John Marshall Bancorp, Inc. (JMSB) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the consolidated financial condition and results of operations of the Company and its subsidiary should be read in conjunction with the consolidated financial statements and related notes presented in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not be indicative of results of operations or trends in operations for any future periods.
Use of Non-GAAP Financial Measures
This discussion and analysis contains financial information determined by methods other than in accordance with GAAP. Management believes that the supplemental non-GAAP information provides a better comparison of period-to-period operating performance. Additionally, the Company believes this information is utilized by regulators and market analysts to evaluate a company’s financial condition and therefore, such information is useful to investors. Non-GAAP measures used in this report consist of tax-equivalent net interest income, core net income, core earnings per share (diluted), core return on average assets, core return on average equity and core income tax expense.
These disclosures should not be viewed as a substitute for financial results in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Where the non-GAAP financial measure is used, the comparable GAAP financial measure, as well as reconciliation to that comparable
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GAAP financial measure, a statement of the company’s reasons for utilizing the non-GAAP financial measure, can be found within this discussion and analysis.
Overview
We are a bank holding company headquartered in Reston, Virginia primarily serving the Washington, D.C. metropolitan area. The material business operations of our organization are performed through the Bank. As a result, the discussion and analysis within this section primarily relate to activities conducted at the Bank.
As with most community banks, the Bank derives a significant portion of its income from interest received on loans and investments. The Bank’s primary source of funding is deposits, both interest-bearing and non-interest-bearing. To account for credit risk inherent in all loans, the Bank maintains an allowance for loan credit losses to absorb lifetime losses on existing loans. The Bank establishes and maintains this allowance by recording a provision for loan credit losses against earnings. In addition to net interest income, the Bank also generates income through service charges on deposits, insurance commission income, merchant services fee income, swap fee income and gain on sale of the guaranteed portion of U.S. Small Business Administration (“SBA”) 7(a) loans. In order to maintain its operations, the Bank incurs various operating expenses which are further described within the “Results of Operations” later in this section.
As of December 31, 2024, the Company had total consolidated assets of $2.23 billion, total loans net of unearned income of $1.87 billion, total deposits of $1.89 billion and total shareholders’ equity of $246.6 million.
Critical Accounting Policies and Estimates
The Company’s accounting and reporting policies conform to GAAP, as well as general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported.
The following is a discussion of the critical accounting policy and significant estimate that require us to make complex and subjective judgments. Additional information about this policy can be found in Note 1 of our consolidated financial statements included in Item 8 of this Form 10-K.
Allowance for Loan Credit Losses
The allowance for loan credit losses represents an amount which, in management's judgment, is adequate to absorb the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience. The allowance for loan credit losses is measured and recorded upon the initial recognition of a financial asset. The allowance for loan credit losses is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for (or recovery of) credit losses, which is recorded in the Consolidated Statements of Income.
The Company utilizes a discounted cash flow model to estimate its current expected credit losses. For the purposes of calculating its quantitative reserves, the Company has segmented its loan portfolio based on loans which share similar risk characteristics. Within the quantitative portion of the calculation, the Company utilizes at least one or a combination of loss drivers, which may include unemployment rates, home price indices, and/or gross domestic product, to adjust its loss rates over a reasonable and supportable forecast period of one year. A straight-line reversion technique is used for the following four quarters, at which time the Company reverts to historical averages. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider qualitative factors, including but not limited to: variability in the economic forecast, changes in volume and severity of adversely classified loans, changes in concentrations of credit, changes in the nature and volume of the loan segments, factors related to credit administration, and other idiosyncratic risks not embedded in the data used in the model.
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Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates individually evaluated loans on nonaccrual status as collateral dependent loans, as well as other loans that management of the Company designates as having higher risk and loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
The adoption of CECL did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices or charge-off policy.
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Selected Financial Data
The following table contains selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of December 31, 2024 and 2023 and the selected income statement data for the years ended December 31, 2024 and 2023 have been derived from our audited consolidated financial statements included elsewhere in this Form 10-K and should be read in conjunction with the other information contained in this Form 10-K, including the information contained within this “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 – Financial Statements and Supplementary Data.”
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | | As of or for the Twelve Months Ended | | |||
| (Dollars in thousands, except per share data) | December 31, 2024 | December 31, 2023 | |||||
| Balance Sheet Data: | | | | | | | |
| Loans, net of unearned income | | $ | 1,872,173 | | $ | 1,859,967 | |
| Allowance for loan credit losses | | 18,715 | | 19,543 | | ||
| Total assets | | 2,234,947 | | 2,242,549 | | ||
| Deposits | | 1,892,415 | | 1,906,600 | | ||
| Shareholders’ equity | | 246,614 | | 229,914 | | ||
| Asset Quality Data: | | | | ||||
| Net (charge-offs) recoveries to average total loans, net of unearned income | | 0.00 | % | 0.00 | % | ||
| Allowance for loan credit losses to nonperforming loans | | 0.00 | % | 0.00 | % | ||
| Allowance for loan credit losses to total gross loans net of unearned income | | 1.00 | % | 1.05 | % | ||
| Non-performing assets to total assets | | 0.45 | % | 0.00 | % | ||
| Non-performing loans to total loans | | 0.53 | % | 0.00 | % | ||
| Capital Ratios (Bank level): | | | | ||||
