UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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METROCITY BANKSHARES, INC.
Quarterly Report on Form 10-Q
June 30, 2022
TABLE OF CONTENTS
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
METROCITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
(Unaudited) | ||||||
Assets: |
|
|
| |||
Cash and due from banks | $ | | $ | | ||
Federal funds sold |
| |
| | ||
Cash and cash equivalents |
| |
| | ||
Equity securities | | | ||||
Securities available for sale |
| |
| | ||
Loans held for sale |
| — |
| — | ||
Loans, less allowance for loan losses of $ |
| |
| | ||
Accrued interest receivable |
| |
| | ||
Federal Home Loan Bank stock |
| |
| | ||
Premises and equipment, net |
| |
| | ||
Operating lease right-of-use asset |
| |
| | ||
Foreclosed real estate, net | | | ||||
SBA servicing asset |
| |
| | ||
Mortgage servicing asset, net |
| |
| | ||
Bank owned life insurance |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities: |
|
|
|
| ||
Deposits: |
|
|
|
| ||
Non-interest-bearing demand | $ | | $ | | ||
Interest-bearing |
| |
| | ||
Total deposits |
| |
| | ||
Federal Home Loan Bank advances | | | ||||
Other borrowings |
| |
| | ||
Operating lease liability |
| |
| | ||
Accrued interest payable |
| |
| | ||
Other liabilities |
| |
| | ||
Total liabilities | $ | | $ | | ||
Shareholders' Equity: |
|
|
|
| ||
Preferred stock, $ | ||||||
Common stock, $ | | | ||||
Additional paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Accumulated other comprehensive income (loss) |
| |
| ( | ||
Total shareholders' equity |
| |
| | ||
Total liabilities and shareholders' equity | $ | | $ | | ||
See accompanying notes to unaudited consolidated financial statements.
3
METROCITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Interest and dividend income: |
|
|
| |||||||||
Loans, including fees | $ | | $ | | $ | | $ | | ||||
Other investment income |
| |
| |
| |
| | ||||
Federal funds sold |
| |
| |
| |
| | ||||
Total interest income |
| |
| |
| |
| | ||||
Interest expense: | ||||||||||||
Deposits |
| |
| |
| |
| | ||||
FHLB advances and other borrowings |
| |
| |
| |
| | ||||
Total interest expense |
| |
| |
| |
| | ||||
Net interest income |
| |
| |
| |
| | ||||
Provision for loan losses |
| — |
| |
| |
| | ||||
Net interest income after provision for loan losses |
| |
| |
| |
| | ||||
Noninterest income: | ||||||||||||
Service charges on deposit accounts |
| |
| |
| |
| | ||||
Other service charges, commissions and fees |
| |
| |
| |
| | ||||
Gain on sale of residential mortgage loans |
| |
| — |
| |
| — | ||||
Mortgage servicing income, net |
| ( |
| ( |
| |
| ( | ||||
Gain on sale of SBA loans |
| — |
| |
| |
| | ||||
SBA servicing income, net |
| ( |
| |
| |
| | ||||
Other income |
| |
| |
| |
| | ||||
Total noninterest income |
| |
| |
| |
| | ||||
Noninterest expense: | ||||||||||||
Salaries and employee benefits |
| |
| |
| |
| | ||||
Occupancy and equipment |
| |
| |
| |
| | ||||
Data processing |
| |
| |
| |
| | ||||
Advertising |
| |
| |
| |
| | ||||
Other expenses |
| |
| |
| |
| | ||||
Total noninterest expense |
| |
| |
| |
| | ||||
Income before provision for income taxes |
| |
| |
| |
| | ||||
Provision for income taxes |
| |
| |
| |
| | ||||
Net income available to common shareholders | $ | | $ | | $ | | $ | | ||||
Earnings per share: | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
See accompanying notes to unaudited consolidated financial statements.
4
METROCITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive gain (loss): |
|
|
|
|
|
| ||||||
Unrealized holding losses on securities available for sale |
| ( |
| |
| ( |
| ( | ||||
Net changes in fair value of cash flow hedges | | — | | — | ||||||||
Tax effect |
| ( |
| ( |
| ( |
| | ||||
Other comprehensive gain (loss) |
| |
| |
| |
| ( | ||||
Comprehensive income | $ | | $ | | $ | | $ | | ||||
See accompanying notes to unaudited consolidated financial statements.
5
METROCITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands, except per share data)
Accumulated | |||||||||||||||||
Common Stock | Additional | Other | |||||||||||||||
Number of | Paid-in | Retained | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Total | ||||||
Three Months Ended: | |||||||||||||||||
Balance, April 1, 2022 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Stock based compensation expense |
| — |
| — |
| |
| — |
| — |
| | |||||
Vesting of restricted stock |
| |
| |
| ( | — |
| — |
| — | ||||||
Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||
Other comprehensive income |
| — |
| — |
| — |
| — |
| |
| | |||||
Dividends declared on common stock ($ | — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Balance, June 30, 2022 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Balance, April 1, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Stock based compensation expense |
| — |
| — |
| | — |
| — |
| | ||||||
Vesting of restricted stock |
| |
| |
| ( | — |
| — |
| — | ||||||
Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||
Other comprehensive income | — |
| — | — |
| — |
| |
| | |||||||
Dividends declared on common stock ($ | — |
| — | — |
| ( |
| — |
| ( | |||||||
Balance, June 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Six Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, January 1, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — | — |
| |
| — |
| | ||||||
Stock based compensation expense |
| — |
| — |
| |
| — |
| — |
| | |||||
Vesting of restricted stock |
| |
| |
| ( |
| — |
| — |
| — | |||||
Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||
Other comprehensive income |
| — |
| — | — |
| — |
| |
| | ||||||
Dividends declared on common stock ($ |
| — |
| — | — |
| ( |
| — |
| ( | ||||||
Balance, June 30, 2022 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Balance, January 1, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — | — |
| |
| — |
| | ||||||
Stock based compensation expense |
| — |
| — |
| | — |
| — |
| | ||||||
Vesting of restricted stock |
| |
| |
| ( | — |
| — |
| — | ||||||
Repurchase of common stock | ( | ( | ( | — | — | ( | |||||||||||
Other comprehensive loss |
| — |
| — | — |
| — |
| ( |
| ( | ||||||
Dividends declared on common stock ($ | — |
| — | — |
| ( |
| — |
| ( | |||||||
Balance, June 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
See accompanying notes to unaudited consolidated financial statements.
6
METROCITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Cash flow from operating activities: |
|
|
|
| ||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation, amortization and accretion |
| |
| | ||
Provision for loan losses |
| |
| | ||
Stock based compensation expense |
| |
| | ||
Unrealized losses recognized on equity securities | | — | ||||
Loss on sale of foreclosed real estate |
| |
| — | ||
Proceeds from sales of residential real estate loans |
| |
| — | ||
Gain on sale of residential mortgages |
| ( |
| — | ||
Origination of SBA loans held for sale |
| ( |
| ( | ||
Proceeds from sales of SBA loans held for sale |
| |
| | ||
Gain on sale of SBA loans |
| ( |
| ( | ||
Increase in cash value of bank owned life insurance |
| ( |
| ( | ||
Decrease in accrued interest receivable |
| |
| | ||
Decrease (increase) in SBA servicing rights |
| |
| ( | ||
Decrease in mortgage servicing rights |
| |
| | ||
(Increase) decrease in other assets |
| ( |
| | ||
Increase (decrease) in accrued interest payable |
| |
| ( | ||
Increase in other liabilities |
| |
| | ||
Net cash flow provided by operating activities |
| |
| | ||
Cash flow from investing activities: |
|
|
|
| ||
Purchases of securities available for sale | — | ( | ||||
Proceeds from maturities, calls or paydowns of securities available for sale |
| |
| | ||
Redemption (purchase) of Federal Home Loan Bank stock |
| |
| ( | ||
Increase in loans, net | ( |
| ( | |||
Purchases of premises and equipment |
| ( |
| ( | ||
Proceeds from sales of foreclosed real estate owned | | — | ||||
Purchase of bank owned life insurance | ( | — | ||||
Net cash flow used by investing activities |
| ( |
| ( | ||
Cash flow from financing activities: |
|
|
|
| ||
Dividends paid on common stock |
| ( |
| ( | ||
Repurchases of common stock | ( | ( | ||||
Increase in deposits, net |
| |
| | ||
Decrease in other borrowings, net |
| ( |
| ( | ||
Proceeds from Federal Home Loan Bank advances | | | ||||
Repayments of Federal Home Loan Bank advances |
| ( |
| ( | ||
Net cash flow (used) provided by financing activities |
| ( |
| | ||
See accompanying notes to unaudited consolidated financial statements.
7
METROCITY BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended June 30, | ||||||
| 2022 |
| 2021 | |||
Net change in cash and cash equivalents |
| ( |
| | ||
Cash and cash equivalents at beginning of period |
| |
| | ||
Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental schedule of noncash investing and financing activities: | ||||||
Transfer of residential real estate loans to loans held for sale | $ | | $ | — | ||
Transfer of loan principal to foreclosed real estate, net of write-downs | $ | — | $ | | ||
Initial recognition of operating lease right-of-use assets | $ | — | $ | | ||
Initial recognition of operating lease liabilities | $ | — | $ | | ||
Supplemental disclosures of cash flow information - Cash paid during the year for: | ||||||
Interest | $ | | $ | | ||
Income taxes | $ | | $ | | ||
See accompanying notes to unaudited consolidated financial statements.
8
METROCITY BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the accounts of MetroCity Bankshares, Inc. (“Company”) and its wholly-owned subsidiary, Metro City Bank (the “Bank”). The Company owns
These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) followed within the financial services industry for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements.
The Company principally operates in
In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the consolidated financial statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to current year presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity or cash flows.
Operating results for the three and six month period ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2021.
The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Company’s 2021 Form 10-K”). There were no new accounting policies or changes to existing policies adopted during the first six months of 2022 which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.
Contingencies
Due to the nature of their activities, the Company and its subsidiary are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of June 30, 2022. Although the ultimate outcome of all claims and lawsuits outstanding as of June 30, 2022 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 the Company’s results of operations or financial condition.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and similar instruments) and net investments in leases recognized by a lessor. For debt securities with other-than-temporary impairment (“OTTI”), the guidance will be applied prospectively. Existing purchased credit impaired (“PCI”) assets will be grandfathered and classified as purchased credit deteriorated (“PCD”) assets at the date of adoption. The assets will be grossed up for the allowance of expected credit losses for all PCD assets at the date of adoption and will
9
continue to recognize the noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes in expected credit losses will be recorded through the allowance. Adoption is effective for interim and annual reporting periods beginning after December 15, 2022. Early adoption is permitted; however, we plan to adopt ASU 2016-13 on January 1, 2023. The Company has selected a software solution supported by a third-party vendor to be used in developing an expected credit loss model compliant with ASU 2016-13. The Company has also contracted with a third-party vendor to assist with our CECL implementation and help establish the necessary policies and procedures to be fully compliant with ASU 2016-13. We will continue to evaluate the impact of this new accounting standard through its effective date.
The Company has further evaluated other Accounting Standards Updates issued during 2022 to date but does not expect updates other than those summarized above to have a material impact on the consolidated financial statements.
NOTE 2 – INVESTMENT SECURITIES
The amortized costs, gross unrealized gains and losses, and estimated fair values of securities available for sale as of June 30, 2022 and December 31, 2021 are summarized as follows:
June 30, 2022 | ||||||||||||
| Gross |
| Gross |
| Gross |
| Estimated | |||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||
Obligations of U.S. Government entities and agencies | $ | | $ | — | $ | — | $ | | ||||
States and political subdivisions |
| |
| — |
| ( |
| | ||||
Mortgage-backed GSE residential |
| |
| — | ( |
| | |||||
Total | $ | | $ | — | $ | ( | $ | | ||||
December 31, 2021 | ||||||||||||
| Gross |
| Gross |
| Gross |
| Estimated | |||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
(Dollars in thousands) | Cost | Gains | Losses | Value | ||||||||
Obligations of U.S. Government entities and agencies | $ | | $ | — | $ | — | $ | | ||||
States and political subdivisions |
| |
| |
| ( |
| | ||||
Mortgage-backed GSE residential |
| |
| |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
The amortized costs and estimated fair values of investment securities available for sale at June 30, 2022 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale | ||||||
| Amortized |
| Estimated | |||
(Dollars in thousands) | Cost | Fair Value | ||||
Due in one year or less | $ | | $ | | ||
Due after one year but less than five years |
| |
| | ||
Due after five years but less than ten years |
| — |
| — | ||
Due in more than ten years |
| |
| | ||
Mortgage-backed GSE residential |
| |
| | ||
Total | $ | | $ | | ||
There were
10
Information pertaining to securities with gross unrealized losses at June 30, 2022 and December 31, 2021 aggregated by investment category and length of time that individual securities have been in a continuous loss position, are summarized in the table below.
