CITIZENS HOLDING CO /MS/ 10-Q

cizn20230331_10q.htm     UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM 10-Q   ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the quarterly period ended March 31, 2023   or   ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the transition period from __________ to __________   Commission File Number: 001-15375   CITIZENS HOLDING COMPANY (Exact name of registrant as specified in its charter)   Mississippi   64-0666512 (State or other jurisdiction of Company or organization)   (IRS Employer Identification No.)       521 Main Street , Philadelphia , MS   39350 (Address of principal executive offices)   (Zip Code)   601 - 656-4692 (Registrant’s telephone number, including area code)   Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered Common Stock, $0.20 par value CIZN NASDAQ Global Market   Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.     Large accelerated filer ☐ Accelerated filer ☐   Non-accelerated filer ☑ Emerging growth company ☐ Smaller Reporting Company ☑   If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No   Number of shares outstanding of each of the issuer’s classes of common stock, as of May 4, 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 March 31, 2023 (Unaudited) and December 31, 2022 (Audited) 1             Consolidated Statements of Income for the Three months ended March 31, 2023 (Unaudited) and 2022 (Unaudited) 2             Consolidated Statements of Comprehensive Income (Loss) for the Three months ended March 31, 2023 (Unaudited) and 2022 (Unaudited) 3             Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 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. 32           Item 3. Quantitative and Qualitative Disclosures About Market Risk. 47           Item 4. Controls and Procedures. 49       PART II. OTHER INFORMATION 50         Item 1. Legal Proceedings. 50           Item 1A. Risk Factors. 50           Item 6.  Exhibits. 50         SIGNATURES   51           PART I.‐ FINANCIAL INFORMATION   ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except share data)       March 31,     December 31,       2023     2022       (Unaudited)     (Audited)   Assets                 Cash and due from banks   $ 15,600     $ 26,948   Interest bearing deposits with other banks     606       1,646   Cash and cash equivalents     16,206       28,594   Investment securities held-to-maturity, at amortized cost     402,237       406,590   Investment securities available-for-sale, at fair value     201,740       201,322   Loans held for investment (LHFI) (1)     567,240       585,591   Less allowance for credit losses (ACL), LHFI (1)     6,017       5,264   Net LHFI     561,223       580,327   Premises and equipment, net     27,561       27,705   Other real estate owned, net     1,179       1,179   Accrued interest receivable     4,562       4,864   Cash surrender value of life insurance     25,909       25,724   Deferred tax assets, net     29,091       29,574   Identifiable intangible assets, net     13,413       13,442   Other assets     6,349       4,682                     Total Assets   $ 1,289,470     $ 1,324,003                     Liabilities and Shareholders' Equity                 Liabilities                 Deposits:                 Non-interest bearing deposits   $ 288,466     $ 299,112   Interest bearing deposits     827,360       827,290   Total deposits     1,115,826       1,126,402                     Securities sold under agreement to repurchase     98,532       127,574   Short-term borrowings     1,725       -   Borrowings on secured line of credit     18,000       18,000   Deferred compensation payable     9,985       9,868   Other liabilities     4,279       3,134   Total liabilities     1,248,347       1,284,978                     Shareholders' Equity                 Common stock, $ 0.20 par value, 22,500,000 shares authorized, Issued and outstanding: 5,607,438 shares - March 31, 2023; 5,603,750 shares - December 31, 2022     1,122       1,122   Additional paid-in capital     18,488       18,448   Accumulated other comprehensive loss, net of tax benefit of $ 19,916 at March 31, 2023 and $ 20,726 at December 31, 2022     ( 79,822 )     ( 83,070 ) Retained earnings     101,335       102,525                     Total shareholders' equity     41,123       39,025                     Total liabilities and shareholders' equity   $ 1,289,470     $ 1,324,003     (1) Effective January 1, 2023, Citizens adopted FASB ASU 2016-13 using the modified restrospective approach.  Therefore prior period balances are presented under legacy GAAP and may not be comparable to current period presentation.    The accompanying notes are an integral part of these financial statements.   1       CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data)       For the Three Months       Ended March 31,       2023     2022   Interest Income                 Interest and fees on loans   $ 7,323     $ 6,397   Interest on securities                 Taxable     2,306       1,697   Nontaxable     1,065       947   Other interest     339       13   Total interest income     11,033       9,054   Interest Expense                 Deposits     1,821       556   Other borrowed funds     1,534       211   Total interest expense     3,355       767   Net Interest Income     7,678       8,287   Provision for credit losses (PCL)     47       93   Net Interest Income After PCL     7,631       8,194                     Other Income                 Service charges on deposit accounts     914       945   Other service charges and fees     1,037       1,025   Other operating income, net     412       563   Total other income     2,363       2,533   Other Expense                 Salaries and employee benefits     4,695       4,439   Occupancy expense     1,845       1,775   Other expense     2,160       2,087   Total other expense     8,700       8,301                     Income Before Income Taxes     1,294       2,426                     Income taxes     154       390                     Net Income   $ 1,140     $ 2,036                     Earings Per Share                 -Basic   $ 0.20     $ 0.36   -Diluted   $ 0.20     $ 0.36                     Dividends Paid Per Share   $ 0.24     $ 0.24     The accompanying notes are an integral part of these financial statements.   2       CITIZENS HOLDING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands)       For the Three Months       Ended March 31,       2023     2022                     Net income   $ 1,140     $ 2,036                     Other comprehensive income (loss)                                   Securities available-for-sale                 Unrealized holding gains (losses) during the period     3,227       ( 58,204 ) Income tax effect     ( 805 )     14,522   Net unrealized gains (losses)     2,422       ( 43,682 )                   Amortization of net unrealized losses on securities transferred from AFS to HTM     1,101       -   Income tax effect     ( 275 )     -   Net unrealized gains     826       -                     Total other comprehensive income (loss)     3,248       ( 43,682 )                   Comprehensive income (loss)   $ 4,388     $ ( 41,646 )   The accompanying notes are an integral part of these financial statements.   3       CITIZENS HOLDING COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)       For the Three Months       Ended March 31,       2023     2022                     Operating Activities                                   Net cash provided by operating activities   $ 1,310     $ 2,978                     Investing Activities                 Proceeds from maturities, paydowns and calls of securities available-for-sale     2,600       15,803   Proceeds from maturities, paydowns and calls of securities held-to-maturity     4,973       -   Purchases of investment securities     -       ( 43,886 ) Purchases of bank premises and equipment     ( 179 )     ( 250 ) Net change in FHLB stock     ( 317 )     ( 717 ) Proceeds from sale of other real estate owned     -       1,078   Net change in loans     18,464       ( 11,177 )                   Net cash provided by (used in) investing activities     25,541       ( 39,149 )                   Financing Activities                 Net change in deposits     ( 10,576 )     37,688   Net change in securities sold under agreement to repurchase     ( 29,042 )     ( 6,965 ) Net change in short-term borrowings     1,725       -   Payment of dividends     ( 1,346 )     ( 1,343 )                   Net cash (used in) provided by financing activities     ( 39,239 )     29,380                     Net decrease in cash and cash equivalents     ( 12,388 )     ( 6,791 ) Cash and cash equivalents, beginning of period     28,594       79,236   Cash and cash equivalents, end of period   $ 16,206     $ 72,445     The accompanying notes are an integral part of these financial statements.   4     CITIZENS HOLDING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the three months ended March 31, 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.   