MainStreet Bancshares Inc
For the period ended Jun 30, 2024. Filed Aug 13, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 13, 2024
MNSB$22.11+2.1%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-13.
0001437749-24-016165
Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-13.
0001437749-24-026291
Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 123 previous paragraphs and 153 current paragraphs.
87 unchanged; 36 reworded; 19 added; 0 removed; 0 previous and 11 current paragraphs rearranged.
Tables are not compared: 53 previous and 60 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (19)
Current report
The recovery of credit losses on off-balance sheet credit exposure was $293,000 for the three months ended June 30, 2024 compared to a provision for credit losses of $21,000 for the three months ended June 30, 2023. The decrease in off-balance sheet credit exposure was primarily related to the utilization of revolving lines of credit.
Current report
During the three months ended June 30, 2024, special mention (criticized) loans increased $15.9 million and substandard (classified) loans increased $22.9 million as of June 30, 2024 to a balance of $33.4 million. Of the classified loans as of June 30, 2024, 55% are related to the two relationships that are experiencing a drop in liquidity due to the sharp rise in interest rates.
Current report
Classified loans have increased to $33.4 million as of June 30, 2024 compared to the same period in 2023. Approximately 55% of the classified loan balances are related to two borrowers who are experiencing liquidity tightening as a result of the sharp increase in interest rates. The Company routinely charges off potential exposure as identified, and identifies and executes the best course of action to minimize any further loss exposure. Approximately 45% of classified loans are made up of smaller credits that have been either placed on nonaccrual or the Company is monitoring closely to be able to assess repayment. As interest rates have risen significantly over the last two years, management believes in taking a proactive approach to risk management in the loan portfolio, particularly as credits are due to reprice in a new rate environment. During the three months ended June 30, 2024, there was $370,000 in charge-offs incurred and recoveries of $6,000 were received.
Current report
Non-interest income increased $63,000, or 7.8%, to $873,000 for the three months ended June 30, 2024 from $810,000 for the three months ended June 30, 2023. The increase in non-interest income was primarily due to the adoption of the new accounting guidance that allowed for the use of proportional amortization on tax credit investments. In 2023, undistributed losses on operations of these investments were recognized in the income statement in non-interest income and subsequently are now recorded in income tax expense. Decreases in deposit account service charges in the three months ended June 30, 2024 were $45,000 compared to the same period in 2023. The decrease in account service charges was offset by an increase of $32,000 in bank owned life insurance income for the three months ended June 30, 2024, as a result of the elevated interest rate environment compared to same period in the prior year. During the three months ended June 30, 2024, the Company recorded a net loss on a security that was called and exchanged for a similar instrument from the same issuer, however, accounting guidance determined the transaction be treated as a disposal and acquisition under GAAP. The Company continues to focus on increasing non-interest income as it continues to add services that strategically benefit our customers.
Current report
General
Current report
Total revenue increased $6.3 million to $67.5 million for the six months ended June 30, 2024 from $61.2 million for the six months ended June 30, 2023. This increase in total revenue was offset primarily by an increase in interest expense. Total expenses increased $18.5 million, to $60.0 million for the six months ended June 30, 2024 from $41.5 million for the six months ended June 30, 2023, of which interest expense accounted for $16.1 million. The increase in revenue for the six months ended June 30, 2024 was primarily due to increases in loan interest income of $6.4 million over the same period in 2023. Operating costs grew by 10.8%, or $2.4 million for the six months ended June 30, 2024 from $22.6 million for the six months ended June 30, 2023. Net income decreased $9.2 million to $5.9 million for the six months ended June 30, 2024 from $15.1 million for the six months ended June 30, 2023. The decrease in net income was primarily impacted by the sharp rise in funding costs that occurred in the last three quarters of 2023 and continues through the first six months 2024.
Current report
Interest Income
Current report
Total interest income increased $6.4 million, or 10.7%, to $65.8 million for the six months ended June 30, 2024 from $59.5 million for the six months ended June 30, 2023, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $6.4 million. Total average interest-earning assets increased $114.9 million, to $1.94 billion for the six months ended June 30, 2024 from $1.82 billion for the same period in 2023 primarily because of an increase of $130.8 million in the average balance of loans and was offset by a decrease of $14.7 million in the average balance of federal funds sold and a $1.1 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 27 basis points to 6.86% for the six months ended June 30, 2024 as compared to 6.59% for the six months ended June 30, 2023 primarily due to market conditions, and the Company strategically managing the balance sheet in response to the changing conditions.
Current report
Interest and fees on loans increased $6.4 million, to $62.0 million for the six months ended June 30, 2024 from $55.6 million for the same period in 2023. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $130.8 million, which increased to $1.76 billion for the six months ended June 30, 2024 from $1.62 billion for the six months ended June 30, 2023. The average yield on loans increased 23 basis points, or 3.3% for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.
Current report
Interest income on federal funds sold and interest-earning deposits decreased by $47,000 to $2.3 million for the six months ended June 30, 2024, from $2.3 million for the six months ended June 30, 2023. The decrease was primarily due to an decrease in the average balances despite the yield on these deposits increasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $14.7 million to $88.3 million for the six months ended June 30, 2024 from $103.1 million for the same period in 2023. The average yield increased to 5.17% for the six months ended June 30, 2024 from 4.52% for the same period in 2023.
Current report
Interest Expense
Current report
Net Interest Income
Current report
Net interest income decreased approximately $9.7 million, or 24.0%, to $30.7 million for the six months ended June 30, 2024 from $40.4 million for the six months ended June 30, 2023 in connection with our net interest-earning assets decreasing $102.8 million to $485.0 million for the six months ended June 30, 2024 from $587.8 million for the six months ended June 30, 2023. The interest rate spread tightened by 150 basis points to 1.99% for the six months ended June 30, 2024 from 3.49% for the six months ended June 30, 2023, on a tax equivalent basis. The net interest margin compressed by 127 basis points from 4.48% for the six months ended June 30, 2023 to 3.21% for the six months ended June 30, 2024 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.
