UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to to
Commission file number:
MainStreet Bancshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices and Zip Code)
(
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | | The | ||
| | The |
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. ☒
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). ☒
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 | ☐ | |||
| | ☒ | 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).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 8, 2023, there were
INDEX
PART I – FINANCIAL INFORMATION
Item 1 – Consolidated Financial Statements – Unaudited
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition as of September 30, 2023 and December 31, 2022 (Dollars in thousands, except share data)
| At September 30, 2023 (unaudited) | At December 31, 2022 (*) | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Federal funds sold | ||||||||
| Cash and cash equivalents | ||||||||
| Investment securities available-for-sale, at fair value | ||||||||
| Investment securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ and $, respectively. | ||||||||
| Restricted securities, at amortized cost | ||||||||
| Loans, net of allowance for credit losses of $ and $, respectively | ||||||||
| Premises and equipment, net | ||||||||
| Accrued interest and other receivables | ||||||||
| Bank owned life insurance | ||||||||
| Computer software, net of amortization | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Non-interest bearing deposits | $ | $ | ||||||
| Interest bearing demand deposits | ||||||||
| Savings and NOW deposits | ||||||||
| Money market deposits | ||||||||
| Time deposits | ||||||||
| Total deposits | ||||||||
| Federal Home Loan Bank advances | ||||||||
| Subordinated debt, net | ||||||||
| Allowance for credit losses on off-balance sheet credit exposure | ||||||||
| Other liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $ par value, shares authorized; shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Common stock, $ par value, shares authorized; issued and outstanding shares (including nonvested shares) at September 30, 2023 and shares (including nonvested shares) at December 31, 2022 | ||||||||
| Capital surplus | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
* Derived from audited consolidated financial statements.
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022 (Dollars in thousands, except per share data)
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Interest Income |
||||||||||||||||
| Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
| Interest on investments securities |
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| Taxable securities |
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| Tax-exempt securities |
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| Interest on federal funds sold and interest-bearing deposits |
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| Total Interest Income |
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| Interest Expense |
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| Interest on interest-bearing DDA deposits |
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| Interest on savings and NOW deposits |
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| Interest on money market deposits |
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| Interest on time deposits |
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| Interest on federal funds borrowed |
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| Interest on Federal Home Loan Bank advances |
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| Interest on subordinated debt |
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| Total Interest Expense |
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| Net Interest Income |
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| Provision For (Recovery of) Credit Losses - Loans |
( |
) | ||||||||||||||
| Provision for Credit Losses - Off-Balance Sheet Credit Exposure |
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| Net Interest Income After Provision For (Recovery of) Credit Losses |
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| Non-Interest Income |
. | |||||||||||||||
| Deposit account service charges |
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| Bank owned life insurance income |
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| Loan swap fee income |
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| Net gain on held-to-maturity securities |
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| Net loss on sale of loans |
( |
) | ( |
) | ||||||||||||
| Other fee income |
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| Total Non-Interest Income |
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| Non-Interest Expense |
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| Salaries and employee benefits |
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| Furniture and equipment expenses |
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| Advertising and marketing |
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| Occupancy expenses |
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| Outside services |
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| Administrative expenses |
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| Other operating expenses |
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| Total Non-Interest Expense |
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| Income Before Income Taxes |
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| Income Tax Expense |
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| Net Income |
$ | $ | $ | $ | ||||||||||||
| Preferred Stock Dividends |
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| Net Income Available To Common Shareholders |
$ | $ | $ | $ | ||||||||||||
| Earnings Per Common Share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022 (Dollars in thousands)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Comprehensive Income, net of taxes | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive loss, net of tax benefit: | ||||||||||||||||
| Unrealized losses on available for sale securities arising during the period (net of tax benefit, $ and $, respectively, for the three months ended September 30, and $ and $, respectively for the nine months ended September 30). | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Add: reclassification adjustment for amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $ and $, respectively, for the three months ended September 30, and $ and $, respectively, for the nine months ended September 30). | ||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive Income | $ | $ | $ | $ | ||||||||||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Stockholders’ Equity for the Three and Nine months ended September 30, 2023 and 2022 (Dollars in thousands)
| Accumulated Other | ||||||||||||||||||||||||
| Preferred | Common | Capital | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Stock | Surplus | Earnings | Loss | Total | |||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Vesting of restricted stock | ( | ) | ||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||
| Dividends on preferred stock - ($ per depositary share) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends on common stock - ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Accumulated Other | ||||||||||||||||||||||||
| Preferred | Common | Capital | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Stock | Surplus | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Cumulative change in accounting principle (Note 3) | ( | ) | ( | ) | ||||||||||||||||||||
| Vesting of restricted stock | ( | ) | ||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Dividends on preferred stock - ($ per depositary share) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends on common stock - ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Accumulated Other | ||||||||||||||||||||||||
| Preferred | Common | Capital | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Stock | Surplus | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Vesting of restricted stock | ( | ) | ||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Dividends on preferred stock - ($ per depositary share) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends on common stock - ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Accumulated Other | ||||||||||||||||||||||||
| Preferred | Common | Capital | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Stock | Surplus | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Vesting of restricted stock | ( | ) | ||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Dividends on preferred stock - ($ per depositary share) | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends on common stock - ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows (Dollars in thousands)
| For the nine months ended September 30, |
2023 |
2022 |
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| Cash Flows from Operating Activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation, amortization, and accretion, net |
||||||||
| Deferred income tax expense (benefit) |
( |
) | ||||||
| Provision for credit losses |
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| Writedown of other real estate owned |
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| Loss on sale of other real estate owned |
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| Loss on sale of loans |
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| Stock based compensation expense |
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| Income from bank owned life insurance |
( |
) | ( |
) | ||||
| Subordinated debt amortization expense |
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| Gain on disposal of premises and equipment |
( |
) | ||||||
| Loss on New Market Tax Credit investment operations |
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| Gain on call of held-to-maturity securities |
( |
) | ||||||
| Amortization of operating lease right-of-use assets |
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| Change in: |
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| Accrued interest receivable and other receivables |
( |
) | ( |
) | ||||
| Other assets |
( |
) | ( |
) | ||||
| Other liabilities |
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| Net cash provided by operating activities |
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| Cash Flows from Investing Activities |
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| Activity in available-for-sale securities: |
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| Payments |
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| Maturities |
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| Purchases |
( |
) | ||||||
| Activity in held-to-maturity securities: |
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| Called |
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| Purchases of equity securities |
( |
) | ( |
) | ||||
| Proceeds on sale of loans |
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| Proceeds on sale of other real estate owned |
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| Purchases of restricted investment in bank stock |
( |
) | ( |
) | ||||
| Redemption of restricted investment in bank stock |
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| Net increase in loan portfolio |
( |
) | ( |
) | ||||
| Computer software developed |
( |
) | ( |
) | ||||
| Proceeds from sale of premises and equipment |
||||||||
| Purchases of premises and equipment |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash Flows from Financing Activities |
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| Net increase (decrease) in non-interest deposits |
( |
) | ||||||
| Net increase in interest bearing demand, savings, and time deposits |
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| Net decrease in Federal Home Loan Bank advances |
( |
) | ||||||
| Net increase in subordinated debt, net issuance costs |
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| Cash dividends paid on preferred stock |
( |
) | ( |
) | ||||
| Cash dividends paid on common stock |
( |
) | ( |
) | ||||
| Repurchases of common stock |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
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| Increase (Decrease) in Cash and Cash Equivalents |
( |
) | ||||||
| Cash and Cash Equivalents, beginning of period |
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| Cash and Cash Equivalents, end of period |
$ | $ | ||||||
| Supplementary Disclosure of Cash Flow Information |
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| Cash paid during the period for interest |
$ | $ | ||||||
| Cash paid during the period for income taxes |
$ | $ | ||||||
| Net unrealized loss on securities available-for-sale |
$ | ( |
) | $ | ( |
) | ||
| Net cumulative change in accounting principle |
$ | ( |
) | $ | ||||
See Notes to the Unaudited Consolidated Financial Statements
MAINSTREET BANCSHARES, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Note 1. Organization, Basis of Presentation and Impact of Recently Issued Accounting Pronouncements
Organization
MainStreet Bancshares, Inc. (the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia whose primary activity is the ownership and management of MainStreet Bank (the “Bank”). On October 12, 2021, the Company filed an election with the Federal Reserve Board to be a financial holding company in order to engage in a broader range of financial activities than are permitted for bank holding companies generally. The Company is authorized to issue
On April 18, 2019, the Company completed the registration of its common stock with the Securities Exchange Commission (the “SEC”) through its filing of a General Form for Registration of Securities on Form 10 (“Form 10”), pursuant to Section 12(b) of the Securities Exchange Act of 1934. The Company is considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act,” and as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act.” We are also a “smaller reporting company” as defined in Exchange Act Rule 12b-2. As such, we may elect to comply with certain reduced public company reporting requirements in future reports that we file with the SEC.
The Company was approved to list shares of our common stock on the Nasdaq Capital Market under our current symbol “MNSB” as of April 22, 2019. We were approved to list depositary shares of preferred stock on the Nasdaq Capital Market under the symbol “MNSBP” as of September 16, 2020. Each depositary share represents a th ownership interest in a share of
The Bank is headquartered in Fairfax, Virginia where it also operates a branch. The Bank was incorporated on March 28, 2003, and received its charter from the Bureau of Financial Institutions of the Commonwealth of Virginia (the “Bureau”) on March 16, 2004. The Bank commenced regular operations on May 26, 2004, and is supervised by the Bureau and the Federal Reserve. The Bank is a member of the Federal Reserve System and the Federal Deposit Insurance Corporation. The Bank places special emphasis on serving the needs of retail customers, small and medium-sized businesses and professionals in the Washington, D.C. metropolitan area.
In September 2021, MainStreet Bancshares, Inc. established MainStreet Community Capital, LLC, a wholly owned subsidiary, to be a community development entity (“CDE”). This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”). In January 2022, the Community Development Financial Institutions Fund (“CDFI”) of the United States Department of the Treasury certified MainStreet Community Capital, LLC as a registered CDE. MainStreet Community Capital's primary business objective will be to apply for and receive New Market Tax Credit ("NMTC") allocations that are awarded and distributed annually.
On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu, a division of MainStreet Bank. Avenu provides an embedded banking solution that connects our partners (fintechs, application developers, money movers, and entrepreneurs) directly and seamlessly to our Software as a Service (SaaS) solution. Our SaaS solution has launched with our first beta client.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) for interim information and with the instructions to the Quarterly Report on Form 10-Q, as applicable to a smaller reporting company. Accordingly, they do not include all the information and notes required by US GAAP for complete financial statements.
The financial statements are unaudited; but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. The balances as of December 31, 2022 have been derived from the audited consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto contained in the Form 10-K filed by the Company with the SEC on March 23, 2023. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or any other period.
Use of estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from the estimates.
The Company’s critical accounting policies relate to (1) the allowance for credit losses on loans, (2) fair value of financial instruments, and (3) derivative financial instruments. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions, and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. In connection with the determination of the allowances for credit losses on loans management obtains independent appraisals for significant properties.
Summary of Significant Accounting Policies
Adoption of New Accounting Standards: On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by the lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that is more likely than not they will be required to sell.
The Company adopted ASC 326 and all the subsequent amendments effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior periods amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $
Impact of Recently Issued Accounting Pronouncements
In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method”. These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The ASU is effective for public business entities for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in any interim period. The Company does not expect the adoption of ASU 2023-02 to have a material impact on its consolidated financial statements.
In July 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.
In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 to have a material impact on its consolidated financial statements.
