91% for the ~~six~~nine months ended ~~June~~September 30, 2023, and ~~11.52%~~12.12% for the corresponding period in 2022. The decrease in ROE for the three and ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same period in 2022 was primarily the result of a ~~increase in equity due to the decline~~decrease in net ~~income and unrealized losses on investments in AOCI.~~income.

Book value per share ~~increased~~decreased to ~~$7.17~~$6.13 at ~~June~~September 30, 2023, compared to $6.97 at December 31, 2022. The ~~increase~~decrease in book value per share is directly attributable to the ~~increase~~decrease in shareholders’ equity resulting from the increase in AOCI caused by the ~~decrease~~increase in medium-term interest rates. Average assets for the ~~six~~nine months ended ~~June~~September 30, 2023 were ~~$1,320,107~~$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 ~~$7,414~~$7,432 and ~~$15,092~~$22,524 for the three and ~~six~~nine months ended ~~June~~September 30, 2023 as compared to ~~$8,763~~$9,049 and ~~$17,050~~$26,099 for the same respective time periods in 2022.

The annualized net interest margin was ~~2.55%~~2.40% for the three months ended ~~June~~September 30, 2023, compared to ~~2.78%~~2.90% for the corresponding period of 2022. Additionally, the annualized net interest margin was ~~2.54%~~2.49% for the ~~six~~nine months ended ~~June~~September 30, 2023 and ~~2.74%~~2.79% for the corresponding period of 2022. The decrease in net interest margin for the three and ~~six~~nine months ended ~~June~~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 ~~June~~September 30, 2023 increased the cost of funds to ~~147~~210 and ~~145~~167 basis point (“bps”) for the three and ~~six~~nine months ended ~~June~~September 30, 2023 compared to 3345 bps and 37 bps for the three and ~~six~~nine months ended ~~June~~September 30, ~~2022. The linked-quarter interest~~2022, respectively. Interest expense increased for the three and ~~six~~nine months ended ~~June 30,2023~~September 30, 2023 by ~~$2,948,~~$4,313, or ~~369.85%~~402.05%, and ~~5,535,~~9,848, or ~~353.88%~~373.49%, ~~respectively.~~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 June 30,

Average Balance

Income/Expense

Average Yield/Rate

2023

2022

2023

2022

2023

2022

Loans:

LHFI⁽¹⁾
$ 578,300 $ 590,407 $ 7,556 $ 6,667 5.23 % 4.52 %

Investment Securities

Taxable
442,254 474,366 2,263 1,901 2.05 % 1.60 %
Tax-exempt
202,258 214,330 1,337 1,229 2.64 % 2.29 %
Total Investment Securities
644,512 688,697 3,600 3,130 2.23 % 1.82 %

Federal Funds Sold and Other
26,571 22,634 297 37 4.47 % 0.65 %

Total Interest Earning Assets⁽¹⁾⁽²⁾
1,249,383 1,301,738 11,453 9,834 3.67 % 3.02 %

Non-Earning Assets
80,598 32,786

Total Assets
$ 1,329,981 $ 1,334,523

Deposits:

Interest-bearing Demand Deposits⁽³⁾
507,028 $ 490,712 $ 1,190 $ 207 0.94 % 0.17 %
Savings
127,098 134,774 93 33 0.29 % 0.10 %
Time
189,631 202,027 1,166 288 2.46 % 0.57 %
Total Deposits
823,756 827,513 2,449 528 1.19 % 0.26 %

Borrowed Funds

Short-term Borrowings
144,157 106,153 948 83 2.63 % 0.31 %
Long-term Borrowings
18,000 18,000 347 186 7.71 % 4.13 %
Total Borrowed Funds
162,157 124,153 1,295 269 3.19 % 0.87 %
Total Interest-Bearing Liabilities ⁽³⁾
985,913 951,665 3,744 797 1.52 % 0.33 %

Non-Interest Bearing Liabilities

Demand Deposits
290,463 305,677
Other Liabilities
13,926 13,533
Shareholders' Equity
39,680 63,648
Total Liabilities and Shareholders' Equity
$ 1,329,981 $ 1,334,523

