NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Organization:
The
Bank of South Carolina (the “Bank”) was organized on October 22, 1986 and opened for business as a state-chartered
financial institution on February 26, 1987, in Charleston, South Carolina. The Bank was reorganized into a wholly owned subsidiary
of Bank of South Carolina Corporation (the “Company”), effective April 17, 1995. At the time of the reorganization,
each outstanding share of the Bank was exchanged for two shares of Bank of South Carolina Corporation stock.
Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank.
In consolidation, all significant intercompany balances and transactions have been eliminated.
References
to “we”, “us”, “our”, “the Bank”, or “the Company” refer to the parent
and its subsidiary that are consolidated for financial purposes.
Basis
of Presentation:
The
accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles, or (“GAAP”), for the interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, our interim consolidated financial statements do not include all of the information
and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form
10-K, filed with the Securities and Exchange Commission (“SEC”) on March 2, 2023. In the opinion of management, these
interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and
results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily
indicative of the results of operations that may be expected for a full year or any future period.
Accounting
Estimates and Assumptions:
The
consolidated financial statements are prepared in conformity with GAAP, which require management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ significantly from these estimates and assumptions. Material estimates generally
susceptible to significant change are related to the determination of the allowance for credit losses, impaired loans, other real
estate owned, deferred tax assets, and the fair value of financial instruments.
Income
Per Common Share:
Basic
income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.
Dilutive income per share is computed by dividing net income by the weighted-average number of common shares and potential common
shares outstanding. Potential common shares consist of dilutive stock options determined using the treasury stock method and the
average market price of common stock.
Subsequent
Events:
Subsequent
events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized
subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the
balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events
are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
We have reviewed events occurring through the date the financial statements were available to be issued and no subsequent events
occurred requiring accrual or disclosure.
Recent
Accounting Pronouncements:
The
following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of
financial information by the Company.
In
June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The Accounting Standards Update, or ASU, introduced
a new credit loss methodology, the Current Expected Credit Loss (“CECL”) methodology, which requires earlier recognition
of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB
has issued several updates to the original ASU.
The
CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses
for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. It also
applies to off-balance sheet credit exposures such as unfunded commitments to extend credit. The expected credit losses are adjusted
each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods
in current GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where
fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted
each period for changes in credit risk.
On
January 1, 2023, the Company adopted the guidance prospectively. Results for
reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported
in accordance with the previously applicable incurred loss accounting methodology. The adoption of CECL resulted in an increase in the allowance for unfunded commitments of $600,000, a decrease in the allowance for credit losses of $600,000
and no change to the Company’s investment securities portfolio. There was no adjustment to retained
earnings as of January 1, 2023. Federal banking regulatory agencies provided optional relief to delay the adverse regulatory capital
impact of CECL at adoption. The Company did not elect to use this optional relief.
Significant
Accounting Policy Changes
Upon
adoption of ASC 326, the Company revised the accounting policy for the Allowance for Credit Losses as detailed below.
Allowance
for Credit Losses - Securities Available for Sale
For available for sale debt securities in an unrealized loss position, the
Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to sell the security before
recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized
cost basis is written down to fair value through income with the establishment of an allowance under CECL compared to a direct write down
of the security under Incurred Loss. For debt securities available for sale that do not meet the aforementioned criteria, the Company
evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers 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 cost 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
in other comprehensive income.
Changes in the allowance for credit losses under CECL are recorded as provision for (or reversal of) credit
loss 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. At March 31, 2023, there was no allowance
for credit losses related to the available-for-sale portfolio.
Accrued interest receivable on available for sale debt securities totaled
$436,000 at March 31, 2023 and was excluded from the estimate of credit losses.
Allowance
for Credit Losses - Loans
Under
the current expected credit loss model, the allowance for credit losses on loans is a valuation allowance estimated at each balance
sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected
to be collected on the loans.
Management
assesses the adequacy of the allowance on a quarterly basis. This assessment includes procedures to estimate the allowance and
test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation
of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay a loan, the estimated value of
any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent
factors, including regulatory recommendations. Management believes the level of the allowance for credit losses is adequate to
absorb all expected future losses inherent in the loan portfolio at the balance sheet date. The allowance is increased through
provision for credit losses and decreased by charge-offs, net of recoveries of amounts previously charged-off, or negative provisions,
when appropriate.
The
allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company
uses the Loss Rate Approach to estimate the current expected credit losses. The Bank calculates the annual loss rate by dividing
the annual net charge-offs by the average balance of loans. The Bank used the simple average of the prior year and current year
balance to get the average balance by segment and is adjusted by the estimated prepayment rate to get the lifetime historical loss
rate, which is further adjusted by qualitative and forecast adjustments to get the estimated lifetime loss rate.
The
forecast adjustments (House Price Index, Vacancy Rate, and Unemployment Rate) are discussed by the Management Asset Liability
Committee (ALCO) on a periodic basis. Upon ALCO’s recommendation, the calculation can be adjusted accordingly to reflect
the current market and economic conditions.
The
Company uses the loan purpose codes to segment loans based on similar purpose and risk characteristics. The Bank manages these loans
on a collective basis. This segmentation is used for call report purposes and the Bank believes it is appropriate for the CECL
calculations. Due to the size of the Bank’s loan portfolio, further segmentation would be granular and segments would be
statistically insignificant.
Loans
that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and
are excluded from the collectively evaluated loan pools. Individual loan evaluations are generally performed for impaired loans,
which includes nonaccrual loans. Such loans are evaluated
for credit losses based on either discounted cash flows or the fair value of collateral. The Company has elected the practical
expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, which considers selling costs
in the event of the sale of the collateral.
While
the Company’s policies and procedures used to estimate the allowance for credit losses, as well as the resultant provision
for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators, model
validators and internal audit, they are necessarily approximate and imprecise. There are factors beyond the Company’s control,
such as changes in projected economic conditions, real estate markets or particular industry conditions which may materially impact
asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.
Allowance for Credit Losses - Accrued Interest Receivable
Accrued
interest receivable related to loans totaled $1.8 million at March 31, 2023 and was reported in accrued interest receivable
on the consolidated balance sheets. The Company elected not to measure an allowance for credit losses for accrued interest receivable
and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally
when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company
has concluded that this policy results in the timely reversal of uncollectable interest.