Recently Adopted Accounting Developments
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. ASU 2016-13 was effective for the Company on January 1, 2023. The adjustment recorded at adoption to the overall allowance for credit losses, which consisted of adjustments to the allowance for credit losses on loans and an adjustment to the Company’s reserve for unfunded loan commitments, was $
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs. An entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. ASU 2022-02 was effective for the Company on January 1, 2023. There was no material impact to the Company's consolidated financial statements or related disclosures.
Note 2. Investment Securities
The following tables summarize the amortized cost and fair value of securities available-for-sale and securities held-to-maturity at September 30, 2023 and December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss). Upon further analysis, the Company did not record an allowance for credit losses on its securities held-to-maturity portfolio as of September 30, 2023.
Investment securities available-for-sale was comprised of the following:
| September 30, 2023 | ||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Collateralized Mortgage Backed | $ | $ | $ | ( | ) | $ | ||||||||||
| Subordinated Debt | ( | ) | ||||||||||||||
| Municipal Securities: | ||||||||||||||||
| Taxable | ( | ) | ||||||||||||||
| Tax-exempt | ( | ) | ||||||||||||||
| U.S. Governmental Agencies | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
Investment securities held-to-maturity was comprised of the following:
| September 30, 2023 | ||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Municipal Securities: | ||||||||||||||||
| Tax-exempt | $ | $ | $ | ( | ) | $ | ||||||||||
| Subordinated Debt | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
Investment securities available-for-sale was comprised of the following:
| December 31, 2022 | ||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Collateralized Mortgage Backed | $ | $ | $ | ( | ) | $ | ||||||||||
| Subordinated Debt | ( | ) | ||||||||||||||
| Municipal Securities: | ||||||||||||||||
| Taxable | ( | ) | ||||||||||||||
| Tax-exempt | ( | ) | ||||||||||||||
| U.S. Governmental Agencies | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
Investment securities held-to-maturity was comprised of the following:
| December 31, 2022 | ||||||||||||||||
| (Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Municipal Securities: | ||||||||||||||||
| Tax-exempt | $ | $ | $ | ( | ) | $ | ||||||||||
| Subordinated Debt | ||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
Credit Quality Indicators and Allowance for Credit Losses - HTM
For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis. The Company estimates expected credit losses on HTM debt securities on an individual basis using security-level credit ratings. The Company’s HTM securities ACL was immaterial at September 30, 2023. The primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The majority of the Company’s HTM securities with credit risk are obligations of states and political subdivisions.
The following table presents the amortized cost of HTM securities as of September 30, 2023 and December 31, 2022 by security type and credit rating:
| (Dollars in thousands) | Municipal Securities | Subordinated Debt | Total HTM securities | |||||||||
| September 30, 2023 | ||||||||||||
| Credit Rating: | ||||||||||||
| AAA/AA/A | $ | $ | $ | |||||||||
| Not Rated - Non Agency | ||||||||||||
| Total | $ | $ | $ | |||||||||
| December 31, 2022 | ||||||||||||
| Credit Rating: | ||||||||||||
| AAA/AA/A | $ | $ | $ | |||||||||
| Not Rated - Non Agency | ||||||||||||
| Total | $ | $ | $ | |||||||||
The scheduled maturities of securities available-for-sale and held-to-maturity at September 30, 2023 were as follows:
| September 30, 2023 | ||||||||||||||||
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| (Dollars in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
| Due in one year or less | $ | $ | $ | $ | ||||||||||||
| Due from one to five years | ||||||||||||||||
| Due from after five to ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The scheduled maturities of securities available-for-sale and held-to-maturity at December 31, 2022 were as follows:
| December 31, 2022 | ||||||||||||||||
| Available-for-Sale | Held-to-Maturity | |||||||||||||||
| (Dollars in thousands) | Amortized | Fair Value | Amortized | Fair Value | ||||||||||||
| Due in one year or less | $ | $ | $ | $ | ||||||||||||
| Due from one to five years | ||||||||||||||||
| Due from after five to ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Securities with a fair value of $
The following tables summarize the unrealized loss positions of securities available-for-sale and held-to-maturity as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| (Dollars in thousands) | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||
| Collateralized Mortgage Backed | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Subordinated Debt | ( | ) | ( | ) | ||||||||||||||||||||
| Municipal securities: | ||||||||||||||||||||||||
| Taxable | ( | ) | ( | ) | ||||||||||||||||||||
| Tax-exempt | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| U.S Governmental Agencies | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| (Dollars in thousands) | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| Available-for-sale: | ||||||||||||||||||||||||
| Collateralized Mortgage Backed | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Subordinated Debt | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Municipal Securities: | ||||||||||||||||||||||||
| Taxable | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Tax-exempt | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| U.S Government Agencies | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| Held-to-maturity: | ||||||||||||||||||||||||
| Municipal Securities: | ||||||||||||||||||||||||
| Tax-exempt | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||
Unrealized losses on each of the major categories of securities have not been recognized into income because all the securities are of high credit quality (rated A or higher, if rated). Management does not intend to sell and it is unlikely management will be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. The fair value is expected to recover as the securities approach maturity. The following description provides the number of investment positions in an unrealized loss position and approximate duration of that loss position.
At September 30, 2023, there was
Certain municipal securities originally purchased as available for sale were transferred to held to maturity during 2013. The unrealized loss on the securities transferred to held to maturity is being amortized over the expected life of the securities. The unamortized, unrealized loss, before tax, at September 30, 2023 and December 31, 2022 was $
The Company periodically invests in New Market Tax Credit opportunities, related primarily to certain community development projects. The Company receives tax credits related to these investments, for which the Company typically acts as a limited partner and therefore does not exert control over the operating or financial policies of the partnerships. These tax credits are subject to recapture by taxing authorities based on compliance features required to be met at the project level. Recognition of tax credits and any associated losses on operations associated with these entities are recorded as a reduction to the carrying value of these investments. Proportional operational losses associated with these investments are included in non-interest income. As of and for the three and nine months ended September 30, 2023 , the Company recorded approximately $
Note 3. Loans Receivable
Loans receivable were comprised of the following:
| (Dollars in thousands) | September 30, 2023 | December 31, 2022 | ||||||
| Residential Real Estate: | ||||||||
| Single family | $ | $ | ||||||
| Multifamily | ||||||||
| Farmland | ||||||||
| Commercial Real Estate: | ||||||||
| Owner-occupied | ||||||||
| Non-owner occupied | ||||||||
| Construction and Land Development | ||||||||
| Commercial – Non Real-Estate: | ||||||||
| Commercial & Industrial | ||||||||
| Consumer – Non Real-Estate: | ||||||||
| Unsecured | ||||||||
| Secured | ||||||||
| Total Gross Loans | ||||||||
| Less: unearned fees, net | ( | ) | ( | ) | ||||
| Less: allowance for credit losses - loans | ( | ) | ( | ) | ||||
| Net Loans | $ | $ | ||||||
The unsecured consumer loans above include $
The following tables summarize the activity in the allowance for credit losses on loans by loan class for the three and nine months ended September 30, 2023 and 2022.
Allowance for Credit Losses By Portfolio Segment
| Real Estate | ||||||||||||||||||||||||
| For the three months ended September 30, 2023 | Residential | Commercial | Construction | Commercial | Consumer | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the nine months ended September 30, 2023 | ||||||||||||||||||||||||
| Beginning Balance, prior to adoption of ASC 326 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Impact of adopting ASC 326 | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Real Estate | ||||||||||||||||||||||||
| For the three months ended September 30, 2022 | Residential | Commercial | Construction | Commercial | Consumer | Total | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For the nine months ended September 30, 2022 | ||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision for (recovery of) credit losses | ( | ) | ( | ) | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Ending Balance: | ||||||||||||||||||||||||
| Individually evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for credit loss | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Credit quality risk ratings include regulatory classifications of Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Loans classified as Pass have quality metrics to support that the loan will be repaid according to the terms established. Loans classified as Watch have similar characteristics as Pass loans with some emerging signs of financial weaknesses that should be monitored closer. Loans classified as Special Mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of prospects for repayment. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, based on current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for credit losses. Loans not classified are rated pass.
The following tables summarize the amortized cost basis by aggregate Pass and criticized categories of Watch, Special Mention, and Substandard within the Company’s internal risk rating system as of September 30, 2023 and December 31, 2022.
| Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Total | ||||||||||||||||||||||||
| Residential Real Estate - Single Family | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Residential Real Estate - Single Family | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Residential Real Estate - Multifamily | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Residential Real Estate - Multifamily | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Residential Real Estate - Farmland | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Residential Real Estate - Farmland | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial Real Estate - Owner Occupied | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Commercial Real Estate - Owner Occupied | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial Real Estate - Non-Owner Occupied | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Commercial Real Estate - Non-Owner Occupied | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Construction & Land Development | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total Commercial & Industrial | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Consumer - Unsecured | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Consumer - Unsecured | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Consumer - Secured | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total Consumer - Secured | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| (Dollars in thousands) | Pass | Watch | Special Mention | Substandard | Total | |||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
| Single Family | $ | $ | $ | $ | $ | |||||||||||||||
| Multifamily | ||||||||||||||||||||
| Farmland | ||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||
| Commercial – Non Real Estate: | ||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||
| Consumer – Non Real Estate: | ||||||||||||||||||||
| Unsecured | ||||||||||||||||||||
| Secured | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The following tables present the amortized cost basis by segments of the loan portfolio summarized by aging categories as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Greater than 90 Days | Total Past Due | Current | Total Loans Receivable | Nonaccrual | |||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||||||
| Single Family | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||||||||||
| Commercial – Non Real Estate: | ||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||
| Consumer – Non Real Estate: | ||||||||||||||||||||||||||||
| Unsecured | ||||||||||||||||||||||||||||
| Secured | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | 30-59 | 60-89 | Greater | Total Past | Current | Total | Nonaccrual | |||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||||||||||
| Single Family | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Multifamily | ||||||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||
| Commercial Real Estate: | ||||||||||||||||||||||||||||
| Owner occupied | ||||||||||||||||||||||||||||
| Non-owner occupied | ||||||||||||||||||||||||||||
| Construction & Land Development | ||||||||||||||||||||||||||||
| Commercial – Non Real Estate: | ||||||||||||||||||||||||||||
| Commercial & Industrial | ||||||||||||||||||||||||||||
| Consumer – Non Real Estate: | ||||||||||||||||||||||||||||
| Unsecured | ||||||||||||||||||||||||||||
| Secured | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
There were
The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:
| ● | Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. |
| ● | Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. |
| ● | Home equity lines of credit are generally secured by second mortgages on residential real estate property. |
| ● | Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral |
The following table details the amortized cost of collateral dependent loans:
| (Dollars in thousands) | September 30, 2023 | |||
| Residential Real Estate: | ||||
| Single family | $ | |||
| Commercial Real Estate: | ||||
| Owner occupied | ||||
| Non-owner occupied | ||||
| Commercial and Industrial | ||||
| Total | $ | |||
The Company did modify any loans to borrowers experiencing financial distress during the three and nine months ended September 30, 2023.
As of September 30, 2023 there were
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.
| December 31, 2022 | ||||||||||||
| Loans Receivable | ||||||||||||
| (Dollars in thousands) | Ending | Ending | Ending | |||||||||
| Residential Real Estate | $ | $ | $ | |||||||||
| Commercial Real Estate | ||||||||||||
| Construction and Land Development | ||||||||||||
| Commercial & Industrial | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans could include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The tables below include all loans that were individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.