Interest Rate Spread
2.15 % 2.69 %

Net Interest Margin
$ 7,709 $ 9,037 2.55 % 2.78 %

Less

Tax Equivalent Adjustment
295 274

Net Interest Income
$ 7,414 $ 8,763

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

3642

	Six Months Ended June 30,														Nine Months Ended September 30,
	Average Balance				Income/Expense				Average Yield/Rate						Average Balance				Income/Expense				Average Yield/Rate
	2023		2022		2023		2022		2023			2022			2023		2022		2023		2022		2023			2022
Loans:
Loans, net of unearned⁽¹⁾	$	573,481	$	584,301	$	14,906	$	13,093		5.20	%		4.48	%	$	576,671	$	583,859	$	23,505	$	19,976		5.43	%		4.56	%

Investment Securities
Taxable		440,011		468,287		4,568		3,598		2.08	%		1.54	%		436,146		470,223		6,892		5,729		2.11	%		1.62	%
Tax-exempt		202,144		212,632		2,668		2,412		2.64	%		2.27	%		201,899		213,708		3,989		3,732		2.63	%		2.33	%
Total Investment Securities		642,155		680,919		7,236		6,010		2.25	%		1.77	%		638,045		683,931		10,881		9,461		2.27	%		1.84	%

Federal Funds Sold and Other		24,411		27,684		636		50		5.21	%		0.36	%		40,272		23,621		1,502		123		4.97	%		0.69	%

Total Interest Earning Assets⁽¹⁾⁽²⁾		1,240,047		1,292,904		22,778		19,153		3.67	%		2.96	%		1,254,988		1,291,411		35,888		29,560		3.81	%		3.05	%

Non-Earning Assets		80,060		50,662												79,780		57,163

Total Assets	$	1,320,107	$	1,343,566											$	1,334,768	$	1,348,574

Deposits:
Interest-bearing Demand Deposits⁽³⁾	$	509,958	$	484,017	$	2,170	$	395		0.85	%		0.16	%	$	514,720	$	482,405	$	3,959	$	534		1.03	%		0.15	%
Savings		125,251		132,248		169		64		0.27	%		0.10	%		122,780		133,263		260		98		0.28	%		0.10	%
Time		191,786		210,857		1,931		625		2.01	%		0.59	%		202,773		205,661		3,532		948		2.32	%		0.61	%
Total Deposits		826,995		827,122		4,270		1,084		1.03	%		0.26	%		840,273		821,329		7,751		1,580		1.23	%		0.26	%

Borrowed Funds
Short-term Borrowings		133,963		102,706		2,136		143		3.19	%		0.28	%		136,787		112,723		3,635		466		3.54	%		0.55	%
Long-term Borrowings		18,000		18,000		693		337		7.70	%		3.74	%		18,000		18,000		1,099		591		8.14	%		4.38	%
Total Borrowed Funds		151,963		120,706		2,829		480		3.72	%		0.80	%		154,787		130,723		4,734		1,057		4.08	%		1.08	%
Total Interest-Bearing Liabilities ⁽³⁾		978,958		947,828		7,099		1,564		1.45	%		0.33	%		995,060		952,052		12,485		2,637		1.67	%		0.37	%

Non-Interest Bearing Liabilities
Demand Deposits		287,451		303,067												285,687		305,374
Other Liabilities		14,039		13,204												-2,980		12,438
Shareholders' Equity		39,659		79,467												57,001		78,710
Total Liabilities and Shareholders' Equity	$	1,320,107	$	1,343,566											$	1,334,768	$	1,348,574

Interest Rate Spread										2.22	%		2.63	%										2.14	%		2.68	%

Net Interest Margin					$	15,679	$	17,589		2.54	%		2.74	%					$	23,403	$	26,923		2.49	%		2.79	%

Less
Tax Equivalent Adjustment						587		539												879		824

Net Interest Income					$	15,092	$	17,050											$	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.}

3743

The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 3.95%, which is net of federal tax benefit.

