Citizens Holding Co: Form 10-Q for the period ended Sep 30, 2023

(in thousands, except share and per share data)

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q (the “Quarterly Report”) contains statements that constitute forward‑looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are based on management's beliefs, plans, expectations and assumptions and on information currently available to management. The words “may,” “should,” “expect,” “anticipate,” “intend,” “plan,” “continue,” “believe,” “seek,” “estimate” and similar expressions used in this Quarterly Report that do not relate to historical facts are intended to identify forward‑looking statements. These statements appear in a number of places in this Quarterly Report. The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements.

The risks and uncertainties that may affect the operation, performance, development and results of the business of Citizens Holding Company (the “Company”) and the Company’s wholly owned subsidiary, The Citizens Bank of Philadelphia, Mississippi (the “Bank” and collectively with the Company, the “Company”), include, but are not limited to, the following:

• expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions;
• adverse changes in asset quality and loan demand, and the potential insufficiency of the ACL and our ability to foreclose on delinquent mortgages;
• the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Company operates;
• natural disasters, civil unrest, epidemics and other catastrophic events in the Company’s geographic area;
• the impact of increasing inflation rates on the general economic, market or business conditions;
• extensive regulation, changes in the legislative and regulatory environment that negatively impact the Company and the Bank through increased operating expenses and the potential for regulatory enforcement actions, claims, or litigation;
• increased competition from other financial institutions, in particular with respect to deposits, and the risk of failure to achieve our business strategies;
• events affecting our business operations, including the effectiveness of our risk management framework, the accuracy of our estimates, our reliance on third party vendors, the risk of security breaches and potential fraud, and the impact of technological advances;
• climate change and societal responses to climate change could adversely affect the Company’s business and results of operations, including indirectly through impact to its customers;
• our ability to maintain sufficient capital and to raise additional capital when needed;
• our ability to maintain adequate liquidity to conduct business and meet our obligations;
• events affecting our ability to compete effectively and achieve our strategies, such as the risk of failure to achieve the revenue increases expected to result from our acquisitions, branch additions and in new product and service offerings, our ability to control expenses and our ability to attract and retain skilled people;
• events that adversely affect our reputation, and the resulting potential adverse impact on our business operations;
• increased cybersecurity risk, including network breaches, business disruptions or financial losses;
• risks arising from owning our common stock, such as the volatility and trading volume, our ability to pay dividends, the regulatory limitations on stock ownership, and provisions in our governing documents that may make it more difficult for another party to obtain control of us;
• risks associated with national and global events, such as the conflict between Russia and Ukraine and supply chain disruptions;
• risks associated with the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, which have resulted in significant market volatility and less confidence in depository institutions;
• internal and external factors affecting net interest margin; and
• other risks detailed from time-to-time in the Company’s filings with the Securities and Exchange Commission.

Except as required by law, the Company does not undertake any obligation to update or revise any forward-looking statements subsequent to the date of this Quarterly Report, or if earlier, the date on which such statements were made.

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

OVERVIEW

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

The Bank was opened on February 8, 1908, as The First National Bank of Philadelphia. In 1917, the Bank surrendered its national charter and obtained a state charter, at which time the name of the Bank was changed to The Citizens Bank of Philadelphia, Mississippi. At September 30, 2023, the Bank was the largest bank headquartered in Neshoba County, Mississippi, with total assets of $1,413,219 and total deposits of $1,194,636. All significant intercompany transactions have been eliminated in consolidation. The principal executive offices of both the Company and the Bank are located at 521 Main Street, Philadelphia, Mississippi 39350, and the main telephone number is (601) 656-4692. All references hereinafter to the activities or operations of the Company reflect the Company’s activities or operations through the Bank.

CRITICAL ACCOUNTING POLICIES

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

LIQUIDITY

The Company has an asset and liability management program that assists management in maintaining net interest margins during times of both rising and falling interest rates and in maintaining sufficient liquidity. A measurement of liquidity is the ratio of net cash, short-term investments and marketable assets divided by net deposits and short-term liabilities. This measurement for liquidity of the Company at September 30, 2023, was 22.58% and at December 31, 2022, was 14.58%. The increase was due to an increase in interest bearing cash and cash equivalents partially offset by an decrease in the fair market value of investment securities as of September 30, 2023. Management believes it maintains adequate liquidity for the Company’s current needs.

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

The Company also had $130,320 in interest bearing deposits at other banks at September 30, 2023 and $1,646 at December 31, 2022. The Company had secured and unsecured federal funds lines with correspondent banks in the amount of $50,000 at September 30, 2023 and $45,000 at December 31, 2022. In addition, the Company has the ability to draw on its line of credit with the FHLB and FHN. At September 30, 2023, the Company had unused and available $189,165 of its line of credit with the FHLB and at December 31, 2022, the Company had unused and available $160,488 of its line of credit with the FHLB. The increase in the amount available under the Company’s line of credit with the FHLB from the end of 2022 to September 30, 2023, was the result of an increase in the amount of loans eligible for the collateral pool securing the Company’s line of credit with the FHLB. In addition to the line of credit previously mentioned with the FHLB that is secured by pledged loans, the Company can also pledge investment securities at their current face value, less a predetermined discount amount, typically between 3% to 10%. This is similar to the BTFP except the Company can structure the terms of the line of credit with the FHLB and the BTFP is a one-year line of credit secured by investment securities at par. The Company has approximately $132,712 and $133,033 of unpledged securities at September 30, 2023 and December 31, 2022, respectively. The secured line of credit with FHN was originated on June 9, 2021. At September 30, 2023, the Company had unused and available $2,000 of its secured line of credit with FHN. The Company had federal funds purchased of $-0- as of September 30, 2023 and December 31, 2022. The Company may purchase federal funds from correspondent banks on a temporary basis to meet short-term funding needs.

