FB Bancorp, Inc. /MD/ (FBLA) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflect certain information contained in our financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with the business and financial information regarding FB Bancorp provided in this Annual Report on Form 10-K, including the financial statements, which appear beginning on page F-1 herein.
Overview
FB Bancorp conducts its operations primarily through Fidelity Bank. Fidelity Bank’s business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans, commercial real estate loans, commercial loans, home equity loans and lines of credit, consumer loans and construction loans. We also invest in securities, which have historically consisted primarily of mortgage-backed securities and obligations issued by U.S. government sponsored enterprises. We offer a variety of deposit accounts including negotiable orders of withdrawal, which we refer to as “NOW” , savings accounts, money market accounts and certificate of deposit accounts. Fidelity Bank is subject to comprehensive regulation and examination by the LOFI and the FDIC and FB Bancorp is subject to comprehensive regulation and examination by the Federal Reserve Board.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for credit losses, non-interest income and non-interest expenses. Non-interest income currently consists primarily of service charges on deposit accounts, gain on the resale of mortgage loans and mortgage servicing rights and other service charges and fees. Non-interest expenses currently consist primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, advertising and marketing, amortization of mortgage servicing rights, and other expenses.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Business Strategy
Our principal objective is to build long-term value for our stockholders by operating a profitable community-oriented financial institution dedicated to meeting the banking needs of our customers by emphasizing personalized and efficient customer service. Highlights of our current business strategy include:
Continuing to seek to grow and diversify our loan portfolio prudently by increasing originations of commercial real estate and commercial loans in an effort to increase the overall loan portfolio yield. We intend to continue to prudently increase our originations of commercial real estate and commercial loans in order to diversify our loan portfolio and increase yield. At December 31, 2024, commercial real estate loans amounted to $241.1 million, or 31.8% of total loans and commercial loans amounted to $95.0 million, or 12.5% of total loans.
Continuing NOLA’s focus on originating residential mortgage loans at its current pace primarily for sale into the secondary market. NOLA originates all of our one-to four-family residential mortgage loans with the intent to sell such loans into the secondary market. During the year ended December 31, 2024, our NOLA division originated $435.0 million of one- to four-family residential mortgage loans, of which $377.0 million were sold into the secondary market for a gain on sale of approximately $12.7 million. We intend to generally maintain NOLA’s level of loan originations going forward, subject to customer demand and market interest rates.
Maintaining our strong asset quality through conservative loan underwriting. We intend to maintain strong asset quality through what we believe are our conservative underwriting standards and credit monitoring processes. At December 31, 2024, our non-performing loans totaled 1.72% of total loans.
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Continuing to attract and retain customers in our current market areas and growing our low-cost “core” deposit base while expanding our offices and banking activity in the Baton Rouge and Lafayette, Louisiana markets. We consider our core deposits to include NOW accounts, statement savings accounts, money market accounts, and other savings deposit accounts. We will continue our efforts to increase our core deposits to provide a stable source of funds to support loan growth at costs consistent with improving our interest rate spread and net interest margin. Core deposits totaled $484.9 million, or 60.7% of total deposits, at December 31, 2024. We have expanded our deposit and lending activities into the Baton Rouge and Lafayette, Louisiana markets over the last several years, including the hiring of Market Area Presidents and lending teams and we anticipate that these efforts will continue.
Continuing to implement and invest in both our online banking infrastructure and our fully digital bank (“Andi”) in order to meet current customer needs as well as expand our customer base in existing and new markets. We are expanding our online banking infrastructure for consumer and commercial customers to meet existing and prospective customer expectations with digital deposit products, lending products and financial wellness products. We have also established a fully digital, online-only bank, called Andi, as a division of Fidelity Bank.
Remaining a community-oriented institution relying on high quality service to maintain and build a loyal local customer base. We have been operating continuously in southern Louisiana since 1908. Through the goodwill we have developed over years of providing timely, efficient banking services, we believe that we have been able to attract a loyal base of local retail customers on which we hope to continue to build our banking business.