| Equity-to-total assets ratio | | | 11.9 | % | | 11.1 | % |
| Total risk-based capital ratio | | 16.2 | % | 15.7 | % | ||
| Tier 1 risk-based capital ratio | | 15.2 | % | 14.7 | % | ||
| Common equity tier 1 ratio | | | 15.2 | % | | 14.7 | % |
| Leverage ratio | | 12.4 | % | 11.6 | % | ||
| Income Statement Data: | | | | ||||
| Interest and dividend income | | $ | 110,133 | | $ | 100,770 | |
| Interest expense | | 59,086 | | 50,286 | | ||
| Net interest income | | $ | 51,047 | | $ | 50,484 | |
| Provision for (recovery of) credit losses | | (370) | | (3,252) | | ||
| Non-interest income (loss) | | 2,271 | | (14,940) | | ||
| Non-interest expense | | 31,809 | | 30,815 | | ||
| Income before taxes | | $ | 21,879 | | $ | 7,981 | |
| Income tax expense | | 4,758 | | 2,823 | | ||
| Net income | | $ | 17,121 | | $ | 5,158 | |
| Per Share Data and Shares Outstanding: | | | | ||||
| Weighted average common shares (basic) | | 14,172,166 | | 14,076,925 | | ||
| Weighted average common shares (diluted) | | 14,206,109 | | 14,147,193 | | ||
| Common shares outstanding | | 14,269,469 | | 14,148,533 | | ||
| Earnings per share, basic | | $ | 1.20 | | $ | 0.37 | |
| Earnings per share, diluted | | $ | 1.20 | | $ | 0.36 | |
| Book value per share | | $ | 17.28 | | $ | 16.25 | |
| Performance Ratios: | | | | | |||
| Return on average assets ("ROAA")(1) | | 0.76 | % | 0.22 | % | ||
| Return on average equity ("ROAE")(2) | | 7.16 | % | 2.32 | % | ||
| Net interest margin | | 2.28 | % | 2.20 | % | ||
| Tax-equivalent net interest margin (Non-GAAP)(3) | | | 2.28 | % | | 2.21 | % |
| Non-interest expense to average assets(4) | | | 1.41 | % | | 1.33 | % |
| Efficiency ratio(5) | | 59.7 | % | 86.7 | % |
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| Column 1 | Column 2 |
|---|---|
| (1) | ROAA is calculated by dividing net income by year-to-date average assets. |
| Column 1 | Column 2 |
|---|---|
| (2) | ROAE is calculated by dividing net income by year-to-date average equity. |
| Column 1 | Column 2 |
|---|---|
| (3) | Net interest margin for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
| Column 1 | Column 2 |
|---|---|
| (4) | Non-interest expense to average assets is calculated by dividing non-interest expense by average assets. |
| Column 1 | Column 2 |
|---|---|
| (5) | The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income. |
Results of Operations – Years Ended December 31, 2024 and December 31, 2023
Overview
The Company reported net income of $17.1 million for the year ended December 31, 2024, an increase of $12.0 million when compared to the same period in 2023. As disclosed in our 2023 10-K filed March 20, 2024, during July 2023, the Company sold certain lower-yielding available-for-sale investment securities with a total par value of $161.2 million and agreed to surrender $21.4 million of bank owned life insurance (“BOLI”) contracts, resulting in a non-recurring, after-tax loss of $14.6 million that was recorded during the third quarter of 2023 (the “Restructuring”). Core net income (Non-GAAP) defined as reported net income excluding the non-recurring after-tax loss resulting from the Restructuring, was $19.8 million for the year ended December 31, 2023. The following table reconciles net income to core net income, which is a non-GAAP measure, and outlines reported (GAAP) and core (Non-GAAP) diluted earnings per share, ROAA and ROAE as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | For the Years Ended | | ||||
| (Dollars in thousands, except per share amounts) | December 31, 2024 | | December 31, 2023 | | |||
| Net income (GAAP) | | $ | 17,121 | | $ | 5,158 | |
| Add: Loss on securities sale, net of tax | | | - | | | 13,520 | |
| Add: Non-recurring tax and 10% modified endowment contract penalty on early surrender of BOLI policies | | | - | | | 1,101 | |
| Core net income (Non-GAAP) (1) | | $ | 17,121 | | $ | 19,779 | |
| Income tax expense (GAAP) | | $ | 4,758 | | $ | 2,823 | |
| Adjustment: Tax and 10% modified endowment contract penalty on early surrender of BOLI policies | | | - | | | (1,101) | |
| Adjustment: Tax benefit of loss recognized on sale of available-for-sale securities | | | - | | | 3,594 | |
| Core income tax expense (Non-GAAP) (2) | | $ | 4,758 | | $ | 5,316 | |
| | | | | | | | |
| Earnings per share - diluted (GAAP) | | $ | 1.20 | | $ | 0.36 | |
| Core earnings per share - diluted (Non-GAAP) (3) | | $ | 1.20 | | $ | 1.39 | |
| Return on average assets (annualized) (GAAP) | | | 0.76 | % | | 0.22 | % |
| Core return on average assets (annualized) (Non-GAAP) (4) | | | 0.76 | % | | 0.85 | % |
| Return on average equity (annualized) (GAAP) | | | 7.16 | % | | 2.32 | % |
| Core return on average equity (annualized) (Non-GAAP) (5) | | | 7.16 | % | | 8.91 | % |
| Column 1 | Column 2 |
|---|---|
| (1) | Core net income reflects net income adjusted for the non-recurring tax effected loss recognized on the sale of available-for-sale securities. Tax benefit (expense) is calculated using the federal statutory tax rate of 21%. |
| Column 1 | Column 2 |
|---|---|
| (2) | Includes tax benefit (expense) calculated using the federal statutory tax rate of 21% |
| Column 1 | Column 2 |
|---|---|
| (3) | Core earnings per share – diluted is calculated by dividing core net income by the sum of basic weighted average shares outstanding and diluted weighted average shares outstanding for each period presented. |
| Column 1 | Column 2 |
|---|---|
| (4) | Core return on average assets is calculated by dividing core net income by average assets for each period presented. |
| Column 1 | Column 2 |
|---|---|
| (5) | Core return on average equity is calculated by dividing core net income by average equity for each period presented. |
Net Interest Income and Net Interest Margin
Net interest income is the excess of interest earned on loans and investments over the interest paid on deposits and borrowings, and is the Company’s primary revenue source. Net interest income is affected by overall balance sheet growth, changes in interest rates and changes in the mix of investments, loans, deposits and borrowings. The Company’s interest-earning assets include loans, investment securities and interest-bearing deposits in other banks, while our interest-bearing liabilities include interest-bearing deposits and borrowings. Net interest margin represents the difference between interest
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received and interest paid as a percentage of average total interest-earning assets. Management seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk through management’s asset and liability management policies. Interest rate risk is managed by monitoring the pricing, maturity, and repricing options of all classes of interest-bearing assets and liabilities. Management expects net interest income and net interest margin to fluctuate based on changes in interest rates and changes in the amount and composition of the Company’s interest-earning assets and interest-bearing liabilities.
The following table presents the average balance for each principal balance sheet category, and the amount of interest income or expense associated with that category, as well as corresponding average yields earned and rates paid for the years ended December 31, 2024 and 2023.
