10-Q: Magnolia Bancorp Reports Q3 Loss Amid Conversion Costs, Rate Cuts

Magnolia Bancorp, Inc. reported an increased net loss for the third quarter and first nine months of 2025, driven by higher public company expenses following its January conversion, despite improved net interest income.

Summary

• Net loss increased to $48,000 for the three months ended September 30, 2025, compared to $36,000 for the comparable period in 2024.
• Net loss for the nine months ended September 30, 2025, was $114,000, an increase from $60,000 for the same period in 2024.
• Total assets decreased by $7.8 million (17.8%) to $36.1 million at September 30, 2025, primarily due to a $7.0 million decrease in cash and cash equivalents.
• Total deposits decreased by $14.3 million (48.4%) to $15.2 million at September 30, 2025, largely due to funds used in the conversion and refunds from an over-subscribed offering.
• Total stockholders' equity increased by $6.1 million (44.0%) to $20.0 million, driven by the $6.9 million net proceeds from the January 2025 stock offering.
• Net interest income increased by $70,000 (26.8%) to $331,000 for the three months ended September 30, 2025, and by $192,000 (23.9%) to $994,000 for the nine months ended September 30, 2025, primarily due to lower interest expense on deposits.
• Noninterest expense significantly increased by $85,000 (27.0%) for the three months and $259,000 (28.7%) for the nine months, mainly due to public company costs and increased professional fees.
• The Federal Reserve Board decreased its federal funds rate by 0.25% in September 2025 and again on October 29, 2025.
• Identified material weaknesses in internal control over financial reporting as of December 31, 2024, related to the allowance for credit losses, insufficient personnel for segregation of duties, lack of effective risk assessment, monitoring program, and information/communication processes. Remedial measures are underway.

Sentiment

Score: 4

Explanation: While net interest income improved and capital ratios are strong post-conversion, the increased net losses, significant decline in cash and deposits, and identified material weaknesses in internal controls present notable challenges. The positive outlook on future rate cuts is tempered by expected increases in non-interest expenses.

Positives

• Net interest income increased by $70,000 (26.8%) for the three months ended September 30, 2025, and by $192,000 (23.9%) for the nine months ended September 30, 2025, driven by a significant reduction in interest expense.
• Total stockholders' equity increased by $6.1 million (44.0%) to $20.0 million, reflecting the successful completion of the stock offering and conversion.
• The Association is categorized as 'well capitalized' by the OCC, with all capital ratios significantly exceeding regulatory minimums (e.g., Tier 1 Leverage Ratio at 47.49% vs. 5.00% required).
• Loan originations increased by $2.5 million (369%) in the first nine months of 2025 compared to the same period in 2024, indicating growing demand for fixed-rate loans.
• Asset quality remains strong with the allowance for credit losses at $185,000, representing 257% of non-performing assets at September 30, 2025.
• Management expects future Federal Reserve rate reductions to lead to further declines in the cost of funds and increased demand for fixed-rate loans.

Negatives

• Net loss increased to $48,000 for the three months ended September 30, 2025, from $36,000 in the prior year comparable period.
• Net loss for the nine months ended September 30, 2025, increased to $114,000 from $60,000 in the prior year comparable period.
• Total assets decreased by $7.8 million (17.8%) to $36.1 million, primarily due to a $7.0 million (70.5%) decrease in cash and cash equivalents.
• Total deposits decreased significantly by $14.3 million (48.4%) to $15.2 million, largely due to the conversion and refunds from the over-subscribed community offering.
• Noninterest expense increased substantially by $85,000 (27.0%) for the three months and $259,000 (28.7%) for the nine months, primarily due to costs associated with operating as a public company.
• Nonaccrual loans increased to $72,000 at September 30, 2025, from $0 at December 31, 2024, and total non-performing assets also increased to $72,000.
• Identified material weaknesses in internal control over financial reporting as of December 31, 2024, indicating deficiencies in the control environment, risk assessment, monitoring, and information/communication processes.

Risks

• Actual future results may be materially different from forward-looking statements due to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the company's control.
• Risks are associated with plans to modestly increase commercial real estate loans and multi-family residential loans, including the ability to hire experienced loan officers and generate sufficient loan volume to cover their compensation.
• Material weaknesses in internal control over financial reporting could result in a material misstatement in financial statements that may not be prevented or detected on a timely basis.
• If a substantial portion of maturing time deposits is not retained, the company may need to raise interest rates on deposits to attract new accounts or utilize Federal Home Loan Bank advances, which may result in higher levels of interest expense.

