Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion and analysis is to focus on significant changes in the financial condition of MetroCity Bancshares, Inc. and our wholly owned subsidiary, Metro City Bank, from December 31, 2019 through March 31, 2020 and on our results of operations for the three months ended March 31, 2020 and 2019. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K, and information presented elsewhere in this Quarterly Report on Form 10‑Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10‑Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors discussed elsewhere in this quarterly report and the following:
|
·
|
|
business and economic conditions, particularly those affecting the financial services industry and our primary market areas;
|
|
·
|
|
the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitations, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
|
|
·
|
|
adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions related to COVID-19, including as a result of participation in and execution of government programs related to COVID-19;
|
|
·
|
|
factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of various projects that we finance;
|
|
·
|
|
concentration of our loan portfolio in real estate loans changes in the prices, values and sales volumes of commercial and residential real estate;
|
|
·
|
|
credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial, residential real estate and SBA loan portfolios;
|
|
·
|
|
negative impact in our mortgage banking services, including declines in our mortgage originations or profitability due to rising interest rates and increased competition and regulation, the Bank’s or third party’s failure to satisfy
|
mortgage servicing obligations, and the possibility of the Bank being required to repurchase mortgage loans or indemnify buyers;
|
|
·
|
|
our ability to attract sufficient loans that meet prudent credit standards, including in our construction and development, commercial and industrial and owner-occupied commercial real estate loan categories;
|
|
·
|
|
our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas;
|
|
·
|
|
changes in interest rate environment, including changes to the federal funds rate, and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income;
|
|
·
|
|
our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses (“ALL”);
|
|
·
|
|
the adequacy of our reserves (including ALL) and the appropriateness of our methodology for calculating such reserves;
|
|
·
|
|
our ability to successfully execute our business strategy to achieve profitable growth;
|
|
·
|
|
the concentration of our business within our geographic areas of operation and to the general Asian-American population within our primary market areas;
|
|
·
|
|
our focus on small and mid-sized businesses;
|
|
·
|
|
our ability to manage our growth;
|
|
·
|
|
our ability to increase our operating efficiency;
|
|
·
|
|
liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;
|
|
·
|
|
failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;
|
|
·
|
|
risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits;
|
|
·
|
|
a large percentage of our deposits are attributable to a relatively small number of customers;
|
|
·
|
|
inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk, strategic risk and reputational risk;
|
|
·
|
|
the makeup of our asset mix and investments;
|
|
·
|
|
external economic, political and/or market factors, such as changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition;
|
|
·
|
|
continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies, many of which are subject to different regulations than we are;
|
|
·
|
|
challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services;
|
|
·
|
|
restraints on the ability of the Bank to pay dividends to us, which could limit our liquidity;
|
|
·
|
|
increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;
|
|
·
|
|
a failure in the internal controls we have implemented to address the risks inherent to the business of banking;
|
|
·
|
|
inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance;
|
|
·
|
|
changes in our management personnel or our inability to retain motivate and hire qualified management personnel;
|
|
·
|
|
the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets;
|
|
·
|
|
our ability to identify and address cyber-security risks, fraud and systems errors;
|
|
·
|
|
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems;
|
|
·
|
|
disruptions, security breaches, or other adverse events affecting the third-party vendors who perform several of our critical processing functions;
|
|
·
|
|
an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies;
|
|
·
|
|
fraudulent and negligent acts by our clients, employees or vendors and our ability to identify and address such acts;
|
|
·
|
|
risks related to potential acquisitions;
|
|
·
|
|
the expenses that we will incur to operate as a public company and our inexperience complying with the requirements of being a public company;
|
|
·
|
|
the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;
|
|
·
|
|
compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;
|
|
·
|
|
changes in the scope and cost of FDIC insurance and other coverage;
|
|
·
|
|
changes in our accounting standards;
|
|
·
|
|
changes in tariffs and trade barriers;
|
|
·
|
|
changes in federal tax law or policy; and
|
|
·
|
|
other risks and factors identified in our Annual Report on Form 10-K for the year ended December 31, 2019, including those identified under the heading “Risk Factors”.
|
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Quarterly Report on Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
COVID-19 Pandemic
During March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a golobal pandemic in response to the rapidly growing outbreak of the virus. COVID-19 has significantly impacted local, national and global economies due to stay-at-home orders and social distancing guidelines, and has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.
Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law on March 27, 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.
The Company prioritizes the health and safety of its teammates and customers, and has taken protective measures such as implementing remote work arrangements to the full extent possible and by adjusting banking center hours and operational measures to promote social distancing, and it will continue to do so throughout the duration of the pandemic. At the same time, the Company is closely monitoring the effects of the COVID-19 pandemic on our loan and deposit customers, and is assessing the risks in our loan portfolio and working with our customers to reduce the pandemic’s impact on them while minimizing losses for the Company. In addition, the Company remains focused on improving shareholder value, managing credit exposure, challenging expenses, enhancing the customer experience and supporting the communities it serves.
We have implemented loan programs to allow customers who are experiencing hardships from the COVID-19 pandemic to defer loan principal and interest payments for up to 90 days. The Small Business Administration (SBA) has also guaranteed the principal and interest payments of all our SBA loan customers for six months. As of May 11, 2020, we had 88 non-SBA commercial customers with outstanding loan balances totaling $151.2 million who have been approved for a three month payment deferral. Of these non-SBA payment deferrals, 22 loans totaling $69.8 million with a current weighted average loan-to-value (“LTV”) of 58.3% were in the hotel industry and 9 loans totaling $6.1 million with a current weighted average LTV of 66.4% were in the restaurant industry, which are two industries heavily impacted by the COVID-19 pandemic. As of March 31, 2020, the Company had 48 loans totaling $114.5 million in the hotel industry and 116 loans totaling $45.8 million in the restaurant industry.
As a preferred SBA lender, we are participating in the SBA Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act to help provide loans to our business customers in need. As of May 11, 2020, the Company has closed or approved with the SBA over 1,650 PPP loans for an aggregate amount of funds in excess of $94.3 million. We will be using our current cash balances and available liquidity from the Federal Home Loan Bank and Federal Reserve Bank to fund these PPP loans.