Current report
Rate/ Volume Analysis
Current report
Provision for Credit Losses
Current report
Non-Interest Income
Current report
Non-Interest Expense
Current report
Non-interest expense increased $2.4 million, or 10.8%, to $25.0 million for the six months ended June 30, 2024, from $22.6 million for the six months ended June 30, 2023 primarily because of increases in furniture and equipment expenses and other various operating expenses of $1.5 million. Salaries and employee benefits increased $756,000 for the six months ended June 30, 2024 compared to the same period in 2023. The Company added sixteen employees as the franchise continues to grow and build out it strategic initiatives. Outside services, which includes professional fees for attorneys, accountants and consultants, increased $620,000 to $1.6 million for the six months ended June 30, 2024, from $994,000 for the six months ended June 30, 2023. This increase is driven by regulatory requirements in audits and routine legal assistance as the Company grows. Information security tools and other software expenses increased approximately $181,000 to $312,000 for the six months ended June 30, 2024, from $131,000 for the six months ended June 30, 2023. FDIC insurance increased approximately $235,000 to $660,000 for the six months ended June 30, 2024, from $425,000 for the six months ended June 30, 2023 because of the make-up of the FDIC reserve pool for participating banks as of June 30, 2024 compared to the reserve pool as of June 30, 2023. Offsetting these increases was a decrease in advertising and marketing expenses of $475,000, or 31.8%, to $1.0 million for the six months ended June 30, 2024 from $1.5 million for the six months ended June 30, 2023 due to timing and being selective in initiatives to further enhance the Company's brand.
Current report
Income Tax Expense
Reworded paragraphs (36)
Previous wording
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, 2023, previously filed with the SEC on March 20, 2024. Results for the three months ended March 31, 2024 are not necessarily indicative of results for the year ending December 31, 2024 or any future period.
Current wording
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, 2023, previously filed with the SEC on March 20, 2024. Results for the three and six months ended June 30, 2024 are not necessarily indicative of results for the year ending December 31, 2024 or any future period.
Previous wording
MainStreet Bancshares, Inc. is a bank holding company that owns 100% of MainStreet Bank and MainStreet Community Capital, LLC.
Current wording
MainStreet Bancshares, Inc. is a financial holding company that owns 100% of MainStreet Bank and MainStreet Community Capital, LLC.
Previous wording
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 processors, 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). As of March 31, 2024, we have capitalized $15.7 million in developing our SaaS solution, which is shown separately on our statement of financial condition. Our SaaS software program will be deployed in the second quarter of 2024. Additional information can be found in Note 4 of our consolidated financial statements, our investor presentations filed quarterly, and in the investor relations portion of our website.
Current wording
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. This division of MainStreet Bank currently serves money service businesses, payment processors, 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). As of June 30, 2024, we have capitalized $17.2 million in developing our SaaS solution, which is shown separately on our statement of financial condition. Our SaaS software program will be deployed in the second half of 2024. Additional information can be found in Note 4 of our consolidated financial statements, our investor presentations filed quarterly, and in the investor relations portion of our website.
Previous wording
The United States is experiencing the effects of 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.
Current wording
The United States is experiencing the effects of 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 and has maintained the Federal Funds Rate at 5.33% through the first half of 2024. In addition to raising the Federal Funds rate, the Federal Reserve may take other means necessary to fulfill its dual mandate.
Previous wording
Total revenue increased $3.6 million to $33.3 million for the three months ended March 31, 2024 from $29.6 million for the three months ended March 31, 2023. These increases in total revenue were offset primarily by an increase in interest expense. Total expenses increased $10.0 million to $29.3 million for the three months ended March 31, 2024 from $19.3 million for the three months ended March 31, 2023, of which interest expense accounted for $9.4 million. The increase in revenue for the three months ended March 31, 2024 was primarily due to increases in loan interest income of $3.8 million over the same period in 2023. Operating costs grew moderately by 5%, or $621,000 for the three months ended March 31, 2024 from $11.7 million for the three months ended March 31, 2023. Net income decreased $4.8 million to $3.3 million for the three months ended March 31, 2024 from $8.2 million for the three months ended March 31, 2023. The decrease in net income was primarily impacted by the sharp rise in funding costs that occurred in the last three quarters of 2023.
Current wording
Total revenue increased $2.7 million to $34.2 million for the three months ended June 30, 2024 from $31.5 million for the three months ended June 30, 2023. This increase in total revenue was offset primarily by an increase in interest expense. Total expenses increased $8.4 million to $30.7 million for the three months ended June 30, 2024 from $22.3 million for the three months ended June 30, 2023, of which interest expense accounted for $6.6 million. The increase in revenue for the three months ended June 30, 2024 was primarily due to increases in loan interest income of $2.7 million over the same period in 2023. Operating costs grew by 16.7%, or $1.8 million for the three months ended June 30, 2024 from $10.9 million for the three months ended June 30, 2023, as the Company ramps up staffing and infrastructure as Avenu is placed in service. Net income decreased $4.3 million to $2.6 million for the three months ended June 30, 2024 from $6.9 million for the three months ended June 30, 2023. The decrease in net income was primarily impacted by the sharp rise in funding costs that occurred in the last three quarters of 2023.
Previous wording
Total interest income increased $3.7 million, or 13.0%, to $32.4 million for the three months ended March 31, 2024 from $28.7 million for the three months ended March 31, 2023, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $3.8 million. Total average interest-earning assets increased $100.2 million, to $1.91 billion for the three months ended March 31, 2024 from $1.81 billion for the same period in 2023 primarily because of an increase of $129.0 million in the average balance of loans and was offset by a decrease of $26.7 million in the average balance of federal funds sold and a $2.1 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 38 basis points to 6.80% for the three months ended March 31, 2024 as compared to 6.42% for the three months ended March 31, 2023 primarily due to market conditions, and the Federal Reserve increasing the benchmark interest rates by 525 basis points throughout 2022 and 2023.
Current wording
Total interest income increased $2.6 million, or 8.5%, to $33.3 million for the three months ended June 30, 2024 from $30.8 million for the three months ended June 30, 2023, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $2.7 million. Total average interest-earning assets increased $129.8 million, to $1.96 billion for the three months ended June 30, 2024 from $1.83 billion for the same period in 2023 primarily because of an increase of $132.8 million in the average balance of loans and was offset by a decrease of $2.9 million in the average balance of federal funds sold and a $0.1 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 9 basis points to 6.84% for the three months ended June 30, 2024 as compared to 6.75% for the three months ended June 30, 2023 primarily due to market conditions.
