TC Bancshares, Inc. - Quarter Report: 2023 September (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2023


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


	For the transition period from		to

Commission File Number 001-40637

TC Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Georgia	86-2650449
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

131 South Dawson Street, Thomasville, Georgia	31792
(Address of Principal Executive Office)	(Zip Code)

(229) 226-3221

(Issuer’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, par value $0.01	TCBC	The Nasdaq Stock Market LLC

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 past 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 for 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act:


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth 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 Securities 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 ☒

As of November 13, 2023, 4,549,842 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.

TC BANCSHARES, INC.

Form 10-Q Quarterly Report

Table of Contents

PART I. FINANCIAL INFORMATION


		Page Number
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47

Signature Pages		48

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

September 30, 2023 and December 31, 2022


ASSETS
	(Unaudited)			(*)
	September 30, 2023			December 31, 2022
Cash and due from banks	$	17,219,418		$	25,545,872
Certificates of deposit with other banks		992,000			1,739,000
Investment securities available-for-sale		41,683,651			43,096,552
Other investments		1,295,650			1,377,500
Mortgage loans held for sale		201,285			2,085,099
Loans		358,259,300			338,501,049
Allowance for credit losses		(4,670,952	)		(4,362,178	)
Net loans		353,588,348			334,138,871
Premises and equipment, net		4,884,509			3,132,282
Right-of-use asset		1,994,216			—
Other real estate owned		—			683,800
Bank owned life insurance		11,655,587			11,442,653
Accrued interest receivable and other assets		6,361,327			6,375,897
Total Assets	$	439,875,991		$	429,617,526

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand	$	45,793,201		$	39,442,441
Interest-bearing demand		49,077,668			58,088,030
Savings and money markets		156,843,370			142,092,384
Certificates of deposit		95,453,772			89,505,398
Total deposits		347,168,011			329,128,253
Federal Home Loan Bank advances		5,000,000			11,000,000
Lease liability		2,113,232			—
Accrued interest payable and other liabilities		4,451,913			4,211,439
Total liabilities		358,733,156			344,339,692

Shareholders' Equity:
Common stock: $.01 par value, 20,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 4,669,642 and 5,049,372 shares issued as of September 30, 2023 and December 31, 2022, respectively; 4,669,642 and 4,974,200 shares outstanding as of September 30, 2023 and December 31, 2022, respectively		46,697			50,494
Additional paid in capital		44,992,377			48,267,762
Retained earnings		44,030,847			45,876,694
Accumulated other comprehensive loss		(4,400,274	)		(4,305,039	)
Treasury stock: -0- shares and 75,172 shares at September 30, 2023 and December 31, 2022, respectively		—			(1,085,265	)
Unearned ESOP shares: 352,682 shares unallocated at September 30, 2023 and December 31, 2022		(3,526,812	)		(3,526,812	)
Total shareholders' equity		81,142,835			85,277,834
Total Liabilities and Shareholders' Equity	$	439,875,991		$	429,617,526
(*) - Derived from audited financial statements.

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED


	Three Months Ended September 30,					Nine Months Ended September 30,
	2023			2022		2023		2022
Interest and Dividend Income:
Interest and fees on loans	$	4,514,506		$	3,640,768	$	13,242,262	$	10,045,278
Interest and dividends on investment securities		406,850			225,551		1,149,514		577,643
Interest on deposits with other banks and federal funds sold		263,372			179,958		842,102		355,991
Total interest and dividend income		5,184,728			4,046,277		15,233,878		10,978,912
Interest Expense:
Interest on deposits		1,799,427			283,631		4,470,969		625,543
Interest on borrowings		51,067			—		185,459		—
Total interest expense		1,850,494			283,631		4,656,428		625,543
Net interest income		3,334,234			3,762,646		10,577,450		10,353,369
Provision for Credit Losses		—			37,744		18,000		98,432
Net interest income after provision for credit losses		3,334,234			3,724,902		10,559,450		10,254,937
Other Income:
Service charges on deposit accounts		148,651			149,674		420,510		437,382
Gain on sale of loans		58,521			219,395		202,642		914,406
Gain (Loss) on sale of premises and equipment		—			—		12,086		(583	)
Bank owned life insurance income		72,561			69,751		212,935		205,711
Other		3,794			8,891		55,429		22,435
Total other income		283,527			447,711		903,602		1,579,351
Other Expense:
Salaries and employee benefits		2,258,355			1,927,975		6,538,758		5,521,629
Occupancy and equipment		366,036			213,733		896,349		624,293
Other real estate owned related expenses, net loss (gain) on sales and write-downs		100			26,811		37,844		58,761
Other		1,117,347			1,088,798		3,469,180		3,033,850
Total other expense		3,741,838			3,257,317		10,942,131		9,238,533
(Loss) Income Before Income Taxes		(124,077	)		915,296		520,921		2,595,755
Income Tax (Benefit) Expense		(29,490	)		212,278		136,769		602,348
Net (Loss) Income	$	(94,587	)	$	703,018	$	384,152	$	1,993,407

(Loss) Earnings per share:
Basic	$	(0.02	)	$	0.14	$	0.08	$	0.41
Diluted	$	(0.02	)	$	0.14	$	0.08	$	0.41
Cash dividends per common share	N/A			N/A		$	0.05	$	0.05

Weighted Average Shares Outstanding:
Basic		4,730,279			4,870,692		4,858,160		4,889,131
Diluted		4,730,279			4,870,692		4,870,306		4,889,131

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

UNAUDITED


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net (Loss) Income	$	(94,587	)	$	703,018		$	384,152		$	1,993,407
Other Comprehensive Income (Loss)
Net of Income Taxes:
Unrealized losses on securities available-for-sale:
Holding losses arising during the period, net of taxes of ($106,631), ($315,191), ($49,615), and ($1,176,160), respectively		(237,865	)		(852,185	)		(95,235	)		(3,179,984	)
Total other comprehensive loss		(237,865	)		(852,185	)		(95,235	)		(3,179,984	)
Comprehensive Income (Loss)	$	(332,452	)	$	(149,167	)	$	288,917		$	(1,186,577	)

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

three and nine months ended September 30, 2023 and 2022

UNAUDITED


	Common Stock			Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Unearned ESOP Shares			Total
Balance, December 31, 2021	$	48,984		$	47,481,077		$	44,613,668		$	(1,608,401	)	$	—		$	(3,722,747	)	$	86,812,581
Net income for the three months ended March 31, 2022		—			—			695,893			—			—			—			695,893
Other comprehensive loss, net of tax		—			—			—			(1,318,938	)		—			—			(1,318,938	)
Balance, March 31, 2022	$	48,984		$	47,481,077		$	45,309,561		$	(2,927,339	)	$	—		$	(3,722,747	)	$	86,189,536
Net income for the three months ended June 30, 2022		—			—			594,496			—			—			—			594,496
Dividend declared		—			—			(244,918	)		—			—			—			(244,918	)
Other comprehensive loss, net of tax		—			—			—			(1,008,861	)		—			—			(1,008,861	)
Balance, June 30, 2022	$	48,984		$	47,481,077		$	45,659,139		$	(3,936,200	)	$	—		$	(3,722,747	)	$	85,530,253
Net income for the three months ended September 30, 2022		—			—			703,018			—			—			—			703,018
Other comprehensive loss, net of tax		—			—			—			(852,185	)		—			—			(852,185	)
Purchase of common stock		—			—			—			—			(734,075	)		—			(734,075	)
Balance, September 30, 2022	$	48,984		$	47,481,077		$	46,362,157		$	(4,788,385	)	$	(734,075	)	$	(3,722,747	)	$	84,647,011

Balance, December 31, 2022	$	50,494		$	48,267,762		$	45,876,694		$	(4,305,039	)	$	(1,085,265	)	$	(3,526,812	)	$	85,277,834
Cumulative change in accounting principle (Note 1)		—			—			(302,504	)		—			—			—			(302,504	)
Balance, January 1, 2023		50,494			48,267,762			45,574,190			(4,305,039	)		(1,085,265	)		(3,526,812	)		84,975,330
Net income for the three months ended March 31, 2023		—			—			332,029			—			—			—			332,029
Retirement of treasury stock		(752	)		(751,519	)		(332,994	)		—			1,085,265			—			—
Other comprehensive income, net of tax		—			—			—			537,092			—			—			537,092
Balance, March 31, 2023	$	49,742		$	47,516,243		$	45,573,225		$	(3,767,947	)	$	—		$	(3,526,812	)	$	85,844,451
Net income for the three months ended June 30, 2023		—			—			146,710			—			—			—			146,710
Stock compensation expense		—			394,824			—			—			—			—			394,824
Dividend declared		—			—			(248,712	)		—			—			—			(248,712	)
Purchase of common stock		—			—			—			—			(2,520,550	)		—			(2,520,550	)
Retirement of treasury stock		(1,743	)		(1,741,286	)		(777,521	)		—			2,520,550			—			—
Other comprehensive loss, net of tax		—			—			—			(394,462	)		—			—			(394,462	)
Balance, June 30, 2023	$	47,999		$	46,169,781		$	44,693,702		$	(4,162,409	)	$	—		$	(3,526,812	)	$	83,222,261
Net loss for the three months ended September 30, 2023		—			—			(94,587	)		—			—			—			(94,587	)
Stock compensation expense		—			123,294			—			—			—			—			123,294
Adjustment for actual dividend paid		—			—			8,718			—			—			—			8,718
Purchase of common stock		—			—			—			—			(1,878,986	)		—			(1,878,986	)
Retirement of treasury stock		(1,302	)		(1,300,698	)		(576,986	)		—			1,878,986			—			—
Other comprehensive loss, net of tax		—			—			—			(237,865	)		—			—			(237,865	)
Balance, September 30, 2023	$	46,697		$	44,992,377		$	44,030,847		$	(4,400,274	)	$	—		$	(3,526,812	)	$	81,142,835

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

TC BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED


	Nine Months Ended September 30,
	2023			2022
Cash Flows from Operating Activities:
Net income	$	384,152		$	1,993,407
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and accretion		479,941			408,125
Lease expense		119,016			—
Provision for credit losses		18,000			98,432
Net loss on sale of other real estate owned		30,848			—
(Gain) loss on sale of premises and equipment		(12,086	)		583
Increase in cash surrender value of bank owned life insurance		(212,935	)		(205,711	)
Write-down of other real estate owned		—			41,675
Gain on loans sold, net		(202,642	)		(914,406	)
Proceeds from the sale of mortgage loans held for sale		12,265,999			41,007,372
Originations of mortgage loans held for sale		(10,179,543	)		(39,133,326	)
Stock compensation expense		518,118			—
Change in:
Accrued interest receivable and other assets		64,184			91,184
Accrued interest payable and other liabilities		240,475			128,863
Net cash provided by operating activities		3,513,527			3,516,198
Cash Flows from Investing Activities:
Net change in interest-bearing deposits in other banks		747,000			1,214,000
Purchase of investment securities available-for -sale		—			(5,760,156	)
Proceeds from calls, paydowns and maturities of investment securities available-for-sale		1,109,633			2,663,301
Purchase of other investments		(385,650	)		(735,000	)
Proceeds from sales of other investments		467,500			—
Net change in loans		(19,769,981	)		(45,308,010	)
Proceeds from sales of other real estate owned		652,952			—
Proceeds from sales of premises and equipment		18,500			—
Purchase of premises and equipment		(2,080,163	)		(177,346	)
Net cash used in investing activities		(19,240,209	)		(48,103,211	)
Cash Flows from Financing Activities:
Net change in deposits		18,039,758			27,406,922
Proceeds from Federal Home Loan Bank advances		8,500,000			—
Repayments of Federal Home Loan Bank advances		(14,500,000	)		—
Repurchase of common stock		(4,399,536	)		(734,075	)
Cash dividend		(239,994	)		(244,918	)
Net cash provided by financing activities		7,400,228			26,427,929
Net Change in Cash and Cash Equivalents		(8,326,454	)		(18,159,084	)
Cash and Cash Equivalents, Beginning of Period		25,545,872			41,890,831
Cash and Cash Equivalents, End of Period	$	17,219,418		$	23,731,747
Supplement Disclosures of Cash Flow Information:
Cash paid during the period for interest	$	4,300,629		$	601,513
Non-Cash Investing and Financing Activities:
Change in unrealized losses on securities-for-sale, net of tax	$	(95,235	)	$	(3,179,984	)
Right-of-use asset recorded in exchange for lease liabilities	$	2,062,360		$	—

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

TC BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – GENERAL: BASIS OF PRESENTATION

Nature of Operations:

TC Bancshares, Inc. ("Company") is a holding company incorporated under the laws of the State of Georgia in 2021, to serve as the holding company for TC Federal Bank ("Bank"). The Company owns 100% of the outstanding stock of the Bank. The Bank was organized in 1934 and chartered in 1937 by the Federal Home Loan Bank Board as a mutual savings and loan association owned 100% by its depositors. The Bank currently operates four branch locations; one branch each in Thomasville, and Savannah, Georgia, as well as in Tallahassee, and Jacksonville, Florida. In addition, the Bank maintains loan production offices in Tallahassee and Jacksonville, Florida. The Bank's primary lending products consist of single-family residential mortgage loans and commercial and multi-family real estate loans. Its deposit products are the primary source of funding. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”) and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank undergoes periodic examinations by the OCC. The Company is subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve").

