1895 Bancorp of Wisconsin, Inc.: Form 10-Q for the period ended Sep 30, 2024
Filed with the SEC on Nov 8, 2024 and accepted by EDGAR at Nov 8, 2024, 11:30 ET.
Management's discussion and analysis
As filed, 50,608 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
General
Management’s discussion and analysis of financial condition and results of operations at September 30, 2024 and for the three and nine months ended September 30, 2024 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
- statements of our goals, intentions and expectations;
- statements regarding our business plans, prospects, growth and operating strategies;
- statements regarding the quality of our loan and investment portfolios; and
- estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
- our ability to maintain liquidity, primarily through deposits, in light of recent events in the banking industry;
- general economic conditions, either nationally or in our market areas, that are worse than expected;
- changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
- inflation and/or changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;
- our ability to manage market risk, credit risk and operational risk;
- our ability to access cost-effective funding;
- fluctuations in real estate values and both residential and commercial real estate market conditions;
- demand for loans and deposits in our market area;
- our ability to implement and change our business strategies;
- competition among depository and other financial institutions;
- adverse changes in the securities or secondary mortgage markets;
- changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums;
- changes in the quality or composition of our loan or investment portfolios;
- technological changes that may be more difficult or expensive than expected;
- the inability of third-party providers to perform as expected;
- a failure or breach of our operational or security systems or infrastructure, including cyberattacks;
- our ability to enter new markets successfully and capitalize on growth opportunities;
- our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we have acquired or may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
- changes in consumer spending, borrowing and savings habits;
- changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board, including the effects of our adoption of the Current Expected Credit Loss (“CECL”) accounting standard, which we implemented on January 1, 2023;
- our ability to retain key employees;
- our compensation expense associated with equity allocated or awarded to our employees; and
- changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Additional factors that may affect our results are discussed under the heading "Risk Factors" in our most recent Annual Report on Form 10-K (fiscal year ended December 31, 2023) filed with the Securities and Exchange Commission (“SEC”) on March 29, 2024, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events. Accordingly, you should not place undue reliance on forward-looking statements.
Critical Accounting Policies
As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for credit losses, determination of fair value for financial instruments, and valuation of deferred income taxes.
A summary of the accounting policies used by management is disclosed in Note 1, “Summary of Significant Accounting Policies” in the Company's most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”) on March 29, 2024.
During 2024, we did not substantively change any material aspect of our overall methodologies and processes used in developing the remaining critical accounting estimates from those described in the Consolidated Financial Statements in our 2023 Annual Report on Form 10-K.
Comparison of Financial Condition at September 30, 2024 and December 31, 2023
Total Assets. Total assets increased $6.9 million, or 1.2%, to $564.5 million at September 30, 2024 from $557.6 million at December 31, 2023. This increase was primarily due to a $12.4 million net increase in cash and cash equivalents and a $3.0 million increase in loans, partially offset by a $9.3 million decrease in available-for-sale securities.
Cash and Cash Equivalents. Cash and cash equivalents increased $12.4 million, or 93.2%, to $25.7 million at September 30, 2024 from $13.3 million at December 31, 2023. This increase was primarily due to a $4.8 million net increase in FHLB advances, a $8.6 million increase in advance payments by borrowers for taxes and insurance and $13.6 million from maturities, payments and calls of available-for-sale securities, partially offset by an $8.4 million decrease in deposits, a $3.0 million increase in loans and the purchase of $2.0 million in available-for-sale securities.
Available-for-Sale Securities. Available-for-sale securities decreased $9.3 million, or 8.5%, to $100.3 million at September 30, 2024, from $109.6 million at December 31, 2023. This decrease was primarily due to maturities, payments and calls of securities totaling $13.6 million, partially offset by and a $2.4 million decrease in the net unrealized loss on available-for-sale securities and the purchase of $2.0 million of available-for-sale securities. The net unrealized loss on available-for-sale securities held in the portfolio was $7.1 million at September 30, 2024.
Loans. Loans held for investment, net of deferred costs, increased $3.0 million, or 0.8%, to $401.6 million at September 30, 2024, from $398.6 million at December 31, 2023. This increase was primarily the result of a $2.4 million increase in commercial loans and a $2.0 million increase in commercial real estate loans, partially offset by a $1.5 million decrease in first mortgage residential real estate loans.