As of March 31, 2020, our residential real estate loan portfolio made up 58.1% of our total loan portfolio and had a weighted average LTV of approximately 56.9%. As of May 11, 2020, 19.8% of our residential mortgages have been
approved for a hardship payment deferral covering principal and interest payments for three months. The following table presents our outstanding residential mortgage balances, weighted average LTVs and current approved payment deferrals by property state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Approved Payment Deferrals
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Outstanding
|
|
Mortgage
|
|
Weighted
|
|
|
Outstanding
|
|
|
State
|
|
Loan Balance
|
|
Portfolio
|
|
Average LTV
|
|
|
Loan Balance
|
|
% of State
|
New York
|
|
$ 332,276
|
|
45.2%
|
|
55.1%
|
|
|
80,601
|
|
24.3%
|
Georgia
|
|
183,362
|
|
25.0%
|
|
57.0%
|
|
|
30,820
|
|
16.8%
|
Pennsylvania
|
|
47,673
|
|
6.5%
|
|
62.4%
|
|
|
3,636
|
|
7.6%
|
New Jersey
|
|
41,248
|
|
5.6%
|
|
56.6%
|
|
|
8,905
|
|
21.6%
|
Texas
|
|
37,226
|
|
5.1%
|
|
60.7%
|
|
|
6,504
|
|
17.5%
|
Florida
|
|
33,857
|
|
4.6%
|
|
62.3%
|
|
|
4,198
|
|
12.4%
|
Virginia
|
|
28,135
|
|
3.8%
|
|
54.8%
|
|
|
5,256
|
|
18.7%
|
Other (AL, CA, DC, CT, MA, MD)
|
|
30,485
|
|
4.2%
|
|
60.1%
|
|
|
5,548
|
|
18.2%
|
Total residential real estate loans
|
|
$ 734,262
|
|
100.0%
|
|
56.9%
|
|
|
$ 145,468
|
|
19.8%
|
Overview
MetroCity Bankshares, Inc. is a bank holding company headquartered in the Atlanta metropolitan area. We operate through our wholly-owned banking subsidiary, Metro City Bank, a Georgia state-chartered commercial bank that was founded in 2006. We currently operate 19 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. As of March 31, 2020, we had total assets of $1.60 billion, total loans (including loans held for sale) of $1.26 billion, total deposits of $1.24 billion and total shareholders’ equity of $223.7 million.
We are a full-service commercial bank focused on delivering personalized service in an efficient and reliable manner to the small to medium-sized businesses and individuals in our markets, predominantly Asian-American communities in growing metropolitan markets in the Eastern U.S. and Texas. We offer a suite of loan and deposit products tailored to meet the needs of the businesses and individuals already established in our communities, as well as first generation immigrants who desire to establish and grow their own businesses, purchase a home, or educate their children in the United States. Through our diverse and experienced management team and talented employees, we are able to speak the language of our customers and provide them with services and products in a culturally competent manner.
Selected Financial Data
The following table sets forth unaudited selected financial data for the most recent five quarters. This data should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Item 1 and the information contained in this Item 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Three Months Ended
|
|
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
(Dollars in thousands, except per share data)
|
|
2020
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
Selected income statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
20,556
|
|
$
|
20,625
|
|
$
|
21,908
|
|
$
|
20,818
|
|
$
|
19,862
|
|
Interest expense
|
|
|
4,646
|
|
|
5,681
|
|
|
5,929
|
|
|
5,570
|
|
|
5,058
|
|
Net interest income
|
|
|
15,910
|
|
|
14,944
|
|
|
15,979
|
|
|
15,248
|
|
|
14,804
|
|
Provision for loan losses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Noninterest income
|
|
|
7,509
|
|
|
9,360
|
|
|
11,001
|
|
|
12,098
|
|
|
7,434
|
|
Noninterest expense
|
|
|
10,049
|
|
|
9,840
|
|
|
10,162
|
|
|
9,934
|
|
|
10,064
|
|
Income tax expense
|
|
|
3,554
|
|
|
3,794
|
|
|
4,462
|
|
|
4,452
|
|
|
3,442
|
|
Net income
|
|
|
9,816
|
|
|
10,670
|
|
|
12,356
|
|
|
12,960
|
|
|
8,732
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.38
|
|
$
|
0.42
|
|
$
|
0.51
|
|
$
|
0.54
|
|
$
|
0.36
|
|
Diluted income per share
|
|
$
|
0.38
|
|
$
|
0.42
|
|
$
|
0.50
|
|
$
|
0.53
|
|
$
|
0.36
|
|
Dividends per share
|
|
$
|
0.11
|
|
$
|
0.11
|
|
$
|
0.11
|
|
$
|
0.10
|
|
$
|
0.10
|
|
Book value per share (at period end)
|
|
$
|
8.76
|
|
$
|
8.49
|
|
$
|
8.00
|
|
$
|
7.58
|
|
$
|
7.20
|
|
Shares of common stock outstanding
|
|
|
25,529,891
|
|
|
25,529,891
|
|
|
24,305,378
|
|
|
24,305,378
|
|
|
24,148,062
|
|
Weighted average diluted shares
|
|
|
25,736,435
|
|
|
25,586,733
|
|
|
24,502,621
|
|
|
24,386,049
|
|
|
24,540,538
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
2.44
|
%
|
|
2.57
|
%
|
|
3.07
|
%
|
|
3.44
|
%
|
|
2.42
|
%
|
Return on average equity
|
|
|
18.21
|
|
|
20.40
|
|
|
26.44
|
|
|
29.61
|
|
|
20.90
|
|
Dividend payout ratio
|
|
|
28.80
|
|
|
26.36
|
|
|
21.79
|
|
|
18.85
|
|
|
28.10
|
|
Yield on total loans
|
|
|
6.11
|
|
|
6.04
|
|
|
6.22
|
|
|
6.11
|
|
|
6.18
|
|
Yield on average earning assets
|
|
|
5.42
|
|
|
5.27
|
|
|
5.78
|
|
|
5.83
|
|
|
5.80
|
|
Cost of average interest bearing liabilities
|
|
|
1.78
|
|
|
2.06
|
|
|
2.23
|
|
|
2.23
|
|
|
2.10
|
|
Cost of deposits
|
|
|
1.86
|
|
|
2.15
|
|
|
2.29
|