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three and ~~six~~nine months ended ~~June~~September 30, 2023, rapidly increasing deposit costs have been the larger driver of decreased profitability. Management believes net interest margin ~~should~~may contract some more in the ~~third~~fourth quarter ~~and then level off for the remainder~~ 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 ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same respective periods in 2022:

TABLE 2 - VOLUME/RATE ANALYSIS

(in thousands)

Three Months Ended June 30, 2023

2023 Change from 2022

Volume

Rate

Total

INTEREST INCOME

LHFI
$ (137 ) $ 1,026 $ 889
Taxable Securities
(129 ) 491 362
Non-Taxable Securities
(69 ) 177 108
Federal Funds Sold and Other
6 254 260

TOTAL INTEREST INCOME
$ 328 $ 1,947 $ 1,619

INTEREST EXPENSE

Interest-bearing demand deposits
$ 7 $ 976 $ 983
Savings Deposits
(2 ) 62 60
Time Deposits
(18 ) 896 878
Short-term borrowings
30 835 865
Long-term borrowings
- 161 161

TOTAL INTEREST EXPENSE
$ 17 $ 2,930 $ 2,947

NET INTEREST INCOME
$ (345 ) $ (983 ) $ (1,328 )

TABLE 2 - VOLUME/RATE ANALYSIS										TABLE 2 - VOLUME/RATE ANALYSIS
(in thousands)										(in thousands)
	Six Months Ended June 30, 2023										Three Months Ended September 30, 2023
	2023 Change from 2022										2023 Change from 2022
	Volume			Rate			Total				Volume			Rate			Total
INTEREST INCOME

Loans	$	(242	)	$	2,055		$	1,813
LHFI											$	(1	)	$	1,717		$	1,716
Taxable Securities		(217	)		1,187			970				(204	)		397			193
Non-Taxable Securities		(119	)		375			256				(88	)		89			1
Federal Funds Sold and Other		(6	)		592			586				261			532			793

TOTAL INTEREST INCOME	$	(585	)	$	4,210		$	3,625			$	(32	)	$	2,735		$	2,703

INTEREST EXPENSE

Interest-bearing demand deposits	$	21		$	1,754		$	1,775			$	13		$	1,637		$	1,650
Savings Deposits		(3	)		108			105				(4	)		61			57
Time Deposits		(57	)		1,363			1,306				48			1,230			1,278
Short-term borrowings		44			1,949			1,993				24			1,152			1,176
Long-term borrowings		-			356			356				-			152			152

TOTAL INTEREST EXPENSE	$	5		$	5,530		$	5,535			$	81		$	4,232		$	4,313


NET INTEREST INCOME	$	(589	)	$	(1,321	)	$	(1,910	)		$	(113	)	$	(1,497	)	$	(1,610	)

3844

	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.

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			Quarter Ended			Year Ended			Amount of		Percent of
	June 30,			December 31,			Increase			Increase			September 30,			December 31,			Increase		Increase
	2023			2022			(Decrease)			(Decrease)			2023			2022			(Decrease)		(Decrease)

BALANCES:
Gross loans	$	574,734		$	585,591		$	(10,857	)		(1.85	%)	$	587,238		$	585,591		$	1,647		0.28	%
ACL		6,397			5,264			1,133			21.52	%		6,390			5,264			1,126		21.39	%
Nonaccrual loans		2,995			2,988			7			0.23	%		3,009			2,988			21		0.70	%
Ratios:
ACL to gross loans		1.11	%		0.90	%								1.09	%		0.90	%
Net loans recovered to ACL(1)		(1.11	%)		(11.91	%)								(1.11	%)		(11.91	%)

(1) Quarter ended amount annualized.

The PCL for the three months ended ~~June~~September 30, 2023 was ~~$417.~~$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 ~~partially offset by a net decrease~~and an increase in loan balances of ~~$10,857~~$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 ~~1.11%~~1.09% and ~~0.86%~~0.88% at ~~June~~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 ~~June~~September 30, 2023, net loan losses recovered to the ACL totaled ~~$11, a decrease~~$112, an increase of ~~$203~~$37 in net recoveries from the ~~$214~~$75 in net recoveries in the same period in 2022. For the ~~six~~nine months ended ~~June~~September 30, 2023, net loan losses recovered to the allowance for loan losses totaled ~~$64,~~$175, a decrease of ~~$320~~$284 in net recoveries from ~~$384~~$459 in the same period in 2022.

