MainStreet Bancshares Inc

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 and six months ended June 30, 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 nine months ended September 30, 2024 are not necessarily indicative of results for the year ending December 31, 2024 or any future period.

Previous wording

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.

Current wording

The Company's business is conducted through two reportable segments; Core Banking and Financial Technology. Core Banking encompasses the community bank where we offer a full range of banking services to individuals, small to medium-sized businesses and professionals through both traditional and electronic delivery. The Financial Technology segment provides services to money service business, payment processors, and Banking as a Service ("BaaS") for fintechs, social media solutions, application developers, money movers and entrepreneurs who want to embed financials services into their solutions. 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. We offer our customers a suite of reciprocal deposit options through IntraFI, an innovative reciprocal deposit placement service that offers FDIC insurance on deposits up to $265 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.

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. 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.

Current wording

On October 25, 2021, MainStreet Bancshares, Inc. formally introduced Avenu, a division of MainStreet Bank. Avenu represents the Company’s suite of 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 September 30, 2024, we have capitalized $18.9 million in developing our SaaS solution, which is shown separately on our statement of financial condition. Our SaaS software program was deployed in October of 2024. Additional information can be found in Note 4 and Note 10 of our consolidated financial statements, our investor presentations filed quarterly, and in the investor relations portion of our website.

Previous 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.

Current wording

Total revenue increased $1.8 million to $34.5 million for the three months ended September 30, 2024 from $32.7 million for the three months ended September 30, 2023. This increase in total revenue was offset primarily by an increase in interest expense. Total expenses increased $6.9 million to $31.5 million for the three months ended September 30, 2024 from $24.5 million for the three months ended September 30, 2023, of which interest expense accounted for $5.3 million of the increase.. The increase in revenue for the three months ended September 30, 2024 was primarily due to increases in loan interest income of $1.8 million over the same period in 2023. Operating costs grew by 14.4%, or $1.7 million for the three months ended September 30, 2024 from $11.6 million for the three months ended September 30, 2023, as the Company ramps up staffing and infrastructure as Avenu is placed in service. Net income decreased $6.1 million to $0.3 million for the three months ended September 30, 2024 from $6.3 million for the three months ended September 30, 2023. The decrease in net income was primarily impacted by additions to the provision for credit losses of $2.9 million as well the rise in funding costs that occurred and carried through the first three quarters of 2024.

Previous 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.

Current wording

Total interest income increased $1.8 million, or 5.7%, to $33.7 million for the three months ended September 30, 2024 from $31.8 million for the three months ended September 30, 2023, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $1.8 million. Total average interest-earning assets increased $146.7 million, to $2.0 billion for the three months ended September 30, 2024 from $1.86 billion for the same period in 2023 primarily because of an increase of $142.4 million in the average balance of loans and by an increase of $9.7 million in the average balance of federal funds sold. These increases were offset by a $5.4 million decrease in the average balance of investment securities. The average yield on our interest-earning assets decreased 14 basis points to 6.67% for the three months ended September 30, 2024 as compared to 6.81% for the three months ended September 30, 2023 primarily due to market conditions. For the three months ended September 30, 2024, the Company reversed $984,000 in accrued interest income in relation to loans placed on nonaccrual.

Previous 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.

Current wording

Interest and fees on loans increased $1.8 million, to $31.6 million for the three months ended September 30, 2024 from $29.8 million for the same period in 2023. This was primarily due to an increase in the average loans outstanding increasing $142.4 million, which increased to $1.81 billion for the three months ended September 30, 2024 from $1.67 billion for the three months ended September 30, 2023. The average yield on loans decreased 16 basis points, or 2.3%, for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Interest income on federal funds sold and interest-earning deposits increased by $68,000 to $1.3 million for the three months ended September 30, 2024, from $1.2 million for the three months ended September 30, 2023. The increase was primarily due to the average balances increasing over the period despite having a slight reduction in yield of 21 basis points. The average balance of interest-earning deposits and federal funds sold increased $9.7 million to $104.5 million for the three months ended September 30, 2024 from $94.8 million for the same period in 2023. The average yield decreased to 4.88% for the three months ended September 30, 2024 from 5.09% for the same period in 2023.

