UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from____________ to___________
Commission File Number: 000-12896
OLD POINT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia | 54-1265373 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
101 East Queen Street, Hampton, Virginia 23669
(Address of principal executive offices) (Zip Code)
(757) 728-1200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $5.00 par value per share | OPOF | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer ☐ | ||
Non-accelerated filer | ☒ | Smaller reporting company ☒ | ||
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares outstanding of the registrant’s common stock, ($5.00 par value per share) as of August 7, 2024 was 5,075,876 shares.
OLD POINT FINANCIAL CORPORATION
FORM 10-Q
ITEM | PAGE | |
PART I - FINANCIAL INFORMATION | ||
Item 1. | 1 | |
1 | ||
2 | ||
3 | ||
4 | ||
5 | ||
6 | ||
Item 2. | 27 | |
Item 3. | 46 | |
Item 4. | 48 | |
PART II - OTHER INFORMATION | ||
Item 1. | 48 | |
Item 1A. | 48 | |
Item 2. | 48 | |
Item 3. | 49 | |
Item 4. | 49 | |
Item 5. | 49 | |
Item 6. | 50 | |
51 |
GLOSSARY OF ACRONYMS AND DEFINED TERMS
2023 Form 10-K | Annual Report on Form 10-K for the year ended December 31, 2023 |
ACL | Allowance for Credit Losses |
ACLL | Allowance for Credit Losses on Loans, a component of ACL |
ALCO | Asset-Liability Committee |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
Bank | The Old Point National Bank of Phoebus |
CECL | Current Expected Credit Losses |
CET1 | Common Equity Tier 1 |
Company | Old Point Financial Corporation and its subsidiaries |
CBB | Community Bankers Bank |
CBLR | Community Bank Leverage Ratio Framework |
EGRRCPA | Economic Growth, Regulatory Relief, and Consumer Protection Act |
EPS | Earnings per share |
ESPP | Employee Stock Purchase Plan |
Exchange Act | Securities Exchange Act of 1934, as amended |
FASB | Financial Accounting Standards Board |
FDIC | Federal Deposit Insurance Corporation |
FHLB | Federal Home Loan Bank |
FRB | Federal Reserve Bank |
GAAP | Generally Accepted Accounting Principles |
Incentive Stock Plan | Old Point Financial Corporation 2016 Incentive Stock Plan |
IRLC | Interest Rate Lock Commitments |
NIM | Net Interest Margin |
Notes | The Company’s 3.50% fixed-to-floating rate subordinated notes due 2031 |
OAEM | Other Assets Especially Mentioned |
OREO | Other Real Estate Owned |
ROE | Return on Average Equity |
SEC | U.S. Securities and Exchange Commission |
SOFR | Secured overnight financing rate |
Wealth | Old Point Trust & Financial Services N.A. |
PART I – FINANCIAL INFORMATION
Old Point Financial Corporation and Subsidiaries
June 30, | December 31, | |||||||
(dollars in thousands, except per share amounts) | 2024 | 2023 | ||||||
Assets | (unaudited) | |||||||
Cash and due from banks | $ | 15,517 | $ | 16,778 | ||||
Interest-bearing due from banks | 76,635 | 63,539 | ||||||
Federal funds sold | 593 | 489 | ||||||
Cash and cash equivalents | 92,745 | 80,806 | ||||||
Securities available-for-sale, at fair value | 192,127 | 202,231 | ||||||
Restricted securities, at cost | 3,825 | 5,176 | ||||||
Loans held for sale | - | 470 | ||||||
Loans, net | 1,042,774 | 1,068,046 | ||||||
Premises and equipment, net | 30,783 | 29,913 | ||||||
Premises and equipment, held for sale | 344 | 344 | ||||||
Bank-owned life insurance | 35,623 | 35,088 | ||||||
Goodwill | 1,650 | 1,650 | ||||||
Core deposit intangible, net | 165 | 187 | ||||||
Other assets | 23,318 | 22,471 | ||||||
Total assets | $ | 1,423,354 | $ | 1,446,382 | ||||
Liabilities & Stockholders’ Equity | ||||||||
Deposits: | ||||||||
Noninterest-bearing deposits | $ | 360,296 | $ | 331,992 | ||||
Savings deposits | 624,777 | 655,694 | ||||||
Time deposits | 251,502 | 242,711 | ||||||
Total deposits | 1,236,575 | 1,230,397 | ||||||
Overnight repurchase agreements | 1,381 | 2,383 | ||||||
Federal Home Loan Bank advances | 39,586 | 69,450 | ||||||
Subordinated notes | 29,733 | 29,668 | ||||||
Accrued expenses and other liabilities | 6,083 | 7,706 | ||||||
Total liabilities | 1,313,358 | 1,339,604 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $5 par value, 10,000,000 shares authorized; 5,077,525 and 5,040,095 shares outstanding (includes 68,113 and 53,660 of nonvested restricted stock, respectively) | 25,047 | 24,932 | ||||||
Additional paid-in capital | 17,248 | 17,099 | ||||||
Retained earnings | 84,999 | 82,277 | ||||||
Accumulated other comprehensive loss, net | (17,298 | ) | (17,530 | ) | ||||
Total stockholders’ equity | 109,996 | 106,778 | ||||||
Total liabilities and stockholders’ equity | $ | 1,423,354 | $ | 1,446,382 |
See accompanying notes to consolidated financial statements.
Old Point Financial Corporation and Subsidiaries
Consolidated Statements of Income
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(unaudited, dollars in thousands, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 15,042 | $ | 14,185 | $ | 29,586 | $ | 27,226 | ||||||||
Due from banks | 1,087 | 93 | 1,886 | 157 | ||||||||||||
Federal funds sold | 12 | 9 | 21 | 15 | ||||||||||||
Securities: | ||||||||||||||||
Taxable | 1,761 | 1,772 | 3,559 | 3,536 | ||||||||||||
Tax-exempt | 139 | 209 | 278 | 421 | ||||||||||||
Dividends and interest on all other securities | 77 | 79 | 171 | 145 | ||||||||||||
Total interest and dividend income | 18,118 | 16,347 | 35,501 | 31,500 | ||||||||||||
Interest expense: | ||||||||||||||||
Checking and savings deposits | 2,699 | 1,569 | 5,296 | 2,423 | ||||||||||||
Time deposits | 2,337 | 1,419 | 4,509 | 1,956 | ||||||||||||
Federal funds purchased, securities sold under agreements to repurchase and other borrowings | 1 | 2 | 2 | 39 | ||||||||||||
Federal Home Loan Bank advances | 670 | 963 | 1,448 | 1,580 | ||||||||||||
Long-term borrowings | 295 | 295 | 590 | 590 | ||||||||||||
Total interest expense | 6,002 | 4,248 | 11,845 | 6,588 | ||||||||||||
Net interest income | 12,116 | 12,099 | 23,656 | 24,912 | ||||||||||||
Provision for credit losses | 261 | 361 | 341 | 737 | ||||||||||||
Net interest income after provision for credit losses | 11,855 | 11,738 | 23,315 | 24,175 | ||||||||||||
Noninterest income: | ||||||||||||||||
Fiduciary and asset management fees | 1,129 | 1,154 | 2,321 | 2,270 | ||||||||||||
Service charges on deposit accounts | 837 | 793 | 1,595 | 1,546 | ||||||||||||
Other service charges, commissions and fees | 1,150 | 1,027 | 2,033 | 2,136 | ||||||||||||
Bank-owned life insurance income | 270 | 259 | 535 | 513 | ||||||||||||
Mortgage banking income | 2 | 112 | 18 | 207 | ||||||||||||
Loss on sale of available-for-sale securities, net | - | (164 | ) | - | (164 | ) | ||||||||||
Loss on sale of repossessed assets | (58 | ) | (69 | ) | (36 | ) | (69 | ) | ||||||||
Gain on sale of fixed assets | - | 200 | - | 200 | ||||||||||||
Other operating income | 141 | 165 | 227 | 259 | ||||||||||||
Total noninterest income | 3,471 | 3,477 | 6,693 | 6,898 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 7,195 | 8,043 | 15,026 | 15,406 | ||||||||||||
Occupancy and equipment | 1,373 | 1,255 | 2,546 | 2,450 | ||||||||||||
Data processing | 1,393 | 1,264 | 2,708 | 2,443 | ||||||||||||
Customer development | 176 | 101 | 231 | 214 | ||||||||||||
Professional services | 680 | 756 | 1,265 | 1,429 | ||||||||||||
Employee professional development | 167 | 289 | 378 | 523 | ||||||||||||
Other taxes | 276 | 234 | 537 | 447 | ||||||||||||
Card and other losses | 98 | 154 | 329 | 409 | ||||||||||||
Other operating expenses | 966 | 1,051 | 2,007 | 1,994 | ||||||||||||
Total noninterest expense | 12,324 | 13,147 | 25,027 | 25,315 | ||||||||||||
Income before income taxes | 3,002 | 2,068 | 4,981 | 5,758 | ||||||||||||
Income tax expense | 473 | 266 | 735 | 873 | ||||||||||||
Net income | $ | 2,529 | $ | 1,802 | $ | 4,246 | $ | 4,885 | ||||||||
Basic Earnings per Share: | ||||||||||||||||
Weighted average shares outstanding | 5,064,363 | 5,023,305 | 5,052,091 | 5,011,481 | ||||||||||||
Net income per share of common stock | $ | 0.50 | $ | 0.36 | $ | 0.84 | $ | 0.97 | ||||||||
Diluted Earnings per Share: | ||||||||||||||||
Weighted average shares outstanding | 5,064,503 | 5,023,603 | 5,052,190 | 5,011,697 | ||||||||||||
Net income per share of common stock | $ | 0.50 | $ | 0.36 | $ | 0.84 | $ | 0.97 |
See accompanying notes to consolidated financial statements.
Old Point Financial Corporation
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(unaudited, dollars in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
Net income | $ | 2,529 | $ | 1,802 | $ | 4,246 | $ | 4,885 | ||||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Net unrealized gain (loss) on available-for-sale securities | 500 | (1,452 | ) | 232 | 880 | |||||||||||
Reclassification for losses included in net income | - | 130 | - | 130 | ||||||||||||
Other comprehensive income (loss), net of tax | 500 | (1,322 | ) | 232 | 1,010 | |||||||||||
Comprehensive income | $ | 3,029 | $ | 480 | $ | 4,478 | $ | 5,895 |
See accompanying notes to consolidated financial statements.
Old Point Financial Corporation and Subsidiaries
Accumulated | ||||||||||||||||||||||||
Shares of | Additional | Other | ||||||||||||||||||||||
(unaudited, dollars in thousands, except share and per share data) | Common | Common | Paid-in | Retained | Comprehensive | |||||||||||||||||||
Stock | Stock | Capital | Earnings | Loss | Total | |||||||||||||||||||
Three months ended June 30, 2024 | ||||||||||||||||||||||||
Balance at March 31, 2024 | 4,989,222 | $ | 24,946 | $ | 17,193 | $ | 83,289 | $ | (17,798 | ) | $ | 107,630 | ||||||||||||
Net income | - | - | - | 2,529 | - | 2,529 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 500 | 500 | ||||||||||||||||||
Employee Stock Purchase Plan share issuance | 1,839 | 9 | 17 | - | - | 26 | ||||||||||||||||||
Restricted stock vested | 18,351 | 92 | (92 | ) | - | - | - | |||||||||||||||||
Impact of adoption of new accounting pronouncement | - | - | - | (108 | ) | - | (108 | ) | ||||||||||||||||
Share-based compensation expense | - | - | 130 | - | - | 130 | ||||||||||||||||||
Cash dividends ($0.14 per share) | - | - | - | (711 | ) | - | (711 | ) | ||||||||||||||||
Balance at June 30, 2024 | 5,009,412 | $ | 25,047 | $ | 17,248 | $ | 84,999 | $ | (17,298 | ) | $ | 109,996 | ||||||||||||
Three months ended June 30, 2023 | ||||||||||||||||||||||||
Balance at March 31, 2023 | 4,953,342 | $ | 24,767 | $ | 16,727 | $ | 79,539 | $ | (18,435 | ) | $ | 102,598 | ||||||||||||
Net income | - | - | - | 1,802 | - | 1,802 | ||||||||||||||||||
Other comprehensive loss, net of tax | - | - | - | - | (1,322 | ) | (1,322 | ) | ||||||||||||||||
Employee Stock Purchase Plan share issuance | 1,931 | 9 | 19 | - | - | 28 | ||||||||||||||||||
Restricted stock vested | 22,003 | 110 | (110 | ) | - | - | - | |||||||||||||||||
Share-based compensation expense | - | - | 141 | - | - | 141 | ||||||||||||||||||
Cash dividends ($0.14 per share) | - | - | - | (705 | ) | - | (705 | ) | ||||||||||||||||
Balance at June 30, 2023 | 4,977,276 | $ | 24,886 | $ | 16,777 | $ | 80,636 | $ | (19,757 | ) | $ | 102,542 |
Accumulated | ||||||||||||||||||||||||
Shares of | Additional | Other | ||||||||||||||||||||||
Common | Common | Paid-in | Retained | Comprehensive | ||||||||||||||||||||
(unaudited dollars in thousands, except per share amounts) | Stock | Stock | Capital | Earnings | Loss | Total | ||||||||||||||||||
Six months ended June 30, 2024 | ||||||||||||||||||||||||
Balance at December 31, 2023 | 4,986,435 | $ | 24,932 | $ | 17,099 | $ | 82,277 | $ | (17,530 | ) | $ | 106,778 | ||||||||||||
Net income | - | - | - | 4,246 | - | 4,246 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 232 | 232 | ||||||||||||||||||
Employee Stock Purchase Plan share issuance | 3,865 | 19 | 40 | - | - | 59 | ||||||||||||||||||
Restricted stock vested | 19,112 | 96 | (96 | ) | - | - | - | |||||||||||||||||
Impact of adoption of new accounting pronouncement | - | - | - | (108 | ) | - | (108 | ) | ||||||||||||||||
Share-based compensation expense | - | - | 205 | - | - | 205 | ||||||||||||||||||
Cash dividends ($0.28 per share) | - | - | - | (1,416 | ) | - | (1,416 | ) | ||||||||||||||||
Balance at June 30, 2024 | 5,009,412 | $ | 25,047 | $ | 17,248 | $ | 84,999 | $ | (17,298 | ) | $ | 109,996 | ||||||||||||
Six months ended June 30, 2023 | ||||||||||||||||||||||||
Balance at December 31, 2022 | 4,952,094 | $ | 24,761 | $ | 16,593 | $ | 78,147 | $ | (20,767 | ) | $ | 98,734 | ||||||||||||
Net income | - | - | - | 4,885 | - | 4,885 | ||||||||||||||||||
Other comprehensive income, net of tax | - | - | - | - | 1,010 | 1,010 | ||||||||||||||||||
Impact of adoption of new accounting pronouncement | - | - | - | (991 | ) | - | (991 | ) | ||||||||||||||||
Employee Stock Purchase Plan share issuance | 3,179 | 15 | 46 | - | - | 61 | ||||||||||||||||||
Restricted stock vested | 22,003 | 110 | (110 | ) | - | - | - | |||||||||||||||||
Share-based compensation expense | - | - | 248 | - | - | 248 | ||||||||||||||||||
Cash dividends ($0.28 per share) | - | - | - | (1,405 | ) | - | (1,405 | ) | ||||||||||||||||
Balance at June 30, 2023 | 4,977,276 | $ | 24,886 | $ | 16,777 | $ | 80,636 | $ | (19,757 | ) | $ | 102,542 |
See accompanying notes to consolidated financial statements.
Old Point Financial Corporation and Subsidiaries
Six Months Ended June 30, | ||||||||
(unaudited, dollars in thousands) | 2024 | 2023 | ||||||
Operating activities: | ||||||||
Net income | $ | 4,246 | $ | 4,885 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,081 | 1,092 | ||||||
Amortization of right of use lease assets | 312 | 202 | ||||||
Accretion related to acquisition, net | 22 | 22 | ||||||
Amortization of subordinated debt issuance costs | 65 | 65 | ||||||
Provision for credit losses | 341 | 737 | ||||||
Loss on sale of securities, net | - | 164 | ||||||
Net amortization of securities | 296 | 383 | ||||||
Decrease (increase) in loans held for sale, net | 470 | (596 | ) | |||||
Net gain on disposal of premises and equipment | - | (200 | ) | |||||
Net loss on write-down/sale of repossessed assets | 36 | 69 | ||||||
Income from bank owned life insurance | (535 | ) | (513 | ) | ||||
Stock compensation expense | 205 | 248 | ||||||
Increase in other assets | (108 | ) | (955 | ) | ||||
Decrease in accrued expenses and other liabilities | (1,695 | ) | (540 | ) | ||||
Net cash provided by operating activities | 4,736 | 5,063 | ||||||
Investing activities: | ||||||||
Proceeds from redemption (cash used in purchases) of restricted securities, net | 1,351 | (1,125 | ) | |||||
Proceeds from maturities and paydowns of available-for-sale securities | 970 | - | ||||||
Proceeds from sales of available-for-sale securities | - | 8,088 | ||||||
Paydowns on available-for-sale securities | 9,131 | 7,618 | ||||||
Net decrease (increase) in loans held for investment | 23,747 | (67,920 | ) | |||||
Purchases of premises and equipment | (1,951 | ) | (487 | ) | ||||
Proceeds from sale of premises and equipment | - | 839 | ||||||
Net cash provided by (used in) investing activities | 33,248 | (52,987 | ) | |||||
Financing activities: | ||||||||
Increase (decrease) in noninterest-bearing deposits | 28,304 | (73,886 | ) | |||||
(Decrease) increase in savings deposits | (30,917 | ) | 41,758 | |||||
Increase in time deposits | 8,791 | 104,824 | ||||||
Decrease in federal funds purchased, repurchase agreements and other borrowings, net | (1,002 | ) | (11,865 | ) | ||||
Increase in Federal Home Loan Bank advances | 44,336 | 307,850 | ||||||
Repayment of Federal Home Loan Bank advances | (74,200 | ) | (284,500 | ) | ||||
Proceeds from Employee Stock Purchase Plan issuance | 59 | 61 | ||||||
Cash dividends paid on common stock | (1,416 | ) | (1,405 | ) | ||||
Net cash (used in) provided by financing activities | (26,045 | ) | 82,837 | |||||
Net increase in cash and cash equivalents | 11,939 | 34,913 | ||||||
Cash and cash equivalents at beginning of period | 80,806 | 21,066 | ||||||
Cash and cash equivalents at end of period | $ | 92,745 | $ | 55,979 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash payments for: | ||||||||
Interest | $ | 11,724 | $ | 5,646 | ||||
Supplemental schedule of noncash transactions | ||||||||
Unrealized gains on securities available-for-sale | $ | 293 | $ | 1,279 | ||||
Loans transferred to repossessed assets | $ | 1,256 | $ | - | ||||
Impact of adoption of new accounting pronouncements | $ | 108 | $ | 991 |
See accompanying notes to consolidated financial statements.