|
|
2.23
|
|
|
2.11
|
|
Net interest margin
|
|
|
4.19
|
|
|
3.82
|
|
|
4.22
|
|
|
4.27
|
|
|
4.32
|
|
Efficiency ratio(1)
|
|
|
42.91
|
|
|
40.49
|
|
|
37.66
|
|
|
36.33
|
|
|
45.26
|
|
Asset quality data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs/(recoveries) to average loans held for investment
|
|
|
(0.01)
|
%
|
|
0.00
|
%
|
|
(0.11)
|
%
|
|
0.01
|
%
|
|
0.04
|
%
|
Nonperforming assets to gross loans and OREO
|
|
|
1.13
|
|
|
1.30
|
|
|
1.18
|
|
|
1.41
|
|
|
0.98
|
|
ALL to nonperforming loans
|
|
|
49.47
|
|
|
46.54
|
|
|
47.19
|
|
|
38.67
|
|
|
58.46
|
|
ALL to loans held for investment
|
|
|
0.54
|
|
|
0.59
|
|
|
0.54
|
|
|
0.54
|
|
|
0.57
|
|
Balance sheet and capital ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans held for investment to deposits
|
|
|
101.67
|
%
|
|
88.97
|
%
|
|
94.46
|
%
|
|
91.88
|
%
|
|
88.68
|
%
|
Noninterest bearing deposits to deposits
|
|
|
25.83
|
|
|
22.34
|
|
|
23.30
|
|
|
23.87
|
|
|
23.38
|
|
Common equity to assets
|
|
|
13.94
|
|
|
13.28
|
|
|
11.82
|
|
|
12.09
|
|
|
11.70
|
|
Leverage ratio
|
|
|
13.40
|
|
|
12.70
|
|
|
11.68
|
|
|
11.67
|
|
|
11.35
|
|
Common equity tier 1 ratio
|
|
|
21.75
|
|
|
21.31
|
|
|
18.82
|
|
|
17.99
|
|
|
17.40
|
|
Tier 1 risk-based capital ratio
|
|
|
21.75
|
|
|
21.31
|
|
|
18.82
|
|
|
17.99
|
|
|
17.40
|
|
Total risk-based capital ratio
|
|
|
22.44
|
|
|
22.01
|
|
|
19.51
|
|
|
18.66
|
|
|
18.09
|
|
Mortgage and SBA loan data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans serviced for others
|
|
$
|
1,186,825
|
|
$
|
1,168,601
|
|
$
|
1,122,551
|
|
$
|
1,016,352
|
|
$
|
839,352
|
|
Mortgage loan production
|
|
|
119,667
|
|
|
112,259
|
|
|
163,517
|
|
|
188,713
|
|
|
151,068
|
|
Mortgage loan sales
|
|
|
92,737
|
|
|
106,548
|
|
|
152,503
|
|
|
205,893
|
|
|
55,123
|
|
SBA loans serviced for others
|
|
|
464,576
|
|
|
441,593
|
|
|
446,266
|
|
|
443,830
|
|
|
425,694
|
|
SBA loan production
|
|
|
43,459
|
|
|
30,763
|
|
|
48,878
|
|
|
45,850
|
|
|
29,556
|
|
SBA loan sales
|
|
|
29,958
|
|
|
30,065
|
|
|
28,914
|
|
|
28,675
|
|
|
30,751
|
|
|
(1)
|
|
Represents noninterest expense divided by total revenue (net interest income and total noninterest income)
|
Results of Operations
We recorded net income of $9.8 million for the three months ended March 31, 2020 compared to $8.7 million for the same period in 2019, an increase of $1.1 million, or 12.4%. Basic and diluted earnings per common share for the three months ended March 31, 2020 was $0.38, compared to $0.36 for the basic and diluted earnings per common share for the same period in 2019.
Interest Income
Interest income totaled $20.6 million for the three months ended March 31, 2020, an increase of $694,000, or 3.5%, from the three months ended March 31, 2019, primarily due to an increase of $48.6 million in average loans, including loans held for sale, and $73.7 million in federal funds sold and interest-earning cash accounts. The increase in average loans included increases of $48.0 million and $26.4 million in average commercial real estate loans and commercial and industrial loans. As compared to the three months ended March 31, 2019, the yield on average interest-earning assets decreased by 38 basis points to 5.42% from 5.80% with the yield on average loans decreasing by 7 basis points and the yield on average total investments decreasing by 96 basis points.
Interest Expense
Interest expense for the three months ended March 31, 2020 decreased $412,000 to $4.6 million compared to interest expense of $5.1 million for the three months ended March 31, 2019. This increase is partially attributable to a 25 basis points decrease in deposit costs to 1.86% from 2.11%, which includes a 74 basis points decrease in the yield on average money market deposits and a 10 basis points decrease in the yield on average time deposits. Average money market deposits increased by $104.6 million while average time deposits decreased by $108.6 million.
Average borrowings outstanding for the three months ended March 31, 2020 increased by $71.5 million with an increase in rate of 61 basis points compared to the three months ended March 31, 2019.
Net Interest Margin
The net interest margin for the three months ended March 31, 2020 decreased by 13 basis points to 4.19% from 4.32% for the three months ended March 31, 2019, primarily due to a 32 basis point increase in the cost of interest-bearing liabilities of $1.05 billion and a decrease of 38 basis points in the yield on average interest-earning assets of $1.53 billion. Average earning assets increased by $137.0 million, primarily due to an increase of $48.6 million in average loans and $73.7 million in federal funds sold and interest-earning cash accounts. Average interest-bearing liabilities increased by $70.9 million, primarily driven by an increase in average borrowings of $71.5 million while average interest-bearing deposits remained relatively flat.
Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve. The decline in our net interest margin is primarily the result of a continuous increase in our cost of funds; however, we have been able to partially offset this through growing our volume of interest earning assets.