Previous 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.

Current wording

Interest on investment securities decreased by $29,000 to $769,000 for the three months ended September 30, 2024 from $798,000 for the three months ended September 30, 2023 on a fully tax-equivalent basis. Interest on investments in U.S. Treasury, U.S. Government Agencies, and U.S. Municipals increased in total $24,000, or 6.3%, to $401,000 for the three months ended September 30, 2024, from $377,000 for the three months ended September 30, 2023. Interest on mortgage-backed securities decreased by $23,000, or 21.3%, to $85,000 for the three months ended September 30, 2024, from $108,000 for the three months ended September 30, 2023. Subordinated debt interest income decreased by $34,000, or 25.1%, to $101,000 for the three months ended September 30, 2024, from $135,000 for the three months ended September 30, 2023. The average yield on taxable securities decreased 25 basis points, to 2.89% and the average yield on tax-exempt securities increased 55 basis points, to 4.11% on a tax equivalent basis for the three months ended September 30, 2024, from 3.14% and 3.56%, respectively, for the same period in 2023. Fluctuation in market rates resulted in investment income decreasing, as well as the average balance of investment securities decreasing by $5.4 million, to $90.4 million for the three months ended September 30, 2024, from $95.8 million for the three months ended September 30, 2023.

Previous 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.

Current wording

Total interest expense increased $5.3 million, to $18.2 million for the three months ended September 30, 2024 from $13.0 million for the three months ended September 30, 2023, primarily due to a $2.0 million increase in interest expense on time deposits and a $1.2 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 September 30, 2024 over the three months ended September 30, 2023. These increases were offset by a decrease of interest expense of $186,000 on advances from the Federal Home Loan Bank in the three months ended September 30, 2024, compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Interest expense on deposits increased $5.2 million to $17.1 million for the three months ended September 30, 2024 from $11.9 million for the three months ended September 30, 2023 primarily as a result of an increase in average interest-bearing deposit yields and balances. The increase in average deposit balances was $200.5 million to $1.40 billion during the three months ended September 30, 2024 as compared to $1.24 billion for the three months ended September 30, 2023. The increase in the average balance of interest-bearing deposits was primarily a result of a $32.0 million increase in the average balance of money market deposit accounts and by a $96.9 million increase in the average balance of interest-bearing demand deposits. The average cost of interest-bearing deposits was 472 basis points for the three months ended September 30, 2024, compared to 382 basis points for the three months ended September 30, 2023. The average rate paid on money market deposits increased 80 basis points to 4.70% for the three months ended September 30, 2024 from 3.90% for the three months ended September 30, 2023. The average rate paid on interest-bearing demand deposits increased 372 basis points to 4.83% for the three months ended September 30, 2024 from 1.11% for the three months ended September 30, 2023 primarily due to market competition and the interest rate environment. The average cost of certificates of deposit increased by 73 basis points to 4.99% for the three months ended September 30, 2024 as compared to 4.26% for the three months ended September 30, 2023. The decrease in the average balance of non-interest bearing demand deposits for the three months ended September 30, 2024, primarily was the result of depositors looking for higher yielding products and market competition.

Previous 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.

Current wording

Net interest income decreased approximately $3.4 million, or 18.3%, to $15.4 million for the three months ended September 30, 2024 from $18.8 million for the three months ended September 30, 2023, on a tax equivalent basis, in connection with our net interest-earning assets decreasing $57.2 million to $470.6 million for the three months ended September 30, 2024 from $527.8 million for the three months ended September 30, 2023. The interest rate spread tightened by 99 basis points to 1.94% for the three months ended September 30, 2024 from 2.93% for the three months ended September 30, 2023, on a tax equivalent basis. The net interest margin compressed by 98 basis points from 4.03% for the three months ended September 30, 2023 to 3.05% for the three months ended September 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

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.

