BV Financial, Inc.: Form 10-Q for the period ended Sep 30, 2024
Filed with the SEC on Nov 13, 2024 and accepted by EDGAR at Nov 13, 2024, 09:39 ET.
Management's discussion and analysis
As filed, 40,021 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 is intended to enhance your understanding of our financial condition and results of operations. The financial information in this section is derived from the accompanying financial statements. You should read the financial information in this section in conjunction with the business and financial information contained in this Quarterly Report on Form 10-Q and in the Company’s 2023 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 22, 2024.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q 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,” “contemplate,” “continue,” “intend,” “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 our current beliefs and expectations and are 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. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.
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:
- general economic conditions, either nationally or in our market areas, that are worse than expected, including as a result of unemployment levels and labor shortages, and any potential recession or slowed economic growth;
- changes in the level and direction of loan delinquencies and charge-offs and changes in estimates of the adequacy of the allowance for credit losses;
- changes in the economic assumptions and methodology used to calculate the allowance for credit losses;
- our ability to access cost-effective funding;
- changes in liquidity, including the size and composition of our deposit portfolio and the percentage of uninsured deposits in the portfolio;
- fluctuations in real estate values and both residential and commercial real estate market conditions;
- our continued ability to originate loans outside of our market area;
- our ability to implement and change our business strategies;
- competition among depository and other financial institutions;
- inflation and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations or prepayments on loans we have made and make;
- adverse changes in the securities markets;
- changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and 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;
- system failure or cyber-security breaches of our information technology infrastructure;
- the failure to maintain current technologies and/or successfully implement future information technology enhancements;
- the inability of third-party providers to perform as expected;
- our ability to manage market risk, credit risk and operational risk in the current economic environment;
- 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 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;
- 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. Except as required by 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 such statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies and Use of Critical Accounting Estimates
Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.
Allowance for Credit Losses
The ACL is an estimate of the expected credit losses for loans held for investment and for off-balance sheet exposures. ASC 326, "Financial Instruments-Credit Losses," requires an immediate recognition of the credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Charge-offs are recorded to the ACL when management believes a loan is uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL is maintained in accordance with GAAP and in compliance with appropriate regulatory guidelines. The ACL includes quantitative estimates of losses for collectively and individually evaluated loans. The quantitative estimate for collectively evaluated loans (other than investor commercial real estate loans) is determined using the average charge-off method that utilizes historical losses for all Maryland banks with assets less than $1 billion beginning in March 2000. The investor commercial real estate portfolio utilizes the national loss history for banks with assets less than $1 billion over the same time period. Investor CRE loans are made nationwide, therefore, management deems it appropriate to utilize national loss rates when evaluating this portfolio. Adjustments are made to the historical loss factors under each scenario for economic conditions, portfolio concentrations, collateral values, the level and trend of delinquent and problem loans and internal changes in staffing, loan policies and monitoring of the portfolio. Loans are selected for individual evaluation primarily based on their payment status and whether the loan has been placed on non-accrual status. Loans on non-accrual status include all loans greater than 90 days delinquent and other loans with weaknesses sufficient for management to place these loans on non-accrual status. The ACL is measured on a collective basis when similar risk factors exist as determined by internal loan coding and assignment to a portfolio segment. The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model's calculation also uses an adjustment for a 12-month forecast period utilizing the most recent 12-month economic forecast from the Federal Reserve Board for national gross domestic product ("GDP"). The model compares the average history of loss rates described above to the forecasted GDP to determine the value of the forward-looking adjustment. The establishment of the ACL is significantly affected by management's judgment and by economic and other uncertainties, and different amounts may be reported under different conditions or assumptions. The Federal Deposit Insurance Corporation and the Maryland Office of the Commissioner of Financial Regulation, as an integral part of their examination process, periodically review the ACL for reasonableness and, as a result of such reviews, we may be required to increase our ACL or recognize loan charge-offs. The calculation of ACL excludes accrued interest receivable balances because these balances are reversed in a timely manner against previously recognized interest income when a loan is placed on non-accrual.