Average Balances, Interest and Yields
The following tables present, for the three months ended March 31, 2020 and 2019, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
Average
|
|
Interest and
|
|
Yield /
|
|
Average
|
|
Interest and
|
|
Yield /
|
|
(Dollars in thousands)
|
|
Balance
|
|
Fees
|
|
Rate
|
|
Balance
|
|
Fees
|
|
Rate
|
|
Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other investments(1)
|
|
$
|
193,361
|
|
$
|
802
|
|
1.67
|
%
|
$
|
119,678
|
|
$
|
787
|
|
2.67
|
%
|
Securities purchased under agreements to resell
|
|
|
32,033
|
|
|
140
|
|
1.76
|
|
|
15,000
|
|
|
113
|
|
3.06
|
|
Securities available for sale
|
|
|
16,664
|
|
|
106
|
|
2.56
|
|
|
18,943
|
|
|
123
|
|
2.63
|
|
Total investments
|
|
|
242,058
|
|
|
1,048
|
|
1.74
|
|
|
153,621
|
|
|
1,023
|
|
2.70
|
|
Construction and development
|
|
|
27,233
|
|
|
397
|
|
5.86
|
|
|
38,874
|
|
|
652
|
|
6.80
|
|
Commercial real estate
|
|
|
476,684
|
|
|
7,251
|
|
6.12
|
|
|
428,665
|
|
|
7,300
|
|
6.91
|
|
Commercial and industrial
|
|
|
60,019
|
|
|
979
|
|
6.56
|
|
|
33,606
|
|
|
601
|
|
7.25
|
|
Residential real estate
|
|
|
718,469
|
|
|
10,840
|
|
6.07
|
|
|
731,437
|
|
|
10,236
|
|
5.68
|
|
Consumer and other
|
|
|
1,629
|
|
|
41
|
|
10.12
|
|
|
2,890
|
|
|
50
|
|
7.02
|
|
Gross loans(2)
|
|
|
1,284,034
|
|
|
19,508
|
|
6.11
|
|
|
1,235,472
|
|
|
18,839
|
|
6.18
|
|
Total earning assets
|
|
|
1,526,092
|
|
|
20,556
|
|
5.42
|
|
|
1,389,093
|
|
|
19,862
|
|
5.80
|
|
Noninterest-earning assets
|
|
|
93,504
|
|
|
|
|
|
|
|
75,109
|
|
|
|
|
|
|
Total assets
|
|
|
1,619,596
|
|
|
|
|
|
|
|
1,464,202
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and savings deposits
|
|
|
58,202
|
|
|
43
|
|
0.30
|
|
|
54,782
|
|
|
49
|
|
0.36
|
|
Money market deposits
|
|
|
189,262
|
|
|
669
|
|
1.42
|
|
|
84,665
|
|
|
451
|
|
2.16
|
|
Time deposits
|
|
|
726,034
|
|
|
3,802
|
|
2.11
|
|
|
834,665
|
|
|
4,557
|
|
2.21
|
|
Total interest-bearing deposits
|
|
|
973,498
|
|
|
4,514
|
|
1.86
|
|
|
974,112
|
|
|
5,057
|
|
2.11
|
|
Borrowings
|
|
|
75,876
|
|
|
132
|
|
0.70
|
|
|
4,332
|
|
|
1
|
|
0.09
|
|
Total interest-bearing liabilities
|
|
|
1,049,374
|
|
|
4,646
|
|
1.78
|
|
|
978,444
|
|
|
5,058
|
|
2.10
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
299,088
|
|
|
|
|
|
|
|
293,251
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
54,325
|
|
|
|
|
|
|
|
23,095
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
353,413
|
|
|
|
|
|
|
|
316,346
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
216,809
|
|
|
|
|
|
|
|
169,412
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,619,596
|
|
|
|
|
|
|
$
|
1,464,202
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
15,910
|
|
|
|
|
|
|
$
|
14,804
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
3.64
|
|
|
|
|
|
|
|
3.70
|
|
Net interest margin
|
|
|
|
|
|
|
|
4.19
|
|
|
|
|
|
|
|
4.32
|
|
|
(1)
|
|
Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.
|
|
(2)
|
|
Average loan balances include nonaccrual loans and loans held for sale.
|
Rate/Volume Analysis
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volumes and rate have been allocated to volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
|
|
|
|
Increase (Decrease) Due to Change in:
|
|
(Dollars in thousands)
|
|
Volume
|
|
Yield/Rate
|
|
Total Change
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other investments(1)
|
|
$
|
401
|
|
$
|
(386)
|
|
$
|
15
|
|
Securities purchased under agreements to resell
|
|
|
90
|
|
|
(63)
|
|
|
27
|
|
Securities available for sale
|
|
|
(14)
|
|
|
(3)
|
|
|
(17)
|
|
Total investments
|
|
|
477
|
|
|
(452)
|
|
|
25
|
|
Construction and development
|
|
|
(171)
|
|
|
(84)
|
|
|
(255)
|
|
Commercial real estate
|
|
|
863
|
|
|
(912)
|
|
|
(49)
|
|
Commercial and industrial
|
|
|
440
|
|
|
(62)
|
|
|
378
|
|
Residential real estate
|
|
|
(84)
|
|
|
688
|
|
|
604
|
|
Consumer and Other
|
|
|
(4)
|
|
|
(5)
|
|
|
(9)
|
|
Gross loans(2)
|
|
|
1,044
|
|
|
(375)
|
|
|
669
|
|
Total earning assets
|
|
|
1,521
|
|
|
(827)
|
|
|
694
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
NOW and savings deposits
|
|
|
(3)
|
|
|
(3)
|
|
|
(6)
|
|
Money market deposits
|
|
|
(247)
|
|
|
465
|
|
|
218
|
|
Time deposits
|
|
|
(535)
|
|
|
(220)
|
|
|
(755)
|
|
Total interest-bearing deposits
|
|
|
(785)
|
|
|
242
|
|
|
(543)
|
|
Borrowings
|
|
|
(1)
|
|
|
132
|
|
|
131
|
|
Total interest-bearing liabilities
|
|
|
(786)
|
|
|
374
|
|
|
(412)
|
|
Net interest income
|
|
$
|
2,307
|
|
$
|
(1,201)
|
|
$
|
1,106
|
|
|
(1)
|
|
Includes income and average balances for term federal funds, interest-earning cash accounts, and other miscellaneous earning assets.
|
|
(2)
|
|
Average loan balances include nonaccrual loans and loans held for sale.
|
Provision for Loan Losses
We recorded no provision for loan losses for the three months ended March 31, 2020 and 2019 as asset quality remained strong. Our allowance for loan losses as a percentage of gross loans for the periods ended March 31, 2020 and 2019 was 0.54% and 0.57%, respectively. Our ALL as a percentage of gross loans is relatively lower than our peers due to our high percentage of residential mortgage loans, which tend to have lower allowance for loan loss ratios compared to other commercial or consumer loans due to their low LTVs.
See the section captioned “Allowance for Loan Losses” elsewhere in this document for further analysis of our provision for loan losses.
Noninterest Income
Noninterest income for the three months ended March 31, 2020 was $7.5 million, an increase of $75,000, or 1.0%, compared to $7.4 million for the three months ended March 31, 2019. The following table sets forth the major components of our noninterest income for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
287
|
|
$
|
255
|
|
$
|
32
|
|
12.5
|
%
|
Other service charges, commissions and fees
|
|
|
2,203
|
|
|
2,399
|
|
|
(196)
|
|
(8.2)
|
|
Gain on sale of residential mortgage loans
|
|
|
2,529
|
|
|
938
|
|
|
1,591
|
|
169.6
|
|
Mortgage servicing income, net
|
|
|
372
|
|
|
1,339
|
|
|
(967)
|
|
(72.2)
|
|
Gain on sale of SBA loans
|
|
|
1,301
|
|
|
1,327
|
|
|
(26)
|
|
(2.0)
|
|
SBA servicing income, net
|
|
|
516
|
|
|
1,043
|
|
|
(527)
|
|
(50.5)
|
|
Other income
|
|
|
301
|
|
|
133
|
|
|
168
|
|
126.3
|
|
Total noninterest income
|
|
$
|
7,509
|
|
$
|
7,434
|
|
$
|
75
|
|
1.0
|
%
|
Service charges on deposit accounts increased $32,000 to $287,000 for the three months ended March 31, 2020 compared to $255,000 for the same three months during 2019. The increase is partially attributable to increased analysis fees.
Other service charges, commissions and fees decreased $196,000 to $2.2 million for the three months ended March 31, 2020 compared to $2.4 million for the three months ended March 31, 2019. This decrease is attributable to a $421,000 decrease in underwriting, processing and origination fees earned from our origination of residential mortgage loans offset by increases on various other service charge, commission and fee accounts.