June 30, 2022 | ||||||||||||
Twelve Months or Less | Over Twelve Months | |||||||||||
| Gross |
| Estimated |
| Gross |
| Estimated | |||||
Unrealized | Fair | Unrealized | Fair | |||||||||
(Dollars in thousands) | Losses | Value | Losses | Value | ||||||||
States and political subdivisions | $ | | $ | | $ | — | $ | — | ||||
Mortgage-backed GSE residential | | | — | — | ||||||||
Total | $ | | $ | | $ | — | $ | — | ||||
December 31, 2021 | ||||||||||||
Twelve Months or Less | Over Twelve Months | |||||||||||
| Gross |
| Estimated |
| Gross |
| Estimated | |||||
Unrealized | Fair | Unrealized | Fair | |||||||||
(Dollars in thousands) | Losses | Value | Losses | Value | ||||||||
States and political subdivisions | $ | | $ | | $ | — | $ | — | ||||
Mortgage-backed GSE residential | | | — | — | ||||||||
Total | $ | | $ | | $ | — | $ | — | ||||
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
At June 30, 2022, the
State and political subdivisions. The Company’s unrealized loss on
Mortgage-backed GSE residential. The Company’s unrealized loss on
Equity Securities
As of June 30, 2022 and December 31, 2021, the Company had equity securities with carrying values totaling $
11
During the three and six months ended June 30, 2022, we recognized an unrealized loss of $
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans at June 30, 2022 and December 31, 2021 are summarized as follows:
| June 30, |
| December 31, | |||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
Construction and development | $ | | $ | | ||
Commercial real estate |
| |
| | ||
Commercial and industrial |
| |
| | ||
Residential real estate |
| |
| | ||
Consumer and other |
| |
| | ||
Total loans receivable |
| |
| | ||
Unearned income |
| ( |
| ( | ||
Allowance for loan losses |
| ( |
| ( | ||
Loans, net | $ | | $ | | ||
Included in the commercial and industrial loans are PPP loans totaling $
The Company is not committed to lend additional funds to borrowers with non-accrual or restructured loans.
In the normal course of business, the Company may sell and purchase loan participations to and from other financial institutions and related parties. Loan participations are typically sold to comply with the legal lending limits per borrower as imposed by regulatory authorities. The participations are sold without recourse and the Company imposes no transfer or ownership restrictions on the purchaser.
A summary of changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2022 and 2021 is as follows:
| Three Months Ended June 30, 2022 | ||||||||||||||||||||
Construction | |||||||||||||||||||||
| and |
| Commercial |
| Commercial |
| Residential | Consumer | |||||||||||||
(Dollars in thousands) |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Unallocated |
| Total | |||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Charge-offs |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Recoveries |
| — |
| |
| |
| — |
| — |
| — |
| | |||||||
Provision |
| |
| ( |
| ( |
| |
| |
| ( |
| — | |||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
12
Three Months Ended June 30, 2021 | |||||||||||||||||||||
Construction | |||||||||||||||||||||
and | Commercial | Commercial | Residential | Consumer | |||||||||||||||||
(Dollars in thousands) |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Unallocated |
| Total | |||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | — | $ | | $ | | |||||||
Charge-offs |
| — |
| ( |
| ( |
| — |
| — |
| — |
| ( | |||||||
Recoveries |
| — |
| |
| — |
| — |
| |
| — |
| | |||||||
Provision |
| |
| |
| |
| |
| ( |
| ( |
| | |||||||
Ending balance | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Six Months Ended June 30, 2022 | |||||||||||||||||||||
Construction | |||||||||||||||||||||
and | Commercial | Commercial | Residential | Consumer | |||||||||||||||||
(Dollars in thousands) |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Unallocated |
| Total | |||||||
Allowance for loan losses: | |||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Charge-offs |
| — | — | ( | — | — |
| — |
| ( | |||||||||||
Recoveries |
| — | | | — | |
| — |
| | |||||||||||
Provision |
| | ( | ( | | |
| |
| | |||||||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Six Months Ended June 30, 2021 | |||||||||||||||||||||
Construction | |||||||||||||||||||||
and | Commercial | Commercial | Residential | Consumer | |||||||||||||||||
(Dollars in thousands) |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Unallocated |
| Total | |||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
Charge-offs |
| — |
| ( |
| ( |
| — |
| — |
| — |
| ( | |||||||
Recoveries |
| — |
| |
| — |
| — |
| |
| — |
| | |||||||
Provision |
| |
| |
| |
| |
| ( |
| — |
| | |||||||
Ending balance | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
13
The following tables present, by portfolio segment, the balance in the allowance for loan losses disaggregated on the basis of the Company’s impairment measurement method and the related unpaid principal balance in loans as of June 30, 2022 and December 31, 2021.
| June 30, 2022 | ||||||||||||||||||||
Construction | |||||||||||||||||||||
| and |
| Commercial |
| Commercial |
| Residential | Consumer | |||||||||||||
(Dollars in thousands) |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Unallocated |
| Total | |||||||
Allowance for loan losses: | |||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | | $ | | $ | — | $ | — | $ | — | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
| |
| | | ||||||||
Acquired with deteriorated credit quality | — | — | — | — | — | — | — | ||||||||||||||
Total ending allowance balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Loans: |
| ||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
| |
| — |
| | |||||||
Acquired with deteriorated credit quality |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total ending loans balance | $ | | $ | | $ | | $ | | $ | | $ | — | $ | | |||||||
December 31, 2021 | |||||||||||||||||||||
Construction | |||||||||||||||||||||
and | Commercial | Commercial | Residential | Consumer | |||||||||||||||||
(Dollars in thousands) |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Unallocated |
| Total | |||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | — | $ | | $ | | $ | — | $ | — | $ | — | $ | | |||||||
Collectively evaluated for impairment |
| |
| |
| |
| |
| — |
| — |
| | |||||||
Acquired with deteriorated credit quality |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total ending allowance balance | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Individually evaluated for impairment | $ | — | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Collectively evaluated for impairment | |
| |
| |
| |
| — |
| |
| | ||||||||
Acquired with deteriorated credit quality |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total ending loans balance | $ | | $ | | $ | | $ | | $ | — | $ | | $ | | |||||||
14
Impaired loans as of June 30, 2022 and December 31, 2021, by portfolio segment, are as follows. The recorded investment consists of the unpaid total principal balance plus accrued interest receivable.
Unpaid | Recorded | Recorded | |||||||||||||
Total | Investment | Investment | Total | ||||||||||||
(Dollars in thousands) | Principal | With No | With | Recorded | Related | ||||||||||
June 30, 2022 |
| Balance |
| Allowance |
| Allowance |
| Investment |
| Allowance | |||||
Construction and development | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Commercial real estate |
| |
| |
| |
| |
| | |||||
Commercial and industrial |
| |
| |
| |
| |
| | |||||
Residential real estate |
| |
| |
| — |
| | — | ||||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
Unpaid | Recorded | Recorded | |||||||||||||
Total | Investment | Investment | Total | ||||||||||||
(Dollars in thousands) | Principal | With No | With | Recorded | Related | ||||||||||
December 31, 2021 |
| Balance |
| Allowance |
| Allowance |
| Investment |
| Allowance | |||||
Construction and development | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Commercial real estate |
| |
| |
| |
| |
| | |||||
Commercial and industrial |
| |
| |
| |
| |
| | |||||
Residential real estate |
| |
| |
| — |
| |
| — | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
The average recorded investment in impaired loans and interest income recognized on the cash and accrual basis for the three and six months ended June 30, 2022 and 2021, by portfolio segment, are summarized in the tables below.
Three Months Ended June 30, | ||||||||||||
2022 | 2021 | |||||||||||
Average | Interest | Average | Interest | |||||||||
Recorded | Income | Recorded | Income | |||||||||
(Dollars in thousands) |
| Investment |
| Recognized |
| Investment |
| Recognized | ||||
Construction and development | $ | — | $ | — | $ | — | $ | — | ||||
Commercial real estate |
| |
| |
| |
| | ||||
Commercial and industrial |
| |
| |
| |
| | ||||
Residential real estate |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
Six Months Ended June 30, | ||||||||||||
2022 | 2021 | |||||||||||
Average | Interest | Average | Interest | |||||||||
Recorded | Income | Recorded | Income | |||||||||
(Dollars in thousands) |
| Investment |
| Recognized |
| Investment |
| Recognized | ||||
Construction and development | $ | — | $ | — | $ | — | $ | — | ||||
Commercial real estate |
| |
| |
| |
| | ||||
Commercial and industrial |
| |
| |
| |
| | ||||
Residential real estate |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | | ||||
15
A primary credit quality indicator for financial institutions is delinquent balances. Delinquencies are updated on a daily basis and are continuously monitored. Loans are placed on nonaccrual status as needed based on repayment status and consideration of accounting and regulatory guidelines. Nonaccrual balances are updated and reported on a daily basis. Following are the delinquent amounts, by portfolio segment, as of June 30, 2022 and December 31, 2021:
Accruing | Total | Total | ||||||||||||||||
(Dollars in thousands) | Greater than | Accruing | Financing | |||||||||||||||
June 30, 2022 |
| Current |
| 30-89 Days |
| 90 Days |
| Past Due |
| Nonaccrual |
| Receivables | ||||||
Construction and development | $ | | $ | — | $ | — | $ | — | $ | — | $ | | ||||||
Commercial real estate |
| |
| — |
| — |
| — |
| |
| | ||||||
Commercial and industrial |
| |
| |
| — |
| |
| |
| | ||||||
Residential real estate |
| |
| |
| — |
| |
| |
| | ||||||
Consumer and other | |
| — |
| — |
| — |
| — | | ||||||||
Total | $ | | $ | | $ | — | $ | | $ | | $ | | ||||||
Accruing | Total | Total | ||||||||||||||||
(Dollars in thousands) | Greater than | Accruing | Financing | |||||||||||||||
December 31, 2021 |
| Current |
| 30-89 Days |
| 90 Days |
| Past Due |
| Nonaccrual |
| Receivables | ||||||
Construction and development | $ | | $ | — | $ | — | $ | — | $ | — | $ | | ||||||
Commercial real estate |
| |
| |
| — |
| |
| |
| | ||||||
Commercial and industrial |
| |
| |
| |
| |
| |
| | ||||||
Residential real estate |
| |
| |
| — |
| |
| |
| | ||||||
Consumer and other |
| |
| — |
| — |
| — |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
The Company utilizes a ten grade loan rating system for its loan portfolio as follows:
| ● | Loans rated Pass – Loans in this category have low to average risk. There are six loan risk ratings (grades 1-6) included in loans rated Pass. |
| ● | Loans rated Special Mention – Loans do not presently expose the Company to a sufficient degree of risk to warrant adverse classification, but do possess deficiencies deserving close attention. |
| ● | Loans rated Substandard – Loans are inadequately protected by the current credit-worthiness and paying capability of the obligor or of the collateral pledged, if any. |
| ● | Loans rated Doubtful – Loans which have all the weaknesses inherent in loans classified Substandard, with the added characteristic that the weaknesses make collections or liquidation in full, or on the basis of currently known facts, conditions and values, highly questionable or improbable. |
| ● | Loans rated Loss – Loans classified Loss are considered uncollectible and such little value that their continuance as bankable assets is not warranted. |
Loan grades are monitored regularly and updated as necessary based upon review of repayment status and consideration of periodic updates regarding the borrower’s financial condition and capacity to meet contractual requirements.
16
The following presents the Company’s loans, included purchased loans, by risk rating based on the most recent information available:
Construction | ||||||||||||||||||
(Dollars in thousands) | and | Commercial | Commercial | Residential | Consumer | |||||||||||||
June 30, 2022 |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Total | ||||||
Rating: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Special Mention(1) |
| — |
| |
| |
| — |
| — |
| | ||||||
Substandard |
| — |
| |
| |
| |
| — |
| | ||||||
Doubtful |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Loss |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Construction | ||||||||||||||||||
(Dollars in thousands) | and | Commercial | Commercial | Residential | Consumer | |||||||||||||
December 31, 2021 |
| Development |
| Real Estate |
| and Industrial |
| Real Estate |
| and Other |
| Total | ||||||
Rating: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Special Mention(1) |
| — |
| |
| |
| — |
| — |
| | ||||||
Substandard |
| — |
| |
| |
| |
| — |
| | ||||||
Doubtful |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Loss |
| — |
| — |
| — |
| — |
| — |
| — | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
| (1) | All of the loans classified as Special Mention at June 30, 2022 and December 31, 2021 have been heavily impacted by the ongoing COVID pandemic. While all of these loans are performing, we elected to classify as Special Mention as an abundance of caution as we closely monitor the performance of the underlying businesses. |
Troubled Debt Restructures:
The restructuring of a loan is considered a “troubled debt restructuring” or “TDR” if both (i) the borrower is experiencing financial difficulties and (ii) the Company has granted a concession. Under certain circumstances, it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. When we have modified the terms of a loan, we usually either reduce or defer payments for a period of time. We have not forgiven any material principal amounts on any loan modifications to date. Nonperforming TDRs are generally placed on non-accrual under the same criteria as all other loans.
TDRs as of June 30, 2022 and December 31, 2021 quantified by loan type classified separately as accrual and nonaccrual are presented in the table below.