Basis of Presentation   These interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, these interim consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The interim consolidated financial statements are unaudited and reflect all adjustments and reclassifications, which, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition as of and for the interim periods presented. All adjustments and reclassifications are of a normal and recurring nature. Results for the period ended March 31, 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.   5     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       677   Shareholders' equity:                         Retained earnings   $ 102,525     $ ( 984 )   $ 101,541     6     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 $ 1,935 and $ 1,981 at March 31, 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 March 31, 2023, the Company had entered into loan commitments with certain customers with an aggregate unused balance of $ 71,563 compared to an aggregate unused balance of $ 75,602 at December 31, 2022. There were $ 3,488 of letters of credit outstanding at March 31, 2023 and $ 5,438 at December 31, 2022. The fair value of such commitments is not considered material because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire. The balances of such letters and commitments should not be used to project actual future liquidity requirements. However, the Company does incorporate expectations about the utilization under its credit-related commitments into its asset and liability management program.   The Company is a party to lawsuits and other claims that arise in the ordinary course of business, all of which are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provisions are made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. At the present time, management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not likely have a material impact on the Company’s consolidated financial condition or results of operations.   7       Note 3. Net Income per Share (in thousands, except share and per share data)   Net income per share - basic has been computed based on the weighted average number of shares outstanding during each period. Net income per share - diluted has been computed based on the weighted average number of shares outstanding during each period plus the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Net income per share was computed as follows:       For the Three Months       Ended March 31,       2023     2022   Basic weighted average shares outstanding     5,595,320       5,587,070   Dilutive effect of granted options     -       -                     Diluted weighted average shares outstanding     5,595,320       5,587,070                     Net income   $ 1,140     $ 2,036   Net income per share-basic   $ 0.20     $ 0.36   Net income per share-diluted   $ 0.20     $ 0.36       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 March 31, 2023.   During 2022, the Company’s directors received restricted stock grants totaling 8,250 shares of common stock under the 2013 Plan. These grants vest over a one-year period ending April 27, 2023 during which time the recipients have rights to vote the shares and to receive dividends. The grant date fair value of these shares was $ 157 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 March 31, 2023 and 2022, the Company recorded a provision for income taxes totaling $ 154 and $ 390 , respectively. The effective tax rate was 11.90 % and 16.08 % for the three months ended March 31, 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.   8       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           March 31, 2023   Amortized     Unrealized     Unrealized     Estimated       Cost     Gains     Losses     Fair Value   Securities available-for-sale                                 Mortgage backed securities   $ 104,478     $ 6     $ 8,948     $ 95,536   State, County, Municipals     134,667       24       28,930       105,761   Other securities     500     $ -     $ 57     $ 443   Total   $ 239,645     $ 30     $ 37,935     $ 201,740                 Gross     Gross           December 31, 2022   Amortized     Unrealized     Unrealized     Estimated       Cost     Gains     Losses     Fair Value   Securities available-for-sale                                 Mortgage backed securities   $ 107,055     $ -     $ 10,083     $ 96,972   State, County, Municipals     134,906       -       30,993       103,913   Other securities     500       -       63       437   Total   $ 242,461     $ -     $ 41,139     $ 201,322     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           March 31, 2023   Amortized     Unrealized     Unrealized     Estimated       Cost     Gains     Losses     Fair Value   Securities held-to-maturity                                 Obligations of U.S.                                 Government agencies   $ 4,018     $ -     $ 364     $ 3,654   Mortgage backed securities     305,356       -       21,219       284,137   State, County, Municipals     92,863       -       4,702       88,161   Total   $ 402,237     $ -     $ 26,285     $ 375,952                 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     9     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 March 31, 2023, the net unamortized, unrealized loss on transferred securities included in accumulated other comprehensive income (loss) in the accompanying balance sheet totaled approximately $ 68,511 ($ 51,417 , 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.   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.   10     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 March 31, 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 assume 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 March 31, 2023, the Company’s securities held-to-maturity totaled $ 402,237 . The potential credit loss exposure was $ 92,863 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 March 31, 2023.   11     At March 31, 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 March 31, 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 March 31, 2023 and December 31, 2022:       March 31, 2023     December 31, 2022   Aaa   $ 16,791     $ 18,096   Aa1 to Aa3     41,492       40,174   Not Rated (1)     34,580       34,570       $ 92,863     $ 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.   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 March 31, 2023 and December 31, 2022.   March 31, 2023   Available-for-sale   Less than 12 months     12 months or more     Total       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized   Description of Securities   Value     Losses     Value     Losses     Value     Losses                                                     Mortgage backed securities   $ 55,492     $ 1,878     $ 36,256     $ 7,070     $ 91,748     $ 8,948   State, County, Municipal     16,842       466       87,008       28,464       103,850       28,930   Other securities     -       -       443       57       443       57   Total   $ 72,334     $ 2,344     $ 123,707     $ 35,591     $ 196,041     $ 37,935     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   $ -     $ -     $ 3,654     $ 364     $ 3,654     $ 364   Mortgage backed securities     -       -       284,137       21,219       284,137       21,219   State, County, Municipal     -       -       88,161       4,702       88,161       4,702   Total   $ -     $ -     $ 375,952     $ 26,285     $ 375,952     $ 26,285     12     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.   Contractual Maturities   The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2023 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.       Available-for-sale     Held-to-maturity       Amortized     Estimated     Amortized     Estimated       Cost     Fair Value     Cost     Fair Value                                     Due in one year or less   $ 720     $ 663     $ -     $ -   Due after one year through five years     3,155       3,076       -       -   Due after five years through ten years     5,275       5,008       -       -   Due after ten years     126,017       97,457       96,881       91,815   Residential mortgage backed securities     91,827       83,144       246,433       229,613   Commercial mortgage backed securities     12,651       12,392       58,923       54,524   Total   $ 239,645     $ 201,740     $ 402,237     $ 375,952     Securities Pledged   At March 31, 2023 and December 31, 2022, securities with a carrying value of $ 462,291 and $ 462,954 , respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.   