Allowance for Credit Loss - Unfunded Commitments
Effective
with the adoption of CECL, the Company estimates expected credit losses on commitments to extend credit over the contractual period
in which the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancelable
by the Company. The allowance for off-balance sheet credit exposures, which is reflected within accrued interest payable and other
liabilities on the consolidated balance sheet, is adjusted for as an increase or decrease to the provision for credit losses.
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. The allowance is calculated using the same aggregate reserve rates calculated for
the funded portion of loans at the portfolio level applied to the amount of commitments expected to fund.
The
Company’s CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well as the size and
composition of the loan portfolios.
In March 2022, the FASB issued
ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which
eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-402 and amends the guidance on “vintage
disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements
related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and
restructurings for borrowers experiencing financial difficulty. The Company adopted the amendments in ASU 2022-02 upon the Company’s
adoption of ASU 2016-13 as of January 1, 2023.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate
reform. In December 2022, the FASB extended the sunset date of ASC 848 from December 31, 2022 to December 31, 2024. The Company
does not expect these amendments to have a material effect on its consolidated financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have
a material impact on our financial position, results of operations or cash flows.
Note
2: Investment Securities
The
amortized cost and fair value of investment securities available for sale are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
March 31, 2023 | |
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Estimated Fair Value | |
U.S. Treasury Notes | |
$ | 180,171,098 | | |
$ | — | | |
$ | (9,934,568 | ) | |
$ | 170,236,530 | |
Government-Sponsored Enterprises | |
| 67,332,674 | | |
| — | | |
| (9,254,200 | ) | |
| 58,078,474 | |
Municipal Securities | |
| 41,833,858 | | |
| 2,679 | | |
| (2,711,617 | ) | |
| 39,124,920 | |
Total | |
$ | 289,337,630 | | |
$ | 2,679 | | |
$ | (21,900,385 | ) | |
$ | 267,439,924 | |
There is no allowance for credit losses on available for sale securities at March 31, 2023.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December 31, 2022 | |
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Estimated Fair Value | |
U.S. Treasury Notes | |
$ | 180,298,301 | | |
$ | — | | |
$ | (12,110,986 | ) | |
$ | 168,187,315 | |
Government-Sponsored Enterprises | |
| 67,384,808 | | |
| — | | |
| (10,310,084 | ) | |
| 57,074,724 | |
Municipal Securities | |
| 49,315,041 | | |
| 2,510 | | |
| (3,407,364 | ) | |
| 45,910,187 | |
Total | |
$ | 296,998,150 | | |
$ | 2,510 | | |
$ | (25,828,434 | ) | |
$ | 271,172,226 | |
The
amortized cost and estimated fair value of investment securities available for sale as of March 31, 2023 and December 31, 2022,
by contractual maturity are in the following table.
| |
March 31, 2023 | | |
December 31, 2022 | |
| |
Amortized Cost | | |
Estimated Fair Value | | |
Amortized Cost | | |
Estimated Fair Value | |
Due in one year or less | |
$ | 63,661,723 | | |
$ | 61,990,046 | | |
$ | 42,722,655 | | |
$ | 41,698,011 | |
Due in one year to five years | |
| 174,605,470 | | |
| 162,191,737 | | |
| 190,569,869 | | |
| 176,217,530 | |
Due in five years to ten years | |
| 41,765,078 | | |
| 35,399,509 | | |
| 53,995,700 | | |
| 45,386,818 | |
Due in ten years and over | |
| 9,305,359 | | |
| 7,858,632 | | |
| 9,709,926 | | |
| 7,869,867 | |
Total | |
$ | 289,337,630 | | |
$ | 267,439,924 | | |
$ | 296,998,150 | | |
$ | 271,172,226 | |
Securities
pledged to secure deposits at March 31, 2023 and December 31, 2022, had a fair value of $30.6 million
and $30.1 million,
respectively. During the first quarter of 2023, the Federal Reserve established the Bank Term Funding Program in order to make
available additional funding to eligible depository institutions so as to help assure banks have the ability to meet the needs of
all their depositors. Securities pledged to secure funding made available by this program were $25.0 million at March 31,
2023.
The
tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated
by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March
31, 2023 and December 31, 2022. Unrealized losses have not been recognized into income as we believe that all unrealized losses have resulted from temporary changes in the interest rate
market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to
sell any of the securities referenced in the table below before recovery of their amortized cost.
| |
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|
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|
|
|
|
| |
| |
March 31, 2023 | |
| |
Less Than 12 Months | | |
12 Months or Longer | | |
Total | |
| |
# | | |
Fair Value | | |
Gross Unrealized Loss | | |
# | | |
Fair Value | | |
Gross Unrealized Loss | | |
# | | |
Fair Value | | |
Gross Unrealized Loss | |
U.S. Treasury Notes | |
| 2 | | |
$ | 9,711,525 | | |
$ | (186,791 | ) | |
| 23 | | |
$ | 160,525,005 | | |
$ | (9,747,777 | ) | |
| 25 | | |
$ | 170,236,530 | | |
$ | (9,934,568 | ) |
Government-Sponsored Enterprises | |
| 1 | | |
| 1,294,810 | | |
| (3,283 | ) | |
| 10 | | |
| 56,783,664 | | |
| (9,250,917 | ) | |
| 11 | | |
| 58,078,474 | | |
| (9,254,200 | ) |
Municipal Securities | |
| 5 | | |
| 9,004,486 | | |
| (88,018 | ) | |
| 66 | | |
| 29,583,232 | | |
| (2,623,599 | ) | |
| 71 | | |
| 38,587,718 | | |
| (2,711,617 | ) |
Total | |
| 8 | | |
$ | 20,010,821 | | |
$ | (278,092 | ) | |
| 99 | | |
$ | 246,891,901 | | |
$ | (21,622,293 | ) | |
| 107 | | |
$ | 266,902,722 | | |
$ | (21,900,385 | ) |
| |
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|
|
|
|
|
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|
|
|
|
|
|
|
| |
| |
December 31, 2022 | |
| |
Less Than 12 Months | | |
12 Months or Longer | | |
Total | |
| |
# | | |
Fair Value | | |
Gross Unrealized Loss | | |
# | | |
Fair Value | | |
Gross Unrealized Loss | | |
# | | |
Fair Value | | |
Gross Unrealized Loss | |
U.S. Treasury Notes | |
| 7 | | |
$ | 38,181,255 | | |
$ | (1,790,134 | ) | |
| 18 | | |
$ | 130,006,060 | | |
$ | (10,320,852 | ) | |
| 25 | | |
$ | 168,187,315 | | |
$ | (12,110,986 | ) |
Government-Sponsored Enterprises | |
| 2 | | |
| 6,212,285 | | |
| (84,170 | ) | |
| 9 | | |
| 50,862,439 | | |
| (10,225,914 | ) | |
| 11 | | |
| 57,074,724 | | |
| (10,310,084 | ) |
Municipal Securities | |
| 46 | | |
| 26,068,218 | | |
| (932,565 | ) | |
| 31 | | |
| 14,859,459 | | |
| (2,474,799 | ) | |
| 77 | | |
| 40,927,677 | | |
| (3,407,364 | ) |
Total | |
| 55 | | |
$ | 70,461,758 | | |
$ | (2,806,869 | ) | |
| 58 | | |
$ | 195,727,958 | | |
$ | (23,021,565 | ) | |
| 113 | | |
$ | 266,189,716 | | |
$ | (25,828,434 | ) |
The
tables below show the proceeds from sales of securities available for sale and gross realized gains and losses.