Continuing to grow through organic growth while also considering opportunistic acquisitions or branching. We intend to grow our assets organically on a managed basis, and the capital we raised in the stock offering will enable us to increase our lending and investment capacity. In addition to organic growth, we may also consider expansion opportunities in our market areas or in contiguous markets that we believe would enhance both our franchise value and stockholder returns. These opportunities may include acquiring other financial institutions and/or establishing loan production offices, establishing new, or de novo, branch offices and/or acquiring branch offices. The capital we raised in the stock offering would help us fund any such opportunities that may arise. We have no current plans or intentions regarding any such expansion activities except the previously disclosed banking branch in Lafayette, Louisiana opening in the second half of 2025.
These strategies guided our investment of the net proceeds of the stock offering. We intend to continue to pursue these business strategies, subject to changes necessitated by future market conditions, regulatory restrictions and other factors.
Critical Accounting Policies and Use of Critical Accounting Estimates
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical accounting policies:
Allowance for Credit Losses. On January 1, 2023, Fidelity Bank adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as CECL . The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to
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require credit losses to be presented as an allowance rather than as a write down on available-for-sale debt securities that management does not intend to sell or believe that it is not, more than likely, required to sell.
Upon adoption of this new credit loss measurement standard, Fidelity Bank did not recognize a material change to its financial position or results of operations. No retroactive cumulative effect of accounting changes were recognized in this adoption.
Deferred Tax Assets. Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the 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 recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50%. Deferred tax assets are reduced by a valuation allowance, if based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Fair Value Measurements. Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments.
Comparison of Financial Condition at December 31, 2024 and December 31, 2023
Total Assets. Total assets were $1.22 billion at December 31, 2024, an increase of $96.0 million, or 8.53%, from $1.12 billion at December 31, 2023. The increase was primarily due to the continued growth primarily in loans and cash equivalents, partially offset by a decrease in available-for-sale investment securities.
Interest-Bearing Deposits at Other Financial Institutions. Interest-bearing deposits at other financial institutions increased by $10.7 million, or 13.15%, to $92.0 million at December 31, 2024 from $81.3 million at December 31, 2023. The increase was primarily due to proceeds from the stock conversion and increasing deposits.
Available-for-Sale Investment Securities. Investment securities were $244.1 million at December 31, 2024, a decrease of $5.8 million, or 2.31%, from $249.9 million at December 31, 2023. The decrease was primarily due to maturities, prepayments, and sales of investment securities exceeding the $35.4 million in current year purchases.
The weighted average yield on investment securities was 3.68% for the year ended December 31, 2024, compared to 3.58% for the year ended December 31, 2023, reflecting the increase in market rates of interest between the periods.
Loans Held for Investment, Net. Loans held for investment, net, were $750.7 million at December 31, 2024, an increase of $91.2 million, or 13.82%, from $659.5 million at December 31, 2023. Loan originations (excluding loans held for sale) totaled $226.4 million for the year ended December 31, 2024, compared to $267.0 million in 2023.
Increases in loan balances reflect our strategy to grow the commercial and commercial real estate loan portfolios. We have also expanded our lending activities into the Baton Rouge and Lafayette markets in Louisiana.
Deposits. Deposits increased by $31.5 million, or 4.09%, to $800.7 million at December 31, 2024 from $769.3 million at December 31, 2023. Core deposits (defined as all deposits other than certificates of deposit) decreased $19.5 million, or 3.87%, to $484.9 million at December 31, 2024 from $504.4 million at December 31, 2023. Certificates of deposit increased $51.0 million, or 19.24%, to $315.9 million at December 31, 2024 from $264.9 million at December 31, 2023. Our certificates of deposit included $106.0 million in wholesale and brokered certificates of deposit at December 31, 2024. Such deposits generally tend to be at higher yields than other types of deposits and generally do not represent direct customer relationships, but were utilized, in part, to fund loan growth.
Total Equity. Total equity increased $169.5 million, or 108.15%, to $326.3 million at December 31, 2024 from $156.7 million at December 31, 2023. The increase resulted primarily from the stock offering. For more information about changes to total equity, see the Consolidated Statement of Changes in Shareholders’ Equity statement as included with the financial statements, which appear beginning on page F-1 herein.
Average Balances Sheets. 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.