Current wording

The provision for credit losses on loans was $3.1 million for the three months ended September 30, 2024 compared to a recovery of credit losses on loans of $98,000 for the three months ended September 30, 2023. The Company charged off $1.9 million in loans during the quarter which had to be replaced through provision expense. The Company also added $1 million to the allowance for credit loss reserves for loan growth and in conjunction with heightened risk factors. Loan originations, which totaled approximately $92.0 million for the three months ended September 30, 2023 decreased $32.0 million to $60.0 million for the three months ended September 30, 2024. The Company did see an uptick in non-performing loans at September 30, 2024, with a balance of $28.3 million. 42% of this balance is attributable to one relationship and the remaining 58% are confined to nine relationships that experienced liquidity constraints. The Company is proactive in identifying any potential issues and acts decisively when prudent. As of September 30, 2024, the Company had only 6.86% criticized and classified loans to total gross loans.

Previous wording

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 wording

The recovery of credit losses on off-balance sheet credit exposure was $212,000 for the three months ended September 30, 2024 compared to a provision for credit losses of $353,000 for the three months ended September 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 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 wording

During the three months ended September 30, 2024, special mention (criticized) loans increased $29.9 million and substandard (classified) loans increased $44.2 million as of September 30, 2024 to a balance of $45.8 million and $77.6 million, respectively. Of the classified loans as of September 30, 2024, 57% is related to a relationship that is experiencing a drop in liquidity due to the sharp rise in interest rates.

Previous wording

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 wording

Classified loans have increased by $67.2 million as of September 30, 2024 compared to the same period in 2023. Approximately 65% of the classified loan balances are related to a segment of loans that share similar characteristics. This segment was originated during 2021 and experienced swings in operating costs, permit delays, and 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 35% 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 September 30, 2024, there was $1.9 million in charge-offs incurred and recoveries of $11,000 were received.

Previous wording

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 wording

Non-interest income decreased $5,000, or 0.6%, to $886,000 for the three months ended September 30, 2024 from $891,000 for the three months ended September 30, 2023. The decrease in non-interest income was primarily due to other fee income related to prepayment penalties that were recognized during 2023 that were not recurring in 2024. Offsetting other fee income were increases in deposit account service charges in the three months ended September 30, 2024 of $43,000 compared to the same period in 2023. The increase in account service charges was in addition to an increase of $30,000 in bank owned life insurance income for the three months ended September 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 non-interest income as it continues to add services that strategically benefit our customers.

Previous 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.

Current wording

Non-interest expense increased $1.7 million, or 14.4%, to $13.2 million for the three months ended September 30, 2024, from $11.6 million for the three months ended September 30, 2023 primarily because of increases in salaries and employee benefits of $326,000. The Company added fifteen 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 $148,000 to $845,000 for the three months ended September 30, 2024, from $697,000 for the three months ended September 30, 2023. This increase is driven by regulatory requirements in audits and routine legal assistance as the Company grows. Information security tools, a subset of furniture and equipment expenses, increased approximately $54,000 to $162,000 for the three months ended September 30, 2024, from $108,000 for the three months ended September 30, 2023. Franchise tax, a subset of other operating expenses, increased approximately $98,000 to $557,000 for the three months ended September 30, 2024, from $459,000 for the three months ended September 30, 2023 because of growth in the Company's capital as of September 30, 2024 compared to the capital levels as of September 30, 2023. Offsetting these increases was a decrease in administrative expenses of $62,000, or 22.4%, to $215,000 for the three months ended September 30, 2024 from $277,000 for the three months ended September 30, 2023 due to expense management. During the three months ended September 30, 2024 the Company incurred $594,000 in nonrecurring expenses related to loan sale and dispositions, which was allocated to other operating expenses.

Previous 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.