(Dollars in thousands) | |||||||||
June 30, 2022 |
| Accruing |
| Nonaccrual |
| Total | |||
Commercial real estate | $ | | $ | | $ | | |||
Commercial and industrial |
| |
| — |
| | |||
Total | $ | | $ | | $ | | |||
(Dollars in thousands) | |||||||||
December 31, 2021 |
| Accruing |
| Nonaccrual |
| Total | |||
Commercial real estate | $ | | $ | | $ | | |||
Commercial and industrial |
| |
| — |
| | |||
Total | $ | | $ | | $ | | |||
Our policy is to return nonaccrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also
17
considers payment history of the borrower, but is not dependent upon a specific number of payments. The Company allocated a specific reserve of $
During the three and six months ended June 30, 2022, we modified
Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either defer or decrease monthly payments for a temporary period of time. A summary of the types of concessions for loans classified as troubled debt restructurings are presented in the table below:
(Dollars in thousands) |
| June 30, |
| December 31, | ||
Type of Concession | 2022 | 2021 | ||||
Deferral of payments | $ | |
| $ | | |
Extension of maturity date |
| |
| | ||
Total TDR loans | $ | |
| $ | | |
The following table presents loans by portfolio segment modified as TDRs and the corresponding recorded investment, which includes accrued interest and fees, as of June 30, 2022 and December 31, 2021:
June 30, 2022 | December 31, 2021 | |||||||||
(Dollars in thousands) |
| Number of |
| Recorded |
| Number of |
| Recorded | ||
Type | Loans | Investment | Loans | Investment | ||||||
Commercial real estate |
| | $ | |
| | $ | | ||
Commercial and industrial |
| |
| |
| |
| | ||
Total |
| | $ | |
| | $ | | ||
Modifications in Response to COVID-19
To help mitigate the adverse effects of COVID-19, loan customers were able to apply for a deferral of payments, or portions thereof, for up to
As of June 30, 2022,
18
NOTE 4 – SBA AND USDA LOAN SERVICING
The Company sells the guaranteed portion of certain SBA and USDA loans it originates and continues to service the sold portion of the loan. The portion of the loans sold are not included in the financial statements of the Company. As of June 30, 2022 and December 31, 2021, the unpaid principal balances of serviced loans totaled $
Activity for SBA loan servicing rights are as follows:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Beginning of period | $ | | $ | | $ | | $ | | ||||
Change in fair value |
| ( |
| |
| ( |
| | ||||
End of period, fair value | $ | | $ | | $ | | $ | | ||||
Fair value at June 30, 2022 and December 31, 2021 was determined using discount rates ranging from
The aggregate fair market value of the interest only strips included in SBA servicing assets was $
NOTE 5 – RESIDENTIAL MORTGAGE LOAN SERVICING
Residential mortgage loans serviced for others are not reported as assets. The outstanding principal of these loans at June 30, 2022 and December 31, 2021 was $
Activity for mortgage loan servicing rights and the related valuation allowance are as follows:
(Dollars in thousands) | For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||
Mortgage loan servicing rights: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Beginning of period | $ | | $ | | $ | | $ | | ||||
Additions |
| |
| — |
| |
| — | ||||
Amortization expense |
| ( |
| ( |
| ( |
| ( | ||||
Valuation allowance | | ( | | ( | ||||||||
End of period, carrying value | $ | | $ | | $ | | $ | | ||||
(Dollars in thousands) | For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||
Valuation allowance: |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Beginning balance | $ | | $ | | $ | | $ | | ||||
Additions expensed |
| — |
| |
| — |
| | ||||
Reductions credited to operations | ( | — |
| ( |
| ( | ||||||
Direct write-downs | — | — | — | — | ||||||||
Ending balance | $ | — | $ | | $ | — | $ | | ||||
The fair value of servicing rights was $
19
NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES OTHER BORROWINGS
Advances from the Federal Home Loan Bank (“FHLB”) at June 30, 2022 and December 31, 2021 are summarized as follows:
(Dollars in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Convertible advance maturing August 6, 2029; fixed rate of | $ | — | $ | | ||
Convertible advance maturing November 7, 2029; fixed rate of |
| — |
| | ||
Convertible advance maturing December 5, 2029; fixed rate of |
| — |
| | ||
Convertible advance maturing February 1, 2030; fixed rate of | — | | ||||
Convertible advance maturing August 18, 2031; fixed rate of | — | | ||||
Convertible advance maturing October 7, 2031; fixed rate of | — | | ||||
Convertible advance maturing October 8, 2031; fixed rate of | — | | ||||
Convertible advance maturing October 20, 2031; fixed rate of | — | | ||||
Convertible advance maturing December 17, 2031; fixed rate of | — | | ||||
Convertible advance maturing December 23, 2031; fixed rate of | — | | ||||
Convertible advance maturing December 30, 2031; fixed rate of | — | | ||||
Convertible advance maturing May 6, 2032; fixed rate of | | — | ||||
Convertible advance maturing June 16, 2032; fixed rate of | | — | ||||
Convertible advance maturing June 16, 2032; fixed rate of | | — | ||||
Convertible advance maturing June 23, 2032; fixed rate of | | — | ||||
Convertible advance maturing May 12, 2037; fixed rate of | | — | ||||
Total FHLB advances | $ | | $ | | ||
The FHLB advances outstanding at June 30, 2022 all have a conversion feature that allows the FHLB to call the advances every 3 months ($
At June 30, 2022, the Company had unsecured federal funds lines available with correspondent banks of approximately $
At June 30, 2022, the Company had Federal Reserve Discount Window funds available of approximately $
The Company sells the guaranteed portion of certain SBA loans it originates and continues to service the sold portion of the loan. The Company sometimes retains an interest only strip or servicing fee that is considered to be more than customary market rates. An interest rate strip can result from a transaction when the market rate of the transaction differs from the stated rate on the portion of the loan sold.
The sold portion of SBA loans that have an interest only strip are considered secured borrowings and are included in other borrowings. Secured borrowings at June 30, 2022 and December 31, 2021 were $
NOTE 7 – OPERATING LEASES
The Company has entered into various operating leases for certain branch locations with terms through January 2031. Generally, these leases have initial lease terms of
20
Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets. The Company currently does not have any finance leases.
Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental collateralized borrowing rate provided by the FHLB at the lease commencement date. ROU assets are further adjusted for lease incentives, if any. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy expense in the Consolidated Statements of Income.
The components of lease cost for the three and six months ended June 30, 2022 and 2021 were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) | 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Operating lease cost | $ | | $ | | $ | | $ | | ||||
Variable lease cost |
| |
| |
| |
| | ||||
Short-term lease cost |
| — |
| — |
| — |
| — | ||||
Sublease income |
| — |
| — |
| — |
| — | ||||
Total net lease cost | $ | | $ | | $ | | $ | | ||||
Future maturities of the Company’s operating lease liabilities are summarized as follows:
(Dollars in thousands) |
| ||
Twelve Months Ended: |
| Lease Liability | |
June 30, 2023 | $ | | |
June 30, 2024 |
| | |
June 30, 2025 |
| | |
June 30, 2026 |
| | |
June 30, 2027 |
| | |
After June 30, 2027 |
| | |
Total lease payments |
| | |
Less: interest discount |
| ( | |
Present value of lease liabilities | $ | | |
| |||
Supplemental Lease Information |
| June 30, 2022 |
|
Weighted-average remaining lease term (years) |
| ||
Weighted-average discount rate |
| | % |
Six Months Ended June 30, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
| ||
Operating cash flows from operating leases (cash payments) | $ | | $ | | ||
Operating cash flows from operating leases (lease liability reduction) | $ | | $ | | ||
Operating lease right-of-use assets obtained in exchange for leases entered into during the period | $ | — | $ | | ||
NOTE 8 – INTEREST RATE DERIVATIVES
During third and fourth quarters of 2021 and the first and second quarters of 2022, the Company entered into
21
settlements begin in November 2023 or April 2024.
During October 2021, the Company entered into an interest rate cap agreement with a notional amount of $
The Company is exposed to credit related losses in the event of the nonperformance by the counterparties to the interest rate swaps. The Company performs an initial credit evaluation and ongoing monitoring procedures for all counterparties and currently anticipates that all counterparties will be able to fully satisfy their obligation under the contracts. In addition, the Company may require collateral from counterparties in the form of cash deposits in the event that the fair value of the contracts are positive and such fair value for all positions with the counterparty exceeds the credit support thresholds specified by the underlying agreement. Conversely, the Company is required to post cash deposits as collateral in the event the fair value of the contracts are negative and are below the credit support thresholds. At June 30, 2022, there were
Summary information for the interest rate swaps designated as cash flow hedges is as follows:
| As of or for the | ||
Six Months Ended | |||
(Dollars in thousands) |
| June 30, 2022 | |
Notional Amounts | $ | | |
Weighted-average pay rate | |||
Weighted-average receive rate | |||
Weighted-average maturity | |||
Weighted-average remaining maturity | |||
Net interest (expense) income | $ | ( | |
Summary information for the interest rate caps designated as cash flow hedges is as follows:
| As of or for the | ||
Six Months Ended | |||
(Dollars in thousands) |
| June 30, 2022 | |
Notional Amounts | $ | | |
Rate Cap Premiums | | ||
Cap Rate | |||
Weighted-average maturity | |||
Weighted-average remaining maturity | |||
Net interest (expense) income | $ | ( | |
22
NOTE 9 – LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its 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 the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments where contract amounts represent credit risk as of June 30, 2022 and December 31, 2021 include:
| June 30, |
| December 31, | |||
(Dollars in thousands) |
| 2022 |
| 2021 | ||
Financial instruments whose contract amounts represent credit risk: |
|
|
|
| ||
Commitments to extend credit | $ | | $ | | ||
Standby letters of credit | $ | | $ | | ||
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 to extend credit includes $
Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
The Company maintains cash deposits with a financial institution that during the year are in excess of the insured limitation of the Federal Deposit Insurance Corporation. If the financial institution were not to honor its contractual liability, the Company could incur losses. Management is of the opinion that there is not material risk because of the financial strength of the institution.
NOTE 10 – FAIR VALUE
Financial Instruments Measured at Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value
23
measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following presents the assets and liabilities as of June 30, 2022 and December 31, 2021 which are measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, and the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded:
| June 30, 2022 | ||||||||||||||
Total Gains | |||||||||||||||
(Dollars in thousands) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
| (Losses) | ||||||
Assets |
|
|
|
|
|
|
|
|
|
| |||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
| |||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
| |||||
Obligations of U.S. Government entities and agencies | $ | | $ | — | $ | — | $ | |
|
| |||||
States and political subdivisions |
| | — |
| | — |
|
| |||||||
Mortgage-backed GSE residential |
| | — |
| | — |
|
| |||||||
Total securities available for sale |
| | — |
| |
| |
|
| ||||||
Equity securities | | | — |
| — | ||||||||||
SBA servicing asset |
| | — | — |
| |
|
| |||||||
Interest only strip |
| | — | — |
| |
|
| |||||||
Interest rate derivatives | | — | | — | |||||||||||
$ | | $ | | $ | | $ | | ||||||||
Nonrecurring fair value measurements: |
|
|
|
|
|
|
|
| |||||||
Impaired loans | $ | | $ | — | $ | — | $ | | $ | | |||||
Liabilities | |||||||||||||||
Recurring fair value measurements: | |||||||||||||||
Interest rate swaps | $ | | $ | — | $ | | $ | — | |||||||
24
| December 31, 2021 | ||||||||||||||
Total Gains | |||||||||||||||
(Dollars in thousands) | Total |
| Level 1 |
| Level 2 |
| Level 3 |
| (Losses) | ||||||
Assets |
|
|
|
|
|
|
|
|
|
| |||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
| |||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
| |||||
Obligations of U.S. Government entities and agencies | $ | | $ | — | $ | — | $ | |
|
| |||||
States and political subdivisions |
| | — |
| | — |
|
| |||||||
Mortgage-backed GSE residential |
| | — |
| | — |
|
| |||||||
Total securities available for sale |
| | — |
| |
| |
|
| ||||||
Equity securities | | | — | — | |||||||||||
SBA servicing asset |
| | — | — |
| |
|
| |||||||
Interest only strip |
| | — | — |
| |
|
| |||||||
Interest rate derivatives | | — | | — | |||||||||||
$ | | $ | | $ | | $ | | ||||||||
Nonrecurring fair value measurements: |
|
|
|
|
|
|
|
| |||||||
Impaired loans | $ | | $ | — | $ | — | $ | | $ | ( | |||||
Liabilities | |||||||||||||||
Recurring fair value measurements: | |||||||||||||||
Interest rate swaps | $ | | $ | — | $ | | $ | — | |||||||
The Company used the following methods and significant assumptions to estimate fair value:
Securities, Available for Sale: The Company carries securities available for sale at fair value. For securities where quoted prices are not available (Level 2), the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.
The Company owns certain SBA investments for which the fair value is determined using Level 3 hierarchy inputs and assumptions as the trading market for such securities was determined to be “not active.” This determination was based on the limited number of trades or, in certain cases, the existence of no reported trades. Discounted cash flows are calculated by a third party using interest rate curves that are updated to incorporate current market conditions, including prepayment vectors and credit risk. During time when trading is more liquid, broker quotes are used to validate the model.
Equity Securities: The Company carries equity securities at fair value. Equity securities are measured at fair value using quoted market prices on nationally recognized and foreign securities exchanges (Level 1).
SBA Servicing Assets and Interest Only Strip: The fair values of the Company’s servicing assets are determined using Level 3 inputs. All separately recognized servicing assets and servicing liabilities are initially measured at fair value initially and at each reporting date and changes in fair value are reported in earnings in the period in which they occur.
The fair values of the Company’s interest-only strips are determined using Level 3 inputs. When the Company sells loans to others, it may hold interest-only strips, which is an interest that continues to be held by the transferor in the securitized receivable. It may also obtain servicing assets or assume servicing liabilities that are initially measured at fair value. Gain or loss on sale of the receivables depends in part on both (a) the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the interests that continue to be held by the transferor based on their relative fair value at the date of transfer, and (b) the proceeds received. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for interests that continue to be held by the transferor, so the Company generally estimates fair value based on the future expected cash flows estimated using
25
management’s best estimates of the key assumptions — credit losses and discount rates commensurate with the risks involved.
Interest Rate Derivatives: Exchange-traded derivatives are valued using quoted prices and are classified within Level 1 of the valuation hierarchy. However, few classes of derivative contracts are listed on an exchange; thus, the Company’s derivative positions are valued by third parties using their valuation models and confirmed by the Company. Since the model inputs can be observed in a liquid market and the models do not require significant judgement, such derivative contracts are classified within Level 2 of the fair value hierarchy. The Company’s interest rate derivatives contracts (designated as cash flow hedges) are classified within Level 2.
Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis.
Impaired loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. The value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company if significant, or the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraisals may utilize a single valuation approach or a combination or approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Appraised values are reviewed by management using historical knowledge, market considerations, and knowledge of the client and client’s business.