Note 1. Description of Business and Summary of Significant Accounting Policies
The Company
Headquartered in Hampton, Virginia, Old Point Financial Corporation (NASDAQ: OPOF) (the Company) is a holding company that conducts substantially all of its operations through two wholly-owned subsidiaries, The Old Point National Bank of Phoebus (the Bank) and Old Point Trust & Financial Services, N.A. (Wealth). The Bank serves individual and commercial customers, the majority of which are in the Hampton Roads region of Virginia. As of June 30, 2024, the Bank had 14 branch offices. The Bank offers a full range of deposit and loan products to its retail and commercial customers, including mortgage loan products offered through Old Point Mortgage. A full array of insurance products is also offered through Old Point Insurance, LLC in partnership with Morgan Marrow Company. Wealth offers a full range of services for individuals and businesses. Products and services include retirement planning, estate planning, financial planning, estate and trust administration, retirement plan administration, tax services and investment management services.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company, and its wholly-owned subsidiaries, the Bank and Wealth. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with U.S. GAAP for interim financial information. In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the Company’s financial position at June 30, 2024 and December 31, 2023, the statements of income, comprehensive income, and changes in stockholders’ equity for the three and six months ended June 30, 2024 and 2023, and the statements of cash flows for the six months ended June 30, 2024 and 2023. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.
These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s 2023 Form 10-K.
Estimates
In preparing Consolidated Financial Statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Balance Sheets and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the ACL and evaluation of goodwill for impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.
Reclassification
Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. None of these reclassifications are considered material and did not affect net income or total equity.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Subsequently, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” This guidance provides temporary, optional expedients and exceptions to ease the potential burden in accounting for modifications of loan contracts, borrowings, and other transactions related to reference rate reform associated with the LIBOR transition if certain criteria are met. The amendments are effective as of March 12, 2020 through December 31, 2024 and can be adopted at an instrument level. These modifications have not had and are not expected to have a material impact on the consolidated financial statements.
In November 2023, FASB issued ASU 2023-09, “Income Taxes (Topic 740) – Improvements to Income Tax Disclosures.” The amendments in ASU 2023-09 require that a public entity disclose, on an annual basis, specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, the amount of income taxes paid disaggregated by federal, state, and foreign taxes, and the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid. The amendments also require that entities disclose income from continuing operations before income tax expense disaggregated between domestic and foreign, as well as income tax expense from continuing operations disaggregated by federal, state, and foreign. The amendments apply to all public entities that are subject to Topic 740, “Income Taxes,” and are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments are to be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material effect on its consolidated financial statements.
Other accounting standards that have been adopted by the Company or issued by the FASB or other standards-setting bodies have not or are not currently expected to have a material effect on the Company’s financial position, results of operations or cash flows.
Note 2. Securities
The Company’s debt securities all of which are classified as available-for-sale, are summarized as follows:
June 30, 2024 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(dollars in thousands) | Cost | Gains | (Losses) | Value | ||||||||||||
U.S. Treasury securities | $ | 4,052 | $ | - | $ | (201 | ) | $ | 3,851 | |||||||
Obligations of U.S. Government agencies | 36,875 | 247 | (360 | ) | 36,762 | |||||||||||
Obligations of state and political subdivisions | 57,918 | - | (7,692 | ) | 50,226 | |||||||||||
Mortgage-backed securities | 87,679 | 30 | (10,403 | ) | 77,306 | |||||||||||
Corporate bonds and other securities | 27,500 | - | (3,518 | ) | 23,982 | |||||||||||
$ | 214,024 | $ | 277 | $ | (22,174 | ) | $ | 192,127 |
December 31, 2023 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
(dollars in thousands) | Cost | Gains | (Losses) | Value | ||||||||||||
U.S. Treasury securities | $ | 4,068 | $ | - | $ | (211 | ) | $ | 3,857 | |||||||
Obligations of U.S. Government agencies | 43,233 | 167 | (665 | ) | 42,735 | |||||||||||
Obligations of state and political subdivisions | 58,292 | 13 | (7,708 | ) | 50,597 | |||||||||||
Mortgage-backed securities | 91,328 | 84 | (10,105 | ) | 81,307 | |||||||||||
Corporate bonds and other securities | 27,500 | - | (3,765 | ) | 23,735 | |||||||||||
$ | 224,421 | $ | 264 | $ | (22,454 | ) | $ | 202,231 |
The amortized cost and fair value of securities at June 30, 2024 and December 31, 2023, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
June 30, 2024 | ||||||||
Amortized | Fair | |||||||
(dollars in thousands) | Cost | Value | ||||||
Due in one year or less | $ | 1,702 | $ | 1,665 | ||||
Due after one year through five years | 19,909 | 18,386 | ||||||
Due after five through ten years | 54,125 | 46,856 | ||||||
Due after ten years | 138,288 | 125,220 | ||||||
$ | 214,024 | $ | 192,127 |
December 31, 2023 | ||||||||
Amortized | Fair | |||||||
(dollars in thousands) | Cost | Value | ||||||
Due in one year or less | $ | 1,570 | $ | 1,541 | ||||
Due after one year through five years | 12,962 | 12,178 | ||||||
Due after five through ten years | 63,248 | 54,806 | ||||||
Due after ten years | 146,641 | 133,706 | ||||||
$ | 224,421 | $ | 202,231 |
The following table shows realized gains or losses on the sale of investment securities during the three and six months ended June 30, 2024 and 2023, respectively.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(dollars in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
Realized gains on sales of securities | $ | - | $ | - | $ | - | $ | - | ||||||||
Realized losses on sales of securities | - | (164 | ) | - | (164 | ) | ||||||||||
Net realized loss | $ | - | $ | (164 | ) | $ | - | $ | (164 | ) |
The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses for which an ACL has not been recorded as of June 30, 2024 and December 31, 2023, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated:
June 30, 2024 | ||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
Gross | Gross | Gross | Number | |||||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | of | ||||||||||||||||||||||
(dollars in thousands) | Losses | Value | Losses | Value | Losses | Value | Securities | |||||||||||||||||||||
U.S. Treasury securities | $ | 201 | $ | 3,851 | $ | - | $ | - | $ | 201 | $ | 3,851 | 1 | |||||||||||||||
Obligations of U.S. Government agencies | 185 | 17,180 | 175 | 3,025 | 360 | 20,205 | 33 | |||||||||||||||||||||
Obligations of state and political subdivisions | 7,642 | 49,775 | 50 | 450 | 7,692 | 50,225 | 43 | |||||||||||||||||||||
Mortgage-backed securities | 10,403 | 73,920 | - | - | 10,403 | 73,920 | 40 | |||||||||||||||||||||
Corporate bonds and other securities | 3,518 | 23,982 | - | - | 3,518 | 23,982 | 24 | |||||||||||||||||||||
Total securities available-for-sale | $ | 21,949 | $ | 168,708 | $ | 225 | $ | 3,475 | $ | 22,174 | $ | 172,183 | 141 |
December 31, 2023 | ||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
Gross | Gross | Gross | Number | |||||||||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | of | ||||||||||||||||||||||
(dollars in thousands) | Losses | Value | Losses | Value | Losses | Value | Securities | |||||||||||||||||||||
U.S. Treasury securities | $ | - | $ | - | $ | 211 | $ | 3,857 | $ | 211 | $ | 3,857 | 1 | |||||||||||||||
Obligations of U.S. Government agencies | 91 | 8,803 | 574 | 22,817 | 665 | 31,620 | 43 | |||||||||||||||||||||
Obligations of state and political subdivisions | - | - | 7,708 | 49,597 | 7,708 | 49,597 | 43 | |||||||||||||||||||||
Mortgage-backed securities | 96 | 4,423 | 10,009 | 73,347 | 10,105 | 77,770 | 40 | |||||||||||||||||||||
Corporate bonds and other securities | - | - | 3,765 | 22,735 | 3,765 | 22,735 | 23 | |||||||||||||||||||||
Total securities available-for-sale | $ | 187 | $ | 13,226 | $ | 22,267 | $ | 172,353 | $ | 22,454 | $ | 185,579 | 150 |
The number of investments in an unrealized loss position as of June 30, 2024 and December 31, 2023 were 141 and 150, respectively. The Company concluded no ACL should be recognized as of June 30, 2024 and December 31, 2023 based primarily on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Company intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Company will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, the Company’s state and political subdivision securities are rated AA or better and the Company receives a surveillance report that is reviewed quarterly for indications of credit concerns. The Company’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. The Company’s corporate bonds and other securities portfolio issuers consist of bank holding companies that are monitored on a quarterly basis by the Company’s credit department for indications of declining credit quality.
Restricted Stock
The restricted stock category is comprised of stock in FHLB, FRB, and CBB. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, FHLB, FRB, and CBB stock are carried at cost and evaluated for impairment. When evaluating these stocks for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Restricted stock is viewed as a long-term investment and management believes that the Company has the ability and the intent to hold this stock until its value is recovered. The Company did not consider its investment in restricted stock to be impaired at June 30, 2024 and no impairment has been recognized.
Note 3. Loans and the Allowance for Credit Losses on Loans
The following is a summary of the balances in each class of the Company’s portfolio of loans held for investment as of the dates indicated:
June 30, | December 31, | |||||||
(dollars in thousands) | 2024 | 2023 | ||||||
Mortgage loans on real estate: | ||||||||
Residential 1-4 family | $ | 187,071 | $ | 188,517 | ||||
Commercial - owner occupied | 143,185 | 156,466 | ||||||
Commercial - non-owner occupied | 309,317 | 285,250 | ||||||
Multifamily | 38,645 | 29,207 | ||||||
Construction and land development | 90,184 | 107,179 | ||||||
Second mortgages | 9,996 | 10,148 | ||||||
Equity lines of credit | 59,096 | 55,981 | ||||||
Total mortgage loans on real estate | 837,494 | 832,748 | ||||||
Commercial and industrial loans | 56,635 | 64,112 | ||||||
Consumer automobile loans | 138,912 | 160,437 | ||||||
Other consumer loans | 19,573 | 19,718 | ||||||
Other (1) | 1,988 | 3,237 | ||||||
Total loans, net of deferred fees (2) | 1,054,602 | 1,080,252 | ||||||
Less: Allowance for credit losses on loans | 11,828 | 12,206 | ||||||
Loans, net of allowance and deferred fees (2) | $ | 1,042,774 | $ | 1,068,046 |
(1) | Overdrawn accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts, excluding internal use accounts, totaled $394 thousand and $244 thousand at June 30, 2024 and December 31, 2023, respectively. |
(2) | Net deferred loan fees totaled $1.1 million on June 30, 2024 and $1.2 million on December 31, 2023. |
All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. The following tables show the aging of the Company’s loan portfolio, by class, as of June 30, 2024 and December 31, 2023.
Age Analysis of Past Due Loans as of June 30, 2024
(dollars in thousands) | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 or More Days Past Due and still Accruing | Nonaccrual (2) | Total Current Loans (1) | Total Loans | ||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
Residential 1-4 family | $ | - | $ | 28 | $ | 42 | $ | - | $ | 187,001 | $ | 187,071 | ||||||||||||
Commercial - owner occupied | - | - | - | - | 143,185 | 143,185 | ||||||||||||||||||
Commercial - non-owner occupied | - | - | - | - | 309,317 | 309,317 | ||||||||||||||||||
Multifamily | - | - | - | - | 38,645 | 38,645 | ||||||||||||||||||
Construction and land development | - | - | - | - | 90,184 | 90,184 | ||||||||||||||||||
Second mortgages | - | 52 | - | - | 9,944 | 9,996 | ||||||||||||||||||
Equity lines of credit | 552 | - | - | 44 | 58,500 | 59,096 | ||||||||||||||||||
Total mortgage loans on real estate | $ | 552 | $ | 80 | $ | 42 | $ | 44 | $ | 836,776 | $ | 837,494 | ||||||||||||
Commercial and industrial loans | 861 | 322 | - | - | 55,452 | 56,635 | ||||||||||||||||||
Consumer automobile loans | 2,057 | 654 | 371 | - | 135,830 | 138,912 | ||||||||||||||||||
Other consumer loans | 236 | 127 | 31 | - | 19,179 | 19,573 | ||||||||||||||||||
Other | 33 | 2 | 3 | - | 1,950 | 1,988 | ||||||||||||||||||
Total | $ | 3,739 | $ | 1,185 | $ | 447 | $ | 44 | $ | 1,049,187 | $ | 1,054,602 |
Age Analysis of Past Due Loans as of December 31, 2023
(dollars in thousands) | 30 - 59 Days Past Due | 60 - 89 Days Past Due | 90 or More Days Past Due and still Accruing | Nonaccrual (2) | Total Current Loans (1) | Total Loans | ||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
Residential 1-4 family | $ | 1,194 | $ | - | $ | 368 | $ | 142 | $ | 186,813 | $ | 188,517 | ||||||||||||
Commercial - owner occupied | 100 | - | 322 | - | 156,044 | 156,466 | ||||||||||||||||||
Commercial - non-owner occupied | - | 896 | - | - | 284,354 | 285,250 | ||||||||||||||||||
Multifamily | - | - | - | - | 29,207 | 29,207 | ||||||||||||||||||
Construction and land development | - | - | - | - | 107,179 | 107,179 | ||||||||||||||||||
Second mortgages | 160 | 6 | - | - | 9,982 | 10,148 | ||||||||||||||||||
Equity lines of credit | 205 | - | - | 46 | 55,730 | 55,981 | ||||||||||||||||||
Total mortgage loans on real estate | $ | 1,659 | $ | 902 | $ | 690 | $ | 188 | $ | 829,309 | $ | 832,748 | ||||||||||||
Commercial and industrial loans | 527 | 427 | 306 | - | 62,852 | 64,112 | ||||||||||||||||||
Consumer automobile loans | 3,254 | 706 | 661 | - | 155,816 | 160,437 | ||||||||||||||||||
Other consumer loans | 634 | 264 | 123 | - | 18,697 | 19,718 | ||||||||||||||||||
Other | 29 | - | - | - | 3,208 | 3,237 | ||||||||||||||||||
Total | $ | 6,103 | $ | 2,299 | $ | 1,780 | $ | 188 | $ | 1,069,882 | $ | 1,080,252 |
(1) | For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due. |
(2) | For purposes of this table, if a loan is past due and on nonaccrual, it is included in the nonaccrual column and not also in its respective past due column. |
The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of June 30, 2024 and December 31, 2023. All nonaccrual loans had an ACLL as of June 30, 2024 and December 31, 2023.
Nonaccrual | ||||||||
(dollars in thousands) | June 30, 2024 | December 31, 2023 | ||||||
Mortgage loans on real estate: | ||||||||
Residential 1-4 family | $ | - | $ | 142 | ||||
Commercial - non-owner occupied | - | - | ||||||
Second mortgages | - | - | ||||||
Equity lines of credit | 44 | 46 | ||||||
Total mortgage loans on real estate | 44 | 188 | ||||||
Commercial and industrial loans | - | - | ||||||
Consumer automobile loans | - | - | ||||||
Other consumer loans | - | - | ||||||
Total | $ | 44 | $ | 188 |
The Company’s loan portfolio may include certain loans modified, where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate below current market rates for borrowers with similar risk profiles, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. The Company closely monitors the performance of modified loans to understand the effectiveness of modification efforts. Upon the determination that all or a portion of a modified loan is uncollectible, that amount is charged against the ACL. The Company did not grant any such modifications during the three and six months ended June 30, 2024 and June 30, 2023.
Allowance for Credit Losses on Loans
ACLL is a material estimate for the Company. The Company estimates its ACLL on a quarterly basis. The Company models the ACLL using two primary segments, commercial and consumer. Within each segment, loan classes are further identified based on similar risk characteristics. The Company has identified the following classes within each segment:
• | Commercial: commercial and industrial, real estate - construction and land development, real estate – commercial (owner occupied and non-owner occupied), and other loans |
• | Consumer: real estate – mortgage, and consumer loans |
Each portfolio class has risk characteristics as follows:
• | Commercial and industrial: Commercial and industrial loans carry risks associated with the successful operation of a business or project, in addition to other risks associated with the ownership of a business. The repayment of these loans may be dependent upon the profitability and cash flows of the business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much precision. |
• | Real estate - construction and land development: Construction loans carry risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project. |
• | Real estate - commercial (owner occupied and non-owner occupied): Commercial real estate loans carry risks associated with the successful operation of a business if owner occupied. If non-owner occupied, the repayment of these loans may be dependent upon the profitability and cash flow from rent receipts. |
• | Real estate - mortgage: Residential mortgage loans and equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral. |
• | Consumer loans: Consumer loans carry risks associated with the continued credit-worthiness of the borrowers and the value of the collateral. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy. |
• | Other loans: Other loans are loans to mortgage companies, loans for purchasing or carrying securities, and loans to insurance, investment and finance companies. These loans carry risks associated with the successful operation of a business. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time, depend on interest rates or fluctuate in active trading markets. |
The following tables presents the activity in the ACLL by portfolio class for the six months ended June 30, 2024 and June 30, 2023.
Allowance for Credit Losses and Recorded Investment in Loans
For the Six Months ended June 30, 2024 | ||||||||||||||||||||||||||||||||
(dollars in thousands) | Commercial and Industrial | Real Estate Construction and Land Development | Real Estate - Mortgage (1) | Real Estate - Commercial (2) | Consumer (3) | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 573 | $ | 982 | $ | 2,904 | $ | 5,742 | $ | 1,827 | $ | 178 | $ | - | $ | 12,206 | ||||||||||||||||
Charge-offs | (117 | ) | - | - | - | (756 | ) | (104 | ) | - | (977 | ) | ||||||||||||||||||||
Recoveries | 6 | - | 20 | 11 | 267 | 26 | - | 330 | ||||||||||||||||||||||||
Provision for loan losses | 17 | (129 | ) | 58 | (58 | ) | 372 | 9 | - | 269 | ||||||||||||||||||||||
Ending Balance | $ | 479 | $ | 853 | $ | 2,982 | $ | 5,695 | $ | 1,710 | $ | 109 | $ | - | $ | 11,828 |
For the Six Months Ended June 30, 2023
(dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial (2) | Consumer (3) | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 673 | $ | 552 | $ | 2,575 | $ | 4,499 | $ | 2,065 | $ | 156 | $ | 6 | $ | 10,526 | ||||||||||||||||
Day 1 impact of adoption of CECL | (11 | ) | 19 | 87 | 1,048 | (365 | ) | (137 | ) | - | 641 | |||||||||||||||||||||
Charge-offs | (51 | ) | - | - | - | (534 | ) | (169 | ) | - | (754 | ) | ||||||||||||||||||||
Recoveries | 12 | - | 20 | - | 312 | 21 | - | 365 | ||||||||||||||||||||||||
Provision for loan losses | 43 | 136 | 198 | 162 | 112 | 228 | (6 | ) | 873 | |||||||||||||||||||||||
Ending Balance | $ | 666 | $ | 707 | $ | 2,880 | $ | 5,709 | $ | 1,590 | $ | 99 | $ | - | $ | 11,651 |
(1) | The real estate-mortgage segment includes residential 1 – 4 family, multi-family, second mortgages and equity lines of credit. |
(2) | The real estate-commercial segment included commercial-owner occupied and commercial non-owner occupied. |
(3) | The consumer segment includes consumer automobile loans. |
The following table presents a breakdown of the provision for credit losses for the periods indicated.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
Provision for credit losses: | ||||||||||||||||
Provision for loans | $ | 191 | $ | 310 | $ | 269 | $ | 873 | ||||||||
Provison for (recovery of) unfunded commitments | 70 | 51 | 72 | (136 | ) | |||||||||||
Total | $ | 261 | $ | 361 | $ | 341 | $ | 737 |
Credit Quality Indicators
Credit quality indicators are utilized to help estimate the collectability of each loan. Consumer loans not secured by real estate and made to individuals for household, family and other personal expenditures are segmented into pools based on days past due, while all other loans, including loans to consumers that are secured by real estate, are segmented by risk grades. While other credit quality indicators are evaluated and analyzed as part of the Company’s credit risk management activities, the Company uses internally-assigned risk grades as the primary indicator to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.