Management reviews quarterly with the Company’s Board of Directors the adequacy of the ACL. The ~~PCL~~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 ~~six~~nine months ended ~~June~~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’s~~PCL may be required.

OTHER INCOME

Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended ~~June~~September 30, 2023 was ~~$2,261, a decrease~~$3,205, an increase of ~~$502,~~$328, or ~~(18.17%)~~11.40%, from ~~$2,763~~$2,877 in the same period in 2022. Service charges on deposit accounts were ~~$890~~$994 in the three months ended ~~June~~September 30, 2023, compared to ~~$967~~$1,019 for the same period in 2022. Included in the service charges on deposit accounts line item for the three months ended ~~June~~September 30, 2023, overdraft income decreased by ~~$67,~~$47, or ~~(9.60%~~(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 ~~$27,~~$8, or ~~2.78%~~0.88%, to ~~$945~~$904 for the three months ended ~~June~~September 30, 2023, compared to ~~$972~~$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 ~~$402,~~$195, or ~~(57.26%~~(9.69%) to ~~$300~~$1,817 in the ~~three~~nine months ended ~~June~~September 30, 2023, compared to ~~$702~~$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 ~~three~~nine months ended ~~June~~September 30, 2023 by ~~$121,~~$303, or ~~(57.62%~~(53.53%), to ~~$89~~$263 compared to ~~$210 for the same period in 2022.~~

Other income for the six months ended June 30, 2023 was $4,624, a decrease of $672, or (12.69%), from $5,296 in the same period in 2022. Service charges on deposit accounts were $1,804 in the six months ended June 30, 2023, compared to $1,912 for the same period in 2022. Included in the service charges on deposit accounts line item for the three months ended June 30, 2023, overdraft income decreased by $88, or (6.42%) 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 $25, or 1.32%, to $1,868 for the six months ended June 30, 2023, compared to $1,893 for the same period in 2022. Other operating income not derived from service charges or fees decreased $553, or (43.72%) to $712 in the six months ended June 30, 2023, compared to $1,265 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 six months ended June 30, 2023 by $239, or (57.73%), to $175 compared to $414$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 Six Months				For the Three Months				For the Nine Months
	Ended June 30,				Ended June 30,				Ended September 30,				Ended September 30,
Other income	2023		2022		2023		2022		2023		2022		2023		2022

BOLI Income	$	121	$	120	$	240	$	241	$	250	$	98	$	369	$	339
Mortgage Loan Origination Income		89		210		175		414		177		152		263		566
Gain on sale of OREO		-		16		-		81		107		5		93		86
Other Income		90		356		297		529		571		492		1,092		1,021