Previous wording
Interest and fees on loans increased $3.8 million, to $30.5 million for the three months ended March 31, 2024 from $26.7 million for the same period in 2023. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $129.0 million, which increased to $1.73 billion for the three months ended March 31, 2024 from $1.60 billion for the three months ended March 31, 2023. The average yield on loans increased 29 basis points, or 4.3%, for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023.
Current wording
Interest and fees on loans increased $2.7 million, to $31.5 million for the three months ended June 30, 2024 from $28.9 million for the same period in 2023. This increase was primarily due to an increase in the average yield on loans and the average loans outstanding increasing $132.8 million, which increased to $1.78 billion for the three months ended June 30, 2024 from $1.65 billion for the three months ended June 30, 2023. The average yield on loans increased 8 basis points, or 1.1%, for the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.
Previous wording
Interest income on federal funds sold and interest-earning deposits increased by $50,000 to $1.2 million for the three months ended March 31, 2024, from $1.1 million for the three months ended March 31, 2023. 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 $26.7 million to $92.0 million for the three months ended March 31, 2024 from $118.7 million for the same period in 2023. The average yield increased to 5.15% for the three months ended March 31, 2024 from 3.87% for the same period in 2023.
Current wording
Interest income on federal funds sold and interest-earning deposits decreased by $96,000 to $1.1 million for the three months ended June 30, 2024, from $1.2 million for the three months ended June 30, 2023. The decrease was primarily due to a decrease in the average yield on these deposits as well as the average balances decreasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $2.9 million to $84.7 million for the three months ended June 30, 2024 from $87.6 million for the same period in 2023. The average yield decreased to 5.13% for the three months ended June 30, 2024 from 5.40% for the same period in 2023.
Previous wording
Interest on investment securities decreased by $75,000 to $777,000 for the three months ended March 31, 2024 from $852,000 for the three months ended March 31, 2023 on a fully tax-equivalent basis. Interest on investments in U.S Treasury, U.S. Government Agencies, and U.S Municipals decreased in total $13,000, or 3.6%, to $364,000 for the three months ended March 31, 2024, from $377,000 for the three months ended March 31, 2023. Interest on mortgage-backed securities decreased by $15,000, or 13.0%, to $102,000 for the three months ended March 31, 2024, from $118,000 for the three months ended March 31, 2023. Subordinated debt interest income increased by $2,000, or 2.0%, to $136,000 for the three months ended March 31, 2024, from $133,000 for the three months ended March 31, 2023. The average yield on taxable securities decreased 53 basis points, to 3.12% and the average yield on tax-exempt securities increased 9 basis points, to 3.66% on a tax equivalent basis for the three months ended March 31, 2024, from 3.65% and 3.57%, respectively, for the same period in 2023. Fluctuation in market rates and maturing securities resulted in investment income decreasing, in conjunction with, the average balance of investment securities decreasing by $2.1 million, to $93.4 million for the three months ended March 31, 2024, from $95.5 million for the three months ended March 31, 2023.
Current wording
Interest on investment securities increased by $27,000 to $769,000 for the three months ended June 30, 2024 from $742,000 for the three months ended June 30, 2023 on a fully tax-equivalent basis. Interest on investments in U.S. Treasury, U.S. Government Agencies, and U.S. Municipals decreased in total $7,000, or 1.9%, to $368,000 for the three months ended June 30, 2024, from $375,000 for the three months ended June 30, 2023. Interest on mortgage-backed securities increased by $12,000, or 14.6%, to $94,000 for the three months ended June 30, 2024, from $82,000 for the three months ended June 30, 2023. Subordinated debt interest income increased by $1,000, or 1.0%, to $128,000 for the three months ended June 30, 2024, from $127,000 for the three months ended June 30, 2023. The average yield on taxable securities increased 11 basis points, to 3.12% and the average yield on tax-exempt securities increased 16 basis points, to 3.71% on a tax equivalent basis for the three months ended June 30, 2024, from 3.01% and 3.55%, respectively, for the same period in 2023. Fluctuation in market rates resulted in investment income increasing, despite the average balance of investment securities decreasing by $0.1 million, to $92.0 million for the three months ended June 30, 2024, from $92.1 million for the three months ended June 30, 2023.
Previous wording
Total interest expense increased $9.4 million, to $17.0 million for the three months ended March 31, 2024 from $7.6 million for the three months ended March 31, 2023, primarily due to a $4.7 million increase in interest expense on time deposits and a $4.0 million increase in interest expense on money market deposits. The Company also saw an increase of interest expense on interest bearing demand deposits of $1.5 million in the three months ended March 31, 2024 over the three months ended March 31, 2023. These increases were offset by a decrease of interest expense of $860,000 on advances from the Federal Home Loan Bank in the three months ended March 31, 2024, compared to the three months ended March 31, 2023.
Current wording
Total interest expense increased $6.6 million, to $18.0 million for the three months ended June 30, 2024 from $11.4 million for the three months ended June 30, 2023, primarily due to a $2.0 million increase in interest expense on time deposits and a $2.7 million increase in interest expense on money market deposits. The Company also saw an increase of interest expense on interest bearing demand deposits of $1.9 million in the three months ended June 30, 2024 over the three months ended June 30, 2023. These increases were offset by a decrease of interest expense of $13,000 on advances from the Federal Home Loan Bank in the three months ended June 30, 2024, compared to the three months ended June 30, 2023.
Previous wording
Interest expense on deposits increased $10.2 million to $16.0 million for the three months ended March 31, 2024 from $5.8 million for the three months ended March 31, 2023 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average deposit balances was $300.3 million to $1.33 billion during the three months ended March 31, 2024 as compared to $1.03 billion for the three months ended March 31, 2023. The increase in the average balance of interest-bearing deposits was primarily a result of a $208.6 million increase in the average balance of money market deposit accounts and by a $36.6 million increase in the average balance of time deposits. The average cost of deposits was 482 basis points for the three months ended March 31, 2024, compared to 227 basis points for the three months ended March 31, 2023. The average rate paid on money market deposits increased 262 basis points to 4.79% for the three months ended March 31, 2024 from 2.17% for the three months ended March 31, 2023. The average rate paid on interest-bearing demand deposits increased 343 basis points to 5.10% for the three months ended March 31, 2024 from 1.67% for the three months ended March 31, 2023 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit increased by 249 basis points to 4.99% for the three months ended March 31, 2024 as compared to 2.50% for the three months ended March 31, 2023. The decrease in the average balance of non-interest bearing demand deposits for the three months ended March 31, 2024, primarily was the result of depositors looking for higher yielding products and market competition.