The following table presents loans individually evaluated for impairment by class of loans, as of December 31, 2022:
| December 31, 2022 | ||||||||||||
| (Dollars in thousands) | Recorded | Unpaid | Related | |||||||||
| With no related allowance recorded | ||||||||||||
| Residential Real Estate: | ||||||||||||
| Single family | $ | $ | $ | — | ||||||||
| Total | $ | $ | $ | — | ||||||||
The following table presents information related to the average recorded investment and interest income recognized on impaired loans, for the three months ended September 30, 2023:
| For the three months ended September 30, | ||||||||
| 2023 | ||||||||
| (Dollars in thousands) | Average Record Investment | Interest Income Recognized | ||||||
| With no related allowance recorded | ||||||||
| Residential Real Estate: | ||||||||
| Single family | $ | $ | ||||||
| Commercial Real Estate: | ||||||||
| Owner Occupied | ||||||||
| Non-owner Occupied | ||||||||
| Commercial & Industrial | ||||||||
| Total | $ | $ | ||||||
The following table presents information related to the average recorded investment and interest income recognized on impaired loans, for the nine months ended September 30, 2023:
| For the nine months ended September 30, | ||||||||
| 2023 | ||||||||
| (Dollars in thousands) | Average Record Investment | Interest Income Recognized | ||||||
| With no related allowance recorded | ||||||||
| Residential Real Estate: | ||||||||
| Single family | $ | $ | ||||||
| Commercial Real Estate: | ||||||||
| Owner Occupied | $ | $ | ||||||
| Non-owner Occupied | ||||||||
| Commercial & Industrial | ||||||||
| Total | $ | $ | ||||||
Unfunded Commitments
The Company maintains an allowance for credit losses on off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on funded loans. The allowance for credit losses for off-balance sheet credit exposure of $
The following table presents the balance and activity in the allowance for credit losses for off-balance sheet credit exposure for the three months ended September 30, 2023.
| (Dollars in thousands) | Total Allowance for Credit Losses on Off-Balance Sheet Credit Exposure | |||
| Balance, June 30, 2023 | $ | |||
| Provision for off-balance sheet credit losses | ||||
| Balance, September 30, 2023 | $ | |||
The following table presents the balance and activity in the allowance for credit losses for off-balance sheet credit exposure for the nine months ended September 30, 2023.
| (Dollars in thousands) | Total Allowance for Credit Losses on Off-Balance Sheet Credit Exposure | |||
| Balance, December 31, 2022 | $ | |||
| Adjustment to allowance for off-balance sheet credit losses upon adoption of ASU 2016-13 | ||||
| Provision for off-balance sheet credit losses, net | ||||
| Balance, September 30, 2023 | $ | |||
Note 4. Intangible Assets
The carrying amount of computer software developed was $
| As of September 30, 2023 | As of December 31, 2022 | |||||||||||||||
| (Dollars in thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||
| Amortizable intangible assets: | ||||||||||||||||
| Computer software | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company is still in the development stage of computer software where costs are capitalized. Capitalization ceases when the software is substantially complete and ready for its intended use. At that time the intangible asset will be amortized on a straight-line basis over the estimated useful life of the asset. As of September 30, 2023, the Company has recorded any amortization on its intangible computer software. We anticipate the amortization period for intangible computer software to be years, once placed in service, which is expected to begin in the first quarter of 2024.
Note 5. Derivatives and Risk Management Activities
The Company uses derivative financial instruments (“derivatives”) primarily to assist customers with their risk management objectives. The Company classifies these items as free standing derivatives consisting of customer accommodation interest rate loan swaps (“interest rate loan swaps”). 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 terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Company receives a floating rate. These back-to-back interest rate loan swaps qualify as financial derivatives with fair values reported in “Other assets” and “Other liabilities” in the consolidated financial statements. Changes in fair value are recorded in other noninterest expense and net to zero because of the identical amounts and terms of the interest rate loan swaps.
The following tables summarize key elements of the Company’s derivative instruments as of September 30, 2023 and December 31, 2022.
| September 30, 2023 | ||||||||||||||||||||
| Customer-related interest rate contracts | ||||||||||||||||||||
| Dollars in thousands) | Notional Amount | Number of Positions | Assets | Liabilities | Collateral Pledges | |||||||||||||||
| Matched interest rate swap with borrower | $ | $ | $ | $ | ||||||||||||||||
| Matched interest rate swap with counterparty | $ | $ | $ | $ | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Customer-related interest rate contracts | ||||||||||||||||||||
| Dollars in thousands) | Notional Amount | Number of Positions | Assets | Liabilities | Collateral Pledges | |||||||||||||||
| Matched interest rate swap with borrower | $ | $ | $ | $ | ||||||||||||||||
| Matched interest rate swap with counterparty | $ | $ | $ | $ | ||||||||||||||||
The Company is able to recognize fee income upon execution of the interest rate swap contract. The Company did record any interest rate swap fee income for the three and nine months ended September 30, 2023. $
Note 6. Fair Value Presentation
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosure”, the Bank uses fair value measurements 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 to sell an asset or paid to transfer 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 Bank’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 estimates 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 is a reasonable point within the range that is the most representative of fair value under current market conditions.
In accordance with the guidance, a hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Bank’s market assumptions. The three levels of the fair value hierarchy under FASB ASC 820 based on these two types of inputs are as follows:
Level 1 –Valuation is based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:
Securities available for sale
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. As of September 30, 2023, and December 31, 2022, the Bank’s entire portfolio of available for sale securities are considered to be Level 2 securities, with the exception of one subordinated debt security which is considered a Level 3.
Derivative asset (liability) – interest rate swaps on loans
As discussed in “Note 5: “Derivative Financial Instruments”, the Bank recognizes interest rate swaps at fair value on a recurring basis. The Bank has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques and therefore classifies such interest rate swaps as Level 2.
The following tables provide the fair value for assets required to be measured and reported at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | ||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||
| Collateralized Mortgage Backed | $ | $ | $ | $ | ||||||||||||
| Subordinated Debt | ||||||||||||||||
| Municipal Securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| U.S. Government Agencies | ||||||||||||||||
| Derivative asset – interest rate swap on loans | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liability – interest rate swap on loans | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| (Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Investment securities available-for-sale: | ||||||||||||||||
| Collateralized Mortgage Backed | $ | $ | $ | $ | ||||||||||||
| Subordinated Debt | ||||||||||||||||
| Municipal Securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| U.S. Government Agencies | ||||||||||||||||
| Derivative asset – interest rate swap on loans | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative liability – interest rate swap on loans | $ | $ | $ | $ | ||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
During the nine months ended September 30, 2023, there were
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The Company did have any assets that were measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022.
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. In accordance with ASU 2016-01, the Company uses the exit price notion, rather than the entry 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.
| September 30, 2023 | Carrying | Estimated | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
| (Dollars in thousands) | Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Securities: | ||||||||||||||||||||
| Available for sale | ||||||||||||||||||||
| Held to maturity | ||||||||||||||||||||
| Restricted securities | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Derivative asset – interest rate swap on loans | ||||||||||||||||||||
| Bank owned life insurance | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Subordinated debt, net | ||||||||||||||||||||
| Derivative liability – interest rate swaps on loans | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| December 31, 2022 | Carrying | Estimated | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||||
| (Dollars in thousands) | Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Securities: | ||||||||||||||||||||
| Available for sale | ||||||||||||||||||||
| Held to maturity | ||||||||||||||||||||
| Restricted securities | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Derivative asset – interest rate swap on loans | ||||||||||||||||||||
| Bank owned life insurance | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deposits | $ | $ | $ | $ | $ | |||||||||||||||
| Advances from the FHLB | ||||||||||||||||||||
| Subordinated debt, net | ||||||||||||||||||||
| Derivative liability – interest rate swaps on loans | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
The above information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. Assumptions utilized in the aggregation of fair value of our loan portfolio include prepayment rates, probability of default and loss given default, and discount rates on cash flows. Our third party valuation utilizes average data by homogenous loan segments nationwide and may not properly reflect the characteristics of our specific portfolio. There were no changes in methodologies or transfers between levels at September 30, 2023 and December 31, 2022.
Note 7. Earnings Per Common Share
Basic earnings per common share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock which then shared in the earnings of the Company. There were
The weighted average number of shares used in the calculation of basic and diluted earnings per common share includes unvested restricted shares of the Company’s common stock outstanding. Applicable guidance requires that outstanding un-vested share-based payment awards that contain voting rights and rights to non-forfeitable dividends participate in undistributed earnings with common shareholders.
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| (Dollars in thousands, except for share and per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares issued, basic and diluted | ||||||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic and diluted earnings per common share | $ | $ | $ | $ | ||||||||||||
Note 8. Accumulated Other Comprehensive Loss
The following table presents the cumulative balances of the components of accumulated other comprehensive loss, net of deferred taxes, as of September 30, 2023 and December 31, 2022:
| September 30, 2023 |
December 31, 2022 |
|||||||
| Unrealized loss on investment securities available-for-sale |
$ | ( |
) | $ | ( |
) | ||
| Unrealized loss on securities transferred to HTM |
( |
) | ( |
) | ||||
| Tax benefit |
||||||||
| Total accumulated other comprehensive loss |
$ | ( |
) | $ | ( |
) | ||
Note 9. Leases
Right-of-use assets and lease liabilities are included in other assets and other liabilities, respectively, in the Consolidated Statements of Financial Condition. 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. The incremental borrowing rate was equal to the rate of borrowing from the FHLB that aligned with the term of the lease contract. 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.
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.
Cash paid for amounts included in the measurement of lease liabilities during the nine months ended September 30, 2023 was $
| As of September 30, | As of December 31, | |||||||
| (Dollars in thousands) | 2023 | 2022 | ||||||
| Lease liabilities | $ | $ | ||||||
| Right-of-use assets | ||||||||
| Weighted-average remaining lease term – operating leases (in months). | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
| For the nine months ended September 30, | For the nine months ended September 30, | |||||||
| (Dollars in thousands) | 2023 | 2022 | ||||||
| Lease Cost | ||||||||
| Operating lease cost | $ | $ | ||||||
| Total lease costs | $ | $ | ||||||
| Cash paid for amounts included in measurement of lease liabilities | $ | $ | ||||||
The Company is the lessor for operating leases. One lease is extended on a month-to-month basis while two of these leases have arrangements for over twelve months with an option to extend the lease terms. 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. Total rent income on these operating leases is approximately $
As of September 30, 2023, all of the Company’s lease obligations are classified as operating leases. The Company does have any finance lease obligations.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of September 30, 2023 is as follows:
| (Dollars in thousands) | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total undiscounted cash flows | $ | |||
| Discount | ( | ) | ||
| Lease liabilities | $ |
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended as a review of significant factors affecting the Company’s consolidated financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the related notes and the Company’s Annual Report on Form 10-K, which contains audited consolidated financial statements of the Company as of and for the year ended December 31, 2022, previously filed with the SEC on March 23, 2023. Results for the three and nine months ended September 30, 2023 are not necessarily indicative of results for the year ending December 31, 2023 or any future period.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on the beliefs of management as well as assumptions made by and information currently available to management. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “should,” “could,” or “may” and similar expressions or the negative thereof. Important factors that could cause actual results to differ materially from those in the forward–looking statements included herein include, but are not limited to:
| ● |
general economic conditions, either nationally or in our market area, that are worse than expected; |
| ● |
competition among depository and other financial institutions, particularly intensified competition for deposits; |
| ● |
inflation and an interest rate environment that may reduce our margins or reduce the fair value of certain of our financial instruments; |
| ● |
adverse changes in the securities markets; |
| ● |
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory structure and in regulatory fees and capital requirements; |
| ● |
the impact of significant changes in accounting procedures or requirements on our financial condition or results of operations; |
| ● |
our ability to enter new markets successfully and capitalize on growth opportunities; |
| ● |
our ability to successfully integrate acquired and newly organized entities; |
| ● |
changes in consumer spending, borrowing and savings habits; |
| ● |
changes in accounting policies and practices; |
| ● |
changes in our organization, compensation and benefit plans; |
| ● |
our ability to attract and retain key employees; |
| ● |
changes in our financial condition or results of operations that reduce capital; |
| ● |
changes in the financial condition or future prospects of issuers of securities that we own; |
| ● |
the concentration of our business in the Northern Virginia as well as the greater Washington, DC metropolitan area and the effect of changes in the economic, political and environmental conditions on those markets; |
| ● |
adequacy of or increases in the allowance for credit losses; |
| ● |
cyber threats, attacks or other data security events; |
| ● |
fraud or misconduct by internal or external parties; |
| ● |
reliance on third parties for key services; |
| ● |
deterioration of our asset quality, including an increase in loan delinquencies, problem assets and foreclosures; |
| ● |
future performance of our loan portfolio with respect to recently originated loans; |
| ● |
additional risks related to new lines of business, products, product enhancements or services; |
| ● |
results of examination of us by our regulators, including the possibility that our regulators may require us to increase our allowance for credit losses or to write-down assets or take other supervisory action; |
| ● |
the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting; |
| ● |
liquidity, interest rate and operational risks associated with our business; |
| ● |
implications of our status as a smaller reporting company and as an emerging growth company; |
| ● |
a work stoppage, forced quarantine, or other interruption or the unavailability of key employees; and |
|
| ● | other risk factors and information included in our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q. |
Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. We caution readers not to place undue reliance on forward-looking statements. The Company disclaims any obligation to revise or update any forward-looking statements contained in this Form 10-Q to reflect future events or developments.