Total gain on sale of loans was $3.8 million for the three months ended March 31, 2020 compared to $2.3 million for the same period of 2019, an increase of $1.6 million, or 69.1%.
Gain on sale of residential mortgage loans totaled $2.5 million for the three months ended March 31, 2020 compared to $938,000 for the same period of 2019. We sold $92.7 million in residential mortgage loans during the three months ended March 31, 2020 with an average premium of 2.78%. We sold $55.1 million in residential mortgage loans during the three months ended March 31, 2019 with an average premium of 1.75%. We originated $119.7 million of residential mortgage loans during the three months ended March 31, 2020 compared to $151.1 million for the same period in 2019.
Gain on sale of SBA loans totaled $1.3 million for the three months ended March 31, 2020 and 2019. We sold $30.0 million in SBA loans during the three months ended March 31, 2020 with an average premium of 6.50%. We sold $30.8 million in SBA loans during the three months ended March 31, 2019 with an average premium of 6.51%.
Mortgage loan servicing income, net of amortization, decreased by $967,000, or 72.2%, to $372,000 during the three months ended March 31, 2020 compared to $1.3 million for the same period of 2019. The decrease in mortgage loan servicing income was primarily due to increased servicing asset amortization and a fair value impairment charge. Included
in mortgage loan servicing income for the three months ended March 31, 2020 was $1.6 million in mortgage servicing fees compared to $1.4 million for the same period in 2019, and capitalized mortgage servicing assets of $1.0 million for the three months ended March 31, 2020 and $794,000 for the same period in 2019. The amounts were offset by mortgage loan servicing asset amortization of $1.4 million for the three months ended March 31, 2020 compared to $819,000 during the same period in 2019. During the three months ended March 31, 2020, we recorded a fair value impairment of $884,000 on our mortgage servicing asset partially due to increased prepayment speeds during the quarter. No fair value impairment charge was recorded during the three months ended March 31, 2019. Our total residential mortgage loan servicing portfolio was $1.19 billion at March 31, 2020 compared to $839.4 million at March 31, 2019.
SBA servicing income, net decreased by $527,000 to $516,000 for the three months ended March 31, 2020 compared to $1.0 million for the three months ended March 31, 2019. Our total SBA loan servicing portfolio was $464.6 million as of March 31, 2020 compared to $425.7 million as of March 31, 2019. Our SBA servicing rights are carried at fair value. While our servicing portfolio grew, the inputs used to calculate fair value also changed, which resulted in a $585,000 charge to our SBA servicing rights in the three months ended March 31, 2020 compared to a $56,000 increase to our SBA servicing rights during the three months ended March 31, 2019.
Other noninterest income increased by $168,000 to $301,000 for the three months ended March 31, 2020 compared to $133,000 for the three months ended March 31, 2019. The largest component of other noninterest income is the income on bank owned life insurance which totaled $116,000 for the three months ended March 31, 2020 and 2019.
Noninterest Expense
Noninterest expense for the three months ended March 31, 2020 was $10.0 million compared to $10.1 million for the three months ended March 31, 2019, a slight decrease of $15,000, or 0.1%. The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(Dollars in thousands )
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
|
Noninterest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
6,513
|
|
$
|
6,316
|
|
$
|
197
|
|
3.1
|
%
|
Occupancy
|
|
|
1,211
|
|
|
1,155
|
|
|
56
|
|
4.8
|
|
Data processing
|
|
|
277
|
|
|
293
|
|
|
(16)
|
|
(5.5)
|
|
Advertising
|
|
|
161
|
|
|
170
|
|
|
(9)
|
|
(5.3)
|
|
Other operating
|
|
|
1,887
|
|
|
2,130
|
|
|
(243)
|
|
(11.4)
|
|
Total noninterest expense
|
|
$
|
10,049
|
|
$
|
10,064
|
|
$
|
(15)
|
|
(0.1)
|
%
|
Salaries and employee benefits expense for the three months ended March 31, 2020 was $6.5 million compared to $6.3 million for the three months ended March 31, 2019, an increase of $197,000, or 3.1%. This increase was attributable to an increase in the overall number of employees necessary to support our continued growth. The average number of full-time equivalent employees was 211 for the three months ended March 31, 2020 compared to 196 for the three months ended March 31, 2019.
Occupancy expense for the three months ended March 31, 2020 and 2019 was $1.2 million with an increase of $56,000, or 4.8%, during the three months ended March 31, 2020 compared to the same period in 2019. This increase was primarily due to increased rental expense and fixed asset depreciation.
Data processing expense for the three months ended March 31, 2020 was $277,000 compared to $293,000 for the three months ended March 31, 2019, a decrease of $16,000, or 5.5%. This slight decrease was primarily due to management’s ongoing efforts to reduce costs.
Advertising expense for the three months ended March 31, 2020 remained relatively flat compared to the same period in 2019.
Other operating expenses for the three months ended March 31, 2020 were $1.9 million compared to $2.1 million for the three months ended March 31, 2019, a decrease of $243,000, or 11.4%. This decrease was partially due to lower mortgage related expenses, as well as decreased operating and customer service expenses. Included in other expenses for the three months ended March 31, 2020 and 2019 were directors’ fees of approximately $91,000 and $81,000, respectively.
Income Tax Expense
Income tax expense for the three months ended March 31, 2020 and 2019 was $3.6 million and $3.4 million, respectively. The Company’s effective tax rates were 26.6% and 28.3% for the three months ended March 31, 2020 and 2019, respectively.
Financial Condition
Total assets decreased $27.3 million, or 1.7%, to $1.60 billion at March 31, 2020 as compared to $1.63 billion at December 31, 2019. The decrease in total assets was primarily attributable to decreases in cash and due from banks of $69.5 million and loans held for sale of $85.8 million, partially offset by a $100.4 million increase in loans held for investment.
Loans
Gross loans increased $100.4 million, or 8.6%, to $1.26 billion as of March 31, 2020 as compared to $1.16 billion as of December 31, 2019. Our loan growth during the three months ended March 31, 2020 was comprised of an increase of $4.7 million, or 14.9%, in construction and development loans, an increase of $6.3 million, or 1.5%, in commercial real estate loans, an increase of $7.1 million, or 13.3%, in commercial and industrial loans, an increase of $82.6 million, or 12.7%, in residential real estate loans and a decrease of $314,000, or 17.8%, in consumer and other loans. Loans held for sale were zero at March 31, 2020 compared to $85.8 million at December 31, 2019.