13       Note 7. LHFI and ACL (in thousands, except number of loans)   The composition of LHFI at March 31, 2023 and December 31, 2022 was as follows:       March 31, 2023     December 31, 2022   Loans secured by real estate:                 Land Development and Construction   $ 53,528     $ 52,731   Farmland     11,423       11,437   1-4 Family Mortgages     93,480       92,148   Commercial Real Estate     312,276       316,541   Total Real Estate Loans     470,707       472,857   Business Loans:                 Commercial and Industrial Loans     80,207       96,500   Farm Production and Other Farm Loans     474       504   Total Business Loans     80,681       97,004   Consumer Loans:                 Consumer Loans     13,072       12,992   Credit Cards     2,780       2,738   Total Consumer Loans     15,852       15,730   Gross LHFI     567,240       585,591                     Less Allowance for credit losses     ( 6,017 )     ( 5,264 )                                     Net LHFI   $ 561,223     $ 580,327     14     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   March 31, 2023                         Loans secured by real estate:                         Land Development and Construction   $ -     $ 2     $ -   Farmland     28       108       -   1-4 Family Mortgages     184       1,712       -   Commercial Real Estate     691       825       -   Total Real Estate Loansg     903       2,647       -   Business Loans:                         Commercial and Industrial Loans     196       307       -   Farm Production and Other Farm Loans     -       -       -   Total Business Loans     196       307       -   Consumer Loans:                         Consumer Loans     -       39       -   Credit Cards     -       -       5   Total Consumer Loans     -       39       5   Total   $ 1,099     $ 2,993     $ 5     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 periods ended March 31, 2023 and 2022.   15     An aging analysis of the amortized cost basis of LHFI (including nonaccrual LHFI), segregated by class, was as follows:   March 31, 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   $ 250     $ -     $ 250     $ 53,278     $ 53,528   Farmland     233       -       233       11,190       11,423   1-4 Family Mortgages     1,527       216       1,743       91,737       93,480   Commercial Real Estate     640       504       1,144       311,132       312,276   Total Real Estate Loans     2,650       720       3,370       467,337       470,707   Business Loans:                                         Commercial and Industrial Loans     271       266       537       79,670       80,207   Farm Production and Other Farm Loans     -       -       -       474       474   Total Business Loans     271       266       537       80,144       80,681   Consumer Loans:                                         Consumer Loans     126       -       126       12,946       13,072   Credit Cards     60       5       65       2,715       2,780   Total Consumer Loans     186       5       191       15,661       15,852   Total   $ 3,107     $ 991     $ 4,098     $ 563,142     $ 567,240       December 31, 2022   30 - 89 Days Past Due     Greater Than 89 Days Past Due     Total Past Due     Current Loans     Total   Loans secured by real estate:                                         Land Development and Construction   $ -     $ 4     $ 4     $ 52,727     $ 52,731   Farmland     38       30       68       11,369       11,437   1-4 Family Mortgages     1,799       439       2,238       89,910       92,148   Commercial Real Estate     933       486       1,419       315,122       316,541   Total Real Estate Loans     2,770       959       3,729       469,128       472,857   Business Loans:                                         Commercial and Industrial Loans     109       277       386       96,114       96,500   Farm Production and Other Farm Loans     4       -       4       500       504   Total Business Loans     113       277       390       96,614       97,004   Consumer Loans:                                         Consumer Loans     66       23       89       12,903       12,992   Credit Cards     56       12       68       2,670       2,738   Total Consumer Loans     122       35       157       15,573       15,730   Total   $ 3,005     $ 1,271     $ 4,276     $ 581,315     $ 585,591     Impaired LHFI   Prior to the adoption of FASB ASC Topic 326, the Company’s individually evaluated impaired LHFI included all commercial substandard relationships of $100 or more, which were specifically reviewed for impairment and deemed impaired, and all LHFI classified as troubled-debt restructurings (“TDRs”) in accordance with FASB ASC Subtopic 310-10-50-20 “Impaired Loans.” Once a LHFI was deemed to be impaired, the full difference between book value and the most likely estimate of the collateral’s net realizable value was charged off or a specific reserve was established.   No material interest income was recognized in the income statement on impaired LHFI for the period ended March 31, 2022.   16     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 first quarter of 2023.   At March 31, 2023, LHFI classified as modified loans totaled $ 2,050 . At March 31, 2023, modified loans were primarily comprised of interest rate concessions. The Company had $- 0 - thousand in unused commitments on modified loans at March 31, 2023.   The allocated ACL attributable to modified loans was $ 100 at March 31, 2023. The Company had no commitments to lend additional funds on this troubled debt restructuring as of March 31, 2023.   There were no loans modified within the last twelve months for which there was a payment default during the three months ended March 31, 2023.   At March 31, 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.   17     Collateral-Dependent Loans   The following tables present the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of March 31, 2023:   March 31, 2023   Inventory     Real Estate     Receivables     Total   Loans secured by real estate:                                 Land Development and Construction   $ -     $ -     $ -     $ -   Farmland     -       28       -       28   1-4 Family Mortgages     -       184       -       184   Commercial Real Estate     -       2,741       -       2,741   Total Real Estate Loans     -       2,953       -       2,953   Business Loans:                                 Commercial and Industrial Loans     92       -       104       196   Farm Production and Other Farm Loans     -       -       -       -   Total Business Loans     92       -       104       196                                     Total   $ 92     $ 2,953     $ 104     $ 3,149     18     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.   19     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 March 31, 2023.   20     The following table details the amortized cost basis of LHFI, segregated by loan origination year, grade and class, as of March 31, 2023:   Term Loans Amortized Cost Basis by Origination Year   March 31, 2023   2023     2022     2021     2020     2019     Prior     Revolving Loans     Total Loans   Loans secured by real estate:                                                                 Land Development and Construction                                                                 Satisfactory - Categories 1-4   $ 2,496     $ 7,876     $ 6,566     $ 7,982     $ 950     $ 1,167     $ 24,425     $ 51,462   Special Mention - Category 5 & 6     -       1,104       679       -       -       -       -       1,783   Substandard - Category 7     -       279       -       -       -       4       -       283   Doubtful - Category 8     -       -       -       -       -       -       -       -   Loss 9     -       -       -       -       -       -       -       -   Total Land Development and Construction     2,496       9,259       7,245       7,982       950       1,171       24,425       53,528                                                                      Farmland                                                                 Satisfactory - Categories 1-4     315       1,830       1,443       2,066       3,253       1,222       885       11,014   Special Mention - Category 5 & 6     -       -       88       -       138       38       -       264   Substandard - Category 7     -       37       17       11       29       51       -       145   Doubtful - Category 8     -       -       -       -       -       -       -       -   Loss 9     -       -       -       -       -       -       -       -   Total Farmland     315       1,867       1,548       2,077       3,420       1,311       885       11,423                                                                      1-4 Family Mortgages                                                                 Satisfactory - Categories 1-4     4,356       20,671       12,882       12,645       11,051       9,529       16,911       88,045   Special Mention - Category 5 & 6     -       198       46       135       305       984       176       1,844   Substandard - Category 7     -       37       288       378       137       2,340       411       3,591   Doubtful - Category 8     -       -       -       -       -       -       -       -   Loss 9     -       -       -       -       -       -       -       -   Total 1-4 Family Mortgages     4,356       20,906       13,216       13,158       11,493       12,853       17,498       93,480                                                                      Commercial