Current wording

Income tax expense decreased $1.7 million, or 111.1%, to a tax benefit of $168,000 for the three months ended September 30, 2024 from a tax expense of $1.5 million for the three months ended September 30, 2023. The decrease in federal income tax expense for the three months ended September 30, 2024 compared to the same period a year ago was driven by the decrease in income before income taxes of $7.8 million, to income before income tax of $97,000 for the three months ended September 30, 2024 compared to income before income tax expense of $7.9 million for the same period in the prior year. The Company accrues taxes based on an estimated tax rate basis using inputs and assumptions about pre-tax income. As the inputs and assumptions change, the estimated tax accruals will change throughout the year. The Company was able to apply and claim a research and development tax credit of approximately $245,000 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 $212,000 for the three months ended September 30, 2024. For the three months ended September 30, 2024, the Company had an effective income tax benefit rate of 173%, compared to an effective income tax expense rate of 19.3% for the three months ended September 30, 2023. The effective tax rate for the three months ended September 30, 2024 was largely impacted by muted earnings and adjustments to estimated tax accruals.

Previous wording

Comparison of Statements of Income for the Six Months Ended June 30, 2024 and 2023

Current wording

Comparison of Statements of Income for the Nine Months Ended September 30, 2024 and 2023

Previous wording

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 wording

Total revenue increased $8.1 million to $101.9 million for the nine months ended September 30, 2024 from $93.8 million for the nine months ended September 30, 2023. This increase in total revenue was offset primarily by an increase in interest expense. Total expenses increased $25.4 million, to $91.5 million for the nine months ended September 30, 2024 from $66.1 million for the nine months ended September 30, 2023, of which interest expense accounted for $21.2 million. The increase in revenue for the nine months ended September 30, 2024 was primarily due to increases in loan interest income of $8.3 million over the same period in 2023. Operating costs grew by 12.4%, or $4.3 million for the nine months ended September 30, 2024 from $34.3 million for the nine months ended September 30, 2023. Net income decreased $15.3 million to $6.2 million for the nine months ended September 30, 2024 from $21.4 million for the nine months ended September 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 nine months of 2024. The Company also made provisions for credit losses for $3.4 million during the first nine months of 2024 compared to $1.2 million for the same period in 2023.

Previous wording

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 wording

Total interest income increased $8.3 million, or 9.0%, to $99.5 million for the nine months ended September 30, 2024 from $91.2 million for the nine months ended September 30, 2023, on a tax equivalent basis. The increase was primarily the result of an increase in interest and fees on loans of $8.3 million. Total average interest-earning assets increased $121.1 million, to $1.96 billion for the nine months ended September 30, 2024 from $1.84 billion for the same period in 2023 primarily because of an increase of $132.6 million in the average balance of loans and was offset by a decrease of $5.2 million in the average balance of federal funds sold and a $6.4 million decrease in the average balance of investment securities. The average yield on our interest-earning assets increased 16 basis points to 6.81% for the nine months ended September 30, 2024 as compared to 6.65% for the nine months ended September 30, 2023 primarily due to market conditions, and the Company strategically managing the balance sheet in response to the changing conditions. For the nine months ended September 30, 2024, the Company reversed $1.8 million in accrued interest income in relation to loans placed on nonaccrual.

Previous wording

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 wording

Interest and fees on loans increased $8.3 million, to $93.9 million for the nine months ended September 30, 2024 from $85.5 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 $132.6 million, which increased to $1.77 billion for the nine months ended September 30, 2024 from $1.64 billion for the nine months ended September 30, 2023. The average yield on loans increased 11 basis points, or 1.6% for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023.

Previous wording

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 wording

Interest income on federal funds sold and interest-earning deposits increased by $22,000 to $3.6 million for the nine months ended September 30, 2024, from $3.5 million for the nine months ended September 30, 2023. The increase was primarily due to an increase in the average yield on these deposits increasing over the same time period. The average balance of interest-earning deposits and federal funds sold decreased $5.2 million to $93.9 million for the nine months ended September 30, 2024 from $99.0 million for the same period in 2023. The average yield increased to 5.06% for the nine months ended September 30, 2024 from 4.76% for the same period in 2023.