| |
|
|
|
|
| |
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Gross proceeds | |
$ | — | | |
$ | 15,120,000 | |
Gross realized gains | |
| — | | |
| 61,780 | |
Gross realized losses | |
| — | | |
| — | |
There
was a tax provision of $12,974 related to gains for the three months ended March 31, 2022.
Note
3: Loans and Allowance for Credit Losses
Major
classifications of loans (net of deferred loan fees of $144,055 and $159,434 at March 31,2023 and December 31, 2022, respectively)
are shown in the table below.
| |
March 31, 2023 | | |
December 31, 2022 | |
Commercial | |
$ | 46,212,003 | | |
$ | 45,072,059 | |
Commercial real estate: | |
| | | |
| | |
Construction | |
| 20,146,368 | | |
| 17,524,260 | |
Other | |
| 174,860,808 | | |
| 172,897,387 | |
Consumer: | |
| | | |
| | |
Real estate | |
| 88,962,556 | | |
| 91,636,538 | |
Other | |
| 3,607,720 | | |
| 3,851,538 | |
| |
| 333,789,455 | | |
| 330,981,782 | |
Allowance for credit losses | |
| (3,688,503 | ) | |
| (4,291,221 | ) |
Loans, net | |
$ | 330,100,952 | | |
$ | 326,690,561 | |
We
had $107.9 million and $93.1 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”)
Discount Window at March 31, 2023 and at December 31, 2022, respectively.
Our
portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements
as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices,
and regulatory guidance. Our portfolio is graded in its entirety.
Our
internally assigned grades pursuant to the Board-approved lending policy are as follows:
| ● | Excellent
(1) The borrowing entity has more than adequate cash flow, unquestionable strength,
strong earnings and capital and, where applicable, no overdrafts. |
| ● | Good
(2) The borrowing entity has dependable cash flow, better than average financial
condition, good capital and usually no overdrafts. |
| ● | Satisfactory
(3) The borrowing entity has adequate cash flow, satisfactory financial condition,
and explainable overdrafts (if any). |
| ● | Watch
(4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical
earnings, weak capital, loans to/from stockholders, and infrequent overdrafts. The borrower
has consistent yet sometimes unpredictable sales and growth. |
| ● | OAEM
(5) The borrowing entity has marginal cash flow, occasional past dues, and frequent
and unexpected working capital needs. |
| ● | Substandard
(6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated
financial condition, and bankruptcy is possible. The borrowing entity has declining sales,
rising costs, and may need to look for secondary sources of repayment. |
| ● | Doubtful
(7) The borrowing entity has negative cash flow. Survival of the business is at risk,
full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing
entity shows declining trends and no operating profits. |
| ● | Loss
(8) The borrowing entity has negative cash flow with no alternatives. Survival of
the business is unlikely. |
The following table illustrates credit quality by class indicators by year of origination at March 31, 2023:
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| |
| |
| |
| |
| |
| |
| |
|
| |
Term Loans by Year of Origination | |
|
| |
2023 | |
2022 | |
2021 | |
2020 | |
2019 | |
Prior | |
Revolving | |
Total |
Commercial | |
| |
| |
| |
| |
| |
| |
| |
|
Pass | |
$ | 6,126,737 | | |
$ | 15,777,976 | | |
$ | 5,724,744 | | |
$ | 5,283,844 | | |
$ | 954,143 | | |
$ | 436,185 | | |
$ | 9,651,873 | | |
$ | 43,955,503 | |
Watch | |
| 193,968 | | |
| 517,215 | | |
| 38,787 | | |
| 101,971 | | |
| — | | |
| — | | |
| 183,423 | | |
| 1,035,364 | |
OAEM | |
| — | | |
| 824 | | |
| 15,845 | | |
| — | | |
| — | | |
| — | | |
| 130,000 | | |
| 146,670 | |
Substandard | |
| — | | |
| 939,656 | | |
| — | | |
| 134,810 | | |
| — | | |
| — | | |
| — | | |
| 1,074,466 | |
Doubtful | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 6,320,705 | | |
$ | 17,235,671 | | |
$ | 5,779,376 | | |
$ | 5,520,626 | | |
$ | 954,143 | | |
$ | 436,185 | | |
$ | 9,965,297 | | |
$ | 46,212,003 | |
Current period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 46,341 | | |
$ | — | | |
$ | 46,341 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Real Estate Construction | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 2,717,256 | | |
$ | 9,691,545 | | |
$ | 3,159,648 | | |
$ | 4,577,919 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 20,146,368 | |
Watch | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
OAEM | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Doubtful | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 2,717,256 | | |
$ | 9,691,545 | | |
$ | 3,159,648 | | |
$ | 4,577,919 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 20,146,368 | |
Current period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial Real Estate Other | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 6,648,022 | | |
$ | 56,736,163 | | |
$ | 52,765,365 | | |
$ | 25,416,225 | | |
$ | 10,612,328 | | |
$ | 8,085,081 | | |
$ | 5,573,442 | | |
$ | 165,836,625 | |
Watch | |
| 3,621,749 | | |
| 442,699 | | |
| 779,071 | | |
| 933,712 | | |
| — | | |
| — | | |
| 248,029 | | |
| 6,025,260 | |
OAEM | |
| 863,683 | | |
| — | | |
| 648,343 | | |
| 14,244 | | |