Goodwill
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates it is likely impairment has occurred. Goodwill impairment is determined by comparing the fair value of a reporting unit to its carrying amount. In any given year, the Company may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is in excess of its carrying value. If it is not more likely than not that the fair value of the reporting unit is in excess of the carrying value, or if the Company elects to bypass the qualitative assessment, a quantitative impairment test is performed. In performing a quantitative test for impairment, the fair value of net assets is estimated based on analyses of the Company’s market value, discounted cash flows, and peer values. The determination of goodwill impairment is sensitive to market-based economics and other key assumptions used in determining or allocating fair value. Variability in the market and changes in assumptions or subjective measurements used to estimate fair value are reasonably possible and may have a material impact on our consolidated financial statements or results of operations. Our annual goodwill impairment test is performed each year as of September 30. The Company performed its 2024 goodwill impairment qualitative assessment and determined its goodwill was not considered impaired.
Deferred Income Taxes
At September 30, 2024, we had a net deferred tax asset totaling $8.4 million. In accordance with ASC Topic 740 “Income Taxes,” we use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets are inherently subjective and are reviewed on a regular basis as regulatory or business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance that results in additional income tax expense in the period in which it is recognized would negatively affect income. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize its federal and state deferred tax asset.
Comparison of Financial Condition at September 30, 2024 (unaudited) and December 31, 2023
Assets. Assets were $892.7 million at September 30, 2024, an increase of $7.4 million, or 0.8%, from $885.3 million at December 31, 2023. The increase was due primarily to a $20.3 million increase in cash and cash equivalents which was primarily offset by decreases of $11.6 million in loans and $2.0 million in other non-earning assets.
Cash and Cash Equivalents. Cash and cash equivalents increased $20.3 million, or 27.7%, to $93.8 million at September 30, 2024 from $73.5 million at December 31, 2023 primarily due to the decreases in loans and other non-interest earning assets.
Loans. Loans receivable decreased $11.6 million, or 1.6%, to $693.2 million at September 30, 2024 from $704.8 million at December 31, 2023. Decreases in one- to four-family real estate loans of $15.5 million and owner-occupied commercial real estate loans of $15.8 million were partially offset by increases in investor commercial real estate loans and commercial loans of $24.8 million.
Allowance for Credit Losses.
Our allowance for credit losses – loans decreased $553,000 to $8.0 million at September 30, 2024 compared to $8.6 million at December 31, 2023. The decrease in the ACL resulted from lower historical loss rates and lower life of loan calculations. The ratio of our allowance for credit losses to total loans was 1.15% at September 30, 2024 and September 30, 2023, while the allowance for credit losses to non-performing loans was 201.60% at September 30, 2024 compared to 81.05% at December 31, 2023.
Securities. Securities available for sale increased by $4.4 million, or 12.6%, to $39.2 million at September 30, 2024 from $34.8 million at December 31, 2023. The increase was due to purchases used primarily to secure local government deposits offset by paydowns in the mortgage-backed securities. The held-to-maturity portfolio decreased by $4.2 million or 40.9% due to maturities and paydowns not being replaced by purchases.
Liabilities. Liabilities decreased $3.2 million, or 0.5%, to $683.0 million at September 30, 2024 from $686.2 million at December 31, 2023. The decrease was due primarily to the decrease in borrowings as $3.0 million in junior subordinated debt was paid off in the first quarter of 2024.
Deposits. Total deposits increased $193,000, or 0.03% to $634.3 million at September 30, 2024 from $634.1 million at December 31, 2023. Interest-bearing deposits increased $2.9 million, or 0.6%, to $495.0 million at September 30, 2024 from $492.1 million at December 31, 2023. Noninterest bearing deposits decreased $2.7 million, or 1.9%, to $139.3 million at September 30, 2024 from $142.0 million at December 31, 2023.
Stockholders’ Equity. Stockholders’ equity increased $10.6 million, or 5.4%, to $209.7 million at September 30, 2024 from $199.1 million at December 31, 2023 primarily due to net income of $9.8 million.
Comparison of Operating Results for the Three and Nine Months Ended September 30, 2024 and 2023
Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Average balances exclude loans held for sale, if applicable. Net deferred loan origination fees totaled $2.1 million and $1.5 million at September 30, 2024 and 2023, respectively.