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Average yields include the effect of net deferred fee income, discounts and premiums that are amortized or accreted to interest income or interest expense. Average balances are calculated using daily average balances.
| For the twelve months ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||||||||||||
| Average Outstanding Balance | Interest | Average Yield/Rate | Average Outstanding Balance | Interest | Average Yield/Rate | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 73,451 | $ | 3,444 | 4.69 | % | $ | 38,685 | $ | 1,733 | 4.48 | % | ||||||||||||
| Securities | 246,990 | 9,085 | 3.68 | % | 259,311 | 9,278 | 3.58 | % | ||||||||||||||||
| Loans | 714,884 | 51,445 | 7.20 | % | 611,317 | 41,679 | 6.82 | % | ||||||||||||||||
| Loans held for sale | 30,258 | 1,915 | 6.33 | % | 26,098 | 1,608 | 6.16 | % | ||||||||||||||||
| Total earning assets | 1,065,583 | 65,889 | 6.18 | % | 935,411 | 54,298 | 5.80 | % | ||||||||||||||||
| Non-interest-earning assets: | ||||||||||||||||||||||||
| Cash and cash equivalents | 6,716 | 6,714 | ||||||||||||||||||||||
| Fixed Assets | 52,583 | 49,960 | ||||||||||||||||||||||
| Allowance for credit losses | (6,065 | ) | (6,332 | ) | ||||||||||||||||||||
| Other | 53,892 | 56,563 | ||||||||||||||||||||||
| Total non-interest-earning assets | 107,126 | 106,905 | ||||||||||||||||||||||
| Total Assets | $ | 1,172,709 | $ | 1,042,316 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 113,819 | $ | 220 | 0.19 | % | $ | 131,764 | $ | 136 | 0.10 | % | ||||||||||||
| Interest-bearing savings and money market deposits | 227,373 | 1,842 | 0.81 | % | 262,711 | 1,091 | 0.42 | % | ||||||||||||||||
| Certificates of deposit | 280,756 | 9,134 | 3.25 | % | 232,260 | 5,535 | 2.38 | % | ||||||||||||||||
| Total interest-bearing deposits | 621,948 | 11,196 | 1.80 | % | 626,735 | 6,762 | 1.08 | % | ||||||||||||||||
| Interest-bearing borrowings | 179,663 | 8,237 | 4.58 | % | 80,832 | 3,368 | 4.17 | % | ||||||||||||||||
| Total interest-bearing liabilities | 801,611 | 19,433 | 2.42 | % | 707,567 | 10,130 | 1.43 | % | ||||||||||||||||
| Non-interest: | ||||||||||||||||||||||||
| Demand deposits | 164,276 | 173,927 | ||||||||||||||||||||||
| Other liabilities | 16,577 | 8,197 | ||||||||||||||||||||||
| Total non-interest liabilities | 180,853 | 182,124 | ||||||||||||||||||||||
| Total Equity | 190,245 | 152,625 | ||||||||||||||||||||||
| Total liabilities and equity | $ | 1,172,709 | $ | 1,042,316 | ||||||||||||||||||||
| Net interest income | $ | 46,456 | $ | 44,168 | ||||||||||||||||||||
| Net interest-earning assets (1) | $ | 263,972 | $ | 227,844 | ||||||||||||||||||||
| Net interest rate spread (2) | 3.76 | % | 4.37 | % | ||||||||||||||||||||
| Net yield on interest-earning assets (3) | 4.36 | % | 4.72 | % | ||||||||||||||||||||
| Average of interest-earning assets to interest-bearing liabilities | 132.93 | % | 132.20 | % | ||||||||||||||||||||
| Average equity to assets | 16.22 | % | 14.64 | % |
| (1) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
|---|---|
| (2) | 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. |
| (3) | Represents net interest income divided by average interest-earning assets. |
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.