Allowance for Credit Losses. The allowance for credit losses for loans was $4.0 million, or 0.99%, of loans, net of deferred costs, at September 30, 2024 compared to an allowance for credit losses for loans of $3.7 million, or 0.94% of loans, net of deferred costs, at December 31, 2023. During the first nine months of 2024, we recorded a $121,000 provision for credit losses and $111,000 in net recoveries. The allowance for credit losses for unfunded loan commitments was $979,000 at September 30, 2024, compared to $875,000 at December 31, 2023. The increase in the allowance for credit losses for unfunded loan commitments was the result of a $104,000 provision for credit losses. Nonaccrual loans represented 0.23% of total loans at September 30, 2024 and 0.28% at December 31, 2023.
FHLB Stock. FHLB stock increased $400,000, or 9.5%, from $4.2 million at December 31, 2023 to $4.6 million at September 30, 2024. This increase was primarily due to the requirement by the FHLB to hold additional stock as a result of the increased level of advances.
Deposits. Deposits decreased $8.4 million, or 2.1%, to $395.3 million at September 30, 2024, from $403.7 million at December 31, 2023. During this period, noninterest bearing checking accounts decreased $7.1 million, or 9.0%, interest bearing checking accounts decreased $1.8 million, or 6.2%, money market accounts increased $7.1 million, or 8.0%, and savings accounts decreased $6.5 million million, or 14.0%. Certificates of deposit were relatively unchanged, at $161.1 million at both periods.
Advance Payments by Borrowers for Taxes and Insurance. Advance payments by borrowers for taxes and insurance increased $8.6 million to $9.8 million at September 30, 2024 from $1.2 million at December 31, 2023. The increase was due to normal seasonal activity.
FHLB Advances. FHLB advances increased $4.8 million, or 6.8%, to $75.8 million at September 30, 2024, from $71.0 million at December 31, 2023. The level of FHLB advances was increased to fund cash outflows related to loans and deposits.
Total Stockholders’ Equity. Total stockholders’ equity increased $413,000 to $73.2 million at September 30, 2024, from $72.8 million at December 31, 2023. The increase was primarily due to other comprehensive income of $1.7 million as a result of a decrease in the net unrealized loss on available-for-sale securities, and $504,000 as a result of the equity impact of stock compensation expense, partially offset by a net loss of $981,000 and the Company's purchase of $1.0 million of its common stock under its stock repurchase plan.
Average Balances and Yields
The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances but are reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred costs, premiums and discounts that are amortized or accreted to interest income or interest expense.
(Dollars in thousands)
| Interest-earning assets: | Three Months Ended September 30, 2024 Average Outstanding Balance | Interest and Dividends | Yield/Cost Rate | 2023 Average Outstanding Balance | Interest and Dividends | Yield/Cost Rate |
|---|---|---|---|---|---|---|
| Loans(1) | $402,170 | $4,800 | 4.75% | $384,328 | $4,423 | 4.57% |
| Securities available-for-sale | 102,554 | 946 | 3.67% | 106,003 | 656 | 2.45% |
| Other interest-earning assets | 17,946 | 273 | 6.05% | 20,136 | 292 | 5.75% |
| Total interest-earning assets | 522,670 | 6,019 | 4.58% | 510,467 | 5,371 | 4.17% |
| Non-interest-earning assets | 35,168 | 36,860 | ||||
| Total assets | $557,838 | $547,327 | ||||
| Interest-earning liabilities: | ||||||
| NOW accounts | $27,438 | $91 | 1.33% | $29,328 | $67 | 0.90% |
| Money market accounts | 91,013 | 542 | 2.37% | 89,069 | 473 | 2.11% |
| Savings accounts | 40,886 | 5 | 0.05% | 50,037 | 5 | 0.04% |
| Certificates of deposit | 165,297 | 1,883 | 4.53% | 135,141 | 1,287 | 3.78% |
| Total interest-bearing deposits | 324,634 | 2,521 | 3.09% | 303,575 | 1,832 | 2.39% |
| Federal Home Loan Bank advances | 73,797 | 491 | 2.65% | 82,537 | 586 | 2.82% |
| Other interest-bearing liabilities | 9,133 | 2 | 0.07% | 9,843 | 1 | 0.05% |
| Total interest-bearing liabilities | 407,564 | 3,014 | 2.94% | 395,955 | 2,419 | 2.42% |
| Non-interest-bearing deposits | 69,980 | 72,289 | ||||
| Other non-interest-bearing liabilities | 10,091 | 8,287 | ||||
| Total liabilities | 487,635 | 476,531 | ||||
| Total stockholders’ equity | 70,203 | 70,796 | ||||
| Total liabilities and stockholders’ equity | $557,838 | $547,327 | ||||
| Net interest income | $3,005 | $2,952 | ||||
| Net interest-earning assets | $115,106 | $114,512 | ||||
| Interest rate spread(2) | 1.64% | 1.75% | ||||
| Net interest margin(3) | 2.29% | 2.29% | ||||
| Average interest-earning assets to average interest-bearing liabilities | 128.24% | 128.92% |
(1) Includes net loan expenses of $291,000 and $34,000 for the three months ended September 30, 2024 and 2023, respectively.