Overview
As used herein, the “Company,” “we,” “our,” and “us” refer to MainStreet Bancshares, Inc. and its subsidiaries, and the “Bank” refers to MainStreet Bank.
MainStreet Bancshares, Inc.
MainStreet Bancshares, Inc. is a bank holding company that owns 100% of MainStreet Bank and MainStreet Community Capital, LLC.
The Company and its subsidiaries are incorporated in and chartered by the Commonwealth of Virginia. The Company’s executive offices are located at 10089 Fairfax Boulevard, Fairfax, Virginia. Our telephone number is (703) 481-4567, and our internet address is www.mstreetbank.com. The information contained on our website shall not be considered part of this Quarterly Report on Form 10-Q, and the reference to our website does not constitute incorporation by reference of the information contained on the website.
MainStreet Bank
MainStreet Bank is a community commercial bank incorporated in and chartered by the Commonwealth of Virginia. The Bank is a member of the Federal Reserve Bank of Richmond, and its deposits are insured by the FDIC. The Bank opened for business on May 26, 2004, and is headquartered in Fairfax, Virginia. We currently operate six Bank branches; located in Herndon, Fairfax, McLean, Clarendon, Leesburg in Virginia, and one in Washington D.C.
We emphasize providing responsive and personalized services to our clients. Due to the consolidation of financial institutions in our primary market area, we believe there is a significant opportunity for a local bank to provide a full range of financial services. By offering highly professional, personalized banking products and service delivery methods and employing advanced banking technologies, we seek to distinguish ourselves from larger, regional banks operating in our market area and believe we are able to compete effectively with other community banks.
We believe we have a solid franchise that meets the financial needs of our clients and communities by providing an array of personalized products and services delivered by seasoned banking professionals with decisions made at the local level. We believe a significant customer base in our market prefers to do business with a local institution that has a local management team, a local Board of Directors and local founders and that this customer base may not be satisfied with the responsiveness of larger regional banks. By providing quality services, coupled with the opportunities provided by the economies in our market area, we have generated and expect to continue to generate organic growth.
We service Northern Virginia as well as the greater Washington, D.C. metropolitan area. Our goal is to deliver a customized and targeted mix of products and services that meets or exceeds customer expectations. To accomplish this goal, we have deployed a premium operating system that gives customers access to up-to-date banking technology. These systems and our highly skilled staff have allowed us to compete with larger financial institutions. The combination of sophisticated technology and personal service sets us apart from our competition. We strive to be the leading community bank in our market.
We offer a full range of banking services to individuals, small to medium-sized businesses and professionals through both traditional and electronic delivery. We were the first community bank in the Washington, D.C. metropolitan area to offer a full online business banking solution, including remote check scanners on a business customer’s desktop. We offer mobile banking apps for iPhones, iPads and Android devices that provide for remote deposit of checks. In addition, we were the first bank headquartered in the Commonwealth of Virginia to offer CDARS, the Certificate of Deposit Account Registry Service, an innovative deposit insurance solution that provides FDIC insurance on deposits up to $150 million. We believe that enhanced electronic delivery systems and technology increase profitability through greater productivity and cost control and allow us to offer new and better products and services.
Our products and services include: business and consumer checking, premium interest-bearing checking, business account analysis, savings, certificates of deposit and other depository services, as well as a broad array of commercial, real estate and consumer loans. Internet account access is available for all personal and business accounts, internet bill payment services are available on most accounts, and a robust online cash management system is available for business customers.
Avenu
On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu, a division of MainStreet Bank. Avenu represents the Company’s suite of Banking as a Service (“BaaS”) solutions designed to meet the banking needs of Fintech customers. We believe our approach to providing a proprietary BaaS solution is unique. Our transformational subledger combined with our high-touch compliance training goes beyond the industry standards to ensure that our Fintech partners will prosper. This division of MainStreet Bank currently serves money service businesses, payment processers, and BaaS customers and provides the Bank with valuable low-cost deposits and additional streams of fee income. A major component of the BaaS solution includes a fintech core, which is Software as a Service (SaaS). Our SaaS solution has launched with our first beta client.
MainStreet Community Capital, LLC
In August 2021, the Company created a community development entity (“CDE”) subsidiary, MainStreet Community Capital, LLC, a Virginia limited liability company, to apply for NMTC allocations from the U.S. Department of Treasury’s Community Development Financial Institutions Fund. To promote development in economically distressed areas, the NMTC program was established under the Community Renewal Tax Relief Act of 2000 to provide tax incentives for capital investment in disadvantaged market areas that have not experienced economic expansion. The program establishes a tax credit for investment in a CDE and ongoing compliance with the program is accomplished through a governing board and an advisory board which maintains accountability to residents and businesses in the aforementioned disadvantaged areas. This CDE will be an intermediary vehicle for the provision of loans and investments in Low-Income Communities (“LICs”).
Effects of Inflation
The United States is experiencing elevated inflation. In response, the Federal Open Markets Committee (FOMC) raised the Federal Funds rate 425 basis points throughout 2022 and an additional 100 basis points during the first nine months of 2023. In addition to raising the Federal Funds rate, the Federal Reserve may take other means necessary to fulfill its dual mandate.
The effects of rising inflation and the actions of the Federal Reserve, as well as the economy at large may impact the Bank’s customers, including their willingness and ability to repay their obligations, to invest, to save or to spend. This impact could affect the Bank’s customer's general appetite for banking products and the credit health of the Bank’s customer base. The timing and impact of inflation and rising interest rates on our business and related financial results will depend on future developments, which are highly uncertain and difficult to predict.
Critical Accounting Policies
The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. Critical accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the current period or in future periods.
Following the announcement by the U.K.’s Financial Conduct Authority in July 2017 that it will no longer persuade or require banks to submit rates for the London InterBank Offered Rate (LIBOR) after 2021, the Company has opted to use the published Secured Overnight Funding Rate (SOFR) as a substitute and replacement for any financial instruments that are or would otherwise be tied to the LIBOR index. The Bank has officially transitioned all instruments away from LIBOR.
Our critical accounting policies involving significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2023, have remained unchanged since our Annual Report on Form 10-K for the year ended December 31, 2022 was filed, unless noted herein. As of January 1, 2023, we have adopted the current expected credit loss standard. Any additional changes are discussed in our Recently Issued Accounting Pronouncements.
Comparison of Statements of Income for the Three Months Ended September 30, 2023 and 2022
General
Total revenue increased $9.4 million to $32.7 million for the three months ended September 30, 2023 from $23.3 million for the three months ended September 30, 2022. These increases in total revenue were offset by increases in total expenses. Total expenses increased $10.8 million to $24.5 million for the three months ended September 30, 2023 from $13.7 million for the three months ended September 30, 2022. The increase in revenue for the three months ended September 30, 2023 was primarily due to increases in loan interest income of $9.5 million over the same period in 2022. Income was positively impacted by interest earned on federal funds sold, which earned $204,000 in additional interest for the three months ended September 30, 2023 than the same period in 2022. These increases in income were offset by increases in interest expense of $9.3 million and $1.1 million in salaries and employee benefits for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Net income decreased $1.4 million to $6.3 million for the three months ended September 30, 2023 from $7.7 million for the three months ended September 30, 2022.
Interest Income
Total interest income increased $9.8 million, or 44.6%, to $31.7 million for the three months ended September 30, 2023 from $21.9 million for the three months ended September 30, 2022, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $9.5 million and an increase in interest on federal funds sold of $204,000. Total average interest-earning assets increased $124.6 million, to $1.87 billion for the three months ended September 30, 2023 from $1.74 billion for the same period in 2022 primarily because of an increase of $218.8 million in the average balance of loans and was offset by a decrease of $87.5 million in the average balance of federal funds sold and a $6.7 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 175 basis points to 6.76% for the three months ended September 30, 2023 as compared to 5.01% for the three months ended September 30, 2022 primarily because of higher average yields on interest earning assets due to market conditions, and the Federal Reserve increasing the benchmark interest rates by 525 basis points over the course of the previous eighteen months.
Interest and fees on loans increased $9.5 million, to $29.8 million for the three months ended September 30, 2023 from $20.3 million for the same period in 2022. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $218.8 million, which increased to $1.67 billion for the three months ended September 30, 2023 from $1.45 billion for the three months ended September 30, 2022. The average yield on loans increased 153 basis points, or 27.5%, for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The Federal Reserve increased the federal funds target interest rate by 25 basis points during the quarter so we expect our asset sensitive balance sheet to continue to benefit from the current rate environment.
Interest income on federal funds sold and interest-earning deposits increased by $0.2 million to $1.2 million for the three months ended September 30, 2023, from $1.0 million for the three months ended September 30, 2022. The increase was primarily due to an increase in the average yield on these deposits despite the average balances decreasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $87.5 million to $94.8 million for the three months ended September 30, 2023 from $182.3 million for the same period in 2022. The average yield increased to 5.09% for the three months ended September 30, 2023 from 2.20% for the same period in 2022.
Interest on investment securities increased by $90,000 to $798,000 for the three months ended September 30, 2023 from $708,000 for the three months ended September 30, 2022 on a fully tax-equivalent basis. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total $60,000, or 19.0%, to $377,000 for the three months ended September 30, 2023, from $317,000 for the three months ended September 30, 2022. Interest on mortgage-backed securities decreased by $5,000, or 4.5%, to $108,000 for the three months ended September 30, 2023, from $114,000 for the three months ended September 30, 2022. Subordinated debt interest income increased by $3,000, or 2.0%, to $135,000 for the three months ended September 30, 2023, from $132,000 for the three months ended September 30, 2022. The average yield on taxable securities increased 67 basis points, to 2.70% and the average yield on tax-exempt securities increased 12 basis points, to 3.56% on a tax equivalent basis for the three months ended September 30, 2023, from 2.03% and 3.44%, respectively, for the same period in 2022. Increased market rates resulted in investment income rising despite the average balance of investment securities decreasing by $6.7 million, to $105.3 million for the three months ended September 30, 2023, from $112.0 million for the three months ended September 30, 2022.