| — | | |
| — | | |
| 297,909 | | |
| 1,824,180 | |
Substandard | |
| — | | |
| — | | |
| 863,493 | | |
| — | | |
| — | | |
| 311,249 | | |
| — | | |
| 1,174,743 | |
Doubtful | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 11,133,454 | | |
$ | 57,178,862 | | |
$ | 55,056,273 | | |
$ | 26,364,181 | | |
$ | 10,612,328 | | |
$ | 8,396,330 | | |
$ | 6,119,380 | | |
$ | 174,860,808 | |
Current period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer Real Estate | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 4,439,050 | | |
$ | 29,475,217 | | |
$ | 8,479,952 | | |
$ | 9,320,267 | | |
$ | 291,943 | | |
$ | 29,311 | | |
$ | 34,899,380 | | |
$ | 86,935,121 | |
Watch | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,503,232 | | |
| 1,503,232 | |
OAEM | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 274,445 | | |
| 274,445 | |
Substandard | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 249,758 | | |
| 249,758 | |
Doubtful | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 4,439,050 | | |
$ | 29,475,217 | | |
$ | 8,479,952 | | |
$ | 9,320,267 | | |
$ | 291,943 | | |
$ | 29,311 | | |
$ | 36,926,815 | | |
$ | 88,962,556 | |
Current period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Consumer Other | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Pass | |
$ | 633,324 | | |
$ | 1,204,254 | | |
$ | 626,934 | | |
$ | 359,183 | | |
$ | 116,129 | | |
$ | 51,352 | | |
$ | 389,933 | | |
$ | 3,381,110 | |
Watch | |
| 4,055 | | |
| 87,544 | | |
| 21,822 | | |
| 40,864 | | |
| — | | |
| — | | |
| 28,469 | | |
| 182,755 | |
OAEM | |
| — | | |
| — | | |
| — | | |
| 6,324 | | |
| — | | |
| — | | |
| — | | |
| 6,324 | |
Substandard | |
| 37,530 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 37,530 | |
Doubtful | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 674,909 | | |
$ | 1,291,799 | | |
$ | 648,757 | | |
$ | 406,372 | | |
$ | 116,129 | | |
$ | 51,352 | | |
$ | 418,402 | | |
$ | 3,607,720 | |
Current period gross charge-offs | |
$ | — | | |
$ | — | | |
$ | 1,977 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 1,977 | |
The following table illustrates credit quality by class and internally assigned grades at December 31, 2022. "Pass" includes loans internally
graded as excellent, good and satisfactory.
December 31, 2022 | |
| | |
Commercial | | |
Commercial Real Estate Construction | | |
Commercial Real Estate Other | | |
Consumer Real Estate | | |
Consumer Other | | |
Total | |
Pass | | |
$ | 42,724,289 | | |
$ | 17,524,260 | | |
$ | 167,518,577 | | |
$ | 86,183,899 | | |
$ | 3,597,886 | | |
$ | 317,548,911 | |
Watch | | |
| 976,966 | | |
| — | | |
| 3,223,532 | | |
| 4,928,437 | | |
| 208,417 | | |
| 9,337,352 | |
OAEM | | |
| 94,803 | | |
| — | | |
| 968,611 | | |
| 274,445 | | |
| 7,345 | | |
| 1,345,204 | |
Substandard | | |
| 1,276,001 | | |
| — | | |
| 1,186,667 | | |
| 249,757 | | |
| 37,890 | | |
| 2,750,315 | |
Doubtful | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total | | |
$ | 45,072,059 | | |
$ | 17,524,260 | | |
$ | 172,897,387 | | |
$ | 91,636,538 | | |
$ | 3,851,538 | | |
$ | 330,981,782 | |
The
following tables include an aging analysis of the recorded investment in loans segregated by class.
March 31, 2023 |
| |
30-59 Days Past Due | | |
60-89 Days Past Due | | |
Greater than 90 Days | | |
Total Past Due | | |
Current | | |
Total Loans Receivable | | |
Recorded Investment ≥ 90 Days and Accruing | |
Commercial | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 46,212,003 | | |
$ | 46,212,003 | | |
$ | — | |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 20,146,368 | | |
| 20,146,368 | | |
| — | |
Commercial Real Estate Other | |
| 360,029 | | |
| — | | |
| 627,927 | | |
| 987,956 | | |
| 173,872,852 | | |
| 174,860,808 | | |
| — | |
Consumer Real Estate | |
| — | | |
| 274,444 | | |
| — | | |
| 274,444 | | |
| 88,688,112 | | |
| 88,962,556 | | |
| — | |
Consumer Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,607,720 | | |
| 3,607,720 | | |
| — | |
Total | |
$ | 360,029 | | |
$ | 274,444 | | |
$ | 627,927 | | |
$ | 1,262,400 | | |
$ | 332,527,055 | | |
$ | 333,789,455 | | |
$ | — | |
December 31, 2022 |
| |
30-59 Days Past Due | | |
60-89 Days Past Due | | |
Greater than 90 Days | | |
Total Past Due | | |
Current | | |
Total Loans Receivable | | |
Recorded Investment ≥ 90 Days and Accruing | |
Commercial | |
$ | 16,451 | | |
$ | 178,975 | | |
$ | — | | |
$ | 195,426 | | |
$ | 44,876,633 | | |
$ | 45,072,059 | | |
$ | — | |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | | |
| 17,524,260 | | |
| 17,524,260 | | |
| — | |
Commercial Real Estate Other | |
| 45,425 | | |
| — | | |
| 631,453 | | |
| 676,878 | | |
| 172,220,509 | | |
| 172,897,387 | | |
| — | |
Consumer Real Estate | |
| 274,445 | | |
| — | | |
| — | | |
| 274,445 | | |
| 91,362,093 | | |
| 91,636,538 | | |
| — | |
Consumer Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,851,538 | | |
| 3,851,538 | | |
| — | |
Total | |
$ | 336,321 | | |
$ | 178,975 | | |
$ | 631,453 | | |
$ | 1,146,749 | | |
$ | 329,835,033 | | |
$ | 330,981,782 | | |
$ | — | |
There
were no loans over 90 days past due and still accruing as of March 31, 2023 and December 31, 2022.