The following table presents the ending balance of each major category in our loan portfolio held for investment at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(Dollars in thousands)
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Construction and development
|
|
$
|
36,477
|
|
2.9
|
%
|
$
|
31,739
|
|
2.7
|
%
|
Commercial real estate
|
|
|
431,205
|
|
34.1
|
%
|
|
424,950
|
|
36.5
|
%
|
Commercial and industrial
|
|
|
60,183
|
|
4.8
|
%
|
|
53,105
|
|
4.6
|
%
|
Residential real estate
|
|
|
734,262
|
|
58.1
|
%
|
|
651,645
|
|
56.0
|
%
|
Consumer and other
|
|
|
1,454
|
|
0.1
|
%
|
|
1,768
|
|
0.2
|
%
|
Gross loans
|
|
$
|
1,263,581
|
|
100.0
|
%
|
$
|
1,163,207
|
|
100.0
|
%
|
Less unearned income
|
|
|
(1,978)
|
|
|
|
|
(2,045)
|
|
|
|
Total loans held for investment
|
|
$
|
1,261,603
|
|
|
|
$
|
1,161,162
|
|
|
|
SBA Loan Servicing
As of March 31, 2020 and December 31, 2019, we serviced $464.6 million and $441.6 million, respectively, in SBA loans for others. The size our SBA loan servicing portfolio continues to grow as we have consistently originated and sold portions of the SBA loans we originate while retaining loan servicing rights. We carried a servicing asset of $7.6 million and $8.2 million at March 31, 2020 and December 31, 2019, respectively. See Note 4 of our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for additional information on the activity for SBA loan servicing rights for the three months ended March 31, 2020 and 2019.
Residential Mortgage Loan Servicing
As of March 31, 2020, we serviced $1.19 billion in residential mortgage loans for others compared to $1.17 billion as of December 31, 2019. We carried a servicing asset, net of amortization, of $16.8 million and $18.1 million at March 31,
2020 and December 31, 2019, respectively. Amortization relating to the mortgage loan servicing asset was $1.4 million for the three months ending March 31, 2020 compared to $819,000 for the same period in 2019. During the three months ended March 31, 2020, we recorded a fair value impairment of $884,000 on our mortgage servicing asset. No fair value impairment charge was recorded during the three months ended March 31, 2019. See Note 5 of our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for additional information on the activity for mortgage loans servicing rights for the three a months ended March 31, 2020 and 2019.
Asset Quality
Nonperforming Loans
Asset quality remained strong during the first quarter of 2020. The outbreak of COVID-19 will likely have an impact on our asset quality, but it is unknown to what extent at this point. Nonperforming loans were $13.9 million at March 31, 2020 compared to $14.7 million at December 31, 2019. The decrease from December 31, 2019 to March 31, 2020 was primarily attributable to a $1.4 million decrease in nonaccrual construction and development loans, partially offset by the $463,000 increase in accruing TDRs. We did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2020 and year ended December 31, 2019.
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings. Nonaccrual loans at March 31, 2020 comprised of $3.0 million of commercial real estate loans, $17,000 in commercial and industrial loans and $7.9 million in residential real estate loans. Nonaccrual loans at December 31, 2019 comprised of $1.4 million of construction and development loans, $2.9 million in commercial real estate loans, $19,000 in commercial and industrial loans, and $7.9 million in residential real estate loans.
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Nonaccrual loans
|
|
$
|
10,944
|
|
$
|
12,236
|
|
Past due loans 90 days or more and still accruing
|
|
|
—
|
|
|
—
|
|
Accruing troubled debt restructured loans
|
|
|
2,922
|
|
|
2,459
|
|
Total nonperforming loans
|
|
|
13,866
|
|
|
14,695
|
|
Other real estate owned
|
|
|
423
|
|
|
423
|
|
Total nonperforming assets
|
|
$
|
14,289
|
|
$
|
15,118
|
|
Nonperforming loans to gross loans
|
|
|
1.10
|
%
|
|
1.26
|
%
|
Nonperforming assets to total assets
|
|
|
0.89
|
%
|
|
0.93
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
49.47
|
%
|
|
46.54
|
%
|
In March 2020, regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID–19. The agencies confirmed with the staff of the FASB that short–term modifications made on a good faith basis in response to the COVID–19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. See Note 1 to of our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for more information regarding accounting treatment of loan modifications as a response to COVID-19.
Allowance for Loan Losses
The allowance for loan losses was $6.9 million at March 31, 2020 compared to $6.8 million at December 31, 2019, a slight increase of $20,000, or 0.3%. We increased the qualitative factors in our allowance for loan losses calculation as of March 31, 2020 for the economic uncertainties caused by the COVID-19 pandemic; however, these increases did not result in additional provision for loan losses as of March 31, 2020 given the level of unallocated reserves as of December 31, 2019, net recovery for the quarter and the low credit risk and loss allocation associated with our residential real estate portfolio. The Company is not required to implement the provisions of the current expected credit losses accounting standard issued by the Financial Accounting Standards Board in the Accounting Standards Update No. 2016-13 until January 1, 2023, and is continuing to account for the allowance for loan losses under the incurred loss model.
In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial and industrial, commercial real estate, construction and land development loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions for loan losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.
It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. The FDIC and Georgia Department of Banking and Finance also review the allowance for loan losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if economic conditions and the real estate market in our market areas were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.
The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs for the periods presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(Dollars in thousands )
|
|
2020
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
6,839
|
|
$
|
6,645
|
|
Charge-offs:
|
|
|
|
|
|
|
|
Construction and development
|
|
|
—
|
|
|
—
|
|
Commercial real estate
|
|
|
—
|
|
|
—
|
|
Commercial and industrial
|
|
|
—
|
|
|
—
|
|
Residential real estate
|
|
|
—
|
|
|
—
|
|
Consumer and other
|
|
|
23
|
|
|
239
|
|
Total charge-offs
|
|
|
23
|
|
|
239
|
|
Recoveries:
|
|
|
|
|
|
|
|
Construction and development
|
|
|
—
|
|
|
—
|
|
Commercial real estate
|
|
|
2
|
|
|
5
|
|
Commercial and industrial
|
|
|
25
|
|
|
—
|
|
Residential real estate
|
|
|
—
|
|
|
—
|
|
Consumer and other
|
|
|
16
|
|
|
115
|
|
Total recoveries
|
|
|
43
|
|
|
120
|
|
Net charge-offs/(recoveries)
|
|
|
(20)
|
|
|
119
|
|
Provision for loan losses
|
|
|
—
|
|
|
—
|
|
Balance, end of period
|
|
$
|
6,859
|
|
$
|
6,526
|
|
Total loans at end of period
|
|
$
|
1,263,581
|
|
$
|
1,138,631
|
|
Average loans(1)
|
|
|
1,241,138
|
|
|
1,136,450
|
|
Net charge-offs to average loans
|
|
|
(0.01)
|
%
|
|
0.04
|
%
|
Allowance for loan losses to total loans
|
|
|
0.54
|
%
|
|
0.57
|
%
|
|
(1)
|
|
Excludes loans held for sale
|
Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as of March 31, 2020; provided, however, that with the emergence of the COVID-19 pandemic late in the first quarter of 2020 leading to significant market changes, high levels of unemployment and increasing degrees of uncertainty in the U.S. economy, the impact on collectability is not currently known, and it is possible that additional provisions for credit losses could be needed in future periods.