Average Balance Sheets and Interest Rates on Interest-Earning Assets and Interest-Bearing Liabilities
| | | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2024 | | December 31, 2023 | |||||||||||||
| | | | Interest Income / | Average | | | Interest Income / | Average | |||||||||
| (Dollars in thousands) | | Average Balance | | Expense | | Rate | | Average Balance | | Expense | | Rate | |||||
| Assets: | | | | | | ||||||||||||
| Securities: | | | | | | ||||||||||||
| Taxable | | $ | 253,421 | $ | 5,083 | 2.01 | % | $ | 368,922 | $ | 7,506 | 2.03 | % | ||||
| Tax-exempt(1) | | 1,379 | | 45 | 3.26 | % | 2,351 | | 68 | 2.89 | % | ||||||
| Total securities | | $ | 254,800 | | $ | 5,128 | 2.01 | % | $ | 371,273 | | $ | 7,574 | 2.04 | % | ||
| Loans, net of unearned income(2): | | | | | | ||||||||||||
| Taxable | | 1,807,547 | | 95,770 | 5.30 | % | 1,764,315 | | 85,515 | 4.85 | % | ||||||
| Tax-exempt(1) | | 18,389 | | 712 | 3.87 | % | 28,190 | | 1,164 | 4.13 | % | ||||||
| Total loans, net of unearned income | | $ | 1,825,936 | | $ | 96,482 | 5.28 | % | $ | 1,792,505 | | $ | 86,679 | 4.84 | % | ||
| Interest-bearing deposits in other banks | | $ | 162,165 | | $ | 8,682 | 5.35 | % | $ | 126,623 | | $ | 6,776 | 5.35 | % | ||
| Total interest-earning assets | | $ | 2,242,901 | | $ | 110,292 | 4.92 | % | $ | 2,290,401 | | $ | 101,029 | 4.41 | % | ||
| Total non-interest earning assets | | 15,630 | | | | | 32,430 | | | | | ||||||
| Total assets | | $ | 2,258,531 | | | | | $ | 2,322,831 | | | | | ||||
| Liabilities & Shareholders’ Equity: | | | | | | ||||||||||||
| Interest-bearing deposits: | | | | | | ||||||||||||
| NOW accounts | | $ | 322,028 | | $ | 8,848 | 2.75 | % | $ | 299,468 | | $ | 6,804 | 2.27 | % | ||
| Money market accounts | | 342,057 | | 10,707 | 3.13 | % | 362,243 | | 10,150 | 2.80 | % | ||||||
| Savings accounts | | 48,466 | | 664 | 1.37 | % | 69,742 | | 831 | 1.19 | % | ||||||
| Time deposits | | 757,494 | | 34,273 | 4.52 | % | 842,121 | | 29,383 | 3.49 | % | ||||||
| Total interest-bearing deposits | | $ | 1,470,045 | | $ | 54,492 | 3.71 | % | $ | 1,573,574 | | $ | 47,168 | 3.00 | % | ||
| Federal funds purchased | | | 28 | | | 2 | | 7.14 | % | | 302 | | | 15 | | 4.97 | % |
| Subordinated debt | | 24,747 | | 1,396 | 5.64 | % | 24,664 | | 1,396 | 5.66 | % | ||||||
| Federal Reserve Bank borrowings | | | 51,314 | | | 2,451 | | 4.78 | % | | 34,176 | | | 1,640 | | 4.80 | % |
| Federal Home Loan Bank advances | | 18,361 | | 745 | 4.06 | % | 1,487 | | 67 | 4.51 | % | ||||||
| Total interest-bearing liabilities | | $ | 1,564,495 | | $ | 59,086 | 3.78 | % | $ | 1,634,203 | | $ | 50,286 | 3.08 | % | ||
| Demand deposits | | 437,694 | | | | | 447,804 | | | | | ||||||
| Other liabilities | | 17,261 | | | | | 18,791 | | | | | ||||||
| Total liabilities | | $ | 2,019,450 | | | | | $ | 2,100,798 | | | | | ||||
| Shareholders’ equity | | $ | 239,081 | | | | | $ | 222,033 | | | | | ||||
| Total liabilities and shareholders’ equity | | $ | 2,258,531 | | | | | $ | 2,322,831 | | | | | ||||
| Tax-equivalent net interest income and spread (Non-GAAP)(1) | | | | | $ | 51,206 | | 1.14 | % | | | | | 50,743 | | 1.33 | % |
| Less: tax-equivalent adjustment | | | | | | 159 | | | | | | | $ | 259 | | | |
| Net interest income and spread (GAAP) | | | | | $ | 51,047 | | 1.13 | % | | | | | 50,484 | | 1.32 | % |
| | | | | | | | | | | | | | | | | | |
| Interest income/earnings assets | | | | | | | | 4.91 | % | | | | | | | 4.40 | % |
| Interest expense/earning assets | | | | | | | | 2.63 | % | | | | | | | 2.20 | % |
| Net interest margin | | | | | | | | 2.28 | % | | | | | | | 2.20 | % |
| | | | | | | | | | | | | | | | | | |
| Tax-equivalent interest income/earnings assets (Non-GAAP)(1) | | | | | | | | 4.92 | % | | | | | | | 4.41 | % |
| Interest expense/earning assets | | | | | | | | 2.63 | % | | | | | | | 2.20 | % |
| Tax-equivalent net interest margin (Non-GAAP)(3) | | | | | | | | 2.28 | % | | | | | | | 2.21 | % |
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| Column 1 | Column 2 |
|---|---|
| (1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
| Column 1 | Column 2 |
|---|---|
| (2) | The Company did not have any loans on non-accrual as of December 31, 2024 or December 31, 2023. |
(3) Tax-equivalent net interest margin adjusts for differences in tax treatment of interest income sources. The entire tax-equivalent adjustment is attributable to interest income on earning assets. Interest expense and the related cost of interest-bearing liabilities and cost of funds ratios are not affected by the tax-equivalent components.
Net interest margin as presented above is calculated by dividing tax-equivalent net interest income by total average earning assets. Net interest income, on a tax equivalent basis, is a financial measure that the Company believes provides a more accurate picture of the interest margin for comparative purposes. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The following table, “Tax-Equivalent Net Interest Income,” reconciles net interest income to tax-equivalent net interest income, which is a non-GAAP measure.
Tax-Equivalent Net Interest Income
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Year ended | ||||
| | | December 31, | ||||
| (Dollars in thousands) | 2024 | 2023 | ||||
| GAAP Financial Measurements: | | | | |||
| Interest Income - Loans | | $ | 96,332 | | $ | 86,435 |
| Interest Income - Securities and Other Interest-Earning Assets | | 13,801 | | 14,335 | ||
| Interest Expense - Deposits | | 54,492 | | 47,168 | ||
| Interest Expense - Borrowings | | 4,594 | | 3,118 | ||
| Total Net Interest Income (GAAP) | | $ | 51,047 | | $ | 50,484 |
| | | | | | | |
| Non-GAAP Financial Measurements: | | | ||||
| Add: Tax Benefit on Tax-Exempt Interest Income - Loans | | 150 | | 244 | ||
| Add: Tax Benefit on Tax-Exempt Interest Income - Securities | | 9 | | 15 | ||
| Total Tax Benefit on Tax-Exempt Interest Income (1) | | $ | 159 | | $ | 259 |
| Tax-Equivalent Net Interest Income (Non-GAAP) | | $ | 51,206 | | $ | 50,743 |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | Tax benefit was calculated using the federal statutory tax rate of 21%. |
Net interest income increased $0.5 million or 0.9% on a fully tax-equivalent basis for the year ended December 31, 2024. The increase in net interest income was driven by the increase in the yield of interest-earning assets and the reduction in the average balance of interest-bearing liabilities outpacing the increase in the cost on interest-bearing liabilities.
On a fully tax-equivalent basis, the net interest margin was 2.28% for the year ended December 31, 2024, compared to 2.21% for the same period in 2023. The increase in net interest margin was primarily due to increases in the yield of interest-bearing assets, which was partially offset by an increase in the cost of interest-bearing deposits.
The cost of interest-bearing liabilities increased 0.70% from 3.08% for the year ended December 31, 2023 to 3.78% for the year ended December 31, 2024. The increase in the cost of interest-bearing liabilities was primarily due to higher interest expense on deposits and other borrowings. The increase in the cost of interest-bearing liabilities was primarily due to a 71 basis point increase in the cost of interest-bearing deposits as a result of the repricing of the Company’s time deposits coupled with an increase in rates offered on money market, NOW and savings deposit accounts since the fourth quarter of 2023.