The Company’s internally assigned risk grades are as follows:
• | Pass: Loans are of acceptable risk. |
• | Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention. |
• | Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic, or managerial nature. |
• | Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions, and values highly questionable or improbable. |
• | Loss: Loans have been identified for charge-off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. |
The following tables present credit quality exposures by internally assigned risk ratings originated as of the dates indicated:
June 30, 2024 | ||||||||||||||||||||||||||||||||
Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||
(dollars in thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||
Construction and land development | ||||||||||||||||||||||||||||||||
Pass | $ | 15,683 | $ | 35,372 | $ | 29,170 | $ | 5,149 | $ | 2,523 | $ | 649 | $ | 1,638 | $ | 90,184 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total construction and land development | $ | 15,683 | $ | 35,372 | $ | 29,170 | $ | 5,149 | $ | 2,523 | $ | 649 | $ | 1,638 | $ | 90,184 | ||||||||||||||||
Commercial real estate - owner occupied | ||||||||||||||||||||||||||||||||
Pass | $ | 5,262 | $ | 7,989 | $ | 28,903 | $ | 18,073 | $ | 11,163 | $ | 69,715 | $ | 1,274 | $ | 142,379 | ||||||||||||||||
OAEM | - | - | - | - | - | 56 | 750 | 806 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial real estate - owner occupied | $ | 5,262 | $ | 7,989 | $ | 28,903 | $ | 18,073 | $ | 11,163 | $ | 69,771 | $ | 2,024 | $ | 143,185 | ||||||||||||||||
Commercial real estate - non-owner occupied | ||||||||||||||||||||||||||||||||
Pass | $ | 3,259 | $ | 33,843 | $ | 64,109 | $ | 116,726 | $ | 40,179 | $ | 49,548 | $ | 873 | $ | 308,537 | ||||||||||||||||
OAEM | - | - | - | - | - | 780 | - | 780 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial real estate - non-owner occupied | $ | 3,259 | $ | 33,843 | $ | 64,109 | $ | 116,726 | $ | 40,179 | $ | 50,328 | $ | 873 | $ | 309,317 | ||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||
Pass | $ | 5,432 | $ | 13,417 | $ | 16,147 | $ | 3,639 | $ | 1,247 | $ | 5,055 | $ | 11,698 | $ | 56,635 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial and industrial | $ | 5,432 | $ | 13,417 | $ | 16,147 | $ | 3,639 | $ | 1,247 | $ | 5,055 | $ | 11,698 | $ | 56,635 | ||||||||||||||||
Multifamily real estate | ||||||||||||||||||||||||||||||||
Pass | $ | - | $ | 7,663 | $ | 1,363 | $ | 2,116 | $ | 592 | $ | 22,998 | $ | 3,913 | $ | 38,645 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total multifamily real estate | $ | - | $ | 7,663 | $ | 1,363 | $ | 2,116 | $ | 592 | $ | 22,998 | $ | 3,913 | $ | 38,645 | ||||||||||||||||
Residential 1-4 family | ||||||||||||||||||||||||||||||||
Pass | $ | 4,874 | $ | 32,469 | $ | 41,099 | $ | 33,756 | $ | 25,445 | $ | 60,409 | $ | 57,592 | $ | 255,644 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | 339 | 180 | - | 519 | ||||||||||||||||||||||||
Total residential 1-4 family | $ | 4,874 | $ | 32,469 | $ | 41,099 | $ | 33,756 | $ | 25,784 | $ | 60,589 | $ | 57,592 | $ | 256,163 | ||||||||||||||||
Consumer - automobile | ||||||||||||||||||||||||||||||||
Pass | $ | 10,721 | $ | 42,895 | $ | 68,183 | $ | 9,739 | $ | 2,948 | $ | 4,426 | $ | - | $ | 138,912 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total consumer - automobile | $ | 10,721 | $ | 42,895 | $ | 68,183 | $ | 9,739 | $ | 2,948 | $ | 4,426 | $ | - | $ | 138,912 | ||||||||||||||||
Consumer - other | ||||||||||||||||||||||||||||||||
Pass | $ | 468 | $ | 248 | $ | 445 | $ | 280 | $ | 45 | $ | 15,363 | $ | 2,724 | $ | 19,573 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total consumer - other | $ | 468 | $ | 248 | $ | 445 | $ | 280 | $ | 45 | $ | 15,363 | $ | 2,724 | $ | 19,573 | ||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Pass | $ | 90 | $ | - | $ | - | $ | 292 | $ | - | $ | 1,606 | $ | - | $ | 1,988 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total other | $ | 90 | $ | - | $ | - | $ | 292 | $ | - | $ | 1,606 | $ | - | $ | 1,988 | ||||||||||||||||
Total loans | ||||||||||||||||||||||||||||||||
Pass | $ | 45,789 | $ | 173,896 | $ | 249,419 | $ | 189,770 | $ | 84,142 | $ | 229,769 | $ | 79,712 | $ | 1,052,497 | ||||||||||||||||
OAEM | - | - | - | - | - | 836 | 750 | 1,586 | ||||||||||||||||||||||||
Substandard | - | - | - | - | 339 | 180 | - | 519 | ||||||||||||||||||||||||
Total loans | $ | 45,789 | $ | 173,896 | $ | 249,419 | $ | 189,770 | $ | 84,481 | $ | 230,785 | $ | 80,462 | $ | 1,054,602 |
December 31, 2023 | ||||||||||||||||||||||||||||||||
Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||
(dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||
Construction and land development | ||||||||||||||||||||||||||||||||
Pass | $ | 40,168 | $ | 36,581 | $ | 25,770 | $ | 3,630 | $ | 297 | $ | 285 | $ | 448 | $ | 107,179 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total construction and land development | $ | 40,168 | $ | 36,581 | $ | 25,770 | $ | 3,630 | $ | 297 | $ | 285 | $ | 448 | $ | 107,179 | ||||||||||||||||
Commercial real estate - owner occupied | ||||||||||||||||||||||||||||||||
Pass | $ | 10,145 | $ | 33,720 | $ | 21,058 | $ | 13,708 | $ | 12,025 | $ | 56,978 | $ | 5,680 | $ | 153,314 | ||||||||||||||||
OAEM | - | - | - | - | 77 | 2,985 | - | 3,062 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | 90 | - | 90 | ||||||||||||||||||||||||
Total commercial real estate - owner occupied | $ | 10,145 | $ | 33,720 | $ | 21,058 | $ | 13,708 | $ | 12,102 | $ | 60,053 | $ | 5,680 | $ | 156,466 | ||||||||||||||||
Commercial real estate - non-owner occupied | ||||||||||||||||||||||||||||||||
Pass | $ | 31,539 | $ | 53,217 | $ | 96,755 | $ | 38,704 | $ | 10,517 | $ | 51,451 | $ | 2,263 | $ | 284,446 | ||||||||||||||||
OAEM | - | - | - | - | 804 | - | - | 804 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial real estate - non-owner occupied | $ | 31,539 | $ | 53,217 | $ | 96,755 | $ | 38,704 | $ | 11,321 | $ | 51,451 | $ | 2,263 | $ | 285,250 | ||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||
Pass | $ | 18,248 | $ | 21,698 | $ | 4,300 | $ | 1,691 | $ | 2,192 | $ | 2,075 | $ | 13,908 | $ | 64,112 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial and industrial | $ | 18,248 | $ | 21,698 | $ | 4,300 | $ | 1,691 | $ | 2,192 | $ | 2,075 | $ | 13,908 | $ | 64,112 | ||||||||||||||||
Multifamily real estate | ||||||||||||||||||||||||||||||||
Pass | $ | 6,568 | $ | 3,841 | $ | 2,151 | $ | 605 | $ | 5,955 | $ | 9,005 | $ | 1,082 | $ | 29,207 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total multifamily real estate | $ | 6,568 | $ | 3,841 | $ | 2,151 | $ | 605 | $ | 5,955 | $ | 9,005 | $ | 1,082 | $ | 29,207 | ||||||||||||||||
Residential 1-4 family | ||||||||||||||||||||||||||||||||
Pass | $ | 27,497 | $ | 41,062 | $ | 39,937 | $ | 26,368 | $ | 13,009 | $ | 52,148 | $ | 54,087 | $ | 254,108 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | 350 | 46 | 142 | - | 538 | ||||||||||||||||||||||||
Total residential 1-4 family | $ | 27,497 | $ | 41,062 | $ | 39,937 | $ | 26,718 | $ | 13,055 | $ | 52,290 | $ | 54,087 | $ | 254,646 | ||||||||||||||||
Consumer - automobile | ||||||||||||||||||||||||||||||||
Pass | $ | 52,750 | $ | 83,885 | $ | 13,184 | $ | 4,152 | $ | 1,618 | $ | 4,848 | $ | - | $ | 160,437 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total consumer - automobile | $ | 52,750 | $ | 83,885 | $ | 13,184 | $ | 4,152 | $ | 1,618 | $ | 4,848 | $ | - | $ | 160,437 | ||||||||||||||||
Consumer - other | ||||||||||||||||||||||||||||||||
Pass | $ | 323 | $ | 765 | $ | 330 | $ | 109 | $ | 11 | $ | 16,089 | $ | 2,091 | $ | 19,718 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total consumer - other | $ | 323 | $ | 765 | $ | 330 | $ | 109 | $ | 11 | $ | 16,089 | $ | 2,091 | $ | 19,718 | ||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Pass | $ | 1,620 | $ | - | $ | 292 | $ | - | $ | - | $ | 1,325 | $ | - | $ | 3,237 | ||||||||||||||||
OAEM | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total other | $ | 1,620 | $ | - | $ | 292 | $ | - | $ | - | $ | 1,325 | $ | - | $ | 3,237 | ||||||||||||||||
Total loans | ||||||||||||||||||||||||||||||||
Pass | $ | 188,858 | $ | 274,769 | $ | 203,777 | $ | 88,967 | $ | 45,624 | $ | 194,204 | $ | 79,559 | $ | 1,075,758 | ||||||||||||||||
OAEM | - | - | - | - | 881 | 2,985 | - | 3,866 | ||||||||||||||||||||||||
Substandard | - | - | - | 350 | 46 | 232 | - | 628 | ||||||||||||||||||||||||
Total loans | $ | 188,858 | $ | 274,769 | $ | 203,777 | $ | 89,317 | $ | 46,551 | $ | 197,421 | $ | 79,559 | $ | 1,080,252 |
The following tables detail the current period gross charge-offs of loans by year of origination for the six months ended June 30, 2024 and June 30, 2023:
June 30, 2024 | ||||||||||||||||||||||||||||||||
Current Period Charge-offs by Origination Year | ||||||||||||||||||||||||||||||||
(dollars in thousands) | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans Amortized Cost Basis | Total | ||||||||||||||||||||||||
Commercial and industrial | $ | - | $ | - | $ | 108 | $ | - | $ | - | $ | 9 | $ | - | $ | 117 | ||||||||||||||||
Consumer - automobile | - | 151 | 438 | 131 | 17 | 15 | - | 752 | ||||||||||||||||||||||||
Consumer - other | - | - | - | - | - | 4 | - | 4 | ||||||||||||||||||||||||
Other (1) | 104 | - | - | - | - | - | - | 104 | ||||||||||||||||||||||||
Total | $ | 104 | $ | 151 | $ | 546 | $ | 131 | $ | 17 | $ | 28 | $ | - | $ | 977 |
(1) | Gross charge-offs of other loans for the six months ended June 30, 2024 included $104 thousand of demand deposit overdrafts that originated in 2024. |
June 30, 2023 | ||||||||||||||||||||||||||||||||
Current Period Charge-offs by Origination Year | ||||||||||||||||||||||||||||||||
(dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Total | ||||||||||||||||||||||||
Commercial and industrial | $ | - | $ | 51 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 51 | ||||||||||||||||
Consumer - automobile | | - | 265 | 142 | 45 | 18 | 49 | - | 519 | |||||||||||||||||||||||
Consumer - other | - | - | 5 | - | 3 | 7 | - | 15 | ||||||||||||||||||||||||
Other (1) | 147 | 22 | - | - | - | - | - | 169 | ||||||||||||||||||||||||
Total | $ | 147 | $ | 338 | $ | 147 | $ | 45 | $ | 21 | $ | 56 | $ | - | $ | 754 |
(1) | Gross charge-offs of other loans for the six months ended June 30, 2023 included $147 thousand of demand deposit overdrafts that originated in 2023. |
As of June 30, 2024 and December 31, 2023, the Company had no collateral dependent loans for which repayment was expected to be derived substantially through the operation or sale of the collateral and where the borrower was experiencing financial difficulty.
Note 4. Leases
Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs, and any incentives received from the lessor.
The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.
The right-of-use assets and lease liabilities are included in “Other Assets” and “Other Liabilities”, respectively, in the Consolidated Balance Sheets. There were no new leases executed during the six months ended June 30, 2024. The following tables present information about the Company’s leases:
(dollars in thousands) | June 30, 2024 | December 31, 2023 | ||||||
Lease liabilities | $ | 1,032 | $ | 1,248 | ||||
Right-of-use assets | $ | 836 | $ | 1,148 | ||||
Weighted average remaining lease term | 3.02 years | 3.37 years | ||||||
Weighted average discount rate | 3.16 | % | 3.06 | % |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
Operating lease cost | $ | 206 | $ | 101 | $ | 312 | $ | 202 | ||||||||
Total lease cost | $ | 206 | $ | 101 | $ | 312 | $ | 202 | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 109 | $ | 112 | $ | 217 | $ | 203 |
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:
As of | ||||
(dollars in thousands) | June 30, 2024 | |||
Six months ending December 31, 2024 | $ | 206 | ||
Twelve months ending December 31, 2025 | 382 | |||
Twelve months ending December 31, 2026 | 278 | |||
Twelve months ending December 31, 2027 | 208 | |||
Twelve months ending December 31, 2028 | 24 | |||
Total undiscounted cash flows | $ | 1,098 | ||
Discount | (66 | ) | ||
Lease liabilities | $ | 1,032 |
Note 5. Low-Income Housing Tax Credits
The Company was invested in four separate housing equity funds at both June 30, 2024 and December 31, 2023. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia; develop and implement strategies to maintain projects as low-income housing; deliver Federal Low Income Housing Credits to investors; allocate tax losses and other possible tax benefits to investors; and preserve and protect project assets.
The investments in these funds were recorded as other assets on the consolidated balance sheets and were $821 thousand and $1.1 million at June 30, 2024 and December 31, 2023, respectively. The expected terms of these investments and the related tax benefits run through 2033. There were no additional capital calls expected for the funds at June 30, 2024.
During the period, the Company adopted ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method,” (“ASC 323”). These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The adoption resulted in an adjustment of $108 thousand, which reduced the investment balance and stockholders’ equity.
The table below summarizes the tax credits and other tax benefits recognized by the Company related to these investments during the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(dollars in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
Tax credits and other benefits | ||||||||||||||||
Amortization of operating losses | $ | 42 | $ | 92 | $ | 134 | $ | 184 | ||||||||
Tax benefit of operating losses* | 9 | 19 | 28 | 39 | ||||||||||||
Tax credits | 78 | 78 | 155 | 155 | ||||||||||||
Total tax benefits | $ | 87 | $ | 97 | $ | 183 | $ | 194 |
* | Computed using a 21% tax rate. |
Note 6. Borrowings
Short-Term Borrowings
The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Short-term borrowings sources consist of federal funds purchased, overnight repurchase agreements (which are secured transactions with customers that generally mature within one to four days), and advances from the FHLB.
The Company maintains federal funds lines with several correspondent banks to address short-term borrowing needs. As of both June 30, 2024 and December 31, 2023, the remaining credit available from these lines totaled $90.0 million. The Company has a secured credit line with the FHLB with remaining credit availability of $391.3 million and $362.1 million as of June 30, 2024 and December 31, 2023, respectively.
The following table presents total short-term borrowings as of the dates indicated:
(dollars in thousands) | June 30, 2024 | December 31, 2023 | ||||||
Federal funds purchased | $ | - | $ | - | ||||
Overnight repurchase agreements | 1,381 | 2,383 | ||||||
Federal Home Loan Bank advances | 19,586 | 9,450 | ||||||
Total short-term borrowings | $ | 20,967 | $ | 11,833 | ||||
Maximum month-end outstanding balance (year-to-date) | $ | 41,682 | $ | 84,360 | ||||
Average outstanding balance during the period | $ | 44,106 | $ | 53,466 | ||||
Average interest rate (year-to-date) | 4.63 | % | 4.90 | % | ||||
Average interest rate at end of period | 5.65 | % | 5.65 | % |
Long-Term Borrowings
The Company had a long-term FHLB advance totaling $20.0 million outstanding at June 30, 2024 with a scheduled maturity of April 14, 2025 at a rate of 4.28%. The Company had long-term FHLB advances totaling $60.0 million outstanding at December 31, 2023 with scheduled maturities through November 29, 2028 and rates ranging from 3.37% to 4.28%.
On July 14, 2021, the Company completed a $30.0 million issuance, ($29.4 million, net of issuance costs) of subordinated notes (the Notes) in a private placement transaction. The Notes are due in 2031 and bear interest at a fixed rate of 3.5% for five years and at the three-month SOFR plus 286 basis points, resetting quarterly, thereafter.