Current wording
Interest expense on deposits increased $6.6 million to $17.0 million for the three months ended June 30, 2024 from $10.4 million for the three months ended June 30, 2023 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average deposit balances was $207.8 million to $1.40 billion during the three months ended June 30, 2024 as compared to $1.19 billion for the three months ended June 30, 2023. The increase in the average balance of interest-bearing deposits was primarily a result of a $119.5 million increase in the average balance of money market deposit accounts and by a $98.4 million increase in the average balance of interest-bearing demand deposits. The average cost of deposits was 488 basis points for the three months ended June 30, 2024, compared to 350 basis points for the three months ended June 30, 2023. The average rate paid on money market deposits increased 147 basis points to 4.88% for the three months ended June 30, 2024 from 3.41% for the three months ended June 30, 2023. The average rate paid on interest-bearing demand deposits increased 370 basis points to 5.06% for the three months ended June 30, 2024 from 1.36% for the three months ended June 30, 2023 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit increased by 113 basis points to 5.06% for the three months ended June 30, 2024 as compared to 3.93% for the three months ended June 30, 2023. The decrease in the average balance of non-interest bearing demand deposits for the three months ended June 30, 2024, primarily was the result of depositors looking for higher yielding products and market competition.
Previous wording
Net interest income decreased approximately $5.7 million, or 27.1%, to $15.4 million for the three months ended March 31, 2024 from $21.1 million for the three months ended March 31, 2023 in connection with our net interest-earning assets decreasing $130.5 million to $496.6 million for the three months ended March 31, 2024 from $627.1 million for the three months ended March 31, 2023. The interest rate spread tightened by 185 basis points to 1.99% for the three months ended March 31, 2024 from 3.84% for the three months ended March 31, 2023, on a tax equivalent basis. The net interest margin compressed by 149 basis points from 4.73% for the three months ended March 31, 2023 to 3.24% for the three months ended March 31, 2024 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.
Current wording
Net interest income decreased approximately $4.0 million, or 20.7%, to $15.3 million for the three months ended June 30, 2024 from $19.3 million for the three months ended June 30, 2023, on a tax equivalent basis, in connection with our net interest-earning assets decreasing $75.5 million to $473.4 million for the three months ended June 30, 2024 from $548.9 million for the three months ended June 30, 2023. The interest rate spread tightened by 120 basis points to 1.97% for the three months ended June 30, 2024 from 3.17% for the three months ended June 30, 2023, on a tax equivalent basis. The net interest margin compressed by 109 basis points from 4.24% for the three months ended June 30, 2023 to 3.15% for the three months ended June 30, 2024 on a tax equivalent basis. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of adjusted net interest margin.
Previous wording
Non-interest expense increased $621,000, or 5.3%, to $12.3 million for the three months ended March 31, 2024, from $11.7 million for the three months ended March 31, 2023 primarily because of increases in furniture and equipment expenses and other various operating expenses of $400,000. Information security tools and other software expenses increased approximately $321,000 to $465,000 for the three months ended March 31, 2024, from $144,000 for the three months ended March 31, 2023. Franchise taxes increased approximately $98,000 to $557,000 for the three months ended March 31, 2024, from $459,000 for the three months ended March 31, 2023 because of the make up of the Company’s capital as of March 31, 2024 compared to the balance sheet as of March 31, 2023. Offsetting these increases was a decrease in advertising and marketing expenses of $343,000, or 43.0%, to $454,000 for the three months ended March 31, 2024 from $797,000 for the three months ended March 31, 2023 due to timing and being selective in initiatives to further enhance the Company's brand.
Current wording
Non-interest expense increased $1.8 million, or 16.7%, to $12.7 million for the three months ended June 30, 2024, from $10.9 million for the three months ended June 30, 2023 primarily because of increases in salaries and employee benefits of $889,000. The Company added sixteen employees as the franchise continues to grow and build out its strategic initiatives. Outside services, which includes professional fees for attorneys, accountants and consultants, increased $335,000 to $839,000 for the six months ended June 30, 2024, from $504,000 for the six months ended June 30, 2023. This increase is driven by regulatory requirements in audits and routine legal assistance as the Company grows. Information security tools increased approximately $120,000 to $186,000 for the three months ended June 30, 2024, from $67,000 for the three months ended June 30, 2023. FDIC insurance increased approximately $135,000 to $330,000 for the three months ended June 30, 2024, from $195,000 for the three months ended June 30, 2023 because of the make-up of the reserve pool as of June 30, 2024 compared to the reserve pool as of June 30, 2023. Offsetting these increases was a decrease in advertising and marketing expenses of $132,000, or 18.9%, to $566,000 for the three months ended June 30, 2024 from $698,000 for the three months ended June 30, 2023 due to timing and being selective in initiatives to further enhance the Company's brand.
Previous wording
Income tax expense decreased $1.1 million, or 57.6%, to a tax expense of $830,000 for the three months ended March 31, 2024 from a tax expense of $2.0 million for the three months ended March 31, 2023. The decrease in federal income tax expense for the three months ended March 31, 2024 compared to the same period a year ago was driven by the decrease in income before income taxes of $6.0 million, to income before income tax of $4.1 million for the three months ended March 31, 2024 compared to income before income tax expense of $10.1 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 $326,000 for its associated work in developing a software platform in 2023. The Company also invests in projects that have tax credit benefits in order to help reduce its 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 $105,000 for the three months ended March 31, 2024. For the three months ended March 31, 2024, the Company had an effective income tax expense rate of 20.1%, compared to an effective income tax expense rate of 19.4% for the three months ended March 31, 2023. Since the Company adopted the proportional amortization method to account for its tax credit investments, we expected our effective income tax rate to increase moderately.