Interest Expense
Total interest expense increased $9.3 million, to $13.1 million for the three months ended September 30, 2023 from $3.8 million for the three months ended September 30, 2022, primarily due to a $5.3 million increase in interest expense on time deposits and a $3.7 million increase in interest expense on money market deposits. There were additional increases in interest expense primarily due to the increase in average outstanding balances of advances on FHLB borrowings that were included in the three months ended September 30, 2023 over the three months ended September 30, 2022
Interest expense on deposits increased $9.1 million to $12.1 million for the three months ended September 30, 2023 from $3.0 million for the three months ended September 30, 2022 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average deposit balances was $258.2 million to $1.24 billion during the three months ended September 30, 2023 as compared to $981.6 million for the three months ended September 30, 2022. The increase in the average balance of interest-bearing deposits was primarily a result of a $156.6 million increase in the average balance of money market deposit accounts and by a $124.6 million increase in the average balance of time deposits. The average cost of deposits was 386 basis points for the three months ended September 30, 2023, compared to 121 basis points for the three months ended September 30, 2022. The average rate paid on money market deposits increased 322 basis points to 3.99% for the three months ended September 30, 2023 from 0.77% for the three months ended September 30, 2022. The average rate paid on interest-bearing demand deposits increased 50 basis points to 1.24% for the three months ended September 30, 2023 from 0.74% for the three months ended September 30, 2022 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit increased by 269 basis points to 4.26% for the three months ended September 30, 2023 as compared to 1.57% for the three months ended September 30, 2022. The decrease in the average balance of non interest-bearing demand deposits for the three months ended September 30, 2023, primarily was the result of depositors looking for higher yielding products and market competition.
Net Interest Income
Net interest income increased approximately $0.5 million, or 2.7%, to $18.6 million for the three months ended September 30, 2023 from $18.1 million for the three months ended September 30, 2022 despite our net interest-earning assets decreasing $149.9 million to $537.4 million for the three months ended September 30, 2023 from $687.3 million for the three months ended September 30, 2022. The interest rate spread tightened by 73 basis points to 2.84% for the three months ended September 30, 2023 from 3.57% for the three months ended September 30, 2022, on a tax equivalent basis. The net interest margin compressed by 17 basis points from 4.14% for the three months ended September 30, 2022 to 3.97% for the three months ended September 30, 2023 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.
| For the Three Months Ended September 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense(6) |
Yield/ Cost(5)(6) | Average Balance |
Interest Income/ Expense(6) |
Yield/ Cost(5)(6) | |||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans(1) |
$ | 1,665,474 | $ | 29,750 | 7.09 | % | $ | 1,446,679 | $ | 20,261 | 5.56 | % | ||||||||||||
| Investment securities: |
||||||||||||||||||||||||
| Taxable |
67,513 | 459 | 2.70 | % | 73,914 | 378 | 2.03 | % | ||||||||||||||||
| Tax-exempt |
37,812 | 339 | 3.56 | % | 38,074 | 330 | 3.44 | % | ||||||||||||||||
| Federal funds and interest-bearing deposits |
94,808 | 1,217 | 5.09 | % | 182,331 | 1,013 | 2.20 | % | ||||||||||||||||
| Total interest-earning assets |
1,865,607 | $ | 31,765 | 6.76 | % | 1,740,998 | $ | 21,982 | 5.01 | % | ||||||||||||||
| Non-interest-earning assets |
63,883 | 61,479 | ||||||||||||||||||||||
| Total assets |
$ | 1,929,490 | $ | 1,802,477 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 77,047 | $ | 240 | 1.24 | % | $ | 93,569 | $ | 175 | 0.74 | % | ||||||||||||
| Savings and NOW deposits |
48,594 | 145 | 1.18 | % | 55,100 | 43 | 0.31 | % | ||||||||||||||||
| Money market deposits |
413,710 | 4,156 | 3.99 | % | 257,091 | 496 | 0.77 | % | ||||||||||||||||
| Time deposits |
700,405 | 7,526 | 4.26 | % | 575,832 | 2,275 | 1.57 | % | ||||||||||||||||
| Total interest-bearing deposits |
1,239,756 | 12,067 | 3.86 | % | 981,592 | 2,989 | 1.21 | % | ||||||||||||||||
| Federal funds purchased |
2,501 | 35 | 5.55 | % | 2 | — | — | |||||||||||||||||
| Federal Home Loan Bank advances |
13,478 | 186 | 5.48 | % | — | — | — | |||||||||||||||||
| Subordinated debt |
72,504 | 828 | 4.53 | % | 72,107 | 828 | 4.56 | % | ||||||||||||||||
| Total interest-bearing liabilities |
1,328,239 | $ | 13,116 | 3.92 | % | 1,053,701 | $ | 3,817 | 1.44 | % | ||||||||||||||
| Non-interest-bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits and other liabilities |
388,004 | 558,337 | ||||||||||||||||||||||
| Total liabilities |
1,716,243 | 1,612,038 | ||||||||||||||||||||||
| Stockholders’ equity |
213,247 | 190,439 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 1,929,490 | $ | 1,802,477 | ||||||||||||||||||||
| Net interest income |
$ | 18,649 | $ | 18,165 | ||||||||||||||||||||
| Interest rate spread(2) |
2.84 | % | 3.57 | % | ||||||||||||||||||||
| Net interest-earning assets(3) |
$ | 537,368 | $ | 687,297 | ||||||||||||||||||||
| Net interest margin(4) |
3.97 | % | 4.14 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
140.5 | % | 165.23 | % | ||||||||||||||||||||
| (1) |
Includes loans classified as non-accrual |
| (2) |
Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities. |
| (3) |
Net interest earning assets represent total average interest–earning assets less average interest–bearing liabilities. |
| (4) |
Net interest margin represents net interest income divided by total average interest-earning assets. |
| (5) | Annualized. |
| (6) |
Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.” |
Rate/ Volume Analysis
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, . The Total Increase (Decrease) column represents the sum of the prior columns.
| For the Three Months Ended |
||||||||||||
| September 30, 2023 and 2022 |
||||||||||||
| Increase (Decrease) Due to |
Total Increase |
|||||||||||
| Volume |
Rate |
(Decrease) |
||||||||||
| (Dollars in thousands) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 3,365 | $ | 6,124 | $ | 9,489 | ||||||
| Investment securities: |
||||||||||||
| Taxable |
(189 | ) | 270 | 81 | ||||||||
| Tax-exempt |
(14 | ) | 23 | 9 | ||||||||
| Federal funds and interest-bearing deposits |
(2,766 | ) | 2,970 | 204 | ||||||||
| Total interest-earning assets |
396 | 9,387 | 9,783 | |||||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing demand deposits |
(180 | ) | 245 | 65 | ||||||||
| Savings and NOW accounts |
(34 | ) | 136 | 102 | ||||||||
| Money market deposit accounts |
465 | 3,195 | 3,660 | |||||||||
| Time deposits |
589 | 4,662 | 5,251 | |||||||||
| Total deposits |
840 | 8,238 | 9,078 | |||||||||
| Fed funds purchased |
35 | — | 35 | |||||||||
| Federal Home Loan Bank advances |
186 | — | 186 | |||||||||
| Subordinated debt |
20 | (20 | ) | — | ||||||||
| Total interest-bearing liabilities |
1,081 | 8,218 | 9,299 | |||||||||
| Change in net interest income |
$ | (685 | ) | $ | 1,169 | $ | 484 | |||||
Provision for Credit Losses
Management believes that the provision recorded for the period ended September 30, 2023 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, credit quality and supportable forecasts. We will continuously review the credit portfolio to determine the depth and breadth of potential credit losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the credit portfolio that may arise, additional provision expenses may be required.
The provision for credit losses, which is an operating expense, is maintained to ensure that the allowance for credit losses is maintained at levels we consider necessary and appropriate to absorb expected credit losses at a balance sheet date. In determining the level of the allowance for credit losses on loans and off-balance sheet credit exposure, we consider past and current loss experience, evaluations of real estate collateral, current and future economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change or as more information becomes available. The allowance for credit losses is assessed monthly and provisions are made for credit losses as required in order to maintain the overall allowance.
The provision for credit losses on loans decreased by $98,000 to a recovery for credit losses on loans of $98,000 for the three months ended September 30, 2023 from a provision for credit losses on loans of $0 for the three months ended September 30, 2022. Loan originations, which totaled approximately $83.2 million for the three months ended September 30, 2022 increased $8.8 million to $92.0 million for the three months ended September 30, 2023. Despite loan originations increasing, the Company noted that many lines of credit were paid down during the quarter, which lowered the provision for loan losses for the period ended 2023 compared to 2022. The Company noted that a majority of this provision just shifted and increased the provision for unfunded commitments as of September 30, 2023. The Company did not have any non-performing loans at September 30, 2022 and non-performing loans to gross loans was only 0.02% as of September 30, 2023.
The provision for credit losses on off-balance sheet credit exposure increased by $353,000 for the three months ended September 30, 2023.
During the three months ended September 30, 2023, there was one loan downgraded to special mention for $16.0 million. Substandard and doubtful loans remained consistant as of September 30, 2023 for a collective balance of $10.7 million. Of the substandard loans as of September 30, 2023, 79% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows and occupancy levels have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the three months ended September 30, 2023, watch list loans, which are considered pass credits, improved by $35.6 million to $56.3 million as of September 30, 2023. As interest rates have risen significantly over the last eighteen months, management believes in taking a proactive approach to risk management in the loan portfolio. While these credits do not represent expected losses, management will take a more active monitoring role to ensure any potential risk is mitigated. During the three months ended September 30, 2023, there was $324,000 in charge-offs incurred for one credit, and recoveries of $1,000 were received.
Non-Interest Income
Non-interest income decreased $385,000, or 28.6%, to $963,000 for the three months ended September 30, 2023 from $1.3 million for the three months ended September 30, 2022. The decrease in non-interest income was primarily due to decreases in fee income earned on originating loan swaps in the three months ended September 30, 2023 compared to the same period in 2022. The Company also recognized a nonrecurring operating loss on a new market tax credit equity investment during the quarter of $87,000. The Company continues to focus on increasing fee income as it strategically benefits our customers.
Non-Interest Expense
Non-interest expense increased $1.5 million, or 15.5%, to $11.4 million for the three months ended September 30, 2023 from $9.9 million for the three months ended September 30, 2022 primarily because of increases in salary and employee benefits of $1.1 million and other various operating expenses of $1.3 million. Salaries and employee benefits expense increased by $1.1 to $6.9 million for the three months ended September 30, 2023 from $5.9 million for the three months ended September 30, 2022 primarily as a result of twenty-eight new employees and the related salary and benefit expenses for these additional employees. Franchise taxes increased approximately $93,000 to $459,000 for the three months ended September 30, 2023 from $366,000 for the three months ended September 30, 2022 because of the make up of the Company’s capital as of September 30, 2023 compared to the balance sheet as of September 30, 2022. Offsetting these increases was a decrease in advertising and marketing expenses decreased $127,000, or 18.0%, to $577,000 for the three months ended September 30, 2023 from $704,000 for the three months ended September 30, 2022 due to timing and new initiatives to further enhance the Company's brand.
Income Tax Expense
Income tax expense decreased $292,000, or 16.2%, to a tax expense of $1.5 million for the three months ended September 30, 2023 from a tax expense of $1.8 million for the three months ended September 30, 2022. The decrease in federal income tax expense for the three months ended September 30, 2023 compared to the same period a year ago was driven by the decrease in income before income taxes of $1.7 million, to income before income tax of $7.9 million for the three months ended September 30, 2023 compared to income before income tax expense of $9.6 million for the same period in the prior year. The Company was able to apply and claim a research and development tax credit of approximately $242,000 for its associated work in developing a software platform in 2022. The Company also invests in projects that have tax credit benefits in order to help reduce it's overall tax liability. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $212,000 for the three months ended September 30, 2023. For the three months ended September 30, 2023, the Company had an effective income tax expense rate of 19.3%, compared to an effective income tax expense rate of 18.9% for the three months ended September 30, 2022.