(dollars in thousands)
(Unaudited)
| Interest-earning assets: | For the Three Months Ended September 30, 2024 Average Outstanding Balance | Interest | Average Yield/Rate(1) | 2023 Average Outstanding Balance | Interest | Average Yield/Rate(1) |
|---|---|---|---|---|---|---|
| Loans | $690,170 | $10,522 | 6.05% | $702,320 | $9,763 | 5.52% |
| Securities available-for-sale | 36,201 | 353 | 3.87% | 35,867 | 302 | 3.34% |
| Securities held-to-maturity | 9,937 | 83 | 3.31% | 12,493 | 89 | 2.83% |
| Cash, cash equivalents and other interest-earning assets | 86,322 | 1,192 | 5.48% | 115,553 | 1,559 | 5.35% |
| Total interest-earning assets | 822,630 | 12,150 | 5.86% | 866,233 | 11,713 | 5.36% |
| Noninterest-earning assets | 68,767 | 65,878 | ||||
| Total assets | $891,397 | $932,111 | ||||
| Interest-bearing liabilities: | ||||||
| Interest-bearing demand deposits | $79,652 | 207 | 1.03% | $82,096 | 219 | 1.06% |
| Savings deposits | 128,918 | 89 | 0.27% | 155,521 | 49 | 0.13% |
| Money market deposits | 108,518 | 669 | 2.45% | 85,981 | 254 | 1.17% |
| Certificates of deposit | 173,751 | 1,416 | 3.23% | 189,117 | 1,240 | 2.60% |
| Total interest-bearing deposits | 490,839 | 2,381 | 1.92% | 512,715 | 1,762 | 1.36% |
| Federal Home Loan Bank advances | — | — | — | 37,500 | 529 | 5.60% |
| Subordinated debentures | 34,827 | 466 | 5.30% | 37,175 | 545 | 5.82% |
| Total borrowings | 34,827 | 466 | 5.30% | 74,675 | 1,074 | 5.71% |
| Total interest-bearing liabilities | 525,666 | 2,847 | 2.15% | 587,390 | 2,836 | 1.92% |
| Noninterest-bearing demand deposits | 140,039 | 144,603 | ||||
| Other noninterest-bearing liabilities | 18,101 | 50,437 | ||||
| Total liabilities | 683,806 | 782,430 | ||||
| Equity | 207,591 | 149,681 | ||||
| Total liabilities and equity | $891,397 | $932,111 | ||||
| Net interest income | $9,303 | $8,877 | ||||
| Net interest rate spread(2) | 3.71% | 3.44% | ||||
| Net interest-earning assets(3) | $296,964 | $278,843 | ||||
| Net interest margin(4) | 4.49% | 4.07% | ||||
| Average interest-earning assets to interest-bearing liabilities | 156.49% | 147.47% |
(1) Annualized.
(2) Net 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-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
The following table sets forth the effects of changing rates and volumes on our net interest income for the three months ended September 30, 2024 and 2023. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by current 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 volume.
(In thousands)
| Interest income: | For the Three Months Ended September 30, 2024 Interest Income Increase (Decrease) Due to Volume | Rate | Total |
|---|---|---|---|
| Loans receivable | $(185) | $944 | $759 |
| Investment securities AFS | 3 | 48 | 51 |
| Investment securities HTM | (21) | 15 | (6) |
| Total Investment securities | (18) | 63 | 45 |
| Short-term investments and other | |||
| interest-earning assets | (404) | 37 | (367) |
| Total interest-earning assets | $(607) | $1,044 | $437 |
| Interest expense: | |||
| Deposits | $(106) | $725 | $619 |
| FHLB Borrowings | — | (529) | (529) |
| Subordinated Debentures | (31) | (48) | (79) |
| Total Borrowings | (31) | (577) | (608) |
| Total interest-bearing liabilities | (137) | 148 | 11 |
| Change in net interest income | $(470) | $896 | $426 |
40
BV FINANCIAL, INC. AND SUBSIDIARIES
(dollars in thousands)
(Unaudited)
| Interest-earning assets: | For the Nine Months Ended September 30, 2024 Average Outstanding Balance | Interest | Average Yield/Rate(1) | 2023 Average Outstanding Balance | Interest | Average Yield/Rate(1) |
|---|---|---|---|---|---|---|
| Loans | $701,310 | $30,481 | 5.79% | $688,654 | $27,864 | 5.39% |
| Securities available-for-sale | 34,569 | 966 | 3.72% | 35,746 | 846 | 3.15% |
| Securities held-to-maturity | 10,507 | 266 | 3.37% | 12,276 | 275 | 2.98% |