Basis of Presentation:

The accounting and financial reporting policies of the Company conform, in all material respects to accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management reflect all necessary adjustments for a fair presentation of the Company's consolidated financial position and consolidated results of operations. All adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the consolidated financial statements do not include all information and footnotes required by GAAP for complete financial presentation and should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2022, included in the Company's 2022 Annual Report on Form 10-K as filed with the SEC. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the full year or any future period.

Summary of Significant Accounting Policies:

The accounting and reporting policies of the Company conform to GAAP and general practices within the banking industry. The Notes to Consolidated Financial Statements appearing in the Company's 2022 Annual Report on Form 10-K, which include descriptions of significant accounting policies, as updated by the information contained in this report, should be read in conjunction with these interim financial statements. There have been no material changes or developments in the application of principles or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Estimates as disclosed in the Company's 2022 Annual Report on Form 10-K, except as disclosed in the Allowance for Credit Losses below.

Allowance for Credit Losses:

On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic ASC 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

The Company adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the periods beginning after January 1, 2023, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net

reduction of retained earnings of $302,504 upon adoption. The transition adjustment includes an increase in credit related reserves of $255,000 for loans plus an increase in credit related reserves of $149,147 for unfunded commitments net of a corresponding decrease in deferred tax assets of $101,643.

As allowed by ASC 326, the Company elected to maintain pools of loans accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether modifications to individually acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption.

The allowance for credit losses ("ACL") is evaluated on a regular basis and established through charges to earnings in the form of a provision for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

a. Portfolio Segmentation ("Collectively Evaluated Loans")

Portfolio segmentation is defined as the pooling of loans based upon similar risk characteristics such that quantitative methodologies and qualitative adjustment factors for estimating the ACL are constructed for each segment. The Company has identified seven portfolio segments of loans including; real estate - residential, real estate - home equity, real estate - multi-family, real estate - commercial, real estate - construction and land development, consumer loans and commercial and industrial loans.

The ACL for Collectively Evaluated Loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loss experience with reasonable and supportable forecasts using forward looking information. Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics. The Company has determined the nine “universal” qualitative adjustments categories prescribed by the 2006 Interagency Policy Statement are appropriate given their markets and pool of loans. These criteria are evaluated quarterly to ensure additional criteria do not need to be added, nor do the ranges assigned to each category need to be changed. The nine factors are as follows:

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.

Changes in the nature and volume of the portfolio and in the terms of loans.

Changes in the experience, ability, and depth of lending management and other relevant staff.

Changes in the volume and severity of past-due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans.

Changes in the quality of the institution’s loan review system.

Changes in the value of underlying collateral for collateral-dependent loans.

The existence and effect of any concentrations of credit, and changes in the level of such concentrations.

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

b. Individually Evaluated Loans

The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the collectively evaluated loan pools. These individually evaluated loans are removed from the pooling approach discussed above for the collectively evaluated loan pools, and may include nonaccrual loans, loan modifications to borrowers with financial difficulty, and other loans deemed appropriate by management.

c. Available-for-Sale ("AFS") Debt Securities

For AFS securities in an unrealized loss position, management first assesses whether (i) the Company intends to sell, or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income. If there were any adjustments to the allowance, they would be reported in the Company's income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

d. Accrued Interest Receivable

Upon adoption of ASU 2016-13 and its related amendments on January 1, 2023, the Company made the following elections regarding accrued interest receivable:

•

Presenting accrued interest receivable balances within another line item on the consolidated balance sheets labeled "accrued interest receivable and other assets".

•

Excluding accrued interest receivable that is included in the amortized cost of financing receivables and debt securities from related disclosure requirements.

•

Continuing the Company's policy to write off accrued interest receivable by reversing interest income. The write-off of accrued interest on loans typically occurs upon becoming 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Historically, the Company has not experienced uncollectible accrued interest receivable on its investment securities. However, the Company would generally write off accrued interest receivables by reversing interest income if the Company does not reasonably expect to receive payments. Due to the timely manner in which accrued interest receivables are written off, the amounts of such write offs are immaterial.

e. Reserve for Unfunded Commitments

The reserve for unfunded commitments (the "Unfunded Reserve") represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The Unfunded Reserve is recognized as a liability (accrued interest payable and other liabilities in the consolidated balance sheets), with adjustments to the reserve recognized as an expense in other expenses in the consolidated statements of income. The Unfunded Reserve is determined by estimating expected future fundings, under each segment, and applying to the expected loss rates. Expected future fundings are based on historical averages of funding rates (i.e., the likelihood of draws taken).

Allowance for Loan Losses:

Prior to January 1, 2023, as described in further detail in the Company's 2022 Annual Report on Form 10-K, the Company used the incurred loss impairment model. Under this methodology, loans were charged against the allowance for loan losses when management believed that the collectability of the principal is unlikely. The allowance represents an amount which, in management's judgment, based on, among other things, historical losses and on the current economic environment, will be adequate to absorb probable losses on existing loans that may become uncollectible. Loans deemed uncollectible are charged-off and deducted from the allowance and recoveries on loans previously charged-off are added back to the allowance. Management's judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower's ability to pay, overall portfolio quality, and review of specific problem loans.

Treasury Stock:

Treasury stock is accounted for by the cost method. Subsequent reissuances are accounted for at average cost. See Note 8 for further discussion.

Earnings per Share:

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury method) that would have been outstanding if all potentially dilutive common stock equivalents were issued during the period. Unallocated employee stock ownership plan shares are not deemed outstanding for earnings per share calculations.

Employee Stock Ownership Plan:

The Company sponsors an employee stock ownership plan ("ESOP") that covers all employees who meet certain service requirements. The Company will make annual contributions to the ESOP in amounts as defined by the plan document. These contributions are used to pay debt service and purchase additional shares. Certain ESOP shares are pledged as collateral for debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year.

In connection with the Company's initial public stock offering, the ESOP borrowed $3.9 million payable to the Company for the purpose of purchasing shares of the Company's common stock. A total of 391,868 shares were purchased with the loan proceeds. Because the source of the loan payments are contributions received by the ESOP from the Company, the related notes receivable is shown as a reduction of shareholders' equity.

Equity Incentive Plan:

On September 21, 2022, the Company's stockholders approved the TC Bancshares, Inc. 2022 Equity Incentive Plan ("Equity Plan") which provides for the grant of stock options, restricted stock awards and other equity awards to our officers, employees, directors, advisors, and consultants. As of September 30, 2023, 357,510 stock options had been granted under the Equity Plan. In addition, 156,590 restricted stock awards had been granted with 32,598 vested and 123,992 unvested. The Company accounts for its stock-based compensation plan using a fair value based method whereby compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.

Recent Accounting Pronouncements:

In August 2018, the FASB issued ASU 2018-14 – Compensation – Retirement Benefits – Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant. This ASU is effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04- Earning per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). This ASU provides clarity and reduction in diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The amendments in this ASU affect all entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of

earnings per share ("EPS") for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings Per Share. The amendments do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic. The amendments do not affect a holder's accounting for freestanding call options. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.

Recently Issued Not Yet Effective Accounting Pronouncements:

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual sale restriction should not be considered in measuring fair value. It also requires entities with investments in equity securities subject to contractual sale restrictions to disclose certain qualitative and quantitative information about such securities. The guidance is effective for public companies for fiscal years beginning after December 15, 2023. All other entities have an extra year to adopt; early adoption is permitted. The Company is assessing ASU 2022-03 and its impact on its accounting and disclosures.

In March 2023, the FASB issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company is assessing ASU 2023-02 and its impact on its accounting and disclosures.

Emerging Growth Company Status:

The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as the Company is an emerging growth company, it may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies. An emerging growth company may elect to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, but must make such election when the company is first required to file a registration statement. The Company has elected to use the extended transition period described above and intends to maintain its emerging growth company status as allowed under the JOBS Act.

Reclassifications:

Certain prior period amounts have been reclassified to conform to the current period presentation.

NOTE 2 - INVESTMENT SECURITIES

Investment securities available-for-sale at September 30, 2023, and December 31, 2022 are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Fair Value as % of Total
September 30, 2023-
US treasuries	$	10,096,096	$	—	$	765,549	$	9,330,547		22	%
Mortgage-backed securities		9,226,812		—		1,002,517		8,224,295		20	%
Collateralized mortgage obligations		14,858,820		—		787,061		14,071,759		34	%
Municipal bonds		8,759,616		—		1,681,306		7,078,310		17	%
Corporate obligations		3,625,000		—		646,260		2,978,740		7	%
	$	46,566,344	$	—	$	4,882,693	$	41,683,651		100	%

December 31, 2022-
US treasuries	$	10,115,310	$	—	$	790,778	$	9,324,532		22	%
Mortgage-backed securities		9,618,355		—		886,322		8,732,033		20	%
Collateralized mortgage obligations		15,713,313		—		869,283		14,844,030		35	%
Municipal bonds		8,762,417		—		1,733,506		7,028,911		16	%
Corporate obligations		3,625,000		—		457,954		3,167,046		7	%
	$	47,834,395	$	—	$	4,737,843	$	43,096,552		100	%

The following outlines the unrealized losses and estimated fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023, and December 31, 2022:


	September 30, 2023				December 31, 2022
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Unrealized loss for less than 12 months:
US treasuries	$	—	$	—	$	4,863,478	$	142,541
Mortgage-backed securities		—		—		3,004,339		304,844
Collateralized mortgage obligations		—		—		5,558,664		329,329
Municipal bonds		—		—		—		—
Corporate obligations		—		—		651,464		98,536
Total less than 12 months	$	—	$	—	$	14,077,945	$	875,250
Unrealized loss for more than 12 months:
US treasuries		9,330,547		765,549		4,461,054		648,237
Mortgage-backed securities		8,224,295		1,002,517		5,727,694		581,478
Collateralized mortgage obligations		14,071,759		787,061		9,285,366		539,954
Municipal bonds		7,078,310		1,681,306		7,028,911		1,733,506
Corporate obligations		2,978,740		646,260		2,515,582		359,418
Total more than 12 months		41,683,651		4,882,693		29,018,607		3,862,593
Total	$	41,683,651	$	4,882,693	$	43,096,552	$	4,737,843

The unrealized losses on the debt securities arose due to changing interest rates and market conditions and are considered to be temporary because of acceptable investment grades or because the repayment sources of principal and interest are backed by government entities. At September 30, 2023 and December 31, 2022, all five US treasuries, all 14 mortgage-backed securities, all 13 collateralized mortgage obligations, all nine municipal bonds and all seven corporate obligations contained unrealized losses.

As of September 30, 2023, no ACL has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our AFS securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as AFS in the table above and believes that it is more likely than not that we will not have to sell any such

securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. As of September 30, 2023 and December 31, 2022, accrued interest on investment securities was approximately $172,000 and $204,000, respectively.

The amortized cost and estimated fair value of investment securities AFS at September 30, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because some borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.


	Amortized Cost		Estimated Fair Value
Investment securities with maturities -
Within 1 year	$	5,002,163	$	4,931,445
1 to 5 years		5,093,933		4,399,102
5 to 10 years		12,384,616		10,057,050
Mortgage-backed securities and collateralized mortgage obligations		24,085,632		22,296,054
Total	$	46,566,344	$	41,683,651

The Company did not sell any investment securities available-for-sale for the nine months ended September 30, 2023 or 2022. Securities with carrying values of approximately $1,466,000 and $197,000 at September 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits as required by law and for other purposes.

NOTE 3 - LOANS AND ALLOWANCE FOR CREDIT LOSSES

Major classifications of loans, by purpose code, at September 30, 2023 and December 31, 2022, are summarized as follows:


	September 30, 2023		Percent			December 31, 2022		Percent
Real estate loans:
Residential	$	146,778,534		40.83	%	$	138,275,923		40.72	%
Home equity		11,309,281		3.15	%		12,410,820		3.65	%
Multi-family		19,360,416		5.39	%		19,649,491		5.79	%
Commercial		121,093,440		33.69	%		116,109,590		34.19	%
Construction and land development		44,057,800		12.26	%		28,660,635		8.44	%
Total real estate loans		342,599,471					315,106,459
Consumer loans		792,416		0.22	%		846,717		0.25	%
Commercial and industrial loans		16,045,360		4.46	%		23,644,426		6.96	%
Total loans		359,437,247		100.00	%		339,597,602		100.00	%
Less: Allowance for credit losses		4,670,952					4,362,178
Deferred loan fees		1,177,947					1,096,553
Loans, net	$	353,588,348				$	334,138,871

The Company grants loans and extensions of credit to individuals, as well as a variety of firms and corporations throughout its footprint. Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent on the real estate market.

