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Quarterly Results of Operations

Quarterly net income was $2.8 million for 2Q24, as compared to $3.0 million for 1Q24 and $3.3 million for 2Q23 . A summary of the quarterly results of operations are included in the table and comments below.

Net interest income in 2Q24 decreased $214 thousand, or 2.9%, as compared to 2Q23, which was primarily attributable to an increase in deposit costs of $1.2 million, or 85.0%. Costs of interest-bearing deposits increased 86 bps in 2Q24 as compared 2Q23. The increase in deposit costs was offset by a $1.2 million, or 17.6%, increase in interest revenue from loans, as loan yields increased 46 bps and average loan balances increased 7.4%. Compared to the prior quarter, net interest income increased in 2Q24 by $349 thousand, or 5.1%. Organic loan growth of $9.5 million and a 17 bps increase in loan yields resulted in an increase in loan revenue of $462 thousand, or 6.1% in 2Q24, as compared to the prior quarter. Deposit costs increased at a slower pace in 2Q24 and were 9 bps higher than the prior quarter.

The allowance for credit losses was 0.63% of total loans as of 2Q24, which is relatively unchanged compared to 2Q23 and 1Q24. No significant changes in the economic indicators and related forecasts utilized in the CECL model occurred in 2Q24. The provision for credit losses recorded in 2Q24 and 2Q23 of $75 thousand and $240 thousand, respectively, were related to growth in the loan portfolio during the same period. The provision for credit losses of $475 thousand recorded in 1Q24 was primarily the result of aging of the loan portfolio and increases in lines of credit related to seasonal borrowings and was not related to loan charge-offs.

Noninterest income decreased in 2Q24 by $248 thousand, or 32.3%, as compared to 2Q23, primarily due to a $179 thousand, or 126.3%, decrease in bank owned life insurance ("BOLI") income. During 2Q24, certain BOLI policies were exchanged for new policies with substantially higher yields to maximize future BOLI income. A loss of $170 thousand was recognized upon the exchange of these BOLI policies for charges levied by the previous insurance carrier. In addition, noninterest income decreased by $129 thousand when compared to 2Q23, due to increased customer check fraud losses related to a settlement with another financial institution over fraudulent check claims. Compared to 1Q24, noninterest income decreased $654 thousand, or 55.8%, in the current quarter and is attributable to a $1.0 million decrease in income from BOLI policies, partially offset by the absence of losses realized on investment securities sold.

Current quarter noninterest expense increased by $179 thousand or 4.8%, as compared to 2Q23, and was a result of an increase in salaries and employee benefits expenses of $114 thousand. Noninterest expense decreased in 2Q24 by $35 thousand, or 0.9%, as compared to the previous quarter, which primarily relates to annual state bank examinations assessments recorded in 1Q24 of $73 thousand.

Quarterly per share data and repurchases of stock by the Company for each period is included in the following table. The stock repurchase plan previously adopted by the Board of Directors remains in place and as of June 30, 2024 has 40,982 shares available to be repurchased. The amount and timing of future stock repurchases will depend upon several factors including regulatory capital requirements, market value of the Company's stock, general market and economic conditions, liquidity, and other relevant considerations, as determined by the Company.

Year to Date Results of Operations

Net income was $5.8 million for the six months ended June 30, 2024 as compared to $6.6 million for the six months ended June 30, 2023, a decrease of $825 thousand, or 12.5%. A summary of the year to date results of operations are included in the table and comments below.

Net interest income decreased $778 thousand, or 5.2%, for the six months ended June 30, 2024, as compared to same period last year, and was attributable to increases in deposit costs outpacing growth in interest income from earning assets. Deposit costs increased $2.4 million, or 93.4%, over the prior year while interest income increased $1.6 million, or 9.1%, in the same period. Costs of interest-bearing deposits increased 86 bps in the six months ended June 30, 2024, as compared the same period in the prior year. Organic loan growth combined with higher yields enhanced interest income from loans by $2.6 million, or 20.4%, for the six months ended June 30, 2024, as compared to six months ended June 30, 2023. Loan yields have increased 46 bps in the previous 12 months due to higher interest rates on new loan originations. Loan balances increased $45.1 million, or 8.0%, since June 30, 2023 and the growth was primarily funded by decreases in debt securities and fed funds sold which decreased by $29.7 million, or 11.0%, in the same period. Interest income from debt securities and fed funds sold decreased by $1.1 million, in the same period, as the result of lower balances.

The allowance for credit losses was 0.63% of total loans as of June 30, 2024, which is relatively unchanged compared to June 30, 2023. The provision for credit losses recorded in the six months ended June 30, 2024 of $550 thousand was primarily related to growth in the loan portfolio during the same period and not the result of loan charge-offs. No significant changes in the economic indicators and related forecasts utilized in the CECL model occurred in 2024. The provision for credit losses of $420 thousand recorded in the six months ended June 30, 2023 was related to growth in the loan portfolio during the same period and not the result of loan charge-offs.

Noninterest income for the six months ended June 30, 2024 increased by $173 thousand, or 11.4%, as compared to the six months ended June 30, 2023, primarily due to a $636 thousand increase in income from BOLI. Nonrecurring income of $784 thousand was recognized in the first quarter of 2024 related to death proceeds from BOLI. Other sources of noninterest income decreased compared to the prior year partially offsetting the increase in BOLI income and included losses from the disposition of debt securities of $311 thousand and losses from check fraud of $83 thousand. Restructuring of the debt securities portfolio in 2024 resulted in the sale of lower-yielding debt securities at a loss so proceeds could be reinvested into new securities or fund loans at substantially higher yields to maximize future interest revenue.