(2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(Dollars in thousands)
| Interest-earning assets: | Nine Months Ended September 30, 2024 Average Outstanding Balance | Interest and Dividends | Yield/Cost Rate | 2023 Average Outstanding Balance | Interest and Dividends | Yield/Cost Rate |
|---|---|---|---|---|---|---|
| Loans(1) | $400,201 | $14,535 | 4.85% | $375,817 | $12,487 | 4.44% |
| Securities available-for-sale | 105,079 | 2,993 | 3.81% | 110,193 | 1,847 | 2.24% |
| Other interest-earning assets | 16,051 | 729 | 6.07% | 17,393 | 767 | 5.89% |
| Total interest-earning assets | 521,331 | 18,257 | 4.68% | 503,403 | 15,101 | 4.01% |
| Non-interest-earning assets | 35,145 | 36,935 | ||||
| Total assets | $556,476 | $540,338 | ||||
| Interest-earning liabilities: | ||||||
| NOW accounts | $28,387 | $272 | 1.28% | $30,709 | $178 | 0.78% |
| Money market accounts | 86,874 | 1,523 | 2.34% | 102,209 | 1,545 | 2.02% |
| Savings accounts | 42,799 | 16 | 0.05% | 54,055 | 20 | 0.05% |
| Certificates of deposit | 165,672 | 5,607 | 4.52% | 104,948 | 2,368 | 3.02% |
| Total interest-bearing deposits | 323,732 | 7,418 | 3.06% | 291,921 | 4,111 | 1.88% |
| Federal Home Loan Bank advances | 77,281 | 1,605 | 2.78% | 84,436 | 1,733 | 2.74% |
| Other interest-bearing liabilities | 6,254 | 5 | 0.10% | 6,502 | 4 | 0.09% |
| Total interest-bearing liabilities | 407,267 | 9,028 | 2.96% | 382,859 | 5,848 | 2.04% |
| Non-interest-bearing deposits | 70,125 | 77,321 | ||||
| Other non-interest-bearing liabilities | 9,357 | 7,441 | ||||
| Total liabilities | 486,749 | 467,621 | ||||
| Total stockholders’ equity | 69,727 | 72,717 | ||||
| Total liabilities and stockholders’ equity | $556,476 | $540,338 | ||||
| Net interest income | $9,229 | $9,253 | ||||
| Net interest-earning assets | $114,064 | $120,544 | ||||
| Interest rate spread(2) | 1.72% | 1.97% | ||||
| Net interest margin(3) | 2.36% | 2.46% | ||||
| Average interest-earning assets to average interest-bearing liabilities | 128.01% | 131.49% |
(1) Includes net loan expenses of $311,000 and $89,000 for the nine months ended September 30, 2024 and 2023, respectively.
(2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following tables present the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in average rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period average rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.