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| Twelve months ended December 31, 2024 vs. twelve months ended December 31, 2023 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to | Total Increase (Decrease) | |||||||||||
| Volume | Rate | |||||||||||
| (In thousands) | ||||||||||||
| Interest-earning assets: | ||||||||||||
| Cash and cash equivalents | $ | 1,557 | $ | 154 | $ | 1,711 | ||||||
| Securities | (441 | ) | 248 | (193 | ) | |||||||
| Loans | 7,061 | 2,705 | 9,766 | |||||||||
| Loans held for sale | 256 | 51 | 307 | |||||||||
| Total interest-earning assets | 8,433 | 3,158 | 11,591 | |||||||||
| Interest-bearing liabilities: | ||||||||||||
| Interest-bearing demand deposits | (18 | ) | 102 | 84 | ||||||||
| Interest-bearing savings and money market deposits | (148 | ) | 899 | 751 | ||||||||
| Certificates of deposit | 1,156 | 2,443 | 3,599 | |||||||||
| Total interest-bearing deposits | 990 | 3,444 | 4,434 | |||||||||
| Interest-bearing borrowings | 4,120 | 749 | 4,869 | |||||||||
| Total interest-bearing liabilities | 5,110 | 4,193 | 9,303 | |||||||||
| Net interest income | $ | 3,323 | $ | (1,035 | ) | $ | 2,288 |
Comparison of Operating Results for the Years Ended December 31, 2024 and 2023
General. Net loss of $6.2 million was recorded for the year ended December 31, 2024, a decrease of $7.3 million from net income of $1.1 million for the year ended December 31, 2023. The decrease in net income was primarily due to the previously disclosed 2024 goodwill impairment of $5.8 million and a decrease in the gain on sales of mortgage servicing rights of $2.7 million.
Interest Income. Interest income increased $11.6 million, or 21.35%, to $65.9 million for the year ended December 31, 2024, compared to $54.3 million for the year ended December 31, 2023. This increase was attributable to both an increase in total earning assets and yield on those assets.
The average balance of loans held for investment during the year ended December 31, 2024 increased $103.6 million, or 16.94%, while the average yield on loans increased to 7.20% for the year ended December 31, 2024, from 6.82% for the year ended December 31, 2023. The increase in average yield on loans was due to strong loan originations and disciplined pricing.
The average balance of investment securities decreased $12.3 million, or 4.75%%, to $247.0 million for the year ended December 31, 2024 from $259.3 million for the year ended December 31, 2023, while the average yield on investment securities increased to 3.68% for the year ended December 31, 2024 from 3.58% for the year ended December 31, 2023. The increase in the average yield on securities was due primarily to the increase in market rates of interest between the periods.
The average balance of interest earning cash and cash equivalents increased $34.8 million, or 89.87%, for the year ended December 31, 2024, which was accompanied by an increase in the average yield, to 4.69% for the year ended December 31, 2024 from 4.48% for the year ended December 31, 2023. The average yield on cash and cash equivalents reflected the increases in overnight interest paid at the Federal Reserve.
Interest Expense. Total interest expense increased $9.3 million, or 91.84%, to $19.4 million for the year ended December 31, 2024, from $10.1 million for the year ended December 31, 2023. The increase was primarily due to an increase in the average cost of deposits to 1.80% for the year ended December 31, 2024 from 1.08% for the year ended December 31, 2023, reflecting the increase in market rates of interest between the periods, and an increase in the average cost of borrowing to 4.58% for the year ended December 31, 2024 from 4.17% for the year ended December 31, 2023. However, borrowings were paid down in the fourth quarter of 2024, total borrowings were $73.5 million at December 31, 2024, compared to the 2024 average of $179.7 million, and the average cost decreased to 4.08% as of December 31, 2024, compared to the 2024 annual average cost of 4.58%. This deleveraging of wholesale borrowings was facilitated by proceeds from the stock conversion.
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Net Interest Income. Net interest income increased $2.3 million, or 5.18%, to $46.5 million for the year ended December 31, 2024, from $44.2 million for the year ended December 31, 2023. The increase reflected an increase in the average net interest-earning assets of $36.1 million, or 15.86%, partially offset by a decrease in the net interest margin to 4.36% for the year ended December 31, 2024 from 4.72% for the year ended December 31, 2023.
Provision for Credit Losses. There was a $1.5 million provision for credit losses for the year ended December 31, 2024 compared to a $649 thousand provision for the year ended December 31, 2023. The increase in the provision for credit losses was due primarily to growth in loans held for investment. The allowance for credit losses was $6.2 million and $6.2 million for the years ended December 31, 2024 and 2023, respectively, and represented 0.82% of total loans at December 31, 2024 and 0.93% of total loans at December 31, 2023.
Total non-performing loans were $13.0 million at December 31, 2024, compared to $7.7 million at December 31, 2023. Classified loans totaled $15.8 million at December 31, 2024, compared to $12.0 million at December 31, 2023, and total loans past due greater than 30 days were $34.6 million and $10.2 million at those respective dates. Special mention loans were $2.1 million at December 31, 2024 compared to $11.6 million at December 31, 2023. As a percentage of non-performing loans, the allowance for credit losses was 48.1% at December 31, 2024 compared to 80.9% at December 31, 2023.