Total other income	$	300	$	702	$	712	$	1,265	$	1,105	$	747	$	1,817	$	2,012

OTHER EXPENSES

Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended ~~June~~September 30, 2023 and 2022 were ~~$9,037~~$9,084 and ~~$8,432,~~$8,936, respectively, an increase of ~~$605,~~$148, or ~~7.18%~~1.66%. Salaries and benefits increased ~~$298,~~$149, or ~~6.75%~~3.31%, to ~~$4,710~~$4,655 for the three months ended ~~June~~September 30, 2023 when compared to the same period in 2022. Occupancy expense ~~increased~~decreased by ~~$145,~~$33, or ~~8.47%~~(1.68%), to ~~$1,856~~$1,935 for the three months ended ~~June~~September 30, 2023, compared to ~~$1,711~~$1,968 for the same period of 2022. ~~The increase in occupancy expense is the result of the Company replacing ATMs and ITMs at several branch locations throughout the second quarter of 2023.~~ For the three months ended ~~June~~September 30, 2023, other expense increased ~~$162,~~$32, or ~~12.38%~~1.30% to ~~$2,471~~$2,494 compared to ~~$2,309~~$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 ~~$50~~$109 that occurred during the ~~second~~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 ~~six~~nine months ended ~~June~~September 30, 2023 and 2022 were ~~$17,737~~$26,821 and ~~$16,733,~~$25,669, respectively, an increase of ~~$1,004,~~$1,152, or ~~6.00%~~4.49%. Salaries and benefits increased ~~$554,~~$703, or ~~6.26%~~5.26%, to ~~$9,405~~$14,060 for the ~~six~~nine months ended ~~June~~September 30, 2023 when compared to the same period in 2022. Occupancy expense increased by ~~$215,~~$182, or ~~6.17%~~3.34%, to ~~$3,701~~$5,636 for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$3,486~~$5,454 for the same period of 2022. ~~The increase in occupancy expense is the result of the Company replacing ATMs and ITMs at several branch locations throughout the first six months.~~ For the ~~six~~nine months ended ~~June~~September 30, 2023, other expense increased ~~$235,~~$267, or ~~5.35%~~3.89% to ~~$4,631~~$7,125 compared to ~~$4,396~~$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 ~~$188~~$297 that occurred during the first ~~six~~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 Six Months				For the Three Months				For the Nine Months
	Ended June 30,				Ended June 30,				Ended September 30,				Ended September 30,
Other Expense	2023		2022		2023		2022		2023		2022		2023		2022

Advertising	$	191	$	172	$	238	$	303	$	169	$	172	$	407	$	475
Office Supplies		248		250		479		459		266		284		745		743
Professional Fees		249		223		529		442		318		346		847		788
Technology expense		111		109		220		225		103		111		323		336
Postage and Freight		144		168		288		306		148		132		436		438
Loan Collection Expense		22		13		46		20		18		5		64		25
Regulatory and related expense		231		208		427		412		262		208		689		620
Debit Card/ATM expense		995		202		1,201		390		228		200		654		590
Write down on OREO		-		-		-		42		-		-		-		42
Travel and Convention		10		63		78		115		126		53		204		168
Other expenses		270		901		1,125		1,682		856		951		2,756		2,633

Total other expense	$	2,471	$	2,309	$	4,631	$	4,396	$	2,494	$	2,462	$	7,125	$	6,858

The Company’s efficiency ratio for the three and ~~six~~nine months ended ~~June~~September 30, 2023 was ~~92.64%~~83.69% and ~~89.41%~~87.41%, compared to ~~71.83%~~72.79% and ~~73.51%~~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.

4148

BALANCE SHEET ANALYSIS

					Amount of			Percent of							Amount of			Percent of
	June 30,		December 31,		Increase			Increase			September 30,		December 31,		Increase			Increase
	2023		2022		(Decrease)			(Decrease)			2023		2022		(Decrease)			(Decrease)

Cash and due from banks	$	17,086	$	26,948	$	(9,862	)		(36.60%	)	$	14,061	$	26,948	$	(12,887	)		(47.82	%)
Interest bearing deposits with other banks		862		1,646		(784	)		(47.63%	)		130,320		1,646		128,674			7817.38	%
Investment securities held to maturity		396,931		406,590		(9,659	)		(2.38%	)		392,133		406,590		(14,457	)		(3.56	%)
Investment securities available for sale		196,866		201,322		(4,456	)		(2.21%	)		183,535		201,322		(17,787	)		(8.84	%)
Net LHFI		568,337		580,327		(11,990	)		(2.07%	)		580,848		580,327		521			0.09	%
Total assets		1,289,339		1,324,003		(34,664	)		(2.62%	)		1,414,010		1,324,003		90,007			6.80	%

Total deposits		1,103,072		1,126,402		(23,330	)		(2.07%	)		1,194,697		1,126,402		68,295			6.06	%