Note 7. Commitments and Contingencies
Credit-Related Financial Instruments
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making such commitments as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent credit risk were outstanding as of June 30, 2024 and December 31, 2023 were as follows:
June 30, | December 31, | |||||||
(dollars in thousands) | 2024 | 2023 | ||||||
Commitments to extend credit: | ||||||||
Home equity lines of credit | $ | 94,729 | $ | 91,885 | ||||
Commercial real estate, construction and development loans committed but not funded | 72,861 | 74,218 | ||||||
Other lines of credit (principally commercial) | 49,251 | 47,622 | ||||||
Total | $ | 216,841 | $ | 213,725 | ||||
Letters of credit | $ | 816 | $ | 802 |
Note 8. Share-Based Compensation
The Company has adopted an ESPP and offers share-based compensation through its equity compensation plan. Share-based compensation arrangements may include stock options, restricted and unrestricted stock awards, restricted stock units, performance units and stock appreciation rights. Accounting standards require all share-based payments to employees and non-employee directors to be valued using a fair value method on the date of grant and to be expensed based on that fair value over the applicable vesting period. The Company accounts for forfeitures during the vesting period as they occur.
Employee Stock Purchase Plan
Under the Company’s ESPP, substantially all employees of the Company and its subsidiaries can authorize a specific payroll deduction from their base compensation for the periodic purchase of the Company’s common stock. Shares of stock are issued quarterly at a discount to the market price of the Company’s stock on the day of purchase, which can range from 0-15% and was set at 5% for 2023 and for the first six months of 2024.
Total stock purchases under the ESPP amounted to 3,865 shares during the six months ended June 30, 2024. At June 30, 2024, the Company had 210,488 remaining shares reserved for issuance under the ESPP.
Incentive Stock Plan
The Incentive Stock Plan permits the issuance of up to 300,000 shares of common stock for awards to key employees and non-employee directors of the Company and its subsidiaries in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and performance units. As of June 30, 2024, only restricted stock had been granted under the Incentive Stock Plan.
Restricted stock activity for the six months ended June 30, 2024 and June 30, 2023 is summarized below:
Weighted Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Nonvested, December 31, 2023 | 53,660 | $ | 22.32 | |||||
Issued | 37,674 | 14.05 | ||||||
Vested | (19,112 | ) | 19.95 | |||||
Forfeited | (4,109 | ) | 20.70 | |||||
Nonvested, June 30, 2024 | 68,113 | $ | 18.51 |
Weighted Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Nonvested, December 31, 2022 | 46,989 | $ | 22.49 | |||||
Issued | 35,013 | 17.20 | ||||||
Vested | (22,003 | ) | 19.86 | |||||
Forfeited | - | - | ||||||
Nonvested, June 30, 2023 | 59,999 | $ | 20.37 |
The weighted average period over which nonvested awards are expected to be recognized in compensation expense is 1.93 years.
The remaining unrecognized compensation expense for nonvested restricted stock shares totaled $796 thousand as of June 30, 2024 and $523 thousand as of December 31, 2023.
Stock-based compensation expense was $130 thousand and $141 thousand for the three months ended June 30, 2024 and 2023, respectively, and $205 thousand and $248 thousand for the six months ended June 30, 2024 and 2023, respectively.
Note 9. Stockholders’ Equity and Earnings per Common Share
Stockholders’ Equity – Accumulated Other Comprehensive Loss
The following tables present amounts reclassified out of accumulated other comprehensive income (loss), by category, during the three and six months ended June 30, 2024 and 2023, respectively.
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30, | June 30, | Affected Line Item on Consolidated Statement of Income | |||||||||||||||
(dollars in thousands) | 2024 | 2023 | 2024 | 2023 | |||||||||||||
Sale of securities | |||||||||||||||||
Realized loss on sale of securities | $ | - | $ | (164 | ) | $ | - | $ | (164 | ) | Loss on sale of securities, net | ||||||
Tax effect | - | 34 | - | 34 | Income tax expense | ||||||||||||
$ | - | $ | (130 | ) | $ | - | $ | (130 | ) |
The following table presents the changes in accumulated other comprehensive income (loss), by category, net of tax, for the periods indicated:
(dollars in thousands) | Unrealized Gains (Losses) on Available- for-Sale Securities | Accumulated Other Comprehensive (Loss) Income | ||||||
Three Months Ended June 30, 2024 | ||||||||
Balance at beginning of period | $ | (17,798 | ) | $ | (17,798 | ) | ||
Net other comprehensive income | 500 | 500 | ||||||
Balance at end of period | $ | (17,298 | ) | $ | (17,298 | ) | ||
Three Months Ended June 30, 2023 | ||||||||
Balance at beginning of period | $ | (18,435 | ) | $ | (18,435 | ) | ||
Net other comprehensive loss | (1,322 | ) | (1,322 | ) | ||||
Balance at end of period | $ | (19,757 | ) | $ | (19,757 | ) |
(dollars in thousands) | Unrealized Gains (Losses) on Available- for-Sale Securities | Accumulated Other Comprehensive (Loss) Income | ||||||
Six Months Ended June 30, 2024 | ||||||||
Balance at beginning of period | $ | (17,530 | ) | $ | (17,530 | ) | ||
Net other comprehensive income | 232 | 232 | ||||||
Balance at end of period | $ | (17,298 | ) | $ | (17,298 | ) | ||
Six Months Ended June 30, 2023 | ||||||||
Balance at beginning of period | $ | (20,767 | ) | $ | (20,767 | ) | ||
Net other comprehensive income | 1,010 | 1,010 | ||||||
Balance at end of period | $ | (19,757 | ) | $ | (19,757 | ) |
The following tables present the change in each component of accumulated other comprehensive income (loss) on a pre-tax and after-tax basis for the periods indicated:
Three Months Ended June 30, 2024 | ||||||||||||
(dollars in thousands) | Pretax | Tax | Net-of-Tax | |||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 633 | $ | (133 | ) | $ | 500 | |||||
Total change in accumulated other comprehensive loss, net | $ | 633 | $ | (133 | ) | $ | 500 |
Three Months Ended June 30, 2023 | ||||||||||||
(dollars in thousands) | Pretax | Tax | Net-of-Tax | |||||||||
Unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses arising during the period | $ | (1,838 | ) | $ | 386 | $ | (1,452 | ) | ||||
Reclassification adjustment for losses recognized in income | 164 | (34 | ) | 130 | ||||||||
(1,674 | ) | 352 | (1,322 | ) | ||||||||
Total change in accumulated other comprehensive loss, net | $ | (1,674 | ) | $ | 352 | $ | (1,322 | ) |
Six Months Ended June 30, 2024 | ||||||||||||
(dollars in thousands) | Pretax | Tax | Net-of-Tax | |||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 294 | $ | (62 | ) | $ | 232 | |||||
Total change in accumulated other comprehensive loss, net | $ | 294 | $ | (62 | ) | $ | 232 |
Six Months Ended June 30, 2023 | ||||||||||||
(dollars in thousands) | Pretax | Tax | Net-of-Tax | |||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 1,114 | $ | (234 | ) | $ | 880 | |||||
Reclassification adjustment for losses recognized in income | 164 | (34 | ) | 130 | ||||||||
1,278 | (268 | ) | 1,010 | |||||||||
Total change in accumulated other comprehensive loss, net | $ | 1,278 | $ | (268 | ) | $ | 1,010 |
Earnings Per Common Share
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of potentially dilutive common shares attributable to the ESPP. The Company had no antidilutive shares outstanding in the three and six months ended June 30, 2024 and 2023, respectively. Nonvested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.
Note 10. Fair Value Measurements
Determination of Fair Value
The Company follows ASC 820, “Fair Value Measurements and Disclosures” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value can be a reasonable point within a range that is most representative of fair value under current market conditions.
The Company follows ASC 820, “Fair Value Measurements and Disclosures” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value can be a reasonable point within a range that is most representative of fair value under current market conditions.
In estimating the fair value of assets and liabilities, the Company relies mainly on two models. The first model used by the Company’s bond accounting service provider, determines the fair value of securities. Securities are priced based on an evaluation of observable market data, including benchmark yield curves, reported trades, broker/dealer quotes, and issuer spreads. Pricing is also impacted by credit information about the issuer, perceived market movements, and current news events impacting the individual sectors. The second source is a third-party vendor the Company utilizes to provide fair value exit pricing for loans and interest-bearing deposits in accordance with guidance.
In accordance with ASC 820, the Company groups its financial assets and financial liabilities generally measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
In accordance with ASC 820, the Company groups its financial assets and financial liabilities generally measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
• | Level 1: Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
• | Level 2: Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
• | Level 3: Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation. |
An instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Debt securities with readily determinable fair values that are classified as “available-for-sale” are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive loss. Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third-party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities.
The Company recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s IRLCs are classified as Level 2. At June 30, 2024, there were no IRLCs and at December 31, 2023, there were $10 thousand of IRLCs.
The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Company simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties. All of the Company’s interest rate swaps on loans are classified as Level 2.
Loans held for sale are carried at the lower of cost or fair value. Loans held for sale consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are reported on a separate line item on the Company’s Consolidated Statements of Income. There were no loans held for sale at June 30, 2024 and $470 thousand at December 31, 2023.
The Company recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best-efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s IRLCs are classified as Level 2. At June 30, 2024, there were no IRLCs and at December 31, 2023, there were $10 thousand of IRLCs.
The Company enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Company simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties. All of the Company’s interest rate swaps on loans are classified as Level 2.
Loans held for sale are carried at the lower of cost or fair value. Loans held for sale consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are reported on a separate line item on the Company’s Consolidated Statements of Income. There were no loans held for sale at June 30, 2024 and $470 thousand at December 31, 2023.
The following tables present the balances of certain assets measured at fair value on a recurring basis as of the dates indicated:
Fair Value Measurements at June 30, 2024 Using | ||||||||||||||||
(dollars in thousands) | Balance | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: | ||||||||||||||||
Available-for-sale securities | ||||||||||||||||
U.S. Treasury securities | $ | 3,851 | $ | - | $ | 3,851 | $ | - | ||||||||
Obligations of U.S. Government agencies | 36,762 | - | 36,762 | - | ||||||||||||
Obligations of state and political subdivisions | 50,226 | - | 50,226 | - | ||||||||||||
Mortgage-backed securities | 77,306 | - | 77,306 | - | ||||||||||||
Corporate bonds and other securities | 23,982 | - | 23,982 | - | ||||||||||||
Total available-for-sale securities | 192,127 | - | 192,127 | - | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap on loans | 1,724 | - | 1,724 | - | ||||||||||||
Total assets | $ | 193,851 | $ | - | $ | 193,851 | $ | - | ||||||||
Liabilities: | ||||||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap on loans | 1,724 | - | 1,724 | - | ||||||||||||
Total liabilities | $ | 1,724 | $ | - | $ | 1,724 | $ | - |
Fair Value Measurements at December 31, 2023 Using | ||||||||||||||||
(dollars in thousands) | Balance | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities | ||||||||||||||||
U.S. Treasury securities | $ | 3,857 | $ | - | $ | 3,857 | $ | - | ||||||||
Obligations of U.S. Government agencies | 42,735 | - | 42,735 | - | ||||||||||||
Obligations of state and political subdivisions | 50,597 | - | 50,597 | - | ||||||||||||
Mortgage-backed securities | 81,307 | - | 81,307 | - | ||||||||||||
Corporate bonds and other securities | 23,735 | - | 23,735 | - | ||||||||||||
Total available-for-sale securities | $ | 202,231 | $ | - | $ | 202,231 | $ | - | ||||||||
Loans held for sale | 470 | - | 470 | - | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate locks | 10 | - | 10 | - | ||||||||||||
Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||
Total assets | $ | 203,960 | $ | - | $ | 203,960 | $ | - | ||||||||
Liabilities: | ||||||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||
Total liabilities | $ | 1,249 | $ | - | $ | 1,249 | $ | - |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with GAAP. As of June 30, 2024 and December 31, 2023, the Company had no assets or liabilities recorded at fair value on a nonrecurring basis.
The Company may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with GAAP. As of June 30, 2024 and December 31, 2023, the Company had no assets or liabilities recorded at fair value on a nonrecurring basis.
Fair Value of Financial Instruments
FASB ASC 825, “Financial Instruments”, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
The following tables reflect the carrying amounts and estimated fair values of the Company’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.
Fair Value Measurements at June 30, 2024 Using | ||||||||||||||||
(dollars in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 92,745 | $ | 92,745 | $ | - | $ | - | ||||||||
Securities available-for-sale | 192,127 | - | 192,127 | - | ||||||||||||
Restricted securities | 3,825 | - | 3,825 | - | ||||||||||||
Loans, net | 1,042,774 | - | - | 984,390 | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap on loans | 1,724 | - | 1,724 | - | ||||||||||||
Bank owned life insurance | 35,623 | - | 35,623 | - | ||||||||||||
Accrued interest receivable | 4,873 | - | 4,873 | - | ||||||||||||
Liabilities | ||||||||||||||||
Deposits | $ | 1,236,575 | $ | - | $ | 1,234,452 | $ | - | ||||||||
Overnight repurchase agreements | 1,381 | - | 1,381 | - | ||||||||||||
Federal Home Loan Bank advances | 39,586 | - | 39,586 | - | ||||||||||||
Subordinated notes | 29,733 | - | 25,786 | - | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap on loans | 1,724 | - | 1,724 | - | ||||||||||||
Accrued interest payable | 2,028 | - | 2,028 | - |
Fair Value Measurements at December 31, 2023 Using | ||||||||||||||||
(dollars in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 78,759 | $ | 78,759 | $ | - | $ | - | ||||||||
Securities available-for-sale | 202,231 | - | 202,231 | - | ||||||||||||
Restricted securities | 5,176 | - | 5,176 | - | ||||||||||||
Loans held for sale | 470 | - | 470 | - | ||||||||||||
Loans, net | 1,068,046 | - | - | 1,025,622 | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate lock | 10 | - | 10 | - | ||||||||||||
Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||
Bank owned life insurance | 35,088 | - | 35,088 | - | ||||||||||||
Accrued interest receivable | 4,921 | - | 4,921 | - | ||||||||||||
Liabilities | ||||||||||||||||
Deposits | $ | 1,230,397 | $ | - | $ | 1,228,477 | $ | - | ||||||||
Overnight repurchase agreements | 2,383 | - | 2,383 | - | ||||||||||||
Federal Home Loan Bank advances | 69,450 | - | 69,450 | - | ||||||||||||
Subordinated notes | 29,668 | - | 25,561 | - | ||||||||||||
Derivatives | ||||||||||||||||
Interest rate swap on loans | 1,249 | - | 1,249 | - | ||||||||||||
Accrued interest payable | 1,972 | - | 1,972 | - |
Note 11. Segment Reporting
The Company operates in a decentralized fashion in three principal business segments: the Bank, Wealth, and the Company (for purposes of this Note, the Parent). Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Wealth’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly interest and dividends received from the Bank and Wealth. The Company has no other segments. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, requires different technologies and marketing strategies.