The Company has divided the loan portfolio into seven portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are real estate - residential, real estate - home equity, real estate - multi-family, real estate - commercial, real estate - construction and land development, consumer loans and commercial and industrial loans.

Real Estate - Residential: The Company originates residential real estate loans for the purchase or refinancing of a mortgage. These loans are primarily collateralized by owner-occupied properties and rental properties located primarily in the Company's market areas.

Real Estate - Home Equity: The Company originates home equity real estate loans to provide home equity lines of credit and closed-end home equity loans. These loans are primarily collateralized by owner-occupied properties located primarily in the Company's market areas.

Real Estate - Multi-family: Multi-family loans consist of loans to finance real estate purchases, refinancings, expansions and improvements to multi-family properties. These loans may be secured by, but are not limited to, first liens on apartments, mobile home parks or other multi-family properties primarily located within the Company's market areas. The Company's underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s and borrower’s related entities’ financial condition, and a detailed analysis of the borrower’s underlying cash flows. Multi-family loans are larger than residential or home equity loans and involve greater credit risk. The repayment of these loans largely depends on the results of operations and management of these properties. Adverse economic conditions also affect the repayment ability to a greater extent than residential or home equity real estate loans.

Real Estate - Commercial: Commercial real estate loans consist of loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. These loans may be secured by first liens on office buildings, farms, retail and mixed-use properties, churches, warehouses and restaurants primarily located within the Company's market areas. The Company's underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s and borrower’s related entities’ financial condition, and a detailed analysis of the borrower’s underlying cash flows. Commercial real estate loans are larger than residential loans and involve greater credit risk. The repayment of these loans largely depends on the results of operations and management of these properties. Adverse economic conditions also affect the repayment ability to a greater extent than residential real estate loans.

Real Estate - Construction and land development: These loans are made to borrowers to build commercial structures, a primary or secondary residence and, in some cases, to real estate investors to acquire and develop land. These loans are more difficult to evaluate since they are significantly more vulnerable to changes in economic conditions. In addition, these loans possess a higher degree of credit risk since they are made based on estimates of the future worth of a project and the estimated costs required for completion. The Company limits its overall investment in this portfolio segment due both to management’s assessment of risk and certain percentage guidance set by the regulatory agencies.

Consumer: Consumer loans mainly consist of personal loans, revolving credit plans and other loans. The Company's consumer loans may be uncollateralized and rely on the borrower’s income for repayment.

Commercial and industrial: Commercial and industrial loans consist generally of business loans and lines of credit to companies in the Company's market area. Commercial and industrial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Such loans are usually collateralized by the financed assets, although a portion may be made on an unsecured basis and contain the guarantee of the business principals. The Company's underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business.

As of September 30, 2023, and December 31, 2022, accrued interest on loans was approximately $1,327,000 and $1,050,000, respectively.

Allowance for Credit Losses:

The Company's estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The following tables present the activity in the ACL by class of loans for the three and nine months ended September 30, 2023, and the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2022.


	Real Estate Loans
	Residential			Home Equity			Multi-family			Commercial			Construction and Land Development			Consumer loans			Commercial and Industrial loans			Unallocated			Total
	Three Months Ended September 30, 2023
Allowance for credit losses:
Beginning balance	$	2,991,480		$	144,039		$	128,521		$	986,826		$	294,436		$	6,202		$	90,661		$	—		$	4,642,165
Charge-offs		—			—			—			—			—			(7,927	)		—			—			(7,927	)
Recoveries		9,000			—			—			—			11,345			267			16,102			—			36,714
Provision		36,747			(36,601	)		(49,143	)		117,210			(125,156	)		23,307			33,636			—			—
Balance at September 30, 2023	$	3,037,227		$	107,438		$	79,378		$	1,104,036		$	180,625		$	21,849		$	140,399		$	—		$	4,670,952

	Nine Months Ended September 30, 2023
Allowance for credit losses:
Beginning balance	$	1,960,955		$	186,733		$	225,869		$	1,632,241		$	264,589		$	615		$	81,182		$	9,994		$	4,362,178
ASC 326 adoption		1,028,700			(27,875	)		(68,217	)		(694,135	)		(102,349	)		48,540			80,330			(9,994	)		255,000
Charge-offs		—			—			—			—			—			(26,784	)		(77,940	)		—			(104,724	)
Recoveries		27,000			—			—			—			22,690			1,704			89,104			—			140,498
Provision		20,572			(51,420	)		(78,274	)		165,930			(4,305	)		(2,226	)		(32,277	)		—			18,000
Balance at September 30, 2023	$	3,037,227		$	107,438		$	79,378		$	1,104,036		$	180,625		$	21,849		$	140,399		$	—		$	4,670,952

	Three Months Ended September 30, 2022
Allowance for loan losses:
Beginning balance	$	1,529,019		$	168,804		$	270,349		$	1,819,725		$	334,691		$	1,218		$	124,200		$	23,776		$	4,271,782
Charge-offs		—			—			—			—			—			(8,848	)		—			—			(8,848	)
Recoveries		9,000			—			—			—			11,345			2,003			13,622			—			35,970
Provision		189,620			(4,288	)		29,103			(99,825	)		(33,406	)		6,781			(36,730	)		(13,511	)		37,744
Balance at September 30, 2022	$	1,727,639		$	164,516		$	299,452		$	1,719,900		$	312,630		$	1,154		$	101,092		$	10,265		$	4,336,648

	Nine Months Ended September 30, 2022
Allowance for loan losses:
Beginning balance	$	1,468,649		$	174,579		$	288,455		$	1,757,794		$	350,586		$	1,798		$	109,724		$	32,014		$	4,183,599
Charge-offs		(2,842	)		—			—			—			—			(45,950	)		—			—			(48,792	)
Recoveries		28,500			—			—			—			11,345			4,017			59,547			—			103,409
Provision		233,332			(10,063	)		10,997			(37,894	)		(49,301	)		41,289			(68,179	)		(21,749	)		98,432
Balance at September 30, 2022	$	1,727,639		$	164,516		$	299,452		$	1,719,900		$	312,630		$	1,154		$	101,092		$	10,265		$	4,336,648

As described in Note 1 General: Basis of Presentation, the Company adopted ASU 2016-13 on January 1, 2023, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset. The primary reason for the increase in required ACL was to capture the expected lifetime losses of the portfolio, which was previously measured under an incurred loss model.

The Company uses the weighted-average remaining maturity (WARM) method as the basis for the estimation of expected credit losses. The WARM method uses a historical average annual charge-off rate containing loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans in a segment at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted, using qualitative factors described in Note 1, for current conditions and for reasonable and supportable forecast periods. Qualitative loss factors are based on the Company's judgment of the Company, market, industry or business specific data, differences in loan-specific risk characteristics such as underwriting standards, portfolio mix, risk grades,

delinquency level or term. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflected in the Company's historical loss factors. Additionally, the Company has adjusted for changes in expected environmental and economic conditions, such as changes in unemployment rates, property values and other relevant factors over the next 12 to 24 months. Management adjusted the historical loss experience for these expectations. No reversion adjustments were necessary, as the starting point for the Company's estimate was a cumulative loss rate covering the expected contractual term of the portfolio.

The ACL is measured on a collective segment basis when similar risk characteristics exist. Our loan portfolio is segmented first by the seven portfolio segments described above, and second, by internally identified risk grades (see description below). Consistent forecasts of the loan drivers are used across the loan segments. For loans that do not share general risk characteristics with segments, we estimate a specific reserve on an individual basis. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan's initial effective interest rate or the fair value of collateral for collateral-dependent loans.

The Company closely monitors economic conditions and loan performance trends to manage and evaluate the exposure to credit risk. Key factors tracked by the Company and utilized in evaluating the credit quality of the loan portfolio include trends in delinquency ratios, the level of nonperforming assets, borrower's repayment capacity and collateral coverage.

The following tables present information relative to individually and collectively evaluated loans by portfolio segment as of September 30, 2023, and December 31, 2022:


	Loans				Allowance for credit losses
	Individually evaluated for impairment		Collectively evaluated for impairment		Individually evaluated for impairment		Collectively evaluated for impairment
September 30, 2023 -
Real estate loans:
Residential	$	411,853	$	146,366,681	$	—	$	3,037,227
Home equity		—		11,309,281		—		107,438
Multi-family		—		19,360,416		—		79,378
Commercial		—		121,093,440		—		1,104,036
Construction and development		—		44,057,800		—		180,625
Total real estate loans		411,853		342,187,618		—		4,508,704
Consumer loans		—		792,416		—		21,849
Commercial and industrial loans		667,515		15,377,845		69,660		70,739
Total	$	1,079,368	$	358,357,879	$	69,660	$	4,601,292
December 31, 2022 -
Real estate loans:
Residential	$	1,037,428	$	137,238,495	$	—	$	1,960,955
Home equity		—		12,410,820		—		186,733
Multi-family		—		19,649,491		—		225,869
Commercial		57,000		116,052,590		—		1,632,241
Construction and development		43,388		28,617,247		—		264,589
Total real estate loans		1,137,816		313,968,643		—		4,270,387
Consumer loans		—		846,717		—		615
Commercial and industrial loans		—		23,644,426		—		81,182
Unallocated		—		—		—		9,994
Total	$	1,137,816	$	338,459,786	$	—	$	4,362,178

Collateral-Dependent Loans:

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents collateral dependent loans by

portfolio segment and collateral type, including those loans with and without a related allowance allocation as of September 30, 2023.


	Collateral Type
	Real Estate		Other Business Assets		Total		Without an Allowance		With an Allowance		Allowance Allocation
September 30, 2023 -
Real estate loans:
Residential	$	411,853	$	—	$	411,853	$	411,853	$	—	$	—
Home equity		—		—		—		—		—		—
Multi-family		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Total real estate loans		411,853		—		411,853		411,853		—		—
Consumer loans		—		—		—		—		—		—
Commercial and industrial loans		—		667,515		667,515		—		667,515		69,660
Total	$	411,853	$	667,515	$	1,079,368	$	411,853	$	667,515	$	69,660

Impaired Loans:

The following table presents impaired loans by class of loans as of December 31, 2022:


	Recorded Investment		Principal Balance		Related Allowance
December 31, 2022 -
Impaired loans with related allowance:
Real estate loans:
Residential	$	—	$	—	$	—
Home equity		—		—		—
Multi-family		—		—		—
Commercial		—		—		—
Construction and land development		—		—		—
Total real estate loans		—		—		—
Consumer loans		—		—		—
Commercial and industrial loans		—		—		—
Total	$	—	$	—	$	—
Impaired loans without related allowance:
Real estate loans:
Residential	$	1,037,428	$	1,037,428	$	—
Home equity		—		—		—
Multi-family		—		—		—
Commercial		57,000		57,000		—
Construction and land development		43,388		43,388		—
Total real estate loans		1,137,816		1,137,816		—
Consumer loans		—		—		—
Commercial and industrial loans		—		—		—
Total	$	1,137,816	$	1,137,816	$	—

Past Due and Nonaccrual Loans:

The following tables present the aging of the recorded investment in past due loans and nonaccrual loans as of September 30, 2023 and December 31, 2022, by class of loans:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total		Non-accrual
September 30, 2023 -
Real estate loans:
Residential	$	192,416	$	196,103	$	—	$	388,519	$	146,390,015	$	146,778,534	$	239,538
Home equity		—		—		—		—		11,309,281		11,309,281		—
Multi-family		—		—		—		—		19,360,416		19,360,416		—
Commercial		—		—		—		—		121,093,440		121,093,440		—
Construction and land development		—		—		—		—		44,057,800		44,057,800		—
Total real estate loans		192,416		196,103		—		388,519		342,210,952		342,599,471		239,538
Consumer loans		3,211		—		—		3,211		789,205		792,416		—
Commercial and industrial loans		—		—		—		—		16,045,360		16,045,360		667,515
	$	195,627	$	196,103	$	—	$	391,730	$	359,045,517	$	359,437,247	$	907,053
December 31, 2022 -
Real estate loans:
Residential	$	221,100	$	—	$	31,541	$	252,641	$	138,023,282	$	138,275,923	$	453,749
Home equity		24,968		57,266		—		82,234		12,328,586		12,410,820		—
Multi-family		—		—		—		—		19,649,491		19,649,491		—
Commercial		—		—		57,000		57,000		116,052,590		116,109,590		57,000
Construction and land development		—		—		—		—		28,660,635		28,660,635		43,388
Total real estate loans		246,068		57,266		88,541		391,875		314,714,584		315,106,459		554,137
Consumer loans		5,718		—		—		5,718		840,999		846,717		—
Commercial and industrial loans		—		—		—		—		23,644,426		23,644,426		—
	$	251,786	$	57,266	$	88,541	$	397,593	$	339,200,009	$	339,597,602	$	554,137

As of September 30, 2023 and December 31, 2022, there were no loans greater than 90 days past due and still accruing.