26
Changes in level 3 fair value measurements
The table below presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2022 and 2021:
Obligations of | SBA | |||||||||||
(Dollars in thousands) | U.S. Government | Servicing | Interest Only | |||||||||
Three Months Ended: |
| Entities and Agencies |
| Asset |
| Strip |
| Liabilities | ||||
Fair value, April 1, 2022 | $ | | $ | | $ | | $ | — | ||||
Total losses included in income |
| — |
| ( |
| ( |
| — | ||||
Settlements |
| — |
| — |
| — |
| — | ||||
Prepayments/paydowns |
| ( |
| — |
| — |
| — | ||||
Transfers in and/or out of level 3 |
| — |
| — |
| — |
| — | ||||
Fair value, June 30, 2022 | $ | | $ | | $ | | $ | — | ||||
Fair value, April 1, 2021 | $ | | $ | | $ | | $ | — | ||||
Total gains included in income |
| — |
| |
| |
| — | ||||
Settlements |
| — |
| — |
| — |
| — | ||||
Prepayments/paydowns |
| ( |
| — |
| — |
| — | ||||
Transfers in and/or out of level 3 |
| — |
| — |
| — |
| — | ||||
Fair value, June 30, 2021 | $ | | $ | | $ | | $ | — | ||||
Six Months Ended: | ||||||||||||
Fair value, January 1, 2022 | $ | | $ | | $ | | $ | — | ||||
Total (losses)/gains included in income |
| — |
| ( |
| |
| — | ||||
Settlements |
| — |
| — |
| — |
| — | ||||
Prepayments/paydowns |
| ( |
| — |
| — |
| — | ||||
Transfers in and/or out of level 3 |
| — |
| — |
| — |
| — | ||||
Fair value, June 30, 2022 | $ | | $ | | $ | | $ | — | ||||
Fair value, January 1, 2021 | $ | | $ | | $ | | $ | — | ||||
Total gains included in income |
| — |
| |
| |
| — | ||||
Settlements |
| — |
| — |
| — |
| — | ||||
Prepayments/paydowns |
| ( |
| — |
| — |
| — | ||||
Transfers in and/or out of level 3 |
| — |
| — |
| — |
| — | ||||
Fair value, June 30, 2021 | $ | | $ | | $ | | $ | — | ||||
27
There were
| Valuation |
| Unobservable |
| General | |
Technique | Input | Range | ||||
June 30, 2022: | ||||||
Recurring: | ||||||
Obligations of U.S. Government entities and agencies |
|
| Discount rate |
| ||
SBA servicing asset and interest only strip |
|
| Prepayment speed |
| ||
Discount rate |
| |||||
Nonrecurring: | ||||||
Impaired loans | Estimated selling costs | |||||
December 31, 2021: |
|
|
|
|
|
|
Recurring: | ||||||
Obligations of U.S. Government entities and agencies |
|
| Discount rate |
| ||
SBA servicing asset and interest only strip |
|
| Prepayment speed |
| ||
| Discount rate |
| ||||
Nonrecurring: | ||||||
Impaired Loans | Estimated selling costs | |||||
The carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2022 and December 31, 2021 are as follows:
Carrying |
| Estimated Fair Value at June 30, 2022 | |||||||||||||
(Dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
| |||||
Cash, due from banks, and federal funds sold | $ | | $ | — | $ | | $ | — | $ | | |||||
Investment securities |
| |
| |
| | |
| | ||||||
FHLB stock |
| |
| — |
| — |
| — |
| N/A | |||||
Loans, net |
| |
| — |
| — |
| |
| | |||||
Accrued interest receivable |
| |
| — |
| |
| |
| | |||||
SBA servicing assets |
| |
| — |
| — |
| |
| | |||||
Interest only strips |
| |
| — |
| — |
| |
| | |||||
Mortgage servicing assets |
| |
| — |
| — |
| |
| | |||||
Interest rate derivatives | | — | | — | | ||||||||||
Financial Liabilities: |
|
|
|
|
|
|
|
| |||||||
Deposits |
| |
| — |
| |
| — |
| | |||||
Federal Home Loan Bank advances | | — | | — | | ||||||||||
Other borrowings |
| |
| — |
| |
| — |
| | |||||
Accrued interest payable |
| |
| — |
| |
| — |
| | |||||
Interest rate derivatives |
| |
| — |
| |
| — |
| | |||||
28
Carrying | Estimated Fair Value at December 31, 2021 | ||||||||||||||
(Dollars in thousands) |
| Amount |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
| |||||
Cash, due from banks, and federal funds sold | $ | | $ | — | $ | | $ | — | $ | | |||||
Investment securities |
| |
| |
| |
| |
| | |||||
FHLB stock |
| |
| — |
| — |
| — |
| N/A | |||||
Loans, net |
| |
| — |
| — |
| |
| | |||||
Accrued interest receivable |
| |
| — |
| |
| |
| | |||||
SBA servicing asset |
| |
| — |
| — |
| |
| | |||||
Interest only strips |
| |
| — |
| — |
| |
| | |||||
Mortgage servicing assets |
| | — |
| — |
| |
| | ||||||
Interest rate derivatives | | — | | — | | ||||||||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
| ||||||
Deposits |
| |
| — |
| |
| — |
| | |||||
Federal Home Loan Bank advances | | — | | — | | ||||||||||
Other borrowings |
| |
| — |
| |
| — |
| | |||||
Accrued interest payable |
| |
| — |
| |
| — |
| | |||||
Interest rate derivatives |
| |
| — |
| |
| — |
| | |||||
NOTE 11 – REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer of
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
29
The Company’s actual capital amounts (in thousands) and ratios are also presented in the following table:
To Be Well Capitalized |
| |||||||||||||
Minimum Capital Required - | Under Prompt Corrective |
| ||||||||||||
Actual | Basel III | Action Provisions: |
| |||||||||||
(Dollars in thousands) |
| Amount |
| Ratio |
| Amount ≥ |
| Ratio ≥ |
| Amount ≥ |
| Ratio ≥ |
| |
As of June 30, 2022: | ||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||
Consolidated | $ | | | % | | | % | |
| | % | |||
Bank |
| | | % | | | |
| | |||||
Tier I Capital (to Risk Weighted Assets) | ||||||||||||||
Consolidated |
| | | % | | | % | |
| | % | |||
Bank |
| | | % | | | |
| | |||||
Common Tier 1 (CET1) | ||||||||||||||
Consolidated |
| | | % | | | % | |
| | % | |||
Bank |
| | | % | | | |
| | |||||
Tier 1 Capital (to Average Assets) | ||||||||||||||
Consolidated |
| | | % | | | % | |
| | % | |||
Bank |
| | | % | | | |
| | |||||
As of December 31, 2021: | ||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||
Consolidated | $ | |
| | % | | | % | N/A |
| N/A | |||
Bank |
| |
| | % | | | |
| | % | |||
Tier I Capital (to Risk Weighted Assets) | ||||||||||||||
Consolidated |
| |
| | % | | | % | N/A |
| N/A | |||
Bank |
| |
| | % | | | |
| | % | |||
Common Tier 1 (CET1) | ||||||||||||||
Consolidated |
| |
| | % | | | % | N/A |
| N/A | |||
Bank |
| |
| | % | | | |
| | % | |||
Tier 1 Capital (to Average Assets) | ||||||||||||||
Consolidated |
| |
| | % | | | % | N/A |
| N/A | |||
Bank |
| |
| | % | | | |
| | % | |||
NOTE 12 – STOCK BASED COMPENSATION
The Company adopted the MetroCity Bankshares, Inc. 2018 Stock Option Plan (the “Prior Option Plan”) effective as of April 18, 2018, and the Prior Option Plan was approved by the Company’s shareholders on May 30, 2018. The Prior Option Plan provided for awards of stock options to officers, employees and directors of the Company. The Board of Directors of the Company determined that it was in the best interests of the Company and its shareholders to amend and restate the Prior Option Plan to provide for the grant of additional types of awards. Acting pursuant to its authority under the Prior Option Plan, the Board of Directors approved and adopted the MetroCity Bankshares, Inc. 2018 Omnibus Incentive Plan (the “2018 Incentive Plan”), which constitutes the amended and restated version of the Prior Option Plan. The Board of Directors has reserved
30
Stock Options
A summary of stock option activity for the six months ended June 30, 2022 is presented below:
Weighted | |||||
Average | |||||
| Shares |
| Exercise Price | ||
Outstanding at January 1, 2022 |
| | $ | | |
Granted |
| — |
| — | |
Exercised |
| — |
| — | |
Forfeited |
| — |
| — | |
Outstanding at June 30, 2022 |
| | $ | | |
During the three months ended June 30, 2022 and 2021, the Company recognized compensation expense for stock options of $
Restricted Stock Units
The Company has periodically issued restricted stock units to its directors, executive officers and certain employees under the 2018 Incentive Plan. Compensation expense for restricted stock is based upon the grant date fair value of the shares and is recognized over the vesting period of the units. Shares of restricted stock units issued to officers and employees vest in annual installments on the first
A summary of restricted stock activity for the six months ended June 30, 2022 is presented below:
|
| Weighted- | |||
Average Grant- | |||||
Nonvested Shares | Shares | Date Fair Value | |||
Nonvested at January 1, 2022 |
| | $ | | |
Granted |
| |
| | |
Vested |
| ( |
| | |
Forfeited |
| — |
| — | |
Nonvested at June 30, 2022 |
| | $ | | |
During the three months ended June 30, 2022 and 2021, the Company recognized compensation expense for restricted stock of $
31
NOTE 13 – EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings per common share for the periods indicated:
Three Months Ended |
| Six Months Ended | ||||||||||
June 30, | June 30, | |||||||||||
(Dollars in thousands, except per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Basic earnings per share | ||||||||||||
Net Income | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding |
| |
| |
| |
| | ||||
Basic earnings per common share | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share | ||||||||||||
Net Income | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding for basic earnings per common share |
| |
| |
| |
| | ||||
Add: Dilutive effects of restricted stock and options |
| |
| |
| |
| | ||||
Average shares and dilutive potential common shares |
| |
| |
| |
| | ||||
Diluted earnings per common share | $ | | $ | | $ | | $ | | ||||
There were
32
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, 2021 through June 30, 2022 and on our results of operations for the three and six months ended June 30, 2022 and 2021. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2021 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 Exchange 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, including with regard to developments related to the continuing COVID-19 (and the variants thereof) pandemic. 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 risk of inflation and interest rate increases resulting from monetary and fiscal stimulus responses, 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; |
| ● | the risk that a future economic downturn and contraction, including a recession, could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of rising interest rates, supply chain challenges and inflation; |
| ● | 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 |
33
| 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 System (“FRB”), 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; |
| ● | uncertainty related to the transition away from the London Inter-bank Offered Rate (“LIBOR”); |
34
| ● | the continued impact of the COVID-19 pandemic 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 Coronavirus Aid, Relief, and Economic Security (“CARES”) Act), including the risk of inflation and interest rate increases resulting from monetary and fiscal stimulus responses; |
| ● | adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions related to the COVID-19 pandemic, including as a result of participation in and execution of government programs related to the COVID-19 pandemic, including, but not limited to, the Paycheck Protection Program (“PPP”); |
| ● | continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies (including fintech 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, which may be impacted as a result of labor shortages; |
| ● | 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; |
35
| ● | 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 Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage; |
| ● | changes in our accounting standards; |
| ● | changes in tariffs and trade barriers; |
| ● | changes in federal tax law or policy; |
| ● | the effects of war or other conflicts (including Russia’s military action in Ukraine), acts of terrorism, natural disasters, health emergencies, epidemics or pandemics, or other catastrophic events that may affect general economic conditions; and |
| ● | other risks and factors identified in our Annual Report on Form 10-K for the year ended December 31, 2021, including those identified under the heading “Risk Factors”, and detailed from time to time in our other filings with the U.S. Securities and Exchange Commission. |
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
The Company continues to closely monitor the effects of the ongoing coronavirus (COVID-19) pandemic on our loan and deposit customers, and continues to assess the risks in our loan portfolio and work with our customers to reduce the pandemic’s impact on them while minimizing losses for the Company. Meanwhile, the Company remains focused on improving shareholder value, managing credit exposure, monitoring expenses, enhancing the customer experience and supporting the communities it serves.
We 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 twenty-four months. As of June 30, 2022, we had no commercial or SBA customers under an approved payment deferral related to these loan programs.
As of June 30, 2022, our residential real estate loan portfolio made up 75.4% of our total loan portfolio and had a weighted average amortized loan-to-collateral value ratio (“LTV”) of approximately 54.6%. As of June 30, 2022, we had no residential mortgages on hardship payment deferrals.
As a preferred SBA lender, we participated in the PPP created under the CARES Act and implemented by the SBA to help provide loans to our business customers in need. During the first round of PPP funding in the second and third quarters of 2020, the Company approved and funded over 1,800 PPP loans totaling $97.0 million. These PPP loans were funded with our current cash balances and all PPP loans are fully guaranteed by the SBA. As of August 2, 2022, the SBA had granted forgiveness for these PPP loans totaling $96.6 million, or 99.6% of PPP loans funded
The Economic Aid Act, signed into law on December 27, 2020, authorized an additional $284.5 billion in new PPP funding and extended the authority of lenders to make PPP loans through May 31, 2021. We participated in this new round
36
of PPP loan funding by offering first and second draw loans. The Company approved and funded over 1,000 PPP loans totaling $61.8 million under this new round of PPP loan funding. As of August 2, 2022, the SBA had granted forgiveness for these PPP loans totaling $56.4 million, or 91.3% of PPP loans funded.
Despite the progress and while the overall outlook has improved based on the availability of the vaccine to all adults and older children, the emergence and spread of variants remains as a risk to containing and ending the pandemic, as well as to full economic recovery in our footprint. Even with improvements in certain economic indicators, significant uncertainty remains over the timing and scope of additional government stimulus packages, and the speed of the recovery from the downturn on our business, customers, and the economy as a whole remains uncertain.
Critical Accounting Policies and Estimates
Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting policies to include the allowance for loan losses, servicing assets, fair value of financial instruments and income taxes.
Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company's Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and Note 1 of our consolidated financial statements as of December 31, 2021 in the Company’s 2021 Form 10-K. As of June 30, 2022, there have been no significant changes to our critical accounting estimates.