| Cash, cash equivalents and other interest-earning assets | 74,720 | 3,058 | 5.46% | 76,308 | 2,957 | 5.17% |
| Total interest-earning assets | 821,106 | 34,771 | 5.64% | 812,984 | 31,942 | 5.23% |
| Noninterest-earning assets | 68,985 | 73,244 | ||||
| Total assets | $890,091 | $886,228 | ||||
| Interest-bearing liabilities: | ||||||
| Interest-bearing demand deposits | $83,683 | 681 | 1.08% | $87,159 | 380 | 0.58% |
| Savings deposits | 138,474 | 250 | 0.24% | 163,312 | 141 | 0.12% |
| Money market deposits | 96,724 | 1,496 | 2.06% | 92,457 | 491 | 0.71% |
| Certificates of deposit | 174,896 | 4,183 | 3.19% | 172,950 | 2,682 | 2.07% |
| Total interest-bearing deposits | 493,777 | 6,610 | 1.78% | 515,878 | 3,694 | 0.95% |
| Federal Home Loan Bank advances | — | — | — | 33,098 | 1,312 | 5.28% |
| Subordinated debentures | 35,139 | 1,985 | 7.53% | 37,122 | 1,622 | 5.82% |
| Total borrowings | 35,139 | 1,985 | 7.53% | 70,220 | 2,934 | 5.57% |
| Total interest-bearing liabilities | 528,916 | 8,595 | 2.16% | 586,098 | 6,628 | 1.51% |
| Noninterest-bearing demand deposits | 139,642 | 154,521 | ||||
| Other noninterest-bearing liabilities | 17,676 | 25,536 | ||||
| Total liabilities | 686,234 | 766,155 | ||||
| Equity | 203,857 | 120,073 | ||||
| Total liabilities and equity | $890,091 | $886,228 | ||||
| Net interest income | $26,176 | $25,314 | ||||
| Net interest rate spread(2) | 3.48% | 3.72% | ||||
| Net interest-earning assets(3) | $292,190 | $226,886 | ||||
| Net interest margin(4) | 4.25% | 4.15% | ||||
| Average interest-earning assets to interest-bearing liabilities | 155.24% | 138.71% |
(1) Annualized.
(2) Net 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-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
The following table sets forth the effects of changing rates and volumes on our net interest income for the nine months ended September 30, 2024 and 2023. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by current 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 volume.
(In thousands)
| Interest income: | For the Nine Months Ended September 30, 2024 Interest Income Increase (Decrease) Due to Volume | Rate | Total |
|---|---|---|---|
| Loans receivable | $550 | $2,067 | $2,617 |
| Investment securities AFS | (33) | 153 | 120 |
| Investment securities HTM | (45) | 36 | (9) |
| Total Investment securities | (78) | 189 | 111 |
| Short-term investments and other | |||
| interest-earning assets | (65) | 166 | 101 |
| Total interest-earning assets | $407 | $2,422 | $2,829 |
| Interest expense: | |||
| Deposits | $(296) | $3,212 | $2,916 |
| FHLB Borrowings | (447) | (865) | (1,312) |
| Subordinated Debentures | (112) | 475 | 363 |
| Total Borrowings | (559) | (390) | (949) |
| Total interest-bearing liabilities | (855) | 2,822 | 1,967 |
| Change in net interest income | $1,262 | $(400) | $862 |
42
Net Income. Net income was $3.8 million or $0.35 per diluted share for the three months ended September 30, 2024 compared to $3.7 million or $0.35 per diluted share for the three months ended September 30, 2023. In the quarter ended September 30, 2024, the Company recorded a recovery for credit losses of $714,000 as a result of the improvement in the asset quality of the Company’s loan portfolio. In the quarter ended September 30, 2023, the Company recognized a recovery for credit loss of $333,000. Net income was $9.8 million or $0.91 per diluted share for the nine months ended September 30, 2024 compared to $10.7 million or $1.20 per diluted share for the nine months ended September 30, 2023. The difference between the nine months ended September 30, 2024 when compared to the same period in 2023 is that in the nine months ended September 30, 2023, the Company recognized a gain on the sale of foreclosed real estate of $678,000, a gain on the sale of fixed assets of $188,000 and received $225,000 in life insurance death benefits. These items did not recur in 2024.