Future Outlook

Management expects Federal Reserve rate reductions in September and October 2025 to continue to result in declines in the cost of funds and an increase in demand for fixed-rate loans. However, total non-interest expenses are anticipated to remain high due to the need to hire additional lending and accounting personnel and increased costs associated with operating as a public company, including expected grants under stock-based benefit plans. The company intends to grow organically and through opportunistic branching, leveraging the capital raised from the stock offering.

Management Comments

• We expect these rate reductions will continue to result in declines in our cost of funds and improvement in our net interest income.
• We also expect the demand for our fixed-rate loans will begin to increase as market interest rates decline.
• However, we expect our total non-interest expenses to increase due to our need to hire additional lending and accounting personnel, and the increased expenses associated with being a public company.
• We intend to maintain strong asset quality through what we believe are our conservative underwriting standards and credit monitoring processes.
• 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.
• We intend to grow our balance sheet organically on a managed basis, and with the capital we raised in the stock offering which we expect will enable us to increase our lending capacity.
• We have no current plans or intentions regarding any such expansion activities.

Industry Context

The banking industry is currently navigating a dynamic interest rate environment, with the Federal Reserve recently initiating rate cuts after a period of significant increases. This shift is expected to reduce banks' cost of funds and potentially stimulate loan demand, particularly for fixed-rate products. However, the transition also brings increased competition for deposits and pressure on net interest margins for institutions that cannot quickly adjust their funding costs. For smaller, newly public entities like Magnolia Bancorp, the added regulatory and operational costs of public reporting can strain profitability, especially when combined with strategic investments in personnel and growth initiatives.

Management Changes

Corporate Governance

Legal Proceedings

• The Company is not subject to any pending legal proceedings.
• The Association is subject to various legal actions arising in the normal course of business, but management does not expect their resolution to have a material adverse effect on financial condition or results of operations.

Related Party Transactions

• Loans to principal officers and directors, and entities in which they have significant ownership or management positions, had an ending balance of $1,240,000 as of September 30, 2025, after $46,000 in payments during the nine months.
• Deposits from members of the Board of Directors and officers totaled $4,782,000 as of September 30, 2025.

Stakeholder Impact

• Shareholders experienced an increased net loss, but also a significant increase in equity due to the stock offering. Future profitability depends on successful execution of growth strategies and remediation of internal control weaknesses.
• Employees benefit from the ESOP and approved stock-based benefit plans, indicating potential for increased compensation and ownership.
• Customers will be impacted by changes in deposit rates and loan offerings as the company adjusts to market conditions and pursues growth.
• Creditors are assured by the company's strong capital ratios and 'well capitalized' status.
• Regulators are overseeing the company's efforts to address identified material weaknesses in internal controls, which is crucial for compliance and stability.

Next Steps

• Continue efforts to remediate identified material weaknesses in internal control over financial reporting, with testing continuing through the end of the year.
• Anticipate making grants under the 2025 Stock Option Plan and 2025 Recognition and Retention Plan and Trust Agreement in the near future, following a quarter-end blackout period.
• Continue to focus on originating fixed-rate oneto four-family residential mortgage loans and residential construction loans for retention in the portfolio.
• Modestly increase commercial real estate loan portfolio and multi-family residential loan portfolio.
• Continue efforts to grow low-cost core deposits, with an emphasis on consumer deposits.
• Consider expansion opportunities in the market area or contiguous markets, potentially through loan production offices, new branch offices, and/or acquiring branch offices.
• Hire additional lending and accounting personnel.

Key Dates

Recommendation

While the company has a strong capital base post-conversion and is taking steps to improve net interest income in a declining rate environment, the increased net losses and identified material weaknesses in internal controls warrant caution. The significant decrease in cash and deposits also raises liquidity management concerns. A "hold" recommendation is appropriate as the company navigates its transition to a public entity and works to remediate internal control issues, with potential for improvement if these challenges are successfully addressed and growth strategies materialize.

Keywords

Banking, Financial Services, Community Bank, Mortgage Loans, Residential Real Estate, Deposits, Net Interest Income, SEC Filing, 10-Q, Financial Results, Louisiana, New Orleans, Stock Conversion, Capital Ratios, Internal Controls