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 June 30, 2022, we had total assets of $3.17 billion, total loans of $2.77 billion, total deposits of $2.40 billion and total shareholders’ equity of $323.1 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.
37
Selected Financial Data
The following table sets forth unaudited selected financial data for the most recent five quarters and for the six months ended June 30, 2022 and 2021. 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.
38
As of or for the Three Months Ended | As of or for the Six Months Ended |
| ||||||||||||||||||||
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||||||
(Dollars in thousands, except per share data) | 2022 | 2022 | 2021 | 2021 | 2021 | 2022 | 2021 |
| ||||||||||||||
Selected income statement data: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Interest income | $ | 33,025 | $ | 31,953 | $ | 30,857 | $ | 29,324 | $ | 25,888 | $ | 64,978 | $ | 48,560 | ||||||||
Interest expense |
| 2,805 |
| 1,300 |
| 1,236 |
| 1,135 |
| 1,063 |
| 4,105 |
| 2,201 | ||||||||
Net interest income |
| 30,220 |
| 30,653 |
| 29,621 |
| 28,189 |
| 24,825 |
| 60,873 |
| 46,359 | ||||||||
Provision for loan losses |
| — |
| 104 |
| 546 |
| 2,579 |
| 2,205 |
| 104 |
| 3,804 | ||||||||
Noninterest income |
| 4,653 |
| 7,656 |
| 7,491 |
| 9,532 |
| 8,594 |
| 12,309 |
| 16,780 | ||||||||
Noninterest expense |
| 13,119 |
| 12,179 |
| 12,512 |
| 13,111 |
| 12,093 |
| 25,298 |
| 22,801 | ||||||||
Income tax expense |
| 5,654 |
| 6,597 |
| 6,609 |
| 5,149 |
| 4,728 |
| 12,251 |
| 9,160 | ||||||||
Net income |
| 16,100 |
| 19,429 |
| 17,445 |
| 16,882 |
| 14,393 |
| 35,529 |
| 27,374 | ||||||||
Per share data: |
|
|
|
|
|
|
|
| ||||||||||||||
Basic income per share | $ | 0.63 | $ | 0.76 | $ | 0.69 | $ | 0.66 | $ | 0.56 | $ | 1.40 | $ | 1.07 | ||||||||
Diluted income per share | $ | 0.63 | $ | 0.76 | $ | 0.68 | $ | 0.66 | $ | 0.56 | $ | 1.38 | $ | 1.06 | ||||||||
Dividends per share | $ | 0.15 | $ | 0.15 | $ | 0.14 | $ | 0.12 | $ | 0.10 | $ | 0.30 | $ | 0.20 | ||||||||
Book value per share (at period end) | $ | 12.69 | $ | 12.19 | $ | 11.40 | $ | 10.84 | $ | 10.33 | $ | 12.69 | $ | 10.33 | ||||||||
Shares of common stock outstanding |
| 25,451,125 |
| 25,465,236 |
| 25,465,236 |
| 25,465,236 |
| 25,578,668 |
| 25,451,125 |
| 25,578,668 | ||||||||
Weighted average diluted shares |
| 25,729,156 |
| 25,719,035 |
| 25,720,128 |
| 25,729,043 |
| 25,833,328 |
| 25,746,691 |
| 25,840,530 | ||||||||
Performance ratios: |
|
|
|
|
|
|
|
| ||||||||||||||
Return on average assets |
| 2.16 | % | 2.52 | % | 2.33 | % |
| 2.61 | % |
| 2.53 | % |
| 2.34 | % |
| 2.57 | % | |||
Return on average equity |
| 20.65 |
| 26.94 |
| 24.80 |
| 25.23 |
| 22.51 |
| 23.67 |
| 21.94 | ||||||||
Dividend payout ratio |
| 23.85 |
| 19.76 |
| 20.52 |
| 18.24 |
| 17.95 |
| 21.62 |
| 18.88 | ||||||||
Yield on total loans |
| 4.95 |
| 5.00 |
| 4.93 |
| 5.16 |
| 5.21 |
| 4.98 |
| 5.21 | ||||||||
Yield on average earning assets |
| 4.65 |
| 4.34 |
| 4.32 |
| 4.75 |
| 4.79 |
| 4.49 |
| 4.82 | ||||||||
Cost of average interest bearing liabilities |
| 0.56 |
| 0.24 |
| 0.24 |
| 0.28 |
| 0.31 |
| 0.40 |
| 0.34 | ||||||||
Cost of deposits |
| 0.55 |
| 0.27 |
| 0.27 |
| 0.28 |
| 0.29 |
| 0.41 |
| 0.32 | ||||||||
Net interest margin |
| 4.26 |
| 4.16 |
| 4.15 |
| 4.57 |
| 4.60 |
| 4.21 |
| 4.60 | ||||||||
Efficiency ratio(1) |
| 37.62 |
| 31.79 |
| 33.71 |
| 34.76 |
| 36.19 |
| 34.57 |
| 36.11 | ||||||||
Asset quality data (at period end): |
|
|
|
|
|
|
|
| ||||||||||||||
Net charge-offs to average loans held for investment |
| 0.00 | % |
| 0.06 | % |
| 0.01 | % |
| 0.00 | % |
| 0.02 | % |
| 0.03 | % |
| 0.01 | % | |
Nonperforming assets to gross loans and OREO |
| 1.22 |
| 0.63 |
| 0.61 |
| 0.55 |
| 0.67 |
| 1.22 |
| 0.67 | ||||||||
ALL to nonperforming loans |
| 54.79 |
| 134.39 |
| 143.69 |
| 189.44 |
| 147.82 |
| 54.79 |
| 147.82 | ||||||||
ALL to loans held for investment |
| 0.60 |
| 0.66 |
| 0.67 |
| 0.69 |
| 0.66 |
| 0.60 |
| 0.66 | ||||||||
39
Balance sheet and capital ratios: |
|
|
|
|
|
|
|
| ||||||||||||||
Gross loans held for investment to deposits |
| 115.86 | % |
| 105.72 | % |
| 110.98 | % |
| 112.15 | % |
| 106.31 | % |
| 115.86 | % |
| 106.31 | % | |
Noninterest bearing deposits to deposits |
| 25.87 |
| 25.84 |
| 26.18 |
| 30.32 |
| 31.30 |
| 25.87 |
| 31.30 | ||||||||
Common equity to assets |
| 10.20 |
| 9.88 |
| 9.34 |
| 10.04 |
| 10.50 |
| 10.20 |
| 10.50 | ||||||||
Leverage ratio |
| 10.31 |
| 9.46 |
| 9.44 |
| 10.34 |
| 11.14 |
| 10.31 |
| 11.14 | ||||||||
Common equity tier 1 ratio |
| 16.70 |
| 17.24 |
| 16.76 |
| 16.61 |
| 17.75 |
| 16.70 |
| 17.75 | ||||||||
Tier 1 risk-based capital ratio |
| 16.70 |
| 17.24 |
| 16.76 |
| 16.61 |
| 17.75 |
| 16.70 |
| 17.75 | ||||||||
Total risk-based capital ratio |
| 17.60 |
| 18.22 |
| 17.77 |
| 17.64 |
| 18.72 |
| 17.60 |
| 18.72 | ||||||||
Mortgage and SBA loan data: |
|
|
|
|
|
|
|
| ||||||||||||||
Mortgage loans serviced for others | $ | 589,500 | $ | 605,112 | $ | 608,208 | $ | 669,358 | $ | 746,660 | $ | 589,500 | $ | 746,660 | ||||||||
Mortgage loan production |
| 326,968 |
| 162,933 |
| 237,195 |
| 368,790 |
| 326,507 |
| 489,901 |
| 590,205 | ||||||||
Mortgage loan sales |
| 37,928 |
| 56,987 |
| — |
| — |
| — |
| 94,915 |
| — | ||||||||
SBA loans serviced for others |
| 504,894 |
| 528,227 |
| 542,991 |
| 549,818 |
| 549,238 |
| 504,894 |
| 549,238 | ||||||||
SBA loan production(2) |
| 21,407 |
| 50,689 |
| 52,727 |
| 85,265 |
| 67,376 |
| 72,096 |
| 147,842 | ||||||||
SBA loan sales |
| — |
| 22,898 |
| 30,169 |
| 37,984 |
| 34,158 |
| 22,898 |
| 56,557 |
| (1) | Represents noninterest expense divided by total revenue (net interest income and total noninterest income). |
| (2) | The amounts presented for the three and six months ended June 30, 2021 include PPP loan originations totaling $14.1 million and $60.8 million, respectively. |
Results of Operations
We recorded net income of $16.1 million for the three months ended June 30, 2022 compared to $14.4 million for the same period in 2021, an increase of $1.7 million, or 11.9%. For the six months ended June 30, 2022, we recorded net income of $35.5 million compared to $27.4 million for the six months ended June 30, 2021, an increase of $8.1 million, or 29.8%.
Basic and diluted earnings per common share for the three months ended June 30, 2022 was $0.63 compared to $0.56 for both the basic and diluted earnings per common share for the same period in 2021. For the six months ended June 30, 2022, basic and diluted earnings per common share was $1.40 and $1.38, respectively, compared to $1.07 and $1.06 for the same period a year ago, respectively.
Interest Income
Interest income totaled $33.0 million for the three months ended June 30, 2022, an increase of $7.1 million, or 27.6%, from the three months ended June 30, 2021, primarily due to an increase in average loan balances of $636.4 million. We also recognized PPP fee income of $341,000 during the three months ended June 30, 2022 compared to PPP fee income of $1.7 million during the three months ended June 30, 2021. The increase in average loans is due to an increase of $65.7 million in average commercial real estate loans and an increase of $677.2 million in average residential mortgage loans, offset by a decrease of $14.5 million in average construction and development loans and a decrease of $92.0 million in commercial and industrial loans. As compared to the three months ended June 30, 2021, the yield on average interest-earning assets decreased by 14 basis points to 4.65% from 4.79% with the yield on average loans decreasing by 26 basis points and the yield on average total investments increasing by 91 basis points.
40
Interest income was $65.0 million for the six months ended June 30, 2022 compared to $48.6 million for the same period in 2021, an increase of $16.4 million, or 33.8%, primarily due to the increase in average loan balances of $717.0 million. The increase in average loans is due to an increase of $61.6 million in average commercial real estate loans and an increase of $757.3 million in average residential mortgage loans, offset by a decrease of $12.5 million in average construction and development loans and a decrease of $89.5 million in average commercial and industrial loans. As compared to the six months ended June 30, 2021, the yield on average interest-earning assets decreased by 33 basis points to 4.49% from 4.82% with the yield on average loans decreasing by 23 basis points and the yield on average total investments increasing by 33 basis points.
Interest Expense
Interest expense for the three months ended June 30, 2022 increased $1.7 million, or 163.9%, to $2.8 million compared to interest expense of $1.1 million for the three months ended June 30, 2021, primarily due to a $465.7 million increase in average interest-bearing deposit balances coupled with a 26 basis points increase in deposit costs. The 26 basis points increase in deposit costs included a 41 basis point increase in the yield on average money market deposits and a five basis points increase in the yield on average time deposits. Average money market deposits increased by $507.1 million while average time deposits decreased by $131.8 million. Interest expense totaled $4.1 million for the six months ended June 30, 2022, an increase of $1.9 million, or 86.5%, compared to the same period in 2021, primarily due to a $530.4 million increase in average interest-bearing deposit balances coupled with a 21 basis points increase in money market deposit costs.
Average borrowings outstanding for the three months ended June 30, 2022 increased by $152.3 million with an increase in rate of seven basis points compared to the three months ended June 30, 2021. Average borrowings outstanding for the six months ended June 30, 2022 increased by $266.0 million with a decrease in rate of 31 basis points compared to the same period in 2021.
Net Interest Margin
The net interest margin for the three months ended June 30, 2022 decreased by 34 basis points to 4.26% from 4.60% for the three months ended June 30, 2021, primarily due to a 14 basis points decrease in the yield on average interest-earning assets of $2.85 billion and a 25 basis points increase in the cost of average interest-bearing liabilities of $2.00 billion. Average earning assets for the three months ended June 30, 2022 increased by $679.5 million from the same period in 2021, primarily due to a $636.4 million increase in average loans and a $24.4 million increase in average interest-earning cash accounts. Average interest-bearing liabilities for the three months ended June 30, 2022 increased by $618.1 million from the three months ended June 30, 2021, driven by an increase in average interest-bearing deposits of $465.7 million and an increase in average borrowings of $152.3 million. The inclusion of PPP loan average balances, interest and fees had a three basis points impact on both the yield on average loans and the net interest margin for the three months ended June 30, 2022. The inclusion of PPP loan average balances, interest and fees had a 14 basis point impact on the yield on average loans and a 16 basis points impact on the net interest margin for the three months ended June 30, 2021.
The net interest margin for the six months ended June 30, 2022 decreased by 39 basis points to 4.21% from 4.60% for the six months ended June 30, 2021, primarily due to a 33 basis point decrease in the yield of average interest-earnings assets of $2.92 billion and a six basis points increase in the cost of interest-bearing liabilities of $2.09 billion. Average earning assets increased by $884.2 million, primarily due to a $717.0 million increase in average loans and a $148.5 million increase in average interest-earning cash accounts. Average interest-bearing liabilities increased by $796.4 million, primarily driven by an increase in average interest-bearing deposits of $530.4 million, as well as an increase in average borrowings of $266.0 million. The inclusion of PPP loan average balances, interest and fees had a four basis point impact on both the yield on average loans and the net interest margin for the six months ended June 30, 2022. The inclusion of PPP loan average balances, interest and fees had an eight basis point impact on the yield on average loans and a 10 basis points impact on the net interest margin for the six months ended June 30, 2021.
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
41
interest rates, competition and the shape of the interest rate yield curve. The decline in our net interest margin is primarily the result of the decrease in the yield on our interest-earning assets and the increase in our deposit costs.
