10-Q 1 main20230930_10q.htm FORM 10-Q main20230930_10q.htm
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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

 

OR

 

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

 

For the transition period from to                      to                     

 

Commission file number: 001-38817

 

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MainStreet Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Virginia

 

81-2871064

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

10089 Fairfax Boulevard, Fairfax, VA 22030

(Address of Principal Executive Offices and Zip Code)

 

(703) 481-4567

(Registrant’s Telephone Number, Including Area Code)

 

Not applicable

(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

Common Stock

 

MNSB

 

The Nasdaq Stock Market LLC

     
Depositary Shares (each representing a 1/40th interest in a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock) 

MNSBP

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 8, 2023, there were 7,527,295 outstanding shares, par value $4.00 per share, of the issuer’s common stock.

 
 

 

 
 

PART I – FINANCIAL INFORMATION

 

Item 1 – Consolidated Financial Statements – Unaudited

 

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

 

Consolidated Statements of Financial Condition as of  September 30, 2023 and December 31, 2022 (Dollars in thousands, except share data)

 

  At September 30, 2023 (unaudited)  At December 31, 2022 (*) 

Assets

        

Cash and due from banks

 $44,912  $48,931 

Federal funds sold

  76,271   81,669 

Cash and cash equivalents

  121,183   130,600 

Investment securities available-for-sale, at fair value

  56,726   62,631 

Investment securities held-to-maturity, at amortized cost, net of allowance for credit losses of $0 and $0, respectively.

  17,565   17,642 

Restricted securities, at amortized cost

  20,619   24,325 

Loans, net of allowance for credit losses of $15,626 and $14,114, respectively

  1,681,444   1,579,950 

Premises and equipment, net

  14,275   14,709 

Accrued interest and other receivables

  11,184   9,581 

Bank owned life insurance

  38,035   37,249 

Computer software, net of amortization

  13,373   9,149 

Other assets

  47,087   39,915 

Total Assets

 $2,021,491  $1,925,751 

Liabilities and Stockholders’ Equity

        

Liabilities

        

Non-interest bearing deposits

 $394,859  $550,690 

Interest bearing demand deposits

  76,423   80,099 

Savings and NOW deposits

  46,550   51,419 

Money market deposits

  461,398   222,540 

Time deposits

  703,960   608,141 

Total deposits

  1,683,190   1,512,889 

Federal Home Loan Bank advances

  —   100,000 

Subordinated debt, net

  72,543   72,245 

Allowance for credit losses on off-balance sheet credit exposure

  1,552   — 

Other liabilities

  50,463   42,335 

Total Liabilities

  1,807,748   1,727,469 

Stockholders’ Equity

        

Preferred stock, $1.00 par value, 2,000,000 shares authorized; 28,750 shares issued and outstanding at September 30, 2023 and December 31, 2022

  27,263   27,263 

Common stock, $4.00 par value, 10,000,000 shares authorized; issued and outstanding 7,524,877 shares (including 228,300 nonvested shares) at September 30, 2023 and 7,442,743 shares (including 259,036 nonvested shares) at December 31, 2022

  29,188   28,736 

Capital surplus

  65,407   63,999 

Retained earnings

  102,694   86,830 

Accumulated other comprehensive loss

  (10,809)  (8,546)

Total Stockholders’ Equity

  213,743   198,282 

Total Liabilities and Stockholders’ Equity

 $2,021,491  $1,925,751 

 

*         Derived from audited consolidated financial statements.

 

See Notes to the Unaudited Consolidated Financial Statements

 

3
 

 

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

 

Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (Dollars in thousands, except per share data)

 

   

For the Three Months Ended September 30,

    

For the Nine Months Ended September 30,

  
   

2023

    

2022

    

2023

    

2022

  

Interest Income

                                

Interest and fees on loans

   $ 29,750     $ 20,261     $ 85,336     $ 54,900  

Interest on investments securities

                                

Taxable securities

     459       378       1,384       1,136  

Tax-exempt securities

     268       261       797       796  

Interest on federal funds sold and interest-bearing deposits

     1,217       1,013       3,528       1,241  

Total Interest Income

     31,694       21,913       91,045       58,073  

Interest Expense

                                

Interest on interest-bearing DDA deposits

     240       175       834       345  

Interest on savings and NOW deposits

     145       43       400       122  

Interest on money market deposits

     4,156       496       8,285       766  

Interest on time deposits

     7,526       2,275       18,747       5,236  

Interest on federal funds borrowed

     35       —       274       —  

Interest on Federal Home Loan Bank advances

     186       —       1,105       83  

Interest on subordinated debt

     828       828       2,460       2,108  

Total Interest Expense

     13,116       3,817       32,105       8,660  

Net Interest Income

     18,578       18,096       58,940       49,413  

Provision For (Recovery of) Credit Losses - Loans

     (98 )     —       934       1,280  

Provision for Credit Losses - Off-Balance Sheet Credit Exposure

     353       —       242       —  

Net Interest Income After Provision For (Recovery of) Credit Losses

     18,323       18,096       57,764       48,133  

Non-Interest Income

                     .          