Total shareholders' equity		40,141		39,025		1,116			2.86	%		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 ~~June~~September 30, 2023 was ~~$17,086,~~$14,061, which was a decrease of ~~$9,862~~$12,887 from the balance of $26,948 at December 31, 2022. Interest bearing deposits with other banks ~~decreased~~increased by ~~$784,~~$128,674, or ~~(47.63%~~(7,817.38%), to ~~$862~~$130,320 at ~~June~~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 ~~June~~September 30, 2023 decreased by ~~$15,576,~~$23,739, or ~~2.40%~~3.66%, to ~~$633,475~~$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 ~~decreased~~increased by ~~$10,857,~~$1,647, or ~~(1.85%)~~0.28%, during the ~~six~~nine months ended ~~June~~September 30, 2023, to ~~$574,734~~$587,238 from $585,591 at December 31, 2022. The year-to-date ~~decline in~~ loan growth primarily reflects ~~paydown activity~~new loans in excess of ~~new loans coupled with management’s strategic reduction of substandard loans during the quarter.~~paydown activity. No material changes were made to the loan products offered by the Company during this period.

4249

DEPOSITS

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

					Amount of			Percent of							Amount of			Percent of
	June 30,		December 31,		Increase			Increase			September 30,		December 31,		Increase			Increase
	2023		2022		(Decrease)			(Decrease)			2023		2022		(Decrease)			(Decrease)

Noninterest-Bearing Deposits	$	281,812	$	299,112	$	(17,300	)		(5.78	%)	$	277,949	$	299,112	$	(21,163	)		(7.08%	)
Interest-Bearing Deposits		500,235		515,337		(15,102	)		(2.93	%)		562,712		515,337		47,375			9.19	%
Savings Deposits		121,961		133,030		(11,069	)		(8.32	%)		117,518		133,030		(15,512	)		(11.66%	)
Certificates of Deposit		199,064		178,923		20,141			11.26	%		236,518		178,923		57,595			32.19	%

Total deposits	$	1,103,072	$	1,126,402	$	(23,330	)		(2.07	%)	$	1,194,697	$	1,126,402	$	68,295			6.06	%

All deposit accounts except for ~~certificates of~~noninterest-bearing deposits ~~decreased~~and savings deposits increased during the ~~six~~nine months ended ~~June~~September 30, 2023. The ~~decrease~~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 coupled with the aforementioned increased deposit competition.~~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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.~~

~~Asset/Liability Management and Interest Rate Risk~~

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

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

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

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

~~The following table summarizes the simulated change in net interest income assuming a static balance sheet versus unchanged rates as of June 30, 2023 and December 31, 2022:~~

June 30, 2023

December 31, 2022

Following

Months

Following

Months

12 months
13-24
12 months
13-24
+400 basis points
-14.0 % -6.2 % -12.0 % -2.2 %
+300 basis points
-9.8 -3.9 -7.9 -0.4
+200 basis points
-5.6 -1.7 -3.9 1.0
+100 basis points
-2.0 -0.1 -0.8 1.6
Flat rates
- - - -
-100 basis points
1.2 -0.8 1.3 -1.2
-200 basis points
3.7 -0.5 2.6 -2.5

~~The following table presents the change in our economic value of equity as of June 30, 2023 and December 31, 2022, assuming immediate parallel shifts in interest rates:~~

Economic Value of Equity at Risk (%)

June 30, 2023

December 31, 2022

+400 basis points
-39.5 % -33.1 %
+300 basis points
-30.5 -24.7
+200 basis points
-20.7 -16.6
+100 basis points
-10.4 -8.3
Flat rates
- -
-100 basis points
6.9 5.1
-200 basis points
9.3 5.7

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

As part of our asset/liability management strategy, our management has emphasized the origination of shorter duration loans as well as variable rate loans to limit the negative exposure to a rate increase. We also desire to acquire deposit transaction accounts, particularly non-interest or low interest-bearing non-maturity deposit accounts, whose cost is less sensitive to changes in interest rates.

ITEM 4. CONTROLS AND PROCEDURES.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in 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 ~~June~~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 ~~June~~September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 ~~recent~~ 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.

ITEM 6.

EXHIBITS.