The
following table summarizes the balances of non-accrual loans:
| |
CECL | |
Incurred Loss |
| |
March 31, 2023 | |
December 31, 2022 |
| |
Nonaccrual Loans with No Allowance | |
Nonaccrual Loans with an Allowance | |
Total Nonaccrual Loans | |
Nonaccrual Loans |
Commercial | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | | |
| — | |
Commercial Real Estate Other | |
| 627,927 | | |
| — | | |
| 627,927 | | |
| 631,453 | |
Consumer Real Estate | |
| — | | |
| — | | |
| — | | |
| — | |
Consumer Other | |
| — | | |
| — | | |
| — | | |
| — | |
Total | |
$ | 627,927 | | |
$ | — | | |
$ | 627,927 | | |
$ | 631,453 | |
We
designate individually evaluated loans on nonaccrual status as collateral dependent loans, as well other loans that management designates
as having higher risk. Collateral dependent loans are loans for which repayment is expected to be provided substantially through the
operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics
and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral
dependent loans, we adopted the practical expedient to measure the allowance for credit losses based on the fair value of the collateral.
The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s
collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized
cost, no allowance is required.
The
following table details the amortized cost of collateral dependent loans:
| |
March
31, 2023 | |
Commercial | |
$ | — | |
Commercial Real Estate Construction | |
| — | |
Commercial Real Estate Other | |
| 1,188,986 | |
Consumer Real Estate | |
| 249,758 | |
Consumer Other | |
| — | |
Total | |
$ | 1,438,744 | |
The
following table set forth the changes in the allowance for credit losses and an allocation of the allowance for credit losses by class
for the three months ended March 31, 2023 under the CECL methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2023 |
| |
Commercial | | |
Commercial Real Estate Construction | | |
Commercial Real Estate Other | | |
Consumer Real Estate | | |
Consumer Other | | |
Total | |
Allowance for Credit Losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 735,759 | | |
$ | 230,625 | | |
$ | 2,216,484 | | |
$ | 1,014,777 | | |
$ | 93,576 | | |
$ | 4,291,221 | |
Adoption of ASU 2016-13 | |
| (82,001 | ) | |
| (36,509 | ) | |
| (314,522 | ) | |
| (160,802 | ) | |
| (6,166 | ) | |
| (600,000 | ) |
Charge-offs | |
| (46,341 | ) | |
| — | | |
| — | | |
| — | | |
| (1,977 | ) | |
| (48,318 | ) |
Recoveries | |
| 600 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 600 | |
Provisions | |
| (93,936 | ) | |
| 42,873 | | |
| 98,558 | | |
| 6,524 | | |
| (9,019 | ) | |
| 45,000 | |
Ending balance | |
$ | 514,081 | | |
$ | 236,989 | | |
$ | 2,000,520 | | |
$ | 860,498 | | |
$ | 76,415 | | |
$ | 3,688,503 | |
Prior to the adoption of ASC 326 on January 1, 2023, we calculated the allowance for loan losses under the incurred loss methodology.
The following table sets forth the changes in the allowance for loan losses for the three months ended March 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2022 |
| |
Commercial | | |
Commercial Real Estate Construction | | |
Commercial Real Estate Other | | |
Consumer Real Estate | | |
Consumer Other | | |
Paycheck Protection Program | | |
Total | |
Allowance for Loan Losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 795,689 | | |
$ | 175,493 | | |
$ | 2,376,306 | | |
$ | 924,784 | | |
$ | 104,715 | | |
$ | — | | |
$ | 4,376,987 | |
Charge-offs | |
| — | | |
| — | | |
| — | | |
| (2,035 | ) | |
| — | | |
| (10 | ) | |
| (2,045 | ) |
Recoveries | |
| — | | |
| — | | |
| — | | |
| — | | |
| 4,200 | | |
| 360 | | |
| 4,560 | |
Provisions | |
| (7,596 | ) | |
| 28,075 | | |
| (82,296 | ) | |
| (2,777 | ) | |
| (10,056 | ) | |
| (350 | ) | |
| (75,000 | ) |
Ending balance | |
$ | 788,093 | | |
$ | 203,568 | | |
$ | 2,294,010 | | |
$ | 919,972 | | |
$ | 98,859 | | |
$ | — | | |
$ | 4,304,502 | |
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology.
The tables are are disclosures related to the allowance for loan losses in prior periods.
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
December 31, 2022 |
| |
Commercial | |
Commercial Real Estate Construction | |
Commercial Real Estate Other | |
Consumer Real Estate | |
Consumer Other | |
Total |
Allowance for Loan Losses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | 179,230 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 37,889 | | |
$ | 217,119 | |
Collectively evaluated for impairment | |
| 556,529 | | |
| 230,625 | | |
| 2,216,484 | | |
| 1,014,777 | | |
| 55,687 | | |
| 4,074,102 | |
Total Allowance for Loan Losses | |
$ | 735,759 | | |
$ | 230,625 | | |
$ | 2,216,484 | | |
$ | 1,014,777 | | |
$ | 93,576 | | |
$ | 4,291,221 | |
Loans Receivable | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated for impairment | |
$ | 1,276,001 | | |
$ | — | | |
$ | 1,202,412 | | |
$ | 249,758 | | |
$ | 37,889 | | |
$ | 2,766,060 | |
Collectively evaluated for impairment | |
| 43,796,058 | | |
| 17,524,260 | | |
| 171,694,975 | | |
| 91,386,780 | | |
| 3,813,649 | | |
| 328,215,722 | |
Total Loans Receivable | |
$ | 45,072,059 | | |
$ | 17,524,260 | | |
$ | 172,897,387 | | |
$ | 91,636,538 | | |
$ | 3,851,538 | | |
$ | 330,981,782 | |
As
of December 31, 2022, loans individually evaluated and considered impaired are presented in the following table.