Deposit account service charges

     514       601       1,639       1,810  

Bank owned life insurance income

     272       254       786       755  

Loan swap fee income

     —       518       —       619  

Net gain on held-to-maturity securities

     —       —       —       4  

Net loss on sale of loans

     —       (211 )     —       (168 )

Other fee income

     177       186       352       753  

Total Non-Interest Income

     963       1,348       2,777       3,773  

Non-Interest Expense

                                

Salaries and employee benefits

     6,924       5,874       21,139       17,025  

Furniture and equipment expenses

     713       760       1,983       2,076  

Advertising and marketing

     577       704       2,072       1,684  

Occupancy expenses

     375       400       1,287       1,093  

Outside services

     697       611       1,691       1,545  

Administrative expenses

     277       253       703       658  

Other operating expenses

     1,866       1,291       5,109       4,268  

Total Non-Interest Expense

     11,429       9,893       33,984       28,349  

Income Before Income Taxes

     7,857       9,551       26,557       23,557  

Income Tax Expense

     1,516       1,808       5,119       4,462  

Net Income

   $ 6,341     $ 7,743     $ 21,438     $ 19,095  

Preferred Stock Dividends

     539       539       1,617       1,617  

Net Income Available To Common Shareholders

   $ 5,802     $ 7,204     $ 19,821     $ 17,478  

Earnings Per Common Share:

                                

Basic

   $ 0.77     $ 0.97     $ 2.64     $ 2.31  

Diluted

   $ 0.77     $ 0.97     $ 2.64     $ 2.31  

 

See Notes to the Unaudited Consolidated Financial Statements

 

4
 

 

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

 

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

 

  

For the Three Months Ended September 30,

  

For the Nine Months Ended September 30,

 
  

2023

  

2022

  

2023

  

2022

 

Comprehensive Income, net of taxes

                

Net Income

 $6,341  $7,743  $21,438  $19,095 

Other comprehensive loss, net of tax benefit:

                

Unrealized losses on available for sale securities arising during the period (net of tax benefit, $687 and $850, respectively, for the three months ended September 30, and $687 and $2,641, respectively for the nine months ended September 30).

  (2,465)  (3,199)  (2,268)  (9,965)

Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $0 and $1, respectively, for the three months ended September 30, and $1 and $3, respectively, for the nine months ended September 30).

  2   4   5   12 

Other comprehensive loss

  (2,463)  (3,195)  (2,263)  (9,953)

Comprehensive Income

 $3,878  $4,548  $19,175  $9,142 

 

See Notes to the Unaudited Consolidated Financial Statements

 

5
 

 

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

 

Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Nine months ended September 30, 2023 and 2022 (Dollars in thousands)

 

                  

Accumulated Other

     
  

Preferred

  

Common

  

Capital

  

Retained

  

Comprehensive

     
  

Stock

  

Stock

  

Surplus

  

Earnings

  

Loss

  

Total

 

Balance, June 30, 2023

 $27,263  $29,177  $64,768  $97,646  $(8,346) $210,508 

Vesting of restricted stock

  —   11   (11)  —   —   — 

Stock based compensation expense

  —   —   650   —   —   650 

Dividends on preferred stock - ($0.47 per depositary share)

  —   —   —   (539)  —   (539)

Dividends on common stock - ($0.10 per share)

  —   —   —   (754)  —   (754)

Net income

  —   —   —   6,341   —   6,341 

Other comprehensive loss

  —   —   —   —   (2,463)  (2,463)

Balance, September 30, 2023

 $27,263  $29,188  $65,407  $102,694  $(10,809) $213,743 

 

                  

Accumulated Other

     
  

Preferred

  

Common

  

Capital

  

Retained

  

Comprehensive

     
  

Stock

  

Stock

  

Surplus

  

Earnings

  

Income (Loss)

  

Total

 

Balance, December 31, 2022

 $27,263  $28,736  $63,999  $86,830  $(8,546) $198,282 

Cumulative change in accounting principle (Note 3)