Interest Income. Interest income increased $435,000, or 3.7%, to $12.1 million for the three months ended September 30, 2024 from $11.7 million for the three months ended September 30, 2023. The increase was due primarily to an increase in interest income on loans, partially offset by a decrease in other interest income on cash and cash equivalents. Interest income on loans increased $759,000 or 7.8%, to $10.5 million for the three months ended September 30, 2024 from $9.8 million for the three months ended September 30, 2023 due to increases in the average yield on loans. The average balance of loans decreased $12.1 million, or 1.7%, to $690.2 million for the three months ended September 30, 2024 from $702.3 million for the three months ended September 30, 2023. The weighted average yield on loans increased 53 basis points to 6.05% for the three months ended September 30, 2024 compared to 5.52% for the three months ended September 30, 2023, as variable rate loans reset to higher interest rates and the rates on new loans exceeded the rates on paid off loans due to the higher interest rate environment. Other interest income decreased related to interest income on cash, cash equivalents and other interest-earning assets $370,000 to $1.2 million for the three months ended September 30, 2024 from $1.6 million for the three months ended September 30, 2023 due to a decrease in the average balance of cash, cash equivalents and other interest-earning assets.
Interest income increased $2.8 million, or 8.9%, to $34.8 million for the nine months ended September 30, 2024 from $31.9 million for the nine months ended September 30, 2023. The increase was due primarily to increases in interest income on loans, and, to a lesser extent, other interest income on cash, cash equivalents and other interest-earning assets. Interest income on loans increased $2.6 million, or 9.4%, to $30.5 million for the nine months ended September 30, 2024 from $27.9 million for the nine months ended September 30, 2023 due to increases in the average balance of loans and the average yield on loans. The average balance of loans increased $12.6 million, or 1.8%, to $701.3 million for the nine months ended September 30, 2024 from $688.7 million for the nine months ended September 30, 2023. The weighted average yield on loans increased 40 basis points to 5.79% for the nine months ended September 30, 2024 compared to 5.39% for the nine months ended September 30, 2023, as variable rate loans reset to higher interest rates and the rates on new loans exceeded the rates on paid off loans due to the higher interest rate environment. Other interest income on cash, cash equivalents and other interest-earning assets increased $100,000 to $3.1 million for the nine months ended September 30, 2024 from $3.0 million for the nine months ended September 30, 2023 due to a 29 basis point increase in the average yield, offset by a slight decrease in the average balance of cash, cash equivalents and other interest-earning assets.
Interest Expense. Interest expense remained unchanged at $2.8 million for the three months ended September 30, 2024 and 2023. Interest expense on deposits increased $619,000 for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, as rates paid increased and depositors moved money into higher-cost certificates of deposit, offset by a decrease in interest expense on borrowed money of $608,000 as there were no advances outstanding from the FHLB in the quarter ended September 30, 2024.
The increase in interest expense on deposits was due to a 56 basis point increase in the average rate, offset by a $21.9 million decrease in the average balance of interest-bearing deposits to $490.8 million at September 30, 2024 from $512.7 million for the three months ended September 30, 2023. The average rate on interest-bearing deposits was 1.92% for the three months ended September 30, 2024 compared to 1.36% for the three months ended September 30, 2023.
We had no interest expense on FHLB advances for the three months ended September 30, 2024 compared to $530,000 for the three months ended September 30, 2023 as all advances were paid off.
Interest expense on subordinated debentures decreased $79,000, or 14.7%, to $466,000 for the three months ended September 30, 2024 compared to $545,000 for the three months ended September 30, 2023. The decrease was due primarily to the pay-off in the first quarter of 2024 of $3.0 million in junior subordinated debt assumed in a prior acquisition.
Interest expense increased $2.0 million, or 29.7%, to $8.6 million for the nine months ended September 30, 2024 compared to $6.6 million for the nine months ended September 30, 2023 primarily due to a $2.9 million increase in interest expense on deposits as rates paid increased and depositors moved money into higher-cost certificate of deposit accounts, and an increase of $364,000 in interest expense on subordinated debt, offset by a $1.3 million decrease in interest expense on borrowed money as there were no advances outstanding from the FHLB during the nine months ended September 30, 2024.