Comparison of Statements of Income for the Nine Months Ended September 30, 2023 and 2022
General
Total revenue increased $32.0 million to $93.8 million for the nine months ended September 30, 2023 from $61.8 million for the nine months ended September 30, 2022. These increases in total revenue were offset by increases in total expenses. Total expenses increased $29.1 million to $66.1 million for the nine months ended September 30, 2023 from $37.0 million for the nine months ended September 30, 2022. The increase in revenue for the nine months ended September 30, 2023 was primarily due to increases in net interest income of $9.5 million over the same period in 2022. Income was positively impacted by interest earned on federal funds sold, which earned $2.3 million in additional interest for the nine months ended September 30, 2023 than the same period in 2022. These increases in income were offset by increases of $4.1 million in salaries and employee benefits for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Net income increased $2.3 million to $21.4 million for the nine months ended September 30, 2023 from $19.1 million for the nine months ended September 30, 2022.
Interest Income
Total interest income increased $33.0 million, or 56.8%, to $91.0 million for the nine months ended September 30, 2023 from $58.1 million for the nine months ended September 30, 2022 ,on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $30.4 million and an increase in interest on federal funds sold of $2.3 million. Total average interest-earning assets increased $192.6 million, to $1.85 billion for the nine months ended September 30, 2023 from $1.65 billion for the same period in 2022 primarily because of an increase of $220.4 million in the average balance of loans and was offset by a decrease of $22.8 million in the average balance of federal funds sold and interest-earning deposits and a $5.1 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 190 basis points to 6.61% for the nine months ended September 30, 2023 as compared to 4.71% for the nine months ended September 30, 2022 primarily because of higher average yields on interest earning assets due to market conditions, loans related to PPP lending with a rate of 1% paying off, and the Federal Reserve increasing the benchmark interest rates by 525 basis points over the course of the previous eighteen months.
Interest and fees on loans increased $30.4 million, to $85.3 million for the nine months ended September 30, 2023 from $54.9 million for the same period in 2022. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $220.4 million, which increased to $1.64 billion for the nine months ended September 30, 2023 from $1.42 billion for the nine months ended September 30, 2022. The average yield on loans increased 178 basis points, or 34.4%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The Federal Reserve increased the federal funds target interest rate by 100 basis points throughout the first nine months of 2023 and we expect our asset sensitive balance sheet to continue to benefit from the current rate environment.
Interest income on federal funds sold and interest-earning deposits increased by $2.3 million to $3.5 million for the nine months ended September 30, 2023, from $1.2 million for the nine months ended September 30, 2022. The increase was primarily due to an increase in the average yield on these deposits despite the average balances decreasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $22.8 million to $99.0 million for the nine months ended September 30, 2023 from $121.8 million for the same period in 2022. The average yield increased to 4.76% for the nine months ended September 30, 2023 from 1.36% for the same period in 2022.
Interest on investment securities increased by $249,000 to $2.4 million for the nine months ended September 30, 2023 from $2.1 million for the nine months ended September 30, 2022 on a fully tax-equivalent basis. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals increased in total $161,000, or 16.6%, to $1.1 million for the nine months ended September 30, 2023, from $969,000 for the nine months ended September 30, 2022. Interest on mortgage-backed securities decreased by $13,000, or 4.0%, to $308,000 for the nine months ended September 30, 2023, from $321,000 for the nine months ended September 30, 2022. Subordinated debt interest income increased by $7,000, or 1.8%, to $395,000 for the nine months ended September 30, 2023, from $388,000 for the nine months ended September 30, 2022. The average yield on taxable securities increased 60 basis points, to 2.67% and the average yield on tax-exempt securities increased 8 basis points, to 3.56% on a tax equivalent basis for the nine months ended September 30, 2023, from 2.07% and 3.48%, respectively, for the same period in 2022. Increased market rates resulted in investment income rising despite the average balance of investment securities decreasing by $5.1 million, to $107.1 million for the nine months ended September 30, 2023, from $112.2 million for the nine months ended September 30, 2022.
Interest Expense
Total interest expense increased $23.4 million, to $32.1 million for the nine months ended September 30, 2023 from $8.7 million for the nine months ended September 30, 2022, primarily due to a $13.5 million increase in interest expense on time deposits and a $7.5 million increase in interest expense on money market deposits. There were additional increases in interest expense primarily due to the increase in average outstanding balance of our FHLB advances that were included in the nine months ended September 30, 2023 over the nine months ended September 30, 2022.
Interest expense on deposits increased $21.8 million to $28.3 million for the nine months ended September 30, 2023 from $6.5 million for the nine months ended September 30, 2022 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average interest-bearing deposit balances was $238.0 million to $1.16 billion during the nine months ended September 30, 2023 as compared to $917.8 million for the nine months ended September 30, 2022. The increase in the average balance of interest-bearing deposits was primarily a result of a $75.0 million increase in the average balance of money market deposit accounts and by a $188.1 million increase in the average balance of time deposits. The average cost of deposits was 327 basis points for the nine months ended September 30, 2023, compared to 94 basis points for the nine months ended September 30, 2022. The average rate paid on money market deposits increased 298 basis points to 3.38% for the nine months ended September 30, 2023 from 0.40% for the nine months ended September 30, 2022. The average rate paid on interest-bearing demand deposits increased 90 basis points to 1.43% for the nine months ended September 30, 2023 from 0.53% for the nine months ended September 30, 2022 primarily due to market competition and the interest rate environment. The average cost of time deposits increased by 221 basis points to 3.58% for the nine months ended September 30, 2023 as compared to 1.37% for the nine months ended September 30, 2022. The decrease in the average balance of interest-bearing demand deposits for the nine months ended September 30, 2023, primarily was the result of depositors looking for higher yielding products and market competition.
The average balance of subordinated debt increased $9.6 million for the nine months ended September 30, 2023, due to an additional $43.9 million issued in late March of 2022 and was fully captured in the nine months ended September 30, 2023.
Net Interest Income
Net interest income increased approximately $9.5 million, or 19.8%, to $58.9 million for the nine months ended September 30, 2023 from $49.4 million for the nine months ended September 30, 2022 despite our net interest-earning assets decreasing $68.5 million to $581.0 million for the nine months ended September 30, 2023 from $649.4 million for the nine months ended September 30, 2022. The interest rate spread decreased by 34 basis points to 3.22% for the nine months ended September 30, 2023 from 3.56% for the nine months ended September 30, 2022, on a tax equivalent basis. The net interest margin increased by 27 basis points from 4.01% for the nine months ended September 30, 2022 to 4.28% for the nine months ended September 30, 2023 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. All average balances are based on daily balances.
| For the Nine Months Ended September 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| Average Balance |
Interest Income/ Expense (6) |
Yield/ Cost(5)(6) |
Average Balance |
Interest Income/ Expense(6) |
Yield/ Cost(5)(6) |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans(1) |
$ | 1,640,460 | $ | 85,336 | 6.95 | % | $ | 1,420,013 | $ | 54,900 | 5.17 | % | ||||||||||||
| Investment securities: |
||||||||||||||||||||||||
| Taxable |
69,260 | 1,384 | 2.67 | % | 73,496 | 1,136 | 2.07 | % | ||||||||||||||||
| Tax-exempt |
37,876 | 1,009 | 3.56 | % | 38,703 | 1,008 | 3.48 | % | ||||||||||||||||
| Federal funds and interest-bearing deposits |
99,004 | 3,528 | 4.76 | % | 121,832 | 1,241 | 1.36 | % | ||||||||||||||||
| Total interest-earning assets |
1,846,600 | $ | 91,257 | 6.61 | % | 1,654,044 | $ | 58,285 | 4.71 | % | ||||||||||||||
| Non-interest-earning assets |
62,832 | 71,361 | ||||||||||||||||||||||
| Total assets |
$ | 1,909,432 | $ | 1,725,405 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 78,018 | $ | 834 | 1.43 | % | $ | 86,836 | $ | 345 | 0.53 | % | ||||||||||||
| Savings and NOW deposits |
50,382 | 400 | 1.06 | % | 66,714 | 122 | 0.24 | % | ||||||||||||||||
| Money market deposits |
328,037 | 8,285 | 3.38 | % | 252,992 | 766 | 0.40 | % | ||||||||||||||||
| Time deposits |
699,377 | 18,747 | 3.58 | % | 511,242 | 5,236 | 1.37 | % | ||||||||||||||||
| Total interest-bearing deposits |
1,155,814 | 28,266 | 3.27 | % | 917,784 | 6,469 | 0.94 | % | ||||||||||||||||
| Federal funds purchased |
6,878 | 274 | 5.33 | % | 2 | — | — | |||||||||||||||||
| Federal Home Loan Bank advances |
30,531 | 1,105 | 4.84 | % | 24,011 | 83 | 0.46 | % | ||||||||||||||||
| Subordinated debt |
72,405 | 2,460 | 4.54 | % | 62,807 | 2,108 | 4.49 | % | ||||||||||||||||
| Total interest-bearing liabilities |
1,265,628 | $ | 32,105 | 3.39 | % | 1,004,604 | $ | 8,660 | 1.15 | % | ||||||||||||||
| Non-interest-bearing liabilities: |
||||||||||||||||||||||||
| Demand deposits and other liabilities |
436,157 | 531,115 | ||||||||||||||||||||||
| Total liabilities |
1,701,785 | 1,535,719 | ||||||||||||||||||||||
| Stockholders’ Equity |
207,647 | 189,686 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 1,909,432 | $ | 1,725,405 | ||||||||||||||||||||
| Net interest income |
$ | 59,152 | $ | 49,625 | ||||||||||||||||||||
| Interest rate spread(2) |
3.22 | % | 3.56 | % | ||||||||||||||||||||
| Net interest-earning assets(3) |
$ | 580,972 | $ | 649,440 | ||||||||||||||||||||
| Net interest margin(4) |
4.28 | % | 4.01 | % | ||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
145.90 | % | 164.65 | % | ||||||||||||||||||||
| (1) |
Includes loans classified as non-accrual |
| (2) |
Interest rate spread represents the difference between the average yield on average interest–earning assets and the average cost of average interest-bearing liabilities. |
| (3) |
Net interest earning assets represent total average interest–earning assets less average interest–bearing liabilities. |
| (4) |
Net interest margin represents net interest income divided by total average interest-earning assets. |
| (5) | Annualized. |
| (6) |
Income and yields for all periods presented are reported on a tax-equivalent basis using the federal statutory tax rate of 21%. Refer to “Use of Certain Non-GAAP Financial Measures.” |
Rate/ Volume Analysis
The following table presents the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior average volume). The volume column shows the effects attributable to changes in volume (changes in average volume multiplied by prior rate). Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately. The Total Increase (Decrease) column represents the sum of the prior columns.
| For the Nine Months Ended |
||||||||||||
| September 30, 2023 and 2022 |
||||||||||||
| Increase (Decrease) Due to |
Total Increase |
|||||||||||
| Volume |
Rate |
(Decrease) |
||||||||||
| (In thousands) |
||||||||||||
| Interest-earning assets: |
||||||||||||
| Loans |
$ | 9,459 | $ | 20,977 | $ | 30,436 | ||||||
| Investment securities: |
||||||||||||
| Taxable |
(105 | ) | 353 | 248 | ||||||||
| Tax-exempt |
(29 | ) | 30 | 1 | ||||||||
| Federal funds and interest-bearing deposits |
(418 | ) | 2,705 | 2,287 | ||||||||
| Total interest-earning assets |
8,907 | 24,065 | 32,972 | |||||||||
| Interest-bearing liabilities: |
||||||||||||
| Interest-bearing demand deposits |
(61 | ) | 550 | 489 | ||||||||
| Savings and NOW accounts |
(54 | ) | 332 | 278 | ||||||||
| Money market deposit accounts |
288 | 7,231 | 7,519 | |||||||||
| Time deposits |
2,509 | 11,002 | 13,511 | |||||||||
| Total deposits |
2,682 | 19,115 | 21,797 | |||||||||
| Federal funds purchased |
274 | — | 274 | |||||||||
| Federal Home Loan Bank advances |
31 | 1,074 | 1,105 | |||||||||
| Subordinated debt |
328 | 24 | 352 | |||||||||
| Total interest-bearing liabilities |
3,315 | 20,213 | 23,528 | |||||||||
| Change in net interest income |
$ | 5,592 | $ | 3,852 | $ | 9,444 | ||||||
Provision for Credit Losses
Management believes that the provision recorded for the period ended September 30, 2023 reflects a balance sufficient to provide for each allowance segment, using objective data and information available to us at this time in evaluating our standard analysis of local/national economic data, changes in underwriting quality, portfolio concentrations, experience of lending team, credit quality and supportable forecasts. We will continuously review the credit portfolio to determine the depth and breadth of potential credit losses. As we obtain additional information and to more accurately assess the full nature and extent of elevated risk to the credit portfolio that may arise, additional provision expenses may be required.