Information about reportable segments, and reconciliation of such information to the Consolidated Financial Statements as of and for the three and six months ended June 30, 2024 and 2023 follows:
Three Months Ended June 30, 2024 | ||||||||||||||||||||
(dollars in thousands) | Bank | Wealth | Parent | Eliminations | Consolidated | |||||||||||||||
Revenues | ||||||||||||||||||||
Interest and dividend income | $ | 18,069 | $ | 49 | $ | 4,321 | $ | (4,321 | ) | $ | 18,118 | |||||||||
Income from fiduciary activities | - | 1,179 | - | (50 | ) | 1,129 | ||||||||||||||
Other income | 2,158 | 236 | 50 | (102 | ) | 2,342 | ||||||||||||||
Total operating income | 20,227 | 1,464 | 4,371 | (4,473 | ) | 21,589 | ||||||||||||||
Expenses | ||||||||||||||||||||
Interest expense | 5,707 | - | 295 | - | 6,002 | |||||||||||||||
Provision for credit losses | 261 | - | - | - | 261 | |||||||||||||||
Salaries and employee benefits | 6,159 | 887 | 199 | (50 | ) | 7,195 | ||||||||||||||
Other expenses | 4,720 | 337 | 174 | (102 | ) | 5,129 | ||||||||||||||
Total operating expenses | 16,847 | 1,224 | 668 | (152 | ) | 18,587 | ||||||||||||||
Income (loss) before taxes | 3,380 | 240 | 3,703 | (4,321 | ) | 3,002 | ||||||||||||||
Income tax expense (benefit) | 552 | 51 | (130 | ) | - | 473 | ||||||||||||||
Net income (loss) | $ | 2,828 | $ | 189 | $ | 3,833 | $ | (4,321 | ) | $ | 2,529 | |||||||||
Capital expenditures | $ | 1,152 | $ | - | $ | - | $ | - | $ | 1,152 | ||||||||||
Three Months Ended June 30, 2023 | ||||||||||||||||||||
(dollars in thousands) | Bank | Wealth | Parent | Eliminations | Consolidated | |||||||||||||||
Revenues | ||||||||||||||||||||
Interest and dividend income | $ | 16,312 | $ | 35 | $ | 2,296 | $ | (2,296 | ) | $ | 16,347 | |||||||||
Income from fiduciary activities | - | 1,154 | - | - | 1,154 | |||||||||||||||
Other income | 2,139 | 200 | 50 | (66 | ) | 2,323 | ||||||||||||||
Total operating income | 18,451 | 1,389 | 2,346 | (2,362 | ) | 19,824 | ||||||||||||||
Expenses | ||||||||||||||||||||
Interest expense | 3,953 | - | 295 | - | 4,248 | |||||||||||||||
Provision for credit losses | 361 | - | - | - | 361 | |||||||||||||||
Salaries and employee benefits | 6,745 | 1,099 | 199 | - | 8,043 | |||||||||||||||
Other expenses | 4,648 | 341 | 181 | (66 | ) | 5,104 | ||||||||||||||
Total operating expenses | 15,707 | 1,440 | 675 | (66 | ) | 17,756 | ||||||||||||||
Income (loss) before taxes | 2,744 | (51 | ) | 1,671 | (2,296 | ) | 2,068 | |||||||||||||
Income tax expense (benefit) | 406 | (9 | ) | (131 | ) | - | 266 | |||||||||||||
Net income (loss) | $ | 2,338 | $ | (42 | ) | $ | 1,802 | $ | (2,296 | ) | $ | 1,802 | ||||||||
Capital expenditures | $ | 357 | $ | - | $ | - | $ | - | $ | 357 | ||||||||||
Six Months Ended June 30, 2024 | ||||||||||||||||||||
(dollars in thousands) | Bank | Wealth | Parent | Eliminations | Consolidated | |||||||||||||||
Revenues | ||||||||||||||||||||
Interest and dividend income | $ | 35,410 | $ | 91 | $ | 5,121 | $ | (5,121 | ) | $ | 35,501 | |||||||||
Income from fiduciary activities | - | 2,396 | - | (75 | ) | 2,321 | ||||||||||||||
Other income | 3,992 | 447 | 100 | (167 | ) | 4,372 | ||||||||||||||
Total operating income | 39,402 | 2,934 | 5,221 | (5,363 | ) | 42,194 | ||||||||||||||
Expenses | ||||||||||||||||||||
Interest expense | 11,255 | - | 590 | - | 11,845 | |||||||||||||||
Provision for credit losses | 341 | - | - | - | 341 | |||||||||||||||
Salaries and employee benefits | 12,800 | 1,911 | 390 | (75 | ) | 15,026 | ||||||||||||||
Other expenses | 9,205 | 735 | 228 | (167 | ) | 10,001 | ||||||||||||||
Total operating expenses | 33,601 | 2,646 | 1,208 | (242 | ) | 37,213 | ||||||||||||||
Income (loss) before taxes | 5,801 | 288 | 4,013 | (5,121 | ) | 4,981 | ||||||||||||||
Income tax expense (benefit) | 905 | 63 | (233 | ) | - | 735 | ||||||||||||||
Net income (loss) | $ | 4,896 | $ | 225 | $ | 4,246 | $ | (5,121 | ) | $ | 4,246 | |||||||||
Capital expenditures | $ | 1,951 | $ | - | $ | - | $ | - | $ | 1,951 | ||||||||||
Six Months Ended June 30, 2023 | ||||||||||||||||||||
(dollars in thousands) | Bank | Wealth | Parent | Eliminations | Consolidated | |||||||||||||||
Revenues | ||||||||||||||||||||
Interest and dividend income | $ | 31,433 | $ | 67 | $ | 5,801 | $ | (5,801 | ) | $ | 31,500 | |||||||||
Income from fiduciary activities | - | 2,270 | - | - | 2,270 | |||||||||||||||
Other income | 4,205 | 454 | 100 | (131 | ) | 4,628 | ||||||||||||||
Total operating income | 35,638 | 2,791 | 5,901 | (5,932 | ) | 38,398 | ||||||||||||||
Expenses | ||||||||||||||||||||
Interest expense | 5,998 | - | 590 | - | 6,588 | |||||||||||||||
Provision for credit losses | 737 | - | - | - | 737 | |||||||||||||||
Salaries and employee benefits | 12,830 | 2,173 | 403 | - | 15,406 | |||||||||||||||
Other expenses | 9,129 | 645 | 266 | (131 | ) | 9,909 | ||||||||||||||
Total operating expenses | 28,694 | 2,818 | 1,259 | (131 | ) | 32,640 | ||||||||||||||
Income (loss) before taxes | 6,944 | (27 | ) | 4,642 | (5,801 | ) | 5,758 | |||||||||||||
Income tax expense (benefit) | 1,119 | (3 | ) | (243 | ) | - | 873 | |||||||||||||
Net income (loss) | $ | 5,825 | $ | (24 | ) | $ | 4,885 | $ | (5,801 | ) | $ | 4,885 | ||||||||
Capital expenditures | $ | 487 | $ | - | $ | - | $ | - | $ | 487 |
(dollars in thousands) | Bank | Wealth | Parent | Eliminations | Consolidated | |||||||||||||||
Total assets at June 30,2024 | $ | 1,414,168 | $ | 7,481 | $ | 140,287 | $ | (138,582 | ) | $ | 1,423,354 | |||||||||
Total assets at December 31, 2023 | $ | 1,437,603 | $ | 7,235 | $ | 137,004 | $ | (135,460 | ) | $ | 1,446,382 |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies reported in the Company’s 2023 Form 10-K. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion is intended to assist readers in understanding and evaluating the results of operations, financial condition, liquidity, and capital resources of the Company, consisting of the parent company (the Parent) and its wholly-owned subsidiaries, the Bank and Wealth. This discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements, the notes to the financial statements, and the other financial information contained elsewhere in this report, as well as the Company’s 2023 Form 10-K. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to the Company’s future business, financial condition, or results of operations. For a description of certain factors that may have a significant impact on the Company’s future business, financial condition, or results of operations, see “Cautionary Statement Regarding Forward-Looking Statements” at the end of this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.
Overview
The Company’s primary goals are to maximize earnings by maintaining strong asset quality and deploying capital in profitable growth initiatives that will enhance long-term stockholder value. The Company operates in three principal business segments: the Bank, Wealth, and the Company as a separate segment, the Parent. Revenues from the Bank’s operations consist primarily of interest earned on loans and investment securities, fees earned on deposit accounts, debit card interchange, and treasury and commercial services and mortgage banking income. Wealth’s operating revenues consist principally of income from fiduciary and asset management fees. The Parent’s revenues are mainly fees and dividends received from the Bank and Wealth.
The following table presents selected financial performance highlights for the periods indicated:
Table 1: Financial Performance Highlights
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in thousands, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
Net income (loss) | ||||||||||||||||
Bank | $ | 2,828 | $ | 2,338 | $ | 4,896 | $ | 5,825 | ||||||||
Wealth | 189 | (42 | ) | 225 | (24 | ) | ||||||||||
Parent | 3,833 | 1,802 | 4,246 | 4,885 | ||||||||||||
Eliminations | (4,321 | ) | (2,296 | ) | (5,121 | ) | (5,801 | ) | ||||||||
Consolidated net income | $ | 2,529 | $ | 1,802 | $ | 4,246 | $ | 4,885 | ||||||||
Earnings per share - basic and diluted | $ | 0.50 | $ | 0.36 | $ | 0.84 | $ | 0.97 | ||||||||
Annualized return on average equity | 9.43 | % | 7.01 | % | 7.94 | % | 9.68 | % | ||||||||
Annualized return on average assets | 0.71 | % | 0.51 | % | 0.59 | % | 0.70 | % |
Net income for the three months ended June 30, 2024 was $2.5 million ($0.50 diluted earnings per share) compared to $1.8 million ($0.36 diluted earnings per share) for the three months ended June 30, 2023. For the six months ended June 30, 2024 and 2023, net income was $4.2 million ($0.84 diluted earnings per share) and $4.9 million ($0.97 diluted earnings per share), respectively.
Key highlights of the three and six months ended June 30, 2024 are as follows, with comparisons against the three and six months ended June 30, 2023 unless otherwise stated:
• | Total assets were $1.4 billion at June 30, 2024, decreasing $23.0 million or 1.6% from December 31, 2023. Net loans held for investment were $1.0 billion at June 30, 2024, decreasing $25.3 million, or 2.4%, from December 31, 2023. |
• | Total deposits increased $6.2 million, or 0.5%, from December 31, 2023. |
• | Return on average equity (ROE) (annualized) was at 9.4% for the second quarter of 2024, compared to 7.0% for the second quarter of 2023. Return on average assets (ROA) (annualized) was 0.71% for the second quarter of 2024, compared to 0.51% for the second quarter of 2023. |
• | Book value per share and tangible book value per share (non-GAAP) at June 30, 2024 increased 6.39% and 6.60%, respectively from June 30, 2023. |
• | Net income improved $727 thousand, or 40.3%, to $2.5 million for the second quarter of 2024 from $1.8 million for the second quarter of 2023. |
• | Net interest margin (NIM) was 3.62% for the second quarter of 2024 compared to 3.67% for the second quarter of 2023. NIM on a fully tax-equivalent basis (FTE) (non-GAAP) was 3.63% for the second quarter of 2024 compared to 3.69% for the second quarter of 2023. |
• | Net interest income increased $17 thousand, or 0.1%, to $12.1 million for the second quarter of 2024 compared to the second quarter of 2023. |
• | Provision for credit losses of $261 thousand was recognized for the second quarter of 2024, compared to $361 thousand for the second quarter of 2023. |
• | Non-performing assets increased by $516 thousand to $2.0 million or 0.14% of total assets at June 30, 2024 from $1.4 million or 0.10% of total assets at June 30, 2023. |
• | Liquidity as of June 30, 2024, defined as cash and cash equivalents, unpledged securities, and available secured borrowing capacity, totaled $403.8 million, representing 28.4% of total assets compared to $342.5 million, representing 23.7% of total assets as of December 31, 2023. |
• | One-time costs related to the cost saving initiatives were $550 thousand at June 30, 2024 with an additional $350 thousand expected to be incurred through the remainder of the year. Once fully implemented, these cost saving initiatives will reduce noninterest expense by approximately $5.0 million on an annualized basis (excluding one-time costs). |
• | The Company’s Crown Center branch, located at 580 East Main Street in Norfolk, VA will be closing on September 27, 2024. |
For more information about financial measures that are not calculated in accordance with GAAP, please see “Non-GAAP Financial Measures” below.
Capital Management and Dividends
Total equity was $110.0 million as of June 30, 2024, compared to $106.8 million at December 31, 2023. Total equity increased $3.2 million at June 30, 2024 compared to December 31, 2023, due primarily to net income and lower unrealized losses in the market value of securities available-for-sale, which are recorded as a component of accumulated other comprehensive loss, partially offset by cash dividend payments. The unrealized loss in market value of securities available-for-sale was a result of increases in market interest rates since the securities were acquired, rather than credit quality issues. The Company does not expect these unrealized losses to affect the earnings or regulatory capital of the Company or its subsidiaries.
For the second quarter of 2024, the Company declared dividends of $0.14 per share, consistent with the second quarter of 2023. For both the six months ended June 30, 2024 and 2023, dividends declared were $0.28 per share. The dividend represents a payout ratio of 33.3% of EPS for the first six months of 2024. The Board of Directors of the Company continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital requirements, and expected future earnings. The Company’s principal goals related to the maintenance of capital are to provide adequate capital to support the Company’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, and provide a competitive return to stockholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital for the Bank are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets. See “Table 14. Regulatory Capital” below for additional information.
At June 30, 2024, the book value per share of the Company’s common stock was $21.66, and tangible book value per share (non-GAAP) was $21.31, compared to $20.36 and $19.99, respectively, at June 30, 2023. Refer to “Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.
Critical Accounting Estimates
The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. Those accounting policies with the greatest uncertainty and that require management’s most difficult, subjective, or complex judgments affecting the application of these policies, and the greatest likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.
For further information on the Company’s critical accounting estimates, refer to “Note 1. Description of Business and Summary of Significant Accounting Policies” and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in its 2023 Form 10-K.
Allowance for Credit Losses on Loans
The ACLL represents the estimated balance the Company considers adequate to absorb expected credit losses over the expected contractual life of the loan portfolio. The ACLL is estimated using a loan-level discounted cash flows method for all loans with the exception of its automobile, farmland, and consumer portfolios. For the automobile, farmland, and consumer portfolios, the Company has elected to pool those loans based on similar risk characteristics to determine the ACLL using the remaining life method.
Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACLL in future periods. There are both internal factors (i.e., loan balances, credit quality, and the contractual lives of loans) and external factors (i.e., economic conditions such as trends in interest rates, GDP, inflation, and unemployment) that can impact the ACLL estimate.
For instance, the Company considers the Virginia and regional unemployment rate as an external economic variable in developing the ACLL. The quantitative ACLL estimate is sensitive to changes in the unemployment rate. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and therefore the appropriateness of the ACLL, could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall ACLL because changes in those factors and inputs may not occur at the same rate and may not be consistent across all loan types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.
The Company reviews its ACLL estimation process regularly for appropriateness as the economic and internal environment are constantly changing. While the ACLL estimate represents management’s current estimate of expected credit losses, due to uncertainty surrounding internal and external factors, there is potential that the estimate may not be adequate over time to cover credit losses in the portfolio. While management uses available information to estimate expected losses on loans, future changes in the ACLL may be necessary based on changes in portfolio composition, portfolio credit quality, economic conditions and/or other factors.
For further information on the Company’s critical accounting estimates, refer to “Note 1. Description of Business and Summary of Significant Accounting Policies” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in its 2023 Form 10-K.
Results of Operations
Net Interest Income
The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid to fund them. Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The NIM is calculated by dividing net interest income by average earning assets, or on a fully tax-equivalent basis, tax-equivalent net interest income by average earning assets.
Net interest income for the second quarter of 2024 was $12.1 million, an increase of $17 thousand, or 0.1%, from the second quarter of 2023. The increase from the prior year quarter is due primarily to higher average earning asset balances at higher average yields partially offset by higher average interest-bearing liabilities at higher average rates. For the six months ended June 30, 2024 and 2023, net interest income was $23.7 million and $24.9 million, respectively. The decrease from the prior-year comparative period was due to higher average-interest bearing liabilities at higher average rates, partially offset by higher average earning assets at higher average earning yields.
Net interest income, on a fully tax-equivalent basis (non-GAAP), was $12.2 million for the second quarter of 2024, a decrease of $2 thousand from the 2023 comparative quarter. For the six months ended June 30, 2024 and 2023, net interest income, on a fully tax-equivalent basis (non-GAAP), was $23.7 million and $25.0 million, respectively. NIM for the second quarter of 2024 was 3.62%, a decrease from 3.67% for the prior year quarter. For the six months ended June 30, 2024 and 2023, NIM was 3.53% and 3.84%, respectively. On a fully tax-equivalent basis (non-GAAP), NIM was 3.63% and 3.55%, for the three and six months ended June 30, 2024, respectively, compared to 3.69% and 3.86% for the respective prior year comparative periods. For more information on these FTE financial measures, please see “Non-GAAP Financial Measures” below.
Average earning asset balances for the second quarter of 2024 increased $19.9 million compared to the second quarter of 2023 with yields on average earning assets increasing 45 basis points due to deployment of liquidity into higher earning assets and the effects of the rising interest rate environment. During the first six months of 2024, average earning assets increased $35.3 million over the 2023 comparative period.
Average loans decreased $26.8 million, or 2.5%, and $3.0 million, or 0.3%, for the second quarter and first six months of 2024, respectively, compared to the same periods of 2023. The decrease in average loans outstanding in 2024 compared to 2023 was due primarily to reduction in size of the construction and land development, commercial - owner occupied, and consumer automobile segments of the loan portfolio. Average loan yields were higher for the second quarter and first six months of 2024 by 45 basis points and 43 basis points, respectively, compared to the same periods of 2023 due primarily to the effects of rising interest rates.
Average securities available-for-sale decreased $25.4 million and $24.3 million for the second quarter and first six months of 2024, respectively, compared to the same period in 2023, due primarily to fluctuations in fair market value, maturities, and principal paydowns. The average yield on the investment securities portfolio increased 28 basis points and 27 basis points for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023 due primarily to the effects of rising interest rates on the Company’s variable rate investment securities portfolio.
Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the FRB, increased $72.2 million and $61.8 million for the second quarter and first six months of 2024, compared to the respective periods in 2023 due primarily to deployment of liquidity into higher yielding assets. The average yield on interest-bearing deposits in other banks increased 51 basis points for the second quarter and 101 basis points for the first six months of 2024 compared to the same periods in 2023 due to rising interest rates. The FRB interest rate on excess cash reserve balances was 5.40% at June 30, 2024.
Average interest-bearing liabilities increased $23.7 million for the second quarter of 2024 compared to the same period of 2023, with costs increasing 69 basis points and increased $72.6 million for the six months ended June 30, 2024 compared to the same period of 2023, with costs increasing 98 basis points. The higher interest cost of liabilities was primarily driven by higher average balances and interest rates on money market and time deposits and a higher average balance on interest-bearing demand deposits, partially offset by decreases in short-term average FHLB advances during the period. Average money market, time deposits, and interest-bearing demand deposits increased $69.9 million and $103.2 million for the second quarter and first six months of 2024, respectively, compared to the same periods in 2023. Average noninterest-bearing demand deposits decreased $8.0 million for the second quarter of 2024 and $42.7 million for the first six months of 2024, compared to the same periods of 2023. The average cost of interest-bearing deposits increased 86 basis points for the second quarter of 2024 and 114 basis points for the first six months of 2024, compared to the same periods in 2023, due primarily to higher rates on deposits driven by depositors seeking increased yields and competitive pricing pressures. While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity and the pace with which customers move funds from other deposit products into or out of time deposit products. The extent to which rising interest rates will ultimately affect the Company’s NIM is uncertain.
The following table shows an analysis of average earning assets, interest-bearing liabilities and rates and yields for the periods indicated. Nonaccrual loans are included in loans outstanding.
Table 2: Average Balance Sheets, Net Interest Income and Rates
For the quarters ended June 30, | ||||||||||||||||||||||||
2024 | 2023 | |||||||||||||||||||||||
(dollars in thousands) | Average Balance | Interest Income/ Expense | Yield/ Rate** | Average Balance | Interest Income/ Expense | Yield/ Rate** | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Loans* | $ | 1,061,884 | $ | 15,042 | 5.68 | % | $ | 1,088,723 | $ | 14,185 | 5.23 | % | ||||||||||||
Investment securities: | ||||||||||||||||||||||||
Taxable | 169,675 | 1,761 | 4.16 | 183,278 | 1,772 | 3.88 | ||||||||||||||||||
Tax-exempt* | 26,036 | 176 | 2.71 | 37,851 | 265 | 2.81 | ||||||||||||||||||
Total investment securities | 195,711 | 1,937 | 3.97 | 221,129 | 2,037 | 3.69 | ||||||||||||||||||
Interest-bearing due from banks | 79,752 | 1,087 | 5.47 | 7,510 | 93 | 4.96 | ||||||||||||||||||
Federal funds sold | 894 | 12 | 5.38 | 718 | 9 | 4.88 | ||||||||||||||||||
Other investments | 4,506 | 77 | 6.85 | 4,806 | 79 | 6.68 | ||||||||||||||||||
Total earning assets | 1,342,747 | $ | 18,155 | 5.42 | 1,322,886 | $ | 16,403 | 4.97 | ||||||||||||||||
Allowance for credit losses | (11,905 | ) | (11,732 | ) | ||||||||||||||||||||
Other non-earning assets | 107,487 | 106,738 | ||||||||||||||||||||||
Total assets | $ | 1,438,329 | $ | 1,417,892 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest-bearing transaction accounts | $ | 94,868 | $ | 3 | 0.01 | $ | 80,393 | $ | 3 | 0.02 | ||||||||||||||
Money market deposit accounts | 446,359 | 2,689 | 2.42 | 437,481 | 1,558 | 1.43 | ||||||||||||||||||
Savings accounts | 85,098 | 7 | 0.03 | 105,161 | 8 | 0.03 | ||||||||||||||||||
Time deposits | 247,472 | 2,337 | 3.79 | 200,951 | 1,419 | 2.83 | ||||||||||||||||||
Total time and savings deposits | 873,797 | 5,036 | 2.31 | 823,986 | 2,988 | 1.45 | ||||||||||||||||||
Federal funds purchased, repurchase | ||||||||||||||||||||||||
agreements and other borrowings | 2,006 | 1 | 0.20 | 4,959 | 2 | 0.13 | ||||||||||||||||||
Federal Home Loan Bank advances | 54,006 | 670 | 4.98 | 77,255 | 963 | 4.93 | ||||||||||||||||||
Long term borrowings | 29,712 | 295 | 3.98 | 29,585 | 295 | 3.95 | ||||||||||||||||||
Total interest-bearing liabilities | 959,521 | 6,002 | 2.51 | 935,785 | 4,248 | 1.82 | ||||||||||||||||||
Demand deposits | 362,884 | 370,907 | ||||||||||||||||||||||
Other liabilities | 8,380 | 8,125 | ||||||||||||||||||||||
Stockholders’ equity | 107,544 | 103,075 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,438,329 | $ | 1,417,892 | ||||||||||||||||||||
Net interest margin | $ | 12,153 | 3.63 | % | $ | 12,155 | 3.69 | % |
*Computed on a fully tax-equivalent basis using a 21% rate, adjusting interest income by $37 thousand and $56 thousand for the quarters ended June 30, 2024 and 2023, respectively.
