SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _______________ to _______________
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer | |
(Address of Principal Executive Offices) | (Zip Code) |
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(Registrant’s telephone number)
N/A
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| The | |||
(Title of each class to be registered) | (Ticker Symbol) | (Name of each exchange on which each class is to be registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES
As of November 8, 2024,
NB Bancorp, Inc.
Form 10-Q
Index
EXPLANATORY NOTE
NB Bancorp, Inc., a Maryland corporation (the “Company” or the “Registrant”), was formed on June 7, 2023 to serve as the bank holding company for Needham Bank (the “Bank”) as part of the Bank’s mutual-to-stock conversion, which was consummated on December 27, 2023. Financial and other information prior to and including December 27, 2023 included in this Quarterly Report is for the Bank.
Part I. – Financial Information | ||||||
Item 1. Financial Statements | ||||||
NB Bancorp, Inc. | ||||||
Consolidated Balance Sheets | ||||||
September 30, 2024 (Unaudited) and December 31, 2023 | ||||||
(in thousands except share and per share data) | ||||||
| September 30, 2024 | December 31, 2023 | ||||
Assets | ||||||
Cash and due from banks | $ | | $ | | ||
Federal funds sold | | | ||||
Total cash and cash equivalents | | | ||||
Available-for-sale securities, at fair value | | | ||||
Loans receivable, net of deferred fees | | | ||||
Allowance for credit losses | ( | ( | ||||
Net loans | | | ||||
Accrued interest receivable | | | ||||
Banking premises and equipment, net | | | ||||
Federal Home Loan Bank ("FHLB") stock, at cost | | | ||||
Federal Reserve Bank stock, at cost | | | ||||
Non-public investments | | | ||||
Bank-owned life insurance ("BOLI") | | | ||||
Prepaid expenses and other assets | | | ||||
Deferred income tax asset, net | | | ||||
Total assets | $ | | $ | | ||
Liabilities and shareholders' equity | ||||||
Deposits | $ | | $ | | ||
Mortgagors' escrow accounts | | | ||||
FHLB borrowings | | | ||||
Accrued expenses and other liabilities | | | ||||
Accrued retirement liabilities | | | ||||
Total liabilities | | | ||||
Shareholders' equity: | ||||||
Preferred stock, $ | | | ||||
Common stock, $ | | | ||||
Additional paid-in capital | | | ||||
Unallocated common shares held by the Employee Stock Ownership Plan ("ESOP") | ( | ( | ||||
Retained earnings | | | ||||
Accumulated other comprehensive loss | ( | ( | ||||
Total shareholders' equity | | | ||||
Total liabilities and shareholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
NB Bancorp, Inc. | ||||||||||||
Consolidated Statements of Income | ||||||||||||
(Unaudited - Dollars in thousands, except per share data) | ||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
INTEREST AND DIVIDEND INCOME | ||||||||||||
Interest and fees on loans | $ | | $ | | $ | | $ | | ||||
Interest on investment securities | | | | | ||||||||
Interest and dividends on cash equivalents and other | | | | | ||||||||
Total interest and dividend income | | | | | ||||||||
INTEREST EXPENSE | ||||||||||||
Interest on deposits | | | | | ||||||||
Interest on borrowings | | | | | ||||||||
Total interest expense | | | | | ||||||||
NET INTEREST INCOME | | | | | ||||||||
PROVISION FOR CREDIT LOSSES | ||||||||||||
Provision for credit losses - loans | | | | | ||||||||
Provision for (release of) credit losses - unfunded commitments | ( | — | ( | | ||||||||
Total provision for credit losses | | | | | ||||||||
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | | | | | ||||||||
NONINTEREST INCOME | ||||||||||||
Customer service fees | | | | | ||||||||
Increase in cash surrender value of BOLI | | | | | ||||||||
Mortgage banking income | | | | | ||||||||
Swap contract income | | | | | ||||||||
Loss on sale of available-for-sale securities, net | ( | — | ( | — | ||||||||
Employee retention credit income | — | — | — | | ||||||||
Other income | | | | | ||||||||
Total noninterest income | | | | | ||||||||
NONINTEREST EXPENSE | ||||||||||||
Salaries and employee benefits | | | | | ||||||||
Director and professional service fees | | | | | ||||||||
Occupancy and equipment expenses | | | | | ||||||||
Data processing expenses | | | | | ||||||||
Marketing and charitable contribution expenses | | | | | ||||||||
FDIC and state insurance assessments | | | | | ||||||||
General and administrative expenses | | | | | ||||||||
Total noninterest expense | | | | | ||||||||
INCOME BEFORE TAXES | | | | | ||||||||
INCOME TAXES | | | | | ||||||||
NET INCOME | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding, basic | | N/A | | N/A | ||||||||
Weighted average common shares outstanding, diluted | | N/A | | N/A | ||||||||
Earnings per share, basic | $ | | $ | N/A | $ | | $ | N/A | ||||
Earnings per share, diluted | $ | | $ | N/A | $ | | $ | N/A | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
NB Bancorp, Inc. | ||||||||||||
Consolidated Statements of Comprehensive Income | ||||||||||||
(Unaudited - Dollars in thousands) | ||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
NET INCOME | $ | | $ | | $ | | $ | | ||||
OTHER COMPREHENSIVE INCOME, NET OF TAX: | ||||||||||||
Net change in fair value of available-for-sale securities | | | | | ||||||||
Net change in fair value of cash flow hedge | — | ( | — | ( | ||||||||
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX: | | | | | ||||||||
TOTAL COMPREHENSIVE INCOME, NET OF TAX | $ | | $ | | $ | | $ | | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
NB Bancorp, Inc. | ||||||||||||||||||||
Consolidated Statements of Changes in Shareholders' Equity | ||||||||||||||||||||
(Unaudited - Dollars in thousands) | ||||||||||||||||||||
For the Three Months Ended | ||||||||||||||||||||
Shares of | Unallocated | Accumulated | ||||||||||||||||||
Common | Additional | Common | Other | |||||||||||||||||
Stock | Paid-In | Stock Held by | Retained | Comprehensive | ||||||||||||||||
| Outstanding |
| Common Stock |
| Capital |
| ESOP |
| Earnings |
| Income (Loss) |
| Total | |||||||
Balance, June 30, 2023 | — | $ | — | $ | — | $ | — | $ | | $ | ( | $ | | |||||||
Net income | — | — | — | — | | — | | |||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | | | |||||||||||||
Balance, September 30, 2023 | — | $ | — | $ | — | $ | — | $ | | $ | ( | $ | | |||||||
Balance, June 30, 2024 |
| |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Net income | — | — | — | — | | — | | |||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | | | |||||||||||||
ESOP shares committed to be released ( | — | — | | | — | — | | |||||||||||||
Balance, September 30, 2024 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
For the Nine Months Ended | ||||||||||||||||||||
Shares of | Unallocated | Accumulated | ||||||||||||||||||
Common | Additional | Common | Other | |||||||||||||||||
Stock | Paid-In | Stock Held by | Retained | Comprehensive | ||||||||||||||||
| Outstanding |
| Common Stock |
| Capital |
| ESOP |
| Earnings |
| Income (Loss) |
| Total | |||||||
Balance, December 31, 2022 | — | $ | — | $ | — | $ | — | $ | | $ | ( | $ | | |||||||
Adoption of ASU 2016-13 | — | — | — | — | ( | — | ( | |||||||||||||
Net income | — | — | — | — | | — | | |||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | | | |||||||||||||
Balance, September 30, 2023 | — | $ | — | $ | — | $ | — | $ | | $ | ( | $ | | |||||||
Balance, December 31, 2023 |
| |
| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Adoption of ASU 2023-02 | — | — | — | — | ( | — | ( | |||||||||||||
Net income | — | — | — | — | | — | | |||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | | | |||||||||||||
Net costs from stock offering and issuance of common shares | — | — | ( | — | — | — | ( | |||||||||||||
Purchase of common shares by the ESOP ( | — | — | — | ( | — | — | ( | |||||||||||||
ESOP shares committed to be released ( | — | — | | | — | — | | |||||||||||||
Balance, September 30, 2024 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
NB Bancorp, Inc. | ||||||
Consolidated Statements of Cash Flows | ||||||
(Unaudited - Dollars in thousands) | ||||||
For the Nine Months Ended | ||||||
| September 30, 2024 |
| September 30, 2023 | |||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash from operating activities: | ||||||
Net amortization (accretion) of available-for-sale securities | ( | ( | ||||
Loss on sale of available-for-sale securities | | — | ||||
Amortization of core deposit intangible | | | ||||
Provision for credit losses | | | ||||
Loan hedge fair value adjustments, including amortization | | | ||||
Change in net deferred loan origination fees | | | ||||
Mortgage loans originated for sale | ( | ( | ||||
Proceeds from sale of mortgage loans held for sale | | | ||||
Gain on sale of mortgage loans | ( | ( | ||||
Depreciation and amortization expense | | | ||||
Increase in cash surrender values of BOLI | ( | ( | ||||
Establishment of solar income tax credit investment basis reduction deferred tax liability | | — | ||||
Deferred income tax benefit | ( | ( | ||||
ESOP expense | | — | ||||
Changes in operating assets and liabilities: | ||||||
Accrued interest receivable | ( | ( | ||||
Prepaid expenses and other assets | ( | ( | ||||
Accrued expenses and other liabilities | ( | | ||||
Accrued retirement liabilities | | | ||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Loan originations and purchases, net of repayments | ( | ( | ||||
Purchases of available-for-sale securities | ( | ( | ||||
Proceeds from sales of available-for-sale securities | | — | ||||
Proceeds from maturities, calls and paydowns of available-for-sale securities | | | ||||
Redemptions (purchases) of Federal Home Loan Bank stock, net | | ( | ||||
Purchases of Federal Reserve stock, net | ( | ( | ||||
Recoveries of loans previously charged off | | | ||||
Net change in non-public investments | ( | | ||||
Purchases of BOLI policies | ( | — | ||||
Purchases of banking premises and equipment | ( | ( | ||||
NET CASH USED IN INVESTING ACTIVITIES | ( | ( | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
Net change in deposits | | | ||||
Net costs from stock offering and issuance of common shares | ( | — | ||||
Purchase of common shares held by ESOP | ( | — | ||||
Net change in mortgagors' escrow accounts | | ( | ||||
Increase (decrease) in FHLB borrowings, net | ( | | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | | | ||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | | ( | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | ||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | | $ | | ||
Supplemental disclosure of cash paid during the period for: | ||||||
Interest | $ | | $ | | ||
Income taxes | | | ||||
Supplemental disclosure of non-cash transactions: | ||||||
Cumulative effect adjustment of adoption of ASC 326, net of income taxes | $ | — | $ | | ||
Cumulative effect adjustment of adoption of ASU 2023-02, net of income taxes | | — | ||||
Unrealized (gains) losses on available-for-sale securities | ( | | ||||
Unrealized holding losses on cash flow hedge | — | ( | ||||
Mortgage loans transferred to loans held for sale | | — | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
NB Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Conversion
Effective December 27, 2023, NB Financial, MHC (the “MHC”), the former mutual holding company of Needham Bank (the “Bank”) and the predecessor to NB Bancorp, Inc. (the “Company”), consummated its mutual to stock conversion and the Company consummated its related stock offering. In the offering, the Company sold
In connection with the conversion, liquidation accounts were established by the Company and the Bank in an aggregate amount equal to (i) the MHC’s ownership interest in the shareholders’ equity of NB Financial, Inc. as of the date of the latest statement of financial condition included in the Company’s definitive prospectus dated October 12, 2023, plus (ii) the value of the net assets of the MHC as of the date of the MHC’s latest statement of financial condition before the consummation of the Conversion (excluding the MHC’s ownership interest in NB Financial, Inc.).
Each eligible account holder and supplemental eligible account holder is entitled to a proportionate share of the liquidation accounts in the unlikely event of a liquidation of (i) the Company and the Bank or (ii) the Bank, and only in such events. This share will be reduced if the eligible account holder’s or supplemental account holder’s deposit balance falls below the amounts on the date of record and will cease to exist if the account is closed. The liquidation account will never be increased despite any increase after conversion in the related deposit balance.
The Bank may not pay a dividend on its capital stock if the effect thereof would cause retained earnings to be reduced below the liquidation account amount or regulatory capital requirements.
Note 2 – Basis of Presentation
The Company’s accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated financial statements of NB Bancorp, Inc. (referred to herein as the “Company," “we,” “us,” or “our”) include the balances and results of operations of the Company and the Bank, its wholly-owned subsidiary, as well as the Bank’s wholly-owned subsidiaries, Needco-op Investment Corporation, Inc., 1892 Investments LLC and Eaton Square Realty LLC. Intercompany transactions and balances are eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position as of September 30, 2024 and the results of operations and cash flows for the interim periods ended September 30, 2024 and 2023. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the fiscal year.
The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2023 and accompanying notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The Company qualifies as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act of 2012 and has elected to defer the adoption of new or revised accounting standards until the nonpublic company effective dates. As such, the Company will adopt standards on the nonpublic company effective dates until such time that we no longer qualify as an EGC.
