TYSONS CORNER, Va., November 04, 2022 - Reflecting our continued solid growth and strong financial performance, ODNB Financial Corporation (the “Company” or “ODNB”), the holding company for Old Dominion National Bank (the “Bank”) ended the first nine months of 2022 marking our highest net income for any consecutive nine-month period at $6.1 million, and total assets reached a record level of $971.3 million at September 30, 2022.
We also delivered our eleventh consecutive quarter of profitability for the quarter ended September 30, 2022, as we continued to grow total assets, gross loans and deposits to produce record net revenue. Our talented team continues to navigate the rapidly changing interest rate environment and challenging market conditions to maintain a healthy net interest margin and pristine asset quality.
With the formation of our bank holding company effective July 1, 2022, and the successful completion of the Company’s oversubscribed $24.0 million subordinated debt offering in September 2022, we are well positioned with a strong capital base for continued growth in the fourth quarter and into 2023.
The financial data presented in this letter and included in the financial highlights is now consolidated, which only affected third quarter 2022 results. The data for the second quarter of 2022 and all prior periods are Bank-only financial results.
Continued Profitability and Increased Operating Leverage
Net income for the third quarter of 2022 was $1.4 million, compared to $3.5 million in the immediate prior quarter. Earnings in the second quarter of 2022 were enhanced by an income tax benefit of $1.7 million, which included the reversal of a $2.0 million deferred tax asset (“DTA”) valuation allowance. ODNB reported pretax income of $1.8 million compared to $1.8 million in the linked quarter. Earnings from pre-tax, pre-provision for loan losses increased to $2.8 million in the third quarter of 2022, or 17%, from $2.4 million in the linked quarter. The increase was driven by strong loan growth of $73.2 million, while maintaining our net interest margin at 3.48%, resulting in total net revenue of $7.9 million in the current quarter, or 23% annualized growth, compared to $7.5 million in the second quarter of 2022. At the same time, non-interest expense remained at $5.1 million consistent with prior quarter, as we remain focused on generating higher revenues and managing expenses to increase profitability. This continued improvement in operating leverage contributed to our ability to lower the efficiency ratio to 64.50% in the current quarter from to 67.93% in the second quarter of 2022.
The net interest margin (“NIM”) in the third quarter of 2022 was 3.48% compared to 3.50% in the preceding quarter. While we experienced a 45 basis points increase in cost of interest bearing deposits when compared to the linked quarter, our NIM contracted only two basis points in the same period, as we were able to improve the mix of earning assets and deploy excess cash into higher yielding loan assets. As a result, we increased our loan to deposit ratio to 99% in the current quarter from 90% in the second quarter of 2022. Our ability to keep our NIM at current levels in the near term will largely depend on slowing the rate of increasing funding costs until the Fed stops raising rates, increase the proportion of variable rate assets in the loan portfolio, and maintain and grow our non-interest bearing customer deposits. Non-interest bearing deposits, considered the crown jewel of banking, becomes more impactful to NIM in an increasing interest rate environment with rising asset yields and deposit costs. At September 30, 2022, our non-interest bearing deposits were $314.6 million and represented 39% of total deposits.
High Growth and Strong Balance Sheet
Total assets were $971.3 million at September 30, 2022, compared to $941.4 million at June 30, 2022, and $815.0 million on September 30, 2021. Year-over-year asset growth of 19.2% was driven primarily by 13.5% deposit growth combined with increased levels of other funding sources, including the $24.0 million subordinated debt offering that closed in the third quarter of 2022. The increased funding together with cash generated from the forgiveness of $58.6 million in PPP loans were largely deployed into gross loans resulting in significant loan growth of $242.0 million, or 43%, at September 30, 2022 compared to September 30, 2021. Our organic loan growth was driven by our high-performing commercial banking team fostering new client relationships, and their ability to bring prior business relationships to our Bank. This is supported by a back office team of professionals dedicated to our client service model.
ODNB’s gross loans totaled $804.6 million at September 30, 2022, growing 40.0% on an annualized basis during the third quarter of 2022 from $731.4 million at June 30, 2022. We continue to see rising rates impact demand for residential mortgages, although we have not experienced a slow-down in commercial real estate and commercial and industrial lending. As a result of our deep and expanding commercial lending team with broad lending capabilities across industries, including professional services, healthcare, government contracting, and commercial real estate, commercial lending continued to be the primary driver of our loan growth in the third quarter of 2022.
Our loan growth remains largely funded through locally sourced and relationship-driven deposit gathering activities. Total deposits were $813.6 million at September 30, 2022, an increase of $2.0 million from June 30, 2022. Like many community banks throughout the country and within our markets, we experienced slower deposit growth in the current quarter than previous periods. While we have seen a lower level of average deposit balances on account for existing customers, that has been more than offset by growth in new customer deposit relationships. Also, it was noteworthy that deposit pricing competition picked up in the third quarter of 2022, and the cost of borrowing funds has increased significantly with the extraordinary move higher in market interest rates since the beginning of 2022. Despite these headwinds, our Bank’s liquidity, which includes cash and unencumbered marketable securities, remains strong at $132.7 million, or 15.5% of total liabilities, at September 30, 2022.
Pristine Asset Quality and Capital Strength
Asset quality remained strong with nonperforming loans of $522 thousand, representing only 0.05% of total assets at September 30, 2022, and there were no loans 30 days or more past due and accruing. We recorded a loan loss provision of $964 thousand in the third quarter to account for loan growth and risk changes in the portfolio. The allowance for loan losses was 1.21% of gross loans at September 30, 2022.
Capital ratios remain well above regulatory thresholds at the end of the third quarter of 2022. The Bank has maintained strong capital ratios with a tier one leverage ratio of 12.95% and total risk-based capital ratio of 14.37% at September 30, 2022.
The Company’s common tangible book value (“TBV”) per share was $10.50 at September 30, 2022, compared to $10.62 at June 30, 2022, reflecting ODNB’s retained earnings growth, which was more than offset by the change in unrealized losses in the current quarter on marketable securities available-for- sale (“AFS”). Accounting for these unrealized losses reduces accumulated other comprehensive income as a component of stockholders’ equity on the balance sheet, which in turn affects TBV per share, even though there is no impact on the income statement or earnings. While application of these accounting rules may create volatility in our TBV per share, given our intent to hold these bonds to maturity, we anticipate a full recovery of TBV related to these temporary unrealized losses. Excluding a $0.80 impact of the unrealized losses on the AFS portfolio, the common TBV per share would have been $11.30 at September 30, 2022.
We will continue to build upon this solid foundation, and believe we are on course for a stronger future. On behalf of our entire, team, we thank you for your continued support and investment in ODNB. We stand ready to address any questions you may have or client referrals you wish to share with us. For shareholder information, please visit our website’s Investor Relations webpage or email shareholders@ODNBonline.com.