Real Estate                                                                 Satisfactory - Categories 1-4     4,719       53,935       61,039       56,352       42,180       36,853       16,612       271,690   Special Mention - Category 5 & 6     66       2,493       2,285       1,073       1,487       463       -       7,867   Substandard - Category 7     -       187       3,758       2,805       269       25,700       -       32,719   Doubtful - Category 8     -       -       -       -       -       -       -       -   Loss 9     -       -       -       -       -       -       -       -   Total Commercial Real Estate     4,785       56,615       67,082       60,230       43,936       63,016       16,612       312,276   Total Real Estate Loans     11,952       88,647       89,091       83,447       59,799       78,351       59,420       470,707   Business Loans:                                                                 Commercial and Industrial Loans                                                                 Satisfactory - Categories 1-4     1,706       24,185       5,629       14,380       6,906       11,748       10,546       75,100   Special Mention - Category 5 & 6     -       133       -       337       8       1,368       2,811       4,657   Substandard - Category 7     -       3       55       -       59       261       72       450   Doubtful - Category 8     -       -       -       -       -       -       -       -   Loss 9     -       -       -       -       -       -       -       -   Total Commercial & Industrial Loans     1,706       24,321       5,684       14,717       6,973       13,377       13,429       80,207                                                                      Farm Production and Other Farm Loans                                                                 Satisfactory - Categories 1-4     -       272       -       9       -       92       91       464   Special Mention - Category 5 & 6     -       -       -       -       -       -       -       -   Substandard - Category 7     -       -       7       -       -       3       -       10   Doubtful - Category 8     -       -       -       -       -       -       -       -   Loss 9     -       -       -       -       -       -       -       -   Total Farm Production & Other Farm Loans     -       272       7       9       -       95       91       474   Total Business Loans     1,706       24,593       5,691       14,726       6,973       13,472       13,520       80,681   Consumer Loans:                                                                 Satisfactory - Categories 1-4     2,158       5,697       2,454       946       962       317       240       12,774   Special Mention - Category 5 & 6     -       -       -       -       -       4       -       4   Substandard - Category 7     238       24       27       3       1       1       -       294   Doubtful - Category 8     -       -       -       -       -       -       -       -   Loss 9     -       -       -       -       -       -       -       -   Total Consumer Loans     2,396       5,721       2,481       949       963       322       240       13,072                                                                     Credit Cards                                                                 Performing     -       -       -       -       -       -       2,775       2,775   Nonperforming     -       -       -       -       -       -       5       5   Total Credit Card     -       -       -       -       -       -       2,780       2,780   Gross LHFI   $ 16,054     $ 118,961     $ 97,263     $ 99,122     $ 67,735     $ 92,145     $ 75,960     $ 567,240                                                                     Less ACL                                                             ( 6,017 ) Net LHFI                                                           $ 561,223     21     There were no revolving loans converted to term loans during the three months ended March 31, 2023.   The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior period.   A discussion of the Company’s policies regarding internal risk-rating of loans is discussed above and is applicable to these tables. The following table presents the Company’s loan portfolio by internal risk-rating grades as of December 31, 2022:               Special                                       Satisfactory     Mention     Substandard     Doubtful     Loss     Total        1,2,3,4      5,6      7      8      9     Loans   Real Estate:                                                 Land Development and Construction   $ 50,015     $ 2,427     $ 289     $ -     $ -     $ 52,731   Farmland     10,832       269       336       -       -       11,437   1-4 Family Mortgages     85,861       1,816       4,471       -       -       92,148   Commercial Real Estate     274,901       7,975       33,665       -       -       316,541   Total Real Estate Loans     421,609       12,487       38,761       -       -       472,857                                                     Business Loans:                                                 Commercial and Industrial Loans     91,016       4,902       577       -       5       96,500   Farm Production and Other Farm Loans     491       -       13       -       -       504   Total Business Loans     91,507       4,902       590       -       5       97,004                                                     Consumer Loans:                                                 Credit Cards     2,670       -       68       -       -       2,738   Other Consumer Loans     12,934       7       51       -       -       12,992   Total Consumer Loans     15,604       7       119       -       -       15,730                                                                                                       Total Loans   $ 528,720     $ 17,396     $ 39,470     $ -     $ 5     $ 585,591       Note 8. ACL on LHFI   The Company’s ACL methodology for LHFI is based upon guidance within ASC Subtopic 326-20 as well as applicable regulatory guidance. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the LHFI portfolio is continuously monitored by Management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within the Company’s existing LHFI portfolio. The ACL for LHFI is adjusted through the PCL, LHFI and reduced by the charge off of loan amounts, net of recoveries.   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.   22     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.   23     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 Company loss history   Overdrafts 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.   24     The following table details activity in the ACL by portfolio segment for the three months ended:       Real     Business                   March 31, 2023   Estate     Loans     Consumer     Total   Beginning Balance, January 1, 2023   $ 4,154     $ 713     $ 397     $ 5,264   FASB ASU 2016-13 adoption adjustment     665       56       ( 86 )     635   Provision for credit losses ("PCL")     ( 46 )     112       ( 19 )     47   Chargeoffs     1       -       32       33   Recoveries     26       7       71       104   Net recoveries     ( 25 )     ( 7 )     ( 39 )     ( 71 ) Ending Balance   $ 4,798     $ 888     $ 331     $ 6,017                                     Period end allowance allocated to:                                 Loans individually evaluated for impairment   $ 100     $ -     $ -     $ 100   Loans collectively evaluated for impairment     4,698       888       331       5,917   Ending Balance, March 31, 2023   $ 4,798     $ 888     $ 331     $ 6,017     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 months ended:       Real     Business                   March 31, 2022   Estate     Loans     Consumer     Total   Beginning Balance, January 1, 2022   $ 3,622     $ 645     $ 246     $ 4,513   PCL     170       57       ( 134 )     93   Chargeoffs     -       56       26       82   Recoveries     50       5       197       252   Net chargeoffs (recoveries)     ( 50 )     51       ( 171 )     ( 170 ) Ending Balance   $ 3,842     $ 651     $ 283     $ 4,776                                     Period end allowance allocated to:                                 Loans individually evaluated for impairment   $ -     $ -     $ -     $ -   Loans collectively evaluated for impairment     3,842       651       283       4,776   Ending Balance, March 31, 2022   $ 3,842     $ 651     $ 283     $ 4,776     The Company recorded a provision for credit losses of $ 47 during the first quarter of 2023, as compared to a provision for credit losses of $ 93 recorded in the first quarter of 2022. 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 activity during the current quarter was primarily driven by increased recessionary risks due to inflationary pressures partially offset by a decline in loans.   