(Dollars in thousands)
| Interest-earning assets: | Three Months Ended September 30, 2024 vs. 2023 Increase (Decrease) Due to Volume | Rate | Total Increase (Decrease) |
|---|---|---|---|
| Loans | $210 | $167 | $377 |
| Securities | (21) | 311 | 290 |
| Other | (35) | 16 | (19) |
| Total interest-earning assets | 154 | 494 | 648 |
| Interest-bearing liabilities: | |||
| NOW | 4 | (28) | (24) |
| Money market deposits | (10) | (59) | (69) |
| Savings | 2 | (2) | — |
| Certificates of deposit | (317) | (279) | (596) |
| Total interest-bearing deposits | (321) | (368) | (689) |
| Borrowings | 60 | 35 | 95 |
| Other | — | (1) | (1) |
| Total interest-bearing liabilities | (261) | (334) | (595) |
| Change in net interest income | $(107) | $160 | $53 |
(Dollars in thousands)
| Interest-earning assets: | Nine Months Ended September 30, 2024 vs. 2023 Increase (Decrease) Due to Volume | Rate | Total Increase (Decrease) |
|---|---|---|---|
| Loans | $841 | $1,207 | $2,048 |
| Securities | (82) | 1,228 | 1,146 |
| Other | (62) | 24 | (38) |
| Total interest-earning assets | 697 | 2,459 | 3,156 |
| Interest-bearing liabilities: | |||
| NOW | 12 | (106) | (94) |
| Money market deposits | (330) | 352 | 22 |
| Savings | 5 | (1) | 4 |
| Certificates of deposit | (1,738) | (1,501) | (3,239) |
| Total interest-bearing deposits | (2,051) | (1,256) | (3,307) |
| Borrowings | 149 | (21) | 128 |
| Other | — | (1) | (1) |
| Total interest-bearing liabilities | (1,902) | (1,278) | (3,180) |
| Change in net interest income | $(1,205) | $1,181 | $(24) |
40
Comparison of Operating Results for the three months ended September 30, 2024 and 2023
Net Loss. We recorded a net loss of $159,000 for the three months ended September 30, 2024, compared to a net loss of $3.6 million for the three months ended September 30, 2023. The decrease in net loss was primarily due to a $1.9 million net loss on sale of securities during the three months ended September 30, 2023, a $1.7 million decrease in income tax expense and a $358,000 increase in other noninterest income (excluding net loss on sale of securities) in the current quarter, partially offset by a $577,000 increase in noninterest expenses.
Interest and Dividend Income. Interest and dividend income increased $648,000, or 12.0%, to $6.0 million for the three months ended September 30, 2024 from $5.4 million for the three months ended September 30, 2023. The increase was due primarily to a $377,000 increase in interest and fees on loans and a $290,000 increase in interest income on securities. The increase in interest and fees earned on loans was primarily due to a $17.9 million increase in the average amount of loans outstanding, from $384.3 million in the third quarter of 2023 to $402.2 million in the third quarter of 2024, and an 18 basis point increase in the yield earned on loans, from 4.57% for the third quarter of 2023 to 4.75% in the third quarter of 2024. The increase in the yield earned on loans during the third quarter of 2024 was primarily due to higher yields on new loans and existing loans that have repriced at higher rates since the third quarter of 2023, as a result of higher market interest rates. The increase in loans outstanding is consistent with the Company's strategy to grow the loan portfolio. The increase in interest on securities was primarily due to a 122 basis point increase in the yield earned on securities, from 2.45% for the third quarter of 2023 to 3.67% in the third quarter of 2024, partially offset by a $3.4 million decrease in the average amount of securities outstanding. The increase in yield and interest income on securities was primarily due to the previously disclosed balance sheet repositioning strategies that the Company implemented during 2023.
Interest Expense. Interest expense increased $595,000, or 24.8%, to $3.0 million for the three months ended September 30, 2024, from $2.4 million for the three months ended September 30, 2023. This increase was primarily due to a $689,000 increase in interest expense on deposits, partially offset by a $95,000 decrease in interest expense on FHLB advances. The increase in interest expense on deposits was primarily due to a 70 basis point increase in the average rate paid on deposits and a $21.1 million increase in average interest-bearing deposits outstanding from the third quarter of 2023 to the third quarter of 2024. The increase in interest expense on deposits was primarily due to the increase in market rates of interest and a shift in our deposit mix. As market rates increased, many of our deposit customers transferred funds from noninterest bearing checking accounts and lower rate deposit accounts into higher rate certificates of deposit. During this period, the average balance of noninterest bearing checking accounts decreased $2.3 million, or 3.2%, NOW accounts decreased $1.9 million, or 6.4% and savings accounts decreased $9.2 million, or 18.3%. During the same period, the average balance of certificates of deposits increased $30.2 million, or 22.3% and money market accounts increased $1.9 million, or 21.8%. Interest expense on certificates of deposit increased $596,000 from the third quarter of 2023 to the third quarter of 2024 as a result of the increase in average balance and a 75 basis point increase in the average rate paid on these accounts.