The provision for credit losses, which is an operating expense, is maintained to ensure that the allowance for credit losses is maintained at levels we consider necessary and appropriate to absorb expected credit losses at a balance sheet date. In determining the level of the allowance for credit losses on loans and off-balance sheet credit exposure, we consider past and current loss experience, evaluations of real estate collateral, current and future economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of non-performing loans. The amount of the allowance is based on estimates, and actual losses may vary from such estimates as more information becomes available over time or economic conditions change. This evaluation is inherently subjective, as it requires estimates and assumptions that are susceptible to significant revision as circumstances change or as more information becomes available. The allowance for credit losses is assessed monthly and provisions are made for credit losses as required in order to maintain the overall allowance.
The provision for credit losses on loans decreased by $346,000 to a provision for credit losses on loans of $934,000 for the nine months ended September 30, 2023 from a provision for credit losses on loans of $1.3 million for the nine months ended September 30, 2022. Loan originations, which totaled approximately $227.7 million for the nine months ended September 30, 2022 increased $108.0 million to loan originations of $335.7 million for the nine months ended September 30, 2023. The Company did not have any non-performing loans at September 30, 2022 and non-performing loans to gross loans was only 0.02% as of September 30, 2023.
The provision for credit losses on off-balance sheet credit exposure increased by $242,000 for a provision of credit losses on off-balance sheet credit exposure of $1.6 million for the nine months ended September 30, 2023.
During the nine months ended September 30, 2023, there was one loan downgraded to special mention for $16.0 million. Substandard and doubtful loans increased $1.2 million as of September 30, 2023 for a balance of $10.4 million. Of the substandard loans as of September 30, 2023, 79% are connected to the hospitality industry. These loans were initially impacted by the pandemic and were downgraded out of an abundance of caution while cash flows and occupancy levels have continued to increase to pre-pandemic levels. Management does not believe there will be losses associated with these credits. During the nine months ended September 30, 2023, watch list loans, which are considered pass credits, increased $32.7 million. As the rates have risen significantly over the last eighteen months, management believes in taking a proactive approach to risk management in the loan portfolio. While these credits do not represent expected losses, management will take a more active monitoring role to ensure any potential risk is mitigated. During the nine months ended September 30, 2023, there were $331,000 in charge-offs incurred, and recoveries of $14,000 were received.
Non-Interest Income
Non-interest income decreased $996,000, or 26.4%, to $2.8 million for the nine months ended September 30, 2023 from $3.8 million for the nine months ended September 30, 2022. The decrease in non-interest income was primarily due to decreases in mortgage origination and fee income on loan swaps originated in the nine months ended September 30, 2023 compared to the same period in 2022. The Company also recognized operating losses on a new market tax credit equity investments during the year of $176,000. The Company continues to focus on increasing fee income as it strategically benefits our customers.
Non-Interest Expense
Non-interest expense increased $5.6 million, or 19.9%, to $34.0 million for the nine months ended September 30, 2023 from $28.3 million for the nine months ended September 30, 2022 primarily because of increases in salary and employee benefits of $4.1 million and advertising and marketing expenses of $388,000. Salaries and employee benefits expense increased by $4.1 million to $21.1 million for the nine months ended September 30, 2023 from $17.0 million for the nine months ended September 30, 2022 primarily as a result of twenty-eight new employees and the related salary and benefit expenses for these additional employees. Advertising and marketing expenses increased $388,000, or 23.0%, to $2.1 million for the nine months ended September 30, 2023 from $1.7 million for the nine months ended September 30, 2022 due to timing and new initiatives to further enhance the Company's brand. Franchise taxes increased approximately $311,000 to $1.4 million for the nine months ended September 30, 2023 from $1.1 million for the nine months ended September 30, 2022 because of the make up of the Company’s capital as of September 30, 2023 compared to the balance sheet as of September 30, 2022. Offsetting these increases was a decrease in furniture and equipment expenses of $93,000, or 4.4%, to $2.0 million for the nine months ended September 30, 2023 from $2.1 million for the nine months ended September 30, 2022 due to more normalized expense levels for furniture and equipment.
Income Tax Expense
Income tax expense increased $657,000, or 14.7%, to a tax expense of $5.1 million for the nine months ended September 30, 2023 from a tax expense of $4.5 million for the nine months ended September 30, 2022. The increase in federal income tax expense for the nine months ended September 30, 2023 compared to the same period a year ago was driven by the increase in income before income taxes of $3.0 million, to income before income tax of $26.6 million for the nine months ended September 30, 2023 compared to income before income tax expense of $23.6 million for the same period in the prior year. The Company was able to apply and claim a research and development tax credit of approximately $242,000 for its associated work in developing a software platform in 2022. The Company also invests in projects that have tax credit benefits in order to help reduce it's overall tax liability. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $675,000 for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the Company had an effective income tax expense rate of 19.3%, compared to an effective income tax expense rate of 18.9% for the nine months ended September 30, 2022.
Comparison of Statements of Financial Condition at September 30, 2023 and December 31, 2022
Total Assets
Total assets increased $95.7 million, or 5.0%, to $2.0 billion at September 30, 2023 from $1.93 billion at December 31, 2022. The increase was primarily the result of increases in the loan portfolio of $101.5 million and was offset by a decrease in federal funds sold of $9.4 million as of September 30, 2023.
Investment Securities
Investment securities decreased $9.7 million, or 9.3%, from $104.6 million at December 31, 2022 to $94.9 million at September 30, 2023. The decrease was primarily due to normal paydown of available-for-sale securities, amortization of certain restricted stock securities, and fluctuations in balances of restricted stock held in connection to FHLB advances. At September 30, 2023, our held-to-maturity portion of the securities portfolio, at amortized cost, was $17.6 million, and our available-for-sale portion of the securities portfolio, at fair value, was $56.7 million compared to our held-to-maturity portion of the securities portfolio of $17.6 million and our available-for-sale portion of the securities portfolio of $62.6 million at December 31, 2022.
Net Loans
Net loans increased $101.5 million, or 6.4%, to $1.68 billion at September 30, 2023 from $1.58 billion at December 31, 2022. Residential real estate loans increased $68.5 million, or 17.4%, to $462.9 million at September 30, 2023 from $394.4 million at December 31, 2022. Commercial real estate loans increased by $33.9 million from $700.7 million at December 31, 2022 to $734.6 million at September 30, 2023. Commercial and industrial loans decreased by $23.5 million from $97.4 million at December 31, 2022 to $73.9 million at September 30, 2023. Paycheck Protection Program ("PPP") loans comprised $1.0 million of this portfolio as of September 30, 2023. Construction loans increased $32.9 million to $426.7 million at September 30, 2023 from $393.8 million at December 31, 2022. Consumer loans decreased by $8.7 million from $13.3 million at December 31, 2022 to $4.6 million at September 30, 2023. The $8.7 million decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.
Allowance for Credit Losses - Loans
The allowance for credit losses on loans represents an amount that, in our judgment, will be adequate to absorb current and expected losses in the loan portfolio. The provision for credit losses on loans increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The table below summarizes the allowance activity for the periods indicated:
| For the Nine Months Ended September 30, |
For the Year Ended December 31, |
|||||||
| 2023 |
2022 |
|||||||
| (Dollars in thousands) |
||||||||
| Balance at beginning of year |
$ | 14,114 | $ | 11,697 | ||||
| Impact of adopting ASC 326 |
895 | — | ||||||
| Charge-offs: |
||||||||
| Commercial and industrial |
(325 | ) | — | |||||
| Consumer |
(6 | ) | — | |||||
| Total charge-offs |
(331 | ) | — | |||||
| Recoveries: |
||||||||
| Residential real estate |
8 | — | ||||||
| Consumer |
6 | 19 | ||||||
| Total recoveries |
14 | 19 | ||||||
| Net (charge-offs) recoveries |
(317 | ) | 19 | |||||
| Provision for credit losses - loans |
934 | 2,398 | ||||||
| Balance at end of period |
$ | 15,626 | $ | 14,114 | ||||
| Ratios: |
||||||||
| Net (charge-offs) recoveries to average loans outstanding |
(0.02 | )% | 0.00 | % | ||||
| Non-performing loans to allowance for credit losses on loans at end of period |
2.08 | % | 0.15 | % | ||||
| Allowance for credit losses on loans to gross loans at end of period |
0.92 | % | 0.88 | % | ||||
Nonperforming Assets
The following table presents information regarding nonperforming assets at the dates indicated:
| September 30, |
December 31, |
|||||||
| 2023 |
2022 |
|||||||
| (Dollars in thousands) |
||||||||
| Loans accruing past 90 days: |
||||||||
| Commercial and industrial |
$ | — | $ | 15 | ||||
| Consumer - secured |
— | 6 | ||||||
| Total loans accruing past 90 days |
— | 21 | ||||||
| Non-accrual loans |
||||||||
| Commercial and industrial |
325 | — | ||||||
| Total non-accrual loans |
325 | — | ||||||
| Total non-performing loans |
325 | 21 | ||||||
| Other real estate owned |
— | — | ||||||
| Total non-performing assets |
$ | 325 | $ | 21 | ||||
| Ratios: |
||||||||
| Total non-performing loans to gross loans receivable |
0.02 | % | 0.00 | % | ||||
| Total non-performing loans to total assets |
0.02 | % | 0.00 | % | ||||
| Total non-performing assets to total assets |
0.02 | % | 0.00 | % | ||||
Deposits
Deposits increased $170.3 million, or 11.3% to $1.68 billion at September 30, 2023 from $1.51 billion at December 31, 2022. Our core deposits decreased $20.0 million, or 1.7%, to $1.14 billion at September 30, 2023 from $1.16 billion at December 31, 2022. Non-interest bearing demand deposits decreased $155.8 million, or 28.3%, to $394.9 million at September 30, 2023 from $550.7 million at December 31, 2022. Interest bearing demand deposits decreased $3.7 million, or 4.6%, to $76.4 million at September 30, 2023 from $80.1 million at December 31, 2022. Time deposits increased $95.8 million, or 15.8%, to $704.0 million at September 30, 2023 from $608.1 million at December 31, 2022. Money market demand deposits increased $238.9 million, or 107.3%, to $461.4 million at September 30, 2023 from $222.5 million at December 31, 2022. The increase in money market deposit accounts and time deposits were primarily the result of the higher rate environment, deposit competition, and customers looking for additional interest-bearing options.
Liquidity and Capital Resources
Liquidity Management. Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Deposits are the primary source of funds for lending and investing activities. The Company uses wholesale deposits in addition to customer deposits, as funding sources. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB secured advances, other secured borrowings, federal funds purchased, and other short-term unsecured borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. Additional liquidity can be obtained through the Federal Reserve Bank Term Funding Program and discount window. The Company’s funding activities are monitored and governed through the Company’s asset/liability management process. MainStreet Bank had no federal funds purchased outstanding and an additional secured borrowing capacity of $560.3 million as of September 30, 2023. Additionally, at September 30, 2023, we had the ability to borrow up to $129.0 million from other financial institutions.