When the Company has more funds than it needs for its short-term liquidity needs, the Company increases its investment portfolio, increases the balances in interest bearing due from bank accounts or sells federal funds. It is management’s policy to maintain an adequate portion of its portfolio of assets and liabilities on a short-term basis to ensure rate flexibility and to meet loan funding and liquidity needs. When deposits decline or do not grow sufficiently to fund loan demand, management will seek funding either through federal funds purchased or advances from the FHLB.

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

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

CAPITAL RESOURCES

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

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

Quantitative measures established by federal regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (primarily common stock and retained earnings, less goodwill) to risk weighted assets, and of Tier 1 capital to average assets. Management believes that as of September 30, 2023, the Company and Bank meet all capital adequacy requirements to which they are subject and according to these requirements the Company and Bank are considered to be well capitalized.

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

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

• Create a requirement to maintain a ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%;
• Increase the minimum leverage capital ratio to 4% for all banking organizations (currently 3% for certain banking organizations);
• Increase the minimum Tier 1 risk-based capital ratio from 4% to 6%; and
• Maintain the minimum total risk-based capital ratio at 8%.

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

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

Management believes that, as of September 30, 2023, the Company and the Bank met all capital adequacy requirements under Basel III.

RESULTS OF OPERATIONS

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

See Note 3 to the Company’s Consolidated Financial Statements for an explanation regarding the Company’s calculation of Net Income Per Share - basic and - diluted.

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

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

NET INTEREST INCOME / NET INTEREST MARGIN (“NIM”)

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

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

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

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

TABLE 1 - AVERAGE BALANCE SHEETS AND INTEREST RATES

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(1) Overdrafts, while not considered an earning asset, are included in Loans, net of unearned in the average volume calculation due to the immaterial impact on the yield.

(2) Earnings Assets in the table above includes the dividend paying stock of the Federal Home Loan Bank.

(3) Demand deposits are not included in the average volume calculation as they are not interest bearing liabilities. They are included within the non-interest bearing liabilities section above.

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

Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes in volume, mix and pricing decisions. External factors include changes in market interest rates, competition and the shape of the interest rate yield curve. For the three and nine months ended September 30, 2023, rapidly increasing deposit costs have been the larger driver of decreased profitability. Management believes net interest margin may contract some more in the fourth quarter of 2023. Management remains focused on loan growth to help offset the increased funding costs.

The following table sets forth a summary of the changes in interest earned, on a tax equivalent basis, and interest paid resulting from changes in volume and rates for the Company for the three and nine months ended September 30, 2023 compared to the same respective periods in 2022:

TABLE 2 - VOLUME/RATE ANALYSIS

(in thousands)

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CREDIT LOSS EXPERIENCE

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

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

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

The Company’s ACL is designed to provide for loan losses that can be reasonably anticipated. The ACL is established through charges to operating expenses in the form of provisions for credit losses. Actual loan losses or recoveries are charged or credited to the ACL. Management determines the amount of the allowance, and the Board of Directors reviews and approves the ACL. Among the factors considered in determining the ACL are the current financial condition of the Company’s borrowers and the value of security, if any, for their loans. Estimates of future economic conditions and their impact on various industries and individual borrowers are also taken into consideration, as are the Company’s historical loan loss experience and reports of banking regulatory authorities. As these estimates, factors and evaluations are primarily judgmental, no assurance can be given as to whether the Company will sustain loan losses in excess or below its allowance or that subsequent evaluation of the loan portfolio may not require material increases or decreases in such allowance.

The following table summarizes the Company’s ACL for the dates indicated:

(1) Quarter ended amount annualized.

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

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

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

OTHER INCOME

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

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

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

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OTHER EXPENSES

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

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

The following is a detail of the major expense classifications that make up the other expense line item in the income statement:

The Company’s efficiency ratio for the three and nine months ended September 30, 2023 was 83.69% and 87.41%, compared to 72.79% and 73.26% for the same period in 2022, respectively. The efficiency ratio is the ratio of non-interest expenses divided by the sum of net interest income (on a fully tax equivalent basis) and non-interest income.

BALANCE SHEET ANALYSIS

CASH AND CASH EQUIVALENTS

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

INVESTMENT SECURITIES

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

LHFI

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

DEPOSITS

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

All deposit accounts except for noninterest-bearing deposits and savings deposits increased during the nine months ended September 30, 2023. The increase in deposit accounts is directly attributable to customers moving noninterest-bearing deposits to certificates of deposits and interest-bearing deposits due to the current rate environment. Management continually monitors the interest rates on time deposit products to ensure that the Company is managing liquidity in line with our asset and liability management objectives. These rate adjustments impact deposit balances.

OFF-BALANCE SHEET ARRANGEMENTS

Please refer to Note 2 to the Consolidated Financial Statements included in this Quarterly Report for a discussion of the nature and extent of the Company’s off-balance sheet arrangements, which consist solely of commitments to fund loans and letters of credit.

The management of the Company, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of September 30, 2023 (the end of the period covered by this Quarterly Report).

There were no changes to the Company’s internal control over financial reporting that occurred in the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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

Risks Related to Recent Events Impacting the Financial Services Industry

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

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