Net Interest Income. Net interest income increased $53,000, or 1.8%, to $3.0 million for the three months ended September 30, 2024. This increase was primarily due to a $648,000 increase in interest income partially offset by a $595,000 increase in interest expense. Our net interest rate spread decreased 11 basis points to 1.64% for the three months ended September 30, 2024, from 1.75% for the three months ended September 30, 2023. Our net interest margin was 2.29% for the three months ended September 30, 2024 and the three months ended September 30, 2023.
Provision for Credit Losses. The provision for credit losses was $75,000 for each of the three months ended September 30, 2024 and the three months ended September 30, 2023. The provision in each period was primarily due to an increase in average loans outstanding in each of the respective periods.
Noninterest Income. Noninterest income increased $2.3 million, from negative $1.4 million for the three months ended September 30, 2023 to $900,000 for the three months ended September 30, 2024. The increase was primarily due to a $1.9 million net loss on sale of securities during the three months ended September 30, 2023 and a $406,000 increase in the unrealized gain (loss) on marketable equity securities. The loss on sale of securities was a result of the balance sheet repositioning strategies that the Company implemented during 2023. The increase in unrealized gains on marketable equity securities was due to an increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market value of equity securities in noninterest expense.
Noninterest Expense. Noninterest expense increased $577,000, or 15.6%, to $4.3 million for the three months ended September 30, 2024 from $3.7 million for the three months ended September 30, 2023. This increase was primarily due to a $281,000 increase in salaries and benefits expense and a $406,000 increase in unrealized gains on marketable equity securities. The increase in salaries and benefits was primarily due to a $199,000 increase in bonus expense and a $64,000 increase in deferred compensation expense. During 2023, we adjusted our bonus program, which resulted in no bonus expense for the third quarter of 2023. The increase in deferred compensation expense was as a result of an increase in the value of our stock held in the deferred compensation plan. The Company continues to implement cost savings initiatives, including the review of all open positions prior to rehiring. This initiative has resulted in a reduction in the number of full-time equivalent employees from 106 at September 30, 2022, to 88 at September 30, 2024. The increase in unrealized gains on marketable equity securities was due to an increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market value of equity securities in noninterest income.
Income Tax Expense. We recorded an income tax benefit of $298,000 for the three months ended September 30, 2024, compared to income tax expense of $1.4 million for the three months ended September 30, 2023. The change in income tax expense (benefit) was primarily due to the impact of the change in Wisconsin tax law in July 2023, retroactive to January 2023. As a result of this change in tax law, we did not record any income tax benefit for Wisconsin state taxes for the three months ended September 30, 2024. In addition, during the second quarter of 2023, this tax law change resulted in a $1.8 million increase in the valuation allowance for deferred tax assets and the recording of a $98,000 reduction in tax benefits previously booked for the six months ended June 30, 2023.
Comparison of Operating Results for the nine months ended September 30, 2024 and 2023
Net Loss. We recorded a net loss of $981,000 for the nine months ended September 30, 2024, compared to a net loss of $4.5 million for the nine months ended September 30, 2023. The decrease in net loss was primarily due to a $2.3 million increase in noninterest income and a $1.6 million decrease in income tax expense (benefit), partially offset by a $319,000 increase in noninterest expenses.
Interest and Dividend Income. Interest and dividend income increased $3.2 million, or 21.2%, to $18.3 million for the nine months ended September 30, 2024, from $15.1 million for the nine months ended September 30, 2023. The increase was due primarily to a $2.0 million increase in interest and fees on loans and an $1.1 million increase in interest income on securities. The increase in interest and fees earned on loans was primarily due to a $24.4 million increase in the average amount of loans outstanding, from $375.8 million in the first nine months of 2023 to $400.2 million in the first nine months of 2024, and a 41 basis point increase in the yield earned on loans, from 4.44% for the first nine months of 2023 to 4.85% in the first nine months of 2024. The increase in the yield earned on loans during the first nine months of 2024 was primarily due to higher yields on new loans and existing loans that have repriced at higher rates since the first nine months of 2023, as a result of higher market interest rates. The increase in loans is consistent with the Company's strategy to grow the loan portfolio. The increase in interest on securities was primarily due to a 157 basis point increase in the yield earned on securities, from 2.24% for the first nine months of 2023 to 3.81% in the first nine months of 2024. The increase in yield was primarily due to the balance sheet repositioning strategies that the Company implemented during 2023.