| |
Impaired Loans as of | |
| |
December 31, 2022 | |
| |
Unpaid Principal Balance | | |
Recorded Investment | | |
Related Allowance | |
With no related allowance recorded: | |
| | | |
| | | |
| | |
Commercial | |
$ | 317,553 | | |
$ | 317,553 | | |
$ | — | |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | |
Commercial Real Estate Other | |
| 1,202,412 | | |
| 1,202,412 | | |
| — | |
Consumer Real Estate | |
| 249,758 | | |
| 249,758 | | |
| — | |
Consumer Other | |
| — | | |
| — | | |
| — | |
Total | |
| 1,769,723 | | |
| 1,769,723 | | |
| — | |
| |
| | | |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | | |
| | |
Commercial | |
| 958,448 | | |
| 958,448 | | |
| 179,230 | |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | |
Commercial Real Estate Other | |
| — | | |
| — | | |
| — | |
Consumer Real Estate | |
| — | | |
| — | | |
| — | |
Consumer Other | |
| 37,889 | | |
| 37,889 | | |
| 37,889 | |
Total | |
| 996,337 | | |
| 996,337 | | |
| 217,119 | |
| |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Commercial | |
| 1,276,001 | | |
| 1,276,001 | | |
| 179,230 | |
Commercial Real Estate Construction | |
| — | | |
| — | | |
| — | |
Commercial Real Estate Other | |
| 1,202,412 | | |
| 1,202,412 | | |
| — | |
Consumer Real Estate | |
| 249,758 | | |
| 249,758 | | |
| — | |
Consumer Other | |
| 37,889 | | |
| 37,889 | | |
| 37,889 | |
Total | |
$ | 2,766,060 | | |
$ | 2,766,060 | | |
$ | 217,119 | |
The
following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for
the periods indicated.
| |
|
|
|
|
|
|
| |
Three Months Ended March 31, |
| |
2022 |
| |
Average
Recorded
Investment | |
Interest
Income
Recognized |
With no related allowance recorded: | |
| | | |
| | |
Commercial | |
$ | 181,347 | | |
$ | 2,720 | |
Commercial Real Estate Construction | |
| — | | |
| — | |
Commercial Real Estate Other | |
| 1,226,665 | | |
| 7,706 | |
Consumer Real Estate | |
| 249,758 | | |
| 2,617 | |
Consumer Other | |
| — | | |
| — | |
| |
| 1,657,770 | | |
| 13,043 | |
| |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | |
Commercial | |
| 1,186,718 | | |
| 19,382 | |
Commercial Real Estate Construction | |
| — | | |
| — | |
Commercial Real Estate Other | |
| — | | |
| — | |
Consumer Real Estate | |
| — | | |
| — | |
Consumer Other | |
| 39,822 | | |
| 638 | |
| |
| 1,226,540 | | |
| 20,020 | |
Total | |
| | | |
| | |
Commercial | |
| 1,368,065 | | |
| 22,102 | |
Commercial Real Estate Construction | |
| — | | |
| — | |
Commercial Real Estate Other | |
| 1,226,665 | | |
| 7,706 | |
Consumer Real Estate | |
| 249,758 | | |
| 2,617 | |
Consumer Other | |
| 39,822 | | |
| 638 | |
| |
$ | 2,884,310 | | |
$ | 33,063 | |
The
allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset
origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information,
which includes losses from modifications of receivables to borrowers experiencing financial difficulty. We use the loss rate
approach to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is
made on the date of a modification.
Because
the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit
losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally
not recorded upon modification. Occasionally, we modify loans by providing principal forgiveness on certain real estate loans.
When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses.
The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting
in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
In
some cases, we will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term
extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal
forgiveness, may be granted.
There
were no loans modified during the first quarter of 2023. As of March 31, 2023, there were five loans with a balance of $1.0 million that
were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. One loan
was performing as agreed as of March 31, 2023, while the other loan was not performing and we are considering further collection actions,
including potential foreclosure proceedings.
The
following table shows the amortized cost basis as of March 31, 2023 of the loans modified for borrowers experiencing financial difficulty,
disaggregated by class of loans and describes the financial effect of the modifications made for borrowers experiencing financial difficulty:
| |
Term Extension |
| |
Amortized Cost Basis | | |
% of Total Loan Type | | |
Financial
Effect |
Commercial | |
$ | 303,143 | | |
| 0.7 | % | |
Reduced monthly
payment |
Commercial Real Estate Other | |
| 613,682 | | |
| 0.4 | % | |
Forbearance agreement signed
for one loan and provided eleven months deferral to second borrower and added to the end of the original term loan |
Consumer
Other | |
| 37,529 | | |
| 1.0 | % | |
Reduced
monthly payment |
Total | |
$ | 954,354 | | |
| | | |
|
We
maintain an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to
extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend
credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The
allowance for 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, which is based on a historical funding study derived from internal
information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the
same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded
loan commitments of $644,912 at March 31, 2023 and December 31, 2022 is classified on the balance sheet within Accrued interest
payable and other liabilities.
Note
4: Leases
As
of March 31, 2023 and December 31, 2022, the Company had operating right of use (“ROU”) assets of $13.3 million and
$13.4 million, respectively, and had operating lease liabilities of $13.3 million and $13.4 million, respectively. The Company
maintains operating leases on land, branch facilities, and parking. Most of the leases include one or more options to renew, with
renewal terms extending up to 20 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet
and are recognized in lease expense.
As
of March 31, 2023, the weighted average remaining lease term was 15.3 years and the weighted average incremental borrowing rate
was 4.18%.
The
table below shows lease expense components for the three months ended March 31, 2023 and 2022.
| |
|
|
|
|
| |
| |
March 31, | |
| |
2023 | | |
2022 | |
Operating lease expense | |
$ | 302,645 | | |
$ | 299,571 | |
Short-term lease expense | |
| — | | |
| — | |
Total lease expense | |
$ | 302,645 | | |
$ | 299,571 | |
Total
rental expense was $302,645 and $299,571 for the three months ended March 31, 2023 and 2022, respectively and was included in
net occupancy expense within the consolidated statements of income.
As
of March 31, 2023 and December 31, 2022, we did not maintain any finance leases, and we determined that the number and dollar
amount of equipment leases was immaterial. As of March 31, 2023, we had no operating leases that had not yet commenced.
Note
5: Disclosures Regarding Fair Value of Financial Statements
Fair
value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring
or nonrecurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly
transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing
activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction.
GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs. Observable inputs, which are developed based on market data we have obtained from independent
sources, are ones that market participants would use in pricing an asset or liability. Unobservable inputs, which are developed
based on the best information available in the circumstances, reflect our estimate of assumptions that market participants would
use in pricing an asset or liability.
The
fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken
down into three levels based on the reliability of inputs as follows:
| ● | Level
1: valuation is based upon unadjusted quoted market prices for identical instruments
traded in active markets. |
| ● | Level
2: valuation is based upon quoted market prices for similar instruments traded in active
markets, quoted market prices for identical or similar instruments traded in markets
that are not active and model-based valuation techniques for which all significant assumptions
are observable in the market or can be corroborated by market data. |
| ● | Level
3: valuation is derived from other valuation methodologies, including discounted cash
flow models and similar techniques that use significant assumptions not observable in
the market. These unobservable assumptions reflect estimates of assumptions that market
participants would use in determining fair value. |
Fair
value estimates are made at a specific point of 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 our entire holdings
of a particular financial instrument. Because no active market exists for a significant portion of our financial instruments,
fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, current interest
rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes
in any of these assumptions used in calculating fair value also would also significantly affect the estimates. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates
and have not been considered in any of these estimates.
The
following paragraphs describe the valuation methodologies used for assets recorded at fair value on a recurring basis.
Investment
Securities Available for Sale
Investment
securities are recorded at fair value on a recurring basis and are based upon quoted prices if available. If quoted prices are
not available, fair value is 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, or
by dealers or brokers in active over-the counter markets. Level 2 securities include mortgage-backed securities issued by government
sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include municipal securities
in less liquid markets.
Derivative
Instruments
Derivative
instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change
in the value of the underlying loan between the commitment date and the end of the period. We classify these instruments as Level
3.
We
had no embedded derivative instruments requiring separate accounting treatment as of March 31, 2023 and December 31, 2022. We had freestanding derivative instruments
consisting of fixed rate conforming loan commitments with interest rate locks and commitments to sell fixed rate conforming loans on
a best efforts basis. We do not currently engage in hedging activities. Based on the short-term nature of mortgage loans to be sold
(derivative contracts), our derivative instruments were immaterial to our consolidated financial statements as of March 31, 2023 and
December 31, 2022.
The
following table presents information about assets measured at fair value on a recurring basis as of March 31, 2023 and December
31, 2022:
| |
March 31, 2023 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
U.S. Treasury Notes | |
$ | 170,236,530 | | |
$ | — | | |
$ | — | | |
$ | 170,236,530 | |
Government-Sponsored Enterprises | |
| — | | |
| | |
| — | | |
| |
Municipal Securities | |
| — | | |
| 16,575,620 | | |
| 22,549,300 | | |
| 39,124,920 | |
Total | |
$ | 170,236,530 | | |
$ | 74,654,094 | | |
$ | 22,549,300 | | |
$ | 267,439,924 | |
| |
December 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
U.S. Treasury Notes | |
$ | 168,187,315 | | |
$ | — | | |
$ | — | | |
$ | 168,187,315 | |
Government-Sponsored Enterprises | |
| — | | |
| | |
| — | | |
| |
Municipal Securities | |
| — | | |
| 16,448,375 | | |
| 29,461,812 | | |
| 45,910,187 | |
Total | |
$ | 168,187,315 | | |
$ | 73,523,099 | | |
$ | 29,461,812 | | |
$ | 271,172,226 | |
There
were no liabilities recorded at fair value on a recurring basis as of March 31, 2023 or December 31, 2022.
The
following table reconciles the changes in assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the three months ended March 31, 2023 and 2022:
| |
|
|
|
|
|
| |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Beginning balance | |
$ | 29,461,812 | | |
$ | 24,484,047 | |
Total gains or (losses) (realized/unrealized) | |
| | | |
| | |
Included in other comprehensive income (loss) | |
| 549,488 | | |
| (1,444,393 | ) |
Purchases, issuances, and settlements net of maturities | |
| (7,462,000 | ) | |
| (2,413,000 | ) |
Ending balance | |
$ | 22,549,300 | | |
$ | 20,626,654 | |
There
were no transfers between fair value levels during the three months ended March 31, 2023 or 2022.
The
following paragraphs describe the valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring
basis.
Individually Assessed Loans
Individually assessed
loans are carried at the lower of recorded investment or fair value. The fair value of the collateral less estimated costs to
sell is the most frequently used method. Typically, we review the most recent appraisal and if it is over 12 to 18 months old,
we may request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location
of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in
the loan, we may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis.
Specifically, as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of our primary
market area, we would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming
or immediately following the determination that the loan is impaired.
However,
as a second example, on a nonperforming commercial real estate loan where we are familiar with the property and surrounding areas
and where the original appraisal value far exceeds the recorded investment in the loan, we may perform an internal analysis whereby
the previous appraisal value would be reviewed considering recent current conditions, and known recent sales or listings of similar
properties in the area, and any other relevant economic trends. This analysis may result in the call for a new appraisal. These
valuations are reviewed and updated on a quarterly basis.
In
accordance with ASC 820, Fair Value Measurement, individually assessed loans, where an allowance is established based on the fair value
of collateral, require classification in the fair value hierarchy. These individually assessed loans are classified as Level 3. Individually assessed loans
measured using discounted future cash flows are not deemed to be measured at fair value.
Mortgage
Loans to be Sold
Mortgage
loans to be sold are carried at the lower of cost or market value. The fair values of mortgage loans to be sold are based on current
market rates from investors within the secondary market for loans with similar characteristics. Carrying value approximates fair
value. These loans are classified as Level 2.
Certain
assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). The following tables present information about certain assets
measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, 2022:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
March 31, 2023 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Individually assessed loans | |
$ | — | | |
$ | — | | |
$ | 1,438,744 | | |
$ | 1,438,744 | |
Mortgage loans to be sold | |
| — | | |
| 1,278,158 | | |
| — | | |
| 1,278,158 | |
Total | |
$ | — | | |
$ | 1,278,158 | | |
$ | 1,438,744 | | |
$ | 2,716,902 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Impaired loans | |
$ | — | | |
$ | — | | |
$ | 1,452,170 | | |
$ | 1,452,170 | |
Mortgage loans to be sold | |
| — | | |
| 866,594 | | |
| — | | |
| 866,594 | |
Total | |
$ | — | | |
$ | 866,594 | | |
$ | 1,452,170 | | |
$ | 2,318,764 | |
There
were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2023 or December 31, 2022.