The loan portfolio’s yield for the year ended December 31, 2024 was 5.28% compared to 4.84% for the year ended December 31, 2023. The increase in yield on the Company’s loan portfolio was primarily a result of repricing of assets subsequent to the fourth quarter of 2023 and certain prepayment penalties.
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The investment securities portfolio’s yield for the year ended December 31, 2024 was 2.01% compared to 2.04% for the year ended December 31, 2023. The decrease was primarily due higher yielding investments maturing during the year ended December 31, 2024.
The yield on interest-bearing deposits due from banks for the year ended December 31, 2024 was 5.35% compared to 5.35% for the year ended December 31, 2023.
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. 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 prior rate). The net 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 to volume.
Rate/Volume Analysis
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | For the Year Ended December 31, | |||||||
| | | 2024 and 2023 | |||||||
| | | Increase | | | | ||||
| | | (Decrease) Due to | | | | ||||
| (Dollars in thousands) | Volume | Rate | Total Increase (Decrease) | ||||||
| Interest-earning Assets: | | | | ||||||
| Securities: | | | | ||||||
| Taxable | | $ | (2,321) | | $ | (102) | | $ | (2,423) |
| Tax-exempt(1) | | (28) | | 5 | | (23) | |||
| Total securities | | $ | (2,349) | | $ | (97) | | $ | (2,446) |
| Loans, net of unearned income: | | | | ||||||
| Taxable | | 2,292 | | 7,963 | | 10,255 | |||
| Tax-exempt(1) | | (379) | | | (73) | | (452) | ||
| Total loans, net of unearned income(2) | | $ | 1,913 | | $ | 7,890 | | $ | 9,803 |
| Interest-bearing deposits in other banks | | $ | 1,824 | | $ | 82 | | $ | 1,906 |
| Total interest-earning assets | | $ | 1,388 | | $ | 7,875 | | $ | 9,263 |
| Interest-bearing Liabilities: | | | | ||||||
| Interest-bearing deposits: | | | | ||||||
| NOW accounts | | $ | 1,107 | | $ | 937 | | $ | 2,044 |
| Money market accounts | | (873) | | 1,430 | | 557 | |||
| Savings accounts | | (291) | | 124 | | (167) | |||
| Time deposits | | (3,856) | | 8,746 | | 4,890 | |||
| Total interest-bearing deposits | | $ | (3,913) | | $ | 11,237 | | $ | 7,324 |
| Federal funds purchased | | (13) | | — | | (13) | |||
| Subordinated debt | | 5 | | (5) | | — | |||
| Federal Reserve Bank borrowings | | | 819 | | (8) | | 811 | ||
| Federal Home Loan Bank advances | | 685 | | (7) | | 678 | |||
| Total interest-bearing liabilities | | $ | (2,417) | | $ | 11,217 | | $ | 8,800 |
| Change in tax-equivalent net interest income (Non-GAAP) | | $ | 3,805 | | $ | (3,342) | | $ | 463 |
| Column 1 | Column 2 |
|---|---|
| (1) | Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. |
(2)The Company did not have any loans on non-accrual as of December 31, 2024 or December 31, 2023.
Interest Income
Interest income increased by $9.3 million or 9.2% to $110.3 million on a fully tax-equivalent basis for the year ended December 31, 2024 compared to $101.0 million for the year ended December 31, 2023, driven by an increase in rates which was partially offset by decrease in volume on interest-earning assets. The increase in rate on interest-earning assets
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was primarily attributable to the Company’s loan portfolio. The decrease in volume of average interest-earning assets was primarily attributable to the Company’s securities portfolio.
Fully tax-equivalent interest income on loans increased by approximately $9.9 million or 11.5% primarily as a result of rate. Average loans increased approximately $33.4 million between the years ended December 31, 2024 and December 31, 2023, which was primarily attributable to growth in the investor real estate and residential loan portfolios.
Fully tax-equivalent interest income on investment securities decreased by approximately $2.4 million. The decrease was primarily the result of volume decreasing from the Restructuring and to a lesser extent, the amortization and maturities of securities. Average investment securities decreased approximately $116.5 million between the years ended December 31, 2024 and December 31, 2023.
Interest Expense
Interest expense increased by $8.8 million to $59.1 million for the year ended December 31, 2024 compared to $50.3 million for the year ended December 31, 2023, primarily due to an increase in rates. The increase in rates was primarily a result of the repricing of the Company’s time deposits. The increase in rates was partially offset by 69.7 million or 4.3% decrease in average interest-bearing liabilities, as the Company utilized a portion of the cash from the Restructuring and other cash flow from the investment portfolio to pay down higher cost funding.
Provision Expense
The Company recorded a $0.4 million recovery of provision for credit losses for the year ended December 31, 2024 compared to a $3.3 million recovery of provision for the year ended December 31, 2023. The decreased recovery of provision for credit losses during 2024 was primarily a result of changes in the composition and volume of the loan portfolio, considerations of qualitative factors and the continued strong credit performance of our loan portfolio segments.
Non-interest Income
The Company’s recurring sources of non-interest income consist primarily of interchange income, service charges on deposit accounts, gain on sale of government guaranteed loans, and insurance commissions. Generally speaking, loan fees are included in interest income on the loan portfolio and not reported as non-interest income.
The following table summarizes non-interest income for the years ended December 31, 2024 and December 31, 2023.
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Year ended | ||||
| | | December 31, | ||||
| (Dollars in thousands) | 2024 | 2023 | ||||
| Service charges on deposit accounts | | | | | | |
| Overdrawn account fees | | $ | 84 | | $ | 82 |
| Account service fees | | 265 | | 248 | ||
| Other service charges and fees | | | ||||
| Interchange income | | 363 | | 403 | ||
| Other charges and fees | | 292 | | 435 | ||
| Bank owned life insurance | | — | | 224 | ||
| Losses on sale of available-for-sale securities | | — | | (17,316) | ||
| Net gains on premises and equipment | | 1 | | 16 | ||
| Insurance commissions | | 416 | | 386 | ||
| Gain on sale of government guaranteed loans | | | 520 | | | 131 |
| Non-qualified deferred compensation plan asset gains, net | | | 236 | | | 317 |
| Other operating income | | 94 | | 134 | ||
| Total non-interest income | | $ | 2,271 | | $ | (14,940) |
Non-interest income increased $17.2 million during the year ended December 31, 2024 compared to the same period in 2023. Excluding the impact of the Restructuring, non-interest income decreased $0.1 million or 4.4%. The decrease reflects the surrender of BOLI as part of the Restructuring.
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Non-interest Expense
Generally, non-interest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing banking services. The largest component of non-interest expense is salaries and employee benefits. Non-interest expense also includes operational expenses, such as occupancy and equipment expenses, data processing expenses, professional fees, advertising expenses and other general and administrative expenses, including FDIC assessments, and Virginia state franchise taxes.