Current wording
Income tax expense decreased $1.4 million, or 85.5%, to a tax expense of $238,000 for the three months ended June 30, 2024 from a tax expense of $1.6 million for the three months ended June 30, 2023. The decrease in federal income tax expense for the three months ended June 30, 2024 compared to the same period a year ago was driven by the decrease in income before income taxes of $5.7 million, to income before income tax of $2.9 million for the three months ended June 30, 2024 compared to income before income tax expense of $8.6 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 $326,000 for its associated work in developing a software platform. The Company also invests in projects that have tax credit benefits in order to help reduce its overall tax liability, timing of these tax credits are layered into our overall assessment. As a result of expanding its footprint, the Company has included assessments in income tax expense for potential state tax liabilities which totaled $76,000 for the three months ended June 30, 2024. For the three months ended June 30, 2024, the Company had an effective income tax expense rate of 8.3%, compared to an effective income tax expense rate of 19.1% for the three months ended June 30, 2023. The effective tax rate for the three months ended June 30, 2024 was largely impacted by a tax credit investment during the quarter with immediate credit claim components. Since the Company adopted the proportional amortization method to account for its tax credit investments, we expected our effective income tax rate to increase moderately.
Previous wording
The provision for credit losses on loans decreased by $251,000 for the three months ended March 31, 2024 from a provision for credit losses on loans of $415,000 for the three months ended March 31, 2023. Loan originations, which totaled approximately $45.5 million for the three months ended March 31, 2023 decreased $11.5 million to $34.0 million for the three months ended March 31, 2024. During the quarter ended March 31, 2024, the Company was able to further segment many loans within the commercial and industrial segment that had collateral backed by government contracts. These loans present a different risk profile than typical commercial and industrial loans, and come with different qualitative factors within our credit loss model. The Company did see an uptick in non-performing loans at March 31, 2024, with a balance of $9.3 million, however this is largely attributed to one loan and the Company is actively working towards a solution. As of March 31, 2024, the Company had only 2.12% criticized and classified loans to total gross loans.
Current wording
The provision for credit losses on loans increased by $63,000 for the six months ended June 30, 2024 from a provision for credit losses on loans of $1.0 million for the six months ended June 30, 2023. Loan originations, which totaled approximately $128.2 million for the six months ended June 30, 2023 decreased $47.7 million to $80.5 million for the six months ended June 30, 2024. During the six months ended June 30, 2024, the Company was able to further segment many loans within the commercial and industrial segment that had collateral backed by government contracts. These loans present a different risk profile than typical commercial and industrial loans, and come with different qualitative factors within our credit loss model. The Company did see an uptick in non-performing loans at June 30, 2024, with a balance of $20.7 million, however this is largely attributed to two relationships who encountered liquidity constraints. The Company is proactive in identifying issues and acts decisively when prudent. As of June 30, 2024, the Company had only 2.74% criticized and classified loans to total gross loans.
Previous wording
The recovery of credit losses on off-balance sheet credit exposure was $359,000 for the three months ended March 31, 2024 and $132,000 for the three months ended March 31, 2023.
Current wording
The recovery of credit losses on off-balance sheet credit exposure was $652,000 for the six months ended June 30, 2024 and $111,000 for the six months ended June 30, 2023. The decrease in off-balance sheet credit exposure was primarily related to the utilization of revolving lines of credit.
Previous wording
During the three months ended March 31, 2024, special mention loans decreased $3.0 million and substandard loans remained consistent as of March 31, 2024 with a balance of $21.1 million. Of the substandard loans as of March 31, 2024, 52% is related to one relationship that the Company feels is on a path to positive resolution and an additional 27% of substandard loans have SBA guarantees associated with them. As interest rates have risen significantly over the last two years, management believes in taking a proactive approach to risk management in the loan portfolio, particularly as credits are due to reprice in a new rate environment . During the three months ended March 31, 2024, there was $141,000 in charge-offs incurred and recoveries of $2,000 were received.
Current wording
During the six months ended June 30, 2024, special mention (criticized) loans decreased $3.1 million. Substandard (classified) loans increased $12.2 million as of June 30, 2024 to a balance of $33.4 million. Of the classified loans as of June 30, 2024, 55% are related to the two relationships that are experiencing a drop in liquidity due to the sharp rise in interest rates. Approximately 45% of classified loans are made up of smaller credits that have been placed on nonaccrual or the Company is monitoring closely to be able to assess repayment. During the six months ended June 30, 2024, the Company has adjusted certain factors within the allowance for credit loss model to respond to the current increase in nonperforming loans. As interest rates have risen significantly over the last two years, management believes in taking a proactive approach to risk management in the loan portfolio, particularly as credits are due to reprice in a new rate environment. During the six months ended June 30, 2024, there was $511,000 in charge-offs incurred and recoveries of $8,000 were received.
Previous wording
Non-interest income decreased $112,000, or 11.2%, to $891,000 for the three months ended March 31, 2024 from $1.0 million for the three months ended March 31, 2023. The decrease in non-interest income was primarily due to decreases in deposit account service charges in the three months ended March 31, 2024 compared to the same period in 2023. The decrease in account service charges was offset by an increase $37,000 in bank owned life insurance income for the three months ended March 31, 2024, as a result of the elevated interest rate environment compared to same period in the prior year. The Company continues to focus on increasing fee as it continues to add services that strategically benefit our customers.
Current wording
Non-interest income decreased $49,000, or 2.7%, to $1.8 million for the six months ended June 30, 2024 from $1.8 million for the six months ended June 30, 2023. The decrease in non-interest income was primarily due to decreases in deposit account service charges in the six months ended June 30, 2024 compared to the same period in 2023. The decrease in account service charges was offset by an increase $69,000 in bank owned life insurance income for the six months ended June 30, 2024, as a result of the elevated interest rate environment compared to same period in the prior year. The Company continues to focus on increasing fee income as it continues to add services that strategically benefit our customers. The Company recognized a loss of $48,000 on a security that was called and replaced with more favorable terms that benefited both the bond issuers and bond holders.