Previous wording

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 wording

Interest on investment securities decreased by $78,000 to $2.3 million for the nine months ended September 30, 2024 from $2.4 million for the nine months ended September 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 $3,000, or 0.3%, to $1.1 million for the nine months ended September 30, 2024, from $1.1 million for the nine months ended September 30, 2023. Interest on mortgage-backed securities decreased by $27,000, or 8.8%, to $281,000 for the nine months ended September 30, 2024, from $308,000 for the nine months ended September 30, 2023. Subordinated debt interest income decreased by $31,000, or 7.7%, to $364,000 for the nine months ended September 30, 2024, from $395,000 for the nine months ended September 30, 2023. The average yield on taxable securities decreased 1 basis points, to 3.04% and the average yield on tax-exempt securities increased 28 basis points, to 3.84% on a tax equivalent basis for the nine months ended September 30, 2024, from 3.05% 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 $6.4 million, to $92.1 million for the nine months ended September 30, 2024, from $98.5 million for the nine months ended September 30, 2023.

Previous wording

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 wording

Total interest expense increased $21.2 million, to $53.0 million for thenine months ended September 30, 2024 from $31.8 million for thenine months ended September 30, 2023, primarily due to an $8.7 million increase in interest expense on time deposits and a $7.8 million increase in interest expense on money market deposits. The Company also saw an increase of interest expense on interest bearing demand deposits of $5.3 million in thenine months ended September 30, 2024 over thenine months ended September 30, 2023. These increases were offset by a decrease of interest expense of $1.1 million on advances from the Federal Home Loan Bank in thenine months ended September 30, 2024, compared to thenine months ended September 30, 2023.

Previous wording

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 wording

Interest expense on deposits increased $22.0 million to $49.9 million for the nine months ended September 30, 2024 from $28.0 million for the nine months ended September 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 $235.6 million to $1.39 billion during the nine months ended September 30, 2024 as compared to $1.16 billion for the nine months ended September 30, 2023. The increase in the average balance of interest-bearing deposits was primarily a result of a $119.6 million increase in the average balance of money market deposit accounts and by an $86.2 million increase in the average balance of interest-bearing demand deposits. The average cost of deposits was 479 basis points for the nine months ended September 30, 2024, compared to 323 basis points for the nine months ended September 30, 2023. The average rate paid on money market deposits increased 145 basis points to 4.75% for the nine months ended September 30, 2024 from 3.30% for the nine months ended September 30, 2023. The average rate paid on interest bearing demand deposits increased 363 basis points to 4.93% for the nine months ended September 30, 2024 from 1.3% for the nine months ended September 30, 2023 primarily due to market competition and the interest rate environment. The average cost of time deposits increased by 146 basis points to 5.02% for the nine months ended September 30, 2024 as compared to 3.56% for the nine months ended September 30, 2023. The decrease in the average balance of non-interest bearing demand deposits for the nine months ended September 30, 2024, primarily was the result of depositors looking for higher yielding products and market competition.

Previous wording

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 wording

Net interest income, on a tax equivalent basis, decreased approximately $13.0 million, or 21.7%, to $46.8 million for the nine months ended September 30, 2024 from $59.7 million for the nine months ended September 30, 2023 in connection with our net interest-earning assets decreasing $91.9 million to $480.4 million for the nine months ended September 30, 2024 from $572.4 million for the nine months ended September 30, 2023. The interest rate spread tightened by 128 basis points to 2.02% for the nine months ended September 30, 2024 from 3.30% for the nine months ended September 30, 2023, on a tax equivalent basis. The net interest margin compressed by 115 basis points from 4.34% for the nine months ended September 30, 2023 to 3.19% for the nine months ended September 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