  —   —   —   (1,699)  —   (1,699)

Vesting of restricted stock

  —   460   (460)  —   —   — 

Stock based compensation expense

  —   —   1,903   —   —   1,903 

Common stock repurchased

  —   (8)  (35)  —   —   (43)

Dividends on preferred stock - ($0.94 per depositary share)

  —   —   —   (1,617)  —   (1,617)

Dividends on common stock - ($0.30 per share)

  —   —   —   (2,258)  —   (2,258)

Net income

  —   —   —   21,438   —   21,438 

Other comprehensive loss

  —   —   —   —   (2,263)  (2,263)

Balance, September 30, 2023

 $27,263  $29,188  $65,407  $102,694  $(10,809) $213,743 

 

                  

Accumulated Other

     
  

Preferred

  

Common

  

Capital

  

Retained

  

Comprehensive

     
  

Stock

  

Stock

  

Surplus

  

Earnings

  

Income (Loss)

  

Total

 

Balance, June 30, 2022

 $27,263  $29,178  $64,822  $73,702  $(6,561) $188,404 

Vesting of restricted stock

  —   10   (10)  —   —   — 

Stock based compensation expense

  —   —   609   —   —   609 

Common stock repurchased

  —   (460)  (2,190)  —   —   (2,650)

Dividends on preferred stock - ($0.47 per depositary share)

  —   —   —   (539)  —   (539)

Dividends on common stock - ($0.05 per share)

  —   —   —   (372)  —   (372)

Net income

  —   —   —   7,743   —   7,743 

Other comprehensive loss

  —   —   —   —   (3,195)  (3,195)

Balance, September 30, 2022

 $27,263  $28,728  $63,231  $80,534  $(9,756) $190,000 

 

                  

Accumulated Other

     
  

Preferred

  

Common

  

Capital

  

Retained

  

Comprehensive

     
  

Stock

  

Stock

  

Surplus

  

Earnings

  

Income (Loss)

  

Total

 

Balance, December 31, 2021

 $27,263  $29,466  $67,668  $64,194  $197  $188,788 

Vesting of restricted stock

  —   399   (399)  —   —   — 

Stock based compensation expense

  —   —   1,743   —   —   1,743 

Common stock repurchased

  —   (1,137)  (5,781)  —   —   (6,918)

Dividends on preferred stock - ($0.94 per depositary share)

  —   —   —   (1,617)  —   (1,617)

Dividends on common stock - ($0.15 per share)

  —   —   —   (1,138)  —   (1,138)

Net income

  —   —   —   19,095   —   19,095 

Other comprehensive loss

  —   —   —   —   (9,953)  (9,953)

Balance, September 30, 2022

 $27,263  $28,728  $63,231  $80,534  $(9,756) $190,000 

 

See Notes to the Unaudited Consolidated Financial Statements

 

6
 

 

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

 

Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)

 

For the nine months ended September 30,

  

2023

    

2022

  

Cash Flows from Operating Activities

                

Net income

   $ 21,438     $ 19,095  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation, amortization, and accretion, net

     1,684       1,625  

Deferred income tax expense (benefit)

     238       (59 )

Provision for credit losses

     1,176       1,280  

Writedown of other real estate owned

     —       70  

Loss on sale of other real estate owned

     —       4  

Loss on sale of loans

     —       168  

Stock based compensation expense

     1,903       1,743  

Income from bank owned life insurance

     (786 )     (755 )

Subordinated debt amortization expense

     298       229  

Gain on disposal of premises and equipment

     (129 )     —  

Loss on New Market Tax Credit investment operations

     176       —  

Gain on call of held-to-maturity securities

     —       (4 )

Amortization of operating lease right-of-use assets

     239       233  

Change in:

                

Accrued interest receivable and other receivables

     (1,597 )     (572 )

Other assets

     (5,520 )     (26,875 )

Other liabilities

     7,188       26,688  

Net cash provided by operating activities

     26,308       22,870  

Cash Flows from Investing Activities

                

Activity in available-for-sale securities:

                

Payments

     2,666       5,783  

Maturities

     —       145,000  

Purchases

     —       (226,215 )

Activity in held-to-maturity securities:

                

Called

     —       2,595  

Purchases of equity securities

     (231 )     (224 )

Proceeds on sale of loans

     —       868  

Proceeds on sale of other real estate owned

     —       701  

Purchases of restricted investment in bank stock

     (5,974 )     (4,873 )

Redemption of restricted investment in bank stock

     9,339       4,125  

Net increase in loan portfolio

     (103,323 )     (108,627 )

Computer software developed

     (4,224 )     (4,765 )

Proceeds from sale of premises and equipment

     129       —  

Purchases of premises and equipment

     (490 )     (614 )

Net cash used in investing activities

     (102,108 )     (186,246 )

Cash Flows from Financing Activities

                

Net increase (decrease) in non-interest deposits

     (155,831 )     35,338  

Net increase in interest bearing demand, savings, and time deposits

     326,132       106,623  

Net decrease in Federal Home Loan Bank advances

     (100,000 )     —  

Net increase in subordinated debt, net issuance costs

     —       42,623  

Cash dividends paid on preferred stock

     (1,617 )     (1,617 )

Cash dividends paid on common stock

     (2,258 )     (1,138 )

Repurchases of common stock

     (43 )     (6,918 )

Net cash provided by financing activities

     66,383       174,911  

Increase (Decrease) in Cash and Cash Equivalents

     (9,417 )     11,535  

Cash and Cash Equivalents, beginning of period

     130,600       93,199  

Cash and Cash Equivalents, end of period

   $ 121,183     $ 104,734  

Supplementary Disclosure of Cash Flow Information

                

Cash paid during the period for interest

   $ 29,581     $ 7,869  

Cash paid during the period for income taxes

   $ 6,180     $ 3,941  

Net unrealized loss on securities available-for-sale

   $ (2,955 )   $ (12,606 )

Net cumulative change in accounting principle

   $ (1,699 )   $ —  

 

See Notes to the Unaudited Consolidated Financial Statements

 

7
 

 

MAINSTREET BANCSHARES, INC. AND SUBSIDIARY

 

Notes to Unaudited Consolidated Financial Statements

 

 

Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements

 

Organization

 

MainStreet Bancshares, Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose primary activity is the ownership and management of MainStreet Bank (the “Bank”). On October 12, 2021, the Company filed an election with the Federal Reserve Board to be a financial holding company in order to engage in a broader range of financial activities than are permitted for bank holding companies generally. The Company is authorized to issue 10,000,000 shares of common stock with a par value of $4.00 per share. Additionally, the Company is authorized to issue 2,000,000 shares of preferred stock at a par value $1.00 per share. There are currently 28,750 shares of preferred stock outstanding. The Company is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”) and is subject to inspection, examination, and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

 

On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission (the “SEC”) through its filing of a General Form for Registration of Securities on Form 10 (“Form 10”), pursuant to Section 12(b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b-2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the SEC.

 

The Company was approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB” as of April 22, 2019. We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market under the symbol “MNSBP” as of September 16, 2020. Each depositary share represents a 1/40th ownership interest in a share of 7.50% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock.

 

The Bank is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March 28, 2003, and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004. The Bank commenced regular operations on May 26, 2004, and is supervised by the Bureau and the Federal Reserve. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of retail customers, small and medium-sized businesses and professionals in the Washington, D.C. metropolitan area.

 

In September 2021, MainStreet Bancshares, Inc. established MainStreet Community Capital, LLC, a wholly owned subsidiary, to be a community development entity (“CDE”). This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE. MainStreet Community Capital's primary business objective will be to apply for and receive New Market Tax Credit ("NMTC") allocations that are awarded and distributed annually.

 

On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu, a division of MainStreet Bank. Avenu provides an embedded banking solution that connects our partners (fintechs, application developers, money movers, and entrepreneurs) directly and seamlessly to our Software as a Service (SaaS) solution.  Our SaaS solution has launched with our first beta client.

 

Basis of Presentation

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and notes required by US GAAP for complete financial statements.

 

The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2022 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form 10-K filed by the Company with the SEC on March 23, 2023. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or any other period.

 

Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.

 

8
 
 

The Company’s critical accounting policies relate to (1) the allowance for credit losses on loans, (2) fair value of financial instruments, and (3) derivative financial instruments. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions, and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. In connection with the determination of the allowances for credit losses on loans management obtains independent appraisals for significant properties.

 

Summary of Significant Accounting Policies

 

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

 

The Company adopted ASC 326 and all the subsequent amendments effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior periods amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $1.7 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The transition adjustment includes an increase in allowance for credit reserves of $2.2 million and an increase in net deferred tax assets of $506,000.

 

Impact of Recently Issued Accounting Pronouncements

 

In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.

 

In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

 

In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”.  This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.

 

 

9
 
 

 

Recently Adopted Accounting Developments

 

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.   ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans and an adjustment to the Company’s reserve for unfunded loan commitments, was $2.2 million. The adjustment net of tax recorded to stockholders’ equity totaled $1.7 million.  

 

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB 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 by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs. An entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. There was no material impact to the Company's consolidated financial statements or related disclosures.

 
 

Note 2. Investment Securities

 

The following tables summarize the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at September 30, 2023  and December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss). Upon further analysis, the Company did not record an allowance for credit losses on its securities held-to-maturity portfolio as of September 30, 2023.

 

Investment securities available-for-sale was comprised of the following:

 

  

September 30, 2023

 

(Dollars in thousands)

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

Collateralized Mortgage Backed

 $24,402  $—  $(5,231) $19,171 

Subordinated Debt

  9,970   —   (1,692)  8,278 

Municipal Securities:

                

Taxable

  10,656   —   (2,997)  7,659 

Tax-exempt

  22,707   —   (4,108)  18,599 

U.S. Governmental Agencies

  3,054   3   (38)  3,019 

Total

 $70,789  $3  $(14,066) $56,726 

 

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Investment securities held-to-maturity was comprised of the following:

 

  

September 30, 2023

 

(Dollars in thousands)

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

Municipal Securities:

                

Tax-exempt

 $15,065  $—  $(744) $14,321 

Subordinated Debt

  2,500   —   (9)  2,491 

Total

 $17,565  $—  $(753) $16,812 

 

Investment securities available-for-sale was comprised of the following:

 

  

December 31, 2022

 

(Dollars in thousands)

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

Collateralized Mortgage Backed

 $26,801  $—  $(4,574) $22,227 

Subordinated Debt

  9,970   —   (1,143)  8,827 

Municipal Securities:

                

Taxable

  10,675   —   (2,709)  7,966 

Tax-exempt

  22,823   10   (2,658)  20,175 

U.S. Governmental Agencies

  3,470   2   (36)  3,436 

Total

 $73,739  $12  $(11,120) $62,631 

 

Investment securities held-to-maturity was comprised of the following:

 

  

December 31, 2022

 

(Dollars in thousands)

 

Amortized Cost

  

Gross Unrealized Gains

  

Gross Unrealized Losses

  

Fair Value

 

Municipal Securities:

                

Tax-exempt

 $15,142  $35  $(237) $14,940 

Subordinated Debt

  2,500   —   —   2,500 

Total

 $17,642  $35  $(237) $17,440 

 

Credit Quality Indicators and Allowance for Credit Losses - HTM

 

For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis. The Company estimates expected credit losses on HTM debt securities on an individual basis using security-level credit ratings. The Company’s HTM securities ACL was immaterial at  September 30, 2023. The primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The majority of the Company’s HTM securities with credit risk are obligations of states and political subdivisions.

 

The following table presents the amortized cost of HTM securities as of  September 30, 2023 and  December 31, 2022 by security type and credit rating:

 

(Dollars in thousands)

 

Municipal Securities

  

Subordinated Debt

  

Total HTM securities

 

September 30, 2023

            

Credit Rating:

            

AAA/AA/A

 $15,065  $—  $15,065 

Not Rated - Non Agency

  —   2,500   2,500 

Total

 $15,065  $2,500  $17,565 

December 31, 2022

            

Credit Rating:

            

AAA/AA/A

 $15,142  $—  $15,142 

Not Rated - Non Agency

  —   2,500   2,500 

Total

 $15,142  $2,500  $17,642 

 

The scheduled maturities of securities available-for-sale and held-to-maturity at  September 30, 2023 were as follows:

 

  

September 30, 2023

 
  

Available-for-Sale

  

Held-to-Maturity

 

(Dollars in thousands)

 

Amortized Cost

  

Fair Value

  

Amortized Cost

  

Fair Value

 

Due in one year or less

 $—  $—  $265  $264 

Due from one to five years

  1,000   955   3,643   3,547 

Due from after five to ten years

  14,100   11,834   7,227   7,063 

Due after ten years

  55,689   43,937   6,430   5,938 

Total

 $70,789  $56,726  $17,565  $16,812 

 

11
 
 

The scheduled maturities of securities available-for-sale and held-to-maturity at  December 31, 2022 were as follows:

 

  

December 31, 2022

 
  

Available-for-Sale

  

Held-to-Maturity

 

(Dollars in thousands)

 

Amortized
Cost

  

Fair Value

  

Amortized
Cost

  

Fair Value

 

Due in one year or less

 $—