Previous wording
Total assets increased $34.6 million, or 1.7%, to $2.1 billion at March 31, 2024 from $2.0 billion at December 31, 2023. The increase was primarily the result of increases in the loan portfolio of $21.9 million and an increase in federal funds sold of $14.6 million as of March 31, 2024.*** ***
Current wording
Total assets increased $58.3 million, or 2.9%, to $2.1 billion at June 30, 2024 from $2.0 billion at December 31, 2023. The increase was primarily the result of increases in the loan portfolio of $73.7 million and was offset by a decrease in federal funds sold of $11.2 million as of June 30, 2024.*** ***
Previous wording
Investment securities decreased $1.7 million, or 1.7%, from $101.6 million at December 31, 2023 to $99.9 million at March 31, 2024. The decrease was primarily due to normal paydown of available-for-sale securities and amortization of certain restricted stock securities. At March 31, 2024, our held-to-maturity portion of the securities portfolio, at amortized cost, was $17.3 million, and our available-for-sale portion of the securities portfolio, at fair value, was $58.7 million compared to our held-to-maturity portion of the securities portfolio of $17.3 million and our available-for-sale portion of the securities portfolio of $59.9 million at December 31, 2023.
Current wording
Investment securities decreased $1.1 million, or 1.1%, from $101.6 million at December 31, 2023 to $100.4 million at June 30, 2024. The decrease was primarily due to normal paydown of available-for-sale securities and amortization of certain restricted stock securities, which was offset by new investments of restricted equities of $2.4 million. At June 30, 2024, our held-to-maturity portion of the securities portfolio, at amortized cost, was $16.0 million, and our available-for-sale portion of the securities portfolio, at fair value, was $57.6 million compared to our held-to-maturity portion of the securities portfolio of $17.3 million and our available-for-sale portion of the securities portfolio of $59.9 million at December 31, 2023.
Previous wording
Net loans increased $22.0 million, or 1.3%, to $1.73 billion at March 31, 2024 from $1.71 billion at December 31, 2023. Residential real estate loans decreased $22.6 million, or 4.8%, to $452.0 million at March 31, 2024 from $474.6 million at December 31, 2023. Commercial real estate loans increased by $69.6 million from $743.8 million at December 31, 2023 to $813.4 million at March 31, 2024. Commercial and industrial loans decreased by $3.6 million from $75.4 million at December 31, 2023 to $71.8 million at March 31, 2024. Construction loans decreased $20.7 million to $408.9 million at March 31, 2024 from $429.6 million at December 31, 2023. Consumer loans decreased by $708,000 from $3.6 million at December 31, 2023 to $2.9 million at March 31, 2024. The decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.
Current wording
Net loans increased $73.7 million, or 4.3%, to $1.78 billion at June 30, 2024 from $1.71 billion at December 31, 2023. Residential real estate loans decreased $24.9 million, or 5.2%, to $449.7 million at June 30, 2024 from $474.6 million at December 31, 2023. Commercial real estate loans increased by $101.2 million from $743.8 million at December 31, 2023 to $845.0 million at June 30, 2024. Commercial and industrial loans increased by $18.2 million from $75.4 million at December 31, 2023 to $93.6 million at June 30, 2024. Construction and land development loans decreased $18.9 million to $410.7 million at June 30, 2024 from $429.6 million at December 31, 2023. Consumer loans decreased by $1.4 million from $3.6 million at December 31, 2023 to $2.2 million at June 30, 2024. The decrease in consumer loans is primarily a result of management’s decision to let the indirect lending portfolio amortize off the balance sheet.
Previous wording
The Company holds a concentration in commercial real estate loans. As of March 31, 2024, construction, land development and other land loans represented 130.1% of consolidated risk-based capital. Total commercial real estate loans as defined by the Agency guidance represented 364.7% of consolidated risk-based capital. During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio by 56%.
Current wording
The Company holds a concentration in commercial real estate loans. As of June 30, 2024, construction, land development and other land loans represented 130.2% of consolidated risk-based capital. Total commercial real estate loans as defined by the Agency guidance represented 367.2% of consolidated risk-based capital. During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio by 57%.
Previous wording
The management team has extensive experience in underwriting commercial real estate loans and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. The Board of Directors has established internal maximum limits on CRE as an asset class overall as well as sub limits within CRE by property class, to better manage and control the exposure to property classes during periods of changing economic conditions. The Board of Directors also has minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.
Current wording
The management team has extensive experience in underwriting commercial real estate loans and has implemented and continues to maintain heightened risk management procedures and strong underwriting criteria with respect to its commercial real estate portfolio. The Board of Directors has established internal maximum limits on CRE to better manage and control the exposure to property classes during periods of changing economic conditions. The Board of Directors also has minimum targets for regulatory capital ratios that are in excess of well capitalized ratios.
Previous wording
(2) Non-owner occupied includes multifamily call code 1D
Current wording
(2) Non-owner occupied includes multifamily call code 1E2 and 1D
Previous wording
(2) Non-owner occupied includes multifamily call code 1D
Current wording
(2) Non-owner occupied includes multifamily call code 1E2 and 1D
Previous wording
Deposits increased $46.6 million, or 2.8% to $1.73 billion at March 31, 2024 from $1.69 billion at December 31, 2023. Our core deposits increased $60.2 million, or 4.8%, to $1.31 billion at March 31, 2024 from $1.25 billion at December 31, 2023. Non-interest bearing demand deposits increased $155.7 million, or 4.3%, to $348.9 million at March 31, 2024 from $364.6 million at December 31, 2023. Interest bearing demand deposits increased $28.2 million, or 20.6%, to $165.3 million at March 31, 2024 from $137.1 million at December 31, 2023. Time deposits increased $29.2 million, or 4.0%, to $725.5 million at March 31, 2024 from $696.3 million at December 31, 2023. Money market demand deposits increased $4.7 million, or 1.1%, to $446.9 million at March 31, 2024 from $442.2 million at December 31, 2023. 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.
Current wording
Deposits increased $69.2 million, or 4.1% to $1.76 billion at June 30, 2024 from $1.69 billion at December 31, 2023. Our core deposits increased $124.5 million, or 9.9%, to $1.38 billion at June 30, 2024 from $1.25 billion at December 31, 2023. Non-interest bearing demand deposits decreased $50.0 million, or 13.7%, to $314.6 million at June 30, 2024 from $364.6 million at December 31, 2023. Interest bearing demand deposits increased $42.4 million, or 30.9%, to $179.5 million at June 30, 2024 from $137.1 million at December 31, 2023. Time deposits increased $27.6 million, or 4.0%, to $724.0 million at June 30, 2024 from $696.3 million at December 31, 2023. Money market demand deposits increased $34.2 million, or 7.7%, to $476.4 million at June 30, 2024 from $442.2 million at December 31, 2023. 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.