The increase in interest expense on deposits was due to a 83 basis point increase in the average rate, offset by a $22.1 million decrease in the average balance of interest-bearing deposits to $493.8 million at September 30, 2024 from $515.9 million for the nine months ended September 30, 2023. The average rate on interest-bearing deposits was 1.78% for the nine months ended September 30, 2024 compared to 0.95% for the nine months ended September 30, 2023.
We had no interest expense on FHLB advances for the nine months ended September 30, 2024 compared to $1.3 million for the nine months ended September 30, 2023 as all advances were paid off.
Interest expense on subordinated debentures increased $363,000, or 22.4%, to $2.0 million for the nine months ended September 30, 2024 compared to $1.6 million for the nine months ended September 30, 2023. The average rate on subordinated debentures increased 171 basis points to 7.53% for the nine months ended September 30, 2024 compared to 5.82% for the nine months ended September 30, 2023. The increase was due primarily to the write-off (increase in interest expense) of the remaining purchase accounting fair market value adjustment of $566,000 upon the pay-off in the first quarter of 2024 of $3.0 million in junior subordinated debt assumed in a prior acquisition.
Net Interest Income. Net interest income was $9.3 million for the three months ended September 30, 2024 compared to $8.9 million in the three months ended September 30, 2023. The net interest margin for the three months ended September 30, 2024 was 4.49% compared to 4.07% for the three months ended September 30, 2023. The increase in net interest income was due to higher yields on interest-earning assets, and lower balances of interest-bearing liabilities offsetting higher rates paid on deposits.
Net interest income was $26.2 million for the nine months ended September 30, 2024, compared to $25.3 million in the nine months ended September 30, 2023. The net interest margin for the nine months ended September 30, 2024 was 4.25% compared to 4.15% for the nine months ended September 30, 2023. The increase in net interest income was due to higher yields on interest earning assets, and lower balances of interest-bearing liabilities offsetting higher rates paid on deposits.
Provision for Credit Losses.
We recorded a recovery for credit losses of $714,000 for the three months ended September 30, 2024 compared to a recovery for credit losses of $333,000 for the three months ended September 30, 2023. We recorded a recovery of credit losses of $806,000 for the nine months ended September 30, 2024 compared to a recovery of credit losses of $480,000 for the nine months ended September 30, 2023. Our allowance for credit losses was $8.0 million at September 30, 2024 compared to $8.2 million at September 30, 2023. The ratio of our allowance for credit losses to total loans was 1.15% at September 30, 2024 compared to 1.15% at September 30, 2023, while the allowance for credit losses to non-performing loans was 201.6% at September 30, 2024 compared to 213.5% at September 30, 2023. The Company had net recoveries on previously charged off loans of $132,000 in the quarter ended September 30, 2024 as compared to net recoveries of $255,000 in the quarter ended September 30, 2023 and net recoveries of $284,000 in the nine months ended September 30, 2024 as compared to net recoveries of $421,000 in the nine months ended September 30, 2023.
Non-interest Income. For the three months ended September 30, 2024, noninterest income totaled $696,000 compared to $882,000 for the quarter ended September 30, 2023. For the quarter ended September 30, 2023, the Company recognized a gain of $188,000 on the sale of a former branch building.
For the nine months ended September 30, 2024, noninterest income totaled $1.9 million as compared to $3.1 million for the nine months ended September 30, 2023. In the nine months ended September 30, 2023, the Company recognized a gain of $678,000 on the sale of foreclosed real estate, a gain of $188,000 on the sale of a former branch building and $225,000 in life insurance death benefits.
Non-interest Expense. For the three months ended September 30, 2024, noninterest expense totaled $5.5 million compared to $5.0 million in the three months ended September 30, 2023. Compensation and benefits increased $344,000, or 10.9%, due to increases in salary and benefits. Professional fees increased by $180,000, or 81.9%, primarily due to legal and accounting costs related to the Company becoming a public company, and data processing expense increased by $21,000 or 6.2%. These increases were partially offset by decreases in all other categories of expenses.
