John Marshall Bancorp, Inc. [JMSB] Filings

10-Q 1 jmsb-20230930x10q.htm 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

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

EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-41315

John Marshall Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Virginia

81-5424879

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1943 Isaac Newton Square East

Suite 100

Reston, VA 20190

(Address of Principal Executive Offices)

(703) 584-0840

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading symbol	Name of Exchange on which registered
Common Stock, $0.01 par value per share	JMSB	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☐

Non-accelerated filer	☒	Smaller reporting company	☒	Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 3, 2023, there were 14,126,084 shares of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

		Page

Part I	Financial Information

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (Unaudited)	3

	Consolidated Statements of Income for the three and nine months ended September 30, 2023 and September 30, 2022 (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and September 30, 2022 (Unaudited)	5

	Consolidated Statements of Shareholders’ Equity for the three months ended September 30, 2023 and September 30, 2022 (Unaudited)	6

	Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2023 and September 30, 2022 (Unaudited)	7

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and September 30, 2022 (Unaudited)	8

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	61

Part II	Other Information

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	62

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	62

Item 3.	Defaults Upon Senior Securities	62

Item 4.	Mine Safety Disclosures	62

Item 5.	Other Information	62

Item 6.	Exhibits	62

Signatures

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

JOHN MARSHALL BANCORP, INC.

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)


	September 30, 2023		December 31, 2022
Assets
Cash and due from banks	$	7,642	$	6,583
Interest-bearing deposits in other banks		185,014		55,016
Total cash and cash equivalents		192,656		61,599
Securities available-for-sale, at fair value		169,084		357,576
Securities held-to-maturity at amortized cost, fair value of $75,733 and $81,161 as of September 30, 2023 and December 31, 2022, respectively		96,347		99,415
Less: Allowance for investment credit losses		—		—
Securities held-to-maturity, net		96,347		99,415
Restricted securities, at cost		5,007		4,425
Equity securities, at fair value		2,443		2,115
Loans, net of unearned income		1,820,132		1,789,508
Less: Allowance for loan credit losses		(20,036)		(20,208)
Loans, net		1,800,096		1,769,300
Bank premises and equipment, net		1,264		1,219
Accrued interest receivable		5,701		5,531
Bank owned life insurance		-		21,170
Right of use assets		4,136		4,611
Other assets		21,468		21,274
Total assets	$	2,298,202	$	2,348,235
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Non-interest bearing demand deposits	$	437,880	$	476,697
Interest-bearing demand deposits		675,819		691,945
Savings deposits		57,408		95,241
Time deposits		810,516		803,857
Total deposits		1,981,623		2,067,740
Federal funds purchased		—		25,500
Federal Reserve Bank borrowings		54,000		—
Subordinated debt		24,687		24,624
Accrued interest payable		2,610		1,035
Lease liabilities		4,415		4,858
Other liabilities		10,300		11,678
Total liabilities	$	2,077,635	$	2,135,435
Commitments and contingencies
Shareholders’ Equity
Preferred stock, par value $0.01 per share; authorized 1,000,000 shares; none issued	$	—	$	—
Common stock, nonvoting, par value $0.01 per share; authorized 1,000,000 shares; none issued		—		—
Common stock, voting, par value $0.01 per share; authorized 30,000,000 shares; issued and outstanding, 14,126,084 shares at September 30, 2023, including 45,871 unvested shares, 14,098,986 shares at December 31, 2022, including 55,185 unvested shares		141		141
Additional paid-in capital		95,510		94,726
Retained earnings		141,886		146,630
Accumulated other comprehensive loss		(16,970)		(28,697)
Total shareholders’ equity	$	220,567	$	212,800
Total liabilities and shareholders’ equity	$	2,298,202	$	2,348,235