Previous wording
The Company uses wholesale deposits as a funding source in addition to customer deposits. Wholesale deposits provide a diversified and stable source of funding during times of market volatility. As of March 31, 2024, the Company had $420.5 million of total wholesale deposit funding sources, a decrease of $12.5 million compared to December 31, 2023, which totaled $433.0 million.
Current wording
The Company uses wholesale deposits as a funding source in addition to customer deposits. Wholesale deposits provide a diversified and stable source of funding during times of market volatility. As of June 30, 2024, the Company had $348.6 million of total wholesale deposit balances, a decrease of $84.4 million compared to December 31, 2023, which totaled $433.0 million.
Previous wording
Given the interest rate environment and strategic initiatives, the Company replaced maturing lower yielding wholesale CDs with higher market rate CDs. The replacement CDs include call options at our discretion if economic conditions changed. The Company also utilized additional wholesale demand deposits to provide liquidity and more effectively balance our interest rate sensitivity. During the quarter ended, total wholesale deposit funding accounted for approximately 35% of our interest expense.
Current wording
Given the interest rate environment and strategic initiatives, the Company replaced maturing lower yielding wholesale CDs with higher market rate CDs. The replacement CDs include call options at our discretion if economic conditions changed. The Company also utilized additional wholesale demand deposits to provide liquidity and more effectively balance our interest rate sensitivity. During the six months ended June 30, 2024, total wholesale deposit funding accounted for approximately 31% of our interest expense.
Previous wording
Each quarter the Bank files a bank call report with the FDIC, which has a specific way it defines wholesale brokered deposits. As of March 31, 2024, the Company had $388.9 million of wholesale deposits outstanding, as defined by FDIC, a decrease of $9.6 million from December 31, 2023. In addition, pursuant to rule 12 CFR 337.6(e), well-capitalized and well-rated institutions are not required to treat reciprocal deposits as wholesale deposits up to the lesser of 20 percent of their total liabilities or $5 billion. Reciprocal core deposits exceeding this threshold must be reported additionally as wholesale deposits for call report purposes only. As of March 31, 2024, the Company additionally reported $210.9 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $599.8 million as of March 31, 2024. As of March 31, 2024, all of the Company's reciprocal deposits were core deposits from customers who placed their deposits in the reciprocal network for additional FDIC insurance coverage.
Current wording
Each quarter the Bank files a bank call report with the FDIC, which has a specific way it defines wholesale brokered deposits. As of June 30, 2024, the Company had $327.5 million of wholesale deposits outstanding, as defined by FDIC, a decrease of $71.0 million from December 31, 2023. In addition, pursuant to rule 12 CFR 337.6(e), well-capitalized and well-rated institutions are not required to treat reciprocal deposits as wholesale deposits up to the lesser of 20 percent of their total liabilities or $5 billion. Reciprocal core deposits exceeding this threshold must be reported additionally as wholesale deposits for call report purposes only. As of June 30, 2024, the Company additionally reported $290.5 million in reciprocal deposits considered wholesale for call report purposes only, bringing regulatory defined wholesale deposits to $639.1 million as of June 30, 2024. As of June 30, 2024, all of the Company's reciprocal deposits were core deposits from customers who placed their deposits in the reciprocal network for additional FDIC insurance coverage.
Previous wording
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 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 $507.8 million as of March 31, 2024. Additionally, at March 31, 2024, we had the ability to borrow up to $129.0 million from other financial institutions.
Current wording
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 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 $516.6 million as of June 30, 2024. Additionally, at June 30, 2024, we had the ability to borrow up to $129.0 million from other financial institutions.
Previous wording
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 March 31, 2024, cash and cash equivalents totaled $124.7 million. The Company has availability on secured and unsecured lines for an additional $636.8 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $58.7 million at March 31, 2024.
Current wording
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 June 30, 2024, cash and cash equivalents totaled $91.5 million. The Company has availability on secured and unsecured lines for an additional $645.6 million. Finally, securities classified as available-for-sale, which provide additional sources of liquidity, totaled $57.6 million at June 30, 2024.
Previous wording
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 $3.6 million and $8.8 million for the three months ended March 31, 2024 and March 31, 2023, respectively. There were no sales of securities in the three months ended March 31, 2024 or for three months ended March 31, 2023. 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 $23.3 million and $37.9 million for the three months ended March 31, 2024 and March 31, 2023, respectively. Net cash provided by financing activities was $29.9 million and $123.8 for the three months ended March 31, 2024 and 2023, respectively, which consisted primarily of increases in interest bearing deposits of $62.3 million for the three months ended March 31, 2024, partially offset by repayments of federal funds purchased of $15.0 million and decreased non-interest bearing deposits of $15.7 million.
Current wording
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 $4.8 million and $16.7 million for the six months ended June 30, 2024 and June 30, 2023, respectively. There were no sales of securities in the six months ended June 30, 2024 or for six months ended June 30, 2023. 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 $78.8 million and $57.1 million for the six months ended June 30, 2024 and June 30, 2023, respectively. Net cash provided by financing activities was $50.9 million and $7.9 for the six months ended June 30, 2024 and 2023, respectively, which consisted primarily of increases in interest bearing deposits of $119.2 million for the six months ended June 30, 2024, partially offset by repayments of federal funds purchased of $15.0 million and decreased non-interest bearing deposits of $50 million.
Previous wording
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 March 31, 2024, totaled $543.7 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.
Current wording
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 June 30, 2024, totaled $476.8 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.
Previous wording
*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 $7.9 million as of March 31, 2024, compared to recording accumulated other comprehensive loss in the amount of $7.5 million as of December 31, 2023. This unrealized loss is counter to total equity growth during 2023 and 2024 that had otherwise had continued capital addition through net earnings. Management does not anticipate the unrealized losses to result in write-down through earnings as they do not reflect credit deterioration within the portfolio.