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 wording

The provision for credit losses on loans increased by $3.3 million for the nine months ended September 30, 2024 from a provision for credit losses on loans of 934,000 for the nine months ended September 30, 2023. The Company charged off $2.4 million in loans during the year. The Company also added $1 million to the allowance for credit loss reserves for loan growth and in conjunction with heightened risk factors. Loan originations, which totaled approximately $227.7 million for the nine months ended September 30, 2023 decreased $80.1 million to $147.6 million for the nine months ended September 30, 2024. The Company did see an uptick in non-performing loans at September 30, 2024, with a balance of $28.3 million. 42% of this balance is attributable to one relationship and the remaining 58% are confined to nine relationships that experienced liquidity constraints. The Company is proactive in identifying any potential issues and acts decisively when prudent. As of September 30, 2024, the Company had only 6.86% criticized and classified loans to total gross loans.

Previous 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.

Current wording

The recovery of credit losses on off-balance sheet credit exposure was $864,000 for the nine months ended September 30, 2024 and provision for this exposure was $242,000 for the nine months ended September 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 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.

Current wording

During the nine months ended September 30, 2024, special mention (criticized) loans increased $26.8 million. Substandard (classified) loans increased $56.4 million as of September 30, 2024 to a balance of $77.6 million. Of the classified loans as of September 30, 2024, approximately 65% of the balances are related to a subset of loans that share similar characteristics. This subset was originated during 2021 and experienced swings in operating costs, permit delays, and 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 35% 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. During the nine months ended September 30, 2024, the Company has adjusted certain factors within the allowance for credit loss model to respond to the current increase in nonperforming loans and directional consistency for credit quality indicators. 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 nine months ended September 30, 2024, there was $2.4 in charge-offs incurred and recoveries of $19,000 were received.

Previous 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.

Current wording

Non-interest income decreased $137,000, or 5.3%, to $2.4 million for the nine months ended September 30, 2024 from $2.6 million for the nine months ended September 30, 2023. The decrease in non-interest income was primarily due to decreases in deposit account service charges in the nine months ended September 30, 2024 compared to the same period in 2023. Additionally, there was nonrecurring prepayment fee income recognized in the nine months ended September 30, 2023 that contributed to the decrease of $65,000 in other fee income during 2024. The decrease in account service charges was offset by an increase $99,000 in bank owned life insurance income for the nine months ended September 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 during the nine months ended September 30, 2024.

Previous wording

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 wording

Non-interest expense increased $4.2 million, or 12.4%, to $38.5 million for the nine months ended September 30, 2024, from $34.3 million for the nine months ended September 30, 2023 primarily because of increases in furniture and equipment expenses of $823,000 and other various operating expenses of $2.1 million. Salaries and employee benefits increased $1.1 million for the nine months ended September 30, 2024 compared to the same period in 2023. The Company added fifteen 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 $767,000 to $2.5 million for the nine months ended September 30, 2024, from $1.7 million for the nine months ended September 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, which are subsets of furniture and equipment expenses, increased approximately $358,000 to $658,000 for the nine months ended September 30, 2024, from $300,000 for the nine months ended September 30, 2023. Franchise tax, a subset of other operating expenses, increased approximately $294,000 to $1.7 million for the nine months ended September 30, 2024, from $1.4 million for the nine months ended September 30, 2023 because of the level of the Company's capital as of September 30, 2024 compared to the capital levels as of September 30, 2023. Offsetting these increases was a decrease in advertising and marketing expenses of $473,000, or 22.8%, to $1.6 million for the nine months ended September 30, 2024 from $2.1 million for the nine months ended September 30, 2023 due to timing and being selective in initiatives to further enhance the Company's brand.

Previous wording

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.

Current wording

Income tax expense decreased $4.2 million, or 82.4%, to a tax expense of $900,000 for the nine months ended September 30, 2024 from a tax expense of $5.1 million for the nine months ended September 30, 2023. The decrease in federal income tax expense for the nine months ended September 30, 2024 compared to the same period a year ago was driven by the decrease in income before income taxes of $19.5 million, to income before income tax of $7.1 million for the nine months ended September 30, 2024 compared to income before income tax expense of $26.6 million for the same period in the prior year. The Company accrues taxes based on an estimated tax rate basis using inputs and assumptions about pre-tax income. As the inputs and assumptions change, the estimated tax accruals will change throughout the year. The Company was able to apply and claim a research and development tax credit of approximately $245,000 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 $185,000 for the nine months ended September 30, 2024. For the nine months ended September 30, 2024, the Company had an effective income tax expense rate of 12.7%, compared to an effective income tax expense rate of 19.3% for the nine months ended September 30, 2023.

