United States
Securities and Exchange Commission
Washington, D.C. 20549
Form
(Mark One)
For
the quarterly period ended
For the transition period from _____ to _____
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
N/A
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer | ☐ |
| 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 Exchange Act ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of July 28, 2023, there were Common Shares outstanding.
Part I. Financial Information
Item 1. Financial Statements
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| (Unaudited) | ||||||||
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits at the Federal Reserve | ||||||||
| Investment securities available for sale | ||||||||
| Mortgage loans to be sold | ||||||||
| Loans | ||||||||
| Less: Allowance for credit losses | ( | ) | ( | ) | ||||
| Net loans | ||||||||
| Premises, equipment and leasehold improvements, net | ||||||||
| Right of use asset | ||||||||
| Accrued interest receivable | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Non-interest bearing demand | $ | $ | ||||||
| Interest bearing demand | ||||||||
| Money market accounts | ||||||||
| Time deposits $250,000 and over | ||||||||
| Other time deposits | ||||||||
| Other savings deposits | ||||||||
| Total deposits | ||||||||
| Short-term borrowings | ||||||||
| Accrued interest payable and other liabilities | ||||||||
| Lease liability | ||||||||
| Total liabilities | ||||||||
| Shareholders’ equity | ||||||||
| Common stock - par shares authorized; Issued shares at both June 30, 2023 and December 31, 2022. Shares outstanding and at June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock: shares and shares at June 30, 2023 and December 31, 2022, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss, net of income taxes | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
3
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Interest and fee income | ||||||||
| Loans, including fees | $ | $ | ||||||
| Taxable securities | ||||||||
| Tax-exempt securities | ||||||||
| Other | ||||||||
| Total interest and fee income | ||||||||
| Interest expense | ||||||||
| Deposits | ||||||||
| Short-term borrowings | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision for credit losses | ||||||||
| Net interest income after provision for credit losses | ||||||||
| Other income | ||||||||
| Service charges and fees | ||||||||
| Mortgage banking income | ||||||||
| Other non-interest income | ||||||||
| Total other income | ||||||||
| Other expense | ||||||||
| Salaries and employee benefits | ||||||||
| Net occupancy expense | ||||||||
| Other operating expenses | ||||||||
| Professional fees | ||||||||
| Data processing fees | ||||||||
| Total other expense | ||||||||
| Income before income tax expense | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Weighted average shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Basic income per common share | $ | $ | ||||||
| Diluted income per common share | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
4
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Interest and fee income | ||||||||
| Loans, including fees | $ | $ | ||||||
| Taxable securities | ||||||||
| Tax-exempt securities | ||||||||
| Other | ||||||||
| Total interest and fee income | ||||||||
| Interest expense | ||||||||
| Deposits | ||||||||
| Short-term borrowings | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision for credit losses | ( | ) | ||||||
| Net interest income after provision for credit losses | ||||||||
| Other income | ||||||||
| Service charges and fees | ||||||||
| Mortgage banking income | ||||||||
| Gain on sales of securities | ||||||||
| Other non-interest income | ||||||||
| Total other income | ||||||||
| Other expense | ||||||||
| Salaries and employee benefits | ||||||||
| Net occupancy expense | ||||||||
| Other operating expenses | ||||||||
| Professional fees | ||||||||
| Data processing fees | ||||||||
| Total other expense | ||||||||
| Income before income tax expense | ||||||||
| Income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Weighted average shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Basic income per common share | $ | $ | ||||||
| Diluted income per common share | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
5
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive loss | ||||||||
| Unrealized loss on securities arising during the period | ( | ) | ( | ) | ||||
| Other comprehensive loss before tax | ( | ) | ( | ) | ||||
| Income tax effect related to items of other comprehensive loss before tax | ||||||||
| Other comprehensive loss after tax | ( | ) | ( | ) | ||||
| Total comprehensive income (loss) | $ | $ | ( | ) | ||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income | ||||||||
| Unrealized gain (loss) on securities arising during the period | ( | ) | ||||||
| Reclassification adjustment for securities gains realized in net income | ( | ) | ||||||
| Other comprehensive income (loss) before tax | ( | ) | ||||||
| Income tax effect related to items of other comprehensive income (loss) before tax | ||||||||
| Other comprehensive income (loss) after tax | ( | ) | ||||||
| Total comprehensive income (loss) | $ | $ | ( | ) | ||||
See accompanying notes to consolidated financial statements.