25     The following table represents gross charge-offs by year of origination for the date presented:                                                       Revolving     Total Charge-       2023     2022     2021     2020     2019     Prior     Loans     Offs   Gross Charge-Offs                                                                 March 31, 2023                                                                 Loans secured by real estate:                                                                 Commercial Real Estate   $ -     $ -     $ -     $ -     $ -     $ 1     $ -     $ 1   Total Real Estate Loans     -       -       -       -       -       1       -       1                                                                     Total Consumer Loans     -       2       -       4       -       -       -       6                                                                     Total Credit Card     -       -       -       -       -       -       26       26                                                                     Net LHFI   $ -     $ 2     $ -     $ 4     $ -     $ 1     $ 26     $ 33     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 ended March 31, 2023         ACL for off-balance sheet credit exposure:         Beginning balance   $ -   FASB ASU 2016-13 adoption adjustment     677   PCL for off-balance sheet credit exposure     ( 41 ) Ending Balance   $ 636     The Company recorded a negative PCL for off-balance sheet credit exposure of ($ 41 ) during the first quarter of 2023, The Company’s allowance for credit losses model considers economic projections, primarily the national unemployment rate, recessionary risks, GDP and CRE price fluctuations. The negative provision during the current quarter was primarily driven by a decrease in unfunded loan commitments partially offset by increased recessionary risks due to inflationary pressures.   26       Note 9. Secured Line of Credit (in thousands)   On June 9, 2021, the Company obtained a secured revolving line of credit (“Line”) in the amount of $ 20,000 with First Horizon Bank. The proceeds of the Line were used to enhance the Bank’s capital structure. The Line bears interest at a floating interest rate linked to WSJ Prime Rate with an initial interest rate of 3.25 %, which is payable quarterly on the first day of each calendar quarter, commencing on July 1, 2021, with the final installment of interest being due and payable concurrently on the same date that the principal balance is due. As of March 31, 2023, the interest rate was 8 %. The Line also bears an unused line fee at a rate equal to 0.25 %, applied to the unused balance of the Line. The Line is fully secured by the common stock of the Bank. The Line matures on June 9, 2023, at which time all unpaid interest and principal is due and payable.       March 31, 2023     December 31, 2022   Funded balance   $ 18,000     $ 18,000   Unfunded balance     2,000       2,000   Total credit facility   $ 20,000     $ 20,000       Note 10. Shareholders ’ Equity (in thousands, except share data)   The following summarizes the activity in the capital structure of the Company:                               Accumulated                       Number             Additional     Other                       of Shares     Common     Paid-In     Comprehensive     Retained               Issued     Stock     Capital     (Loss) Income     Earnings     Total   Balance, January 1, 2023     5,603,570     $ 1,122     $ 18,448     $ ( 83,070 )   $ 102,525     $ 39,025   FASB ASU 2016-13 adoption adjustment                                     ( 984 )     ( 984 ) Net income     -       -       -       -       1,140       1,140   Dividends paid ($ 0.24 per share)     -       -       -       -       ( 1,346 )     ( 1,346 ) Restricted stock granted     3,868       -       -       -       -       -   Stock compensation expense     -       -       40       -       -       40   Other comprehensive loss, net     -       -       -       3,248       -       3,248   Balance, March 31, 2023     5,607,438     $ 1,122     $ 18,488     $ ( 79,822 )   $ 101,335     $ 41,123                                 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       27       Note 11. Fair Value of Financial Instruments (in thousands)   The fair value topic of the ASC establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:     Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities;         Level 2 Inputs other than quoted prices in active markets for identical assets and liabilities included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active; or         Level 3 Unobservable inputs for an asset or liability, such as discounted cash flow models or valuations.   The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.   The following table presents assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2023:       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   $ -     $ 95,536     $ -     $ 95,536   State, county and municipal     -       105,761       -       105,761   Other securities     -       443       -       443   Total   $ -     $ 201,740     $ -     $ 201,740     28     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 period ended March 31, 2023 or 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   Loans considered impaired are reserved for at the time the loan is identified as impaired taking into account the fair value of the collateral less estimated selling costs. Collateral may be real estate and/or business assets including but not limited to, equipment, inventory and accounts receivable. The fair value of real estate is determined based on appraisals by qualified licensed appraisers. The fair value of the business assets is generally based on amounts reported on the business’s financial statements. Appraised and reported values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation and management knowledge of the client and the client’s business. Since not all valuation inputs are observable, these nonrecurring fair value determinations are classified Level 3. The unobservable inputs may vary depending on the individual assets with the fair value of real estate based on appraised value being the predominant approach. The Company reviews the certified appraisals for appropriateness and adjusts the value downward to consider selling, closing and liquidation costs, which typically approximates 25% of the appraised value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors previously identified.   Other real estate owned   OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the 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.   29     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:       March 31, 2023       Quoted Prices                             in Active     Significant                       Markets for     Other     Significant               Identical     Observable     Unobservable               Assets     Inputs     Inputs               (Level 1)     (Level 2)     (Level 3)     Totals                                     Impaired loans   $ -     $ -     $ 1,950     $ 1,950                                     Total   $ -     $ -     $ 1,950     $ 1,950         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                                     Impaired loans   $ -     $ -     $ 2,074     $ 2,074                                     Total   $ -     $ -     $ 2,074     $ 2,074     Impaired loans, whose fair value was remeasured during the period, with a carrying value of $ 2,050 and $ 2,190 , had an allocated ACL of $ 100 and $ 116 at March 31, 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-month period ended March 31, 2023 and the year ended December 31, 2022, respectively.   30     The financial instruments topic of the ASC requires disclosure of financial instruments’ fair values, as well as the methodology and significant assumptions used in estimating fair values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The financial instruments topic of the ASC excludes certain financial instruments from its disclosure requirements. The following represents the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2023:         Fair Value Measurements Using:               Quoted Prices                                       in Active     Significant                               Markets for     Other     Significant     Total       Carrying     Identical     Observable     Unobservable     Fair   March 31, 2023   Value     Assets     Inputs     Inputs     Value               (Level 1)     (Level 2)     (Level 3)           Financial assets                                         Cash and due from banks   $ 15,600     $ 15,600     $ -     $ -     $ 15,600   Interest bearing deposits with banks     606       606       -       -       606   Securities held-to-maturity     402,237       -       375,952       -       375,952   Securities available-for-sale     201,740       -       201,740       -       201,740   Net LHFI     561,223       -       -       521,259       521,259                                             Financial liabilities                                         Deposits   $ 1,115,826     $ 929,637     $ 187,335     $ -     $ 1,116,972   Securities sold under agreement to repurchase     98,532       98,532       -       -       98,532   Short-term borrowings     1,725       1,725       -       -       1,725   Borrowings on secured line of credit     18,000       18,000       -       -       18,000     The following represents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2022:               Fair Value Measurements Using:               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     31       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 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;   32     ● 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; and ● other risks detailed from time-to-time in the Company’s filings with the Securities and Exchange Commission.   Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.   Management’s discussion and analysis is intended to provide greater insight into the results of operations and the financial condition of the Company. The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Quarterly Report. All dollar amounts appearing in this section of our Quarterly Report are in thousands unless otherwise noted or the context otherwise requires.   OVERVIEW   The Company is a one-bank holding company incorporated under the laws of the State of Mississippi on February 16, 1982. The Company is the sole shareholder of the Bank. The Company does not have any direct subsidiaries other than the Bank.   The Bank was opened on February 8, 1908, as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At March 31, 2023, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,289,079 and total deposits of $1,115,935. 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.   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.   33     LIQUIDITY   The Company has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net deposits and short-term liabilities divided by the sum of net cash, short-term investments and marketable assets. This measurement for liquidity of the Company at March 31, 2023, was 14.35% and at December 31, 2022, was 14.58%. The decrease was due to a decrease in interest bearing cash and cash equivalents partially offset by an increase in the fair market value of investment securities as of March 31, 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 $1,115,826 at March 31, 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 $201,740 invested in available-for-sale investment securities at March 31, 2023, and $201,322 at December 31, 2022. The increase in securities available-for-sale is the result of an increase in the fair market value of investment securities partially offset by paydowns on investment securities.   The Company also had $606 in interest bearing deposits at other banks at March 31, 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 March 31, 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 March 31, 2023, the Company had unused and available $197,867 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 March 31, 2023, was the result of an increase in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. In addition to the line of credit previously mentioned with the FHLB that is secured by pledged loans, the Company can also pledge investment securities at their current face value, less a predetermined discount amount, typically between 3 to 10%. This is similar to the BTFP except the Company can structure the terms of the line of credit with the FHLB and the BTFP is a one-year line of credit secured by investment securities at par. The Company has approximately $132,996 and $133,033 of unpledged securities at March 31, 2023 and December 31, 2022, respectively. The secured line of credit with FHN was originated on June 9, 2021. At March 31, 2023, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of $1,725 and $-0- as of March 31, 2023 and December 31, 2022, respectively. 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.   34     CAPITAL RESOURCES   Total shareholders’ equity was $41,123 at March 31, 2023, as compared to $39,025 at December 31, 2022.  The increase is a result of a change in AOCI caused by a decrease 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 $1,346, or $0.24 per share, during the three-month period ended March 31, 2023 compared to $1,343, or $0.24 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 March 31, 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.   35                                         Minimum Capital                       Minimum Capital     Requirement to be                       Requirement to be     Adequately       Actual     Well Capitalized     Capitalized       Amount     Ratio     Amount     Ratio     Amount     Ratio   March 31, 2023                                                 Citizens Holding Company                                                 Tier 1 leverage ratio   $ 108,373       8.01 %   $ 67,655       5.00 %   $ 54,124       4.00 % Common Equity tier 1 capital ratio     108,373       13.57 %     87,952       6.50 %     60,890       4.50 % Tier 1 risk-based capital ratio     108,373       13.57 %     63,871       8.00 %     47,903       6.00 % Total risk-based capital ratio     114,390       14.33 %     79,839       10.00 %     63,871       8.00 % The Citizens Bank of Philadelphia                                                 Tier 1 leverage ratio   $ 125,673       9.29 %   $ 67,636       5.00 %   $ 54,109       4.00 % Common Equity tier 1 capital ratio     125,673       9.29 %     87,927       6.50 %     60,872       4.50 % Tier 1 risk-based capital ratio     125,673       15.75 %     63,840       8.00 %     47,880       6.00 % Total risk-based capital ratio     131,691       16.50 %     79,800       10.00 %     63,840       8.00 %                                                   December 31, 2022                                                 Citizens Holding Company                                                 Tier 1 leverage ratio   $ 108,756       7.96 %   $ 68,352       5.00 %   $ 54,682       4.00 % Common Equity tier 1 capital ratio     108,756       13.19 %     88,858       6.50 %     61,517       4.50 % Tier 1 risk-based capital ratio     108,756       13.19 %     65,951       8.00 %     49,463       6.00 % Total risk-based capital ratio     114,020       13.83 %     82,438       10.00 %     65,951       8.00 % The Citizens Bank of Philadelphia                                                 Tier 1 leverage ratio   $ 126,105       9.23 %   $ 68,333       5.00 %   $ 54,667       4.00 % Common Equity tier 1 capital ratio     126,105       9.23 %     88,833       6.50 %     61,500       4.50 % Tier 1 risk-based capital ratio     126,105       15.34 %     65,759       8.00 %     49,320       6.00 % Total risk-based capital ratio     131,370       15.98 %     82,199       10.00 %     65,759       8.00 %   The Dodd-Frank Act requires the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Company (“FDIC”) to adopt regulations imposing a continuing “floor” on the risk based capital requirements. In December 2010, the Basel Committee released a final framework for a strengthened set of capital requirements, known as “Basel III”. In early July 2013, each of the U.S. federal banking agencies adopted final rules relevant to us: (1) the Basel III regulatory capital reforms; and (2) the "standardized approach of Basel II for non-core banks and bank holding companies”, such as the Bank and the Company. The capital framework under Basel III replaced the existing regulatory capital rules for all banks, savings associations and U.S. bank holding companies with greater than $500 million in total assets, and all savings and loan holding companies.   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%.   36     In addition, the final Basel III rules subject banking organizations to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its total risk-weighted assets. The effect of the capital conservation buffer increases the minimum common equity Tier 1 capital ratio to 7%, the minimum Tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5% for banking organizations seeking to avoid the limitations on capital distributions and discretionary bonus payments to executive officers.   The final Basel III rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action. Under the final rules, to be well capitalized, an insured depository institution must maintain a minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5%. In addition, the final Basel III rules established more conservative standards for including an instrument in regulatory capital and imposed certain deductions from and adjustments to the measure of common equity Tier 1 capital.   