The following table summarizes non-interest expense for the years ended December 31, 2024 and December 31, 2023.
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Year ended | ||||
| | | December 31, | ||||
| (Dollars in thousands) | 2024 | 2023 | ||||
| Salaries and employee benefits expense | | $ | 19,240 | | $ | 19,436 |
| Occupancy expense of premises | | 1,760 | | 1,811 | ||
| Furniture and equipment expenses | | 1,220 | | 1,178 | ||
| Advertising expense | | 386 | | 288 | ||
| Data processing | | 2,192 | | 1,936 | ||
| FDIC insurance | | 1,000 | | 1,041 | ||
| Professional fees | | 1,001 | | 329 | ||
| State franchise tax | | 2,405 | | 2,389 | ||
| Bank insurance | | 238 | | 174 | ||
| Vendor services | | 640 | | 407 | ||
| Supplies, printing, and postage | | 152 | | 152 | ||
| Director costs | | 776 | | 876 | ||
| Other operating expenses | | 799 | | 798 | ||
| Total non-interest expense | | $ | 31,809 | | $ | 30,815 |
Non-interest expense increased $1.0 million or 3.2% during the year ended December 31, 2024 compared to the same period in 2023. In 2023, the Company realized a non-recurring $0.3 million reversal of a litigation reserve. During the first quarter 2024, the Company incurred non-recurring expenses totaling $0.1 million in connection with a strategic opportunity that was explored and ultimately did not materialize. Excluding these two non-recurring items, non-interest expense increased $0.6 million or 1.9%. The increase was also due to increases in professional fees and data processing, partially offset by lower salaries and employee benefit expense and lower occupancy expense as the Company continues to renegotiate its office leases. The increase in professional fees was due to increased contract costs and services. The increase in data processing fees was primarily due to contractual increases and volume-based activity. The decrease in salaries and employee benefits was due to lower incentive accruals and higher direct loan origination costs when compared to the same period of the prior year, partially offset by higher deferred compensation expense as a result of a mark-to-market fluctuations on the Company’s NQDC.
Income Taxes
Income tax expense increased $1.9 million or 68.5% to $4.8 million for the year ended December 31, 2024 compared to $2.8 million for the year ended December 31, 2023. Our effective tax rate for the year ended December 31, 2024 was 21.7% compared to 35.4% for the year ended December 31, 2023 or 21.2% for the year ended December 31, 2023, when excluding the impact of the Restructuring (Non-GAAP). The increase in effective tax rate between the adjusted comparative periods was due to changes in temporary differences. Income tax for the twelve months ended December 31, 2024 represents a $0.6 million or 10.5% decrease when compared to the Company’s core income tax expense (Non-GAAP) for the twelve months ended December 31, 2023 of $5.3 million.
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Discussion and Analysis of Financial Condition – Years Ended December 31, 2024 and December 31, 2023
Assets, Liabilities, and Shareholders’ Equity
The Company’s total assets decreased $7.6 million or 0.3% to $2.23 billion at December 31, 2024 compared to $2.24 billion at December 31, 2023. The decrease in total assets is primarily attributable to a decrease in available-for-sale securities of $39.7 million, partially offset by increases in interest-bearing deposits in banks and loans, net of unearned income of $24.9 million and $12.2 million, respectively.
The Company’s total liabilities decreased $24.3 million or 1.2% to $1.99 billion at December 31, 2024 compared to $2.01 billion at December 31, 2023. The decrease in total liabilities was primarily attributable to a decrease in time deposits of $125.5 million and a decrease of Federal Reserve Bank borrowings of $54.0 million. The decreases were partially offset by an increase in non-interest bearing demand deposits and interest-bearing demand deposits of $21.9 million and $97.1 million, respectively.
Shareholders’ equity increased $16.7 million or 7.3% to $246.6 million at December 31, 2024 compared to $229.9 million at December 31, 2023. The increase in shareholders’ equity was primarily attributable to the Company’s earnings over the previous twelve months and a decrease in accumulated other comprehensive loss, which was due to decreases in unrealized losses on our available-for-sale investment portfolio from market value increases. This increase was partially offset by increased cash dividends paid. Book value per share was $17.28 as of December 31, 2024 compared to $16.25 as of December 31, 2023.
Investment Securities
The Company maintains a primarily fixed income investment securities portfolio that had a total carrying value of $222.3 million at December 31, 2024 and $265.5 million at December 31, 2023. The investment portfolio is used as a source of liquidity, interest income, and credit risk diversification, as well as to manage rate sensitivity and provide collateral for secured public funds and secured credit lines. Investment securities are classified as available-for-sale or held-to-maturity based on management’s investment strategy and management’s assessment of the intent and ability to hold the securities until maturity. Investment securities that we may sell prior to maturity in response to changes in management’s investment strategy, liquidity needs, interest rate risk profile or for other reasons are classified as available-for-sale. The Company also had restricted stock and equity securities within its investment securities portfolio with total carrying values of $7.6 million and $2.8 million, respectively, as of December 31, 2024 and $5.0 million and $2.8 million, respectively, as of December 31, 2023.
The Company did not purchase or sell any investment securities during the year ended December 31, 2024. The Company had $45.6 million in maturities and principal repayments on securities during the year ended December 31, 2024. Maturities consisted of $17.0 million in U.S. treasuries, $3.0 million in U.S. agency, and $0.3 million in municipal -taxable. Principal repayments consisted of $18.8 million of mortgage-backed securities and $6.4 million of collateralized mortgage obligation securities.
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The following table summarizes the amortized cost and fair value of the Company’s fixed income investment portfolio as of December 31, 2024 and December 31, 2023, respectively.
| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2024 | December 31, 2023 | |||||||||
| | | Amortized | | Fair | | Amortized | | Fair | ||||
| (Dollars in thousands) | Cost | Value | Cost | Value | ||||||||
| Held-to-maturity | | | | | ||||||||
| U.S. Treasuries | | $ | 6,001 | | $ | 5,418 | | $ | 6,001 | | $ | 5,334 |
| U.S. government and federal agencies | | 35,349 | | 30,606 | | 35,434 | | 30,334 | ||||
| U.S. agency collateralized mortgage obligations | | 17,805 | | 13,857 | | 19,395 | | 15,300 | ||||
| Taxable municipal | | 6,041 | | 4,952 | | 6,057 | | 4,956 | ||||
| U.S. agency mortgage-backed | | 26,813 | | 21,437 | | 28,618 | | 23,608 | ||||
| Total Held-to-maturity Securities | | $ | 92,009 | | $ | 76,270 | | $ | 95,505 | | $ | 79,532 |
| Available-for-sale | | | | | ||||||||
| U.S. Treasuries | | $ | 27,920 | | $ | 27,137 | | $ | 44,793 | | $ | 42,977 |
| U.S. government and federal agencies | | 10,966 | | 10,581 | | 13,850 | | 13,275 | ||||
| Corporate bonds | | 3,000 | | 2,739 | | 3,000 | | 2,523 | ||||
| U.S. agency collateralized mortgage obligations | | 36,032 | | 29,611 | | 40,806 | | 34,310 | ||||
| Tax-exempt municipal | | 1,379 | | 1,171 | | 1,380 | | 1,231 | ||||
| Taxable municipal | | 270 | | 263 | | 606 | | 587 | ||||
| U.S. agency mortgage-backed | | 64,274 | | 58,755 | | 81,255 | | 75,090 | ||||
| Total Available-for-sale Securities | | $ | 143,841 | | $ | 130,257 | | $ | 185,690 | | $ | 169,993 |
In the prevailing rate environments as of both December 31, 2024 and December 31, 2023, the Company’s investment portfolio had an estimated weighted average remaining life of approximately 4.2 years. The Company’s available-for-sale investment portfolio had an estimated weighted average remaining life of approximately 3.1 years and 3.0 years in the prevailing rate environments as of December 31, 2024 and December 31, 2023, respectively. The held-to-maturity investment portfolio had an estimated weighted average remaining life of approximately 6.0 years and 6.7 years as of December 31, 2024 and December 31, 2023, respectively.