The
following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2023
and December 31, 2022:
| |
| |
Inputs |
| |
Valuation Technique | |
Unobservable Input | |
General Range of Inputs |
Individually Assessed Loans | |
Appraisal Value/Comparison Sales/Other Estimates | |
Appraisals and/or Sales of Comparable Properties | |
Appraisals Discounted 10% to 20% for Sales Commissions and Other Holding Costs |
Accounting
standards require disclosure of fair value information for all of our assets and liabilities that are considered financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to estimate fair value.
Under
the accounting standard, fair value estimates are based on existing financial instruments without attempting to estimate the value
of anticipated future business and the value of the assets and liabilities that are not financial instruments. Accordingly, the
aggregate fair value amounts of existing financial instruments do not represent the underlying value of those instruments on our
books.
The
following paragraphs describe the methods and assumptions we use in estimating the fair values of financial instruments:
| a. | Cash
and due from banks and interest-bearing deposits at the Federal Reserve Bank |
The
carrying value approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
| b. | 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.
The
fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the fair value of its
loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical
orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides
its loan portfolio into the following categories: variable rate loans, individually assessed loans and all other loans. The results are then
adjusted to account for credit risk as described above. However, under the new guidance, the Company believes a further credit
risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain
assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit
risk over the lifetime of a loan. Additionally, in accordance with ASU 2016-01, Recognition and Measurement of Financial Assets
and Liabilities, this consideration of enhanced credit risk provides an estimated exit price for the Company’s loan
portfolio.
For
variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.
Fair values for individually assessed loans are estimated based on the fair value of the underlying collateral. Individually assessed loans measured using
discounted future cash flows are not deemed to be measured at fair value.
The
estimated fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is estimated
by discounting contractual cash flows, using interest rates currently being offered on the deposit products. The fair value estimates
for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities as compared
to the cost of alternative forms of funding (deposit base intangibles).
| e. | Accrued
interest receivable and payable |
Since
these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are
deemed to be a reasonable estimate of fair value.
Estimates
of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the
credit standing of the counterparties.
The
following tables present the carrying amount, fair value, and placement in the fair value hierarchy of our financial instruments
as of March 31, 2023 and December 31, 2022, respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
March 31, 2023 | |
| |
| | |
Estimated Fair Value | |
| |
Carrying Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Financial Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
$ | 7,099,250 | | |
$ | 7,099,250 | | |
$ | — | | |
$ | — | | |
$ | 7,099,250 | |
Interest-bearing deposits at the Federal Reserve | |
| 14,885,733 | | |
| 14,885,733 | | |
| — | | |
| — | | |
| 14,885,733 | |
Investment securities available for sale | |
| 267,439,924 | | |
| 170,236,530 | | |
| 74,654,094 | | |
| 22,549,300 | | |
| 267,439,924 | |
Mortgage loans to be sold | |
| 1,278,158 | | |
| — | | |
| 1,278,158 | | |
| — | | |
| 1,278,158 | |
Loans, net | |
| 330,100,952 | | |
| — | | |
| — | | |
| 305,598,199 | | |
| 305,598,199 | |
Accrued interest receivable | |
| 1,842,995 | | |
| — | | |
| 1,842,995 | | |
| — | | |
| 1,842,995 | |
Financial Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 523,037,875 | | |
| — | | |
| 523,037,875 | | |
| — | | |
| 523,037,875 | |
Time deposits | |
| 64,554,584 | | |
| — | | |
| 65,658,921 | | |
| — | | |
| 65,658,921 | |
Accrued interest payable | |
| 393,852 | | |
| — | | |
| 393,852 | | |
| — | | |
| 393,852 | |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
December 31, 2022 |
| |
| |
Estimated Fair Value |
| |
Carrying Value | |
Level 1 | |
Level 2 | |
Level 3 | |
Total |
Financial Assets: | |
| |
| |
| |
| |
|
Cash and due from banks | |
$ | 14,772,564 | | |
$ | 14,772,564 | | |
$ | — | | |
$ | — | | |
$ | 14,772,564 | |
Interest-bearing deposits at the Federal Reserve | |
| 12,999,135 | | |
| 12,999,135 | | |
| — | | |
| — | | |
| 12,999,135 | |
Investment securities available for sale | |
| 271,172,226 | | |
| 168,187,315 | | |
| 73,523,099 | | |
| 29,461,812 | | |
| 271,172,226 | |
Mortgage loans to be sold | |
| 866,594 | | |
| — | | |
| 866,594 | | |
| — | | |
| 866,594 | |
Loans, net | |
| 326,690,561 | | |
| — | | |
| — | | |
| 304,249,626 | | |
| 304,249,626 | |
Accrued interest receivable | |
| 2,145,522 | | |
| — | | |
| 2,145,522 | | |
| | | |
| 2,145,522 | |
Financial Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Demand deposits | |
| 582,100,650 | | |
| — | | |
| 582,100,650 | | |
| — | | |
| 582,100,650 | |
Time deposits | |
| 16,569,608 | | |
| — | | |
| 16,933,818 | | |
| — | | |
| 16,933,818 | |
Accrued interest payable | |
| 41,007 | | |
| — | | |
| 41,007 | | |
| | | |
| 41,007 | |
Note
6: Income Per Common Share
The
following table is a summary of the reconciliation of weighted average shares outstanding:
| |
|
|
|
|
|
| |
| |
Three Months Ended March 31, | |
| |
2023 | | |
2022 | |
Net income | |
$ | 1,588,779 | | |
$ | 1,464,106 | |
| |
| | | |
| | |
Weighted average shares outstanding | |
| 5,552,351 | | |
| 5,544,546 | |
Effect of dilutive shares | |
| 87,962 | | |
| 144,073 | |
Weighted average shares outstanding - diluted | |
| 5,640,313 | | |
| 5,688,619 | |
| |
| | | |
| | |
Earnings per share - basic | |
$ | 0.29 | | |
$ | 0.26 | |
Earnings per share - diluted | |
$ | 0.28 | | |
$ | 0.26 | |