Previous 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.*** ***

Current wording

Total assets increased $189.2 million, or 9.3%, to $2.2 billion at September 30, 2024 from $2.0 billion at December 31, 2023. The increase was primarily the result of increases in the loan portfolio of $70.4 million and an increase in federal funds sold of $130.2 million as of September 30, 2024.*** ***

Previous 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.

Current wording

Investment securities decreased $309,000, or 0.3%, from $101.6 million at December 31, 2023 to $101.2 million at September 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 September 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 $58.5 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 $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.

Current wording

Net loans increased $70.4 million, or 4.1%, to $1.78 billion at September 30, 2024 from $1.71 billion at December 31, 2023. Residential real estate loans decreased $1.5 million, or 3.1%, to $446.1 million at September 30, 2024 from $474.6 million at December 31, 2023. Commercial real estate loans increased by $127.5 million from $743.8 million at December 31, 2023 to $871.3 million at September 30, 2024. Commercial and industrial loans increased by $30.8 million from $75.4 million at December 31, 2023 to $106.2 million at September 30, 2024. Construction and land development loans decreased $56.2 million to $373.5 million at September 30, 2024 from $429.6 million at December 31, 2023. Consumer loans decreased by $1.6 million from $3.6 million at December 31, 2023 to $2.0 million at September 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 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%.

Current wording

The Company holds a concentration in commercial real estate loans. As of September 30, 2024, construction, land development and other land loans represented 118.2% of consolidated risk-based capital. Total commercial real estate loans as defined by the Agency guidance represented 360.3% of consolidated risk-based capital. During the prior 36 months, the Company has experienced an increase in its commercial real estate portfolio by 76%.

Previous wording

For all other loans, we utilize the Bank's historic loss rates or if not available, the average loss rates of UBPR Group 4 banks, for bank owned life insurance we utilize default rates from S&P Global ratings, and for securities we obtain an independent fair market value and if it is less than the book value, we subtract the fair market value from the book value to determine the stress loss. The following table shows the Company's earning assets and the results of the stress test performed for the periods indicated.

Current wording

For all other loans, we utilize the Bank's historic loss rates or if not available, the average loss rates of FFIEC Uniform Bank Performance Report Group 4 banks, for bank owned life insurance we utilize default rates from S&P Global ratings, and for securities we obtain an independent fair market value and if it is less than the book value, we subtract the fair market value from the book value to determine the stress loss. The following table shows the Company's earning assets and the results of the stress test performed for the periods indicated.

Previous 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.

Current wording

Deposits increased $207.5 million, or 12.3% to $1.89 billion at September 30, 2024 from $1.69 billion at December 31, 2023. Our core deposits increased $215.2 million, or 17.1%, to $1.47 billion at September 30, 2024 from $1.25 billion at December 31, 2023. Non-interest bearing demand deposits decreased $17.0 million, or 4.7%, to $347.6 million at September 30, 2024 from $364.6 million at December 31, 2023. Interest bearing demand deposits increased $60.4 million, or 44.0%, to $197.5 million at September 30, 2024 from $137.1 million at December 31, 2023. Time deposits increased $138.4 million, or 19.9%, to $834.7 million at September 30, 2024 from $696.3 million at December 31, 2023. Money market demand deposits increased $9.8 million, or 1.4%, to $451.9 million at September 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 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.

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 September 30, 2024, the Company had $422.6 million of total wholesale deposit balances, a decrease of $10.4 million compared to December 31, 2023, which totaled $433.0 million.