Average Balances, Interest and Yields
The following tables present, for the three and six months ended June 30, 2022 and 2021, 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 June 30, |
| ||||||||||||||||
2022 | 2021 |
| |||||||||||||||
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) | $ | 193,955 | $ | 592 |
| 1.22 | % | $ | 169,578 | $ | 76 |
| 0.18 | % | |||
Investment securities |
| 35,754 |
| 123 |
| 1.38 |
| 17,080 |
| 84 |
| 1.97 | |||||
Total investments |
| 229,709 |
| 715 |
| 1.25 |
| 186,658 |
| 160 |
| 0.34 | |||||
Construction and development |
| 32,647 |
| 414 |
| 5.09 |
| 47,173 |
| 615 |
| 5.23 | |||||
Commercial real estate |
| 575,917 |
| 8,403 |
| 5.85 |
| 510,241 |
| 7,344 |
| 5.77 | |||||
Commercial and industrial |
| 54,423 |
| 915 |
| 6.74 |
| 146,408 |
| 2,558 |
| 7.01 | |||||
Residential real estate |
| 1,952,730 |
| 22,545 |
| 4.63 |
| 1,275,555 |
| 15,180 |
| 4.77 | |||||
Consumer and other |
| 266 |
| 33 |
| 49.76 |
| 179 |
| 31 |
| 69.46 | |||||
Gross loans(2) |
| 2,615,983 |
| 32,310 |
| 4.95 |
| 1,979,556 |
| 25,728 |
| 5.21 | |||||
Total earning assets |
| 2,845,692 |
| 33,025 |
| 4.65 |
| 2,166,214 |
| 25,888 |
| 4.79 | |||||
Noninterest-earning assets |
| 146,669 |
|
|
|
| 112,161 |
| |||||||||
Total assets |
| 2,992,361 |
|
|
|
| 2,278,375 |
| |||||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||||
NOW and savings deposits |
| 197,460 | 102 |
| 0.21 |
| 107,072 |
| 53 |
| 0.20 | ||||||
Money market deposits |
| 1,166,272 | 1,860 |
| 0.64 |
| 659,173 |
| 373 |
| 0.23 | ||||||
Time deposits |
| 389,449 | 422 |
| 0.43 |
| 521,217 |
| 493 |
| 0.38 | ||||||
Total interest-bearing deposits |
| 1,753,181 |
| 2,384 |
| 0.55 |
| 1,287,462 |
| 919 |
| 0.29 | |||||
Borrowings |
| 246,779 | 421 |
| 0.68 |
| 94,435 |
| 144 |
| 0.61 | ||||||
Total interest-bearing liabilities |
| 1,999,960 |
| 2,805 |
| 0.56 |
| 1,381,897 |
| 1,063 |
| 0.31 | |||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
| ||||||||
Noninterest-bearing deposits |
| 611,763 |
|
|
|
| 561,170 |
|
| ||||||||
Other noninterest-bearing liabilities |
| 67,979 |
|
|
|
| 78,822 |
|
| ||||||||
Total noninterest-bearing liabilities |
| 679,742 |
|
|
|
| 639,992 |
|
| ||||||||
Shareholders' equity |
| 312,659 |
|
|
|
| 256,486 |
|
| ||||||||
Total liabilities and shareholders' equity | $ | 2,992,361 |
|
|
| $ | 2,278,375 | ||||||||||
Net interest income |
|
| $ | 30,220 |
|
| $ | 24,825 | |||||||||
Net interest spread |
|
|
|
|
| 4.09 |
|
| 4.48 | ||||||||
Net interest margin |
|
|
|
|
| 4.26 |
|
| 4.60 | ||||||||
| (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. |
42
Six Months Ended June 30, |
| ||||||||||||||||
2022 | 2021 |
| |||||||||||||||
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) | $ | 296,230 | $ | 956 |
| 0.65 | % | $ | 147,760 | $ | 149 |
| 0.20 | % | |||
Investment securities |
| 36,295 |
| 253 |
| 1.41 |
| 17,619 |
| 183 |
| 2.09 | |||||
Total investments |
| 332,525 |
| 1,209 |
| 0.73 |
| 165,379 |
| 332 |
| 0.40 | |||||
Construction and development |
| 31,621 |
| 792 |
| 5.05 |
| 44,081 |
| 1,147 |
| 5.25 | |||||
Commercial real estate |
| 562,598 |
| 16,290 |
| 5.84 |
| 500,989 |
| 14,422 |
| 5.81 | |||||
Commercial and industrial |
| 59,906 |
| 1,991 |
| 6.70 |
| 149,403 |
| 4,478 |
| 6.04 | |||||
Residential real estate |
| 1,929,915 |
| 44,619 |
| 4.66 |
| 1,172,597 |
| 28,109 |
| 4.83 | |||||
Other |
| 236 |
| 77 |
| 65.80 |
| 177 |
| 72 |
| 82.03 | |||||
Gross loans(2) |
| 2,584,276 |
| 63,769 |
| 4.98 |
| 1,867,247 |
| 48,228 |
| 5.21 | |||||
Total earning assets |
| 2,916,801 |
| 64,978 |
| 4.49 |
| 2,032,626 |
| 48,560 |
| 4.82 | |||||
Noninterest-earning assets |
| 144,368 |
|
|
|
| 111,665 |
|
|
|
| ||||||
Total assets |
| 3,061,169 |
|
|
|
| 2,144,291 |
|
|
|
| ||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||||
NOW and savings deposits |
| 192,388 |
| 178 |
| 0.19 |
| 99,732 |
| 99 |
| 0.20 | |||||
Money market deposits |
| 1,126,233 |
| 2,517 |
| 0.45 |
| 597,028 |
| 711 |
| 0.24 | |||||
Time deposits |
| 415,196 |
| 828 |
| 0.40 |
| 506,646 |
| 1,101 |
| 0.44 | |||||
Total interest-bearing deposits |
| 1,733,817 |
| 3,523 |
| 0.41 |
| 1,203,406 |
| 1,911 |
| 0.32 | |||||
Borrowings |
| 356,951 |
| 582 |
| 0.33 |
| 90,978 |
| 290 |
| 0.64 | |||||
Total interest-bearing liabilities |
| 2,090,768 |
| 4,105 |
| 0.40 |
| 1,294,384 |
| 2,201 |
| 0.34 | |||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Noninterest-bearing deposits |
| 600,117 |
|
|
|
| 522,645 |
|
|
|
| ||||||
Other noninterest-bearing liabilities |
| 67,642 |
|
|
|
| 75,695 |
|
|
|
| ||||||
Total noninterest-bearing liabilities |
| 667,759 |
|
|
|
| 598,340 |
|
|
|
| ||||||
Shareholders' equity |
| 302,642 |
|
|
|
| 251,567 |
|
|
|
| ||||||
Total liabilities and shareholders' equity | $ | 3,061,169 |
|
|
| $ | 2,144,291 |
|
|
|
| ||||||
Net interest income |
|
| $ | 60,873 |
|
|
| $ | 46,359 |
|
| ||||||
Net interest spread |
|
|
|
|
| 4.09 |
|
|
|
|
| 4.48 | |||||
Net interest margin |
|
|
|
|
| 4.21 |
|
|
|
|
| 4.60 | |||||
| (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. |
43
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 June 30, 2022 Compared to Three Months Ended June 30, 2021 | ||||||||||
Increase (Decrease) Due to Change in: | ||||||||||
(Dollars in thousands) |
| Volume |
| Yield/Rate |
| Total Change |
| |||
Earning assets: |
|
|
|
|
|
|
| |||
Federal funds sold and other investments(1) | $ | 163 | $ | 353 |
| $ | 516 | |||
Investment securities |
| 29 |
| 10 |
|
| 39 | |||
Total investments |
| 192 |
| 363 |
|
| 555 | |||
Construction and development |
| (185) | (16) |
|
| (201) | ||||
Commercial real estate |
| 1,110 | (51) |
|
| 1,059 | ||||
Commercial and industrial |
| (1,592) | (51) |
|
| (1,643) | ||||
Residential real estate |
| 7,774 | (409) |
|
| 7,365 | ||||
Consumer and Other |
| (4) | 6 |
|
| 2 | ||||
Gross loans(2) |
| 7,103 |
| (521) |
|
| 6,582 | |||
Total earning assets |
| 7,295 |
| (158) |
|
| 7,137 | |||
Interest-bearing liabilities: |
|
|
|
|
|
|
| |||
NOW and savings deposits |
| 37 | 12 |
|
| 49 | ||||
Money market deposits |
| 606 | 881 |
|
| 1,487 | ||||
Time deposits |
| (78) | 7 |
|
| (71) | ||||
Total interest-bearing deposits |
| 565 |
| 900 |
|
| 1,465 | |||
Borrowings |
| 259 | 18 |
|
| 277 | ||||
Total interest-bearing liabilities |
| 824 |
| 918 |
|
| 1,742 | |||
Net interest income | $ | 6,471 | $ | (1,076) |
| $ | 5,395 | |||
| (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. |
44
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 | |||||||||
Increase (Decrease) Due to Change in: | |||||||||
(Dollars in thousands) |
| Volume |
| Yield/Rate |
| Total Change | |||
Earning assets: |
|
|
|
|
|
| |||
Federal funds sold and other investments(1) | $ | 414 | $ | 393 |
| $ | 807 | ||
Investment securities |
| 64 |
| 6 |
|
| 70 | ||
Total investments |
| 478 |
| 399 |
|
| 877 | ||
Construction and development |
| (273) | (82) |
|
| (355) | |||
Commercial real estate |
| 2,170 | (302) |
|
| 1,868 | |||
Commercial and industrial |
| (2,984) | 497 |
|
| (2,487) | |||
Residential real estate |
| 17,692 | (1,182) |
|
| 16,510 | |||
Consumer and Other |
| (2) | 7 |
|
| 5 | |||
Gross loans(2) |
| 16,603 |
| (1,062) |
|
| 15,541 | ||
Total earning assets |
| 17,081 |
| (663) |
|
| 16,418 | ||
Interest-bearing liabilities: |
|
|
|
|
|
|
| ||
NOW and savings deposits |
| 77 | 2 |
|
| 79 | |||
Money market deposits |
| 1,011 | 795 |
|
| 1,806 | |||
Time deposits |
| (118) | (155) |
|
| (273) | |||
Total interest-bearing deposits |
| 970 |
| 642 |
|
| 1,612 | ||
Borrowings |
| 499 | (207) |
|
| 292 | |||
Total interest-bearing liabilities |
| 1,469 |
| 435 |
|
| 1,904 | ||
Net interest income | $ | 15,612 | $ | (1,098) |
| $ | 14,514 | ||
| (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 provision for loan losses of $0 and $104,000 during the three and six months ended June 30, 2022 compared to $2.2 million and $3.8 million during the same periods in 2021. The decrease in our provision for loan losses in the three and six months ended June 30, 2022 was primarily due to no provision being added during these periods for the uncertainties in our loan portfolio caused by the ongoing COVID-19 pandemic. The decrease in this COVID-19 provision was sufficient to cover the provision needed for our loan growth during these periods. During the three and six months ended June 30, 2021, the provision recorded was primarily related to the additional reserves added for the uncertainties caused by the ongoing COVID-19 pandemic, as well as the significant growth in our loan portfolio. Our ALL as a percentage of gross loans for the periods ended June 30, 2022 and 2021 was 0.60% and 0.66%, 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 June 30, 2022 was $4.7 million, a decrease of $3.9 million, or 45.9%, compared to $8.6 million for the three months ended June 30, 2021. Noninterest income for the six months ended June 30, 2022 was $12.3 million, a decrease of $4.5 million, or 26.6%, compared to $16.8 million for the six months ended June 30, 2021.
The following table sets forth the major components of our noninterest income for the three and six months ended June 30, 2022 and 2021:
45
Three Months Ended June 30, | Six Months Ended June 30, |
| |||||||||||||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| $ Change |
| % Change |
| 2022 |
| 2021 |
| $ Change |
| % Change |
| ||||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Service charges on deposit accounts | $ | 518 | $ | 411 | $ | 107 |
| 26.0 | % | $ | 999 | $ | 784 | $ | 215 |
| 27.4 | % | |||||
Other service charges, commissions and fees |
| 3,647 |
| 3,877 |
| (230) |
| (5.9) |
| 5,806 |
| 7,275 |
| (1,469) |
| (20.2) | |||||||
Gain on sale of residential mortgage loans |
| 806 |
| — |
| 806 |
| 100.0 |
| 2,017 |
| — |
| 2,017 |
| 100.0 | |||||||
Mortgage servicing income, net |
| (5) |
| (957) |
| 952 |
| (99.5) |
| 96 |
| (791) |
| 887 |
| (112.1) | |||||||
Gain on sale of SBA loans |
| — |
| 2,845 |
| (2,845) |
| (100.0) |
| 1,568 |
| 4,699 |
| (3,131) |
| (66.6) | |||||||
SBA servicing income, net |
| (1,077) |
| 1,905 |
| (2,982) |
| (156.5) |
| 567 |
| 4,038 |
| (3,471) |
| (86.0) | |||||||
Other income |
| 764 |
| 513 |
| 251 |
| 48.9 |
| 1,256 |
| 775 |
| 481 |
| 62.1 | |||||||
Total noninterest income | $ | 4,653 | $ | 8,594 | $ | (3,941) |
| (45.9) | % | $ | 12,309 | $ | 16,780 | $ | (4,471) |
| (26.6) | % | |||||
Service charges on deposit accounts increased $107,000, or 26.0%, to $518,000 for the three months ended June 30, 2022 compared to $411,000 for the same three months during 2021. Service charges on deposit accounts were $999,000 for the six months ended June 30, 2022 compared to $784,000 for the same period in 2021, an increase of $215,000, or 27.4%. These increases were primarily attributable to increased analysis fees and overdraft fees.