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

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest and Dividend Income
Interest and fees on loans	$	21,925	$	18,222	$	63,355	$	53,740
Interest on investment securities, taxable		1,507		2,323		5,895		5,597
Interest on investment securities, tax-exempt		10		30		45		90
Dividends		75		62		222		185
Interest on deposits in banks		2,746		571		4,654		897
Total interest and dividend income	$	26,263	$	21,208	$	74,171	$	60,509
Interest Expense
Deposits	$	13,273	$	3,068	$	33,590	$	6,090
Federal funds purchased		—		—		10		—
Federal Home Loan Bank advances		—		—		67		42
Federal Reserve Bank borrowings		662		—		1,001		—
Subordinated debt		349		448		1,047		1,461
Total interest expense	$	14,284	$	3,516	$	35,715	$	7,593
Net interest income	$	11,979	$	17,692	$	38,456	$	52,916
Provision for (recovery of) credit losses		(829)		—		(2,471)		—
Net interest income after provision for (recovery of) credit losses	$	12,808	$	17,692	$	40,927	$	52,916
Non-interest Income
Service charges on deposit accounts	$	85	$	79	$	239	$	240
Bank owned life insurance		23		255		224		445
Other service charges and fees		160		175		677		469
Losses on sale of available-for-sale securities		(17,114)		—		(17,316)		—
Insurance commissions		54		47		310		312
Gain on sale of government guaranteed loans		27		—		50		—
Non-qualified deferred compensation plan asset gains (losses), net		(60)		(107)		112		(498)
Other income		10		1		140		5
Total non-interest income (loss)	$	(16,815)	$	450	$	(15,564)	$	973
Non-interest Expenses
Salaries and employee benefits	$	5,052	$	5,072	$	14,929	$	15,754
Occupancy expense of premises		445		461		1,363		1,435
Furniture and equipment expenses		282		323		882		989
Other operating expenses		1,881		2,102		6,087		6,247
Total non-interest expenses	$	7,660	$	7,958	$	23,261	$	24,425
Income (Loss) before income taxes	$	(11,667)	$	10,184	$	2,102	$	29,464
Income tax expense (benefit)		(1,530)		2,139		1,446		5,863
Net income (loss)	$	(10,137)	$	8,045	$	656	$	23,601
Earnings (loss) per share, basic	$	(0.72)	$	0.57	$	0.05	$	1.69
Earnings (loss) per share, diluted	$	(0.72)	$	0.57	$	0.05	$	1.67

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

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2023		2022		2023		2022
Net Income (Loss)	$	(10,137)	$	8,045	$	656	$	23,601
Other comprehensive income (loss):
Unrealized (loss) on available-for-sale securities, net of tax of $(503) and $(3,709) for the three months ended September 30, 2023 and September 30, 2022, respectively. Unrealized (loss) on available-for-sale securities, net of tax of $(500) and $(8,081) for the nine months ended September 30, 2023 and September 30, 2022, respectively.		(1,891)		(13,952)		(1,880)		(30,401)
Reclassification adjustment for losses on available-for-sale securities included in net income, net of tax of $(3,594) for the three months ended September 30, 2023. Reclassification adjustment for losses on available-for-sale securities included in net income, net of tax of $(3,636) for the nine months ended September 30, 2023.		13,520		—		13,680		—
Amortization of unrealized gains on securities transferred to held-to-maturity, net of tax of $(7) and $(10) for the three months ended September 30, 2023 and September 30, 2022, respectively. Amortization of unrealized gains on securities transferred to held-to-maturity, net of tax of $(19) and $(31) for the nine months ended September 30, 2023 and September 30, 2022, respectively.		(24)		(36)		(73)		(115)
Total other comprehensive income (loss)	$	11,605	$	(13,988)	$	11,727	$	(30,516)
Total comprehensive income (loss)	$	1,468	$	(5,943)	$	12,383	$	(6,915)

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

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Shareholders’ Equity

For the Three Months Ended September 30, 2023 and 2022

(In thousands, except share and per share data)