**Annualized
For the six months ended June 30, | ||||||||||||||||||||||||
2024 | 2023 | |||||||||||||||||||||||
(dollars in thousands) | Average Balance | Interest Income/ Expense | Yield/ Rate** | Average Balance | Interest Income/ Expense | Yield/ Rate** | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Loans* | $ | 1,069,389 | $ | 29,586 | 5.55 | % | $ | 1,072,391 | $ | 27,227 | 5.12 | % | ||||||||||||
Investment securities: | ||||||||||||||||||||||||
Taxable | 172,458 | 3,559 | 4.14 | 184,776 | 3,536 | 3.86 | ||||||||||||||||||
Tax-exempt* | 26,075 | 352 | 2.71 | 38,028 | 533 | 2.83 | ||||||||||||||||||
Total investment securities | 198,533 | 3,911 | 3.95 | 222,804 | 4,069 | 3.68 | ||||||||||||||||||
Interest-bearing due from banks | 68,837 | 1,886 | 5.49 | 7,056 | 157 | 4.48 | ||||||||||||||||||
Federal funds sold | 801 | 21 | 5.26 | 648 | 15 | 4.59 | ||||||||||||||||||
Other investments | 4,853 | 171 | 7.07 | 4,222 | 145 | 6.95 | ||||||||||||||||||
Total earning assets | 1,342,413 | $ | 35,575 | 5.31 | 1,307,121 | $ | 31,613 | 4.88 | ||||||||||||||||
Allowance for credit losses | (12,149 | ) | (11,536 | ) | ||||||||||||||||||||
Other nonearning assets | 106,340 | 105,630 | ||||||||||||||||||||||
Total assets | $ | 1,436,604 | $ | 1,401,215 | ||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest-bearing transaction accounts | $ | 94,651 | $ | 6 | 0.01 | $ | 75,351 | $ | 6 | 0.02 | ||||||||||||||
Money market deposit accounts | 449,279 | 5,277 | 2.36 | 433,235 | 2,400 | 1.12 | ||||||||||||||||||
Savings accounts | 87,066 | 13 | 0.03 | 110,491 | 17 | 0.03 | ||||||||||||||||||
Time deposits | 242,774 | 4,509 | 3.72 | 174,902 | 1,956 | 2.26 | ||||||||||||||||||
Total time and savings deposits | 873,770 | 9,805 | 2.25 | 793,979 | 4,379 | 1.11 | ||||||||||||||||||
Federal funds purchased, repurchase agreements and other borrowings | 2,245 | 2 | 0.18 | 6,450 | 39 | 1.23 | ||||||||||||||||||
Federal Home Loan Bank advances | 61,861 | 1,448 | 4.69 | 65,009 | 1,580 | 4.90 | ||||||||||||||||||
Long term borrowings | 29,696 | 590 | 3.98 | 29,568 | 590 | 4.03 | ||||||||||||||||||
Total interest-bearing liabilities | 967,572 | 11,845 | 2.46 | 895,006 | 6,588 | 1.48 | ||||||||||||||||||
Demand deposits | 353,491 | 396,202 | ||||||||||||||||||||||
Other liabilities | 8,294 | 8,235 | ||||||||||||||||||||||
Stockholders’ equity | 107,247 | 101,772 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,436,604 | $ | 1,401,215 | ||||||||||||||||||||
Net interest margin | $ | 23,730 | 3.55 | % | $ | 25,025 | 3.86 | % |
*Computed on a fully tax-equivalent (non-GAAP) basis using a 21% rate, adjusting interest income by $74 thousand and $113 thousand for the six months ended June 30, 2024 and 2023, respectively.
**Annualized
Interest income and expense are affected by fluctuations in interest rates, by changes in volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the period-to-period changes in the components of net interest income. The Company calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.
Table 3: Volume and Rate Analysis*
(dollars in thousands) | For the three months ended June 30, 2024 from 2023 Increase (Decrease) | |||||||||||
Due to Changes in: | ||||||||||||
Volume | Rate | Total | ||||||||||
Earning Assets | ||||||||||||
Loans | $ | (350 | ) | $ | 1,207 | $ | 857 | |||||
Investment securities: | ||||||||||||
Taxable | (132 | ) | 121 | (11 | ) | |||||||
Tax-exempt* | (83 | ) | (6 | ) | (89 | ) | ||||||
Total investment securities | (215 | ) | 115 | (100 | ) | |||||||
Federal funds sold | 2 | 1 | 3 | |||||||||
Other investments** | 890 | 102 | 992 | |||||||||
Total earning assets | 327 | 1,425 | 1,752 | |||||||||
Interest-Bearing Liabilities | ||||||||||||
Interest-bearing transaction accounts | 1 | (1 | ) | - | ||||||||
Money market deposit accounts | 32 | 1,099 | 1,131 | |||||||||
Savings accounts | (2 | ) | 1 | (1 | ) | |||||||
Time deposits | 329 | 589 | 918 | |||||||||
Total time and savings deposits | 360 | 1,688 | 2,048 | |||||||||
Federal funds purchased, repurchase agreements and other borrowings | (1 | ) | 0 | (1 | ) | |||||||
Federal Home Loan Bank advances | (290 | ) | (3 | ) | (293 | ) | ||||||
Long term borrowings | 1 | (1 | ) | (0 | ) | |||||||
Total interest-bearing liabilities | 70 | 1,684 | 1,754 | |||||||||
Change in net interest income | $ | 257 | $ | (259 | ) | $ | (2 | ) |
* Computed on a fully tax-equivalent basis, non-GAAP, using a 21% rate.
** Other investments include interest-bearing balances due from banks.
(dollars in thousands) | Six months ended June 30, 2024 from 2023 Increase (Decrease) | |||||||||||
Due to Changes in: | ||||||||||||
Volume | Rate | Total | ||||||||||
Earning Assets | ||||||||||||
Loans | $ | (76 | ) | $ | 2,436 | $ | 2,360 | |||||
Investment securities: | ||||||||||||
Taxable | (236 | ) | 259 | 23 | ||||||||
Tax-exempt* | (168 | ) | (13 | ) | (181 | ) | ||||||
Total investment securities | (404 | ) | 246 | (158 | ) | |||||||
Federal funds sold | 4 | 2 | 6 | |||||||||
Other investments** | 1,397 | 357 | 1,754 | |||||||||
Total earning assets | 921 | 3,041 | 3,962 | |||||||||
Interest-Bearing Liabilities | ||||||||||||
Interest-bearing transaction accounts | 2 | (2 | ) | - | ||||||||
Money market deposit accounts | 89 | 2,788 | 2,877 | |||||||||
Savings accounts | (4 | ) | (0 | ) | (4 | ) | ||||||
Time deposits | 759 | 1,794 | 2,553 | |||||||||
Total time and savings deposits | 846 | 4,580 | 5,426 | |||||||||
Federal funds purchased, repurchase agreements and other borrowings | (25 | ) | (12 | ) | (37 | ) | ||||||
Federal Home Loan Bank advances | (77 | ) | (55 | ) | (132 | ) | ||||||
Long term borrowings | 3 | (3 | ) | - | ||||||||
Total interest-bearing liabilities | 747 | 4,510 | 5,257 | |||||||||
Change in net interest income | $ | 174 | $ | (1,469 | ) | $ | (1,295 | ) |
* Computed on a fully tax-equivalent basis using a 21% rate.
** Other investments include interest-bearing balances due from banks.
The Company believes NIM may be affected in future periods by several factors that are difficult to predict, including (1) changes in interest rates, which may depend on the severity of adverse economic conditions, inflationary pressures, the timing and extent of any economic recovery, which are inherently uncertain; (2) possible changes in the composition of earning assets which may result from decreased loan demand as a result of the current economic environment; and (3) possible changes in the composition of interest-bearing liabilities, which may result from decreased deposit balances or increased competition for deposits, or from changes in the availability of certain types of wholesale funding.
Provision for Credit Losses
For the three months ended June 30, 2024, the Company recognized a provision for credit losses of $261 thousand compared to $361 thousand for the three months ended June 30, 2023. The provision for credit losses for the second quarter of 2024 included a provision for loans of $191 thousand and a provision for unfunded commitments of $70 thousand. The provision for credit losses was $341 thousand for the first six months of 2024, compared to $737 thousand for the first six months of 2023. Charged-off loans totaled $977 thousand and $754 thousand in the first six months of 2024 and 2023, respectively. Recoveries amounted to $330 thousand and $365 thousand for the six months ended June 30, 2024 and 2023, respectively. The Company’s annualized net loans charged off to average loans were 0.12% for the second quarter of 2024 compared to 0.08% for the second quarter of 2023. The decreased provision for credit losses for the three and six months ended June 30, 2024 compared to the same period in 2023 is primarily due to the reduction in size of the loan portfolio.
The state of the local economy can have a significant impact on the level of loan charge-offs. If the economy begins to contract, nonperforming assets could increase as a result of declines in real estate values or increases in unemployment rates and financial stress on borrowers. Increased nonperforming assets would increase charge-offs and reduce earnings due to larger contributions to the provision for credit losses.
Noninterest Income
Total noninterest income was $3.5 million for the second quarter of 2024, decreasing $6 thousand compared to the second quarter of 2023. The decrease over the prior year quarter was primarily driven by decreases in mortgage banking income and no gains on the sale of fixed assets, partially offset by increases in other service charges, commissions, and fees and no losses on available-for-sale securities. The decrease in mortgage banking income in the second quarter of 2024 compared to the second quarter of 2023 was due to declines in the volume of mortgage originations attributable to changes in mortgage market conditions. Noninterest income for the six months ended June 30, 2024 decreased $205 thousand to $6.7 million compared to the six months ended June 30, 2023 primarily driven by decreases in mortgage banking income, partially offset by no losses on available-for-sale securities.
Noninterest Expense
Noninterest expense totaled $12.3 million for the second quarter of 2024 compared to $13.1 million for the second quarter of 2023. The decrease over the prior year quarter was primarily driven by decreases in salaries and employee benefit expense and employee professional development expense, partially offset by increases in occupancy and equipment and data processing. The decrease in salaries and employee benefits in the second quarter of 2024 was primarily driven by lower average headcount and fewer one-time costs related to the cost saving initiatives as the majority of these were incurred in the first quarter of 2024. The noninterest expense reduction initiatives beginning in the first quarter of 2024 reduced the employee headcount by approximately 12% late in the first quarter and into the second quarter of 2024. Occupancy and equipment expenses increased over the comparative periods due to the impairment of the right-of-use asset for the upcoming closure of the Crown Center branch. For the six months ended June 30, 2024, noninterest expense decreased $288 thousand over the six months ended June 30, 2023, primarily due to decreases in salary and employee benefits as discussed above.
Income Tax Expense
The Company’s income tax expense increased $207 thousand and decreased $138 thousand for the three and six months ended June 30, 2024 compared to the same periods in 2023 primarily due to changes in the levels of pre-tax income and the mix of effective tax-exempt income. The effective federal income tax rate for the three and six months ended June 30, 2024 was 15.8% and 14.8% compared to 12.9% and 15.2% for the same periods in 2023.
Discussion and Analysis of Financial Condition
As of June 30, 2024, the Company had total assets of $1.4 billion, a decrease of $23.0 million compared to assets at December 31, 2023.
Net loans held for investment decreased $25.3 million or 2.4%, from December 31, 2023 to $1.0 billion as of June 30, 2024, driven by the following: decreases in consumer loans of $21.7 million, construction loans of $17.0 million, and commercial loans of $7.5 million, partially offset by increases in residential real estate loans of $11.0 million and commercial real estate loans of $10.7 million. Cash and cash equivalents increased $11.9 million from December 31, 2023 to June 30, 2024. Securities available-for-sale, at fair value, decreased $10.1 million from December 31, 2023 to $192.1 million as of June 30, 2024 driven primarily by maturities, principal pay downs, and fluctuations in fair market values.
Total deposits of $1.2 billion as of June 30, 2024 increased $6.2 million, or 0.5% from December 31, 2023. Time deposits increased $8.8 million, or 3.6%, noninterest-bearing deposits increased $28.3 million, or 8.5%, and savings deposits decreased $30.9 million, or 4.7%.
The Company utilizes FHLB advances as a primary source of liquidity as needed. As of June 30, 2024 and December 31, 2023, the Company had FHLB advances of $39.6 million and $69.5 million, respectively. Overnight repurchase agreements decreased $1.0 million as the Company used excess liquidity to pay down high cost borrowed funds. The increased balance in noninterest-bearing deposits was driven by increases from large commercial customers.
Securities Portfolio
When comparing June 30, 2024 to December 31, 2023, securities available-for-sale decreased $10.1 million, or 5.0%, due to maturities and normal cash flows from the portfolio. The Company’s strategy for the securities portfolio is primarily intended to manage the portfolio’s susceptibility to interest rate risk and to provide liquidity to fund loan growth. The securities portfolio is also adjusted to achieve other asset/liability objectives, including pledging requirements, and to manage tax exposure when necessary.
The following table sets forth a summary of the securities portfolio in dollar amounts at fair value and as a percentage of the Company’s total securities available-for-sale as of the dates indicated:
Table 4: Securities Portfolio
(dollars in thousands) | June 30, | December 31, | ||||||||||||||
2024 | 2023 | |||||||||||||||
U.S. Treasury securities | $ | 3,851 | 2 | % | $ | 3,857 | 2 | % | ||||||||
Obligations of U.S. Government agencies | 36,762 | 20 | % | 42,735 | 21 | % | ||||||||||
Obligations of state and political subdivisions | 50,226 | 26 | % | 50,597 | 24 | % | ||||||||||
Mortgage-backed securities | 77,306 | 39 | % | 81,307 | 39 | % | ||||||||||
Corporate bonds and other securities | 23,982 | 12 | % | 23,735 | 11 | % | ||||||||||
192,127 | 99 | % | 202,231 | 98 | % | |||||||||||
Restricted securities: | ||||||||||||||||
Federal Home Loan Bank stock | 2,887 | 1 | % | 4,242 | 2 | % | ||||||||||
Federal Reserve Bank stock | 892 | - | 892 | - | ||||||||||||
Community Bankers’ Bank stock | 46 | - | 42 | - | ||||||||||||
3,825 | 5,176 | |||||||||||||||
Total Securities | $ | 195,952 | 100 | % | $ | 207,407 | 100 | % |
The following table summarizes the contractual maturity of the securities portfolio and their weighted average yields as of June
30, 2024.
Table 5: Maturity of Securities
(dollars in thousands) | 1 year or less | 1-5 years | 5-10 years | Over 10 years | Total | |||||||||||||||
U.S. Treasury securities | $ | - | $ | 3,851 | $ | - | $ | - | $ | 3,851 | ||||||||||
Weighted average yield | - | 1.70 | % | - | - | 1.70 | % | |||||||||||||
Obligations of U.S. Government agencies | $ | 1,173 | $ | 2,711 | $ | 956 | $ | 31,922 | $ | 36,762 | ||||||||||
Weighted average yield | 1.41 | % | 2.79 | % | 3.00 | % | 6.52 | % | 5.99 | % | ||||||||||
Obligations of state and political subdivisions | $ | 492 | $ | 949 | $ | 21,918 | $ | 26,867 | $ | 50,226 | ||||||||||
Weighted average yield | 3.35 | % | 2.40 | % | 2.27 | % | 2.35 | % | 2.32 | % | ||||||||||
Mortgage-backed securities | $ | - | $ | 10,875 | $ | - | $ | 66,431 | $ | 77,306 | ||||||||||
Weighted average yield | - | 2.28 | % | 0.00 | % | 3.18 | % | 3.03 | % | |||||||||||
Corporate bonds and other securities | $ | - | $ | - | $ | 23,982 | $ | - | $ | 23,982 | ||||||||||
Weighted average yield | - | - | 4.43 | % | - | 4.43 | % | |||||||||||||
Total Securities | $ | 1,665 | $ | 18,386 | $ | 46,856 | $ | 125,220 | $ | 192,127 | ||||||||||
Weighted average yield | 1.98 | % | 2.24 | % | 3.39 | % | 3.85 | % | 3.57 | % |
The table above is based on contractual maturities; therefore, it does not reflect cash flow from principal payments or prepayments prior to maturity. The weighted average yield is calculated on a fully tax-equivalent basis using a 21% rate on a pro rata basis for each security based on its relative amortized cost.
For more information about the Company’s securities available-for-sale, including information about securities in an unrealized loss position as of June 30, 2024 and December 31, 2023, see Part I, Item 1, “Financial Statements” under the heading “Note 2. Securities” in this Quarterly Report on Form 10-Q.
Loan Portfolio
The following table shows a breakdown of total loans by segment at June 30, 2024 and December 31, 2023.
Table 6: Loan Portfolio
(dollars in thousands) | June 30, | December 31, | ||||||
2024 | 2023 | |||||||
Commercial and industrial | $ | 56,635 | $ | 64,112 | ||||
Real estate-construction | 90,184 | 107,179 | ||||||
Real estate-mortgage (1) | 294,808 | 283,853 | ||||||
Real estate-commercial (2) | 452,502 | 441,716 | ||||||
Consumer (3) | 158,485 | 180,155 | ||||||
Other | 1,988 | 3,237 | ||||||
Ending Balance | $ | 1,054,602 | $ | 1,080,252 |
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The real estate-commercial segment included commercial-owner occupied and commercial non-owner occupied.
(3) The consumer segment includes consumer automobile loans.