The allowance for credit losses reflects the estimate management believes to be appropriate to cover probable expected losses that were inherent in the loan portfolio at December 31, 2024. While management believes the estimates and assumptions used in the determination of the adequacy of the allowance are reasonable, such estimates and assumptions could be proven incorrect in the future, and the actual amount of future provisions may exceed the amount of past provisions. Any increase in future provisions that may be required may adversely impact Fidelity Bank’s financial condition and results of operations. In addition, bank regulatory agencies periodically review the allowance for credit losses and may recommend an increase in the provision for possible credit losses or the recognition of loan charge-offs, based on judgments different than those of management.
Non-interest Income. Non-interest income totaled $20.0 million for the year ended December 31, 2024, a decrease of $4.9 million, or 19.7%, from $24.9 million for the year ended December 31, 2023. The decrease was primarily due to $2.7 million decrease in gain on sales of mortgage servicing rights and a $2.1 million decrease in mortgage servicing revenue due to the volume of sales of mortgage servicing rights in 2023 and 2024.
Non-interest Expense. Non-interest expense increased $4.3 million, or 6.40%, to $71.3 million for the year ended December 31, 2024, compared to $67.0 million for the year ended December 31, 2023. The increase was primarily due to the previously disclosed 2024 goodwill impairment of $5.8 million, partially offset by decreases in mortgage servicing rights amortization and other general and administrative expenses. Mortgage servicing rights amortization decreased $1.3 million, or 71.5%, and other general and administrative expenses decreased $409 thousand, or 4.6% for the year ended December 31, 2024 compared to the same period in 2023. Mortgage servicing right amortization decreased due to the mortgage servicing sales in 2023 and 2024 and general administrative expenses are down due to management’s focus on lowering the cost of delivery.
Provision (Benefit) for Income Taxes. A benefit of $137 thousand was recognized for the year ended December 31, 2024, compared to a provision of $330 thousand for the year ended December 31, 2023. The fluctuations in the income tax benefit and provision was directly related to fluctuations in net loss and net income before income taxes. The goodwill impairment of $5.8 million in 2024 is not offset by an income tax benefit.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. The Bank has Asset Liability Committees at both the management and the board levels, with one board member having observational status at the management-level committee to ensure continuity. The management-level committee is comprised of senior level officers. The Board’s Asset Liability Committee receives reports from management at each of its meetings and reviews the minutes of the management-level committee. The Board’s Asset Liability Committee establishes the policies and guidelines for managing the Bank’s interest rate risk. All directors participate in discussions during the regular board meetings evaluating the interest rate risk inherent in our assets and liabilities, and the level of risk that is appropriate. These discussions take into consideration our business strategy, operating environment, capital, liquidity and performance objectives consistent with the policy and guidelines approved by them.
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we are using to manage interest rate risk are:
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maintaining capital levels that exceed the thresholds for well-capitalized status under federal regulations;
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hedging our interest rate risk on residential mortgage loans held for sale through the use of forward commitments;
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maintaining a high level of liquidity;
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growing our volume of core deposit accounts;
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managing our investment securities portfolio so as to reduce the average maturity and effective life of the portfolio; and
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continuing to diversify our loan portfolio by adding more commercial-related loans, which typically have shorter maturities and/or balloon payments.
By following these strategies, we believe that we are better positioned to react to increases and decreases in market interest rates.
Economic Value of Equity. We also compute amounts by which the net present value of our assets and liabilities (economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases instantaneously by 100, 200, 300 and 400 basis point increments or decreases instantaneously by 100 or 200 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The following table sets forth, at December 31, 2024, the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the United States Treasury yield curve.