Management believes that, as of March 31, 2023, the Company and the Bank met all capital adequacy requirements under Basel III.   37     RESULTS OF OPERATIONS   The following table sets forth for the periods indicated, certain items in the consolidated statements of income of the Company and the related changes between those periods:       For the Three Months       Ended March 31,       2023     2022                     Interest Income   $ 11,033     $ 9,054   Interest Expense     3,355       767                     Net Interest Income     7,678       8,287   Provision for credit losses (PCL)     47       93                     Net Interest Income After PCL     7,631       8,194   Other Income     2,363       2,533   Other Expense     8,700       8,301                     Income Before Income Taxes     1,294       2,426   Income taxes     154       390                     Net Income   $ 1,140     $ 2,036                     Net Income Per share - Basic   $ 0.20     $ 0.36   Net Income Per Share-Diluted   $ 0.20     $ 0.36     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 11.49% for the three months ended March 31, 2023, and 8.53% for the corresponding period in 2022. The increase in ROE for the three months ended March 31, 2023 compared to the same period in 2022 was primarily the result of a decline in equity due to the unrealized losses on investments in AOCI.   Book value per share increased to $7.35 at March 31, 2023, compared to $6.97 at December 31, 2022. The increase in book value per share is directly attributable to the increase in shareholders’ equity resulting from the increase in AOCI caused by the decrease in medium-term interest rates. Average assets for the three months ended March 31, 2023 were $1,336,480 compared to $1,343,234 for the year ended December 31, 2022.   38     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 $7,678 for the three months ended March 31, 2023 as compared to $8,287 for the same respective time period in 2022.   The annualized net interest margin was 2.56% for the three months ended March 31, 2023, compared to 2.69% for the corresponding period of 2022. The decrease in net interest margin for the three months ended March 31, 2023, when compared to the same period in 2022, was mainly due to rising funding cost during late 2022 and early 2023. In addition, higher interest-bearing deposit balances as of March 31, 2023 increased the cost of funds to 135 basis point (“bps”) for the three months ended March 31, 2023 compared to 33 bps for the three months ended March 31, 2022. The linked-quarter interest expense increased $1,199, or (55.64%), to $3,354 from $2,155. Management expects continued pressure on NIM throughout the first half of 2023 as deposit competition remains tight.   39     The following table sets forth average balance sheet data, including all major categories of interest-earning assets and interest-bearing liabilities, together with the interest earned or interest paid and the average yield or average rate paid on each such category for the periods presented:    TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES       Three Months Ended March 31,       Average Balance   Income/Expense Average Yield/Rate       2023     2022   2023     2022 2023     2022   Loans:                                         LHFI (1)   $ 581,471     $ 578,127   $ 7,350     $ 6,426 5.06 %     4.45 %                                           Investment Securities                                         Taxable     443,731       462,140     2,305       1,698 2.08 %     1.47 % Tax-exempt     202,333       210,915     1,331       1,183 2.63 %     2.24 % Total Investment Securities     646,064       673,055     3,636       2,881 2.25 %     1.71 %                                           Federal Funds Sold and Other     27,993       32,790     322       13 4.60 %     0.16 %                                           Total Interest Earning Assets (1)(2)     1,255,528       1,283,972     11,308       9,320 3.60 %     2.90 %                                           Non-Earning Assets     80,952       68,737                                                                     Total Assets   $ 1,336,480     $ 1,352,709                                                                     Deposits:                                         Interest-bearing Demand                                         Deposits (3)   $ 505,099     $ 477,248   $ 980     $ 188 0.78 %     0.16 % Savings     128,313       129,694     76       31 0.24 %     0.10 % Time     188,212       219,785     765       337 1.63 %     0.61 % Total Deposits     821,624       826,727     1,821       556 0.89 %     0.27 %                                           Borrowed Funds                                         Short-term Borrowings     150,867       99,221     1,188       60 3.15 %     0.24 % Long-term Borrowings     18,000       18,000     346       151 7.69 %     3.36 % Total Borrowed Funds     168,867       117,221     1,534       211 3.63 %     0.72 % Total Interest-Bearing Liabilities (3)     990,491       943,948     3,355       767 1.35 %     0.33 %                                           Non-Interest Bearing Liabilities                                         Demand Deposits     292,445       300,428                           Other Liabilities     13,851       12,871                           Shareholders' Equity     39,693       95,462                           Total Liabilities and Shareholders' Equity   $ 1,336,480     $ 1,352,709                                                                     Interest Rate Spread                             2.25 %     2.58 %                                           Net Interest Margin                 $ 7,953     $ 8,553 2.56 %     2.69 %                                           Less                                         Tax Equivalent Adjustment                   275       266                                                       Net Interest Income                 $ 7,678     $ 8,287               40       (1) Overdrafts, while not considered an earning asset, are included in Loans, net of unearned in the average volume calculation due to the immaterial impact on the yield.     (2) Earnings Assets in the table above does include the dividend paying stock of the Federal Home Loan Bank.     (3) Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the non-interest bearing liabilities section above.   The average balances of nonaccruing assets are included in the tables above. Interest income and weighted average yields on tax-exempt loans and securities have been computed on a fully tax equivalent basis assuming a federal tax rate of 21% and a state tax rate of 3.95%, which is net of federal tax benefit.   Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three months ended March 31, 2023, rapidly increasing deposit costs have been the larger driver of decreased profitability. Management believes net interest margin should contract some more in the second 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 months ended March 31, 2023 compared to the same respective period in 2022:       TABLE 2 - VOLUME/RATE ANALYSIS               (in thousands)               Three Months Ended March 31,       2023 Change from 2022       Volume     Rate     Total   INTEREST INCOME                                                   LHFI   $ 37       887     $ 924   Taxable Securities     (68 )     675       607   Non-Taxable Securities     (48 )     196       148   Federal Funds Sold and Other     (2 )     311       309                             TOTAL INTEREST INCOME   $ (81 )   $ 2,069     $ 1,988                             INTEREST EXPENSE                                                   Interest-bearing demand deposits   $ 11       781       792   Savings Deposits     (0 )     45       45   Time Deposits     (48 )     476       428   Short-term borrowings     31       1,097       1,128   Long-term borrowings     -       195       195                             TOTAL INTEREST EXPENSE   $ (7 )   $ 2,595       2,588                                                       NET INTEREST INCOME   $ (74 )   $ (526 )   $ (600 )   41     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.   42     The following table summarizes the Company’s ACL for the dates indicated:       Quarter Ended     Year Ended     Amount of     Percent of       March 31,     December 31,     Increase     Increase       2023     2022     (Decrease)     (Decrease)                                     BALANCES:                                 Gross loans   $ 567,240     $ 585,591     $ (18,351 )     (3.13% ) ACL     6,017       5,264       753       14.30 % Nonaccrual loans     2,993       2,988       5       0.17 % Ratios:                                 ACL to gross loans     1.06 %     0.90 %                 Net loans recovered to ACL (1)     (1.18% )     (11.91% )                 (1) Quarter ended amount annualized.   The PCL for the three months ended March 31, 2023 was $47. The PCL was primarily driven by a net decrease in loan balances of $18,351 during the quarter partially offset with qualitative factor adjustments due to continued inflationary risk concerns in both the local and national economy. 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 1.06% and 0.82% at March 31, 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 March 31, 2023, net loan losses recovered to the ACL totaled $71, a decrease of $99 in net recoveries from the $170 in net recoveries in the same period in 2022.   