As of September 30, 2023, there was one nonaccrual commercial and industrial loan with a balance of $667,515 that had a related allowance of $69,660. As of December 31, 2022, there were no nonaccrual loans with a related allowance.

Loan Restructurings:

As of January 1, 2023, the Company adopted the accounting guidance in ASU 2022-02 which eliminates the recognition and measurement of trouble debt restructurings ("TDRs"). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is a principal forgiveness, interest rate reduction, other-than-insignificant payment delay, term extension, or combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

A loan that is considered a restructured loan may be subject to the individually evaluated loan analysis; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans refer to the Assets Recorded at Fair Value on a Nonrecurring Basis section of Note 7, Fair Value Measurement, in the Notes to Consolidated Financial Statements in Item I of this Quarterly Report on Form 10-Q.

Since the adoption of ASU 2022-02 and during the nine months ended September 30, 2023, the Company has modified one loan for a borrower experiencing financial difficulty. As of September 30, 2023 this loan had an outstanding balance of $667,515 and a specific reserve of $69,660.

Prior to our adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as TDRs.

The Company had identified six loans as TDRs prior to the adoption of ASU 2022-02. These loans had a total outstanding principal balance of $350,000 at the end of the third quarter of 2023. Two of these loans, totaling $54,000, were included in individually analyzed loans and were nonaccruing at September 30, 2023.

The Company offered various types of concessions when modifying a loan. Concessions made to the original contractual term of the loan typically consisted of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of the restructure, and there were no commitments to lend additional funds to the borrower during the nine months ended September 30, 2023 and 2022.

During the nine months ended September 30, 2022, the Company did not modify any loans as a TDR prior to the adoption of ASU 2022-02.

No loans were modified as a TDR prior to the adoption of ASU 2022-02 within the previous twelve months that subsequently defaulted during the nine months ended September 30, 2023 and 2022.

Credit Quality:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. The Company uses the following definitions for its risk ratings:

Special Mention. Evidence of financial deterioration exists, or file documentation is inadequate or not available to determine the borrower’s financial status or ability to repay. The loan possesses potential weakness which may, if not reversed or corrected, weaken the credit or inadequately protect the Company's position.

Substandard. A well-defined weakness or weaknesses exists that jeopardizes the liquidation of the debt. The loan is characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. All of the weaknesses of a substandard loan exist, with the added characteristic that the weaknesses jeopardize the collection and/or liquidation of the debt. Loss exposure, while evident, is not clearly determinable. Special workout negotiations and/or litigation should be initiated.

Loss. Considered uncollectible in full and of such little value that its continuance as a bankable asset is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. As of September 30, 2023 and December 31, 2022, and based on the most recent analysis performed, the risk category of loans by class of loans and origination year is as follows:


	Amortized cost basis by origination year
	2023		2022		2021		2020		2019		Prior		Revolving Loans		Total
September 30, 2023 -
Real estate loans:
Residential
Pass	$	10,376,119	$	56,856,848	$	23,873,130	$	14,322,600	$	6,231,585	$	32,158,303	$	1,166,823	$	144,985,408
Special Mention		—		—		—		—		—		—		—		-
Substandard		—		597,831		—		35,032		135,801		496,366		528,096		1,793,126
Total residential		10,376,119		57,454,679		23,873,130		14,357,632		6,367,386		32,654,669		1,694,919		146,778,534
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Home equity
Pass		—		—		—		—		—		—		11,280,203		11,280,203
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		29,078		29,078
Total home equity		—		—		—		—		—		—		11,309,281		11,309,281
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Multi-family
Pass		706,503		961,331		3,821,213		6,361,798		888,565		6,621,006		—		19,360,416
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total multi-family		706,503		961,331		3,821,213		6,361,798		888,565		6,621,006		—		19,360,416
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Commercial
Pass		17,866,788		15,522,348		24,536,650		13,779,824		19,959,901		20,890,263		53,945		112,609,719
Special Mention		—		—		—		—		—		3,847,743		—		3,847,743
Substandard		—		—		498,579		2,759,197		—		—		1,378,202		4,635,978
Total commercial		17,866,788		15,522,348		25,035,229		16,539,021		19,959,901		24,738,006		1,432,147		121,093,440
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Construction and land development
Pass		13,473,450		8,502,028		8,205,537		54,575		33,056		2,148,243		11,531,533		43,948,422
Special Mention		—		—		—		—				12,930		—		12,930
Substandard		—		39,707		—		—		—		56,741		—		96,448
Total construction and land development		13,473,450		8,541,735		8,205,537		54,575		33,056		2,217,914		11,531,533		44,057,800
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Total real estate loans		42,422,860		82,480,093		60,935,109		37,313,026		27,248,908		66,231,595		25,967,880		342,599,471
Consumer loans
Pass		202,438		348,084		73,254		54,153		49,213		27,308		37,966		792,416
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total consumer loans		202,438		348,084		73,254		54,153		49,213		27,308		37,966		792,416
YTD Gross Charge-offs		21,103		5,681		—		—		—		—		—		26,784
Commercial and industrial loans
Pass		1,578,963		3,088,946		1,467,802		1,622,480		366,406		997,940		2,435,989		11,558,526
Special Mention		304,957		—		2,689,228		—		—		—		—		2,994,185
Substandard		110,826		1,381,823		—		—		—		—		—		1,492,649
Total commercial and industrial loans		1,994,746		4,470,769		4,157,030		1,622,480		366,406		997,940		2,435,989		16,045,360
YTD Gross Charge-offs		—		77,940		—		—		—		—		—		77,940
	$	44,620,044	$	87,298,946	$	65,165,393	$	38,989,659	$	27,664,527	$	67,256,843	$	28,441,835	$	359,437,247
YTD Gross Charge-offs	$	21,103	$	83,621	$	—	$	—	$	—	$	—	$	—	$	104,724


	Amortized cost basis by origination year
	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
December 31, 2022 -
Real estate loans:
Residential
Pass	$	55,675,718	$	23,257,720	$	15,631,663	$	6,621,692	$	10,117,299	$	24,476,586	$	808,788	$	136,589,466
Special Mention		—		—		—		—		—		447,915		—		447,915
Substandard		—		—		35,877		148,167		—		1,054,498		—		1,238,542
Total residential		55,675,718		23,257,720		15,667,540		6,769,859		10,117,299		25,978,999		808,788		138,275,923
YTD Gross Charge-offs		—		—		—		—		—		2,842		—		2,842
Home equity
Pass		—		—		—		—		—		—		12,410,820		12,410,820
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total home equity		—		—		—		—		—		—		12,410,820		12,410,820
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Multi-family
Pass		981,012		3,980,555		6,502,688		1,144,252		824,352		6,216,632		—		19,649,491
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total multi-family		981,012		3,980,555		6,502,688		1,144,252		824,352		6,216,632		—		19,649,491
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Commercial
Pass		17,015,862		24,161,625		16,280,144		20,633,262		15,229,764		10,029,237		2,558,280		105,908,174
Special Mention		—		675,000		—		2,713,589		—		3,947,084		—		7,335,673
Substandard		—		57,000		2,808,743		—		—		—		—		2,865,743
Total commercial		17,015,862		24,893,625		19,088,887		23,346,851		15,229,764		13,976,321		2,558,280		116,109,590
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Construction and land development
Pass		8,154,115		10,736,254		58,143		37,012		208,365		1,152,037		8,187,617		28,533,543
Special Mention		—		—		—		—		—		20,263		—		20,263
Substandard		43,388		—		—		—		—		63,441		—		106,829
Total construction and land development		8,197,503		10,736,254		58,143		37,012		208,365		1,235,741		8,187,617		28,660,635
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
Total real estate loans		81,870,095		62,868,154		41,317,258		31,297,974		26,379,780		47,407,693		23,965,505		315,106,459
Consumer loans
Pass		483,151		93,947		92,795		98,284		13,238		28,939		36,363		846,717
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total consumer loans		483,151		93,947		92,795		98,284		13,238		28,939		36,363		846,717
YTD Gross Charge-offs		55,979		8,633		—		—		—		—		—		64,612
Commercial and industrial loans
Pass		5,392,327		4,836,577		1,846,412		587,718		879,754		566,733		9,534,905		23,644,426
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total commercial and industrial loans		5,392,327		4,836,577		1,846,412		587,718		879,754		566,733		9,534,905		23,644,426
YTD Gross Charge-offs		—		—		—		—		—		—		—		—
	$	87,745,573	$	67,798,678	$	43,256,465	$	31,983,976	$	27,272,772	$	48,003,365	$	33,536,773	$	339,597,602
YTD Gross Charge-offs	$	55,979	$	8,633	$	—	$	—	$	—	$	2,842	$	—	$	67,454

There were no loans classified in the "doubtful" or "loss" risk rating categories as of the periods ended September 30, 2023 and December 31, 2022.

NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

The following advances from the Federal Home Loan Bank ("FHLB") were outstanding as of September 30, 2023 and December 31, 2022:



Advance Date	Amount		Rate	Interest Rate			Maturity	Call Feature
September 30, 2023 -
May 16, 2023	$	5,000,000	Fixed		4.00	%	May 15, 2026	N/A
	$	5,000,000
December 31, 2022 -
November 18, 2022	$	11,000,000	Fixed		4.57	%	November 20, 2023	N/A
	$	11,000,000

The FHLB advances are collateralized by the Company's FHLB stock and a blanket lien on certain of the Company's residential and commercial real estate loans with a net collateral value of approximately $85.5 million and $56.4 million at September 30, 2023 and December 31, 2022, respectively. Given its pledged collateral position, the Company had approximately $80.5 million and $45.4 million in borrowing capacity with the FHLB at September 30, 2023 and December 31, 2022, respectively.

Unsecured federal funds lines of credit totaling $28.5 million were available to the Company for overnight borrowing through correspondent banks at both September 30, 2023 and December 31, 2022. The Company also had approximately $7.8 million and $5.8 million in available borrowing capacity through the Federal Reserve Bank of Atlanta at September 30, 2023 and December 31, 2022, respectively. There were no borrowings against these facilities at September 30, 2023 or December 31, 2022. The available borrowings with the Federal Reserve Bank are collateralized by a blanket lien on certain of the Bank’s residential and commercial real estate loans with a carrying value of approximately $10.7 million and $8.4 million at September 30, 2023 and December 31, 2022, respectively.

NOTE 5 - COMMITMENTS

Credit Related Financial Instruments:

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company's exposure to a credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. In most cases, the Company requires collateral or other security to support financial instruments with credit risk.


	September 30, 2023		December 31, 2022
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	51,414,000	$	49,189,000
Stand-by letters of credit	$	689,000	$	819,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation. Collateral held varies but may include unimproved and improved real estate, certificates of deposit, or personal property.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to businesses within the Company's trade area.

The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds real estate and assignments of deposit accounts as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held for these commitments at September 30, 2023 and December 31, 2022 varies.

We maintain an ACL on unfunded lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the ACL for loans, modified to take into account the probability of a drawdown on the commitment. The ACL on unfunded loan commitments is classified as a liability account on the balance sheet within other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The allowance for credit losses on unfunded commitments was $132,000 at September 30, 2023. Prior to January 1, 2023, we calculated allowance for losses on unfunded loan commitments using an incurred losses methodology.

NOTE 6 - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under certain adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In July 2013, the federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating components of capital and of computing risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions and, pursuant to the Federal Reserve Board’s policy statements, to top-tier bank and savings and loan holding companies with total consolidated assets of $3.0 billion or more. The rule established a new common equity Tier 1 minimum capital requirement, increased the minimum capital ratios and assigned a higher risk weight to certain assets based on the risk associated with these assets. The final rule included a transition period that implemented the new regulations over a five-year period. These changes were fully phased in on January 1, 2019.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total common equity Tier 1, total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of September 30, 2023 and December 31, 2022, that the Bank met all capital adequacy requirements to which it is subject.