6
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022 (UNAUDITED)
| Shares Outstanding | Additional Paid in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
| December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Adoption of ASU 2016-13 | — | |||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | — | |||||||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||||||
| Cash dividends ($ per common share) | — | ( | ) | ( | ) | |||||||||||||||||||
| March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Cash dividends ($ per common share) | — | ( | ) | ( | ) | |||||||||||||||||||
| June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Shares Outstanding | Additional Paid in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
| December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock option exercises, net of surrenders | ||||||||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||||||
| Cash dividends ($ per common share) | — | ( | ) | ( | ) | |||||||||||||||||||
| March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Other comprehensive loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Stock option exercises, net of surrenders | ||||||||||||||||||||||||
| Stock-based compensation expense | — | |||||||||||||||||||||||
| Cash dividends ($ per common share) | — | ( | ) | ( | ) | |||||||||||||||||||
| June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
See accompanying notes to consolidated financial statements.
7
BANK OF SOUTH CAROLINA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income net cash provided by operating activities: | ||||||||
| Depreciation expense | ||||||||
| Gain on sale of investment securities | ( | ) | ||||||
| Provision for credit losses | ( | ) | ||||||
| Stock-based compensation expense | ||||||||
| Deferred income taxes and other assets | ( | ) | ( | ) | ||||
| Net amortization of unearned discounts on investment securities available for sale | ||||||||
| Origination of mortgage loans held for sale | ( | ) | ( | ) | ||||
| Proceeds from sale of mortgage loans held for sale | ||||||||
| Decrease (increase) in accrued interest receivable | ( | ) | ||||||
| Increase in accrued interest payable and other liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from calls and maturities of investment securities available for sale | ||||||||
| Proceeds from sale of investment securities available for sale | ||||||||
| Purchase of investment securities available for sale | ( | ) | ||||||
| Net increase in loans | ( | ) | ( | ) | ||||
| Purchase of premises, equipment, and leasehold improvements, net | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Net decrease in deposit accounts | ( | ) | ( | ) | ||||
| Net increase in short term borrowings | ||||||||
| Dividends paid | ( | ) | ( | ) | ||||
| Stock options exercised, net of surrenders | ||||||||
| Share repurchases | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at the beginning of the period | ||||||||
| Cash and cash equivalents at the end of the period | $ | $ | ||||||
| Supplemental disclosure of cash flow data: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes, net | $ | $ | ||||||
| Supplemental disclosures for non-cash investing and financing activity: | ||||||||
| Change in unrealized gain (loss) on securities available for sale, net of income taxes | $ | $ | ( | ) | ||||
| Change in dividends payable | $ | ( | ) | $ | ||||
See accompanying notes to consolidated financial statements.
8
BANK OF SOUTH CAROLINA CORPORATION
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.
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted 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 the Company’s common stock.
Subsequent Events:
Subsequent events are events or transactions that occur after the balance sheet date but before the 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 the 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 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 , 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.
9
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 $
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 June 30, 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 $
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 a 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.
10
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 $
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:
| June 30, 2023 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. Treasury Notes | $ | $ | $ | ( | ) | $ | ||||||||||
| Government-Sponsored Enterprises | ( | ) | ||||||||||||||
| Municipal Securities | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
11
There is no allowance for credit losses on available for sale securities at June 30, 2023.
| December 31, 2022 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| U.S. Treasury Notes | $ | $ | $ | ( | ) | $ | ||||||||||
| Government-Sponsored Enterprises | ( | ) | ||||||||||||||
| Municipal Securities | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
The amortized cost and estimated fair value of investment securities available for sale as of June 30, 2023 and December 31, 2022, by contractual maturity are in the following table.
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| Amortized Cost | Estimated Fair Value | Amortized Cost | Estimated Fair Value | |||||||||||||
| Due in one year or less | $ | $ | $ | $ | ||||||||||||
| Due in one year to five years | ||||||||||||||||
| Due in five years to ten years | ||||||||||||||||
| Due in ten years and over | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Securities pledged to secure deposits at
June 30, 2023 and December 31, 2022, had a fair value of $
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 June 30, 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.
| June 30, 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 | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| Government-Sponsored Enterprises | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Municipal Securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| 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 | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
| Government-Sponsored Enterprises | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Municipal Securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||
12
The tables below show the proceeds from sales of securities available for sale and gross realized gains and losses for the periods indicated.
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Gross proceeds | $ | $ | ||||||
| Gross realized gains | ||||||||
| Gross realized losses | ||||||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Gross proceeds | $ | $ | ||||||
| Gross realized gains | ||||||||
| Gross realized losses | ||||||||
There was a tax provision of $
Note 3: Loans and Allowance for Credit Losses
Major classifications of loans (net of
deferred loan fees of $
| June 30, 2023 | December 31, 2022 | |||||||
| Commercial | $ | $ | ||||||
| Commercial real estate: | ||||||||
| Construction | ||||||||
| Other | ||||||||
| Consumer: | ||||||||
| Real estate | ||||||||
| Other | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Loans, net | $ | $ | ||||||
We had $
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.
