The Company had a valuation allowance on federal and state deferred tax assets totaling $15,617,000 as of December 31, 2023. In the third quarter of 2024, the Company reassessed the valuation allowance in accordance with applicable accounting guidance and determined it was appropriate to reverse substantially all the valuation allowance which resulted in a one-time discrete reduction to income tax expense of $15,194,000 in the current quarter. Excluding the discrete item, income tax expense for the nine months ended September 30, 2024, totaled $1,500,000 based upon the expected annual tax rate for 2024 of 23.1% compared to income tax expense of $1,586,000 for the nine months ended September 30, 2023, at an effective rate of 17.6%. The net deferred tax asset recognized on the Company consolidated balance sheet totaled $12,250,000 at September 30, 2024 and $756,000 at December 31, 2023.
Return on average assets for the first nine months ended September 30, 2024, increased 2.14% to 3.33% (which included the discrete item), with the discrete item excluded from the calculation, return on average assets would be 0.82% compared to 1.19% for the first nine months ended September 30, 2023. The Company’s efficiency ratio increased 6% to 72% for the first nine months ended September 30, 2024, compared to 66% for the first nine months ended September 30, 2023.
Asset Quality
Although the economy has experienced a rising rate environment, gross loans increased $9,577,000 from $229,682,000 at September 30, 2023 to $239,259,000 at September 30, 2024. Other real estate decreased from $952,000 at September 30, 2023, to $1 as of September 30, 2024.
“The Bank’s leadership remains committed to maintaining high-quality assets. We are closely monitoring economic conditions and staying vigilant for any potential changes in interest rates,” said Chevis C. Swetman, chairman and chief executive officer of the Company and the Bank.
Shareholders’ Equity
Total shareholders’ equity increased by $37,280,000 to $96,393,000 at September 30, 2024 from $59,113,000 at September 30, 2023, increased by $27,110,000 from $69,283,000 at December 31, 2023, increased by $25,730,000 from $70,663,000 at March 31, 2024, and increased by $22,193,000 from $74,200,000 at June 30, 2024. The improvement in shareholders’ equity was mainly due to positive earnings and a decrease of $18,628,000, $7,774,000, $8,809,000, and $6,762,000 in unrealized losses on securities since September 30, 2023, December 31, 2023, March 31, 2024, and June 30, 2024, respectively and the aforementioned $15,617,000 reduction of the valuation allowance on federal and state deferred tax assets in the current third quarter. Also, the Company has paid dividends of $2,750,000 to shareholders of record since September 30, 2023. The Company reported $50,735,000, $39,881,000, $40,915,000, $38,869,000 and $32,106,000 in unrealized losses on the available for sale securities portfolio as of September 30, 2023, December 31, 2023, March 31, 2024, June 30, 2024, and September 30, 2024, respectively. These unrealized losses are presented in accumulated other comprehensive income for the respective periods. The cause of the unrealized losses has primarily resulted from higher interest rates that have impacted the current market value of available for sale securities. The unrealized losses are not related to any credit deterioration within the portfolio. The Company has maintained strong liquidity and continues to do so; therefore, the Company does not foresee a sale of any affected securities that would cause the realization of these losses by the Company as part of net income in the near future.
The Bank’s leverage ratio has not been impacted by these unrealized losses on available for sale securities due to an opt-out election previously made by the Bank in accordance with current regulatory capital requirements and therefore remained strong at 13.48% as of September 30, 2024.
Liquidity
The Company maintains a well-capitalized balance sheet which includes strong capital and liquidity. The Bank provides a full range of banking, financial and trust services in our local markets. The majority of the Bank’s deposits are fully FDIC insured. The Company evaluates on an ongoing and continuous basis its financial health by preparing for various moderate to severe economic scenarios.
As interest rates have increased and the cost of attracting new deposits and replacing deposit attrition has increased, the Bank experienced a decrease in deposit balances during the nine months ended September 30, 2024. This decrease was mostly caused by a decrease in the balances of several of its interest-bearing deposit accounts but not due to account closures. During the first quarter of each year the Bank experiences an influx of public fund tax deposits and these tax deposits are slowly allocated throughout the year, total deposits have decreased $22,404,000 to $666,086,000 from $688,490,000 as of December 31, 2023.