As of September 30, 2023 and December 31, 2022, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum common equity Tier 1 risk-based, total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Bank’s actual capital amounts and ratios, and minimum amounts under current regulatory standards, as of September 30, 2023 and December 31, 2022, are presented in the following table:


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
September 30, 2023:
Common Equity Tier 1 Capital to Risk- Weighted Assets	$	68,011		20.63	%	$	14,832		4.50	%	$	21,424		6.50	%
Total Capital to Risk- Weighted Assets	$	72,139		21.89	%	$	26,368		8.00	%	$	32,960		10.00	%
Tier 1 Capital to Risk- Weighted Assets	$	68,011		20.63	%	$	19,776		6.00	%	$	26,368		8.00	%
Tier I Capital to Average Assets	$	68,011		15.72	%	$	17,304		4.00	%	$	21,630		5.00	%
December 31, 2022:
Common Equity Tier 1 Capital to Risk- Weighted Assets	$	67,153		21.32	%	$	14,172		4.50	%	$	20,470		6.50	%
Total Capital to Risk- Weighted Assets	$	71,094		22.57	%	$	25,194		8.00	%	$	31,492		10.00	%
Tier 1 Capital to Risk- Weighted Assets	$	67,153		21.32	%	$	18,895		6.00	%	$	25,194		8.00	%
Tier I Capital to Average Assets	$	67,153		16.22	%	$	16,558		4.00	%	$	20,697		5.00	%

NOTE 7 - FAIR VALUE MEASUREMENT

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as impaired loans and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Company groups assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Assets Recorded at Fair Value on a Recurring Basis. The table below presents the recorded amount of assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, all of which consisted of investment securities available-for-sale:


	Level 1		Level 2		Level 3		Total
September 30, 2023:
US treasuries	$	—	$	9,330,547	$	—	$	9,330,547
Mortgage-backed securities		—		8,224,295		—		8,224,295
Collateralized mortgage obligations		—		14,071,759		—		14,071,759
Municipal bonds		—		7,078,310		—		7,078,310
Corporate obligations		—		2,978,740		—		2,978,740
Investment securities available-for-sale	$	—	$	41,683,651	$	—	$	41,683,651
December 31, 2022:
US treasuries	$	—	$	9,324,532	$	—	$	9,324,532
Mortgage-backed securities		—		8,732,033		—		8,732,033
Collateralized mortgage obligations		—		14,844,030		—		14,844,030
Municipal bonds		—		7,028,911		—		7,028,911
Corporate obligations		—		3,167,046		—		3,167,046
Investment securities available-for-sale	$	—	$	43,096,552	$	—	$	43,096,552

Assets Recorded at Fair Value on a Nonrecurring Basis. The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of September 30, 2023 and December 31, 2022:


	Level 1		Level 2		Level 3		Total
September 30, 2023:
Other real estate owned	$	—	$	—	$	—	$	—
Individually evaluated loans		—		—		597,855		597,855
	$	—	$	—	$	597,855	$	597,855
December 31, 2022:
Other real estate owned	$	—	$	—	$	683,800	$	683,800
Impaired loans		—		—		—		—
	$	—	$	—	$	683,800	$	683,800

The following tables show significant unobservable inputs used in the fair value measurement of Level 3 assets:


	Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average Discount
September 30, 2023:
Other real estate owned	$	—	Third party appraisals and sales contracts	Collateral values, market discounts and estimated costs to sell		—
Individually evaluated loans	$	597,855	Third party appraisals and discounted cash flows	Collateral values, market discounts and estimated costs to sell		10	%



December 31, 2022:
Other real estate owned	$	683,800	Third party appraisals and sales contracts	Collateral values, market discounts and estimated costs to sell		52	%
Impaired loans	$	—	Third party appraisals and discounted cash flows	Collateral values, market discounts and estimated costs to sell		—

The following methods and assumptions were used to estimate the fair value of each class of assets and liabilities either recorded or disclosed at fair value.

Cash and Cash Equivalents. The carrying value of cash and cash equivalents is a reasonable estimate of fair value.

Certificates of deposit with other banks. The carrying value of certificates of deposit with other banks is a reasonable estimate of fair value.

Investment Securities Available-for-Sale. Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter market funds. Level 2 securities include mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises and state, county and municipal bonds. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Other Investments. Other investments consist of FHLB and Federal Reserve Bank stock whose carrying value approximates its fair value.

Mortgage Loans Held for Sale. The estimated fair value of mortgage loans held for sale, classified within Level 2, is approximated by the carrying value, given the short-term nature of the loans and similarly to what secondary markets are currently offering for portfolios of loans with similar characteristics.

Loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allocation is established within the allowance for credit losses. Loans for which it is probable that payment of interest and/or principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of three methods, including collateral value, market value of similar debt, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans in which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is utilized or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Other Real Estate Owned. Other real estate owned properties are adjusted to fair value less estimated selling costs upon transfer of the loans to other real estate owned. Subsequently, other real estate owned assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value is based on an observable market price, the Company records the other real estate owned as nonrecurring Level 2. When the fair value is based on an appraised value, or when an appraised value is not available, the Company records the other real estate owned asset as nonrecurring Level 3.

Bank Owned Life Insurance. The carrying value of Bank Owned Life Insurance approximates fair value.

Commitments to Extend Credit. Commitments to extend credit are short-term and, therefore, the carrying value and the fair value are considered immaterial for disclosure.

Deposits. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of savings accounts approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected maturities of time deposits.

Federal Home Loan Bank Advances. Federal Home Loan Bank advances are carried at cost and the fair value is obtained from the Federal Home Loan Bank of Atlanta.

The carrying amounts and estimated fair values of the Bank’s financial instruments as of September 30, 2023 and December 31, 2022 are as follows:


			Fair Value Measurements at September 30, 2023
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	17,219,418	$	17,219,418	$	17,219,418	$	—	$	—
Certificates of deposit with other banks		992,000		992,000		992,000		—		—
Investment securities available-for-sale		41,683,651		41,683,651		—		41,683,651		—
Other investments		1,295,650		1,295,650		—		1,295,650		—
Mortgage loans held for sale		201,285		201,285		—		201,285		—
Loans, net		353,588,348		334,359,651		—		—		334,359,651
Bank owned life insurance		11,655,587		11,655,587		11,655,587		—		—
Financial liabilities:
Deposits		347,168,011		346,180,905		251,714,239		—		94,466,666
FHLB advances		5,000,000		4,916,414		—		—		4,916,414


			Fair Value Measurements at December 31, 2022
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	25,545,872	$	25,545,872	$	25,545,872	$	—	$	—
Certificates of deposit with other banks		1,739,000		1,739,000		1,739,000		—		—
Investment securities available-for-sale		43,096,552		43,096,552		—		43,096,552		—
Other investments		1,377,500		1,377,500		—		1,377,500		—
Mortgage loans held for sale		2,085,099		2,085,099		—		2,085,099		—
Loans, net		334,138,871		318,195,000		—		—		318,195,000
Bank owned life insurance		11,442,653		11,442,653		11,442,653		—		—
Financial liabilities:
Deposits		329,128,253		327,436,855		239,622,855		—		87,814,000
FHLB advances		11,000,000		10,953,000		—		—		10,953,000

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

NOTE 8 – SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE

Shareholders' Equity:

On August 4, 2022, the Company announced the first of two programs to repurchase up to 250,000 shares of the Company's common stock. The second repurchase program was announced on June 27, 2023. Shares may be repurchased on the open market or through private transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The timing and amount of repurchases depends on a number of factors including the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company's financial performance. During 2022, 75,172 shares of the Company's common stock had been repurchased at an average price of $14.44. During the first nine months of 2023, an additional 304,558 shares of the Company's common stock have been repurchased at an average price of $14.45 and subsequently retired prior to September 30, 2023. Additionally, during the six month period ending June 30, 2023, the Company retired the 75,172 shares previously repurchased during 2022 that were held in treasury stock as of December 31, 2022.

Earnings per share:

Earnings per common share was computed based on the following:


	Three months ended September 30,					Nine months ended September 30,
	2023			2022		2023		2022

Numerator:
(Loss) Income applicable to common shares	$	(94,587	)	$	703,018	$	384,152	$	1,993,407
Denominator:
Weighted average common shares outstanding		4,730,279			4,870,692		4,858,160		4,889,131
Effect of dilutive securities:
Restricted stock		—			—		12,146		—
Stock options		—			—		—		—
Weighted average common shares outstanding - assuming dilution		4,730,279			4,870,692		4,870,306		4,889,131
(Loss) Earnings per common share	$	(0.02	)	$	0.14	$	0.08	$	0.41
(Loss) Earnings per common share - assuming dilution	$	(0.02	)	$	0.14	$	0.08	$	0.41

No options were deemed dilutive as the exercise price exceeded the market price as of the close of market on September 30, 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

This discussion and analysis reflects our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the accompanying unaudited financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains certain forward-looking statements, which are included pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available. These forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “potential,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans, prospects, growth and operating strategies;

•

statements regarding the quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

•

our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry;

•

the continuing effects of the COVID-19 pandemic on our business, customers, employees and third-party service providers;

•

general economic conditions, either nationally or in our market areas, that are worse than expected;

•

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, including after implementation of the credit impairment model for Current Expected Credit Losses ("CECL");

•

our ability to access cost-effective funding;

•

fluctuations in real estate values and both residential and commercial real estate market conditions;

•

demand for loans and deposits in our market area;

•

our ability to implement and change our business strategies;

•

competition among depository and other financial institutions;

•

inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

•

adverse changes in the securities or secondary mortgage markets;

•

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

•

changes to statutes, regulations or regulatory policies or practices;

•

our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we operate;

•

the impact of the Dodd-Frank Act and the implementing regulations;

•

changes in the quality or composition of our loan or investment portfolios;

•

changes in consumer spending and saving habits;

•

the effects of harsh weather conditions, including hurricanes, and man-made disasters;

•

technological changes that may be more difficult or expensive than expected;

•

the inability of third party providers to perform as expected;

•

the efficiency and effectiveness of our internal control environment;

•

our ability to manage market risk, credit risk, interest rate risk, liquidity risk and operational risk in the current economic environment;

•

the soundness of other financial institutions;

•

our ability to enter new markets successfully and capitalize on growth opportunities;

•

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC or the Public Company Accounting Oversight Board;

•

our ability to retain key employees;

•

our management team’s ability to focus primarily on the operation of our business rather than diversion of management attention to responses to the COVID-19 pandemic;

•

our compensation expense associated with equity allocated or awarded to our employees;

•

changes in the financial condition, results of operations or future prospects of issuers of securities that we own,

•

the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers' supply chains or disruptions in transportation; and

•

each of the factors and risks under the heading "Risk Factors" in the Company's 2022 Annual Report on Form 10-K and in subsequent filings we make with the SEC.

We caution readers that the foregoing list of factors is not exclusive, is not necessarily in order of importance and readers should not place undue reliance on any forward-looking statements. Because the Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements. Additionally, all statements in this Quarterly Report on Form10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events, except as required by applicable law.

Critical Accounting Estimates

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the U.S. and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in Note 1 to our Consolidated Financial Statements as of December 31, 2022.

Certain accounting policies inherently involve a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported, which could have a material impact on the carrying values of our assets and liabilities and our results of operations. We consider these accounting policies and estimates to be critical accounting policies. We have identified the determination of the allowance for credit losses and income taxes to be our significant accounting policies that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates.

The following represent our significant accounting policies:

Loans and Allowance for Credit Losses (ACL). Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for credit losses. Interest on loans is recognized using the simple-interest method on the daily balances of the principal amount outstanding. Fees associated with the origination of loans and certain direct loan origination costs are netted and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. A loan may continue to accrue interest, even if it is more than 90 days past due, if the loan is both well collateralized and it is in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured in accordance with the terms of the loan agreement.

The Company adopted ASU 2016-13 on January 1, 2023, which introduced the CECL methodology for estimating all expected losses over the life of a financial asset (See footnote 1 General: Basis of Presentation). The allowance for credit losses 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. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Recoveries will not exceed the aggregate of loan amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We use the weighted-average remaining maturity method ("WARM") as the basis for the estimation of expected credit losses. The WARM method uses historical average annual charge-off rates. The average annual charge-off rate contains loss content over a historical lookback period and is used as a foundation for estimating the credit loss reserve for the remaining outstanding balances of loans in a pool or segment of our loan portfolio at the balance sheet date. The average annual charge-off rate is applied to the contractual term, further adjusted for estimated prepayments, to determine the unadjusted historical charge-off rate. The calculation of the unadjusted historical charge-off rate is then adjusted for current conditions and for reasonable and supportable forecast periods. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions.

In general, the loans in our portfolio have low historical credit losses. The credit quality of loans in our portfolio is impacted by delinquency status and debt service coverage generated by our borrowers' businesses and fluctuations in the value of real estate collateral. Management considers delinquency status to be the most meaningful indicator of the credit quality of one-to-four single family residential, home equity loans and lines of credit and other consumer loans. In general, these types of loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as "seasoning." As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. We consider the majority of our consumer type loans to be "seasoned" and that the credit quality and current level of delinquencies and defaults represents the level of reserve needed in the allowance for credit losses. If delinquencies and defaults were to increase, we may be required to increase our provision for loan credit losses, which would adversely affect our results of operations and financial condition. Delinquency statistics are updated at least monthly.

Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial and industrial, construction, and commercial real estate loans. Internal risk ratings are a key factor that impact management's estimates of loss factors used in determining the amount of the allowance for credit losses. Internal risk ratings are updated on a continuous basis.

Loans with unique risk characteristics are evaluated on an individual basis. Loan evaluated individually are also not included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

For off-balance sheet credit exposures, we estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

We review each loan restructuring and determine on a case by case basis if the loan can be grouped with its like segment for allowance consideration or whether it should be individually evaluated for specific allowance for credit loss allocation. If individually evaluated, an allowance for credit loss allocation is based on changes in the discounted cash flows resulting from the modification of the restructured loan.