Noninterest expense for the six months ended June 30, 2024 increased $506 thousand, or 6.9% as compared to the same period in 2023, and is primarily the result of a $386 thousand, or 12.6%, increase in employee salaries expense. Higher salaries expense relates to the fulfillment of open positions and higher salaries paid to remain competitive in the current labor market. Other operating costs increased by $108 thousand, or 10.1%, which relate to increases in professional fees and charitable donations. Employee health insurance is provided through a partially self-funded plan and year to date claims incurred by the plan were lower in 2024, resulting in the decrease in year to date employee benefits costs by $80 thousand, or 7.7%.

Per share data and repurchases of stock by the Company for each period is included in the following table.

Financial Condition

The Company relies predominately on core deposits, as defined by bank regulators, which are gathered from customers in local markets. The Company and the Bank remain well-capitalized according to regulatory capital standards and as of June 30, 2024 the Tier 1 capital of the Company exceeded the threshold to be considered well-capitalized (Community Bank Leverage Ratio) by $41.5 million, or 51.2%. The Company's financial condition at quarter end is summarized in the table and comments below.

Short term interest rates have remained elevated in the last 12 months which encouraged certain depositors to invest excess cash into short term government bonds or other high-yield investments. The Company has been able to offset the outflow of these deposits by growing core deposits and has not relied on brokered deposits or short-term borrowings for funding. During the six months ended June 30, 2024, deposits increased by $42.5 million, or 5.7%, consisting of $39.2 million in time deposits and $6.6 million in noninterest-bearing deposits, partially offset by a decrease in savings accounts. The Bank operates with a high level of core deposits. Core deposits are defined by banking regulators as checking, money market, and savings accounts plus any time deposits less than $250 thousand. All deposit accounts with a balance in excess of the FDIC insurance limit of $250 thousand are disclosed on quarterly regulatory reports filed with bank regulators. As of June 30, 2024, the Bank had deposit accounts with balances in excess of $250 thousand totaling $190.0 million which represents 24.2% of total deposits. The Bank is a member of the IntraFi Network which enables large depositors access to multi-million dollar FDIC insurance for funds placed into the network and provides an equal amount of reciprocal deposits under FDIC insurance limits to the bank. Recent events in the banking industry led to an increase in usage of the IntraFi Network by both commercial and consumer customers. Reciprocal deposits from the IntraFi Network increased by 36.3% to $127.9 million as of June 30, 2024, as compared to $93.8 million as of June 30, 2023.

On-balance sheet liquidity, as measured by cash and unencumbered available for sale debt securities, remains strong as of June 30, 2024 and equaled 25.5% of total deposits. Selected liquidity metrics are summarized in the table below.

Noncore funding sources including Federal Home Loan Bank ("FHLB") borrowings and brokered deposits are readily available to the Bank but are intended for contingency funding needs only and not to pursue growth. As of June 30, 2024, the Bank has the ability to borrow up to $195.3 million from the FHLB that would require pledging of loans and/or debt securities as collateral. Debt securities currently pledged are related to FHLB Letters of Credit used to collateralize public deposits.

Loans and Asset Quality

Higher interest rates, economic uncertainty and other factors have impacted current loan demand as compared to demand experienced in the previous 12 months. Conversely, funding of previously committed construction loans, localized demand for commercial real estate loans, and seasonal borrowings during the six months ended June 30, 2024 resulted in continued organic loan growth with loans increasing $29.6 million, or 5.1%, since December 31, 2023. Loan growth of $45.1 million, or 8.0%, in the previous 12 months was the result of strong demand for local real estate and construction of both residential and commercial properties. Growth in the loan portfolio during the rising interest rate environment over the last 12 months along with variable rate loans within the portfolio have expanded the yield on loans from 4.89% in 2Q23 to 5.35% in 2Q24.

Loan performance has remained strong over the past 12 months as local economic conditions have remained stable. Inflation and higher interest rates have not resulted in a deterioration of credit quality as of June 30, 2024. Past due loans were 0.42% of total loans as of June 30, 2024, as compared to 0.63% of total loans as of March 31, 2024 and 0.36% as of June 30, 2023. Past due loans as of June 30, 2024 primarily consist of loans secured by residential real estate with balances less than $300 thousand and are well secured. Selected asset quality metrics are summarized in the table below.

Financial Statements
Consolidated balance sheets at quarter end and consolidated income statements for the quarters ended are presented below.

Calvin B. Taylor Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets

Calvin B. Taylor Bankshares, Inc. and Subsidiary
Consolidated Statements of Income

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About Calvin B. Taylor Banking Company
Calvin B. Taylor Banking Company, the bank subsidiary of Calvin B. Taylor Bankshares, Inc. (OTCQX:TYCB), founded in 1890, offers a wide range of loan, deposit, and ancillary banking services through both physical and digital delivery channels. The Company has 12 banking locations on the Delmarva Peninsula including Worcester County, Maryland, Wicomico County, Maryland, Sussex County, Delaware and Accomack County, Virginia.

Contact
M. Dean Lewis, Executive Vice President and Chief Financial Officer
410-641-1700, taylorbank.com

SOURCE: Calvin B. Taylor Bankshares, Inc.