The maturity distribution and rate sensitivity of the Company’s loan portfolio as of June 30, 2024 is presented below:
Table 7: Maturity/Repricing Schedule of Loan Portfolio
As of June 30, 2024 | ||||||||||||||||||||||||||||
(dollars in thousands) | Commercial and industrial | Real estate-construction | Real estate-mortgage (1) | Real estate- commercial (2) | Consumer (3) | Other | Total | |||||||||||||||||||||
Variable Rate: | ||||||||||||||||||||||||||||
Within 1 year | $ | 14,928 | $ | 47,597 | $ | 69,514 | $ | 66,617 | $ | 7,542 | $ | 1,269 | $ | 207,467 | ||||||||||||||
1 to 5 years | - | 1,636 | 32,208 | 26,500 | - | 337 | 60,681 | |||||||||||||||||||||
5 to 15 years | - | 2,861 | 39,170 | - | 27 | - | 42,058 | |||||||||||||||||||||
After 15 years | - | - | - | - | - | - | - | |||||||||||||||||||||
Fixed Rate: | ||||||||||||||||||||||||||||
Within 1 year | $ | 1,847 | $ | 9,693 | $ | 5,801 | $ | 29,789 | $ | 1,072 | $ | - | $ | 48,202 | ||||||||||||||
1 to 5 years | 26,472 | 16,337 | 47,977 | 197,195 | 100,878 | - | 388,859 | |||||||||||||||||||||
5 to 15 years | 13,388 | 12,018 | 35,545 | 127,145 | 40,234 | 382 | 228,712 | |||||||||||||||||||||
After 15 years | - | 42 | 64,593 | 5,256 | 8,732 | - | 78,623 | |||||||||||||||||||||
$ | 56,635 | $ | 90,184 | $ | 294,808 | $ | 452,502 | $ | 158,485 | $ | 1,988 | $ | 1,054,602 |
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The real estate-commercial segment included commercial-owner occupied and commercial non-owner occupied.
(3) The consumer segment includes consumer automobile loans.
For more information about the Company’s loan portfolio as of June 30, 2024 and December 31, 2023, see Part I, Item 1, “Financial Statements” under the heading “Note 3. Loans and the Allowance for Credit Losses on Loans” in this Quarterly Report on Form 10-Q.
Nonperforming Assets
The following table summarizes information concerning credit ratios and nonperforming assets as of June 30, 2024 and December 31, 2023.
The Company continued to experience low levels of NPAs in the six months ended June 30, 2024, however, the economic environment could impact performance, which could increase NPAs in future periods. Refer to Part I, Item 1, “Financial Statements” under the heading “Note 3. Loans and the Allowance for Credit Losses on Loans” in this Quarterly Report on Form 10-Q for more information.
Table 8: Nonperforming Assets
June 30, | December 31, | |||||||
(dollars in thousands) | 2024 | 2023 | ||||||
Total loans | $ | 1,054,602 | $ | 1,080,252 | ||||
Nonaccrual loans | 44 | 188 | ||||||
Loans past due 90 days or more and accruing interest | 444 | 1,780 | ||||||
Repossessed assets | 1,471 | 215 | ||||||
Total Nonperforming Assets | $ | 1,959 | $ | 2,183 | ||||
ACLL | $ | 11,828 | $ | 12,206 | ||||
Nonaccrual loans to total loans | 0.00 | % | 0.02 | % | ||||
ACLL to total loans | 1.12 | % | 1.13 | % | ||||
ACLL to nonaccrual loans | 26881.82 | % | 6492.55 | % | ||||
Annualized year-to-date net charge-offs to average loans | 0.12 | % | 0.16 | % |
As shown in the table above, as of June 30, 2024 compared to December 31, 2023, the nonaccrual loan category decreased by $144 thousand or 76.6%, the 90 days past due and still accruing category decreased by $1.3 million or 75.1%, and the repossessed assets category increased by $1.3 million or 584.2%.
Management believes the Company has strong credit quality review processes in place to identify problem loans quickly. For a detailed discussion of the Company’s nonperforming assets, refer to Part I, Item 1, “Financial Statements” under the heading “Note 3. Loans and the Allowance for Credit Losses on Loans” in this Quarterly Report on Form 10-Q.
Allowance for Credit Losses
As of June 30, 2024, the ACL was $12.1 million and included an ACLL of $11.8 million and an allowance for unfunded commitments of $309 thousand. The decrease in the ACL during the first six months of 2024 was due to the reduction in the size of the loan portfolio, primarily the consumer automobile segment (within the consumer segment). The consumer automobile segment declined $21.5 million, or 13.4% during the six months ended June 30, 2024. The following table summarizes the ACL as of June 30, 2024 and December 31, 2023:
Table 9: Allowance for Credit Losses
June 30, | December 31, | |||||||
(dollars in thousands) | 2024 | 2023 | ||||||
Total ACLL | $ | 11,828 | $ | 12,206 | ||||
Total reserve for unfunded commitments | 309 | 236 | ||||||
Total ACL | $ | 12,137 | $ | 12,442 |
For more information regarding the ACL and ACLL, refer to “Note 1. Description of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of the Company’s 2023 Form 10-K and Part I, Item 1, “Financial Statements” under the heading “Note 3. Loans and the Allowance for Credit Losses on Loans” in this Quarterly Report on Form 10-Q.
The ACLL represents an amount that, in management’s judgement, will be adequate to absorb expected credit losses in the loan portfolio; however, if elevated levels of risk are identified, provision for credit losses may increase in future periods. The following tables present the Company’s loan loss experience for the periods indicated:
Table 10: Allowance for Credit Losses on Loans
For the three months ended June 30, 2024 | ||||||||||||||||||||||||||||||||
(dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 486 | $ | 1,015 | $ | 2,845 | $ | 5,624 | $ | 1,782 | $ | 196 | $ | - | $ | 11,948 | ||||||||||||||||
Charge-offs | (117 | ) | - | - | - | (294 | ) | (72 | ) | - | (483 | ) | ||||||||||||||||||||
Recoveries | 2 | - | 7 | - | 144 | 19 | - | 172 | ||||||||||||||||||||||||
Provision for credit losses | 108 | (162 | ) | 130 | 71 | 78 | (34 | ) | - | 191 | ||||||||||||||||||||||
Ending Balance | $ | 479 | $ | 853 | $ | 2,982 | $ | 5,695 | $ | 1,710 | $ | 109 | $ | - | $ | 11,828 | ||||||||||||||||
Average loans | $ | 56,190 | $ | 84,395 | $ | 298,311 | $ | 458,598 | $ | 162,180 | $ | 2,210 | $ | 1,061,884 | ||||||||||||||||||
Ratio of net charge-offs (recoveries) to average loans | 0.20 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.09 | % | 2.40 | % | 0.03 | % |
For the three months ended June 30, 2023 | ||||||||||||||||||||||||||||||||
(dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 664 | $ | 653 | $ | 2,872 | $ | 5,617 | $ | 1,641 | $ | 104 | $ | - | $ | 11,551 | ||||||||||||||||
Charge-offs | (51 | ) | - | - | - | (157 | ) | (97 | ) | - | (305 | ) | ||||||||||||||||||||
Recoveries | 4 | - | 9 | - | 75 | 7 | - | 95 | ||||||||||||||||||||||||
Provision for loan losses | 49 | 54 | (1 | ) | 92 | 31 | 85 | - | 310 | |||||||||||||||||||||||
Ending Balance | $ | 666 | $ | 707 | $ | 2,880 | $ | 5,709 | $ | 1,590 | $ | 99 | $ | - | $ | 11,651 | ||||||||||||||||
Average loans | 75,394 | 88,823 | 277,453 | 437,317 | 207,424 | 2,312 | 1,088,723 | |||||||||||||||||||||||||
Ratio of net charge-offs (recoveries) to average loans | 0.06 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.04 | % | 3.89 | % | 0.02 | % |
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The consumer segment included consumer automobile loans.
For the six months ended June 30, 2024 | ||||||||||||||||||||||||||||||||
(dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 573 | $ | 982 | $ | 2,904 | $ | 5,742 | $ | 1,827 | $ | 178 | $ | - | $ | 12,206 | ||||||||||||||||
Charge-offs | (117 | ) | - | - | - | (756 | ) | (104 | ) | - | (977 | ) | ||||||||||||||||||||
Recoveries | 6 | - | 20 | 11 | 267 | 26 | - | 330 | ||||||||||||||||||||||||
Provision for credit losses | 17 | (129 | ) | 58 | (58 | ) | 372 | 9 | - | 269 | ||||||||||||||||||||||
Ending Balance | $ | 479 | $ | 853 | $ | 2,982 | $ | 5,695 | $ | 1,710 | $ | 109 | $ | - | $ | 11,828 | ||||||||||||||||
Average loans | $ | 60,137 | $ | 104,655 | $ | 289,975 | $ | 443,555 | $ | 168,745 | $ | 2,322 | $ | 1,069,389 | ||||||||||||||||||
Ratio of net charge-offs (recoveries) to average loans | 0.18 | % | 0.00 | % | -0.01 | % | 0.00 | % | 0.29 | % | 3.36 | % | 0.06 | % |
For the six months ended June 30, 2023 | ||||||||||||||||||||||||||||||||
(dollars in thousands) | Commercial and Industrial | Real Estate Construction | Real Estate - Mortgage (1) | Real Estate - Commercial | Consumer (2) | Other | Unallocated | Total | ||||||||||||||||||||||||
Allowance for credit losses on loans: | ||||||||||||||||||||||||||||||||
Balance, beginning | $ | 673 | $ | 552 | $ | 2,575 | $ | 4,499 | $ | 2,065 | $ | 156 | $ | 6 | $ | 10,526 | ||||||||||||||||
Day 1 impact of adoption of CECL | (11 | ) | 19 | 87 | 1,048 | (365 | ) | (137 | ) | - | 641 | |||||||||||||||||||||
Charge-offs | (51 | ) | - | - | - | (534 | ) | (169 | ) | - | (754 | ) | ||||||||||||||||||||
Recoveries | 12 | - | 20 | - | 312 | 21 | - | 365 | ||||||||||||||||||||||||
Provision for loan losses | 43 | 136 | 198 | 162 | 112 | 228 | (6 | ) | 873 | |||||||||||||||||||||||
Ending Balance | $ | 666 | $ | 707 | $ | 2,880 | $ | 5,709 | $ | 1,590 | $ | 99 | $ | - | $ | 11,651 | ||||||||||||||||
Average loans | $ | 76,618 | $ | 86,239 | $ | 272,064 | $ | 432,779 | $ | 202,388 | $ | 2,303 | $ | 1,072,391 | ||||||||||||||||||
Ratio of net charge-offs (recoveries) to average loans | 0.05 | % | 0.00 | % | -0.01 | % | 0.00 | % | 0.11 | % | 6.43 | % | 0.04 | % |
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The consumer segment included consumer automobile loans.
The following table shows the amount of the ACLL allocated to each category and the ratio of corresponding outstanding loan balances as of June 30, 2024 and December 31, 2023. Although the ACLL is allocated into these categories, the entire ACLL is available to cover credit losses in any category.
Table 11: Allocation of the Allowance for Credit Losses on Loans
(dollars in thousands) | June 30, | December 31, | ||||||||||||||
2024 | 2023 | |||||||||||||||
Amount | Percent of Loans to Total Loans | Amount | Percent of Loans to Total Loans | |||||||||||||
Commercial and industrial | $ | 479 | 5.37 | % | $ | 573 | 5.93 | % | ||||||||
Real estate-construction | 853 | 8.55 | % | 982 | 9.92 | % | ||||||||||
Real estate-mortgage (1) | 2,982 | 27.95 | % | 2,904 | 26.28 | % | ||||||||||
Real estate-commercial | 5,695 | 42.91 | % | 5,742 | 40.89 | % | ||||||||||
Consumer (2) | 1,710 | 15.03 | % | 1,827 | 16.68 | % | ||||||||||
Other | 109 | 0.19 | % | 178 | 0.30 | % | ||||||||||
Ending Balance | $ | 11,828 | 100.00 | % | $ | 12,206 | 100.00 | % |
(1) The real estate-mortgage segment included residential 1-4 family, multi-family, second mortgages and equity lines of credit.
(2) The consumer segment included consumer automobile loans.
The Company’s real estate-commercial loans consist of loans secured by a mortgage lien on real property and, if owner occupied, carry risks associated with the successful operation of a business or, if non-owner occupied, carry risks associated with the profitability and cash flow from rent receipts. The borrower’s cash flows may be affected significantly by general economic conditions, a downturn in the local economy or, if non-owner occupied, a downturn in occupancy rates or market rental rates in the market where the property is located. Included in the Company’s real estate-commercial loan segment are loans secured by office buildings, which had an aggregate principal balance of $55.3 million at June 30, 2024 (the “Office Portfolio”). Due to the evolving office space market conditions, we have additional monitoring processes for the Office Portfolio, which can include periodic credit risk assessments of borrowers, guarantors, and significant lessees, as well as periodic reviews of the local office rental markets. Based on analyses of the Office Portfolio, as of June 30, 2024, the Company has identified two loans secured by office buildings with respect to which the Company has begun enhanced credit administration efforts to support the Company’s objective of maintaining a portfolio of quality credits and quickly identifying potential weaknesses. As of June 30, 2024, all loans in the Office Portfolio, including these two loans, are classified as Pass, as the Company believes the Office Portfolio, including these two loans, is well secured and will be able to collect all amounts due. For more information, see Part I, Item 1, “Financial Statements” under the heading “Note 3. Loans and the Allowance for Credit Losses on Loans” in this Quarterly Report on Form 10-Q.
Deposits
The Company’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Company’s deposits are principally provided by individuals and businesses located within the communities served.
As of June 30, 2024, total deposits were $1.2 billion, an increase of $6.2 million, or 0.5%, compared to December 31, 2023. The following table presents average balances and average rates paid on deposits for the periods presented.
Table 12: Deposits
(Dollars in thousands) | Six months ended June 30, | |||||||||||||||
2024 | 2023 | |||||||||||||||
Average Balance | Average Rate | Average Balance | Average Rate | |||||||||||||
Interest-bearing transaction | $ | 94,651 | 0.01 | % | $ | 75,351 | 0.02 | % | ||||||||
Money market | 449,279 | 2.36 | % | 433,235 | 1.12 | % | ||||||||||
Savings | 87,066 | 0.03 | % | 110,491 | 0.03 | % | ||||||||||
Time deposits | 242,774 | 3.72 | % | 174,902 | 2.26 | % | ||||||||||
Total interest bearing | 873,770 | 2.25 | % | 793,979 | 1.11 | % | ||||||||||
Demand | 353,491 | 396,202 | ||||||||||||||
Total deposits | $ | 1,227,261 | $ | 1,190,181 |
The average rate paid on interest-bearing deposits by the Company for the six months ended June 30, 2024 was 2.25% compared to 1.11% for the six months ended June 30, 2023. Average balances of interest bearing, money market, and time deposits had the largest increases from the same period in the prior year, totaling $19.3 million, $16.0 million, and $67.9 million, while average balances of savings and demand deposits decreased $23.4 million and $42.7 million as seen in the table above. The increase in money market and time deposits was driven in part by depositors seeking increased yields. The Company remains focused on increasing lower-cost deposits by actively targeting new noninterest-bearing deposits and savings deposits.
As of June 30, 2024 and December 31, 2023, the estimated amounts of total uninsured deposits were approximately $228.6 million and $220.3 million or 18.5% and 17.9% of total deposits, respectively. The following table shows maturities of the estimated amounts of uninsured time deposits as of June 30, 2024. The estimate of uninsured deposits generally represents deposit accounts that exceed the FDIC insurance limit of $250,000 and is calculated based on the same methodologies and assumptions used for purposes of the Bank’s regulatory reporting requirements.
Table 13: Maturities of Uninsured Time Deposits
As of June 30, | ||||
(dollars in thousands) | 2024 | |||
Maturing in: | ||||
Within 3 months | $ | 35,212 | ||
4 through 6 months | 23,529 | |||
7 through 12 months | 4,890 | |||
Greater than 12 months | 14,661 | |||
$ | 78,292 |
Capital Resources
Total stockholders’ equity as of June 30, 2024 was $110.0 million, up 3.0% from $106.8 million on December 31, 2023. The increase was primarily related to higher net income and lower unrealized losses in the market value of securities available-for-sale, which are recorded as a component of accumulated other comprehensive loss, partially offset by cash dividend payments. The unrealized losses on securities available-for-sale was a result of increases in market interest rates since the securities were acquired, rather than credit quality issues. The Company does not expect these unrealized losses to affect the earnings or regulatory capital of the Company or its subsidiaries.
The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s and the Bank’s capital is regularly reviewed. The Company targets regulatory capital levels that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. While the Company will continue to look for opportunities to invest capital in profitable growth, the Company will also consider investing capital in other transactions, such as share repurchases, that facilitate improving shareholder return, as measured by ROE and EPS.
The Bank’s capital position remains strong as evidenced by the regulatory capital measurements. Under the banking regulations, Total Capital is composed of core capital (Tier 1) and supplemental capital (Tier 2). Tier 1 capital consists of common stockholders’ equity less goodwill. Tier 2 capital consists of certain qualifying debt and a qualifying portion of the ACL. In addition, the Bank has made the one-time irrevocable election to continue treating accumulated other comprehensive income (loss) under regulatory standards that were in place prior to the Basel III Capital Rules in order to eliminate volatility of regulatory capital that can result from fluctuations in accumulated other comprehensive income (loss) and the inclusion of accumulated other comprehensive income (loss) in regulatory capital, as would otherwise be required under the Basel III Capital Rule. As a result of this election, changes in accumulated other comprehensive income (loss), including unrealized losses on securities available-for-sale, do not affect regulatory capital amounts shown in the table below for the Bank, but transactions that would cause the Bank to realize such unrealized losses would affect such regulatory capital amounts.
Pursuant to applicable regulations and regulatory guidance, the Company is treated as a small bank holding company and will not be subject to regulatory capital requirements. For more information, refer to “Regulation and Supervision” included in Item 1, “Business” of the Company’s 2023 Form 10-K.
On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the EGRRCPA. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.
In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework was available for banks to begin using in their March 31, 2020, Call Report. The Bank did not opt into the CBLR framework.
The following is a summary of the Bank’s capital ratios as of June 30, 2024 and December 31, 2023. As shown below, these ratios were all well above the recommended regulatory minimum levels.
Table 14: Regulatory Capital
(dollars in thousands) | 2024 Regulatory Minimums | June 30, 2024 | 2023 Regulatory Minimums | December 31, 2023 | ||||||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | 4.500 | % | 12.07 | % | 4.500 | % | 11.45 | % | ||||||||
Tier 1 Capital to Risk-Weighted Assets | 6.000 | % | 12.07 | % | 6.000 | % | 11.45 | % | ||||||||
Total Capital to Risk-Weighted Assets | 8.000 | % | 13.09 | % | 8.000 | % | 12.46 | % | ||||||||
Tier 1 Leverage to Average Assets | 4.000 | % | 9.87 | % | 4.000 | % | 9.46 | % | ||||||||
Risk-Weighted Assets | $ | 1,186,529 | $ | 1,222,320 |
The Basel III Capital Rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital ratios, which is not included in the table above. Including the capital conservation buffer, the minimum ratios are a Common Equity Tier 1 capital risk-based ratio of 7.0 percent, a Tier 1 capital risk-based ratio of 8.5 percent, and a Total capital risk-based ratio of 10.5 percent. The Bank exceeded these ratios as of June 30, 2024 and December 31, 2023.