We have certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approved these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential loan problems. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial and industrial loans are underwritten after evaluation and understanding the borrower's ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial and industrial loans are secured by the assets being finance or other business assets, such as accounts receivable or inventory, and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial and industrial loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate collateral. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real estate portfolio are generally diverse in terms of type and geographic location throughout primarily the states of Georgia and Florida. This diversity helps us reduce the exposure to adverse economic events that affect any single market or industry.

We utilize methodical credit standards and analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy addresses types of consumer loans that may be originated as well as the underlying collateral, if secured, which must be perfected. The relatively small individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes risk.

Marketable Securities. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Management determines the appropriate classification of securities at the time of purchase. Interest income includes amortization and accretion of purchase premiums and discounts. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

For available-for-sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized costs basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized costs basis is written down to fair value through income. For securities available for sale that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized costs basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized as other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for (or reversal) of credit losses expense. Losses are charged against the allowance when management believes the uncollectability of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Income Taxes. The assessment of income tax assets and liabilities involves the use of estimates, assumptions, interpretation, and judgment concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the results of operations and reported earnings.

We file federal and state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax law rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income tax expense. Valuation allowances are established when it is more likely than not that a portion of the full amount of the deferred tax asset

will not be realized. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. We may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Penalties related to unrecognized tax benefits are classified as income tax expense.

Recent Banking Events

There have been three significant bank failures that have taken place during the first half of 2023. These failures were primarily due to these banks' lack of liquidity as depositors sought to withdraw their funds. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of these bank closures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators have announced that any losses to the Deposit Insurance Fund to support uninsured deposits will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments. Additionally, the Federal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize the need for banks to sell securities at a loss in times of stress. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time.

Overview

The Company is a full service community bank that provides a variety of financial products and services to consumers and commercial customers in our market areas. Our business consists primarily of utilizing customer deposits, together with funds generated from our operations, to fund commercial and consumer loans in our footprint. As of September 30, 2023, we had total assets of $439.9 million, loans, net of the allowance for credit losses and deferred fees of $353.6 million, total deposits of $347.2 million and total equity of $81.1 million. During 2019, the Bank elected to be treated as a “covered savings association” which allows us to engage in the same activities as a national bank.

Our primary deposit products are personal checking accounts, business checking accounts, savings accounts, money market accounts and certificates of deposit. Our lending products include single-family residential loans, construction loans, land development loans and SBA/USDA guaranteed loans.

We expect to continue to focus on originating one-to-four-family residential real estate loans, commercial and multi-family residential real estate loans, commercial and industrial loans, construction and land development loans and consumer loans. Although in recent years we have increased our focus, with what we believe to be conservative underwriting standards, on originating commercial real estate and commercial and industrial loans. In recent years, we have originated single-family owner-occupied loans for sale into the secondary market and for our own portfolio. We intend to continue this activity in the future as a source of fee income, but at a reduced level from prior periods.

In addition to lending, we also invest in securities. The Company's investment portfolio consists primarily of securities issued by the U.S. Treasury or U.S. government sponsored agencies.

As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which can result in interest expense increasing more rapidly than increases in interest income as market rates increase. Therefore, increases in interest rates may adversely affect our net interest income and net economic value, which in turn would likely have an adverse effect on our results of operations. To help manage our balance sheet and our interest rate risk position we continue to focus on promoting our core deposit products, as well as building a more diversified loan portfolio. We believe that the addition of our two recently opened full service branches in Savannah, Georgia and Jacksonville, Florida are significant strides forward, supporting the Company's path towards achieving these objectives.

Comparison of Financial Condition at September 30, 2023 and December 31, 2022

Total Assets. Total assets increased $10.3 million to $439.9 million at September 30, 2023 from $429.6 million at December 31, 2022. The increase was principally due to loan growth during the period, funded with dollars from an expanding customer deposit base. The Company's cash position was lower at the end of the third quarter of 2023 relative to year-end 2022 as excess liquidity was used to payoff FHLB advances, as well as support a $1.8 million increase in premises and equipment associated with establishment of our two new branch locations in Savannah, GA, and Jacksonville, FL.

Cash and Cash Equivalents. Cash and cash equivalents decreased $8.3 million to $17.2 million at September 30, 2023, compared to $25.5 million at December 31, 2022. The decrease is primarily attributable to utilizing excess liquidity to fund loan growth, to pay down FHLB advances, and to repurchase shares during the period.

Total Loans. Loans totaled $358.3 million at September 30, 2023, an increase of $19.8 million from the December 31, 2022, level of $338.5 million. Loans secured by real estate grew $27.5 million, or 8.7%, during the first nine months of 2023. Residential real estate loans grew $8.5 million, or 6.2%, to $146.8 million at September 30, 2023, from $138.3 million at December 31, 2022 due to new loan originations. Construction and land development loans increased $15.4 million, or 53.7%, to $44.1 million at September 30, 2023, from $28.7 million at December 31, 2022. Commercial real estate loans increased $5.0 million, or 4.3%, to $121.1 million at September 30, 2023 from $116.1 million at December 31, 2022. Multi-family real estate loans decreased $289,000, or 1.5%, to $19.3 million at September 30, 2023, from $19.6 million at December 31, 2022. Home equity loans also decreased $1.1 million, or 8.9%, to $11.3 million at September 30, 2023, from $12.4 million at December 31, 2022.

Commercial and industrial loans decreased $7.6 million, or 32.1%, to $16.0 million at September 30, 2023 from $23.6 million at December 31, 2022, as our largest loan of $6.5 million was paid off during the nine month period ended September 30, 2023.

Allowances for Credit Losses. The amount of our allowance for credit losses is based on management's evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for individually evaluated loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable loan losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan credit losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to individually evaluated loans are charged or credited to the provision for loan losses.

During the nine months ended September 30, 2023, 24 loans totaling $4.6 million were downgraded from pass to substandard, and two loans that were classified as substandard, totaling $692,000, were paid off. Two of the loans that were downgraded, totaling $1.1 million, are to a single relationship in the Tallahassee market. In addition, 18 loans that were downgraded, totaling $2.7 million, are to a single relationship in the Jacksonville market.

The Company had 10 individually evaluated loans totaling $1.1 million at September 30, 2023 compared to 15 impaired loans totaling $1.1 million at December 31, 2022. At September 30, 2023, there were $69,660 of specific reserves for a single loan relationship and a $6,000 unallocated allowance. We had net recoveries of $36,000 during the nine months ended September 30, 2023, compared to net recoveries of $55,000 for the nine months ended September 30, 2022.

Effective January 1, 2023, CECL was implemented which resulted in a $255,000 increase in the allowance for credit losses and a decrease in retained earnings. Provision for loan credit losses of $18,000 was recorded for the nine months ended September 30, 2023 and $98,000 of provisions were recorded for the nine months ended September 30, 2022. In addition, effective January 1, 2023, a liability account for unfunded loan commitment credit losses of $149,000 was established which also decreased retained earnings. A reversal of unfunded loan commitment credit losses of $17,000 was recorded for the nine months ended September 30, 2023.

Management believes that the allowance for credit losses, which was $4.7 million, or 1.30% of loans, at September 30, 2023, and the $132,000 allowance for unfunded commitments, which represents 0.25% of available credit lines, are adequate to cover inherent losses in these portfolios.

Investment Securities. Available-for-sale investment securities decreased $1.4 million, or 3.3%, to $41.7 million at September 30, 2023 from $43.1 million at December 31, 2022. This decrease was primarily due to $1.1 million of paydowns on our mortgage-backed securities, coupled with net amortization of $183,000 of premiums paid and an additional $145,000 of unrealized losses in the portfolio. Unrealized losses on our investments increased to $4.9 million at September 30, 2023, from $4.7 million at December 31, 2022. The change unrealized losses was due to a change in market interest rates.

Premises and equipment, net. Net premises and equipment increased $1.8 million, or 55.9%, to $4.9 million at September 30, 2023 from $3.1 million at December 31, 2022. This increase is primarily attributable to leasehold improvements and new equipment purchased for our two new branches located in Savannah, GA and Jacksonville, FL. Additional capitalized expenses associated with the build out of these properties were approximately $1.8 million at September 30, 2023, and $17,000 at December 31, 2022.

Right-of-use asset. In 2023, the Company entered into leases to establish retail branches in Savannah, GA, and Jacksonville, FL. These leases were capitalized for $1.9 million, and are being amortized over a ten year period. The new branch in Savannah, GA, opened in May 2023, and the branch in Jacksonville, FL, opened in June 2023. In addition, during the third quarter of 2023, the Company entered into a new lease for a loan production office in Tallahassee, FL. The initial right-of-use asset associated with this new location was $145,000 and is being amortized over a three year period.

Other Real Estate Owned. Other real estate owned decreased from $684,000 as of December 31, 2022, to zero at the end of the third quarter of 2023 as both properties held in this category at year-end were sold during the period, resulting in a net pre-tax loss of $31,000 for the nine months ended September 30, 2023.

Bank Owned Life Insurance. Our investment in bank owned life insurance increased $213,000, or 1.9%, to $11.6 million at September 30, 2023 from $11.4 million at December 31, 2022. The income generated from these investments provides the Company with support to offer competitive benefits, assisting us in attracting and retaining talented employees.

Deposits. Total deposits increased $18.0 million, or 5.5%, to $347.1 million at September 30, 2023 from $329.1 million at December 31, 2022. Certificates of deposit increased $5.9 million, or 6.6%, to $95.4 million at September 30, 2023, from $89.5 million at December 31, 2022. Non-interest-bearing demand accounts increased $6.4 million, or 16.1%, to $45.8 million at September 30, 2023, from $39.4 million at December 31, 2022. Interest-bearing demand accounts decreased $9.0 million, or 15.5%, to $49.1 million at September 30, 2023, from $58.1 million at December 31, 2022. Savings and money market accounts grew $14.7 million, or 10.4%, to $156.8 million at September 30, 2023 from $142.1 million at December 31, 2022.

Lease Liability. In 2023, as noted earlier, the Company entered into leases to establish retail branches in Savannah, GA, and Jacksonville, FL as well as a loan production office in Tallahassee, FL. The lease liability capitalized in associated with these properties totaled $2.1 million as of September 30, 2023.

Accrued interest payable and other liabilities. Accrued interest payable and other liabilities increased $240,000, or 5.7%, to $4.4 million at September 30, 2023, from $4.2 million at December 31, 2022. Of this change, $132,000 is due to the new allowance for unfunded commitments associated with the adoption of CECL. Other changes included accruals for various incentive plans established to attract and retain our employees, as well as a payable of $252,000 for the cash dividend declared in December of 2022, that was paid to shareholders in January of 2023.

Shareholders’ Equity. Total shareholders' equity decreased $4.1 million, or 4.9%, to $81.1 million at September 30, 2023 from $85.3 million at December 31, 2022. The decrease resulted primarily from $4.4 million of shares repurchased during the first nine months of 2023. Also, in June the Company declared a $0.05 cash dividend payable on July 21, to shareholders of record on July 7, 2023. In addition, with the adoption of CECL, the Company made an adjustment to its allowances for loan and unfunded commitments which resulted in a $303,000 decrease to retained earnings with its implementation on January 1, 2023. In addition, with an increase in interest rates, the Company has incurred an additional $145,000 of unrealized losses associated with our AFS investment portfolio. These reductions to capital were partially offset by $384,000 of net income realized during the first nine months of 2023.

Comparison of Operating Results for the Three Months Ended September 30, 2023 and 2022

General. The Company experienced a net loss of $95,000 during the three months ended September 30, 2023. These results were below that of the $703,000 of net income, or $0.14 of earnings per basic common share, that the Company realized during the same three month time period one year prior. The $798,000 year over year decrease in earnings resulted primarily from a $485,000 increase in operating expenses, coupled with a $429,000 decrease in net interest income and a $160,000 decrease in fees from the sale of mortgage loans.

Interest Income. Interest and dividend income increased $1.1 million, or 28.1%, to $5.2 million for the three months ended September 30, 2023 from $4.1 million for the three months ended September 30, 2022. This increase was primarily due to increases in interest rates relative to one year ago, coupled with growth in our earning asset base as well as a change in our earning asset mix, as higher yielding loans became a larger portion of our average earning assets. Interest income from the loan portfolio grew $874,000, or 24.0%, versus that of the same three month period one year ago. Other increases included interest and dividends on investment securities of $181,000, and interest on deposits with other banks and federal funds sold, which rose $83,000. The average balance of loans, including loans held for sale, increased $31.4 million, or 10.0%, to $346.0 million for the three months ended September 30, 2023, from $314.6 million for the three months ended September 30, 2022, and the average yield on loans increased to 5.18% for the three months ended September 30, 2023 from 4.59% for three months ended September 30, 2022. As a result of this loan growth, the portfolio represented 83.2% of average earning assets for the third quarter of 2023, versus 79.5% for the same three month period one year ago. The average balance of available-for-sale securities decreased $2.6 million, or 5.3% to $46.8 million for the three months ended September 30, 2023, from $49.4 million for the three months ended September 30, 2022, while the average yield on the portfolio increased 149 basis points to 3.30% for the three months ended September 30, 2023, from 1.81% for the three months ended September 30, 2022. The average balance of interest-earning deposits decreased $9.2 million, or 29.8%, to $21.7 million for the three months ended September 30, 2023, from $30.9 million for the three months ended September 30, 2022, while the average yield on interest-earning deposits increased 249 basis points to 4.80% for the three months ended September 30, 2023, from 2.31% for the three months ended September 30, 2022.