Management reviews quarterly with the Company’s Board of Directors the adequacy of the ACL. The PCL is adjusted when specific items reflect a need for such an adjustment. Management believes that there were no material loan losses during the three months ended March 31, 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 may be required.             OTHER INCOME   Other income includes service charges on deposit accounts, wire transfer fees, safe deposit box rentals and other revenue not derived from interest on earning assets. Other income for the three months ended March 31, 2023 was $2,363, a decrease of $170, or (6.71%), from $2,533 in the same period in 2022. Service charges on deposit accounts were $914 in the three months ended March 31, 2023, compared to $945 for the same period in 2022. Included in the service charges on deposit accounts line item for the three months ended March 31, 2023, overdraft income decreased by $20, or (3.05%) 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 increased marginally by $1 ,or 0.12%, to $923 for the three months ended March 31, 2023, compared to $922 for the same period in 2022. Other operating income not derived from service charges or fees decreased $151, or (26.82%) to $412 in the three months ended March 31, 2023, compared to $563 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 months ended March 31, 2023 by $118, or (57.84%), to $86 compared to $204 for the same period in 2022.   43     The following is a detail of the other major income classifications that were included in other operation income on the income statement:       For the Three Months       Ended March 31,   Other income   2023     2022                     BOLI Income   $ 119     $ 121   Mortgage Loan Origination Income     86       204   Gain on sale of OREO     -       65   Other Income     207       173                     Total other income   $ 412     $ 563     OTHER EXPENSES   Other expenses include salaries and employee benefits, occupancy and equipment, and other operating expenses. Aggregate non-interest expenses for the three months ended March 31, 2023 and 2022 were $8,700 and $8,301, respectively, an increase of $399, or 4.81%. Salaries and benefits increased $256, or 5.77%, to $4,695 for the three months ended March 31, 2023 when compared to the same period in 2022.  Occupancy expense increased by $70, or 3.94%, to $1,845 for the three months ended March 31, 2023, compared to $1,775 for the same period of 2022. The increase in occupancy expense is the result of the Company replacing Automated Teller Machines (“ATMs”) and Interactive Teller Machines (“ITMs”) at several branch locations throughout the quarter. For the three months ended March 31, 2023, other expense increased $73, or 3.50% to $2,160 compared to $2,087 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 $138 that occurred during the first quarter of 2023 that are included in the Other expense line item on the Consolidated Statements of Income.   44     The following is a detail of the major expense classifications that make up the other expense line item in the income statement:       For the Three Months       Ended March 31,   Other Expense   2023     2022                     Advertising   $ 47     $ 131   Office Supplies     231       209   Professional Fees     280       219   Technology expense     109       116   Postage and Freight     144       138   Loan Collection Expense     24       7   Regulatory and related expense     196       204   Debit Card/ATM expense     206       188   Write down on OREO     -       42   Travel and Convention     68       52   Other expenses     855       781                     Total other expense   $ 2,160     $ 2,087     The Company’s efficiency ratio for the three months ended March 31, 2023 was 87.15%, compared to 75.33% for the same period in 2022. 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.   BALANCE SHEET ANALYSIS                       Amount of     Percent of       March 31,     December 31,     Increase     Increase       2023     2022     (Decrease)     (Decrease)                                     Cash and due from banks   $ 15,600     $ 26,948     $ (11,348 )     (42.11% ) Interest bearing deposits with other banks     606       1,646       (1,040 )     (63.18% ) Investment securities held to maturity     402,237       406,590       (4,353 )     (1.07% ) Investment securities available for sale     201,740       201,322       418       0.21 % Net LHFI     561,223       580,327       (19,104 )     (3.29% ) Premises and equipment     27,561       27,705       (144 )     (0.52% ) Total assets     1,289,470       1,324,003       (34,533 )     (2.61% )                                   Total deposits     1,115,826       1,126,402       (10,576 )     (0.94% )   CASH AND CASH EQUIVALENTS   Cash and due from banks, which consist of cash, balances at correspondent banks and items in process of collection, balance at March 31, 2023 was $15,600, which was a decrease of $11,348 from the balance of $26,948 at December 31, 2022. Interest bearing deposits with other banks decreased by $1,040, or (63.18%), to $606 at March 31, 2023 compared to $1,646 at December 31, 2022.   45     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 March 31, 2023 decreased by $7,229, or 1.11%, to $641,822 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 by $18,351, or (3.13%), during the three months ended March 31, 2023, to $567,240 from $585,591 at December 31, 2022. The year-to-date decline in loan growth primarily reflects paydown activity in excess of new loans coupled with management’s strategic reduction of substandard loans during the quarter. No material changes were made to the loan products offered by the Company during this period.   DEPOSITS   The following table shows the balance and percentage change in the various deposits:                       Amount of     Percent of       March 31,     December 31,     Increase     Increase       2023     2022     (Decrease)     (Decrease)                                     Noninterest-Bearing Deposits   $ 288,466     $ 299,112     $ (10,646 )     (3.56% ) Interest-Bearing Deposits     514,485       515,337       (852 )     (0.17% ) Savings Deposits     126,686       133,030       (6,344 )     (4.77% ) Certificates of Deposit     186,189       178,923       7,266       4.06 %                                   Total deposits   $ 1,115,826     $ 1,126,402     $ (10,576 )     -0.94 %   All deposit accounts except for certificates of deposits decreased during the three months ended March 31, 2023. The decrease in deposit accounts is directly attributable to customers moving noninterest-bearing deposits to certificates of deposits due to the current rate environment coupled with the aforementioned increased deposit competition. 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.   46     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.   47     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 March 31, 2023 and December 31, 2022:       March 31, 2023     December 31, 2022       Following     Months     Following     Months       12 months       13-24     12 months       13-24   +400 basis points     -12.1 %     -4.9 %     -12.0 %     -2.2 % +300 basis points     -8.3 %     -2.9 %     -7.9 %     -0.4 % +200 basis points     -4.6 %     -1.0 %     -3.9 %     1.0 % +100 basis points     -1.5 %     0.3 %     -0.8 %     1.6 % Flat rates     -       -       -       -   -100 basis points     0.8 %     -1.0 %     1.3 %     -1.2 % -200 basis points     2.8 %     -1.2 %     2.6 %     -2.5 %   48     The following table presents the change in our economic value of equity as of March 31, 2023 and December 31, 2022, assuming immediate parallel shifts in interest rates:       Economic Value of Equity at Risk (%)       March 31, 2023     December 31, 2022   +400 basis points     -40.4 %     -33.1 % +300 basis points     -31.2 %     -24.7 % +200 basis points     -21.1 %     -16.6 % +100 basis points     -10.7 %     -8.3 % Flat rates     -       -   -100 basis points     6.5 %     5.1 % -200 basis points     8.6 %     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 March 31, 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 March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.   49     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) Employment Agreement, dated January 11, 2023 by and between the Citizens Bank of Philadelphia and Stacy M. Brantley   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)   50     SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.     CITIZENS HOLDING COMPANY                     BY: /s/ Stacy M. Brantley     Stacy M. Brantley              President and Chief Executive Officer     (Principal Executive Officer)                     BY: /s/ Phillip R. Branch     Phillip R. Branch     Treasurer and Chief Financial Officer     (Principal Financial Officer and Chief     Accounting Officer)           DATE: May 15, 2023     51