Current wording
*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 $8.0 million as of June 30, 2024, compared to recording accumulated other comprehensive loss in the amount of $7.5 million as of December 31, 2023. This unrealized loss is counter to total equity growth during 2023 and 2024 that had otherwise had continued capital addition through net earnings. Management does not anticipate the unrealized losses to result in write-down through earnings as they do not reflect credit deterioration within the portfolio.
Previous wording
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 2024 and 2023 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 March 31, 2024, the Bank meet all capital adequacy requirements to which each is subject.
Current wording
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 2024 and 2023 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 June 30, 2024, the Bank meet all capital adequacy requirements to which it is subject.
Previous wording
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 March 31, 2024, we had outstanding loan commitments of $339.7 million and $311,000 in outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.
Current wording
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 June 30, 2024, we had outstanding loan commitments of $262.8 million and $311,000 in outstanding stand-by letters of credit. We anticipate that we will have sufficient funds available to meet our current lending commitments.
Rearranged current paragraphs (11)
Current report — wording carried from elsewhere
The provision for credit losses on loans increased by $314,000 for the three months ended June 30, 2024 from a provision for credit losses on loans of $617,000 for the three months ended June 30, 2023. Loan originations, which totaled approximately $75.2 million for the three months ended June 30, 2023 decreased $30.6 million to $44.5 million for the three months ended June 30, 2024. The Company did see an uptick in non-performing loans at June 30, 2024, with a balance of $20.7 million, however this is largely attributed to two relationships who encountered liquidity constraints. The Company is proactive in identifying any potential issues and acts decisively when prudent. As of June 30, 2024, the Company had only 2.74% criticized and classified loans to total gross loans.
Current report — wording carried from elsewhere
Comparison of Statements of Income for the Six Months Ended June 30, 2024 and 2023
Current report — wording carried from elsewhere
Interest on investment securities decreased by $50,000 to $1.5 million for the six months ended June 30, 2024 from $1.6 million for the six months ended June 30, 2023 on a fully tax-equivalent basis. Interest on investments in U.S. Treasury, U.S. Government Agencies, and U.S. Municipals decreased in total $21,000, or 2.7%, to $732,000 for the six months ended June 30, 2024, from $753,000 for the six months ended June 30, 2023. Interest on mortgage-backed securities decreased by $4,000, or 1.8%, to $196,000 for the six months ended June 30, 2024, from $200,000 for the six months ended June 30, 2023. Subordinated debt interest income increased by $3,000, or 1.2%, to $264,000 for the six months ended June 30, 2024, from $261,000 for the six months ended June 30, 2023. The average yield on taxable securities decreased 20 basis points, to 3.13% and the average yield on tax-exempt securities increased 14 basis points, to 3.70% on a tax equivalent basis for the six months ended June 30, 2024, from 3.33% and 3.56%, respectively, for the same period in 2023. Fluctuation in market rates and maturing securities resulted in investment income decreasing, in conjunction with, the average balance of investment securities decreasing by $1.1 million, to $92.8 million for the six months ended June 30, 2024, from $93.9 million for the six months ended June 30, 2023.
Current report — wording carried from elsewhere
Total interest expense increased $16.1 million, to $35.0 million for thesix months ended June 30, 2024 from $19.0 million for thesix months ended June 30, 2023, primarily due to a $6.6 million increase in interest expense on time deposits and a $6.7 million increase in interest expense on money market deposits. The Company also saw an increase of interest expense on interest bearing demand deposits of $3.4 million in thesix months ended June 30, 2024 over thesix months ended June 30, 2023. These increases were offset by a decrease of interest expense of $873,000 on advances from the Federal Home Loan Bank in thesix months ended June 30, 2024, compared to thesix months ended June 30, 2023.
Current report — wording carried from elsewhere
Interest expense on deposits increased $16.9 million to $33.1 million for the six months ended June 30, 2024 from $16.2 million for the six months ended June 30, 2023 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average interest-bearing deposit balances was $253.6 million to $1.37 billion during the six months ended June 30, 2024 as compared to $1.11 billion for the six months ended June 30, 2023. The increase in the average balance of interest-bearing deposits was primarily a result of a $163.7 million increase in the average balance of money market deposit accounts and by an $80.7 million increase in the average balance of interest-bearing demand deposits. The average cost of deposits was 488 basis points for the six months ended June 30, 2024, compared to 293 basis points for the six months ended June 30, 2023. The average rate paid on money market deposits increased 194 basis points to 4.86% for the six months ended June 30, 2024 from 2.92% for the six months ended June 30, 2023. The average rate paid on interest bearing demand deposits increased 359 basis points to 5.11% for the six months ended June 30, 2024 from 1.52% for the six months ended June 30, 2023 primarily due to market competition and the interest rate environment. The average cost of time deposits increased by 181 basis points to 5.05% for the six months ended June 30, 2024 as compared to 3.24% for the six months ended June 30, 2023. The decrease in the average balance of non-interest bearing demand deposits for the six months ended June 30, 2024, primarily was the result of depositors looking for higher yielding products and market competition.
Current report — wording carried from elsewhere
Average Balances, Net Interest Income, Yields Earned and Rates Paid
Current report — wording carried from elsewhere
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.
Current report — wording carried from elsewhere
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.
Current report — wording carried from elsewhere
Management believes that the provision recorded for the period ended June 30, 2024 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.
Current report — wording carried from elsewhere
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.
Current report — wording carried from elsewhere
Income tax expense decreased $2.5 million, or 70.3%, to a tax expense of $1.1 million for the six months ended June 30, 2024 from a tax expense of $3.6 million for the six months ended June 30, 2023. The decrease in federal income tax expense for the six months ended June 30, 2024 compared to the same period a year ago was driven by the decrease in income before income taxes of $11.7 million, to income before income tax of $7.0 million for the six months ended June 30, 2024 compared to income before income tax expense of $18.7 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 $326,000 for its associated work in developing a software platform in 2024. The Company also invests in projects that have tax credit benefits in order to help reduce its 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 $181,000 for the six months ended June 30, 2024. For the six months ended June 30, 2024, the Company had an effective income tax expense rate of 15.3%, compared to an effective income tax expense rate of 19.3% for the six months ended June 30, 2023.