Other service charges, commissions and fees decreased $230,000, or 5.9%, to $3.6 million for the three months ended June 30, 2022 compared to $3.9 million for the three months ended June 30, 2021. This decrease was mainly attributable to lower processing, extension and modification fees earned on our residential mortgage loans. Other service charges, commissions and fees decreased $1.5 million, or 20.2%, to $5.8 million for the six months ended June 30, 2022 compared to $7.3 million for the six months ended June 30, 2021. This decrease was mainly attributable to lower underwriting, processing and origination fees earned from our origination of residential mortgage loans as mortgage volume declined during the six months ended June 30, 2022 compared to the same period in 2021. Mortgage loan originations totaled $489.9 million during the six months ended June 30, 2022 compared to $590.2 million during the same period in 2021.
Total gain on sale of loans was $806,000 for the three months ended June 30, 2022 compared to $2.8 million for the same period of 2021, a decrease of $2.0 million, or 71.7%. Total gain on sale of loans was $3.6 million for the six months ended June 30, 2022 compared to $4.7 million for the same period of 2021, a decrease of $1.1 million, or 23.7%.
Gain on sale of residential mortgage loans totaled $806,000 for the three months ended June 30, 2022 as we sold $37.9 million in residential mortgage loans during the period with an average premium of 2.13%. Gain on sale of residential mortgage loans totaled $2.0 million for the six months ended June 30, 2022 as we sold $94.9 million in residential mortgage loans during the period with an average premium of 2.13%. We recorded no gain on sale of residential mortgage loans during the three and six months ended June 30, 2021 as no mortgage loans were sold during these periods.
We recorded no gain on sale of SBA loans during the three months ended June 30, 2022 as no SBA loans were sold during the quarter. Gain on sale of SBA loans totaled $2.8 million during the three months ended June 30, 2021. We sold $34.2 million in SBA loans during the three months ended June 30, 2021 with an average premium of 11.09%. Gain on sale of SBA loans totaled $1.6 million for the six months ended June 30, 2022 compared to $4.7 million for the same period in 2021. We sold $22.9 million during the six months ended June 30, 2022 with average premiums of 9.00% compared to $56.6 million sold during the same period in 2021 with average premiums of 10.95%.
Mortgage loan servicing income, net of amortization, increased by $952,000, or 99.5%, to an expense balance of $5,000 during the three months ended June 30, 2022 compared to an expense balance of $957,000 for the same period of 2021. Mortgage loan servicing income increased by $887,000, or 112.1%, to $96,000 during the six months ended June 30, 2022 compared to an expense balance of $791,000 for the same period of 2021. The increases in mortgage loan servicing income was primarily due to the increase in capitalized mortgage servicing assets and the decrease in mortgage servicing amortization, offset by a decrease in mortgage servicing fees. Included in mortgage loan servicing income for the three and six months ended June 30, 2022 were $830,000 and $1.8 million, respectively, in mortgage servicing fees compared
46
to $1.2 million and $2.7 million for the same periods in 2021, respectively, and capitalized mortgage servicing assets of $347,000 and $761,000 for the three and six months ended June 30, 2022, respectively, compared to $0 for the same periods in 2021. These amounts were offset by mortgage loan servicing asset amortization of $1.3 million and $2.6 million for the three and six months ended June 30, 2022, respectively, compared to $1.6 million and $3.1 million during the same periods in 2021, respectively. During the three months ended June 30, 2022, we recorded a fair value impairment recovery of $88,000 on our mortgage servicing assets compared to a fair value impairment charge of $603,000 recorded during the three months ended June 30, 2021. During the six months ended June 30, 2022, we recorded a fair value impairment recovery of $163,000 on our mortgage servicing assets compared to a fair value impairment charge of $403,000 recorded during the six months ended June 30, 2021. Our total residential mortgage loan servicing portfolio was $589.5 million at June 30, 2022 compared to $746.7 million at June 30, 2021.
SBA servicing income, net decreased by $3.0 million, or 156.5%, to an expense balance of $1.1 million for the three months ended June 30, 2022 compared to income of $1.9 million for the three months ended June 30, 2021. SBA servicing income was $567,000 for the six months ended June 30, 2022 compared to $4.0 million for the same period in 2021, a decrease of $3.5 million, or 86.0%. Our total SBA loan servicing portfolio was $504.9 million as of June 30, 2022 compared to $549.2 million as of June 30, 2021. Our SBA servicing rights are carried at fair value and the inputs used to calculate fair value change from period to period. During the three months ended June 30, 2022 we recorded a $2.3 million fair value charge to our SBA servicing rights compared to a $624,000 increase to our SBA servicing rights during the three months ended June 30, 2021. During the six months ended June 30, 2022, we recorded a $2.0 million fair value charge to our SBA servicing rights compared to a $1.5 million increase during the six months ended June 30, 2021.
Other noninterest income increased by $251,000 to $764,000 for the three months ended June 30, 2022 compared to $513,000 for the three months ended June 30, 2021. Other noninterest income was $1.3 million for the six months ended June 30, 2022 compared to $775,000 for the same period in 2021, an increase of $481,000. The largest component of other noninterest income is the income on bank owned life insurance which totaled $426,000 and $230,000, respectively, for the three months ended June 30, 2022 and 2021, and $830,000 and $457,000, respectively, for the six months ended June 30, 2022 and 2021.
Noninterest Expense
Noninterest expense for the three months ended June 30, 2022 was $13.1 million compared to $12.1 million for the three months ended June 30, 2021, an increase of $1.0 million, or 8.5%. Noninterest expense for the six months ended June 30, 2022 was $25.3 million compared to $22.8 million for the six months ended June 30, 2021, an increase of $2.5 million, or 11.0%.
The following table sets forth the major components of our noninterest expense for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, | Six Months Ended June 30, |
| |||||||||||||||||||||
(Dollars in thousands ) |
| 2022 |
| 2021 |
| $ Change |
| % Change |
| 2022 |
| 2021 |
| $ Change |
| % Change |
| ||||||
Noninterest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Salaries and employee benefits | $ | 7,929 | $ | 6,915 | $ | 1,014 |
| 14.7 | % | $ | 15,025 | $ | 13,614 | $ | 1,411 |
| 10.4 | % | |||||
Occupancy and equipment |
| 1,200 |
| 1,252 |
| (52) |
| (4.2) |
| 2,427 |
| 2,527 |
| (100) |
| (4.0) | |||||||
Data processing |
| 261 |
| 283 |
| (22) |
| (7.8) |
| 538 |
| 591 |
| (53) |
| (9.0) | |||||||
Advertising |
| 126 |
| 117 |
| 9 |
| 7.7 |
| 276 |
| 262 |
| 14 |
| 5.3 | |||||||
Other expenses |
| 3,603 |
| 3,526 |
| 77 |
| 2.2 |
| 7,032 |
| 5,807 |
| 1,225 |
| 21.1 | |||||||
Total noninterest expense | $ | 13,119 | $ | 12,093 | $ | 1,026 |
| 8.5 | % | $ | 25,298 | $ | 22,801 | $ | 2,497 |
| 11.0 | % | |||||
Salaries and employee benefits expense for the three months ended June 30, 2022 was $7.9 million compared to $6.9 million for the three months ended June 30, 2021, an increase of $1.0 million, or 14.7%. Salaries and employee benefits expense for the six months ended June 30, 2022 was $15.0 million compared to $13.6 million for the six months ended June 30, 2021, an increase of $1.4 million, or 10.4%. These increases were mainly attributable to increased salary costs
47
and employee benefits, partially offset by lower commissions paid to our loan officers as loan volume declined during the six months ended June 30, 2022.
Occupancy and equipment expense for the three months ended June 30, 2022 was $1.2 million compared to $1.3 million for the three months ended June 30, 2021, a decrease of $52,000, or 4.2%. Occupancy and equipment expense for the six months ended June 30, 2022 was $2.4 million compared to $2.5 million for the six months ended June 30, 2021, a decrease of $100,000, or 4.0%. These decreases were partially due to lower rent expense and depreciation.
Data processing expense for the three months ended June 30, 2022 was $261,000 compared to $283,000 for the three months ended June 30, 2021, a decrease of $22,000, or 7.8%. Data processing expense for the six months ended June 30, 2022 was $538,000 compared to $591,000 for the six months ended June 30, 2021, a decrease of $53,000, or 9.0%. These decreases were primarily due management’s ongoing efforts to reduce costs.
Advertising expense for the three and six months ended June 30, 2022 remained relatively flat compared to the same periods in 2021.
Other expenses for the three months ended June 30, 2022 were $3.6 million compared to $3.5 million for the three months ended June 30, 2021, an increase of $77,000, or 2.2%. Other operating expenses for the six months ended June 30, 2022 were $7.0 million compared to $5.8 million for the six months ended June 30, 2021, an increase of $1.2 million, or 21.1%. This increase was primarily due to higher FDIC insurance premiums and professional fees, as well as increased operating and customer service expenses, partially offset by lower other real estate owned expenses. Included in other expenses for the six months ended June 30, 2022 and 2021 were directors’ fees of approximately $285,000 and $205,000, respectively.
Income Tax Expense
Income tax expense for the three months ended June 30, 2022 and 2021 was $5.7 million and $4.7 million, respectively. The Company’s effective tax rates were 26.0% and 24.7% for the three months ended June 30, 2022 and 2021, respectively.
Income tax expense for the six months ended June 30, 2022 and 2021 was $12.3 million and $9.2 million, respectively. The Company’s effective tax rates were 25.6% and 25.1% for the six months ended June 30, 2022 and 2021, respectively.
Financial Condition
Total assets increased $61.7 million, or 2.0%, to $3.17 billion at June 30, 2022 as compared to $3.11 billion at December 31, 2021. The increase in total assets was primarily attributable to increases in loans of $265.0 million, bank owned life insurance of $8.8 million, and other assets of $19.7 million, partially offset by a $218.3 million decrease in cash and cash equivalents.
Loans
Gross loans increased $265.7 million, or 10.6%, to $2.78 billion as of June 30, 2022 as compared to $2.51 billion as of December 31, 2021. Our loan growth during the six months ended June 30, 2022 was comprised of an increase of $6.2 million, or 15.9%, in construction and development loans, an increase of $60.7 million, or 11.7%, in commercial real estate loans, a decrease of $15.2 million, or 20.8%, in commercial and industrial loans, an increase of $213.9 million, or 11.4%, in residential real estate loans and an increase of $86,000, or 108.9%, in consumer and other loans. Included in commercial and industrial loans are PPP loans totaling $8.9 million and unearned PPP fees of $175,000 as of June 30, 2022. There were no loans classified as held for sale as of June 30, 2022 or December 31, 2021.
48
The following table presents the ending balance of each major category in our loan portfolio held for investment at the dates indicated.
June 30, 2022 | December 31, 2021 |
| |||||||||
(Dollars in thousands) |
| Amount |
| % of Total |
| Amount |
| % of Total |
| ||
Construction and development | $ | 45,042 |
| 1.6 | % | $ | 38,857 |
| 1.6 | % | |
Commercial real estate |
| 581,234 |
| 20.9 | % |
| 520,488 |
| 20.7 | % | |
Commercial and industrial |
| 57,843 |
| 2.1 | % |
| 73,072 |
| 2.9 | % | |
Residential real estate |
| 2,092,952 |
| 75.4 | % |
| 1,879,012 |
| 74.8 | % | |
Consumer and other |
| 165 |
| — | % |
| 79 |
| — | % | |
Gross loans | $ | 2,777,236 |
| 100.0 | % | $ | 2,511,508 |
| 100.0 | % | |
Less unearned income |
| (7,216) |
|
|
| (6,438) |
|
| |||
Total loans held for investment | $ | 2,770,020 |
|
| $ | 2,505,070 |
|
| |||
SBA Loan Servicing
As of June 30, 2022 and December 31, 2021, we serviced $504.9 million and $543.0 million, respectively, in SBA loans for others. We carried a servicing asset of $8.2 million and $10.2 million at June 30, 2022 and December 31, 2021, respectively. See Note 4 of our consolidated financial statements as of June 30, 2022, included elsewhere in this Form 10-Q, for additional information on the activity for SBA loan servicing rights for the three and six months ended June 30, 2022 and 2021.
Residential Mortgage Loan Servicing
As of June 30, 2022, we serviced $589.5 million in residential mortgage loans for others compared to $608.2 million as of December 31, 2021. We carried a servicing asset, net of amortization, of $6.1 million and $7.7 million at June 30, 2022 and December 31, 2021, respectively. Amortization relating to the mortgage loan servicing asset was $1.3 million and $2.6 million, respectively, for the three and six months ended June 30, 2022 compared to $1.6 million and $3.1 million for the same periods in 2021. During the three months ended June 30, 2022, we recorded a fair value impairment recovery of $88,000 on our mortgage servicing asset compared to a $603,000 fair value impairment charge recorded for the same period in 2021. During the six months ended June 30, 2022, we recorded a fair value impairment recovery of $163,000 on our mortgage servicing asset compared to a $403,000 fair value impairment charge recorded for the same period in 2021. See Note 5 of our consolidated financial statements as of June 30, 2022, included elsewhere in this Form 10-Q, for additional information on the activity for mortgage loans servicing rights for the three and six months ended June 30, 2022 and 2021.
Asset Quality
Nonperforming Loans
Asset quality remained relatively strong during the second quarter of 2022 as our nonperforming loans to total loans remained low at 1.10% as of June 30, 2022. Nonperforming loans were $30.4 million at June 30, 2022 compared to $11.8 million at December 31, 2021. The increase from December 31, 2021 to June 30, 2022 was primarily attributable to an $11.2 million increase in nonaccrual loans and a $7.8 million increase in accruing troubled debt restructured loans. We did not recognize any interest income on nonaccrual loans during the three and six months ended June 30, 2022 or the year ended December 31, 2021.
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 TDRs. Nonaccrual loans at June 30, 2022 comprised of $14.0 million of commercial real estate loans, $144,000 in commercial and industrial loans and $5.9 million in residential real estate loans. Nonaccrual
49
loans at December 31, 2021 comprised of $3.7 million in commercial real estate loans, $152,000 in commercial and industrial loans, and $4.9 million in residential real estate loans.
(Dollars in thousands) |
| June 30, 2022 |
| December 31, 2021 |
| ||
Nonaccrual loans | $ | 19,966 | $ | 8,759 | |||
Past due loans 90 days or more and still accruing |
| — |
| 342 | |||
Accruing troubled debt restructured loans |
| 10,474 |
| 2,697 | |||
Total nonperforming loans |
| 30,440 |
| 11,798 | |||
Foreclosed real estate |
| 3,562 |
| 3,618 | |||
Total nonperforming assets | $ | 34,002 | $ | 15,416 | |||
Nonperforming loans to gross loans |
| 1.10 | % |
| 0.47 | % | |
Nonperforming assets to total assets |
| 1.07 | % |
| 0.50 | % | |
Allowance for loan losses to nonperforming loans |
| 54.79 | % |
| 143.69 | % | |
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 troubled debt restructurings. As of June 30, 2022, we had no non-SBA commercial loans, SBA loans or residential mortgages under an approved payment deferral plan. As of December 31, 2021, we had two non-SBA commercial loans with outstanding balances of $8.1 million who were under approved payment deferrals. As of December 31, 2021, we had approved payment deferrals for four SBA loans with outstanding gross loan balances totaling $6.5 million ($1.6 million unguaranteed book balance). We had no residential mortgages under approved payment deferrals as of December 31, 2021. See Notes 1 and 3 of our consolidated financial statements as of June 30, 2022, 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 $16.7 million at June 30, 2022 compared to $17.0 million at December 31, 2021, a decrease of $274,000 or 1.6%. The decrease was mainly due to a charge off on a commercial and industrial loans. We had a reduction in our COVID-19 provision during the first half of 2022 that was sufficient to cover the provision needed for our loan growth during this period. The COVID-19 provision was recorded in 2020/2021 for the uncertainties in our loan portfolio caused by the COVID-19 pandemic. The Company is not required to implement the provisions of the CECL accounting standard issued by the FASB in the ASU 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.
50
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 June 30, | Six Months Ended June 30, |
| |||||||||||
(Dollars in thousands ) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Balance, beginning of period | $ | 16,674 | $ | 11,735 | $ | 16,952 | $ | 10,135 | |||||
Charge-offs: |
|
|
|
|
|
|
|
| |||||
Construction and development |
| — |
| — |
| — |
| — | |||||
Commercial real estate |
| — |
| 26 |
| — |
| 26 | |||||
Commercial and industrial |
| — |
| 60 |
| 390 |
| 64 | |||||
Residential real estate |
| — |
| — |
| — |
| — | |||||
Consumer and other |
| — |
| — |
| — |
| — | |||||
Total charge-offs |
| — |
| 86 |
| 390 |
| 90 | |||||
Recoveries: |
|
|
|
|
|
|
|
| |||||
Construction and development |
| — |
| — |
| — |
| — | |||||
Commercial real estate |
| 2 |
| 3 |
| 4 |
| 6 | |||||
Commercial and industrial |
| 2 |
| — |
| 3 |
| — | |||||
Residential real estate |
| — |
| — |
| — |
| — | |||||
Consumer and other |
| — |
| 3 |
| 5 |
| 5 | |||||
Total recoveries |
| 4 |
| 6 |
| 12 |
| 11 | |||||
Net charge-offs/(recoveries) |
| (4) |
| 80 |
| 378 |
| 79 | |||||
Provision for loan losses |
| — |
| 2,205 |
| 104 |
| 3,804 | |||||
Balance, end of period | $ | 16,678 | $ | 13,860 | $ | 16,678 | $ | 13,860 | |||||
Total loans at end of period | $ | 2,777,236 | $ | 2,099,414 | $ | 2,777,236 | $ | 2,099,414 | |||||
Average loans(1) |
| 2,597,019 |
| 1,979,556 |
| 2,571,633 |
| 1,867,247 | |||||
Net charge-offs to average loans |
| 0.00 | % |
| 0.02 | % |
| 0.03 | % |
| 0.01 | % | |
Allowance for loan losses to total loans |
| 0.60 | % |
| 0.66 | % |
| 0.60 | % |
| 0.66 | % | |
| (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 June 30, 2022.
Deposits
Total deposits increased $134.0 million, or 5.9%, to $2.40 billion at June 30, 2022 compared to $2.26 billion at December 31, 2021. The increase was primarily due to the $27.7 million increase in noninterest-bearing demand deposits, $141.0 million increase in money market accounts, and a $30.5 million increase in interest-bearing demand deposits, offset by a $3.5 million decrease in savings accounts and a $61.7 million decrease in time deposits. The increase in money market accounts was partially due to the increase of $35.1 million in brokered money market balances during the six months ended June 30, 2022. As of June 30, 2022 and December 31, 2021, 25.9% and 26.2% of total deposits, respectively, were comprised of noninterest-bearing demand accounts and 74.1% and 73.8%, respectively, of interest-bearing deposit accounts.
We had $481.9 million of brokered deposits, or 20.1% of total deposits, at June 30, 2022 compared to $425.1 million, or 18.8% of total deposits, at December 31, 2021. 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.
51
The following table summarizes our average deposit balances and weighted average rates for the three and six months ended June 30, 2022 and 2021.
Three Months Ended June 30, |
| |||||||||||
2022 | 2021 | |||||||||||
| Average |
| Weighted |
| Average |
| Weighted |
| ||||
(Dollars in thousands ) | Balance | Average Rate | Balance | Average Rate |
| |||||||
Noninterest-bearing demand | $ | 611,763 | — | % | $ | 561,170 |
| — | % | |||
Interest-bearing demand deposits |
| 166,817 |
| 0.21 |
| 78,953 |
| 0.19 | ||||
Savings and money market deposits |
| 746,879 |
| 0.63 |
| 325,598 |
| 0.37 | ||||
Brokered money market deposits | 450,036 | 0.63 | 361,694 | 0.10 | ||||||||
Time deposits |
| 389,449 |
| 0.43 |
| 521,217 |
| 0.38 | ||||
Total interest-bearing deposits |
| 1,753,181 |
| 0.55 |
| 1,287,462 |
| 0.29 | ||||
Total deposits | $ | 2,364,944 |
| 0.40 | $ | 1,848,632 |
| 0.20 | ||||
Six Months Ended June 30, |
| |||||||||||
2022 | 2021 | |||||||||||
| Average |
| Weighted |
| Average |
| Weighted |
| ||||
(Dollars in thousands ) | Balance | Average Rate | Balance | Average Rate |
| |||||||
Noninterest-bearing demand | $ | 600,117 | — | % | $ | 522,645 |
| — | % | |||
Interest-bearing demand deposits |
| 161,148 |
| 0.18 |
| 73,221 |
| 0.20 | ||||
Savings and money market deposits |
| 726,375 |
| 0.47 |
| 320,962 |
| 0.37 | ||||
Brokered money market deposits | 431,098 | 0.40 | 302,577 | 0.10 | ||||||||
Time deposits |
| 415,196 |
| 0.40 |
| 506,646 |
| 0.44 | ||||
Total interest-bearing deposits |
| 1,733,817 |
| 0.41 |
| 1,203,406 |
| 0.32 | ||||
Total deposits | $ | 2,333,934 |
| 0.30 | $ | 1,726,051 |
| 0.22 | ||||
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 real estate loans. At June 30, 2022 and December 31, 2021, we had maximum borrowing capacity from the FHLB of $943.8 million and $826.9 million, respectively. At June 30, 2022 and December 31, 2021, we had $375.0 million and $500.0 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 June 30, 2022 and December 31, 2021. We did not have any advances outstanding under these agreements as of June 30, 2022 and December 31, 2021.
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. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.
52
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. As of June 30, 2022 and December 31, 2021, we had $47.5 million of unsecured federal funds lines with no amounts advanced. In addition, we have access to the FRB’s discount window in the amount of $10.0 million with no borrowings outstanding as of June 30, 2022 and December 31, 2021. The FRB discount window line is collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $29.5 million as of June 30, 2022.
At June 30, 2022 and December 31, 2021, we had $375.0 million and $500.0 million, respectively, of outstanding advances from the FHLB. Based on the values of loans pledged as collateral, we had $568.8 million and $326.9 million of additional borrowing availability with the FHLB as of June 30, 2022 and December 31, 2021, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.
Capital Requirements
The Company and the Bank are 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 Company and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Company’s and the Bank’s capital ratios as of June 30, 2022 and December 31, 2021. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of June 30, 2022 and December 31, 2021. As of December 31, 2021, the FDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events since December 31, 2021 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession, its reported and regulatory capital ratios could be adversely impacted in future periods.
53
Regulatory |
| ||||||||||
Capital Ratio |
| ||||||||||
Requirements | Minimum |
| |||||||||
including | Requirement |
| |||||||||
fully phased- | for Well |
| |||||||||
Regulatory | in Capital | Capitalized |
| ||||||||
Capital Ratio | Conservation | Depository |
| ||||||||
| June 30, 2022 |
| December 31, 2021 |
| Requirements |
| Buffer |
| Institution |
| |
Total capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
| |
Consolidated |
| 17.60 | % | 17.77 | % | 8.00 | % | 10.50 | % | N/A | |
Bank |
| 17.21 | % | 17.18 | % | 8.00 | 10.50 | 10.00 | % | ||
Tier 1 capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
| ||
Consolidated |
| 16.70 | % | 16.76 | % | 6.00 | % | 8.50 | % | N/A | |
Bank |
| 16.30 | % | 16.17 | % | 6.00 | 8.50 | 8.00 | % | ||
CETI capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
| ||
Consolidated |
| 16.70 | % | 16.76 | % | 4.50 | % | 7.00 | % | N/A | |
Bank |
| 16.30 | % | 16.17 | % | 4.50 | 7.00 | 6.50 | % | ||
Tier 1 capital (to average assets) |
|
|
|
|
|
|
|
|
| ||
Consolidated |
| 10.31 | % | 9.44 | % | 4.00 | % | 4.00 | % | N/A | |
Bank |
| 10.06 | % | 9.11 | % | 4.00 | 4.00 | 5.00 | % |
Dividends
On July 20, 2022, the Company declared a cash dividend of $0.15 per share, payable on August 12, 2022, to common shareholders of record as of August 3, 2022. 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 of our consolidated financial statements as of June 30, 2022, included elsewhere in this Form 10-Q, for more information regarding our off-balance sheet arrangements as of June 30, 2022 and December 31, 2021.
54
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.
55
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. The impact of interest rate derivatives, such as interest rate swaps and caps, is included in the model.
Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of June 30, 2022 and December 31, 2021 are presented in the following table:
Net Interest Income Sensitivity |
| ||||||||
12 Month Projection | 24 Month Projection | ||||||||
(Ramp in basis points) |
| +200 |
| -100 |
| +200 |
| -100 |
|
June 30, 2022 |
| (3.40) | % | 2.70 | % | 5.00 | % | 4.20 | % |
December 31, 2021 |
| (3.60) | % | (1.20) | % | (8.70) | % | (10.30) | % |
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:
Economic Value of Equity Sensitivity |
| ||||||||
(Shock in basis points) |
| +300 |
| +200 |
| +100 |
| -100 |
|
June 30, 2022 | (12.30) | % | (8.00) | % | (3.90) | % | 4.50 | % | |
December 31, 2021 |
| (8.90) | % | (3.60) | % | (0.20) | % | (11.90) | % |
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.
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 June 30, 2022. 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 June 30, 2022.
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Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2022, 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. The Company is continually monitoring and assessing changes in processes and activities to determine any potential impact on the design and operating effectiveness of internal controls 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 June 30, 2022 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 1A – Risk Factors” of the Company’s 2021 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. 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.
There are no material changes during the period covered by this Report to the risk factors previously disclosed in the Company’s 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the repurchases of our common shares for the three months ended June 30, 2022.
Total Number of |
| |||||||
Shares Repurchased | Maximum Number of | |||||||
as Part of Publicly | Shares That May Yet Be | |||||||
Total Number of | Average Price Paid | Announced | Purchased Under | |||||
| Shares Repurchased |
| Per Share |
| Plans of Programs |
| the Plans or Programs | |
April 1, 2022 to April 30, 2022 |
| — |
| — |
| — | 689,191 | |
May 1, 2022 to May 31, 2022 | 59,776 | 19.92 | 59,776 | 629,415 | ||||
June 1, 2022 to June 30, 2022 |
| 55,432 |
| 19.70 |
| 55,432 | 573,983 | |
Total |
| 115,208 | 19.80 | 115,208 | 573,983 |
On May 5, 2022, the Company announced that the Board of Directors of the Company approved the adoption of a share repurchase program authorizing the Company to repurchase up to 689,191 shares of the Company’s outstanding shares of common stock. The share repurchase program began on May 6, 2022 and will end on April 30, 2023. The repurchases will be made in compliance with all Securities and Exchange Commission rules, including Rule 10b-18, and other legal requirements and may be made in part under Rule 10b5-1 plans, which permits stock repurchases when the Company might otherwise be precluded from doing so. Repurchases can be made from time-to-time in the open market or through privately negotiated transactions depending on market and/or other conditions. The repurchase program may be modified, suspended or discontinued at any time.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit No. |
| Description of Exhibit |
3.1 | ||
3.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File - the cover page has been formatted in Inline XBRL and contained within the Inline XBRL Instance Document in Exhibit 101 | |
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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.
METROCITY BANKSHARES, INC. | ||
Date: August 5, 2022 | By: | /s/ Nack Y. Paek |
Nack Y. Paek | ||
Chief Executive Officer | ||
Date: August 5, 2022 | By: | /s/ Lucas Stewart |
Lucas Stewart | ||
Chief Financial Officer | ||
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