The Board of Directors, management, and the Asset Liability Committee (ALCO) are responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short and long-term liquidity needs as of September 30, 2023.
We monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand; expected deposit flows; yields available on interest-earning deposits and securities; and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short-and intermediate-term securities.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents, which include federal funds sold and interest-earning deposits in other banks. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2023, cash and cash equivalents totaled $121.2 million. The Company has availability on secured and unsecured lines for an additional $689.3 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $56.7 million at September 30, 2023.
Our cash flows are provided by and used in three primary activities: operating activities, investing activities, and financing activities. Net cash provided by operating activities was $26.3 million and $22.9 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. There were no sales of securities in the nine months ended September 30, 2023 or for nine months ended September 30, 2022. Net cash used in investing activities, which consist primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans and proceeds from maturing securities, was $102.1 million and $186.2 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. Net cash provided by financing activities was $66.4 million and $174.9 for the nine months ended September 30, 2023 and 2022, respectively, which consisted primarily of increases in interest bearing deposits of $326.1 million for the nine months ended September 30, 2023, partially offset by repayments of Federal Home Loan Bank advances of $100.0 million and decreased non-interest bearing deposits of $155.8 million.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily. We anticipate that we have sufficient funds to meet our current funding commitments. Certificates of deposit due within one year of September 30, 2023, totaled $470.8 million of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits, Federal Home Loan Bank advances and commitments from other financial institutions. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay. We believe, however, based on experience that a significant portion of such deposits will remain with us. We can attract and retain deposits by adjusting the interest rates offered.
Effects of Inflation. In an effort to combat inflation, the Federal Reserve, through the FOMC, increased rates a total of 5.25% during 2022 and through September 30, 2023, which has had a negative effect on the price of existing securities. As a result of rising interest rates, the Company recorded an accumulated other comprehensive loss on securities available for sale of approximately $10.8 million as of September 30, 2023, compared to recording accumulated other comprehensive loss in the amount of $8.5 million as of December 31, 2022. This unrealized loss is counter to total equity growth during 2022 and 2023 that had otherwise strong net earnings. Management does not anticipate the unrealized losses to be other than temporary and they do not reflect credit deterioration within the portfolio.
Capital Management. MainStreet Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2023, MainStreet Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory guidelines.
Regulatory Capital
Information presented for September 30, 2023 and December 31, 2022, reflects the Basel III capital requirements that became effective January 1, 2015 for the Bank. Under these capital requirements and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk- weightings and other factors.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2023 and 2022 is 2.50%. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total capital, Common Equity Tier 1 capital, and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2023, the Bank meet all capital adequacy requirements to which each is subject.
The Bank’s actual capital amounts and ratios are presented in the table (dollars in thousands):
| Actual |
Capital Adequacy Purposes |
To Be Well Capitalized Under the Prompt Corrective Action Provision |
||||||||||||||||||||||
| (Dollars in thousands) |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||
| As of September 30, 2023 |
||||||||||||||||||||||||
| Total capital (to risk-weighted assets) |
$ | 307,451 | 16.89 | % | $ | 145,603 | ≥ 8.0% | $ | 182,004 | > 10.0% | ||||||||||||||
| Common equity tier 1 capital (to risk-weighted assets) |
$ | 290,273 | 15.95 | % | $ | 81,902 | ≥ 4.5% | $ | 118,303 | > 6.5% | ||||||||||||||
| Tier 1 capital (to risk-weighted assets) |
$ | 290,273 | 15.95 | % | $ | 109,203 | ≥ 6.0% | $ | 145,603 | > 8.0% | ||||||||||||||
| Tier 1 capital (to average assets) |
$ | 290,273 | 14.97 | % | $ | 77,560 | ≥ 4.0% | $ | 96,950 | > 5.0% | ||||||||||||||
| As of December 31, 2022 |
||||||||||||||||||||||||
| Total capital (to risk-weighted assets) |
$ | 286,572 | 16.27 | % | $ | 140,929 | ≥ 8.0% | $ | 176,161 | ≥ 10.0% | ||||||||||||||
| Common equity tier 1 capital (to risk-weighted assets) |
$ | 272,458 | 15.47 | % | $ | 79,272 | ≥ 4.5% | $ | 114,504 | ≥ 6.5% | ||||||||||||||
| Tier 1 capital (to risk-weighted assets) |
$ | 272,458 | 15.47 | % | $ | 105,696 | ≥ 6.0% | $ | 140,929 | ≥ 8.0% | ||||||||||||||
| Tier 1 capital (to average assets) |
$ | 272,538 | 15.05 | % | $ | 72,435 | ≥ 4.0% | $ | 90,544 | ≥ 5.0% | ||||||||||||||
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2023, we had outstanding loan commitments of $361.8 million and $586,000 in outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.
Use of Certain Non-GAAP Financial Measures
The accounting and reporting policies of the Company conform to U.S. GAAP 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. These measures include adjusted net interest income and net interest margin.
Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods and other financial institutions. The non-GAAP measures used by management enhance comparability by excluding the effects of items that do not reflect ongoing operating performance, including non-recurring gains or charges. These non-GAAP financial measures should not be considered an alternative to U.S. GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. 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 U.S. GAAP financial measures is presented below.
| For the three months ended September 30, |
For the nine months ended September 30, |
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| (Dollars in thousands, except for per share data) |
2023 |
2022 |
2023 |
2022 |
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| Net interest margin, fully-taxable equivalent (FTE) |
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| Net interest income (GAAP) |
$ | 18,578 | $ | 18,096 | $ | 58,940 | $ | 49,413 | ||||||||
| FTE adjustment on tax-exempt securities |
71 | 69 | 212 | 212 | ||||||||||||
| Net interest income (FTE) (non-GAAP) |
$ | 18,649 | $ | 18,165 | 59,152 | 49,625 | ||||||||||
| Average interest earning assets |
1,865,607 | 1,740,998 | 1,846,600 | 1,654,044 | ||||||||||||
| Net interest margin (GAAP) |
3.95 | % | 4.12 | % | 4.27 | % | 3.99 | % | ||||||||
| Net interest margin (FTE) (non-GAAP) |
3.97 | % | 4.14 | % | 4.28 | % | 4.01 | % | ||||||||
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
Market Risk Management
The effective management of market risk is essential to achieving the Company’s strategic financial objectives. As a financial institution, the Company’s most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in the Company’s lines of business. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income, and to offset the risk of price changes for certain assets recorded at fair value.
Interest Rate Market Risk
The Company’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Company manages its exposure to fluctuations in interest rates through policies established by its Asset/Liability Committee. The Asset/Liability Committee meets regularly and has responsibility for approving asset/liability management policies, formulating strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company.
We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under different interest rate assumptions. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturity and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income.
The table below reflects the results of our Earnings-at-Risk (EaR) stress simulation. The EaR stress simulation is a financial risk management tool that we use to assess our raw exposure to an immediate and sustained change in interest rates up and down 400 basis points. The results focus specifically on the potential impact of each scenario to our net interest income, and help us understand how various risks, such as market fluctuations, economic downturns, or specific events, could affect our ability to generate profits.
Our simulation model uses actual data as of September 30, 2023, and dynamically incorporates Board-approved budget assumptions in order to forecast the impact of stress factors. It is important to note that no other changes are made. The purpose of this simulation is so that management and the Board can make informed decisions that enhance our resilience and long-term viability. In other words, we examine the results of the stress test first to ensure that they are within Board-approved risk tolerance limits and second to determine whether we should make changes to the structure of our earning assets and interest-bearing liabilities.
Finally, as we consider simulation model outputs, we also consider their impact to other risk factors and ultimately to determine whether our capital provides a sufficient cushion to our risk profile.
| Net Interest Income Stress Simulation | |||
| September 30, 2023 | |||
| Basis Point Change in |
Net Interest Income |
Year 1 Change |
|
| Interest Rates (1) |
Year 1 Forecast (2) |
From Level |
|
| (Dollars in thousands) |
|||
| +400 |
$89,054 | 6.47 | % |
| +300 |
$88,483 | 5.78 | % |
| +200 |
$87,157 | 4.20 | % |
| +100 |
$86,028 | 2.85 | % |
| Level |
$83,646 | — | |
| -100 | $81,687 | (2.34 | )% |
| -200 | $80,568 | (3.68 | )% |
| -300 | $81,795 | (2.21 | )% |
| -400 | $81,562 | (2.49 | )% |
(1) Interest rate changes are immediate and sustained for the entire 12-month period
(2) Simulation model assumptions are locked for the entire 12-month period.
Item 4 – Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2023. Based on their evaluation of the Company’s disclosure controls and procedures, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures designed 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 the Securities and Exchange Commission rules and regulations are designed and operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) occurred during the third fiscal quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has been no significant effect or impact on internal controls over financial reporting as the Company implemented the current expected credit loss accounting standard.
At September 30, 2023, the Company was not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. In addition, no material proceedings are pending or known to be threatened or contemplated against the Company or its subsidiary by governmental authorities.
For detailed information about certain risk factors that could materially affect our business, financial condition, results of operations or prospects, see “Risk Factors” in Part I, Item 1A of our 2022 Annual Report on Form 10-K. Set forth below are additional risk factors.
Defaults by or deteriorating asset quality of other financial institutions could adversely affect us.
Financial institutions are often interrelated as a result of trading, clearing, counterparty, or other relationships. For example, we execute transactions with financial institution counterparties. These transactions may expose us to counterparty credit risk that could ultimately result in a loss on default. Such a loss could have an effect on our financial condition. Further, actions taken by governments and/or regulatory bodies in response to financial crises affecting the banking system and financial markets, such as nationalization, conservatorship, receivership, or other intervention could have an adverse effect.
The results of mainstream media and social media contagion and speculation could impact the banking system and have an adverse effect on us.
The results of poorly executed decisions in a financial institution of significant size can negatively impact other financial institutions, despite the quality of leadership and decision making of the other financial institutions or their ability to effectively identify, measure, manage and control risk.
Misinformed or inaccurate reporting regarding an incident or incidents can impact the broader banking industry. Any adverse financial market or economic condition could be reported in a way to exert downward pressure on the price of financial institution securities and could negatively impact credit availability for certain issuers without regard to their underlying financial strength.
This contagion risk can also occur when a perceived lack of trust in the banking system spreads throughout the industry based upon the results of a few poorly managed larger financial institutions.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarized the common shares repurchased during the nine months ended September 30, 2023.
| (Dollars in thousands, except for per share amounts) |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs |
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| July 1, 2023 - July 31, 2023 |
— | $ | — | — | $ | 2,109 | ||||||||||
| August 1, 2023 - August 31, 2023 |
— | $ | — | — | $ | 2,109 | ||||||||||
| September 1, 2023 - September 30, 2023 |
— | $ | — | — | $ | 2,109 | ||||||||||
| Total |
— | $ | — | — | $ | — | ||||||||||
| 31.1 |
Rule 13a-14(a) Certification of the Chief Executive Officer * |
|
| 31.2 |
Rule 13a-14(a) Certification of the Chief Financial Officer * |
|
| 32.0 |
||
| 101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101 |
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited) |
|
| 104 |
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included with Exhibit 101) |
* Filed herewith
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.
| MAINSTREET BANCHSHARES, INC |
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| (Registrant) |
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| Date: November 13, 2023 |
By: |
/s/ Jeff W. Dick |
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| Jeff W. Dick |
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| Chairman & Chief Executive Officer |
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| (Principal Executive Officer) |
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| Date: November 13, 2023 | By: |
/s/ Thomas J. Chmelik |
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| Thomas J. Chmelik |
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| Senior Executive Vice President and |
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| Chief Financial Officer |
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| (Principal Financial Officer) |