| December 31, 2024 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EVE as a Percentage of Present Value Assets (3) | ||||||||||||||||||||
| Estimated Increase (Decrease) in EVE | Increase (Decrease) (basis points) | |||||||||||||||||||
| Change in Interest Rates (basis points) (1) | Estimated EVE (2) | Amount | Percent | EVE Ratio (4) | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| 400 | $ | 285,802 | $ | (56,357 | ) | (16.47 | )% | 22.91 | % | (452 | ) | |||||||||
| 300 | 305,181 | (36,978 | ) | (10.81 | )% | 24.47 | % | (296 | ) | |||||||||||
| 200 | 320,943 | (21,216 | ) | (6.20 | )% | 25.73 | % | (170 | ) | |||||||||||
| 100 | 333,412 | (8,747 | ) | (2.56 | )% | 26.73 | % | (70 | ) | |||||||||||
| - | 342,159 | — | — | % | 27.43 | % | — | |||||||||||||
| (100) | 349,597 | 7,438 | 2.17 | % | 28.03 | % | 60 | |||||||||||||
| (200) | 349,240 | 7,081 | 2.07 | % | 28.00 | % | 57 |
| (1) | Assumes an immediate uniform change in interest rates at all maturities. |
|---|---|
| (2) | EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. |
| (3) | Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets. |
| (4) | EVE Ratio represents EVE divided by the present value of assets. |
The table above indicates that at December 31, 2024, we would have experienced a 6.20% decrease in EVE in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 2.07% increase in EVE in the event of an instantaneous 200 basis point decrease in market interest rates. Each of the estimated increases (decreases) in the percentage of change in EVE in the table above are within the Board of Directors’ guidelines.
Change in Net Interest Income. The following table sets forth, at December 31, 2024, the calculation of the estimated changes in our net interest income, or “NII” , that would result from the designated immediate changes in the United States Treasury yield curve.
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| December 31, 2024 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Change in Interest Rates (basis points) (1) | NII Year 1 Forecast | Year 1 Change from Level | ||||||
| (Dollars in thousands) | ||||||||
| +400 | $ | 44,698 | 1.20 | % | ||||
| +300 | 45,316 | 2.60 | % | |||||
| +200 | 45,449 | 2.90 | % | |||||
| +100 | 45,007 | 1.90 | % | |||||
| Level | 44,168 | — | % | |||||
| (100) | 42,622 | (3.50 | )% | |||||
| (200) | 40,679 | (7.90 | )% |
| Column 1 | Column 2 |
|---|---|
| (1) | Assumes an immediate uniform change in interest rates at all maturities. |
The table above indicates that at December 31, 2024, we would have experienced a 2.90% increase in NII in the event of an instantaneous parallel 200 basis point increase in market interest rates and a 7.90% decrease in NII in the event of an instantaneous 200 basis point decrease in market interest rates. Each of the estimated decreases in the percentage of change in the net interest income in the table above are within the Board of Directors’ guidelines.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurement. Modeling changes in EVE and NII require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE and NII tables presented above assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and NII and will differ from actual results.
EVE and NII calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
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, proceeds from maturities of securities and sales of mortgage loans. We also have the ability to borrow from the Federal Home Loan Bank of Dallas and the Federal Reserve Board’s Bank Term Funding Program. At December 31, 2024, we had $73.5 million of outstanding borrowings from the Federal Home Loan Bank of Dallas. At December 31, 2024, we had the capacity to borrow an additional $364 million from the Federal Home Loan Bank of Dallas and an additional $160 million from the Federal Reserve Board discount window.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments and sales 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, cash flows from investing activities, and cash flows from financing activities. For further information, see the statements of cash flows contained in the financial statements appearing elsewhere in this Annual Report on Form 10-K.
We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of our maturing time deposits will be retained.
At December 31, 2024, Fidelity Bank’s Tier 1 leverage capital was $254.2 million, or 19.55% of adjusted assets. Accordingly, it was categorized as well-capitalized at December 31, 2024. Management is not aware of any conditions or events since the most recent notification that would change our category. For further information, see Note 11 to the notes to financial statements included in this Annual Report on Form 10-K.
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Off-Balance Sheet Arrangements. At December 31, 2024, we had $208.8 million of outstanding commitments to originate loans, which included $158.9 million in revolving lines of credit, $27.1 million in residential construction loans and $22.8 million in commercial construction loans and lines of credit. At December 31, 2024, none of our revolving lines of credit related to commercial real estate loans. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2024 totaled $230.3 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank of Dallas advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our financial statements beginning on page F-1 of this Annual Report on Form 10-K.
Impact of Inflation and Changing Prices
The financial statements and related data presented in this Annual Report on Form 10-K have been prepared according to GAAP which require 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.