The following table summarizes the maturity composition of our investment securities as of December 31, 2024, including the weighted average yield of each maturity band. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The weighted-average yield below represents the effective yield for the investment securities and is calculated based on the amortized cost of each security.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2024 | ||||||||
| | | Amortized | | Fair | | Weighted-Average | |||
| (Dollars in thousands) | Cost | Value | Yield | ||||||
| Held-to-maturity | | | | ||||||
| Due in one year or less | | $ | — | | $ | — | — | | |
| Due after one year through five years | | 27,431 | | 24,641 | 1.17 | % | |||
| Due after five years through ten years | | 21,620 | | 17,962 | 1.67 | % | |||
| Due after ten years | | 42,958 | | 33,667 | 1.45 | % | |||
| Total Held-to-maturity Securities | | $ | 92,009 | | $ | 76,270 | 1.42 | % | |
| Available-for-sale | | | | ||||||
| Due in one year or less | | $ | 21,057 | | $ | 20,798 | 1.80 | % | |
| Due after one year through five years | | 29,996 | | 28,849 | 2.14 | % | |||
| Due after five years through ten years | | 36,750 | | 34,830 | 2.66 | % | |||
| Due after ten years | | 56,038 | | 45,780 | 1.56 | % | |||
| Total Available-for-sale Securities | | $ | 143,841 | | $ | 130,257 | 2.00 | % |
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Loan Portfolio
Gross loans net of unearned income increased $12.7 million or 0.7% to $1.87 billion as of December 31, 2024 compared to $1.85 billion as of December 31, 2023. The Company continues to maintain its disciplined underwriting standards while prudently pursuing loan growth opportunities that provide acceptable risk-adjusted returns.
The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of December 31, 2024 and December 31, 2023.
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2024 | December 31, 2023 | |||||||||
| (Dollars in thousands) | Amount | Percent | Amount | Percent | |||||||
| Real Estate Loans: | | | | | |||||||
| Commercial | | $ | 1,181,090 | 63.24 | % | $ | 1,146,116 | 61.79 | % | ||
| Construction and land development | | 164,988 | 8.83 | % | 180,922 | 9.75 | % | ||||
| Residential | | 472,932 | 25.32 | % | 482,182 | 25.99 | % | ||||
| Commercial - Non Real Estate: | | | | | | ||||||
| Commercial loans | | 47,736 | 2.56 | % | 45,204 | 2.44 | % | ||||
| Consumer - Non-Real Estate: | | | | | | ||||||
| Consumer loans | | 906 | 0.05 | % | 560 | 0.03 | % | ||||
| Total Gross Loans | | $ | 1,867,652 | 100.00 | % | $ | 1,854,984 | 100.00 | % | ||
| Allowance for loan credit losses | | (18,715) | | | | (19,543) | | ||||
| Net deferred loan costs | | 4,521 | | | | 4,983 | | ||||
| Total net loans | | $ | 1,853,458 | | | | $ | 1,840,424 | |
The following table summarizes the contractual maturities of the loans as of December 31, 2024 by loan type. Maturities are based on the final contractual payment date, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The table also summarizes the fixed and floating rate composition of loans held for investment for contractual maturities greater than one year.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2024 | ||||||||||||||
| | | | After 1 | After 5 | | | | | |||||||
| | | | | | Year | | years | | Maturing | | | | |||
| | | Within 1 | | Within 5 | | Within 15 | | After 15 | | | | ||||
| (Dollars in thousands) | | Year | | Years | | Years | | Years | | Total | |||||
| Real Estate Loans: | | | | | | | |||||||||
| Commercial | | 71,804 | | 448,388 | | | 649,917 | | | 10,981 | | 1,181,090 | |||
| Construction and land development | | 96,588 | | 52,619 | | | 15,781 | | | — | | 164,988 | |||
| Residential | | $ | 14,446 | | $ | 32,716 | | $ | 34,590 | | $ | 391,180 | | $ | 472,932 |
| Commercial - Non-Real Estate: | | | | | | | | | | | | | |||
| Commercial loans | | 7,787 | | 20,178 | | | 18,260 | | | 1,511 | | 47,736 | |||
| Consumer - Non-Real Estate: | | | | | | | | | | | | | |||
| Consumer loans | | 283 | | 608 | | | — | | | 15 | | 906 | |||
| Total Gross Loans | | $ | 190,908 | | $ | 554,509 | | $ | 718,548 | | $ | 403,687 | | $ | 1,867,652 |
| | | | | | | | | | | | | | | | |
| For Maturities Over One Year: | | | | | | ||||||||||
| Floating rate loans | | | | | $ | 210,258 | | $ | 280,565 | | $ | 401,877 | | $ | 892,700 |
| Fixed rate loans | | | | | 344,251 | | | 437,983 | | | 1,810 | | 784,044 | ||
| | | | | | $ | 554,509 | | $ | 718,548 | | $ | 403,687 | | $ | 1,676,744 |
Asset Quality
The Company maintains policies and procedures to promote sound underwriting and mitigate credit risk. The Chief Credit Officer is responsible for establishing credit risk policies and procedures, including underwriting and hold guidelines and credit approval authority, and monitoring credit exposure and performance of the Company’s lending-related transactions.
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The Company’s asset quality remained strong during the year ended December 31, 2024. The Company had no non accrual loans and OREO as of December 31, 2024 and December 31, 2023. The Company had one loan that was 90 days past due and still accruing interest as of December 31, 2024. The loan paid off, in full, on January 7, 2025.
The Company did not have any nonaccrual loans as of December 31, 2024 or December 31, 2023 nor were there any loans placed on nonaccrual during those periods. A loan is placed on nonaccrual status when (i) the Company is advised by the borrower that scheduled principal or interest payments cannot be met, (ii) when management’s best judgment indicates that payment in full of principal and interest can no longer be expected, or (iii) when any such loan or obligation becomes delinquent for 90 days, unless it is both well-secured and in the process of collection. As a result, the Company did not have any interest income that would have been recognized on nonaccrual loans for the years ended December 31, 2024 or December 31, 2023.