Interest Expense. Total interest expense increased $1.6 million, or 552.4%, to $1.9 million for the three months ended September 30, 2023 from $284,000 for the three months ended September 30, 2022. The increase was primarily due to the federal funds rate increasing 375 basis points to 5.50% as of September 30, 2023, from 1.75% on July 1, 2022. As a result of this rapid rise in interest rates, in order to attract and retain deposits, we have offered increased rates to customers primarily on our money market and certificate of deposit products. This has resulted in depositors shifting funds from lower cost accounts, into higher yielding products. As a consequence, the average balance of interest-bearing deposits increased $19.0 million, or 6.9%, to $293.8 million for the three months ended September 30, 2023, from $274.8 million for the three months ended September 30, 2022, with a 202 basis point increase in the average cost of interest-bearing deposits to 2.43% for the three months ended September 30, 2023, from 0.41% for the three months ended September 30, 2022. The average balance of FHLB advances increased to $5.0 million for the three months ended September 30, 2023 and there were no FHLB advances outstanding for the three months ended September 30, 2022. For the three months ended September 30, 2023, the average cost of FHLB advances was 3.99%.

Net Interest Income. Net interest income decreased by $429,000, or 11.4%, to $3.3 million for the three months ended September 30, 2023 from $3.8 million for the three months ended September 30, 2022. While the relatively recent rise in market interest rates benefited our earning assets, it has hampered our cost of funding. The decrease in our net interest income was primarily due to the change in the level of interest rates paid to our deposit customers to attract and retain their funds. The pace of change in our cost of funds surpassed the increased yields the Company was able to obtain on its interest-earning asset base as our loan portfolio did not reprice at the same velocity as our that of our deposit base. The cost of our average interest bearing deposits increased 202 basis points when comparing the third quarter of 2023 to that of the same three month period one year ago. In comparison, the increase in the yield of our average interest earning assets increased 89 basis points when comparing these same two quarterly periods. In addition to the rise in interest rates, we experienced a shift in the mix of our deposit base as customers migrated their funds to higher yielding money market and certificate of deposit products. Further, enhanced with the opening of two new branch locations, the growth of our interest bearing liabilities out paced the growth of that of our interest bearing assets. Total average interest earning assets grew $19.9 million when comparing the third quarter of 2023 to that of the same quarter one year ago. Over this same time horizon the Company grew its average interest bearing liabilities $24.1 million.

As a result of the above, our interest rate spread decreased to 2.49% for the three months ended September 30, 2023 from 3.65% for the three months ended September 30, 2022, while our net interest margin fell 59 basis points to 3.18% for the three months ended September 30, 2023 from 3.77% for the three months ended September 30, 2022.

Provision for Credit Losses. No provisions for loan credit losses were recorded during the third quarter of 2023, while $38,000 of provisions were booked for the three months ended September 30, 2022. We reversed $15,000 out of our allowance for unfunded loan commitments (which is included in other expenses) during the three months ended September 30, 2023. The Company did not have a separate provision for unfunded commitments prior to January of 2023. Provisions for loan credit losses are charged to operations to establish an allowance for credit losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for credit losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See the section entitled "Allowance for Credit Losses" in this Item 2, and Note 3 of the Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

The allowance for credit losses was $4.7 million, or 1.30% of total loans, at September 30, 2023, and $4.4 million, or 1.29% of total loans, at December 31, 2022, and $4.3 million, or 1.37% of total loans, at September 30, 2022. Classified (substandard, doubtful and loss) loans increased to $8.0 million at September 30, 2023 compared to $4.2 million at December 31, 2022 and September 30, 2022. We had $907,000 of nonperforming loans at September 30, 2023, compared to $554,000 at December 31, 2022 and $524,000 at September 30, 2022. Net recoveries for the three months ended September 30, 2023 and 2022 were $29,000 and $27,000, respectively. We had no loans in deferral at September 30, 2023, or December 31, 2022. In addition, the unfunded loan commitment credit loss liability was $132,000 at September 30, 2023, or 0.25% of our outstanding unfunded loan commitments of $52.1 million.

Other Income. Other income information is as follows.


	For the three months ended September 30,				Change
	2023		2022		Amount			Percent
	(Dollars in thousands)
Service charges on deposit accounts	$	149	$	150	$	(1	)		(0.7	)	%
Gain on sale of loans		59		219		(160	)		(73.1	)
Other		76		79		(3	)		(3.8	)
Total non-interest income	$	284	$	448	$	(164	)		(36.6	)	%

Other income decreased $164,000, or 36.7%, to $284,000 for the three months ended September 30, 2023 from $448,000 for the three months ended September 30, 2022. The decrease was primarily due to a $160,000 decrease in income from the sale of mortgage loans into the secondary market to $59,000 for the three months ended September 30, 2023, compared to $219,000 for the three months ended September 30, 2022. This decrease is primarily due to the decrease in the volume of mortgage loan refinancings and home purchases sold into the secondary market as interest rates have increased since December 31, 2022. As a result of the challenges posed in the mortgage industry, the Company has reduced its level of resources committed to this product line and therefore we do not anticipate our income from the sale of mortgage loans into the secondary market going forward to reach the same levels as posted in prior periods.

Other Expense. Other expense information is as follows.


	For the three months ended September 30,				Change
	2023		2022		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	2,258	$	1,928	$	330			17.1		%
Occupancy and equipment		366		214		152			71.0
Advertising		107		71		36			50.7
Audit and examination		129		125		4			3.2
Checking account related expenses		29		28		1			3.6
Consulting and advisory fees		26		24		2			8.3
Data processing fees		85		114		(29	)		(25.4	)
Director fees		100		62		38			61.3
Legal		37		131		(94	)		(71.8	)
Insurance		55		46		9			19.6
Other real estate loss/(gain) on sale and write-downs		-		27		(27	)		(100.0	)
Other		550		487		63			12.9
Total non-interest expense	$	3,742	$	3,257	$	485			14.9		%

Other expense increased $485,000, or 14.9%, to $3.7 million for the three months ended September 30, 2023, from $3.2 million for the three months ended September 30, 2022. The increase was due primarily to a $330,000 increase in salaries and employee benefits. The bulk of this increase is due to the implementation of the 2022 Equity Incentive Plan approved by the shareholders in September 2022. Expenses associated with stock options and restricted stock awards for employees totaled $82,000 for the three months ended September 30, 2023. Also, contributing to the increase in salaries and benefits was staff hired in conjunction with the opening of our two new branches located in Savannah, GA, and Jacksonville, FL. With these two new branch facilities the Company has also increased its baseline of occupancy and equipment expenses. The costs related to occupancy and equipment for the three month period ended September 30, 2023, was $366,000, an increase of $152,000, or 71.0%, when compared to the same three month period one year prior. Given the addition of two new branch facilities we anticipate that our noninterest expenses will remain at levels above those of prior periods. However, we also anticipate that as these new branches grow their customer base in these highly attractive markets, that the rewards of higher revenues will be realized in future periods. During 2023, the Company has been able to reduce its legal expenses. Legal fees decreased $94,000, or 71.8%, to $37,000 for the three months ended September 30, 2023 from $131,000 for the three months ended September 30, 2022.

Income Tax Expense. The Company had an income tax benefit of $29,000 for the three months ended September 30, 2023, compared to $212,000 of income tax expense for the three months ended September 30, 2022. This change resulted from the $1.0 million decrease in income before taxes for the comparable three month periods. For the three months ended September 30, 2023, the loss before taxes was $124,000, compared to $915,000 of income for the three months ended September 30, 2022. Our effective tax rate was 23.8% for the three months ended September 30, 2023 and 23.2% for the three months ended September 30, 2022.

Average Balances, Interest and Average Yields/Cost

The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material. No tax-equivalent yield adjustments have been made, as the effects would be immaterial.


	For the quarter ended September 30,
	2023								2022
	Average			Interest		Average			Average			Interest		Average
	Balance			Earned/		Yield/			Balance			Earned/		Yield/
	Outstanding			Paid		Rate			Outstanding			Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	346,038		$	4,515		5.18	%	$	314,600		$	3,641		4.59	%
Securities available-for-sale		46,762			386		3.30	%		49,371			223		1.81	%
Interest-earning deposits		21,718			263		4.80	%		30,959			180		2.31	%
Other investments		1,221			21		6.88	%		926			2		0.86	%
Total interest-earning assets		415,739		$	5,185		4.95	%		395,856		$	4,046		4.06	%
Non-interest-earning assets		17,536								17,180
Total assets	$	433,275							$	413,036
Interest-bearing liabilities:
Savings and money market accounts	$	148,622		$	949		2.53	%	$	141,282		$	168		0.47	%
Interest-bearing checking accounts		50,277			66		0.52	%		58,254			17		0.12	%
Certificate accounts		94,933			785		3.28	%		75,221			98		0.52	%
Total interest-bearing deposits		293,832			1,800		2.43	%		274,757			283		0.41	%
Borrowings		5,000			51		3.99	%		—			—		—	%
Total interest-bearing liabilities		298,832			1,851		2.46	%		274,757			283		0.41	%
Non-interest-bearing liabilities		52,204								52,577
Total liabilities		351,036								327,334
Total equity		82,239								85,702
Total liabilities and equity	$	433,275							$	413,036
Net interest income				$	3,334							$	3,763
Net earning assets	$	116,907							$	121,099
Net interest rate spread(1)							2.49	%							3.65	%
Net interest margin(2)							3.18	%							3.77	%
Average interest-earning assets to average interest-bearing liabilities		139.12	%							144.07	%

(1)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.


	Quarter Ended
	September 30,
	2023 vs. 2022
	Increase/
	(decrease)					Total
	due to					increase/
	Volume			Rate		(decrease)
	(In thousands)
Interest-earning assets:
Loans receivable	$	116		$	757	$	873
Securities available for sale		(10	)		172		162
Interest-earning deposits		(14	)		98		84
Other investments		1			18		19
Total interest-earning assets		93			1,045		1,138
Interest-bearing liabilities:
Savings and money market accounts		2			779		781
Interest-bearing checking accounts		(3	)		51		48
Certificate accounts		489			198		687
Total interest-bearing deposits		488			1,028		1,516
Borrowings		51					51
Total interest-bearing liabilities		539			1,028		1,567
Change in net interest income	$	(446	)	$	17	$	(429	)

Comparison of Operating Results for the Nine Months Ended September 30, 2023 and 2022

General. The Company generated $384,000 of net income, or $0.08 of earnings per basic common share, during the nine months ended September 30, 2023. These results were below that of the $2.0 million of net income, or $0.41 of earnings per basic common share, that the Company earned during the same nine month time period one year prior. The $1.6 million, or 80.7%, year over year decrease in net income resulted primarily from a $1.7 million increase in other operating expenses and a $711,000 decrease in fees from the sale of mortgage loans, which was partially offset by a $224,000 increase in net interest income.

Interest Income. Interest and dividend income increased $4.2 million, or 38.8%, to $15.2 million for the nine months ended September 30, 2023 from $11.0 million for the nine months ended September 30, 2022. This increase was due the combination of increases in interest rates relative to one year ago, coupled with a shift in our earning asset mix, as higher yielding loans became a larger portion of our average earning assets. Interest income from our loan portfolio rose $3.2 million, or 31.8%, as well as increases in interest and dividends on investment securities of $572,000 and interest on deposits with other banks and federal funds sold of $486,000. The average balance of loans, including loans held for sale, increased $50.0 million, or 17.0%, to $343.6 million for the nine months ended September 30, 2023, from $293.6 million for the nine months ended September 30, 2022, and the average yield on loans increased to 5.15% for the nine months ended September 30, 2023 from 4.58% for nine months ended September 30, 2022. The average balance of our AFS securities portfolio decreased $1.4 million, or 2.8%, to $47.3 million for the nine months ended September 30, 2023, from $48.6 million for the nine months ended September 30, 2022, while the average yield on these investment securities increased 154 basis points to 3.07% for the nine months ended September 30, 2023, from 1.53% for the nine months ended September 30, 2022. The average balance of interest-earning deposits decreased $19.2 million, or 44.2%, to $24.2 million for the nine months ended September 30, 2023, from $43.4 million for the nine months ended September 30, 2022, while the average yield on interest-earning deposits increased 355 basis points to 4.65% for the nine months ended September 30, 2023, from 1.10% for the nine months ended September 30, 2022.