Interest Expense. Interest expense increased $3.2 million, or 55.2%, to $9.0 million for the nine months ended September 30, 2024, from $5.8 million for the nine months ended September 30, 2023. This increase was primarily due to a $3.3 million increase in interest expense on deposits. The increase in interest expense on deposits was primarily due to a 118 basis point increase in the average rate paid on deposits and a $31.8 million increase in average interest-bearing deposits outstanding from the first nine months of 2023 to the first nine months of 2024. The increase in interest expense on deposits was primarily due to the increase in market rates of interest and a shift in our deposit mix. As market rates increased, many of our deposit customers transferred funds from noninterest bearing checking accounts and lower rate deposit accounts into higher rate certificates of deposit. The average balance of noninterest bearing checking accounts decreased $7.2 million, or 9.3%, NOW accounts decreased $2.3 million, or 7.6%, savings accounts decreased $11.3 million, or 20.8%, and money market accounts decreased $15.3 million, or 15.0%, respectively, from the first nine months of 2023 to the first nine months of 2024. During the same period, the average balance of certificates of deposits increased $60.7 million, or 57.9%. Interest expense on certificates of deposit increased $3.2 million from the first nine months of 2023 to the first nine months of 2024 as a result of the increase in average balance and also a 150 basis point increase in the average rate paid on these accounts.
Net Interest Income. Net interest income decreased $24,000, or 0.3%, to $9.2 million for the nine months ended September 30, 2024. This decrease was primarily due to a $3.2 million increase in interest expense, partially offset by a $3.2 million increase in interest and dividend income. Our net interest rate spread decreased 25 basis points to 1.72% for the nine months ended September 30, 2024, from 1.97% for the nine months ended September 30, 2023. Our net interest margin decreased 10 basis points to 2.36%, from 2.46% over the same period.
Provision for Credit Losses. The provision for credit losses was $225,000 for the nine months ended September 30, 2024 and the nine months ended September 30, 2023, respectively. The provision was primarily due to an increase in average loans outstanding for the nine months ended September 30, 2024 and an increase in average loans outstanding and loan commitments that are expected to fund for the nine months ended September 30, 2024 and the nine months ended September 30, 2023.
Noninterest Income. Noninterest income increased $2.3 million, to $2.6 million for the nine months ended September 30, 2024, from $306,000 for the nine months ended September 30, 2023. The increase was primarily due to a $1.9 million net loss on sale of securities during the nine months ended September 30, 2023, a $439,000 increase in the unrealized gain on marketable equity securities and a $184,000 increase in net gain on sale of loans, partially offset by a $230,000 decrease in other noninterest income. The loss on sale of securities was a result of the balance sheet repositioning strategies that the Company implemented during 2023. The increase in unrealized gains on marketable equity securities was due to an increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market value of equity securities in noninterest expense. The increase in net gain on sale of loans is primarily due to an increase in the origination and sale of mortgage loans, which increased to $17.1 million and $17.6 million, respectively during the first nine months of 2024, compared to $8.9 million and $8.8 million, respectively, during the first nine months of 2023. The decrease in other noninterest income was primarily due to a $157,000 gain from the collection of benefits from a bank owned life insurance policy received in the second quarter of 2023 and a $110,000 gain on the sale of our former branch facility in West Allis in the third quarter of 2023.
Noninterest Expense. Noninterest expense increased $319,000, or 2.5%, to $13.1 million for the nine months ended September 30, 2024 from $12.8 million for the nine months ended September 30, 2023. The increase was primarily due to a $439,000 increase in unrealized gains on marketable equity securities and a $374,000 increase in other noninterest expenses, partially offset by a $332,000 decrease in salaries and benefits expense. The increase in unrealized gains on marketable equity securities was due to an increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market value of equity securities in noninterest income. The increase in other noninterest expense was primarily due to $358,000 in professional fees related to the renegotiation and renewal of our core data processing contract. The renegotiation of this contract is expected to result in a $1.5 million reduction in data processing expenses over the term of the contract. The decrease in salaries and benefits expense was primarily the result of cost savings initiatives implemented by the Company, including the review of all open positions prior to rehiring and a reduction-in-force ("RIF") implemented in April 2023. These actions have resulted in a reduction in the number of full-time equivalent employees from 106 at September 30, 2022, to 88 at September 30, 2024. The positive impact of these initiatives was partially offset by a $176,000 increase in deferred compensation expense as a result of an increase in the value of our stock held in the deferred compensation plan during this period.