The Company made one loan modification to a borrower experiencing financial difficulty during the twelve months ended December 31, 2024. As of December 31, 2024, the outstanding principal balance of the loan was $1.5 million which represents 3.16% of the Commercial Non-Real Estate Loans - Commercial loan segment. The loan was modified to provide a combination of interest rate and term extension. As of December 31, 2024, this loan was current and paying in accordance with the modified terms. The Company did not make any loan modifications to borrowers experiencing financial difficulty during the twelve months ended December 31, 2023.
The following table summarizes the Company’s asset quality as of December 31, 2024 and December 31, 2023.
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | December 31, 2024 | December 31, 2023 | |||||
| Nonaccrual loans | | $ | — | | $ | — | |
| Loans past due 90 days and accruing interest | | 9,978 | | — | | ||
| Other real estate owned and repossessed assets | | — | | — | | ||
| Total nonperforming assets | | $ | 9,978 | | $ | — | |
| | | | | | | | |
| Allowance for loan credit losses to nonperforming assets | | NM | | NM | | ||
| Nonaccrual loans to gross loans | | 0.00 | % | 0.00 | % | ||
| Nonperforming assets to period end loans and OREO | | 0.53 | % | 0.00 | % |
NM – Not meaningful
Allowance for Loan Credit Losses
Refer to the discussion in the “Critical Accounting Policies and Estimates” section above for management’s approach to estimating the allowance for loan credit losses.
The Company recorded net recoveries of $2 thousand during the year ended December 31, 2024 compared to net recoveries of $2 thousand during the year ended December 31, 2023. At December 31, 2024, the allowance for loan credit losses was $18.7 million, or 1.00% of outstanding loans, net of unearned income, compared to $19.5 million, or 1.05% of outstanding loans, net of unearned income, at December 31, 2023. The decrease in the allowance as a percentage of outstanding loans, net of unearned income, was primarily a result of changes in the Company’s loss driver analysis and assumptions, changes in the composition of the loan portfolio, improved economic forecasts used in the quantitative portion of the model and considerations of qualitative factors combined with the continued strong credit performance of our loan portfolio segments.
The following table summarizes the Company’s loan credit loss experience by loan portfolio for the years ended December 31, 2024 and December 31, 2023.
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| | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2024 | | December 31, 2023 | ||||||||
| | | Net | | Net | | Net | | Net | ||||
| | | (charge-offs) | | (charge-off) | | (charge-offs) | | (charge-off) | ||||
| (Dollars in thousands) | recoveries | recovery rate (1) | recoveries | recovery rate (1) | ||||||||
| Real estate loans: | | | | | ||||||||
| Commercial | | $ | — | | — | | $ | — | — | % | ||
| Construction and land development | | — | | — | | — | — | | ||||
| Residential | | — | | — | | — | — | | ||||
| Commercial loans | | 2 | | 0.01 | % | 2 | 0.01 | % | ||||
| Consumer loans | | — | | — | | — | — | | ||||
| Total | | $ | 2 | | | | | $ | 2 | | ||
| | | | | | | | | | | | | |
| Average loans outstanding during the period | | $ | 1,825,936 | | | | | $ | 1,792,505 | | ||
| Allowance coverage ratio (2) | | | | 1.00 | % | 1.05 | % | |||||
| Total net (charge-off) recovery rate | | | | 0.00 | % | 0.00 | % | |||||
| Allowance to nonaccrual loans ratio(3) | | | | NM | | NM | |
NM – Not meaningful
| Column 1 | Column 2 |
|---|---|
| (1) | The net (charge-off) recovery rate is calculated by dividing total net (charge-offs) recoveries during the period by average gross loans outstanding during the period. |
| Column 1 | Column 2 |
|---|---|
| (2) | The allowance coverage ratio is calculated by dividing the allowance for loan credit losses at the end of the period by gross loans, net of unearned income at the end of the period. |
| Column 1 | Column 2 |
|---|---|
| (3) | The allowance to nonaccrual loans ratio is calculated by dividing the allowance for loan credit losses at the end of the period by nonaccrual loans at the end of the period. |
The following table summarizes the allowance for loan credit losses by portfolio with a comparison of the percentage composition in relation to total allowance for loan credit losses and total loans as of December 31, 2024 and December 31, 2023.
| | | | | | | | | |
|---|---|---|---|---|---|---|---|---|
| | December 31, 2024 | |||||||
| | | Allowance | | Percent of Allowance | | Percent of Loans in | ||
| | | for Loan Credit | | in Each Category to | | Each Category to Total | ||
| (Dollars in thousands) | | Losses | | Total Allocated Allowance | | Loans | ||
| Real Estate Loans: | | | | |||||
| Commercial | | $ | 11,732 | 62.69 | % | 63.24 | % | |
| Construction and land development | | 1,761 | 9.41 | % | 8.83 | % | ||
| Residential | | 4,594 | 24.54 | % | 25.32 | % | ||
| Commercial - Non-Real Estate: | | | ||||||
| Commercial loans | | 548 | 2.93 | % | 2.56 | % | ||
| Consumer - Non-Real Estate: | | | ||||||
| Consumer loans | | 80 | 0.43 | % | 0.05 | % | ||
| Total | | $ | 18,715 | 100.00 | % | 100.00 | % |
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| | | | | | | | | |
|---|---|---|---|---|---|---|---|---|
| | | December 31, 2023 | ||||||
| | Allowance | Percent of Allowance | Percent of Loans in | |||||
| | | for Loan Credit | | in Each Category to | | Each Category to Total | ||
| (Dollars in thousands) | | Losses | | Total Allocated Allowance | | Loans | ||
| Real Estate Loans: | | | | |||||
| Commercial | | $ | 12,841 | 65.71 | % | 61.79 | % | |
| Construction and land development | | 1,787 | 9.14 | % | 9.75 | % | ||
| Residential | | 4,323 | 22.12 | % | 25.99 | % | ||
| Commercial - Non-Real Estate: | | | | |||||
| Commercial loans | | 495 | 2.53 | % | 2.44 | % | ||
| Consumer - Non-Real Estate: | | | | |||||
| Consumer loans | | 97 | 0.50 | % | 0.03 | % | ||
| Total | | $ | 19,543 | 100.00 | % | 100.00 | % |
Management believes that the allowance for loan credit losses is adequate to absorb lifetime credit losses inherent in the portfolio as of December 31, 2024. There can be no assurance, however, that adjustments to the provision for (recovery of) credit losses will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; or changes in the circumstances of particular borrowers are criteria that could change and make adjustments to the provision for (recovery of) credit losses necessary.
Deposits
Total deposits decreased $14.2 million or 0.7% to $1.89 billion as of December 31, 2024 compared to $1.91 billion as of December 31, 2023.
Non-interest bearing demand deposits increased $21.9 million or 5.3% to $433.3 million as of December 31, 2024 compared to $411.4 million at December 31, 2023. Non-interest bearing demand deposits represented 22.9% and 21.6% of total deposits at December 31, 2024 and December 31, 2023, respectively.