On July 14, 2021, the Company issued $30.0 million ($29.4 million, net of issuance costs) of 3.5 percent fixed-to-floating rate subordinated notes due 2031 (the Notes) in a private placement transaction. The Notes initially bear interest at a fixed rate of 3.5 percent for five years and convert to three-month SOFR plus 286 basis points, resetting quarterly, thereafter. The Notes were structured to qualify as Tier 2 capital of the Company for regulatory purposes (should the Company be subject to regulatory capital requirements) and are included in the Company’s Tier 2 capital as of June 30, 2024 and December 31, 2023.
Liquidity
Liquidity is the ability of the Company to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, federal funds sold, investments in securities and loans maturing within one year. Additional sources of liquidity available to the Company include cash flows from operations, loan payments and payoffs, deposit growth, maturities, calls and sales of securities, the issuance of brokered certificates of deposits and the capacity to borrow additional funds.
A major source of the Company’s liquidity is its large, stable deposit base. In addition, secondary liquidity sources are available through the use of borrowed funds if the need should arise, including secured advances from the FHLB and FRB. As of June 30, 2024, the Company had $430.9 million in total FHLB borrowing availability based on loans and securities currently available for pledging and of that amount, the Company’s remaining availability totaled $391.3 million. The Company believes that the availability at the FHLB is sufficient to meet future cash-flow needs. The Company also has available short-term, unsecured borrowed funds in the form of federal funds lines of credit with correspondent banks.
Based on the Company’s management of liquid assets, the availability of borrowed funds and the ability to generate liquidity through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and to meet its customers’ future borrowing needs. The Bank also participates in the IntraFi Cash Sweep, a product which provides the Bank the capability of providing additional deposit insurance to customers through three types of account arrangements. The Company’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in the Company’s markets. The Company is closely monitoring changes in the industry and market conditions that may affect the Company’s liquidity, including the potential impacts on the Company’s liquidity of declines in the fair value of the Company’s securities portfolio as a result of rising market interest rates and developments in the financial services industry that may change the availability of traditional sources of liquidity or market expectations with respect to available sources and amounts of additional liquidity. Depending on its liquidity levels, its capital position, conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt, equity, other securities or other possible capital markets transactions, the proceeds of which could provide additional liquidity for the Company’s operations.
The following table sets forth information relating to the Company’s sources of liquidity and the outstanding commitments for use of liquidity as of June 30, 2024. Dividing the total short-term sources of liquidity by the outstanding commitments for use of liquidity derives the liquidity coverage ratio.
Table 15: Liquidity Sources and Uses
(dollars in thousands) | June 30, 2024 | |||||||||||
Total | In Use | Available | ||||||||||
Sources: | ||||||||||||
Federal funds lines of credit | $ | 90,000 | $ | - | $ | 90,000 | ||||||
Federal Home Loan Bank advances | 430,925 | (39,586 | ) | 391,339 | ||||||||
Federal funds sold & balances at the Federal Reserve | 76,941 | - | 76,941 | |||||||||
Securities, available for sale and unpledged at fair value | 107,745 | - | 107,745 | |||||||||
Total funding sources | $ | 705,611 | $ | (39,586 | ) | $ | 666,025 | |||||
Uses: (1) | ||||||||||||
Unfunded loan commitments and lending lines of credit | $ | 86,096 | ||||||||||
Letters of credit | 245 | |||||||||||
Total potential short-term funding uses | $ | 86,341 | ||||||||||
Liquidity coverage ratio | 771.4 | % |
(1) Represents partial draw levels based on loan segment.
As a result of the ability to generate liquidity through liability funding and management of liquid assets, management believes the Company maintains overall liquidity sufficient to satisfy operational requirements and contractual obligations. The Company’s internal sources of liquidity are deposits, loan and investment repayments and securities available-for-sale. The Company’s primary external source of liquidity is advances from the FHLB.
In the ordinary course of business, the Company has entered into contractual obligations and has made other commitments to make future payments. As of June 30, 2024, there have been no material changes outside the ordinary course of business as disclosed in the Company’s contractual obligations disclosed in the Company’s 2023 Form 10-K.
Off-Balance Sheet Arrangements
As of June 30, 2024, there were no material changes in the Company’s off-balance sheet arrangements disclosed in the Company’s 2023 Form 10-K.
Non-GAAP Financial Measures
In reporting the results as of and for the three and six months ended June 30, 2024, the accounting and reporting policies of the Company conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Company’s performance which include financial measures presented on a tax equivalent, tangible, or adjusted basis.
Management believes that these non-GAAP measures provide meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of balances of intangible assets, including goodwill, that vary significantly between institutions, and tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. A reconciliation of the non-GAAP financial measures used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures is presented below.
Table 16: Non-GAAP Financial Measures
Three Months Ended | Six Months Ended June 30, | |||||||||||||||
(dollar in thousands, except share and per share data) | June 30, 2024 | June 30, 2023 | 2024 | 2023 | ||||||||||||
Fully Taxable Equivalent Net Interest Income | ||||||||||||||||
Net interest income (GAAP) | $ | 12,116 | $ | 12,099 | $ | 23,656 | $ | 24,912 | ||||||||
FTE adjustment | 37 | 56 | 74 | 113 | ||||||||||||
Net interest income (FTE) (non-GAAP) | $ | 12,153 | $ | 12,155 | $ | 23,730 | $ | 25,025 | ||||||||
Noninterest income (GAAP) | 3,471 | 3,477 | 6,693 | 6,898 | ||||||||||||
Total revenue (FTE) (non-GAAP) | $ | 15,624 | $ | 15,632 | $ | 30,423 | $ | 31,923 | ||||||||
Noninterest expense (GAAP) | 12,324 | 13,147 | 25,027 | 25,315 | ||||||||||||
Average earning assets | $ | 1,342,747 | $ | 1,322,886 | $ | 1,342,413 | $ | 1,307,121 | ||||||||
Net interest margin | 3.62 | % | 3.67 | % | 3.53 | % | 3.84 | % | ||||||||
Net interest margin (FTE) (non-GAAP) | 3.63 | % | 3.69 | % | 3.55 | % | 3.86 | % | ||||||||
Efficiency ratio | 79.07 | % | 84.41 | % | 82.46 | % | 79.58 | % | ||||||||
Efficiency ratio (FTE) (non-GAAP) | 78.88 | % | 84.10 | % | 82.26 | % | 79.30 | % | ||||||||
Tangible Book Value Per Share | ||||||||||||||||
Total Stockholders Equity (GAAP) | $ | 109,996 | $ | 102,542 | ||||||||||||
Less goodwill | 1,650 | 1,650 | ||||||||||||||
Less core deposit intangible | 165 | 209 | ||||||||||||||
Tangible Stockholders Equity (non-GAAP) | $ | 108,181 | $ | 100,683 | ||||||||||||
Shares issued and outstanding, including nonvested restricted stock | 5,077,525 | 5,037,275 | ||||||||||||||
Book value per share | $ | 21.66 | $ | 20.36 | ||||||||||||
Tangible book value per share | $ | 21.31 | $ | 19.99 |
Cautionary Statement Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q, including without limitation, statements regarding the Company’s expense reduction initiative, which use language such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” and similar expressions, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the current beliefs of the Company’s management, as well as estimates and assumptions made by, and information currently available to, management, as of the time such statements are made. These statements are also subject to assumptions with respect to future business strategies and decisions that are subject to change. These statements are inherently uncertain, and there can be no assurance that the underlying beliefs, estimates, or assumptions will prove to be accurate. Actual results, performance, achievements, or trends could differ materially from historical results or those expressed or implied by such statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its businesses or operations. Forward-looking statements in this Quarterly Report on Form 10-Q may include, without limitation statements regarding: strategic business initiatives and the future financial impact of those initiatives; expected future operations and financial performance; efficiency and expense reduction initiatives, including the estimated effects and estimated future cost savings thereof; future financial and economic conditions, industry conditions, and loan demand; the Company’s strategic focuses; impacts of economic uncertainties; performance of the loan and securities portfolios, asset quality; revenue generation; deposit growth and future levels of rates paid on deposits; levels and sources of liquidity and capital resources; future levels of the allowance for credit losses, charge-offs or net recoveries; levels of or changes in interest rates and potential impacts on the Company’s NIM; changes in NIM and items affecting NIM; expected future recovery of investments in debt securities; expected impact of unrealized losses on earnings and regulatory capital of the Company or the Bank; liquidity and capital levels; cybersecurity risks; inflation; the effect of future market and industry trends; and other statements that include projections, predictions, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact.
These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to, changes in or the effects of:
• | interest rates and yields, such as increases or volatility in short-term interest rates or yields on U.S. Treasury bonds and increase or volatility in U.S. Treasury bonds and increases or volatility in mortgage interest rates, and the impacts on macroeconomic conditions, customer and client behavior, the Company’s funding costs, and the Company’s loan and securities portfolios; |
• | inflation and its impacts on economic growth and customer and client behavior; |
• | adverse developments in the financial services industry, such as the bank failures in 2023, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior; |
• | the sufficiency of liquidity and regulatory capital; |
• | general economic and business conditions in the United States generally and particularly in the Company’s service area, including unemployment levels, supply chain disruptions, higher inflation, slowdowns in economic growth and the impacts on customer and client behavior; |
• | conditions within the financial markets and in the banking industry, as well as the financial condition and capital adequacy of other participants in the banking industry, and the market reactions thereto; |
• | monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve, the effect of these policies on interest rates and business in our markets and any changes associated with the current administration; |
• | conditions in the banking industry and the financial condition and capital adequacy of other participants in the banking industry, and market, supervisory and regulatory reactions thereto; |
• | the quality or composition of the loan or securities portfolios and changes therein; |
• | effectiveness of expense control initiatives; |
• | an insufficient ACL or volatility in the ACL resulting from the CECL methodology, either alone or as may be affected by inflation, changing interest rates, or other factors; |
• | the Company’s liquidity and capital positions; |
• | the value of securities held in the Company’s investment portfolios; |
• | deposit flows; |
• | the Company’s technology, efficiency, and other strategic initiatives; |
• | the legislative/regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (the CFPB) and the regulatory and enforcement activities of the CFPB; |
• | future levels of government defense spending particularly in the Company’s service areas; |
• | uncertainty over future federal spending or budget priorities, particularly in connection with the Department of Defense, on the Company’s service areas; |
• | the impact of changes in the political landscape and related policy changes, including monetary, regulatory and trade policies; |
• | the U.S. Government’s guarantee of repayment of student or small business loans purchased by the Company; |
• | potential claims, damages and fines related to litigation or government actions; |
• | demand for loan products and the impact of changes in demand on loan growth; |
• | changes in the volume and mix of interest-earning assets and interest-bearing liabilities; |
• | the effects of management’s investment strategy and strategy to manage the NIM; |
• | the level of net charge-offs on loans; |
• | performance of the Company’s dealer/indirect lending program; |
• | the strength of the Company’s counterparties; |
• | the Company’s ability to compete in the market for financial services and increased competition from both banks and non-banks, including fintech companies; |
• | demand for financial services in the Company’s market area; |
• | the Company’s ability to develop and maintain secure and reliable electronic systems; |
• | any interruption or breach of security in the Company’s information systems or those of the Company’s third-party vendors or their service providers; |
• | reliance on third parties for key services; |
• | cyber threats, attacks, or events; |
• | the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies; |
• | the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, financial crises, political crises, war, and other geopolitical conflicts, such as the war between Russia and Ukraine or in the Middle East, or public health events, and of governmental and societal responses thereto, on, among other things, the Company’s operations, liquidity, and credit quality; |
• | the use of inaccurate assumptions in management’s modeling systems; |
• | technological risks and developments; |
• | the commercial and residential real estate markets; |
• | the demand in the secondary residential mortgage loan markets; |
• | expansion of the Company’s product offerings; |
• | effectiveness of expense control initiatives; |
• | changes in management; and |
• | changes in accounting principles, standards, policies, guidelines and interpretations and elections made by the Company thereunder, and the related impact on the Company’s financial statements. |
These risks and uncertainties, and the factors discussed in more detail in Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2023 Form 10-K should be considered in evaluating the forward-looking statements contained herein. Forward-looking statements are not statements of historical fact. Readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not intend or assume any obligation to update, revise, or clarify any forward-looking statements that may be made from time to time or on behalf of the Company, whether as a result of new information, future events, or otherwise, except as otherwise required by law. In addition, past results of operations are not necessarily indicative of future results.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Market Risk Management
Effectively managing market risk is essential to achieving the Company’s financial objectives. Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. The Company is generally not subject to currency exchange risk or commodity price risk. The Company’s primary market risk exposure is interest rate risk; however, market risk also includes liquidity risk. Both are discussed in the following sections.
Interest Rate Risk Management
Interest rate risk and its impact on net interest income is a primary market risk exposure. The Company manages its exposure to fluctuations in interest rates through policies approved by the ALCO and Board of Directors, both of which receive and review periodic reports of the Company’s interest rate risk position.
The Company uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities. It incorporates numerous assumptions including growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid. Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.
A balance sheet is considered asset sensitive when its earning assets (loans and securities) reprice faster or to a greater extent than its liabilities (deposits and borrowings). An asset sensitive balance sheet will produce relatively more net interest income when interest rates rise and less net interest income when they decline. Based on the Company’s simulation analysis, management believes the Company’s interest sensitivity position at June 30, 2024 is rates neutral. Management makes no predictions on the direction or magnitude of future rates and seeks to maintain a relatively neutral interest rate risk profile to minimize the exposure to higher or lower market rates.
Earnings Simulation
The following table shows the estimated impact of changes in interest rates on net interest income as of June 30, 2024 (dollars in thousands), assuming instantaneous and parallel changes in interest rates and while maintaining a static balance sheet. Net interest income for the following twelve months is projected to decrease marginally when interest rates are shocked higher and lower from current rates.
Change in Net Interest Income | ||||||||||||||||
June 30, 2024 | December 31, 2023 | |||||||||||||||
Change in Yield Curve | Dollars | % | Dollars | % | ||||||||||||
+300 basis points | (2,566 | ) | -5.27 | % | (4,380 | ) | -9.15 | % | ||||||||
+200 basis points | (2,275 | ) | -4.67 | % | (3,540 | ) | -7.39 | % | ||||||||
+100 basis points | (1,423 | ) | -2.92 | % | (2,110 | ) | -4.41 | % | ||||||||
Most likely rate scenario | ||||||||||||||||
-100 basis points | (1,246 | ) | -2.56 | % | (1,060 | ) | -2.21 | % | ||||||||
-200 basis points | (1,468 | ) | -3.02 | % | (1,340 | ) | -2.80 | % | ||||||||
-300 basis points | (1,775 | ) | -3.65 | % | (1,580 | ) | -3.30 | % |
Management cannot predict future interest rates or their exact effect on net interest income. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Certain limitations are inherent in such computations. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.
Any changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect the Company’s interest rate sensitivity position. Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt. Decrease in yields due to the current rate environment have been projected in the model simulation.
Economic Value Simulation
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.
The following table reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly period ended June 30, 2024 (dollars in thousands):
Change in Economic Value of Equity | ||||||||||||||||
June 30, 2024 | December 31, 2023 | |||||||||||||||
Change in Yield Curve | Dollars | % | Dollars | % | ||||||||||||
+300 basis points | 12,933 | 5.68 | % | 3,200 | 1.34 | % | ||||||||||
+200 basis points | 11,419 | 5.02 | % | 5,500 | 2.31 | % | ||||||||||
+100 basis points | 7,232 | 3.18 | % | 5,200 | 2.18 | % | ||||||||||
Most likely rate scenario | ||||||||||||||||
-100 basis points | (11,155 | ) | -4.90 | % | (12,100 | ) | -5.08 | % | ||||||||
-200 basis points | (30,057 | ) | -13.21 | % | (32,900 | ) | -13.81 | % | ||||||||
-300 basis points | (59,494 | ) | -26.14 | % | (66,100 | ) | -27.74 | % |
Item 4. | Controls and Procedures. |
Disclosure Controls and Procedures. Management evaluated, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting. Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in Internal Controls. There were no changes in the Company’s internal control over financial reporting during the Company’s second quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. | Legal Proceedings. |
The nature of the business of the Company ordinarily results in a certain amount of litigation. The Company is involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Based on information presently available, and based on consultation with legal counsel, Management believes that the outcomes of these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Company.
Item 1A. | Risk Factors. |
An investment in the Company’s securities involves risks. In addition to the other information set forth in this Quarterly Report on Form 10-Q, including the information addressed under “Cautionary Statement Regarding Forward-Looking Statements,” investors in the Company’s securities should carefully consider the risk factors discussed in the Company’s 2023 Form 10-K. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report.
There have been no material changes in the risk factors faced by the Company from those disclosed in the Company’s 2023 Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Pursuant to the Company’s equity compensation plans, participants may pay the exercise price of certain awards or satisfy tax withholding requirements associated with awards by surrendering shares of the Company’s common stock that the participants already own. Additionally, participants may also surrender shares upon vesting of restricted stock awards to satisfy tax withholding requirements. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable awards. During the six months ended June 30, 2024, the Company did not repurchase any shares related to the equity compensation plan awards.
During the six months ended June 30, 2024, the Company did not have an effective share repurchase program that was authorized by the Company’s Board of Directors.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
None.
Item 5. | Other Information. |
During the three months ended June 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act informed us of the adoption or termination of any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).
Item 6. | Exhibits. |
Exhibit No. | Description |
Articles of Incorporation of Old Point Financial Corporation, as amended effective June 22, 2000 (incorporated by reference to Exhibit 3.1 to Form 10-K filed March 12, 2009) | |
Articles of Amendment to Articles of Incorporation of Old Point Financial Corporation, effective May 26, 2016 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed May 31, 2016) | |
Bylaws of Old Point Financial Corporation, as amended and restated August 9, 2016 (incorporated by reference to Exhibit 3.2 to Form 10-Q filed August 10, 2016) | |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Certification of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Certification of Chief Executive Officer and Interim Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101 | The following materials from Old Point Financial Corporation’s quarterly report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline XBRL, filed herewith: (i) Consolidated Balance Sheets (unaudited for June 30, 2024), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited) |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2024, formatted in Inline XBRL (included with Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OLD POINT FINANCIAL CORPORATION | ||
Date: August 14, 2024 | /s/Robert F. Shuford, Jr. | |
Robert F. Shuford, Jr. | ||
Chairman, President & Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: August 14, 2024 | /s/Cathy W. Liles | |
Cathy W. Liles | ||
Interim Chief Financial Officer & Senior Vice President/Finance | ||
(Principal Financial & Accounting Officer) |
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