Exhibits

~~10(1)~~

~~First Amendment to Loan Agreement and Revolving Credit Note, as of June 26, 2023, between Citizens Holding Company and First Horizon Bank~~

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
	~~/s/~~ Stacy M. Brantley
	~~Stacy M. Brantley~~ President and Chief Executive Officer
	(Principal Executive Officer)

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

	DATE: ~~August~~November 14, 2023

4652

TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended June 30,
	Average Balance				Income/Expense				Average Yield/Rate
	2023		2022		2023		2022		2023			2022
Loans:
LHFI⁽¹⁾	$	578,300	$	590,407	$	7,556	$	6,667		5.23	%		4.52	%

Investment Securities
Taxable		442,254		474,366		2,263		1,901		2.05	%		1.60	%
Tax-exempt		202,258		214,330		1,337		1,229		2.64	%		2.29	%
Total Investment Securities		644,512		688,697		3,600		3,130		2.23	%		1.82	%

Federal Funds Sold and Other		26,571		22,634		297		37		4.47	%		0.65	%

Total Interest Earning Assets⁽¹⁾⁽²⁾		1,249,383		1,301,738		11,453		9,834		3.67	%		3.02	%

Non-Earning Assets		80,598		32,786

Total Assets	$	1,329,981	$	1,334,523

Deposits:
Interest-bearing Demand Deposits⁽³⁾		507,028	$	490,712	$	1,190	$	207		0.94	%		0.17	%
Savings		127,098		134,774		93		33		0.29	%		0.10	%
Time		189,631		202,027		1,166		288		2.46	%		0.57	%
Total Deposits		823,756		827,513		2,449		528		1.19	%		0.26	%

Borrowed Funds
Short-term Borrowings		144,157		106,153		948		83		2.63	%		0.31	%
Long-term Borrowings		18,000		18,000		347		186		7.71	%		4.13	%
Total Borrowed Funds		162,157		124,153		1,295		269		3.19	%		0.87	%
Total Interest-Bearing Liabilities ⁽³⁾		985,913		951,665		3,744		797		1.52	%		0.33	%

Non-Interest Bearing Liabilities
Demand Deposits		290,463		305,677
Other Liabilities		13,926		13,533
Shareholders' Equity		39,680		63,648
Total Liabilities and Shareholders' Equity	$	1,329,981	$	1,334,523

Interest Rate Spread										2.15	%		2.69	%

Net Interest Margin					$	7,709	$	9,037		2.55	%		2.78	%

Less
Tax Equivalent Adjustment						295		274

Net Interest Income					$	7,414	$	8,763

TABLE 2 - VOLUME/RATE ANALYSIS
(in thousands)
	Three Months Ended June 30, 2023
	2023 Change from 2022
	Volume			Rate			Total
INTEREST INCOME

LHFI	$	(137	)	$	1,026		$	889
Taxable Securities		(129	)		491			362
Non-Taxable Securities		(69	)		177			108
Federal Funds Sold and Other		6			254			260

TOTAL INTEREST INCOME	$	328		$	1,947		$	1,619

INTEREST EXPENSE

Interest-bearing demand deposits	$	7		$	976		$	983
Savings Deposits		(2	)		62			60
Time Deposits		(18	)		896			878
Short-term borrowings		30			835			865
Long-term borrowings		-			161			161

TOTAL INTEREST EXPENSE	$	17		$	2,930		$	2,947


NET INTEREST INCOME	$	(345	)	$	(983	)	$	(1,328	)

	June 30, 2023						December 31, 2022
	Following			Months			Following			Months
	12 months			13-24			12 months			13-24
+400 basis points		-14.0	%		-6.2	%		-12.0	%		-2.2	%
+300 basis points		-9.8			-3.9			-7.9			-0.4
+200 basis points		-5.6			-1.7			-3.9			1.0
+100 basis points		-2.0			-0.1			-0.8			1.6
Flat rates		-			-			-			-
-100 basis points		1.2			-0.8			1.3			-1.2
-200 basis points		3.7			-0.5			2.6			-2.5

	Economic Value of Equity at Risk (%)
	June 30, 2023			December 31, 2022
+400 basis points		-39.5	%		-33.1	%
+300 basis points		-30.5			-24.7
+200 basis points		-20.7			-16.6
+100 basis points		-10.4			-8.3
Flat rates		-			-
-100 basis points		6.9			5.1
-200 basis points		9.3			5.7