6
Relevant standards that were adopted during the nine months ended September 30, 2024:
In March 2023, the FASB issued ASU 2023-02, Investments–Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”). This update permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method (“PAM”) if the following conditions are met:
| ● | It is probable that the income tax credits allocable to the tax equity investor will be available; |
| ● | The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project; |
| ● | Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits include income tax credits, other income tax benefits, and other non-income-tax-related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project; |
| ● | The tax equity investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive; and |
| ● | The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor’s liability is limited to its capital investment. |
Under existing accounting standards, PAM is allowable only for equity investments in low-income-housing tax credit structures. Under PAM, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). Updates made by ASU 2023-02 allow a reporting entity to make an accounting policy election to apply PAM on a tax-credit-program-by-tax-credit-program basis beyond just low-income-housing tax credits. The Company has made an accounting policy election to account for its investments in solar income tax credit investments using PAM. The Company adopted ASU 2023-02 during the quarter ended September 30, 2024, with a modified retrospective adoption reflected as of January 1, 2024, which resulted in a $
Certain previously reported amounts have been reclassified to conform to the current period’s presentation.
Subsequent events are events or transactions that occur after the balance sheet date but before consolidated financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the consolidated balance sheet, including the estimates inherent in the process of preparing consolidated financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the consolidated balance sheet but arose after that date.
Note 3 – Securities
The Company's available-for-sale securities are carried at fair value. For available-for-sale securities in an unrealized loss position, management will first evaluate whether there is intent to sell, or if it is more likely than not that the Company will be required to sell a security prior to anticipated recovery of its amortized cost basis. If either of these criteria are met, the Company will record a write-down of the security's amortized cost basis to fair value through income. For those available-for-sale securities which do not meet the intent or requirement to sell criteria, management will evaluate whether the decline in fair value is a result of credit related matters or other factors. In performing this assessment, management considers the creditworthiness of the issuer including whether the security is guaranteed by the U.S. Federal Government or other government agency, the extent to which fair value is less than amortized cost, and changes in credit rating during the period, among other factors. If this assessment indicates the existence of credit losses, the security will be written down to fair value, as determined by a discounted cash flow analysis. To the extent the estimated cash flows do not support the amortized cost, the deficiency is considered to be due to credit loss and is recognized in earnings.
7
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when the uncollectibility of a security is confirmed, or when either of the aforementioned criteria surrounding intent or requirement to sell have been met.
Securities have been classified on the consolidated balance sheets according to management’s intent. The following tables summarize the amortized cost, allowance for credit losses, and fair value of securities and their corresponding amounts of unrealized gains and losses at the dates indicated:
Amortized | Unrealized | Unrealized | Allowance for | ||||||||||||
| Cost |
| Gain |
| Loss | Credit Losses |
| Fair Value | |||||||
September 30, 2024 | (in thousands) | ||||||||||||||
Available-for-Sale Debt Securities: | |||||||||||||||
U.S. Treasury securities | $ | | $ | | $ | ( | $ | | $ | | |||||
U.S. Government agencies | | | — | | | ||||||||||
Agency mortgage-backed securities | | — | ( | | | ||||||||||
Agency collateralized mortgage obligations | | | ( | | | ||||||||||
Corporate bonds | | | ( | | | ||||||||||
Municipal obligations | | — | ( | | | ||||||||||
Total | $ | | $ | | $ | ( | $ | | $ | | |||||
Amortized | Unrealized | Unrealized | Allowance for | ||||||||||||
| Cost |
| Gain |
| Loss | Credit Losses |
| Fair Value | |||||||
December 31, 2023 | (in thousands) | ||||||||||||||
Available-for-Sale Debt Securities: | |||||||||||||||
U.S. Treasury securities | $ | | $ | | $ | ( | $ | | $ | | |||||
Agency mortgage-backed securities | | | ( | | | ||||||||||
Agency collateralized mortgage obligations | | — | ( | | | ||||||||||
Corporate bonds | | | ( | | | ||||||||||
Municipal obligations | | — | ( | | | ||||||||||
Total | $ | | $ | | $ | ( | $ | | $ | | |||||
The Company did not record a provision for estimated credit losses on any available-for-sale securities for the three and nine months ended September 30, 2024. Excluded from the table above is accrued interest on available-for-sale securities of $
The following is a summary of actual maturities of certain available-for-sale securities as of September 30, 2024. The amortized cost and fair values are based on the contractual maturity dates. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Agency mortgage-backed securities and collateralized mortgage obligations are presented as separate lines as paydowns are expected to occur before contractual maturity dates.
8
Available-for-Sale | ||||||
Amortized Cost | Fair Value | |||||
| (in thousands) | |||||
Within one year |
| $ | |
| $ | |
Over one year to five years |
| |
| | ||
Over five years to ten years |
| |
| | ||
| |
| | |||
Agency mortgage-backed securities |
| |
| | ||
Agency collateralized mortgage obligations |
| |
| | ||
$ | | $ | | |||
When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. During the three and nine months ended September 30, 2024, the Company sold $
The carrying value of securities pledged to secure borrowings from the Federal Reserve Bank was $
The following tables present fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of the dates stated.
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||
September 30, 2024 |
| Number of Securities |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
U. S. Treasuries | $ | ( | $ | — | $ | ( | $ | | $ | ( | $ | | ||||||||
Agency mortgage-backed securities | ( | | ( | | ( | | ||||||||||||||
Agency collateralized mortgage obligations | ( | | ( | | ( | | ||||||||||||||
Corporate bonds | ( | | ( | | ( | | ||||||||||||||
Municipal obligations | — | — | ( | | ( | | ||||||||||||||
Total | $ | ( | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||
Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | |||||||||||||||
December 31, 2023 |
| Number of Securities |
| Losses |
| Value |
| Losses |
| Value |
| Losses |
| Value | ||||||
U.S. Treasury securities | $ | ( | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||
Agency mortgage-backed securities | — | — | ( | | ( | | ||||||||||||||
Agency collateralized mortgage obligations | — | — | ( | | ( | | ||||||||||||||
Corporate bonds | ( | | ( | | ( | | ||||||||||||||
Municipal obligations | ( | | ( | | ( | | ||||||||||||||
Total | $ | ( | $ | | $ | ( | $ | | $ | ( | $ | | ||||||||
Management evaluates securities for expected credit losses at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.
Included in corporate bonds are investments in senior and subordinated debt of banks and bank holding companies, some of which do not have investment ratings.
At September 30, 2024, available-for-sale debt securities had unrealized losses with aggregate depreciation of
9
Note 4 – Loans Receivable, Allowance for Credit Losses and Credit Quality
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until loan maturity or pay-off are reported as held-for-investment at their outstanding principal balance adjusted for any charge-offs and net of any deferred fees (including purchase accounting adjustments) and origination costs (collectively referred to as “amortized cost”). For originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual life of the loan using the level-yield method. When a loan is paid off, the unamortized portion is recognized in interest income. Loans are generally placed into nonaccrual status when they are past due 90 days or more as to either principal or interest or when, in the opinion of management, the collection of principal and/or interest is in doubt. A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest or past due less than 90 days and the borrower demonstrates the ability to pay and remain current. When cash payments are received, they are applied to principal first, then to accrued interest. It is the Company’s policy not to record interest income on nonaccrual loans until principal has become current. In certain instances, accruing loans that are past due 90 days or more as to principal or interest may not go on nonaccrual status if the Company determines that the loans are well-secured and are in the process of collection.
Allowance for Credit Losses
The Allowance for Credit Losses (“ACL”) represents management’s best estimate of credit losses over the remaining life of the loan portfolio. Loans are charged-off against the ACL when management believes the loan balance is no longer collectible. This determination is made based on management's review of specific facts and circumstances of the individual loan, including the expected cash flows to repay the loan, the value of the collateral and the ability and willingness of any guarantors to perform. Subsequent recoveries of previously charged-off amounts are recorded as increases to the ACL. The provision for credit losses on loans is an amount sufficient to bring the ACL to an estimated balance that management considers adequate to absorb lifetime expected losses in the Company’s held-for-investment loan portfolio. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.
Management’s determination of the adequacy of the ACL under FASB ASC 326 – Financial Instruments – Credit Losses is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors.
The Company uses a third-party Current Expected Credit Loss (“CECL”) model as part of its estimation of the ACL on a quarterly basis. Loans with similar risk characteristics are collectively assessed within pools (or segments). Loss estimates within the collectively assessed population are based on a combination of pooled assumptions and loan-level characteristics. The Company has determined that using federal call codes is an appropriate loan segmentation methodology, as it is generally based on risk characteristics of a loan’s underlying collateral. Using federal call codes also allows the Company to utilize and assess publicly available external information when developing its estimate of the ACL.
The weighted average remaining maturity (“WARM”) method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows and expected credit losses for pools of loans using their expected remaining weighted average life.
In applying future economic forecasts, the Company utilizes a forecast period of up to two years. Historical loss rates used in the quantitative model are primarily derived using both the Bank’s data, supplemented with peer bank data obtained from publicly available sources. Management also considers qualitative adjustments when estimating credit losses to take into account the model’s quantitative limitations. Qualitative adjustments to quantitative loss factors, either negative or positive, may include considerations of economic conditions, volume and severity of past due loans, value of underlying collateral, experience, depth, and ability of management, and concentrations of credit.
10
For those loans that do not share similar risk characteristics, the Company evaluates the ACL needs on an individual (or loan by loan) basis. This population of individually evaluated loans (or loan relationships with the same primary source of repayment) is determined on a quarterly basis and consists of: loans with a risk rating of substandard or worse and a balance exceeding $
Measurement of credit loss is based on the expected future cash flows of an individually evaluated loan, discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the estimated market value of the collateral underlying the loan, discounted to consider estimated costs to sell the collateral for collateral-dependent loans. If the net value is less than the loan’s amortized cost, a specific reserve in the ACL is recorded, which is charged-off in the period when management believes the loan balance is no longer collectible.
In the ordinary course of business, the Company enters into commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. The credit risk associated with these commitments is evaluated in a manner similar to the ACL on loans. The reserve for unfunded commitments is included in other liabilities on the consolidated balance sheets.
Loans consist of the following as of the dates stated:
September 30, 2024 |
| December 31, 2023 | ||||||||
Amount | Percent | Amount | Percent | |||||||
(Dollars in thousands) | ||||||||||
One-to-four-family residential | $ | | | % | $ | | | % | ||
Home equity | | | % | | | % | ||||
Total residential real estate | | | % | | | % | ||||
Commercial real estate | | | % | | | % | ||||
Multi-family residential | | | % | | | % | ||||
Total commercial real estate | | | % | | | % | ||||
Construction and land development | | | % | | | % | ||||
Commercial and industrial | | | % | | | % | ||||
Total commercial | | | % | | | % | ||||
Consumer, net of premium/discount | | | % | | | % | ||||
Total loans | | | % | | | % | ||||
Deferred fees, net | ( | ( | ||||||||
Allowance for credit losses | ( | ( | ||||||||
Net loans | $ | | $ | | ||||||
Included in the above are approximately $
During the three months ended September 30, 2024 and 2023, the Company purchased approximately $
11
The outstanding balances of these consumer purchased loan pools, shown net of premium (discount) are as follows as of the dates stated:
September 30, 2024 | ||||||||
Gross Loan | Premium (Discount) |
| Net Loan | |||||
(in thousands) | ||||||||
Student loans | $ | | $ | | $ | | ||
Boat and RV loans | | | | |||||
Automobile loans | | — | | |||||
Solar panel loans | | ( | | |||||
Home improvement loans | | ( | | |||||
Total | $ | | $ | ( | $ | | ||
December 31, 2023 | ||||||||
Gross Loan | Premium (Discount) |
| Net Loan | |||||
(in thousands) | ||||||||
Student loans | $ | | $ | | $ | | ||
Boat and RV loans | | | | |||||
Automobile loans | | — | | |||||
Solar panel loans | | ( | | |||||
Home improvement loans | | ( | | |||||
Total | $ | | $ | ( | $ | | ||
The carrying value of loans pledged to secure advances from the FHLB were $
The following table presents the aging of the amortized cost of loans receivable by loan category as of the date stated:
September 30, 2024 | ||||||||||||||||||
30-59 | 60-89 | 90 Days or | ||||||||||||||||
Current | Days | Days | More Past Due | Total | ||||||||||||||
| Loans |
| Past Due |
| Past Due |
| Still Accruing |
| Nonaccrual |
| Loans | |||||||
(in thousands) | ||||||||||||||||||
Real estate loans: | ||||||||||||||||||
One-to-four-family residential | $ | | $ | | $ | | $ | — | $ | | $ | | ||||||
Home equity |
| |
| |
| — |
| — |
| |
| | ||||||
Commercial real estate |
| |
| |
| |
| — |
| |
| | ||||||
Multi-family residential | | — | — | — | — | | ||||||||||||
Construction and land development |
| |
| |
| — |
| — |
| |
| | ||||||
Commercial and industrial |
| |
| |
| — |
| — |
| |
| | ||||||
Consumer |
| |
| |
| |
| — |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | — | $ | | $ | | ||||||
12
December 31, 2023 | ||||||||||||||||||
30-59 | 60-89 | 90 Days or | ||||||||||||||||
Current | Days | Days | More Past Due | Total | ||||||||||||||
Loans |
| Past Due |
| Past Due |
| Still Accruing |
| Nonaccrual |
| Loans | ||||||||
(in thousands) | ||||||||||||||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
One-to-four-family residential | $ | | $ | | $ | — | $ | — | $ | | $ | | ||||||
Home equity |
| |
| |
| |
| — |
| |
| | ||||||
Commercial real estate |
| |
| |
| — |
| — |
| |
| | ||||||
Multi-family residential | | — | — | — | — | | ||||||||||||
Construction and land development |
| |
| — |
| — |
| — |
| |
| | ||||||
Commercial and industrial |
| |
| |
| |
| — |
| |
| | ||||||
Consumer |
| |
| |
| |
| — |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | — | $ | | $ | | ||||||
The following table presents the amortized cost of nonaccrual loans receivable by loan category as of the dates stated:
September 30, 2024 | December 31, 2023 | |||||||||||||||||
Nonaccrual | Nonaccrual | Total | Nonaccrual | Nonaccrual | Total | |||||||||||||
Loans with | Loans with | Nonaccrual | Loans with | Loans with | Nonaccrual | |||||||||||||
| No ACL |
| an ACL |
| Loans |
| No ACL |
| an ACL |
| Loans | |||||||
(In thousands) | ||||||||||||||||||
Real estate loans: | ||||||||||||||||||
One-to-four-family residential | $ | | $ | — | $ | | $ | | $ | — | $ | | ||||||
Home equity | | — | | | — | | ||||||||||||
Commercial real estate | | — | | | — | | ||||||||||||
Multi-family residential | — | — | — | — | — | — | ||||||||||||
Construction and land development | | — | | | — | | ||||||||||||
Commercial and industrial | | | | | | | ||||||||||||
Consumer | | | | | — | | ||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
During the three and nine months ended September 30, 2024, the Company reversed $
Credit Quality Information
The Company utilizes a nine-grade internal rating system for all loans, except consumer loans, which are not risk rated, as follows:
Loans rated 1-5: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 6: Loans in this category are considered “special mention”. These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 7: Loans in this category are considered “substandard”. Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. Non-accrual residential real estate loans that are well secured (LTV<
13
Loans rated 8: Loans in this category are considered “doubtful”. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company reviews the accuracy of risk ratings for all commercial real estate, construction and land development loans, and commercial and industrial loans based on various ongoing performance characteristics and supporting information that is provided from time to time by commercial borrowers. Annually, the Company engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.
The following table presents the amortized cost of loans receivable by internal risk grade by year of origination as of September 30, 2024. Also presented are current period gross charge-offs by loan type and vintage year for the three months ended September 30, 2024:
Term Loans Amortized Cost Basis by Origination Year (in thousands) | ||||||||||||||||||||||||||
Risk Rating | 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans | Total | ||||||||||||||||||
One-to-Four-Family Residential | ||||||||||||||||||||||||||
Grade: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | | — | | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | | | | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Home Equity | ||||||||||||||||||||||||||
Grade: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Pass | 1-5 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial Real Estate | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | | | | | — | | |||||||||||||||||
Substandard | 7 | — | — | | — | — | | — | | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | $ | — | $ | | ||||||||||
Multi-Family | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
14
Construction and Land Development | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | | — | | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial and Industrial | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | | | — | | | |||||||||||||||||
Substandard | 7 | — | | — | — | | | | | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Consumer | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | | | | | | | | | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | ||||||||||
Total Loans | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | | | | | | | |||||||||||||||||
Substandard | 7 | — | | | — | | | | | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | | — | | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | | | | | | | | | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | | $ | | $ | | $ | | $ | | $ | — | $ | |
(1) Consumer loans are not formally risk rated and included $
15
The following table presents the amortized cost of loans receivable by internal risk grade by year of origination as of December 31, 2023. Also presented are current period gross charge-offs by loan type and vintage year for the three months ended December 31, 2023:
Term Loans Amortized Cost Basis by Origination Year (in thousands) | ||||||||||||||||||||||||||
Risk Rating | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans | Total | ||||||||||||||||||
One-to-Four-Family Residential | ||||||||||||||||||||||||||
Grade: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | | | | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Home Equity | ||||||||||||||||||||||||||
Grade: |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Pass | 1-5 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | — | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial Real Estate | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | — | | | — | | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Multi-Family | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Construction and Land Development | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | $ | | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | | — | | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Commercial and Industrial | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | | — | — | | — | | |||||||||||||||||
Substandard | 7 | — | — | — | — | | | | | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | — | — | — | — | — | — | — | — | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
16
Consumer | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Special Mention | 6 | — | — | — | — | — | — | — | — | |||||||||||||||||
Substandard | 7 | — | — | — | — | — | — | — | — | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | | | | | | | | | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Total Loans | ||||||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||
Pass | 1-5 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special Mention | 6 | — | — | | — | | | — | | |||||||||||||||||
Substandard | 7 | — | — | — | — | | | | | |||||||||||||||||
Doubtful | 8 | — | — | — | — | — | | — | | |||||||||||||||||
Loss | 9 | — | — | — | — | — | — | — | — | |||||||||||||||||
Loans not formally risk rated (1) | | | | | | | | | ||||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Current period gross charge-offs | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | |
(1) Consumer loans are not formally risk rated and included $
The following table presents an analysis of the change in the ACL by major loan segment for the periods stated:
| For the Three Months Ended September 30, 2024 | ||||||||||||||||||||||||||
One-to-Four | Construction | ||||||||||||||||||||||||||
Family | Commercial | and Land | Commercial and | ||||||||||||||||||||||||
Residential |
| Home Equity |
| Real Estate |
| Multi-Family | Development |
| Industrial |
| Consumer |
| Unallocated |
| Total | ||||||||||||
(in thousands) | |||||||||||||||||||||||||||
Balance at June 30, 2024 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
Provision for (release of) credit losses |
| ( | ( | | ( | ( | ( | |
| — |
| | |||||||||||||||
Charge-offs |
| — |
| — |
| ( |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||||
Recoveries of loans previously charged-off |
| — |
| — |
| — |
| — |
| — |
| |
| |
| — |
| | |||||||||
Balance at September 30, 2024 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
| For the Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||||
One-to-Four | Construction | ||||||||||||||||||||||||||
Family | Commercial | and Land | Commercial and | ||||||||||||||||||||||||
Residential |
| Home Equity |
| Real Estate |
| Multi-Family | Development |
| Industrial |
| Consumer |
| Unallocated |
| Total | ||||||||||||
(in thousands) | |||||||||||||||||||||||||||
Balance at December 31, 2023 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
Provision for (release of) credit losses |
| ( | ( | | | ( | | |
| — |
| | |||||||||||||||
Charge-offs |
| — |
| — |
| ( |
| — |
| — |
| ( |
| ( |
| — |
| ( | |||||||||
Recoveries of loans previously charged-off |
| — |
| — |
| — |
| — |
| — |
| |
| |
| — |
| | |||||||||
Balance at September 30, 2024 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
| For the Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||
One-to-Four | |||||||||||||||||||||||||||
Family | Commercial | Construction and | Commercial and | ||||||||||||||||||||||||
Residential |
| Home Equity |
| Real Estate |
| Multi-Family | Land Development |
| Industrial |
| Consumer |
| Unallocated |
| Total | ||||||||||||
(in thousands) | |||||||||||||||||||||||||||
Balance at June 30, 2023 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
Provision for (release of) credit losses |
| | | ( | | | | |
| — |
| | |||||||||||||||
Charge offs |
| ( |
| — |
| — |
| — |
| — |
| ( |
| ( |
| — |
| ( | |||||||||
Recoveries of loans previously charged off |
| — |
| — |
| |
| — |
| — |
| — |
| |
| — |
| | |||||||||
Balance at September 30, 2023 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
| For the Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||
One-to-Four | |||||||||||||||||||||||||||
Family | Commercial | Construction and | Commercial and | ||||||||||||||||||||||||
Residential |
| Home Equity |
| Real Estate |
| Multi-Family | Land Development |
| Industrial |
| Consumer |
| Unallocated |
| Total | ||||||||||||
(in thousands) | |||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Adjustment to allowance for adoption of ASU 2016-13 | | | | — | ( | | | ( | | ||||||||||||||||||
Provision for (release of) credit losses |
| | | | | | | |
| — |
| | |||||||||||||||
Charge offs |
| ( |
| — |
| — |
| — |
| — |
| ( |
| ( |
| — |
| ( | |||||||||
Recoveries of loans previously charged off |
| — |
| — |
| |
| — |
| — |
| — |
| |
| — |
| | |||||||||
Balance at September 30, 2023 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||||
17
The following table presents the amortized cost of collateral-dependent loans as of September 30, 2024 and December 31, 2023:
As of | |||||
September 30, 2024 |
| December 31, 2023 | |||
(in thousands) | |||||
One-to-four-family residential | $ | | $ | | |
Commercial real estate | | — | |||
Construction and land development | | | |||
Commercial and industrial | | | |||
Total | $ | | $ | | |
The Company closely monitors the performance of borrowers experiencing financial difficulty to understand the effectiveness of its loan modification efforts. During the nine months ended September 30, 2024, the Company modified
Note 5 – Employee Benefits
Employee Pension Plan – The Company provided pension benefits through a defined benefit plan maintained with the Co-operative Banks Employees Retirement Association (“CBERA”) (the “Plan”). The Plan was a multi-employer plan whereby the contributions by each bank are not restricted to provide benefits to the employees of the contributing bank; therefore, the Company is not required to recognize the funded status of the plan on its consolidated balance sheet and need only accrue for any quarterly contributions due and payable on demand, or any withdrawal liabilities assessed by CBERA if the Company intended to withdraw from the Plan.
The Company determined to freeze benefit accruals and withdraw from the CBERA Plan as of December 31, 2023.
For the three months ended March 31, 2024, an expense of $
Director Pension Plan – The Company has a director defined benefit pension plan (“Director Pension Plan”), covering directors who were in service prior to 2023 and have met the plan’s vesting requirements. The Company’s liabilities for the Director Pension Plan are calculated by an independent actuary who uses the “projected unit credit” actuarial method to determine the normal cost and actuarial liability. The liability for the Director Pension Plan amounted to $
The Company records an estimate of net periodic pension cost for the director pension plan to accrued retirement liabilities on the consolidated balance sheet on a quarterly basis. Equity adjustments, to accumulated other comprehensive loss, in conjunction with the pension plan are recorded by the Company annually upon receipt of the independent actuarial report.
18
Deferred Compensation Plans – During 2014, the Company put into place an unfunded, defined contribution, Non-qualified Deferred Compensation Plan (“Deferred Comp Plan”) for select employees of the Company.
The Deferred Comp Plan was provided to key management of the Company and results in
The employees vest at varying dates in accordance with each individual’s deferred compensation participation agreement; however, all key officers will be fully vested upon the attainment of age 65.
The obligations under these plans are included in accrued retirement liabilities on the Company’s consolidated balance sheets and approximated $
Long-Term Incentive Plan – In January 2020, the Company put into place a long-term incentive plan for certain members of its management team where benefits are awarded annually on a discretionary basis and cliff vest after
401(k) Plan – The Company has an employee tax deferred incentive plan (the “401(k) plan”) under which the Company makes voluntary contributions within certain limitations. All employees who meet specified age and length of service requirements are eligible to participate in the 401(k) plan.
The amount contributed by the Company to the 401(k) Plan is included in salaries and employee benefits in the consolidated statements of income. The amounts contributed to the 401(k) plan for the three months ended September 30, 2024 and 2023 were $
Employment and Change in Control Agreements – The Company entered into employment agreements with the Chief Executive Officer and the Chief Operating Officer that renew for one additional year each January 1st. During 2024, the Company entered into Change in Control agreements with certain executive officers, which provide severance payments in the event of the executive’s involuntary or constructive termination of employment, including upon a termination following a change in control as defined in the agreements.
Employee Stock Ownership Plan – As part of the Initial Public Offering ("IPO") completed on December 27, 2023, the Bank established a tax-qualified Employee Stock Ownership Plan ("ESOP") to provide eligible employees the opportunity to own Company shares. The ESOP borrowed $
The Company accounts for its ESOP in accordance with FASB ASC 718-40, Compensation – Stock Compensation. Under this guidance, unreleased shares are deducted from shareholders’ equity as unearned ESOP shares on the accompanying consolidated balance sheets.
19
The Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the difference will be credited or debited to shareholders' equity.
As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability on the Company’s consolidated balance sheets. Total compensation expense recognized in connection with the ESOP was $
As of | ||||||
September 30, 2024 | December 31, 2023 | |||||
(Dollars in thousands) | ||||||
Allocated shares | | | ||||
Shares committed to be released | | — | ||||
Unallocated shares | | | ||||
Total shares | | | ||||
Fair value of unallocated shares | $ | | $ | | ||
Note 6 – Fair Value Measurements
ASC 820-10, Fair Value Measurement – Overall (“ASC 820-10”), provides a framework for measuring fair value under U.S. GAAP. This guidance also allows the Company the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.
In accordance with ASC 820-10, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
Level 3 – Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for September 30, 2024 and December 31, 2023.
Available-for-sale securities – Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds (such as U.S. Treasuries), mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
20
Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.
Derivative arrangements – The fair values of derivative arrangements are estimated by the Company using a third-party derivative valuation expert who relies on Level 2 inputs, namely discounted cash flow models to determine a fair value by calculating a settlement termination value with the counterparty.
Assets measured and reported at estimated fair value on a recurring basis are summarized below:
September 30, 2024 | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||
Assets: | (in thousands) | |||||||||||
Available-for-sale debt securities: | ||||||||||||
U.S. Treasury securities | $ | | $ | — | $ | — | $ | | ||||
U.S. Government agencies | — | | — | | ||||||||
Agency mortgage-backed securities | — | | — | | ||||||||
Agency collateralized mortgage obligations | — | | — | | ||||||||
Corporate bonds | — | | | | ||||||||
Municipal obligations | — | | — | | ||||||||
Total available-for-sale debt securities | $ | | $ | | $ | | $ | | ||||
$ | — | $ | | $ | — | $ | | |||||
Liabilities: | ||||||||||||
$ | — | $ | | $ | — | $ | | |||||
December 31, 2023 | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||
Assets: | (in thousands) | |||||||||||
Available-for-sale debt securities: | ||||||||||||
U.S. Treasury securities | $ | | $ | — | $ | — | $ | | ||||
Agency mortgage-backed securities | — | | — | | ||||||||
Agency collateralized mortgage obligations | — | | — | | ||||||||
Corporate bonds | — | | | | ||||||||
Municipal obligations | — | | — | | ||||||||
Total available-for-sale debt securities | $ | | $ | | $ | | $ | | ||||
$ | — | $ | | $ | — | $ | | |||||
Liabilities: | ||||||||||||
$ | — | $ | | $ | — | $ | | |||||
The Company had
The Company may also be required from time to time to measure certain other assets on a non-recurring basis in accordance with U.S. GAAP. Any adjustments to fair value usually result in write-downs of individual assets.
Collateral-Dependent Loans – Collateral-dependent loans with specific reserves are carried at fair value, which equals the estimated market value of the collateral less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.
A loan may have multiple types of collateral; however, the majority of the Company’s loan collateral is real estate.
21
The value of real estate collateral is generally determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for credit losses in the consolidated statements of income.
Mortgage Servicing Rights – Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that market participants would use in estimating future net servicing income. Assumptions in the valuation of mortgage servicing rights may include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors. The Company measures the fair value of mortgage servicing rights accounted for using the amortization method as nonrecurring Level 3.
The Company had
The following table summarizes assets measured at fair value on a non-recurring basis:
September 30, 2024 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value | |||||
(in thousands) | ||||||||||||
Collateral-dependent loans | $ | — | $ | — | $ | | $ | | ||||
Mortgage servicing rights | $ | — | $ | — | $ | | $ | | ||||
December 31, 2023 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value | |||||
(in thousands) | ||||||||||||
Collateral-dependent loans | $ | — | $ | — | $ | | $ | | ||||
Mortgage servicing rights | $ | — | $ | — | $ | | $ | | ||||
For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows:
| Significant |
| Significant |
|
| |
Valuation | Observable | Unobservable | ||||
Technique | Inputs | Inputs | ||||
Collateral-dependent loans |
| Appraisal Value/ Comparison Sales |
| Appraisals and/or sales of comparable properties |
| Appraisals discounted |
Mortgage servicing rights |
| Discounted Cash Flows |
| Comparable sales |
| Weighted average discount rate - |
ASC Topic 825, Financial Instruments (ASC 825), requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.
ASC 825, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
22
The exit price notion is a market-based measurement of fair value that is represented by the price to sell an asset or transfer a liability in the principal market (or most advantageous market in the absence of a principal market) on the measurement date. As of September 30, 2024 and December 31, 2023, fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors.
The following tables present the estimated fair values, related carrying amounts, and valuation level of the financial instruments as of the dates stated:
September 30, 2024 | |||||||||||||||
Carrying | Fair | ||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | |||||||||||
(In thousands) | |||||||||||||||
Financial Assets: | |||||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | — | $ | — | |||||
Loans receivable, net | | | — | — | | ||||||||||
Accrued interest receivable | | | | — | — | ||||||||||
FHLB stock | | | — | | — | ||||||||||
Federal Reserve Bank stock | | | — | | — | ||||||||||
Non-public investments | | | — | — | | ||||||||||
BOLI | | | — | | — | ||||||||||
Financial Liabilities: | |||||||||||||||
Deposits, other than time deposits | $ | | $ | | $ | | $ | — | $ | — | |||||
Time deposits | | | — | | — | ||||||||||
FHLB Borrowings | | | — | | — | ||||||||||
December 31, 2023 | |||||||||||||||
Carrying | Fair | ||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | |||||||||||
(In thousands) | |||||||||||||||
Financial Assets: | |||||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | — | $ | — | |||||
Loans receivable, net | | | — | — | | ||||||||||
Accrued interest receivable | | | | — | — | ||||||||||
FHLB stock | | | — | | — | ||||||||||
Federal Reserve Bank stock | | | — | | — | ||||||||||
Non-public investments | | | — | — | | ||||||||||
BOLI | | | — | | — | ||||||||||
Financial Liabilities: | |||||||||||||||
Deposits, other than time deposits | $ | | $ | | $ | | $ | — | $ | — | |||||
Time deposits | | | — | | — | ||||||||||
FHLB Borrowings | | | — | | — | ||||||||||
Note 7 – Commitments and Contingencies
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, to disburse funds to borrowers on unused construction and land development loans, and to disburse funds on committed but unused lines of credit.
These financial agreements involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
23
Commitments to originate loans and disburse additional funds to borrowers on lines of credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The commitments to originate loans and lines of credit may expire without being funded or drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of September 30, 2024 and December 31, 2023, the maximum potential amount of the Company’s obligation was $
Financial instruments whose contract amounts represents off-balance sheet credit risk and are not reflected on the Company’s consolidated balance sheets consist of the following at the dates stated:
As of | ||||||
September 30, 2024 | December 31, 2023 | |||||
(In thousands) | ||||||
Commitments to originate loans | $ | | $ | | ||
Unadvanced funds on lines of credit | | | ||||
Unadvanced funds on construction loans | | | ||||
Letters of credit | | | ||||
$ | | $ | | |||
The Bank accrues for credit losses related to off-balance sheet financial instruments. Potential losses on off-balance sheet loan commitments are estimated using the same risk factors used to determine the allowance for credit losses on loans, adjusted for the likelihood that funding will occur. The allowance for off-balance sheet commitments is recorded within other liabilities on the consolidated balance sheets and amounted to $
Note 8 – Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives – The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
24
The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s assets and liabilities.
Fair Value Hedges of Interest Rate Risk – The Company is exposed to changes in the fair value of certain pools of its pre-payable fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swap agreements to manage its exposure to changes in the fair value of these instruments attributable to changes in the designated benchmark interest rate.
Interest rate swap agreements designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in interest income.
The Company had previously entered into
During September 2021, the Company terminated these last of layer hedges by paying out $
Non-designated Hedges – Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements and/or the Company has not elected to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships, exclusive of credit valuation adjustments, are recorded directly in earnings.
The Company executes interest rate swaps and cap agreements with commercial banking customers to facilitate its respective risk management strategies. Those interest rate swap and cap agreements are simultaneously hedged by offsetting interest rate swaps and caps that are executed with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As of September 30, 2024, the Company had
Risk Participation Agreements – Risk Participation Agreements (“RPAs”) are guarantees issued by the Company to other parties for a fee, whereby the Company agrees to participate in the credit risk of a derivative customer of the other party. Under the terms of these agreements, the “participating bank” receives a fee from the “lead bank” in exchange for the guarantee of reimbursement if the customer defaults on an interest rate swap. The interest rate swap is transacted such that any and all exchanges of interest payments (favorable and unfavorable) are made between the lead bank and the customer. In the event that an early termination of the swap occurs, and the customer is unable to make a required close out payment, the participating bank assumes that obligation and is required to make this payment. RPAs where the Company acts as the lead bank are referred to as “participations-out,” in reference to the credit risk associated with the customer derivatives being transferred out of the Company. Participations-out generally occur concurrently with the sale of new customer derivatives. RPAs where the Company acts as the participating bank are referred to as “participations-in,” in reference to the credit risk associated with the counterparty’s derivatives being assumed by the Company. The Company’s maximum credit exposure is based on its proportionate share of the settlement amount of the referenced interest rate swap. Settlement amounts are generally calculated based on the fair value of the swap plus outstanding accrued interest receivable from the customer.
25
As of September 30, 2024, the Company had
The table below presents the fair value of the Company’s derivative financial instruments not designated as hedging instruments, as well as their classification on the consolidated balance sheets as of the dates stated:
Derivative | Derivative | |||||
Assets (1) | Liabilities (2) | |||||
September 30, 2024 | (in thousands) | |||||
Derivatives not designated as hedging instruments: | ||||||
Interest rate products | $ | | $ | | ||
RPA credit contracts | — | | ||||
Total derivatives not designated as hedging instruments | $ | | $ | | ||
December 31, 2023 | ||||||
Derivatives not designated as hedging instruments: | ||||||
Interest rate products | $ | | $ | | ||
RPA credit contracts | — | | ||||
Total derivatives not designated as hedging instruments | $ | | $ | | ||
| (1) | Recorded in prepaid expenses and other assets on the consolidated balance sheets. |
| (2) | Recorded in accrued expenses and other liabilities on the consolidated balance sheets. |
The table below presents the financial impact of the Company’s derivative financial instruments not designated as hedges in the consolidated statements of income, caused by changes in fair value for the periods indicated:
| Location of Gain or (Loss) | ||||||||||||
Recognized | Three months ended September 30, | Nine months ended September 30, | |||||||||||
| in Income on Derivative | 2024 |
| 2023 | 2024 |
| 2023 | ||||||
(in thousands) | |||||||||||||
Derivatives Not Designated as Hedging Instruments: |
|
|
|
|
|
|
|
| |||||
| Other non-interest income | $ | ( | $ | ( | $ | | $ | | ||||
Swap contract fees, net of brokerage costs, recognized in earnings on the above noted interest rate products and RPA contracts approximated $
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults (or is capable of being declared in default) on any of its indebtedness, then the Company could also be declared in default on its derivative obligations, and it could be required to terminate its derivative positions with the counterparty. The Company also has agreements with certain of its derivative counterparties that contain a provision whereby if the counterparty fails to maintain its status as a well-capitalized institution, then the Company could be required to terminate its derivative positions with the counterparty. In order to mitigate counterparty default risk in conjunction with these interest rate products and RPA credit contracts, the Company was required to maintain $
Note 9 – Other Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the shareholders' equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss).
26
The components of other comprehensive income (loss) and related tax effects are as follows for the periods indicated:
For the Three Months Ended | ||||||||||||||||||
| September 30, 2024 |
| September 30, 2023 | |||||||||||||||
(In thousands) | ||||||||||||||||||
Pre-Tax | Tax (Expense) | After-Tax | Pre-Tax | Tax (Expense) | After-Tax | |||||||||||||
Amount | Benefit | Amount | Amount | Benefit | Amount | |||||||||||||
Change in fair value of available-for-sale securities | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
Less: Reclassification adjustment for realized (losses) gains in net income | ( | | ( | — | — | — | ||||||||||||
Net change in fair value of available-for-sale securities | | ( | | | ( | | ||||||||||||
Change in fair value of cash flow hedge | — | — | — | ( | | ( | ||||||||||||
Less: Net cash flow hedge gains (losses) reclassified into interest income or interest expense | — | — | — | — | — | — | ||||||||||||
Net change in fair value of cash flow hedge, net of tax | — | — | — | ( | | ( | ||||||||||||
Total other comprehensive income (loss) | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
For the Nine Months Ended | ||||||||||||||||||
| September 30, 2024 |
| September 30, 2023 | |||||||||||||||
(In thousands) | ||||||||||||||||||
Pre-Tax | Tax (Expense) | After-Tax | Pre-Tax | Tax (Expense) | After-Tax | |||||||||||||
Amount | Benefit | Amount | Amount | Benefit | Amount | |||||||||||||
Change in fair value of available-for-sale securities | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
Less: Reclassification adjustment for realized (losses) gains in net income | ( | | ( | — | — | — | ||||||||||||
Net change in fair value of available-for-sale securities | | ( | | | ( | | ||||||||||||
Change in fair value of cash flow hedge | — | — | — | ( | | ( | ||||||||||||
Less: Net cash flow hedge gains (losses) reclassified into interest income or interest expense | — | — | — | — | — | — | ||||||||||||
Net change in fair value of cash flow hedge, net of tax | — | — | — | ( | | ( | ||||||||||||
Total other comprehensive income (loss) | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
The following table presents the components of accumulated other comprehensive loss as of September 30, 2024 and December 31, 2023:
As of | ||||||
September 30, 2024 | December 31, 2023 | |||||
(In thousands) | ||||||
Net unrealized holding losses on available-for-sale securities, net of tax | $ | ( | $ | ( | ||
Unrecognized director pension plan benefits, net of tax | ( | ( | ||||
Total accumulated other comprehensive loss | $ | ( | $ | ( | ||
Note 10 – Regulatory Capital Requirements
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Effective January 1, 2020, the federal banking agencies published a final rule on a Community Bank Leverage Ratio (“CBLR”) Framework that provides a simplified measure of capital adequacy for qualified community banking organizations. Management had determined that the Company meets the standards to qualify under the CBLR framework and opted into this framework for FDIC call reporting purposes during 2020. Under the CBLR framework, a bank that maintains a CBLR of 9.0% (defined as Tier 1 capital divided by total average assets) is considered to have satisfied its capital requirements, determined to be well-capitalized, and will no longer be required to calculate risk-based capital ratios. As of December 31, 2023 the Bank met the minimum requirement with a CBLR of
27
The Company no longer meets the requirement for the CBLR framework due to its unfunded loan commitments being over 25.0% of its capital for more than two consecutive quarters. As a result, the Company operated under the risk-based framework for the three and nine months ended September 30, 2024. Under this framework, quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total Capital, Tier 1 Capital and Common Equity Tier 1 Capital to Risk-Weighted Assets, and Tier 1 Capital to Total Average Assets (as defined in the regulations). Management believes, as of September 30, 2024, that the Company and the Bank meet all capital adequacy requirements to which each is subject.
As of September 30, 2024, the Company and the Bank were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and ratios are presented in the table as of the date indicated:
To be well capitalized | |||||||||||||||
For minimum capital | under prompt corrective | ||||||||||||||
Actual | adequacy purposes | action provisions | |||||||||||||
|
| Amount |
| Ratio |
|
| Amount |
| Ratio |
|
| Amount |
| Ratio | |
September 30, 2024 | (in thousands) | ||||||||||||||
Total Capital | $ | $ | $ | ||||||||||||
(to Risk-Weighted Assets) | |||||||||||||||
Tier 1 Capital | |||||||||||||||
(to Risk-Weighted Assets) | |||||||||||||||
Common Equity Tier I Capital | |||||||||||||||
(to Risk-Weighted Assets) | |||||||||||||||
Tier 1 Capital | |||||||||||||||
(to Total Average Assets) | |||||||||||||||
The Company’s actual consolidated capital amounts and ratios are presented in the table as of the date indicated:
To be well capitalized | |||||||||||||||
For minimum capital | under prompt corrective | ||||||||||||||
Actual | adequacy purposes | action provisions | |||||||||||||
|
| Amount |
| Ratio |
|
| Amount |
| Ratio |
|
| Amount |
| Ratio | |
September 30, 2024 | (in thousands) | ||||||||||||||
Total Capital | $ | $ | $ | ||||||||||||
(to Risk-Weighted Assets) | |||||||||||||||
Tier 1 Capital | |||||||||||||||
(to Risk-Weighted Assets) | |||||||||||||||
Common Equity Tier I Capital | |||||||||||||||
(to Risk-Weighted Assets) | |||||||||||||||
Tier 1 Capital | |||||||||||||||
(to Total Average Assets) | |||||||||||||||
Note 11 – Earnings Per Share (“EPS”)
Basic EPS represents net income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS have been calculated in a manner similar to that of basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options) were issued during the period, computed using the treasury stock method. There were
28
For the Three Months Ended | For the Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
(Dollars in thousands, except per share data) | ||||||||||||
Net income applicable to common shares | $ | | $ | N/A | $ | | $ | N/A | ||||
Average number of common shares outstanding | | N/A | | N/A | ||||||||
Less: average unallocated ESOP shares | ( | N/A | ( | N/A | ||||||||
Average number of common shares outstanding used to calculate basic EPS | | N/A | | N/A | ||||||||
Common stock equivalents | — | N/A | — | N/A | ||||||||
Average number of common shares outstanding used to calculate diluted EPS | | N/A | | N/A | ||||||||
Earnings per common share: | N/A | N/A | ||||||||||
Basic and diluted | $ | $ | N/A | $ | $ | N/A | ||||||
For the three and nine months ended September 30, 2024 and 2023, there were
Note 12 — Investments in Solar Income Tax Credit Projects
The Company has investments in qualified solar income tax credit projects (“SITCPs”) that provide solar income tax credits (“SITC”) and operating loss benefits over a
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended September 30, 2024 and 2023 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
| ● | statements of our goals, intentions and expectations; |
| ● | statements regarding our business plans, prospects, growth and operating strategies; |
29
| ● | statements regarding the quality of our loan portfolio; and |
| ● | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
| ● | weakening in the United States economy in general and the regional and local economies within the Company’s market area; |
| ● | the effects of inflationary pressures, labor market shortages and/or supply chain issues; |
| ● | the instability or volatility in financial markets and unfavorable general business conditions, globally, nationally or regionally, whether caused by geopolitical concerns, recent disruptions in the banking industry, or other factors; |
| ● | unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, pandemics or other external events; |
| ● | changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, including our mortgage servicing rights asset, or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make; |
| ● | changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses on loans; |
| ● | the effect of any change in federal government enforcement of federal laws affecting the cannabis industry; |
| ● | changes in liquidity, including the size and composition of our deposit portfolio, including the percentage of uninsured deposits in the portfolio; |
| ● | our ability to access cost-effective funding; |
| ● | fluctuations in real estate values and both residential and commercial real estate market conditions; |
| ● | demand for loans and deposits in our market area; |
| ● | our ability to implement and change our business strategies; |
| ● | competition among depository and other financial institutions; |
| ● | adverse changes in the securities or secondary mortgage markets; |
| ● | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees, capital requirements and insurance premiums; |
| ● | changes in the quality or composition of our loan or investment portfolios; |
| ● | technological changes that may be more difficult or expensive than expected; |
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| ● | the inability of third-party providers to perform as expected; |
| ● | a failure or breach of our operational or security systems or infrastructure, including cyberattacks; |
| ● | our ability to manage market risk, interest rate risk, credit risk, compliance risk, and operational risk; |
| ● | our ability to enter new markets successfully and capitalize on growth opportunities; |
| ● | changes in consumer spending, borrowing and savings habits; |
| ● | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board; |
| ● | our ability to attract and retain key employees; and |
| ● | changes in the financial condition, results of operations or future prospects of issuers of securities that we own. |
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2024.
Allowance for Credit Losses
The Company estimates the allowance for credit losses in accordance with the CECL methodology for loans measured at amortized cost. The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses. Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment.
The Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. Management's judgement is required for the selection and application of these factors which are derived from historical loss experience as well as assumptions surrounding expected future losses and economic forecasts.
Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting.
For the loans that are individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. Changes in these judgements and assumptions could be due to a number of circumstances which may have a direct impact on the provision for credit losses and may result in changes to the amount of allowance. The allowance for credit losses is increased by the provision for credit losses and by recoveries of loans previously charged off. Credit losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan.
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Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments may require us to make projections of future taxable income and/or to carryback to taxable income in prior years. The judgments and estimates we make in determining our deferred tax assets and liabilities, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.
Securities Valuation
We classify our debt securities as available-for-sale, which are carried at fair value. We obtain our fair values from one or more third-party services. These services’ fair value calculations are based on quoted market prices when such prices are available.
If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows.
For any available-for-sale debt security with a fair value less than its amortized cost basis, we will determine whether we have the intent to sell the available-for-sale debt security or whether it is more likely than not we will be required to sell the available-for-sale debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other available-for-sale debt securities that don't meet either condition and that have expected credit losses, the credit loss will be recognized in earnings. Any non-credit related loss impairment related to all other factors will be recorded in other comprehensive income (loss). Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread changes, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.
Non-GAAP Financial Measures
In addition to results presented in accordance with U.S. GAAP, this quarterly report on Form 10-Q contains certain non-GAAP financial measures, including operating net income, operating noninterest expense, operating noninterest income, operating earnings per share, basic, operating earnings per share, diluted, operating return on average assets, operating return on average shareholders’ equity, operating efficiency ratio, tangible shareholders’ equity, tangible assets, tangible book value per share, and efficiency ratio. The Company’s management believes that the supplemental non-GAAP information is utilized by regulators and market analysts to evaluate a Company’s financial condition and therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results determined in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names.
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NB BANCORP, INC. | |||||||||||
NON-GAAP RECONCILIATION | |||||||||||
(Unaudited) | |||||||||||
(Dollars in thousands) | |||||||||||
For the Three Months Ended | For the Nine Months Ended | ||||||||||
September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||
Net income (GAAP) | $ | 8,383 | $ | 8,467 | $ | 26,537 | $ | 23,444 | |||
Add (Subtract): | |||||||||||
Adjustments to net income: | |||||||||||
Losses on sales of securities available for sale, net | 1,868 | - | 1,868 | - | |||||||
Income tax expense on solar tax credit investment basis reduction | 2,503 | - | 2,503 | - | |||||||
BOLI surrender tax and managed endowment contract penalty | 1,552 | - | 1,552 | - | |||||||
Adjustment for adoption of ASU 2023-02 | (913) | - | (913) | - | |||||||
Total adjustments to net income | $ | 5,010 | $ | - | $ | 5,010 | $ | - | |||
Less net tax benefit associated with losses on sales of securities available for sale, net and reversal of previously taken | |||||||||||
amortization of solar tax credit investments | 277 | - | 277 | - | |||||||
Non-GAAP adjustments, net of tax | 4,733 | - | 4,733 | - | |||||||
Operating net income (non-GAAP) | $ | 13,116 | $ | 8,467 | $ | 31,270 | $ | 23,444 | |||
Weighted average common shares outstanding, basic | 39,289,271 | N/A | 39,423,214 | N/A | |||||||
Weighted average common shares outstanding, diluted | 39,289,271 | N/A | 39,423,214 | N/A | |||||||
Operating earnings per share, basic (non-GAAP) | 0.33 | N/A | 0.79 | N/A | |||||||
Operating earnings per share, diluted (non-GAAP) | 0.33 | N/A | 0.79 | N/A | |||||||
For the Three Months Ended | For the Nine Months Ended | ||||||||||
September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||
Noninterest expense (GAAP) | $ | 24,586 | $ | 23,088 | $ | 76,367 | $ | 68,459 | |||
Subtract (Add): | |||||||||||
Noninterest expense components: | |||||||||||
Adjustment for adoption of ASU 2023-02 | (913) | - | (913) | - | |||||||
Total impact of non-GAAP noninterest expense adjustments | $ | (913) | $ | - | $ | (913) | $ | - | |||
Noninterest expense on an operating basis (non-GAAP) | $ | 25,499 | $ | 23,088 | $ | 77,280 | $ | 68,459 | |||
For the Three Months Ended | For the Nine Months Ended | ||||||||||
September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||
Noninterest income (GAAP) | $ | 1,265 | $ | 3,138 | $ | 7,750 | $ | 12,101 | |||
Subtract (Add): | |||||||||||
Noninterest income components: | |||||||||||
Losses on sales of securities available for sale, net | (1,868) | - | (1,868) | - | |||||||
Total impact of non-GAAP noninterest income adjustments | $ | (1,868) | $ | - | $ | (1,868) | $ | - | |||
Noninterest income on an operating basis (non-GAAP) | $ | 3,133 | $ | 3,138 | $ | 9,618 | $ | 12,101 | |||
For the Three Months Ended | For the Nine Months Ended | ||||||||||
September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||
Operating net income (non-GAAP) | $ | 13,116 | $ | 8,467 | $ | 31,270 | $ | 23,444 | |||
Average assets | 4,890,204 | 4,133,146 | 4,697,200 | 3,854,877 | |||||||
Operating return on average assets (non-GAAP) | 1.07% | 0.81% | 0.89% | 0.81% | |||||||
Average shareholders’ equity | 754,609 | 363,469 | 743,251 | 355,751 | |||||||
Operating return on average shareholders' equity (non-GAAP) | 6.91% | 9.24% | 5.62% | 8.81% | |||||||
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For the Three Months Ended | For the Nine Months Ended | ||||||||||
September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||
Total shareholders’ equity (GAAP) | $ | 747,449 | $ | 365,701 | $ | 747,449 | $ | 365,701 | |||
Subtract: | |||||||||||
Intangible assets (core deposit intangible) | 1,116 | 1,265 | 1,116 | 1,265 | |||||||
Total tangible shareholders’ equity (non-GAAP) | 746,333 | 364,436 | 746,333 | 364,436 | |||||||
Total assets (GAAP) | 5,002,557 | 4,231,792 | 5,002,557 | 4,231,792 | |||||||
Subtract: | |||||||||||
Intangible assets (core deposit intangible) | 1,116 | 1,265 | 1,116 | 1,265 | |||||||
Total tangible assets (non-GAAP) | $ | 5,001,441 | $ | 4,230,527 | $ | 5,001,441 | $ | 4,230,527 | |||
Tangible shareholders' equity / tangible assets (non-GAAP) | 14.92% | 8.61% | 14.92% | 8.61% | |||||||
Total common shares outstanding | 42,705,729 | N/A | 42,705,729 | N/A | |||||||
Tangible book value per share (non-GAAP) | $ | 17.48 | $ | N/A | $ | 17.48 | $ | N/A | |||
For the Three Months Ended | For the Nine Months Ended | ||||||||||
September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||
Noninterest expense on an operating basis (non-GAAP) | $ | 25,499 | $ | 23,088 | $ | 77,280 | $ | 68,459 | |||
Total revenue (net interest income plus total noninterest income) (non-GAAP) | 44,457 | 36,622 | 128,296 | 108,544 | |||||||
Operating efficiency ratio (non-GAAP) | 57.36% | 63.04% | 60.24% | 63.07% | |||||||
Comparison of Financial Condition as of September 30, 2024 and December 31, 2023
Total Assets. Total assets increased $469.1 million, or 10.3%, to $5.00 billion as of September 30, 2024 from $4.53 billion as of December 31, 2023. The increase was primarily driven by increases in net loans, BOLI, cash and cash equivalents and available-for-sale securities.
Cash and Cash Equivalents. Cash and cash equivalents increased $44.5 million, or 16.3%, to $317.0 million as of September 30, 2024 from $272.6 million as of December 31, 2023. The increase in cash and cash equivalents was due to deposit growth outpacing loan and investment growth, offset partially by paydowns of FHLB borrowings, purchases of BOLI policies and increases in prepaid and other assets.
Securities Available for Sale. Securities available for sale increased $13.1 million, or 6.9%, to $202.5 million as of September 30, 2024 from $189.5 million as of December 31, 2023 due to purchases of U.S. treasuries, government agency and corporate bond debt securities. The Company sold $29.3 million in available-for-sale debt securities during the three and nine months ended September 30, 2024 with the proceeds reinvested into higher-yielding available-for-sale debt securities, which were restructured to mitigate portfolio risk and increase yield.
Loans. Net loans increased $354.4 million, or 9.2%, to $4.21 billion as of September 30, 2024 from $3.86 billion as of December 31, 2023. The increase resulted primarily from increases in: commercial real estate loans, which increased $110.1 million, or 9.4%; commercial and industrial loans, which increased $75.0 million, or 15.3%; multi-family residential loans, which increased $62.6 million, or 29.8%; construction and development loans which increased $44.1 million, or 7.1%; consumer loans, which increased $29.6 million, or 14.4%; and one-to-four family residential loans, which increased $26.5 million, or 2.4%. The increase in our loan portfolio reflects our strategy to prudently grow the balance sheet by continuing to diversify into these higher-yielding loans to improve net margins and manage interest rate risk.
The Company had approximately $458.0 million and $365.9 million in loans to borrowers in the cannabis industry at September 30, 2024 and December 31, 2023, respectively. Of that total, $301.9 million and $207.7 million were direct loans to cannabis companies and were collateralized by real estate at September 30, 2024 and December 31, 2023, respectively.
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FHLB Stock. The FHLB is a cooperative bank that provides services to its member financial institutions. The primary reason for our membership in the FHLB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. We held an investment in FHLB stock of $6.8 million and $14.6 million as of September 30, 2024 and December 31, 2023, respectively.
The amount of stock we are required to purchase is in proportion to our FHLB borrowings and level of total assets. Accordingly, the decrease in the FHLB stock from December 31, 2023 to September 30, 2024 is due to the decrease in FHLB borrowings.
BOLI. During the three and nine months ended September 30, 2024, the Company surrendered $46.7 million of existing BOLI policies that were earning an annualized yield of 3.08%. Prior to the surrender of the policies, the Company purchased an additional $50.0 million of BOLI policies, which are currently yielding 4.81%. As a result of the surrender of the BOLI policies, the Company incurred $1.6 million of income tax and penalty, which the Company expects to earn back in less than two years. The insurance carriers have six months to pay out the proceeds from the surrendered policies, and as a result, the Company expects BOLI to be at higher balances and to continue earning income related to the increase in cash surrender value until the proceeds are received, which will further shorten the earn-back period on the income tax and penalty amount.
Prepaid Expenses and Other Assets. Prepaid expenses and other assets consist primarily of right of use assets related to our long-term leases, income taxes receivables and derivatives with a positive fair value. These assets increased $21.4 million, or 40.4%, to $74.6 million as of September 30, 2024 from $53.1 million as of December 31, 2023. The increase resulted primarily from an $18.9 million increase in income taxes receivables as a result of earned solar income tax credits and a $2.4 million increase in right of use assets resulting from a lease extension.
Deposits. Deposits increased $655.5 million, or 19.4%, to $4.04 billion as of September 30, 2024 from $3.39 billion as of December 31, 2023. Core deposits (which we define as all deposits including certificates of deposit, other than brokered deposits) increased $509.1 million, or 15.9%, to $3.71 billion as of September 30, 2024 from $3.20 billion as of December 31, 2023. The increase in deposits was the result of growth in customer deposits, primarily certificates of deposit, which increased $360.1 million, or 27.4%, from December 31, 2023, along with money market accounts and noninterest-bearing demand deposit accounts, which increased $147.4 million, or 16.6%, and $32.4 million, or 6.1%, respectively, from December 31, 2023. Additionally, brokered deposits increased $146.3 million, or 79.7%, from December 31, 2023, as a result of lower rates versus alternative funding sources and to support overall liquidity.
The Company had $302.3 million and $277.5 million in deposits from the cannabis industry as of September 30, 2024 and December 31, 2023, respectively.
FHLB Borrowings. FHLB borrowings decreased $167.0 million, or 58.9%, to $116.3 million as of September 30, 2024 from $283.3 million as of December 31, 2023. The decrease in FHLB borrowings was the result of overall deposit growth and growth in brokered deposits due to lower rates.
Accrued expenses and other liabilities. Accrued expenses and other liabilities decreased $11.8 million, or 14.5%, to $69.5 million as of September 30, 2024 from $81.3 million as of December 31, 2023. The decrease resulted from $15.8 million in IPO-related and other accrued expenses, $5.6 million reduction in accrued incentive bonuses resulting from bonuses being paid partially offset by current period accruals, and a $2.6 million reduction in allowance for credit losses on unfunded commitments; offset partially by a $5.6 million increase in deferred solar tax credit investments resulting from a future expected capital call, a $2.6 million increase in deferred tax liabilities related to a basis reduction on solar tax credits, a $2.5 million increase in lease liabilities resulting from a lease extension and a $1.7 million increase in accrued interest on brokered deposits resulting from increased utilization of brokered deposits.
Shareholders’ Equity. Total shareholders’ equity decreased $10.5 million, or 1.4%, to $747.4 million as of September 30, 2024 from $758.0 million as of December 31, 2023, due to the $31.6 million increase in the unallocated common shares held by the ESOP resulting from the purchase of shares on the open market to fund the ESOP as a result of the conversion, along with the impact of the adoption of ASU 2023-02 of $10.2 million, offset partially by $26.5 million in net income during the nine months ended September 30, 2024.
35
Comparison of Operating Results for the Three Months Ended September 30, 2024 and September 30, 2023
Net Income. Net income was $8.4 million for the quarter ended September 30, 2024, compared to net income of $8.5 million for the quarter ended September 30, 2023, a decrease of approximately $84,000, or 1.0%.
An increase of $7.8 million, or 23.4%, in net interest income was offset by a $3.9 million, or 125.6% increase in income tax expense, a $1.9 million, or 59.7% decrease in noninterest income and a $1.5 million, or 6.5%, increase in noninterest expense.
Operating net income, excluding one-time charges, amounted to $13.1 million, or $0.33 per diluted share for the quarter ended September 30, 2024 compared to net income of $8.5 million for the quarter ended September 30, 2023, an increase of $4.6 million, or 54.9%. The material one-time charges were:
| ● | Loss on the sale of available-for sale securities amounting to $1.9 million; |
| ● | Tax expense and a managed endowment contract penalty related to the surrender of BOLI policies of $1.6 million, and; |
| ● | Tax expense related to a basis write-down of solar income tax credits of $2.5 million, partially offset by; |
| ● | Reversal of previously recognized amortization related to solar income tax credit investments during the first six months of the year, amounting to $913 thousand. |
Interest and Dividend Income. Interest and dividend income increased $16.4 million, or 27.5%, to $76.0 million for the quarter ended September 30, 2024 from $59.6 million for the quarter ended September 30, 2023, primarily due to a $13.8 million, or 24.4%, increase in interest and fees on loans and a $2.5 million, or 245.6%, increase in interest on short-term investments. The increase in interest and fees on loans was primarily due to an increase of $564.7 million, or 15.6%, in the average balance of the loan portfolio to $4.19 billion for the quarter ended September 30, 2024 from $3.62 billion for the quarter ended September 30, 2023 and an increase of 49 basis points in the weighted average yield for the loan portfolio to 6.70% for the quarter ended September 30, 2024 from 6.21% for the quarter ended September 30, 2023, reflecting the growth of our commercial and consumer loan portfolios. The increase in interest income on short-term investments was primarily due to an increase of $183.0 million, or 224.9%, in the average balance of short-term investments to $264.4 million for the quarter ended September 30, 2024 from $81.4 million for the quarter ended September 30, 2023.
Average interest-earning assets increased $738.9 million, to $4.69 billion for the quarter ended September 30, 2024 from $3.95 billion for the quarter ended September 30, 2023. The yield on interest-earning assets increased 46 basis points to 6.45% for the quarter ended September 30, 2024 from 5.99% for the quarter ended September 30, 2023.
Interest Expense. Total interest expense increased $8.6 million, or 32.8%, to $34.7 million for the quarter ended September 30, 2024 from $26.1 million for the quarter ended September 30, 2023. Interest expense on deposit accounts increased $12.8 million, or 61.7%, to $33.6 million for the quarter ended September 30, 2024 from $20.8 million for the quarter ended September 30, 2023. The increase was due to an increase in the average balance of certificates of deposit of $495.3 million to $1.94 billion for the quarter ended September 30, 2024 from $1.45 billion for the quarter ended September 30, 2023, an increase in the weighted average rate on certificates of deposit of 91 basis points to 5.02% for the quarter ended September 30, 2024 from 4.11% for the quarter ended September 30, 2023, and an increase in the weighted average rate on money market accounts of 129 basis points to 4.06% for the quarter ended September 30, 2024 from 2.77% for the quarter ended September 30, 2023.
Interest expense on FHLB borrowings decreased $4.3 million, or 80.0%, to $1.1 million for the quarter ended September 30, 2024 from $5.3 million for the quarter ended September 30, 2023. The average balance of FHLB borrowings decreased $298.4 million, or 77.8%, to $85.2 million for the quarter ended September 30, 2024 from $383.5 million for the quarter ended September 30, 2023. The decrease in the average balance of FHLB borrowings was the result of growth in brokered deposits due to lower rates, as well as, overall deposit growth.
36
Net Interest Income. Net interest income increased $7.8 million, or 23.4%, to $41.3 million for the quarter ended September 30, 2024 from $33.5 million for the quarter ended September 30, 2023, primarily due to an $738.9 million, or 18.7%, increase in the average balance of interest-earning assets to $4.69 billion for the quarter ended September 30, 2024 from $3.95 billion for the quarter ended September 30, 2023 and an increase in the weighted average yield on interest-earning assets of 46 basis points to 6.45% September 30, 2024 from 5.99% September 30, 2023.
These increases were offset partially by an increase in the weighted average rate on interest-bearing liabilities of 80 basis points to 4.13% for the quarter ended September 30, 2024 from 3.33% September 30, 2023 and an increase in the average balance of interest-bearing liabilities of $233.1 million, or 7.5%, to $3.34 billion September 30, 2024 from $3.11 billion September 30, 2023.
Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $2.6 million was recorded for the quarter ended September 30, 2024, of which $5.0 million related to the provision for credit losses on loans, compared to a provision of $2.0 million for the quarter ended September 30, 2023. The provision for credit losses on unfunded commitments decreased $2.4 million during the three months ended September 30, 2024 as a result of a reduction in qualitative factors on construction commitments, as well as, the reduction in the balance of unfunded commitments. The increase of $3.0 million, or 154.3%, in the total provision for credit losses was primarily due to the overall increase in the size of the loan portfolio and increases in the qualitative factors on loans collateralized by purchased consumer loans.
Noninterest Income. Noninterest income decreased $1.9 million, or 59.7%, to $1.3 million for the quarter ended September 30, 2024 from $3.1 million for the quarter ended September 30, 2023. The decrease resulted primarily from losses of sale on available-for-sale debt securities of $1.9 million during the three months ended September 30, 2024. The table below sets forth our noninterest income for the quarters ended September 30, 2024 and 2023:
Three Months Ended | |||||||||||
September 30, | Change | ||||||||||
2024 | 2023 | Amount | Percent | ||||||||
(Dollars in thousands) | |||||||||||
Customer service fees | $ | 1,963 | $ | 1,689 | $ | 274 | 16.22% | ||||
Loss on sale of available-for-sale securities, net | (1,868) | — | (1,868) | (100.00)% | |||||||
Increase in cash surrender value of BOLI | 414 | 374 | 40 | 10.70% | |||||||
Mortgage banking income | 367 | 101 | 266 | 263.37% | |||||||
Swap contract income | 375 | 950 | (575) | (60.53)% | |||||||
Other income | 14 | 24 | (10) | (41.67)% | |||||||
Total noninterest income | $ | 1,265 | $ | 3,138 | $ | (1,873) | (59.69)% | ||||
Noninterest Expense. Noninterest expense increased $1.5 million, or 6.5%, to $24.6 million for the quarter ended September 30, 2024 from $23.1 million for the quarter ended September 30, 2023. Salaries and employee benefit expenses increased $2.5 million, or 17.3%, resulting primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, annual salary raises, $762,000 in ESOP compensation expenses and a $667,000 increase in long-term incentive plan expenses during the quarter ended September 30, 2024. The increases in salaries and employee benefit expenses were offset partially by general and administrative expenses decreasing $1.3 million, or 91.7%, as a result of the adoption of ASU 2023-02, resulting in a $1.4 million decrease in solar income tax credit amortization during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The table below sets forth our noninterest expense for the quarters ended September 30, 2024 and 2023:
Three Months Ended | |||||||||||
September 30, | Change | ||||||||||
2024 | 2023 | Amount | Percent | ||||||||
(Dollars in thousands) | |||||||||||
Salaries and employee benefits | $ | 17,202 | $ | 14,659 | $ | 2,543 | 17.35% | ||||
Director and professional service fees | 1,995 | 1,609 | 386 | 23.99% | |||||||
Occupancy and equipment expenses | 1,394 | 1,279 | 115 | 8.99% | |||||||
Data processing expenses | 2,226 | 2,017 | 209 | 10.36% | |||||||
Marketing and charitable contribution expenses | 842 | 918 | (76) | (8.28)% | |||||||
FDIC and state insurance assessments | 812 | 1,215 | (403) | (33.17)% | |||||||
General and administrative expenses | 115 | 1,391 | (1,276) | (91.73)% | |||||||
Total noninterest expense | $ | 24,586 | $ | 23,088 | $ | 1,498 | 6.49% | ||||
37
Income Tax Expense. Income tax expense increased $3.9, or 125.6%, to $7.0 million for the quarter ended September 30, 2024 from $3.1 million for the quarter ended September 30, 2023. The effective tax rate was 45.5% and 26.8% for the quarter ended September 30, 2024 and 2023, respectively. The increase in the effective tax rate was a result of the $2.5 million tax effect of the basis reduction on solar income tax credits earned and the $1.6 million income tax and penalty on the surrender of BOLI policies during the three months ended September 30, 2024. Excluding these one-time income tax expenses, the effective tax rate for the three months ended September 30, 2024 would have been 19.1%.
Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Non-accrual loans were included in the computation of average balances. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense; such fees, discounts and premiums were not material for the periods presented.
| Three Months Ended | ||||||||||||||||
September 30, 2024 | September 30, 2023 | ||||||||||||||||
| Average |
|
|
| Average |
|
| ||||||||||
Outstanding | Average | Outstanding | Average | ||||||||||||||
Balance | Interest | Yield/Rate (4) | Balance | Interest | Yield/Rate (4) | ||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans | $ | 4,188,504 | $ | 70,518 |
| 6.70 | % | $ | 3,623,804 | $ | 56,702 |
| 6.21 | % | |||
Securities |
| 204,273 |
| 1,768 |
| 3.44 | % |
| 204,074 |
| 1,105 |
| 2.15 | % | |||
Other investments (5) |
| 30,707 |
| 223 |
| 2.89 | % |
| 39,696 |
| 780 |
| 7.80 | % | |||
Short-term investments (5) |
| 264,394 |
| 3,494 |
| 5.26 | % |
| 81,380 |
| 1,011 |
| 4.93 | % | |||
Total interest-earning assets |
| 4,687,878 |
| 76,003 |
| 6.45 | % |
| 3,948,954 |
| 59,598 |
| 5.99 | % | |||
Non-interest-earning assets |
| 240,821 |
|
| 216,254 |
|
| ||||||||||
Allowance for credit losses |
| (38,495) |
|
| (32,062) |
|
|
|
| ||||||||
Total assets | $ | 4,890,204 |
| $ | 4,133,146 |
|
|
| |||||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Savings accounts | $ | 112,632 |
| 15 |
| 0.05 | % | $ | 136,241 |
| 17 |
| 0.05 | % | |||
NOW accounts |
| 327,484 |
| 180 |
| 0.22 | % |
| 337,799 |
| 158 |
| 0.19 | % | |||
Money market accounts |
| 876,933 |
| 8,943 |
| 4.06 | % |
| 806,815 |
| 5,623 |
| 2.77 | % | |||
Certificates of deposit and individual retirement accounts |
| 1,941,143 |
| 24,474 |
| 5.02 | % |
| 1,445,885 |
| 14,991 |
| 4.11 | % | |||
Total interest-bearing deposits |
| 3,258,192 |
| 33,612 |
| 4.10 | % |
| 2,726,740 |
| 20,789 |
| 3.02 | % | |||
FHLB advances |
| 85,156 |
| 1,067 |
| 4.98 | % |
| 383,549 |
| 5,325 |
| 5.51 | % | |||
Total interest-bearing liabilities |
| 3,343,348 |
| 34,679 |
| 4.13 | % |
| 3,110,289 |
| 26,114 |
| 3.33 | % | |||
Non-interest-bearing deposits |
| 713,566 |
|
|
|
| 582,507 |
|
|
|
| ||||||
Other non-interest-bearing liabilities |
| 78,681 |
|
|
| 76,881 |
|
|
|
| |||||||
Total liabilities |
| 4,135,595 |
|
|
| 3,769,677 |
|
|
|
| |||||||
Shareholders' equity |
| 754,609 |
|
|
| 363,469 |
|
|
|
| |||||||
Total liabilities and shareholders' equity | $ | 4,890,204 |
|
| $ | 4,133,146 |
|
|
|
| |||||||
Net interest income |
| $ | 41,324 |
|
|
|
| $ | 33,484 |
|
| ||||||
Net interest rate spread (1) |
|
| 2.32 | % |
|
|
|
|
| 2.66 | % | ||||||
Net interest-earning assets (2) | $ | 1,344,530 |
|
| $ | 838,665 |
|
| |||||||||
Net interest margin (3) |
| 3.51 | % |
|
|
|
|
| 3.36 | % | |||||||
Average interest-earning assets to interest-bearing liabilities |
| 140.22 | % |
|
|
| 126.96 | % |
|
|
|
| |||||
| (1) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. |
| (2) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
| (3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
| (4) | Annualized. |
| (5) | Other investments are comprised of FRB stock, FHLB stock and swap collateral accounts. Short-term investments are comprised of cash and cash equivalents |
38
Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
| Three Months Ended | ||||||||
September 30, 2024 vs. 2023 | |||||||||
Increase (Decrease) Due to | Total | ||||||||
Increase | |||||||||
| Volume |
| Rate |
| (Decrease) | ||||
(In thousands) | |||||||||
Interest-earning assets: |
|
|
|
|
|
| |||
Loans | $ | 9,287 | $ | 4,529 | $ | 13,816 | |||
Securities |
| 1 |
| 662 |
| 663 | |||
Other |
| (147) |
| (410) |
| (557) | |||
Short-term investments |
| 2,415 |
| 68 |
| 2,483 | |||
Total interest-earning assets |
| 11,556 |
| 4,849 |
| 16,405 | |||
Interest-bearing liabilities: |
|
|
|
|
| ||||
Savings accounts |
| (3) |
| 1 |
| (2) | |||
NOW accounts |
| (5) |
| 27 |
| 22 | |||
Money market accounts |
| 524 |
| 2,796 |
| 3,320 | |||
Certificates of deposit and individual retirement accounts |
| 5,815 |
| 3,668 |
| 9,483 | |||
Total interest-bearing deposits |
| 6,332 |
| 6,491 |
| 12,823 | |||
Federal Home Loan Bank advances |
| (3,784) |
| (474) |
| (4,258) | |||
Total interest-bearing liabilities |
| 2,548 |
| 6,017 |
| 8,565 | |||
Change in net interest income | $ | 9,008 | $ | (1,168) | $ | 7,840 | |||
Comparison of Operating Results for the Nine Months Ended September 30, 2024 and September 30, 2023
Net Income. Net income was $26.5 million for the nine months ended September 30, 2024, compared to net income of $23.4 million the nine months ended September 30, 2023, an increase of approximately $3.1 million, or 13.2%. The increase was primarily due to a $22.2 million, or 23.1%, increase in net interest income, partially offset by a $7.9 million, or 11.6%, increase in noninterest expense, a $4.4 million, or 36.0%, decrease in non-interest income, a $4.2 million, or 49.6%, increase in income tax expense and a $2.6 million, or 32.7%, increase in the provision for credit losses.
Operating net income, excluding one-time charges, amounted to $31.3 million, or $0.79 per diluted share for the nine months ended September 30, 2024 compared to net income of $23.4 million for the nine months ended September 30, 2023, an increase of $7.8 million, or 33.4%. The material one-time charges were:
| ● | Loss on the sale of available-for sale securities amounting to $1.9 million; |
| ● | Tax expense and a managed endowment contract penalty related to the surrender of bank-owned life insurance BOLI policies of $1.6 million, and; |
| ● | Tax expense related to a basis write-down of solar income tax credits of $2.5 million. |
Interest and Dividend Income. Interest and dividend income increased $57.5 million, or 36.4%, to $215.3 million for the nine months ended September 30, 2024 from $157.9 million for the nine months ended September 30, 2023, primarily due to a $49.3 million, or 32.7%, increase in interest and fees on loans, and a $7.8 million, or 382.0%, increase in interest on short-term investments.
39
The increase in interest and fees on loans was primarily due to an increase of $670.0 million, or 20.0%, in the average balance of the loan portfolio to $4.03 billion for the nine months ended September 30, 2024 from $3.36 billion for the nine months ended September 30, 2023 and an increase of 64 basis points in the weighted average yield for the loan portfolio to 6.63% for the nine months ended September 30, 2024 from 5.99% for the nine months ended September 30, 2023, reflecting the growth of our commercial and consumer loan portfolios. The increase in interest on short-term investments was primarily due to an increase of $181.9 million, or 313.1%, in the average balance of short-term investments to $239.9 million for the nine months ended September 30, 2024 from $58.1 million for the nine months ended September 30, 2023.
Average interest-earning assets increased $822.4 million, or 22.4%, to $4.50 billion for the nine months ended September 30, 2024 from $3.67 billion for the nine months ended September 30, 2023. The yield on interest-earning assets increased 66 basis points to 6.40% for the nine months ended September 30, 2024 from 5.74% for the nine months ended September 30, 2023.
Interest Expense. Total interest expense increased $35.2 million, or 57.3%, to $96.6 million for the nine months ended September 30, 2024 from $61.4 million for the nine months ended September 30, 2023. Interest expense on deposit accounts increased $42.9 million, or 84.8%, to $93.4 million for the nine months ended September 30, 2024 from $50.5 million for the nine months ended September 30, 2023. The increase was due to an increase in the weighted average rate on certificates of deposit of 139 basis points to 4.98% for the nine months ended September 30, 2024 from 3.59% for the nine months ended September 30, 2023, an increase in the average balance of certificates of deposit of $451.5 million, or 33.1%, to $1.82 billion for the nine months ended September 30, 2024 from $1.36 billion for the nine months ended September 30, 2023, an increase in the weighted average rate on money market accounts of 154 basis points to 3.92% for the nine months ended September 30, 2024 from 2.38% for the nine months ended September 30, 2023 and an increase in the average balance of money market accounts of $95.0 million, or 12.5% to $855.0 million for the nine months ended September 30, 2024 from $760.0 million for the nine months ended September 30, 2023.
Interest expense on FHLB borrowings decreased $7.7 million, or 71.2%, to $3.2 million for the nine months ended September 30, 2024 from $10.9 million for the nine months ended September 30, 2023. The average balance of FHLB advances decreased $190.6 million, or 69.9%, to $82.0 million for the nine months ended September 30, 2024 from $272.6 million for the nine months ended September 30, 2023. The decrease in the average balance of FHLB advances was the result of growth in brokered deposits due to lower rates, as well as, overall deposit growth.
Net Interest Income. Net interest income increased $22.2 million, or 23.1%, to $118.7 million for the nine months ended September 30, 2024 from $96.4 million for the nine months ended September 30, 2023, primarily due to a $822.4 million, or 22.4%, increase in the average balance of interest-earning assets to $4.50 billion for the nine months ended September 30, 2024 from $3.67 billion for the nine months ended September 30, 2023 and an increase in the weighted average yield on interest-earning assets of 66 basis points to 6.40% for the nine months ended September 30, 2024 from 5.74% for the nine months ended September 30, 2023.
These increases were offset partially by an increase in the weighted average rate on interest-bearing liabilities of 121 basis points to 4.04% for the nine months ended September 30, 2024 from 2.83% for the nine months ended September 30, 2023 and an increase in the average balance of interest-bearing liabilities of $296.7 million, or 10.2%, to $3.20 billion for the nine months ended September 30, 2024 from $2.90 billion for the nine months ended September 30, 2023.
Provision for Credit Losses. Based on management’s analysis of the adequacy of the allowance for credit losses, a provision of $10.7 million was recorded for the nine months ended September 30, 2024, of which $13.3 million related to the provision for credit losses on loans, compared to a provision of $8.1 million for the nine months ended September 30, 2023. The provision for credit losses on unfunded commitments decreased $2.7 million during the nine months ended September 30, 2024 as a result of a reduction in qualitative factors on construction commitments, as well as, the reduction in the balance of unfunded commitments. The increase of $2.6 million, or 32.7%, in the total provision for credit losses was primarily due to the overall increase in the size of the loan portfolio and increases in the qualitative factors on loans collateralized by purchased consumer loans.
40
Noninterest Income. Noninterest income decreased $4.4 million, or 36.0%, to $7.8 million for the nine months ended September 30, 2024 from $12.1 million for the nine months ended September 30, 2023. The decrease resulted primarily from one-time employee retention credit income of $3.5 million during the nine months ended September 30, 2023, losses of sale on available-for-sale debt securities of $1.9 million during the nine months ended September 30, 2024 and a $930,000 decrease in swap contract income resulting from lower swap transaction volume; offset partially by an increase in other income resulting from a one-time debit and credit card branding signing bonus of $610,000 and increased customer service fees of $758,000 during the nine months ended September 30, 2024.
The table below sets forth our noninterest income for the nine months ended September 30, 2024 and 2023:
Nine Months Ended | |||||||||||
September 30, | Change | ||||||||||
2024 | 2023 | Amount | Percent | ||||||||
(Dollars in thousands) | |||||||||||
Customer service fees | $ | 5,717 | $ | 4,959 | $ | 758 | 15.29% | ||||
Loss on sale of available-for-sale securities, net | (1,868) | — | (1,868) | (100.00)% | |||||||
Increase in cash surrender value of BOLI | 1,219 | 1,117 | 102 | 9.13% | |||||||
Mortgage banking income | 905 | 469 | 436 | 92.96% | |||||||
Swap contract income | 1,128 | 2,058 | (930) | (45.19)% | |||||||
Employee retention credit income | - | 3,452 | (3,452) | (100.00)% | |||||||
Other income | 649 | 46 | 603 | 1310.87% | |||||||
Total noninterest income | $ | 7,750 | $ | 12,101 | $ | (4,351) | (35.96)% | ||||
Noninterest Expense. Noninterest expense increased $7.9 million, or 11.6%, to $76.4 million for the nine months ended September 30, 2024 from $68.5 million for the nine months ended September 30, 2023. Salaries and employee benefit expenses increased $7.5 million, or 17.0%, primarily from the hiring of additional employees consistent with our business strategy to grow the Bank, annual salary increases, a $2.0 million increase in ESOP compensation expenses, a $1.6 million increase in long term incentive plan expenses, a $627,000 increase in medical and dental benefits, a $477,000 in 401(k) match expenses and a $309,000 increase in federal payroll taxes; offset partially by a $1.2 million decrease in pension expense during the nine months ended September 30, 2024. Director and professional service fees increased $1.2 million, or 23.9%, during the nine months ended September 30, 2024, primarily the result of higher legal fees, lending services, appraisal fee and external audit costs. Data processing expenses increased $1.1 million, or 20.0%, during the nine months ended September 30, 2024, primarily the result of higher electronic banking, information technology and system costs. The above increases were partially offset by decreased FDIC and state insurance assessments of $1.0 million, or 36.5%, and general and administrative expenses of $783,000, or 18.45%, as a result of the adoption of ASU 2023-02, which resulted in a $1.2 million decrease in amortization of solar income tax credits during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The table below sets forth our noninterest expense for the nine months ended September 30, 2024 and 2023:
Nine Months Ended | |||||||||||
September 30, | Change | ||||||||||
2024 | 2023 | Amount | Percent | ||||||||
(Dollars in thousands) | |||||||||||
Salaries and employee benefits | $ | 51,509 | $ | 44,033 | $ | 7,476 | 16.98% | ||||
Director and professional service fees | 6,174 | 4,985 | 1,189 | 23.85% | |||||||
Occupancy and equipment expenses | 4,192 | 3,926 | 266 | 6.78% | |||||||
Data processing expenses | 6,547 | 5,456 | 1,091 | 20.00% | |||||||
Marketing and charitable contribution expenses | 2,680 | 2,972 | (292) | (9.83)% | |||||||
FDIC and state insurance assessments | 1,806 | 2,844 | (1,038) | (36.50)% | |||||||
General and administrative expenses | 3,459 | 4,243 | (784) | (18.48)% | |||||||
Total noninterest expense | $ | 76,367 | $ | 68,459 | $ | 7,908 | 11.55% | ||||
Income Tax Expense. Income tax expense increased $4.2 million, or 49.6%, to $12.8 million for the nine months ended September 30, 2024 from $8.6 million for the nine months ended September 30, 2023. The effective tax rate was 32.5% and 26.7% for the nine months ended September 30, 2024 and 2023, respectively. The increase in the effective tax rate was a result of the $2.5 million tax effect of the basis reduction on solar income tax credits earned and the $1.6 million income tax and penalty on the surrender of BOLI policies during the nine months ended September 30, 2024. Excluding these one-time income tax expenses, the effective tax rate for the nine months ended September 30, 2024 would have been 22.2%.
41
Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. Non-accrual loans were included in the computation of average balances. All average balances are daily average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense; such fees, discounts and premiums were not material for the periods presented.
| Nine Months Ended | ||||||||||||||||
September 30, 2024 | September 30, 2023 | ||||||||||||||||
| Average |
|
|
| Average |
|
| ||||||||||
Outstanding | Average | Outstanding | Average | ||||||||||||||
Balance | Interest | Yield/Rate (4) | Balance | Interest | Yield/Rate (4) | ||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans | $ | 4,026,925 | $ | 199,788 |
| 6.63 | % | $ | 3,356,963 | $ | 150,502 |
| 5.99 | % | |||
Securities |
| 200,648 |
| 4,736 |
| 3.15 | % |
| 225,267 |
| 3,612 |
| 2.14 | % | |||
Other investments (5) |
| 29,321 |
| 939 |
| 4.28 | % |
| 34,099 |
| 1,705 |
| 6.69 | % | |||
Short-term investments (5) |
| 239,946 |
| 9,853 |
| 5.49 | % |
| 58,090 |
| 2,044 |
| 4.70 | % | |||
Total interest-earning assets |
| 4,496,840 |
| 215,316 |
| 6.40 | % |
| 3,674,419 |
| 157,863 |
| 5.74 | % | |||
Non-interest-earning assets |
| 235,696 |
|
| 209,624 |
|
| ||||||||||
Allowance for credit losses |
| (35,336) |
|
| (29,166) |
|
|
|
| ||||||||
Total assets | $ | 4,697,200 |
| $ | 3,854,877 |
|
|
| |||||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Savings accounts | $ | 119,249 |
| 46 |
| 0.05 | % | $ | 145,464 |
| 55 |
| 0.05 | % | |||
NOW accounts |
| 325,364 |
| 521 |
| 0.21 | % |
| 358,380 |
| 334 |
| 0.12 | % | |||
Money market accounts |
| 855,003 |
| 25,100 |
| 3.92 | % |
| 759,991 |
| 13,557 |
| 2.38 | % | |||
Certificates of deposit and individual retirement accounts |
| 1,815,498 |
| 67,741 |
| 4.98 | % |
| 1,363,955 |
| 36,603 |
| 3.59 | % | |||
Total interest-bearing deposits |
| 3,115,114 |
| 93,408 |
| 4.01 | % |
| 2,627,790 |
| 50,549 |
| 2.57 | % | |||
FHLB advances |
| 82,015 |
| 3,230 |
| 5.26 | % |
| 272,622 |
| 10,871 |
| 5.33 | % | |||
Total interest-bearing liabilities |
| 3,197,129 |
| 96,638 |
| 4.04 | % |
| 2,900,412 |
| 61,420 |
| 2.83 | % | |||
Non-interest-bearing deposits |
| 673,327 |
|
|
|
| 530,834 |
|
|
|
| ||||||
Other non-interest-bearing liabilities |
| 83,493 |
|
|
| 67,880 |
|
|
|
| |||||||
Total liabilities |
| 3,953,949 |
|
|
| 3,499,126 |
|
|
|
| |||||||
Shareholders' equity |
| 743,251 |
|
|
| 355,751 |
|
|
|
| |||||||
Total liabilities and shareholders' equity | $ | 4,697,200 |
|
| $ | 3,854,877 |
|
|
|
| |||||||
Net interest income |
| $ | 118,678 |
|
|
|
| $ | 96,443 |
|
| ||||||
Net interest rate spread (1) |
|
| 2.36 | % |
|
|
|
|
| 2.91 | % | ||||||
Net interest-earning assets (2) | $ | 1,299,711 |
|
| $ | 774,007 |
|
| |||||||||
Net interest margin (3) |
| 3.53 | % |
|
|
|
|
| 3.51 | % | |||||||
Average interest-earning assets to interest-bearing liabilities |
| 140.65 | % |
|
|
| 126.69 | % |
|
|
|
| |||||
| (1) | Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities. |
| (2) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
| (3) | Net interest margin represents net interest income divided by average total interest-earning assets. |
| (4) | Annualized. |
| (5) | Other investments are comprised of FRB stock, FHLB stock and swap collateral accounts. Short-term investments are comprised of cash and cash equivalents |
42
Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments required to be excluded from the table below.
| Nine Months Ended | ||||||||
September 30, 2024 vs. 2023 | |||||||||
Increase (Decrease) Due to | Total | ||||||||
Increase | |||||||||
| Volume |
| Rate |
| (Decrease) | ||||
(In thousands) | |||||||||
Interest-earning assets: |
|
|
|
|
|
| |||
Loans | $ | 32,124 | $ | 17,162 | $ | 49,286 | |||
Securities |
| (339) |
| 1,463 |
| 1,124 | |||
Other |
| (215) |
| (551) |
| (766) | |||
Short-term investments |
| 7,414 |
| 395 |
| 7,809 | |||
Total interest-earning assets |
| 38,984 |
| 18,469 |
| 57,453 | |||
Interest-bearing liabilities: |
|
|
|
|
| ||||
Savings accounts |
| (10) |
| 1 |
| (9) | |||
NOW accounts |
| (28) |
| 215 |
| 187 | |||
Money market accounts |
| 1,872 |
| 9,671 |
| 11,543 | |||
Certificates of deposit and individual retirement accounts |
| 14,288 |
| 16,850 |
| 31,138 | |||
Total interest-bearing deposits |
| 16,122 |
| 26,737 |
| 42,859 | |||
Federal Home Loan Bank advances |
| (7,508) |
| (133) |
| (7,641) | |||
Total interest-bearing liabilities |
| 8,614 |
| 26,604 |
| 35,218 | |||
Change in net interest income | $ | 30,370 | $ | (8,135) | $ | 22,235 | |||
Liquidity and Capital Resources
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. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from maturities of securities. We are also able to borrow from the FHLB and the Discount Window at the Federal Reserve Bank of Boston (“FRB”). As of September 30, 2024, we had outstanding advances of $116.3 million from the FHLB. As of September 30, 2024, we had unused borrowing capacity of $730.7 million with the FHLB and $36.6 million available with the FRB. Subsequent to September 30, 2024, the Bank received approval from the FRB under its Borrower in Custody (“BIC”) program, which allowed us to pledge commercial real estate and multi-family loans to the FRB, which provided the Bank with additional borrowing capacity of $531.6 million. Additionally, as of September 30, 2024, we had $329.9 million of brokered deposits and pursuant to our internal liquidity policy, which allows us to utilize brokered deposits up to 25.0% of our total assets, we had an additional capacity of up to approximately $920.7 million of brokered deposits.
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 short-term investments. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities.
43
At September 30, 2024, we had $75.8 million in commitments to originate loans outstanding. In addition, we had $477.6 million in unused lines of credit to borrowers, $487.5 million in unadvanced construction loans and $6.5 million in letters of credit outstanding.
Non-brokered certificates of deposit due within one year of September 30, 2024 totaled $1.65 billion, or 40.9%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including brokered deposits, FHLB advances and FRB borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the non-brokered certificates of deposit due on or before September 30, 2025, or on our other interest-bearing deposit accounts. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of September 30, 2024.
Our primary investing activity is originating loans. During the nine months ended September 30, 2024, we originated $345.4 million of loans, net of repayments.
Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced net increases in deposits of $655.5 million for the nine months ended September 30, 2024. At September 30, 2024 and December 31, 2023, the level of brokered time deposits was $329.9 million and $183.6 million, respectively. Deposit flows are affected primarily by the overall level of interest rates and the interest rates and products offered by us and our competitors. FHLB advances decreased $167.0 million during the nine months ended September 30, 2024.
For additional information, see the consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023 included as part of the consolidated financial statements appearing elsewhere in this Form 10-Q.
We are committed to maintaining a strong liquidity position. We continuously monitor our liquidity position and adjustments are made to the balance between sources and uses of funds as deemed appropriate by management. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding planning process, which provides the basis for the identification of our liquidity needs. We anticipate that we will have sufficient funds to meet our current funding commitments. In addition, based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained.
As of September 30, 2024, Needham Bank and NB Bancorp, Inc. exceeded all of their regulatory capital requirements, and were categorized as well-capitalized at that date. Management is not aware of any conditions or events since the most recent notification of well-capitalized status that would change our category. See Note 10 of the notes to consolidated financial statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented in this Form 10-Q have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Not applicable, as the Registrant is an emerging growth company.
44
Item 4.Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2024. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Registrant’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2024, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II – Other Information
Item 1.Legal Proceedings
The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s or the Bank’s financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in risk factors applicable to the Company from those disclosed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2.Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
| (a) | There were no sales of unregistered securities during the period covered by this Report. |
| (b) | Not applicable. |
| (c) | There were no issuer repurchases of securities during the period covered by this Report. |
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
45
Item 6.Exhibits
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32 | |
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Exhibit 104 | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NB BANCORP, INC. | |
Date: November 8, 2024 | /s/ Joseph Campanelli |
Joseph Campanelli | |
Chairman, President and Chief Executive Officer | |
Date: November 8, 2024 | /s/ Jean-Pierre Lapointe |
Jean-Pierre Lapointe | |
Executive Vice President and Chief Financial Officer |
47