Income Tax Expense. We recorded an income tax benefit of $557,000 for the nine months ended September 30, 2024, compared to income tax expense of $1.0 million for the nine months ended September 30, 2023. The change in income tax expense (benefit) was primarily due to the impact of the change in Wisconsin tax law in July 2023. As a result of this change in tax law, we did not record any income tax benefit for Wisconsin state taxes for the nine months ended September 30, 2024. In addition, during the second quarter of 2023, this tax law change resulted in a $1.8 million increase in the valuation allowance for deferred tax assets and the recording of a $98,000 reduction in tax benefits previously booked for the six months ended June 30, 2023.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:
- originating commercial real estate and commercial loans, which tend to have shorter terms and higher interest rates than owner occupied one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest-bearing checking accounts;
- selling substantially all of our conforming and eligible jumbo, longer-term, fixed-rate one- to four-family residential real estate loans and retaining the non-conforming and shorter-term, fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate, subject to market conditions and periodic review of our asset/liability management needs; and
- reducing our dependence on jumbo and brokered certificates of deposit to support lending and investment activities and increasing our reliance on core deposits, including checking accounts and savings accounts, which are less interest rate sensitive than certificates of deposit.
Our board of directors is responsible for the review and oversight of our executive management team and other essential operational staff which are responsible for our asset/liability analysis. These officers act as an asset/liability committee and are charged with developing and implementing an asset/liability management plan, and they meet at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors.
We do not engage in material hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage-backed securities.
The table below sets forth, as of September 30, 2024, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the U.S. Treasury yield curve.
(Dollars in thousands)
| Change in Interest Rates (basis points) (1) | Net Interest Income Year 1 Forecast | Year 1 Change from Level |
|---|---|---|
| +400 | $12,925 | (4.87)% |
| +300 | 13,174 | (3.04)% |
| +200 | 13,431 | (1.15)% |
| +100 | 13,471 | (0.85)% |
| Level | 13,587 | —% |
| -100 | 13,476 | (0.82)% |
| -200 | 13,242 | (2.54)% |
| -300 | 13,488 | (0.73)% |
| -400 | 13,478 | (0.80)% |
(1) Assumes an immediate uniform change in interest rates at all maturities.
Economic Value of Equity. We also monitor interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of our assets and liabilities (our economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist us in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within our policy guidelines.
The table below sets forth, as of September 30, 2024, the estimated changes in our EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
(Dollars in thousands)
| Basis Point (“bp”) Change in Interest Rates(1) | Estimated EVE(2) | Estimated Increase (Decrease) in EVE Amount | Percent |
|---|---|---|---|
| +400 | $63,018 | $(4,942) | (7.27)% |
| +300 | 64,993 | (2,967) | (4.37)% |
| +200 | 66,942 | (1,018) | (1.50)% |
| +100 | 68,428 | 468 | 0.69% |
| Level | 67,960 | — | — |
| -100 | 68,000 | 40 | 0.06% |
| -200 | 66,772 | (1,188) | (1.75)% |
| -300 | 63,421 | (4,539) | (6.68)% |
| -400 | 60,275 | (7,685) | (11.31)% |
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
The table above indicates that at September 30, 2024, in the event of a 100-basis point increase in interest rates, we would have experienced a 0.69% increase in our EVE and in the event of a 100-basis point decrease in interest rates, we would have experienced a 0.06% increase in our EVE. In the event of a 200-basis point increase in interest rates at September 30, 2024, we would have experienced a 1.50% decrease in our EVE and in the event of a 200-basis point decrease in interest rates, we would have experienced a 1.75% decrease in our EVE.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and will differ from actual results. EVE calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, FHLB advances, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. At September 30, 2024, we had $75.8 million outstanding in FHLB advances. At September 30, 2024, we had $92.5 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago, based on the level of qualifying real estate loans currently pledged to the FHLB. Additionally, at September 30, 2024, we had a $12.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at September 30, 2024. The Company also had an $11.3 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $13.7 million at September 30, 2024. The Company had not drawn on the Federal Reserve line as of September 30, 2024.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and available-for-sale investment securities. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $342,000 for the nine months ended September 30, 2024, as compared to cash used in operating activities of $324,000 for the nine months ended September 30, 2023. Net cash provided by operating activities for the nine months ended September 30, 2024 primarily consisted of $17.6 million in proceeds from the sale of mortgage loans held for sale and a $1.4 million increase in accrued interest payable and other liabilities, partially offset by the origination of $17.1 million in mortgage loans held for sale, a $981,000 net loss and a $726,000 increase in the fair value of marketable equity securities. Net cash used in operating activities for the nine months ended September 30, 2023 primarily consisted of the origination of $8.9 million in mortgage loans held for sale and a $4.5 million net loss, partially offset by $8.8 million in proceeds from the sale of mortgage loans held for sale, a $1.9 million net loss on sale of available-for-sale securities and deferred income tax expense of $1.0 million. Net cash provided by investing activities was $8.1 million for the nine months ended September 30, 2024, as compared to net cash used in investing activities of $16.4 million for the nine months ended September 30, 2023. Net cash provided by investing activities during the nine months ended September 30, 2024 consisted primarily of $13.6 million from maturities, calls and payments on available-for-sale securities, partially offset by a $2.9 million increase in loans and $2.0 million in purchases of available-for-sale securities. Net cash used in investing activities during the nine months ended September 30, 2023 consisted primarily of a $23.5 million increase in loans, the purchase of $21.4 million of available-for-sale securities and a $1.4 million increase in FHLB stock, partially offset by $19.5 million in proceeds from sales of available-for-sale securities and $9.7 million from maturities, calls and payments on available-for-sale securities. Net cash provided by financing activities was $4.0 million for the nine months ended September 30, 2024, as compared to $15.0 million for the nine months ended September 30, 2023. Net cash provided by financing activities for the first nine months of 2024 primarily resulted from borrowings of $72.0 million of FHLB advances and an $8.5 million increase in advance payments by borrowers for taxes and insurance, partially offset by $67.2 million in principal payments on FHLB advances, an $8.4 million decrease in deposits and $1.0 million in stock repurchases. Net cash provided by financing activities for the first nine months of 2023 primarily resulted from $100.5 million of FHLB advances and a $9.2 million increase in advance payments by borrowers for taxes and insurance, partially offset by $93.5 million in principal payments on FHLB advances and a $748,000 decrease in deposits.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments based on our current strategy to increase core deposits, along with the continued use of FHLB advances, as well as brokered certificates of deposit as needed.
Capital
At September 30, 2024, PyraMax Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $63.1 million, or 11.2% of adjusted total assets, which is above the well-capitalized required level of $28.2 million, or 5.0%. The Bank had total risk-based capital of $68.1 million, or 16.0% of risk-weighted assets, which is above the well-capitalized required level of $42.5 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category. For additional information, see Note 13 of the Notes to Financial Statements.
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process as the loans we make. For additional information, see Note 9 of the Notes to Financial Statements.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowings and deposits, and agreements with respect to securities.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Controls and procedures
As filed, 947 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2024. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the third quarter of 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Risk factors
As filed, 280 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
In addition to the other information set forth in the Form 10-Q, you should carefully consider the risk factors that appeared under Item 1A “Risk Factors” disclosed in the Company’s December 31, 2023 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Income tax | 3 months2024-07-01 to 2024-09-30 | −$298.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2024-01-01 to 2024-09-30 | −$557.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-07-01 to 2024-09-30 | −$159.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months2024-01-01 to 2024-09-30 | −$981.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-07-01 to 2024-09-30 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2024-01-01 to 2024-09-30 | −$0.18 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-07-01 to 2024-09-30 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2024-01-01 to 2024-09-30 | −$0.18 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-07-01 to 2024-09-30 | 5,433,940 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2024-01-01 to 2024-09-30 | 5,449,643 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2024-01-01 to 2024-09-30 | $342.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Total assets | At period end2024-09-30 | $564.5m | us-gaap:Assets |
| Total liabilities | At period end2024-09-30 | $491.4m | us-gaap:Liabilities |
| Shareholders' equity | At period end2024-09-30 | $73.2m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-24-124158. Last ingested by Listed: Oct 24, 2026, 15:06 ET. Listed shows no prices and gives no investment advice.