For the nine months ended September 30, 2024, noninterest expense totaled $15.3 million as compared to $14.3 million in the nine months ended September 30, 2023. Compensation and benefits increased $827,000, or 9.3%, due to increases in staffing and salaries and benefits. Professional fees increased $160,000, or 26.8%, primarily due to legal and accounting costs related to the Company becoming a public company. Expenses also increased in the occupancy, data processing and other expense categories while decreases occurred in foreclosed real estate costs, equipment and advertising expenses.
Income Tax Expense. We recognized income tax expense of $1.4 million for each of the three months ended September 30, 2024 and 2023, resulting in effective rates of 27.5% and 27.5%, respectively. In the nine months ended September 30, 2024 and 2023, we recognized income tax expense of $3.8 million and $3.9 million, respectively, resulting in effective tax rates of 27.9% and 26.7%, respectively.
Asset Quality. Non-performing assets at September 30, 2024 totaled $4.1 million consisting of $3.9 million in nonperforming loans and $160,000 in other real estate owned, compared to $10.7 million at December 31, 2023, consisting of $10.6 million in non-performing loans and $170,000 in other real estate owned. During the quarter, our largest loan on non-accrual, a $3.8 million investor commercial real estate loan paid off. At September 30, 2024, the allowance for credit losses on loans was $8.0 million, which represented 1.15% of total loans and 201.6% of non-performing loans compared to $8.6 million at December 31, 2023, which represented 1.21% of total loans and 81.1% of non-performing loans.
Liquidity and Capital Resources
Liquidity. 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, principal and interest payments on loans and securities and proceeds from maturities of securities. We also have the ability to borrow from the FHLB of Atlanta. At September 30, 2024, we had $151.6 million available under a line of credit with the FHLB of Atlanta, and had $23.0 million of FHLB in unfunded letters of credit used to secure municipal deposits outstanding against the line of credit with the FHLB of Atlanta. This resulted in additional borrowing availability from the FHLB of $128.6 million, none of which was outstanding at September 30, 2024. The Company also has a short-term unsecured facility from a correspondent bank in the amount of $20.0 million.
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 short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. 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 deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances, brokered deposits or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense. At September 30, 2024, the Company had $10.0 million in brokered deposits and no brokered deposits at September 30, 2023. In addition, we had $57.7 million of municipal deposits at September 30, 2024, which represented 9.1% of total deposits. The Bank's uninsured deposits totaled $204.6 million, or 30.1% of total deposits, of which $51.6 million were secured using the market value of pledged collateral or letters of credit issued by FHLB, and an additional $45.4 million were deposits of the Company at the Bank.
Capital Resources. At September 30, 2024, the Bank exceeded all of its regulatory capital requirements and was categorized as well capitalized. Management is not aware of any conditions or events since the most recent notification that would change our category.
Controls and procedures
As filed, 886 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 Co-Chief Executive Officers 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 Company’s management, including the Co-Chief Executive Officers and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2024, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Risk factors
As filed, 439 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 this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed under the heading "Risk Factors" contained in the Annual Report on Form 10-K for the year ended December 31, 2023. The Company's evaluation of the risk factors applicable to it has not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2023.
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 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2024-01-01 to 2024-09-30 | $3.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-07-01 to 2024-09-30 | $3.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months2024-01-01 to 2024-09-30 | $9.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-07-01 to 2024-09-30 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2024-01-01 to 2024-09-30 | $0.91 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-07-01 to 2024-09-30 | $0.35 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2024-01-01 to 2024-09-30 | $0.91 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-07-01 to 2024-09-30 | 10,752,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2024-01-01 to 2024-09-30 | 10,686,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2024-01-01 to 2024-09-30 | $12.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2024-01-01 to 2024-09-30 | $594.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2024-09-30 | $94.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | At period end2024-09-30 | $892.7m | us-gaap:Assets |
| Total liabilities | At period end2024-09-30 | $683.0m | us-gaap:Liabilities |
| Long-term debt | At period end2024-09-30 | $34.8m | us-gaap:LongTermDebt |
| Shareholders' equity | At period end2024-09-30 | $209.7m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0000950170-24-125992. Last ingested by Listed: Oct 24, 2026, 15:11 ET. Listed shows no prices and gives no investment advice.