Deposits
Total deposits decreased $64.5 million, or 4.9%, to $1.24 billion at March 31, 2020 compared to $1.31 billion at December 31, 2019. As of March 31, 2020, 25.8% of total deposits were comprised of noninterest-bearing demand accounts and 74.2% of interest-bearing deposit accounts compared to 22.3% and 77.7% as of December 31, 2019, respectively.
We had no brokered deposits at March 31, 2020 and December 31, 2019. We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on competitive interest rate conditions and other factors and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from the Federal Home Loan Bank.
The following table summarizes our average deposit balances and weighted average rates for the three months ended March 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
Average
|
|
Weighted
|
|
Average
|
|
Weighted
|
|
(Dollars in thousands )
|
|
Balance
|
|
Average Rate
|
|
Balance
|
|
Average Rate
|
|
Noninterest-bearing demand
|
|
$
|
299,088
|
|
|
—
|
%
|
$
|
293,251
|
|
—
|
%
|
Interest-bearing demand deposits
|
|
|
41,347
|
|
|
0.20
|
|
|
33,127
|
|
0.20
|
|
Savings and money market deposits
|
|
|
206,117
|
|
|
1.36
|
|
|
106,320
|
|
1.85
|
|
Time deposits
|
|
|
726,034
|
|
|
2.11
|
|
|
834,665
|
|
2.21
|
|
Total interest-bearing deposits
|
|
|
973,498
|
|
|
1.86
|
|
|
974,112
|
|
2.11
|
|
Total deposits
|
|
$
|
1,272,586
|
|
|
1.43
|
|
$
|
1,267,363
|
|
1.62
|
|
Borrowed Funds
Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. At March 31, 2020 and December 31, 2019, we had maximum borrowing capacity from the FHLB of $490.8 million and $494.3 million, respectively. At March 31, 2020 and December 31, 2019, we had $80 million and $60 million, respectively, of outstanding advances from the FHLB.
In addition to our advances with the FHLB, we maintain federal funds agreements with our correspondent banks. Our available borrowings under these agreements were $47.5 million at March 31, 2020 and December 31, 2019. We did not have any advances outstanding under these agreements as of March 31, 2020 and December 31, 2019.
Liquidity and Capital Resources
Liquidity
Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost.
Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.
As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. To provide more liquidity in response to the COVID-19 pandemic, the Federal reserve has recently taken steps to encourage broader
use of the discount window. As of March 31, 2020 and December 31, 2019, we had $47.5 million of unsecured federal funds lines with no amounts advanced. In addition, we have access to the Federal Reserve’s discount window in the amount of $10.0 million with no borrowings outstanding as of March 31, 2020 and December 31, 2019. The Federal Reserve discount window line is collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $31.7 million as of March 31, 2020.
At March 31, 2020 and December 31, 2019, we had $80 million and $60 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $410.8 million and $434.3 million of additional borrowing availability with the FHLB as of March 31, 2020 and December 31, 2019, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.
Capital Requirements
The Bank is required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.
The table below summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of March 31, 2020 and December 31, 2019. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of March 31, 2020 and December 31, 2019. As of December 31, 2019, the FDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events since December 31, 2019 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratio
|
|
|
|
|
|
|
|
|
|
|
|
Requirements
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
including
|
|
Requirement
|
|
|
|
|
|
|
|
|
|
fully phased-
|
|
for "Well
|
|
|
|
|
|
|
|
Regulatory
|
|
in Capital
|
|
Capitalized"
|
|
|
|
|
|
|
|
Capital Ratio
|
|
Conservation
|
|
Depository
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Requirements
|
|
Buffer
|
|
Institution
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
22.44
|
%
|
22.01
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
Bank
|
|
20.86
|
%
|
20.40
|
%
|
8.00
|
%
|
10.50
|
%
|
10.00
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
21.75
|
%
|
21.31
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
Bank
|
|
20.17
|
%
|
19.70
|
%
|
6.00
|
%
|
8.50
|
%
|
8.00
|
%
|
CETI capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
21.75
|
%
|
21.31
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
Bank
|
|
20.17
|
%
|
19.70
|
%
|
4.50
|
%
|
7.00
|
%
|
6.50
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
13.40
|
%
|
12.70
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
Bank
|
|
12.42
|
%
|
11.74
|
%
|
4.00
|
%
|
4.00
|
%
|
5.00
|
%
|
Dividends
On April 15, 2020, we declared a cash dividend of $0.11 per share, payable on May 8, 2020, to common shareholders of record as of May 1, 2020. Any future determination to pay dividends to holders of our common stock will depend on
our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management’s credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.
See Note 9 to our consolidated financial statements as of March 31, 2020, included elsewhere in this Form 10-Q, for more information regarding our off-balance sheet arrangements as of March 31, 2020 and December 31, 2019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.
Interest Rate Risk
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).
Our board of directors establishes broad policy limits with respect to interest rate risk. As part of this policy the asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, the ALCO focuses on ensuring a stable and steadily increasing flow of net interest income through managing the size and mix of the balance sheet. The management of interest rate risk is an active process which encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower
net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
Evaluation of Interest Rate Risk
We use income simulations, an analysis of core funding utilization, and economic value of equity (EVE) simulations as our primary tools in measuring and managing interest rate risk. These tools are utilized to quantify the potential earnings impact of changing interest rates over a two year simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities.
There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic/political/regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, etc.; and, can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Bank’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Bank’s overall asset/liability management process is to facilitate meaningful strategy development and implementation.
Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios, the collective impact of which will enable the Bank to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined.
We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run three standard and plausible comparing current or flat rates with a +/- 200 basis point ramp in rates over 12 months. These rate scenarios are considered appropriate as they are neither too modest (e.g. +/- 100 basis points) or too extreme (e.g. +/- 400 basis points) given the economic and rate cycles which have unfolded in the last 25 years. This analysis also provides the foundation for historical tracking of interest rate risk.
Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of March 31, 2020 and December 31, 2019 are presented in the following table:
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|
|
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Net Interest Income Sensitivity
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|
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12 Month Projection
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24 Month Projection
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|
(Shock in basis points)
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|
+200
|
|
-100
|
|
+200
|
|
-100
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|
March 31, 2020
|
|
5.80
|
%
|
2.60
|
%
|
7.20
|
%
|
4.10
|
%
|
December 31, 2019
|
|
5.00
|
%
|
(1.30)
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%
|
6.10
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%
|
(1.30)
|
%
|
We also model the impact of rate changes on our Economic Value of Equity, or EVE. We base the modeling of EVE based on interest rate shocks as shocks are considered more appropriate for EVE, which accelerates future interest rate risk into current capital via a present value calculation of all future cashflows from the bank’s existing inventory of assets and liabilities. Our simulation model incorporates interest rate shocks of +/- 100, 200, and 300 basis points. The results of the model are presented in the table below:
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Economic Value of Equity Sensitivity
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(Shock in basis points)
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+300
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|
+200
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|
+100
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|
-100
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|
March 31, 2020
|
|
5.10
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%
|
5.20
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%
|
3.10
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%
|
(6.70)
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%
|
December 31, 2019
|
|
3.40
|
%
|
4.20
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%
|
3.50
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%
|
(3.10)
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%
|
Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.
In addition to interest rate risk, the recent COVID-19 pandemic and the related stay-at-home and self-distancing mandates will likely expose us to additional market value risk. Protracted closures, furloughs and lay-offs have curtailed economic activity, and will likely continue to curtail economic activity and could result in lower fair values for collateral in our loan portfolio.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act as of March 31, 2020. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2020.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2020, there was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a‑15 or 15d‑15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to various legal proceedings such as claims and lawsuits arising in the course of our normal business activities. Although the ultimate outcome of all claims and lawsuits outstanding as of March 31, 2020 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in "Part I - Item IA - Risk Factors” of the Company’s 2019 Form 10-K which could materially affect its business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. In addition, these may be heightened by the disruption and uncertainty resulting from COVID-19. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.
Other than the risk factors set forth below related to COVID-19, there have been no material changes in the risk factors discussed in "Part I - Item IA - Risk Factors” of the Company’s 2019 Form 10-K.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
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·
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employees contracting COVID-19;
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|
·
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|
a work stoppage, forced quarantine, or other interruption of the Company’s business;
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|
·
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|
unavailability of key personnel necessary to conduct the Company’s business activities;
|
|
·
|
|
sustained closures of the Bank’s branch lobbies or the offices of the Bank’s customers;
|
|
·
|
|
declines in demand for loans and other banking services and products;
|
|
·
|
|
reduced consumer spending due to both job losses and other effects attributable to the pandemic;
|
|
·
|
|
unprecedented volatility in United States financial markets;
|
|
·
|
|
volatile performance of the Company’s investment securities portfolio;
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|
·
|
|
credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;
|
|
·
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|
declines in collateral values;
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|
·
|
|
third party disruptions, including outages at network providers and other suppliers;
|
|
·
|
|
increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
|
|
·
|
|
operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
|
These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.
The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, any adverse results from current or future litigation related to COVID-19 as a result of our participation in and execution of government programs related to COVID-19, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole.
The COVID-19 pandemic has resulted in significant market volatility and lower interest rates that could materially affect the Company’s results of operations and access to capital.
The COVID-19 pandemic has also caused significant recent volatility in financial markets and adverse economic conditions and may have significant long-term adverse effects on the U.S. economy, including increased instability in capital markets, declines in business and consumer confidence, reductions in economic activity, increased unemployment and recession. This may result in decreased capital and liquidity. If the economic situation deteriorates, federal and state regulators may also consider taking actions such as suspension of dividends, share repurchases and other capital distributions in order to conserve capital and retain capacity, any of which could adversely impact the Company’s business. Further, sustained adverse effects from the COVID-19 pandemic may also prevent us from satisfying our regulatory and other supervisory requirements or result in downgrades in our credit ratings making it more difficult to access the capital markets.
Additionally, the economic disruption caused by COVID-19 has resulted in a number of Federal Reserve actions resulting in market interest rates declining significantly. We expect that these reductions in interest rates, especially if prolonged, could adversely affect the Company’s net interest income, net interest margins and profitability. Furthermore, such low rates increase the risk of a negative interest rate environment in which interest rates drop below zero, either broadly or for some types of instruments. Such an occurrence would likely further reduce the interest the Company earns on loans and other earning assets, while also likely requiring the Company to pay to maintain its deposits with the Federal Reserve Bank. The Company’s systems may not be able to handle adequately a negative interest rate environment and not all variable rate instruments are designed for such a circumstance. The Company cannot predict the nature or timing of future changes in monetary policies in response to COVID-19 or the precise effects that they may have on the Company’s activities and financial results.
The COVID-19 pandemic has impacted, and will likely continue to impact, the Company’s operations.
As a result of the COVID-19 pandemic, the Company has taken significant precautions to ensure the health and safety of its employees and customers, which include operating our branches as drive-thru and appointment only branches and having our employees working remotely. These precautions could impact demand for the Company’s products and services. The increased reliance on remote access to information systems increases the Company’s exposure to potential cybersecurity breaches and could impact the Company’s productivity. Additionally, the Company’s business customers are increasingly required to work remotely as well and may not have appropriately secured remote networks, which may make us more vulnerable to cyber-attacks or phishing schemes. Furthermore, if a large proportion of the Company’s key employees were to contract COVID-19 or be quarantined as a result of the virus, the Company’s operations could be adversely impacted and its business continuity plans may not prove effective.
In addition, federal, state and local governments have mandated or encouraged financial services companies to make accommodations to borrowers and other customers affected by the COVID-19 pandemic. Legal and regulatory responses to concerns about the COVID-19 pandemic could result in additional regulation or restrictions affecting the conduct of our business in the future. In addition to the potential affects from negative economic conditions noted above, the Company instituted certain programs to help COVID-19 impacted customers, including offering payment deferment and other loan relief, as appropriate, for customers impacted by COVID-19. The Company’s liquidity could be negatively impacted if a significant number of customers apply and are approved for the deferral of payments. In addition, if these deferrals are not effective in mitigating the effect of COVID-19 on the Company’s customers, it may adversely affect its business and results of operations more substantially over a longer period of time.
As a participating lender in the Small Business Administration’s Paycheck Protection Program, the Company and the Bank are subject to additional risks of litigation from the Bank’s clients or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Legislation providing an additional $320 billion in funding for the PPP was signed into law on April 24, 2020. The SBA began accepting applications for the new funding on April 27, 2020.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.
The Company also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
Item 6. Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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METROCITY BANKSHARES, INC.
|
|
|
|
Date: May 15, 2020
|
By:
|
/s/ Nack Y. Paek
|
|
|
Nack Y. Paek
|
|
|
Chief Executive Officer
|
|
|
|
Date: May 15, 2020
|
By:
|
/s/ Farid Tan
|
|
|
Farid Tan
|
|
|
President and Chief Financial Officer
|
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