Interest-bearing deposits, which include NOW accounts, regular savings accounts, money market accounts, and time deposits, decreased $36.1 million or 2.41% to $1.46 billion as of December 31, 2024 compared to $1.50 billion as of December 31, 2023. Interest-bearing deposits represented 77.1% and 78.4% of total deposits at December 31, 2024 and December 31, 2023, respectively.
The Company focuses on funding asset growth with deposit accounts, with an emphasis on core deposit growth, as its primary source of deposits. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, time deposits, reciprocal IntraFi Demand® deposits, IntraFi Money Market® deposits and IntraFi CD® deposits. Core deposits totaled $1.62 billion or 85.4% of total deposits and $1.58 billion or 82.7% of total deposits at December 31, 2024 and December 31, 2023, respectively.
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The following table sets forth the average balances of deposits and the average interest rates paid for the years ended December 31, 2024 and 2023.
| | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2024 | | December 31, 2023 | |||||||
| | Average | | Average | | |||||||
| (Dollars in thousands) | | Amount | | Rate | | Amount | | Rate | |||
| Non-interest bearing | | $ | 437,694 | | | $ | 447,804 | | |||
| Interest bearing: | | | | | |||||||
| NOW accounts | | 322,028 | | 2.75 | % | | 299,468 | 2.27 | % | ||
| Money market accounts | | 342,057 | | 3.13 | % | | 362,243 | 2.80 | % | ||
| Savings accounts | | 48,466 | | 1.37 | % | | 69,742 | 1.19 | % | ||
| Time deposits | | 757,494 | | 4.52 | % | | 842,121 | 3.49 | % | ||
| Total interest-bearing | | 1,470,045 | | 3.71 | % | | 1,573,574 | 3.00 | % | ||
| Total | | $ | 1,907,739 | | 2.86 | % | $ | 2,021,378 | 2.33 | % |
The following table sets forth the maturity ranges of certificates of deposit with balances of $250,000 or more as of December 31, 2024.
| | | | | | | |
|---|---|---|---|---|---|---|
| | | December 31, 2024 | ||||
| (Dollars in thousands) | Total | Uninsured | ||||
| Three months or less | | $ | 65,443 | | $ | 46,443 |
| Over three through 6 months | | 120,452 | | 101,952 | ||
| Over 6 through 12 months | | 61,133 | | 48,383 | ||
| Over 12 months | | 68,520 | | 55,270 | ||
| Total | | $ | 315,548 | | $ | 252,048 |
The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) was estimated at $816.7 million at December 31, 2024 and $802.8 million at December 31, 2023. Included in these amounts were $157.4 million and $168.7 million of public fund deposits that are collateralized by securities as of December 31, 2024 and December 31, 2023, respectively. Deposits that were not insured or not collateralized by securities represented 35% and 33% of total deposits, respectively, as of December 31, 2024 and December 31, 2023.
Capital Resources
The Company is a bank holding company with less than $3 billion in assets and does not (i) have significant off balance sheet exposure, (ii) engage in significant non-banking activities, or (iii) have a material amount of securities registered under the Exchange Act. As a result, the Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement and is currently not subject to consolidated regulatory requirements.
The Bank is subject to capital adequacy standards adopted by the Federal Reserve, including the capital rules that implemented the Basel III regulatory capital reforms developed by the Basel Committee on Banking Supervision.
Note 16 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K, contains additional discussion and analysis regarding the Company and Bank’s regulatory capital requirements.
Shareholders’ equity increased $16.7 million or 7.3% to $246.6 million at December 31, 2024 compared to $229.9 million at December 31, 2023. The increase in shareholders’ equity was primarily attributable the Company’s earnings during the year and a decrease in accumulated other comprehensive loss, which was attributable to a decrease in unrealized losses on our available-for-sale portfolio due to market value increases. These increases were partially offset by cash dividends paid.
In August of 2023, the Company’s Board of Directors authorized the extension of the Company’s stock repurchase program that was originally adopted in August of 2021. Under the stock repurchase program, the Company may repurchase up to 700,000 shares of its outstanding common stock. The stock repurchase program will expire on August 31, 2025 or earlier if all the authorized shares have been repurchased. The Company repurchased 3,003 shares at $16.48 per share during the twelve months ended December 31, 2024.
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Table of Contents
Liquidity
Liquidity reflects a financial institution’s ability to fund assets and meet current and future financial obligations. Liquidity is essential in all banks to meet customer withdrawals, compensate for balance sheet fluctuations, and provide funds for growth. Monitoring and managing both liquidity measurements is critical in developing prudent and effective balance sheet management. Management conducts liquidity stress testing on a quarterly basis to prepare for unexpected adverse scenarios and contemporaneously develops mitigating strategies to reduce losses in the event of an economic downturn.
The Company’s principal source of liquidity and funding is its deposit base. The level of deposits necessary to support the Company’s lending and investment activities is determined through monitoring loan demand.
In addition to the liquidity provided by balance sheet cash flows, the Company supplements its liquidity with additional sources such as secured borrowing credit lines with the FHLB and the Reserve Bank. Specifically, the Company has pledged a portion of its loan portfolio to the FHLB and the Reserve Bank. Based on collateral pledged as of December 31, 2024, the total FHLB available borrowing capacity was $462.2 million. Additional borrowing capacity with the Reserve Bank was approximately $104.0 million as of December 31, 2024.
On September 3, 2024, the Company paid off its $77.0 million advance from the Reserve Bank under the Bank Term Funding Program (“BTFP”) and concurrently secured three FHLB advances totaling $56.0 million. The FHLB advances have a weighted average fixed interest rate of 4.01% compared to 4.76% for the retired BTFP advance. Total borrowings as of December 31, 2024 consisted of subordinated debt totaling $24.8 million and the FHLB advances.
Total liquidity, defined as cash and cash equivalents, unencumbered securities at fair value, and available secured borrowing capacity, was $727.3 million at December 31, 2024 compared to $638.9 million at December 31, 2023. The Company’s liquidity position represented 110.3% of uninsured, non-collateralized deposits at December 31, 2024.
In addition to available secured borrowing capacity, the Company had available federal funds lines with correspondent banks of $110.0 million at December 31, 2024.
Liquidity is a core pillar of the Company’s operations. Conditions may arise in the future that could negatively impact the Company’s future liquidity position resulting in funding mismatches. These include market constraints on the ability to convert assets into cash or accessing sources of funds (i.e., market liquidity) and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks also can affect a bank’s liquidity. Management maintains that the Company has a strong liquidity position, but any of the factors referenced above could materially impact that in the future.
The Company has various contractual obligations that affect its cash flows and liquidity. For information regarding material contractual obligations, please see Note 7, Note 8 and Note 11 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K.
Off-Balance Sheet Arrangements
The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the Company’s liquidity and capital resources to the extent customers accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For further information, see Note 11 to the Consolidated Financial Statements, included in Item 8 of this Form 10-K, for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements.