Overview

The company strives to remain a leader in meeting the financial service needs of the local community and provide quality service to individuals and businesses in its market areas. Historically, it has been a community-oriented provider of traditional banking products and services, including residential and commercial real estate loans, consumer loans, and various deposit products.

The company has adopted a growth-oriented strategy that continues to focus on increasing commercial lending and residential lending. The strategy also calls for increasing deposit relationships, specifically core deposits, and broadening its product lines and services. The company believes this business strategy is best for its long-term success and viability, and complements its existing commitment to high quality customer service.

As part of its growth strategy, the company seeks to increase market share and achieve scale to improve profitability and efficiency, grow its commercial loan portfolio and related commercial deposits, supplement the commercial portfolio by growing the residential real estate portfolio, focus on expanding its retail banking deposit franchise, invest in people, systems and technology, grow revenues, increase book value per share and tangible book value, pay competitive dividends, and consider growth through acquisitions.

Financial Performance

For the year ended December 31, 2024, the company reported net income of $11.7 million, or $0.56 diluted earnings per share, compared to $15.1 million, or $0.70 diluted earnings per share, in 2023. The results showed decreases in net interest income and the provision for credit losses, as well as increases in non-interest income and non-interest expense.

Net interest income decreased $8.1 million, or 11.9%, to $59.8 million, primarily due to a $16.8 million, or 50.6%, increase in interest expense, partially offset by an $8.7 million, or 8.6%, increase in interest and dividend income.

The company recorded a reversal of credit losses of $665,000 in 2024, compared to a provision of $872,000 in 2023. The decrease was primarily due to changes in the economic environment and related adjustments to the CECL methodology.

Critical Accounting Policies

The company’s critical accounting policy is the allowance for credit losses and provision for credit losses. The allowance for credit losses is an estimate of expected losses inherent within the company’s loan portfolio. The evaluation is inherently subjective and involves procedures to consider the unique characteristics of loan portfolio segments, including commercial real estate, residential real estate, commercial and industrial, and consumer loans.

The quantitative component of the allowance is model-based and utilizes a forward-looking macroeconomic forecast. For commercial real estate, residential real estate, and commercial and industrial loans, the company uses a discounted cash flow method, incorporating probability of default and loss given default forecasted based on economic variable loss drivers. The expected loss estimates for consumer loans are based on historical loss rates using the WARM method.

Management believes the allowance is adequate for the current economic environment, but future adjustments may be necessary if conditions differ substantially from the current operating environment.

Net Interest Income

The company’s earnings are largely dependent on net interest income, which is the difference between interest earned on loans and investments and the cost of funding, primarily deposits and borrowings. Net interest margin, or net interest income as a percentage of average interest-earning assets, was 2.45% in 2024 compared to 2.82% in 2023.

The average yield on interest-earning assets increased 30 basis points to 4.50% in 2024, while the average cost of funds, including non-interest-bearing deposits and borrowings, increased 70 basis points to 2.14%. The average cost of core deposits increased 24 basis points to 0.89%, and the average cost of time deposits increased 129 basis points to 4.32%.

Loans and Asset Quality

Total loans increased $42.9 million, or 2.1%, to $2.1 billion at December 31, 2024, driven by a $53.5 million, or 7.4%, increase in residential real estate loans, partially offset by decreases in commercial real estate, commercial and industrial, and consumer loans.

Total delinquency was 0.24% of total loans at December 31, 2024, down from 0.30% at the end of 2023. Nonperforming loans totaled $5.4 million, or 0.26% of total loans, at the end of 2024, compared to $6.4 million, or 0.32%, at the end of 2023. The allowance for credit losses was $19.5 million, or 0.94% of total loans and 362.9% of nonperforming loans, at the end of 2024.

The company has a concentration in commercial real estate loans, with non-owner occupied CRE representing 42.6% of total loans and 325.2% of total bank risk-based capital at the end of 2024. The company has implemented heightened risk management procedures and strong underwriting criteria to manage this exposure.

Deposits and Borrowings

Total deposits increased $118.9 million, or 5.6%, to $2.3 billion at December 31, 2024. Core deposits, which exclude time deposits, increased $26.7 million, or 1.7%, to $1.6 billion and represented 68.9% of total deposits.

Total borrowings decreased $33.4 million, or 21.3%, to $123.1 million at the end of 2024. This included a $90.0 million decrease in advances under the Federal Reserve’s Bank Term Funding Program (BTFP), which was utilized in 2023 but had no outstanding balance at the end of 2024.

Shareholders’ Equity

Shareholders’ equity was $235.9 million, or 8.9% of total assets, at December 31, 2024, compared to $237.4 million, or 9.3%, at the end of 2023. Book value per share increased from $10.96 to $11.30, while tangible book value per share increased from $10.30 to $10.63.

The company’s regulatory capital ratios continued to exceed the levels required to be considered “well-capitalized” under federal banking regulations.

Comparison of Operating Results

For the year ended December 31, 2024, net income decreased to $11.7 million, or $0.56 per diluted share, from $15.1 million, or $0.70 per diluted share, in 2023. The decrease was primarily due to the $8.1 million, or 11.9%, decline in net interest income, partially offset by a $1.5 million decrease in the provision for credit losses and a $2.0 million, or 18.4%, increase in non-interest income.

The net interest margin decreased 37 basis points to 2.45% in 2024. The average yield on interest-earning assets increased 30 basis points to 4.50%, while the average cost of funds increased 70 basis points to 2.14%.

The company recorded a reversal of credit losses of $665,000 in 2024, compared to a provision of $872,000 in 2023, primarily due to changes in the economic environment and CECL methodology adjustments.

Non-interest income increased $2.0 million, or 18.4%, driven by higher service charges and fees, income on bank-owned life insurance, and gains on non-marketable equity investments. Non-interest expense increased $78,000, or 0.1%, in 2024.

The efficiency ratio was 80.4% in 2024, compared to 74.0% in 2023. The adjusted efficiency ratio, a non-GAAP measure, was 81.8% in 2024 compared to 74.3% in 2023.

Liquidity and Capital Resources

The company’s primary sources of liquidity are deposits, scheduled loan and securities repayments, and funds provided by operations. It also has available borrowing capacity with the FHLB, Federal Reserve Discount Window, and other correspondent banks.

At December 31, 2024, the company had $464.1 million in available FHLB borrowing capacity, $382.9 million in Federal Reserve Discount Window capacity, and $25.0 million in other unsecured lines of credit. It also had $343.1 million in available home equity and other unadvanced lines of credit.

The company’s regulatory capital ratios exceeded the levels required to be considered “well-capitalized” at the end of 2024. It has material cash commitments related to a core provider contract, operating leases, and $19.8 million in subordinated notes, but does not anticipate any other significant capital expenditures.

Interest Rate Risk

The company utilizes an asset-liability management strategy to limit fluctuations in net interest income as interest rates vary. It employs various tactics, such as maintaining a diverse loan portfolio, emphasizing short-duration investments, and using interest rate swaps when appropriate.

Sensitivity analysis shows that a 200 basis point increase in interest rates would decrease net interest income by 4.4% over the first 12 months and increase it by 7.5% over the following 12 months. A 200 basis point decrease would increase net interest income by 3.9% in the first 12 months and 24.6% in the following 12 months.

Outlook

The company’s financial performance in 2024 showed decreases in net interest income and the provision for credit losses, as well as increases in non-interest income and non-interest expense compared to 2023. The net interest margin compression and higher funding costs were the primary drivers of the decline in profitability.

Looking ahead, the company will need to carefully manage its interest rate risk exposure and continue to focus on growing its commercial and residential lending businesses to offset the pressure on net interest income. Maintaining strong asset quality and controlling non-interest expenses will also be critical.

Overall, the company appears to be well-positioned with a diversified balance sheet, ample liquidity, and solid capital levels. However, the challenging interest rate environment and potential economic headwinds will require the company to execute its growth strategy effectively and manage risk prudently to drive improved financial performance in the future.