13
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. |
14
The following table illustrates credit quality by class indicators by year of origination at June 30, 2023:
| Term Loans by Year of Origination | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | |||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | $ | — | $ | ||||||||||||||||||
| Commercial Real Estate Construction | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| OAEM | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Commercial Real Estate Other | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Consumer Real Estate | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| OAEM | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Consumer Other | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| OAEM | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Current period gross charge-offs | $ | — | $ | — | $ | $ | — | $ | — | $ | — | $ | — | $ | ||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Watch | — | ||||||||||||||||||||||||
| OAEM | — | ||||||||||||||||||||||||
| Substandard | — | ||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | |||||||||||||||||||
| Loss | — | — | — | — | — | — | |||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
15
The following tables include an aging analysis of the recorded investment in loans segregated by class.
| June 30, 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 | $ | $ | — | $ | — | $ | $ | $ | $ | — | ||||||||||||||||||
| Commercial Real Estate Construction | — | — | — | — | — | |||||||||||||||||||||||
| Commercial Real Estate Other | — | — | ||||||||||||||||||||||||||
| Consumer Real Estate | — | — | — | |||||||||||||||||||||||||
| Consumer Other | — | — | — | |||||||||||||||||||||||||
| Total | $ | $ | — | $ | $ | $ | $ | $ | — | |||||||||||||||||||
| 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 | $ | $ | $ | — | $ | $ | $ | $ | — | |||||||||||||||||||
| Commercial Real Estate Construction | — | — | — | — | — | |||||||||||||||||||||||
| Commercial Real Estate Other | — | — | ||||||||||||||||||||||||||
| Consumer Real Estate | — | — | — | |||||||||||||||||||||||||
| Consumer Other | — | — | — | — | — | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | — | ||||||||||||||||||||
There were no loans over 90 days past due and still accruing as of June 30, 2023 and December 31, 2022.
The following table summarizes the balances of non-accrual loans:
| CECL | Incurred Loss | |||||||||||||||
| June 30, 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 | — | |||||||||||||||
| Consumer Real Estate | — | — | — | — | ||||||||||||
| Consumer Other | — | — | — | |||||||||||||
| Total | $ | $ | — | $ | $ | |||||||||||
We designate individually evaluated loans on nonaccrual status as collateral dependent loans, as well as 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:
| June 30, 2023 | ||||
| Commercial | $ | — | ||
| Commercial Real Estate Construction | — | |||
| Commercial Real Estate Other | ||||
| Consumer Real Estate | ||||
| Consumer Other | — | |||
| Total | $ | |||
16
The following tables set forth the changes in the allowance for credit losses and an allocation of the allowance for credit losses by class for the three and six months ended June 30, 2023 under the CECL methodology.
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||
| Commercial | Commercial Real Estate Construction | Commercial Real Estate Other | Consumer Real Estate | Consumer Other | Total | |||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Six Months Ended June 30, 2023 | ||||||||||||||||||||||||
| Commercial | Commercial Real Estate Construction | Commercial Real Estate Other | Consumer Real Estate | Consumer Other | Total | |||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Adoption of ASU 2016-13 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 tables set forth the changes in the allowance for loan losses for the three and six months ended June 30, 2022.
| Three Months Ended June 30, 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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Charge-offs | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Six Months Ended June 30, 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 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Provisions | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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 following tables are disclosures related to the allowance for loan losses in prior periods.
| Decenber 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||
| Total Allowance for Loan Losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Loans Receivable | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||
| Total Loans Receivable | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
17
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 | $ | $ | $ | — | ||||||||
| Commercial Real Estate Construction | — | — | — | |||||||||
| Commercial Real Estate Other | — | |||||||||||
| Consumer Real Estate | — | |||||||||||
| Consumer Other | — | — | — | |||||||||
| Total | — | |||||||||||
| With an allowance recorded: | ||||||||||||
| Commercial | ||||||||||||
| Commercial Real Estate Construction | — | — | — | |||||||||
| Commercial Real Estate Other | — | — | — | |||||||||
| Consumer Real Estate | — | — | — | |||||||||
| Consumer Other | ||||||||||||
| Total | ||||||||||||
| Commercial | ||||||||||||
| Commercial Real Estate Construction | — | — | — | |||||||||
| Commercial Real Estate Other | — | |||||||||||
| Consumer Real Estate | — | |||||||||||
| Consumer Other | ||||||||||||
| Total | $ | $ | $ | |||||||||
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 June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial | $ | $ | $ | $ | ||||||||||||
| Commercial Real Estate Construction | — | — | — | — | ||||||||||||
| Commercial Real Estate Other | ||||||||||||||||
| Consumer Real Estate | ||||||||||||||||
| Consumer Other | — | — | — | — | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial | ||||||||||||||||