Interest Expense. Total interest expense increased $4.0 million, or 644.4%, to $4.6 million for the nine months ended September 30, 2023 from $626,000 for the nine months ended September 30, 2022. The increase was primarily due to the federal funds rate increasing 525 basis points to 5.50% as of September 30, 2023, from 0.25% on January 1, 2022. As a result of this rapid rise in

interest rates, in order to attract and retain deposits we have offered increased rates to customers primarily on our money market and certificate of deposit products. This has resulted in depositors shifting funds from lower cost accounts, into higher costing products. As a consequence, the average balance of interest-bearing deposits increased $23.9 million, or 8.9%, to $291.9 million for the nine months ended September 30, 2023, from $268.0 million for the nine months ended September 30, 2022, with a 174 basis point increase in the average cost of interest-bearing deposits to 2.05% for the nine months ended September 30, 2023, from 0.31% for the nine months ended September 30, 2022. The average balances of borrowed funds, including FHLB advances, increased to $5.5 million for the nine months ended September 30, 2023. There were no borrowings throughout the nine months ended September 30, 2022. For the nine months ended September 30, 2023, the average cost of the Company's borrowings was 4.48%.

Net Interest Income. Net interest income increased $224,000, or 2.16%, to $10.6 million for the nine months ended September 30, 2023 from $10.4 million for the nine months ended September 30, 2022. This increase was supported by increases in interest rates relative to the same nine month period one year ago, coupled with growth in our earning asset base, as well as a change in our earning asset mix, as higher yielding loans became a larger portion of our average earning assets. Our average interest-earning assets increased $30.0 million, or 7.8%, period over period. This increase was due primarily to a $50.0 million increase in our average loans outstanding during the first three quarters of 2023 versus that of the same nine month period one year ago. This increase was partially offset by decreases in average outstanding in our interest earning deposits during this period as compared to the same nine month period one year ago. While the rise in market interest rates benefited our earning assets, it hampered our cost of funding. Our interest rate spread decreased to 2.80% for the nine months ended September 30, 2023 from 3.49% for the nine months ended September 30, 2022, while our net interest margin fell to 3.40% for the nine months ended September 30, 2023 from 3.58% for the nine months ended September 30, 2022.

Provision for Credit Losses. We recorded $18,000 in provision for loan credit losses, and reversed $17,000 in provision for unfunded loan commitment credit losses (which is included in other expenses) for the nine months ended September 30, 2023, and $98,000 of provisions were recorded for the nine months ended September 30, 2022. Provisions for loan credit losses are charged to operations to establish an allowance for credit losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimable at the date of the financial statements. In evaluating the level of the allowance for credit losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See the section entitled "Allowance for Credit Losses" in this Item 2, and Note 3 of the Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

The allowance for credit losses was $4.7 million, or 1.30% of total loans, at September 30, 2023, and $4.4 million, or 1.29%, of total loans at December 31, 2022, and $4.3 million, or 1.37% of total loans, at September 30, 2022. Classified (substandard, doubtful and loss) loans increased to $8.0 million at September 30, 2023 compared to $4.2 million at December 31, 2022 and September 30, 2022. We had $907,000 of nonperforming loans at September 30, 2023, compared to $554,000 at December 31, 2022 and $524,000 at September 30, 2022. Net recoveries for the nine months ended September 30, 2023 and 2022 were $36,000 and $55,000, respectively. We had no loans in deferral at September 30, 2023, or December 31, 2022. In addition, the unfunded loan commitment credit loss liability was $132,000 at September 30, 2023, or 0.25% of our outstanding unfunded loan commitments of $52.1 million.

Other Income. Other income information is as follows.


	For the nine
	months ended
	September 30,				Change
	2023		2022		Amount			Percent
	(Dollars in thousands)
Service charges on deposit accounts	$	421	$	437	$	(16	)		(3.7	)	%
Gain on sale of loans		203		914		(711	)		(77.8	)
Other		280		228		52			22.8
Total non-interest income	$	904	$	1,579	$	(675	)		(42.7	)	%

Other income decreased $675,000, or 42.7%, to $904,000 for the nine months ended September 30, 2023 from $1.6 million for the nine months ended September 30, 2022. The decrease was primarily due to a $711,000 decrease in fees realized from the sale of mortgage loans into the secondary market to $203,000 for the nine months ended September 30, 2023, compared to $914,000 for the nine months ended September 30, 2022. This reduction is primarily due to the decrease in the volume mortgage loan refinancings and home purchases sold into the secondary market as interest rates have increased since December 31, 2022. As a result of the challenges posed in the mortgage industry, the Company has reduced its level of resources committed to this product line and therefore we do not anticipate our income to reach the same levels as posted in prior periods.

Other Expense. Other expense information is as follows.


	For the nine
	months ended
	September 30,				Change
	2023		2022		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	6,539	$	5,522	$	1,017			18.4		%
Occupancy and equipment		896		624		272			43.6
Advertising		303		202		101			50.0
Audit and examination		417		376		41			10.9
Checking account related expenses		94		105		(11	)		(10.5	)
Consulting and advisory fees		49		91		(42	)		(46.2	)
Data processing fees		329		346		(17	)		(4.9	)
Director fees		390		184		206			112.0
Legal		168		247		(79	)		(32.0	)
Insurance		173		156		17			10.9
Other real estate loss/(gain) on sale and write-downs		38		59		(21	)		(36.0	)
Other		1,546		1,327		219			16.5
Total non-interest expense	$	10,942	$	9,239	$	1,703			18.4		%

Other expense increased $1.7 million, or 18.4%, to $10.9 million for the nine months ended September 30, 2023, from $9.2 million for the nine months ended September 30, 2022. The increase was due primarily to a $1.0 million increase in salaries and employee benefits. Two factors are the primary causes for our increase in personnel costs. Expenses associated with equity awards for employees totaled $320,000 for the nine months ended September 30, 2023. Also, contributing to the increase in salaries and benefits was staff hired in conjunction with the opening of our two new branches located in Savannah, GA, and Jacksonville, FL. With these two new branch facilities the Company has also increased its baseline of occupancy and equipment expenses. Expenses related to equity awards of $198,000 is the primary driver behind the year-over-year increase in our director fees.

With the addition of two new branch locations during 2023, the Company's facilities expenses have also risen. The costs related to occupancy and equipment for the nine month period ended September 30, 2023, were $896,000, an increase of $272,000, or 43.6%, when compared to the same nine month period one year prior. Given the branch additions, we anticipate that our noninterest expenses will remain at levels above those of prior periods. However, we also anticipate that as these new branches grow their customer base in these highly attractive markets, that the rewards of higher revenues will be realized in future periods. During 2023, the Company has been able to reduce its legal expenses. Legal fees decreased $79,000, or 32.0%, to $168,000 for the nine months ended September 30, 2023 from $247,000 for the nine months ended September 30, 2022.

Income Tax Expense. Income tax expense decreased $466,000 to $137,000 for the nine months ended September 30, 2023, compared to $602,000 for the nine months ended September 30, 2022. The decrease resulted from the $2.1 million decrease in income before income taxes. For the nine months ended September 30, 2023, income before taxes was $521,000, compared to $2.6 million for the nine months ended September 30, 2022. Our effective tax rate was 26.3% for the nine months ended September 30, 2023 and 23.2% for the nine months ended September 30, 2022.

Average Balances, Interest and Average Yields/Cost

The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. All average balances are daily average balances. Nonaccruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material. No tax-equivalent yield adjustments have been made, as the effects would be immaterial.


		For the nine months ended September 30,
		2023								2022
		Average			Interest		Average			Average			Interest		Average
		Balance			Earned/		Yield/			Balance			Earned/		Yield/
		Outstanding			Paid		Rate			Outstanding			Paid		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable		$	343,591		$	13,243		5.15	%	$	293,557		$	10,046		4.58	%
Securities available-for-sale			47,282			1,087		3.07	%		48,632			557		1.53	%
Interest-earning deposits			24,209			842		4.65	%		43,361			356		1.10	%
Other investments			1,202			62		6.88	%		767			20		3.48	%
Total interest-earning assets			416,284			15,234		4.89	%		386,317			10,979		3.80	%
Non-interest-earning assets			16,219								18,928
Total assets		$	432,503							$	405,245
Interest-bearing liabilities:
Savings and money market accounts		$	141,689			2,299		2.17	%	$	135,443			311		0.31	%
Interest-bearing checking accounts			53,477			166		0.42	%		58,706			44		0.10	%
Certificate accounts			96,777			2,006		2.77	%		73,938			271		0.49	%
Total interest-bearing deposits			291,943			4,471		2.05	%		268,087			626		0.31	%
Borrowings			5,549			186		4.48	%		-			-		—	%
Total interest-bearing liabilities			297,492			4,657		2.09	%		268,087			626		0.31	%
Non-interest-bearing liabilities			50,982								51,137
Total liabilities			348,474								319,224
Total equity			84,029								86,021
Total liabilities and equity		$	432,503							$	405,245
Net interest income					$	10,577							$	10,353
Net earning assets		$	118,792							$	118,230
Net interest rate spread(1)								2.80	%							3.49	%
Net interest margin(2)								3.40	%							3.58	%
Average interest-earning assets to average interest-bearing liabilities			139.93	%							144.10	%

(1)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.

(2)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/Volume Analysis


	Nine Months Ended September 30,
	2023 vs. 2022
	Increase/
	(decrease)						Total
	due to						increase/
	Volume			Rate			(decrease)
	(In thousands)
Interest-earning assets:
Loans receivable	$	1,515		$	1,682		$	3,197
Securities available for sale		1			529			530
Interest-earning deposits		(131	)		617			486
Other investments		15			27			42
Total interest-earning assets		1,400			2,855			4,255
Interest-bearing liabilities:
Savings and money market accounts		14			1,974			1,988
Interest-bearing checking accounts		(4	)		127			123
Certificate accounts		605			1,130			1,735
Total interest-bearing deposits		615			3,231			3,846
Borrowings		185			—			185
Total interest-bearing liabilities		800			3,231			4,031
Change in net interest income	$	600		$	(376	)	$	224

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Our liquidity is a measure of our ability to fund loans, pay withdrawals of deposits, and other cash outflows in an efficient, cost-effective manner. Our short-term sources of liquidity include maturity, repayment and sales of assets, excess cash and cash equivalents, new deposits, as well avenues to borrowings. There has been no material adverse change during the nine months ended September 30, 2023 in our ability to fund our operations.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Atlanta. At September 30, 2023, we had $101.6 million in borrowing capacity under our credit line with the Federal Home Loan Bank of Atlanta, net of the $5.0 million advance outstanding. In addition, we have $28.5 million in unsecured federal funds lines of credit through our correspondent banks and $7.8 million secured borrowing capacity through the Federal Reserve Bank of Atlanta. No amounts were outstanding on these lines of credit at September 30, 2023.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our current strategy to increase our loan portfolio, we will seek to increase core deposits and use Federal Home Loan Bank of Atlanta advances as well as brokered certificates of deposit to support our earning asset growth.

Capital Requirements

At September 30, 2023, the Bank’s Tier 1 capital as a percentage of the Bank’s average assets was 15.72%, and total qualifying capital as a percentage of risk-weighted assets was 21.89%. As of September 30, 2023, the Bank was classified as “well capitalized” for regularity capital purposes. Note 6 to the Financial Statements describes the regulatory capital requirements applicable to the Bank.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. Note 5 to the Financial Statements describes the financial instruments with off-balance-sheet risk that we enter into in the normal course of business to meet the financing needs of our customers.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

There has been no change in the Company’s internal control over financial reporting during the three months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our 2022 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table contains information regarding purchases of the Company's common stock made during the third quarter of 2023 by or on behalf of the Company or any "affiliated purchaser," as defined by Rule 10b-18(a)(3) of the Exchange Act.


Period	Total Number of Shares purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan or Programs		Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (1)
July 1 - 31, 2023		32,200	$	14.52		32,200		217,800
August 1 - 31, 2023		78,000	$	14.51		110,200		139,800
September 1 - 30, 2023		20,000	$	13.97		130,200		119,800
Total		130,200	$	14.43		130,200

(1) On June 27, 2023, the Company announced a second program to buyback up to 250,000 shares of the Company's common stock effective for the period of July 1, 2023, through June 30, 2024.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.



31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32	Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer

101	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (unaudited), (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022 (unaudited), (vi) Consolidated Statements of Change in Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited), (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited), and (vi) the Notes to Financial Statements (unaudited) with detail tagging.

104	The cover page from TC Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included in Exhibit 101).

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		TC BANCSHARES, INC. (Registrant)

Date: November 13, 2023		/s/ Gregory H. Eiford
		Gregory H. Eiford
		Chief Executive Officer

Date: November 13, 2023		/s/ Scott C. McLean
		Scott C. McLean
		Chief Financial Officer