(Unaudited)


								Accumulated
								Other		Total
				Additional Paid- In		Retained		Comprehensive		Shareholders’
	Shares	Common Stock		Capital		Earnings		(Loss)		Equity
Balance, June 30, 2022	13,968,053	$	140	$	93,935	$	130,383	$	(16,928)	$	207,530
Net income	—		—		—		8,045		—		8,045
Other comprehensive loss	—		—		—		—		(13,988)		(13,988)
Exercise of stock options	43,615		—		492		—		—		492
Restricted stock vesting, net of 54 shares surrendered	366		—		—		—		—		—
Share-based compensation	—		—		133		—		—		133
Balance, September 30, 2022	14,012,034	$	140	$	94,560	$	138,428	$	(30,916)	$	202,212

Balance, June 30, 2023	14,079,847	$	141	$	95,380	$	152,024	$	(28,575)	$	218,970
Net income (loss)	—		—		—		(10,137)		—		(10,137)
Other comprehensive income	—		—		—		—		11,605		11,605
Dividend declared on common stock ($0.22 per share)	—		—		—		(1)		—		(1)
Restricted stock vesting, net of 54 shares surrendered	366		—		—		—		—		—
Share-based compensation	—		—		130		—		—		130
Balance, September 30, 2023	14,080,213	$	141	$	95,510	$	141,886	$	(16,970)	$	220,567

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

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Shareholders’ Equity

For the Nine Months Ended September 30, 2023 and 2022

(In thousands, except share and per share data)

(Unaudited)


								Accumulated
								Other		Total
				Additional Paid- In		Retained		Comprehensive		Shareholders’
	Shares	Common Stock		Capital		Earnings		(Loss)		Equity
Balance, December 31, 2021	13,669,772	$	137	$	91,107	$	117,626	$	(400)	$	208,470
Net income	—		—		—		23,601		—		23,601
Other comprehensive loss	—		—		—		—		(30,516)		(30,516)
Dividend declared on common stock ($0.20 per share)	—		—		—		(2,799)		—		(2,799)
Exercise of stock options	325,649		3		3,051		—		—		3,054
Restricted stock vesting, net of 97 shares surrendered	16,613		—		—		—		—		—
Share-based compensation	—		—		402		—		—		402
Balance, September 30, 2022	14,012,034	$	140	$	94,560	$	138,428	$	(30,916)	$	202,212

Balance, December 31, 2022	14,043,801	$	141	$	94,726	$	146,630	$	(28,697)	$	212,800
Net income	—		—		—		656		—		656
Adoption of ASC 326 - Financial Instruments - Credit Losses	—		—		—		(2,292)		—		(2,292)
Other comprehensive income	—		—		—		—		11,727		11,727
Dividend declared on common stock ($0.22 per share)	—		—		—		(3,108)		—		(3,108)
Exercise of stock options	27,375		—		320		—		—		320
Restricted stock vesting, net of 87 shares surrendered	9,037		—		—		—		—		—
Share-based compensation	—		—		464		—		—		464
Balance, September 30, 2023	14,080,213	$	141	$	95,510	$	141,886	$	(16,970)	$	220,567

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

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JOHN MARSHALL BANCORP, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine months ended
	September 30,
	2023		2022
Cash Flows from Operating Activities
Net income	$	656	$	23,601
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation		364		430
Right of use asset amortization		924		1,033
Provision for (recovery of) credit losses		(2,471)		—
Share-based compensation expense		464		402
Net (accretion)/amortization of securities		(197)		68
Fair value adjustment on equity securities		(112)		498
Amortization of debt issuance costs		63		296
Net gains on premises and equipment		(16)		1
Losses on available-for-sale securities		17,316		—
Deferred tax expense		603		670
Net increase in cash surrender value of life insurance		(224)		(73)
Gain on sale of government guaranteed loans		(50)		—
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable		(170)		199
Increase in other assets		(3,305)		(732)
Increase (decrease) in accrued interest payable		1,575		(200)
(Decrease) in other liabilities		(2,855)		(1,030)
Net cash provided by operating activities	$	12,565	$	25,163
Cash Flows from Investing Activities
Net (increase) in loans	$	(31,178)	$	(58,645)
Proceeds from sale of government guaranteed loans originally classified as held for investment		586		—
Purchase of available-for-sale securities		—		(206,889)
Purchase of held-to-maturity securities		—		(1,003)
Proceeds from sale of available-for-sale securities		156,011		—
Proceeds from maturities, calls and principal repayments of available-for-sale securities		30,353		41,151
Proceeds from maturities, calls and principal repayments of held-to-maturity securities		2,921		5,712
Net (purchases) redemptions of restricted securities		(582)		530
Net purchases of equity securities		(216)		(542)
Proceeds from bank owned life insurance contracts		21,394		—
Proceeds from sale of premises and equipment		82		—
Purchases of bank premises and equipment		(475)		(142)
Net cash provided by (used in) investing activities	$	178,896	$	(219,828)
Cash Flows from Financing Activities
Net (decrease) increase in deposits	$	(86,116)	$	181,788
Net repayment of Federal Home Loan Bank advances		—		(18,000)
Proceeds from Federal Reserve Bank borrowings		54,000		—
Issuance of subordinated debt		—		24,579
Repayment of subordinated debt		—		(25,000)
Cash dividends paid		(3,108)		(2,799)
Repayment of federal funds purchased		(25,500)		—
Issuance of common stock for share options exercised		320		3,054
Net cash (used in) provided by financing activities	$	(60,404)	$	163,622
Net increase in cash and cash equivalents	$	131,057	$	(31,043)
Cash and cash equivalents, beginning of period		61,599		105,799
Cash and cash equivalents, end of period	$	192,656	$	74,756
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	34,076	$	7,497
Income taxes		4,110		4,387
Supplemental Disclosures of Noncash Transactions
Unrealized gain (loss) on securities available-for-sale	$	14,936	$	(38,480)
Right of use asset obtained in exchange for new operating lease liability		505		56

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

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JOHN MARSHALL BANCORP, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(Unaudited)

Note 1— Nature of Business and Summary of Significant Accounting Policies

Nature of Banking Activities

John Marshall Bancorp, Inc. (the “Company”), headquartered in Reston, Virginia, became the registered bank holding company under the Bank Holding Company Act of 1956 for its wholly-owned subsidiary, John Marshall Bank (the “Bank”), on March 1, 2017. This reorganization was completed through a one-for-one share exchange in which the Bank’s shareholders received one share of voting common stock of the Company in exchange for each share of the Bank’s voting common stock. The Company was formed on April 21, 2016 under the laws of the Commonwealth Virginia. The Bank was formed on April 5, 2005 under the laws of the Commonwealth of Virginia and was chartered as a bank on February 9, 2006, by the Virginia Bureau of Financial Institutions. The Bank is a member of the Federal Reserve System and is subject to the rules and regulations of the Virginia Bureau of Financial Institutions, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”). The Bank opened for business on April 17, 2006 and provides banking services to its customers primarily in the Washington, D.C. metropolitan area.

Basis of Presentation

The accounting and reporting policies of John Marshall Bancorp, Inc. conform to generally accepted accounting principles in the United States of America (“GAAP”) and reflect practices of the banking industry. The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and with applicable quarterly reporting regulations of the U.S. Securities and Exchange Commission (“SEC”). They do not include all of the information and notes required by GAAP for complete financial statements. As such, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2022, included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC on March 23, 2023.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan credit losses.

In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for any other interim period or for the full year. All amounts and disclosures included in this quarterly report as of December 31, 2022, were derived from the Company’s audited consolidated financial statements. Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or shareholders’ equity.

Significant Accounting Policies and Estimates

Application of the principles of GAAP and practices within the banking industry requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.

The Company's significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited financial statements and notes for the year ended December 31, 2022 and are contained in the

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Company's 2022 Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Accounting Standards Adopted in 2023

ASU 2016-13: On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The CECL methodology requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. At adoption, the after tax impact to retained earnings was a reduction of $(2.3) million based on our evaluation as of that date. This adjustment consisted of increases to the allowance for credit losses on loans, as well as the Company's allowance for unfunded loan commitments.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. The Company did not record an allowance for credit losses for securities classified as available-for-sale or held-to-maturity upon adoption. Refer to Note 2 – Investment Securities for further discussion.

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 uncollectible interest.

ASU 2022-02: On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the Financial Accounting Standards Board as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the standard prospectively and it did not have a material impact on the financial statements.

Allowance for Credit Losses - Held-to-Maturity Securities

The Company estimates expected credit losses on held-to-maturity securities on an individual basis based on a Probability of Default/Loss Given Default (“PD/LGD”) methodology primarily using security-level credit ratings. The primary indicators of credit quality for the Company’s held-to-maturity portfolio are security type and credit rating, which are influenced by a number of factors including obligor cash flow, geography, seniority, among other factors. The Company’s held-to-maturity securities with credit risk are municipal bonds, which had a credit rating of AA or better as of September 30, 2023. All other held-to-maturity securities are covered by the explicit or implied guarantee of the United States government or one of its agencies.

Changes in the allowance for credit loss are recorded as provision for (or recovery of) credit losses in the Consolidated Statements of Income. The Company did not have an allowance for credit losses on held-to-maturity securities as of September 30, 2023 or upon adoption of ASC 326. Refer to Note 2 – Investment Securities for further discussion.

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Allowance for Credit Losses - Available-for-Sale Securities

Management evaluates all available-for-sale securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any deficiency is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

Changes in the allowance for credit loss are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio. Refer to Note 2 – Investment Securities for further discussion.

Accrued interest receivable on available-for-sale securities totaled $535 thousand at September 30, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses - Loans

The allowance for loan credit losses represents an amount which, in management's judgment, is adequate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The allowance for loan credit losses is measured and recorded upon the initial recognition of a financial asset. The allowance for loan credit losses is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statements of Income.

The Company is utilizing a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates, home price indices, and/or gross domestic product, to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following four quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversely classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model.

Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. 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, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of 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 adoption of CECL did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices or charge-off policy.

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Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for (or recovery of) credit losses in the Consolidated Statements of Income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodology as the loan portfolio, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

Accrued Interest Receivable

The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the allowance for credit losses for both loans and held-to-maturity securities, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $4.8 million on loans and $241 thousand on held-to-maturity securities at September 30, 2023, and is included in “Accrued Interest Receivable” on the Company’s Consolidated Balance Sheets.

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Note 2— Investment Securities

Available-for-Sale

Each of the securities in the Company’s available-for-sale investment portfolio is either covered by the explicit or implied guarantee of the United States government or one of its agencies or rated investment grade or higher. All available-for-sale securities were current with no securities past due or on nonaccrual as of September 30, 2023 or December 31, 2022.

The following tables summarize the amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses at September 30, 2023 and December 31, 2022, respectively.


	September 30, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		(Losses)		Value
Available-for-sale
U.S. Treasuries	$	44,765	$	—	$	(2,571)	$	42,194
U.S. government and federal agencies		13,821		—		(940)		12,881
Corporate bonds		3,000		—		(594)		2,406
Collateralized mortgage obligations		41,486		—		(7,964)		33,522
Tax-exempt municipal		1,380		—		(224)		1,156
Taxable municipal		607		—		(27)		580
Mortgage-backed		85,726		—		(9,381)		76,345
Total Available-for-sale Securities	$	190,785	$	—	$	(21,701)	$	169,084